Earnings Call Transcript - FFWM Q1 2023

Operator, Operator

Greetings, and welcome to the First Foundation's First 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; and Chris Naghibi, Chief Operating Officer. Before I hand the call over to Scott, please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results. These forward-looking statements are made subject to the safe harbor statements, including 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. Additionally, First Foundation intends to file a proxy statement and related proxy materials with the Securities and Exchange Commission in connection with the company's 2023 Annual Meeting of Stockholders and the company's directors and certain of the executive officers are participants in the solicitation of proxies from our stockholders in connection with the annual meeting. Stockholders of First Foundation are strongly encouraged to read such proxy statements and all other related materials filed in the Securities and Exchange Commission carefully and in their entirety when they become available as they will contain important information about the 2023 Annual Meeting. And I now would like to turn the call over to President and CEO, Scott Kavanaugh. Please go ahead, sir.

Scott Kavanaugh, President and CEO

Good morning, and thank you for joining today's earnings conference call. I want to express my humility regarding the unprecedented events of the past quarter. This has been the most challenging period in my professional career. However, during this pivotal quarter for the financial services industry, the First Foundation team has shown remarkable dedication to our clients and our company. I want to highlight the resilience of our business amid current economic challenges. We are a diversified regional financial services company with significant scale and a successful business model. Our primary focus is on delivering exceptional financial services to our clients, and our core strategy remains robust. It is thanks to the hard work of every employee at every level that First Foundation remains resilient, well-capitalized, and continues to produce strong, sustainable results despite industry headwinds. I cannot thank our employees enough for their efforts, which are reflected in the financial results we reported. Despite significant challenges, I am proud to report earnings per share for the quarter was $0.15, with revenue of $70.5 million, marking a 14% sequential decline primarily due to decreased net interest income from increased interest expenses on deposits and borrowings. Net income was $8.5 million for the quarter, down from $17.4 million in the fourth quarter of 2022, and our adjusted return on average assets was 0.25%. We are proud of these results. Now, I'd like to take a moment to address the recent extraordinary events and our current standing in today's banking environment. As we all know, the first quarter was heavily impacted by the Federal Reserve's interest rate actions, leading to a significant bank run and capital crisis, resulting in the second-largest financial institution failure in U.S. history. We observed customers withdrawing a staggering $42 billion of deposits from a single institution in a short time. Established banks faced challenges due to deposit concentrations and poorly structured securities portfolios, forcing the entire banking sector, particularly regional banks, to re-examine their operations while also trying to restore client confidence. We took proactive steps as soon as we noticed the Fed's interest rate moves in late 2022, allowing us to effectively manage the impacts on our business model throughout this quarter. In October of last year, we initiated a liquidity funding strategy, with management meetings twice a week to explore ways to increase deposits, lower our loans-to-deposit ratio, and suspend nearly all lending activities. Our leadership remains committed to the hard work required to navigate the challenging interest rate landscape. Fortunately, our deposits have stabilized since the March banking crisis. Initially, we experienced significant outflows, including $844 million in deposits leaving First Foundation following the failures of Silicon Valley Bank and others, as clients sought safety. Most of those outflows went to larger institutions deemed too big to fail, rather than our regional competitors. However, we have significantly fared better than many other banks, with a number of the deposits returning to First Foundation as the banking sector stabilized. Of the $844 million that left, $129 million has returned, and several clients have transferred funds from their FFB accounts to our subsidiary, First Foundation Advisors, estimated at around $100 million. This shift underscores the strength of our business model and our capability to retain client funds across our services. Retail and online banking have been particularly strong, and our deposit levels reached their lowest point related to the financial market disruptions on March 21. Since March 31, we've added $80 million in total deposits across all channels, highlighting our team's effectiveness and the quality of our products. Throughout this quarter, we've been proactive in assisting clients with navigating uncertainty and restoring their confidence in our banking system. We've addressed each deposit relationship to inform clients about the options available to them, ensuring full FDIC coverage on their accounts. On the operational front, management made the difficult decision to reduce staffing through two rounds of layoffs, resulting in a 15% workforce reduction. This choice was made for the benefit of our shareholders in order to better withstand the current lending environment. The affected positions were mainly in sales, lending, and credit, with minimal impact on risk, operations, or client service. These reductions are expected to save approximately $14 million annually. Furthermore, I, along with our executive team, have decided to forego any cash bonuses for the fiscal year 2023, resulting in an additional $3 million in annualized savings, which would have been payable in February 2024. I am also pleased to announce that our uninsured deposits have significantly decreased. By the end of the quarter, insured deposits accounted for 85% of total deposits, leaving uninsured deposits at just 15%. On April 12, our uninsured deposits stood at $1.517 billion, just below 15%. Our total deposits slightly declined in the first quarter from $10.4 billion to $10.1 billion due to outflows in mid-March. Our deposits are well-diversified across various types, including non-interest bearing, interest-bearing, money market, and savings accounts, with the bulk in California, Florida, and Texas. Our loans-to-deposit ratio has improved over the past six months, decreasing from 103.5% to 97% before the market disruptions caused by the Fed. After these disruptions, the ratio rose to 106.1%, but following our successful deposit recovery, the loans-to-deposit ratio is now at 105.6% and improving weekly. We continuously monitor this ratio as a strategic priority. With regard to deposit costs, we were proactive, having raised interest rates in conjunction with the Fed when rates were only at 1%. Hence, our costs align better with the current Fed rates, meaning we won't have to make abrupt rate adjustments. Our liquidity position remains strong at $3.5 billion, with $1.3 billion in cash and securities helping us through a challenging quarter. Our liquidity exceeds uninsured deposits, with a coverage ratio of 223%, as of April 12. Our securities portfolio holds a market value of $1.1 billion, with an average yield increasing to 2.73%. As we strive to stabilize and grow our deposits, we are also focused on managing our loan portfolio and maintaining high credit quality while identifying efficiency opportunities. We acknowledge that recovery from the rough March will take time, but believe we are positioned for future growth and success. Regarding loan growth, our loan balances remained unchanged at $10.7 billion in the quarter, while the average yield increased to 4.54%. Our credit quality is strong, with an NPA ratio at 13 basis points and delinquent loans rising to 0.45%. Our multifamily loan portfolio is strong and well-invested in desirable markets. Our net interest income was $58.8 million for the first quarter, with interest expense increasing to $78.2 million. Our NIM for the quarter decreased to 1.83% amid the current interest rate environment. Our Wealth Management and Trust Services reported revenue of $8.8 million for the quarter and our assets under management rose by $200 million to reach $5.2 billion. We remain well-capitalized with a Tier 1 risk-based capital ratio exceeding regulatory demands and our tangible book value per share stands at $16.17. We've declared a cash dividend of $0.02 per share for the first quarter. As I conclude my opening remarks, I've had the opportunity to connect with many clients recently, emphasizing the advantages of banking with First Foundation, including direct access to leadership and personalized service, particularly during challenging times. This is a hallmark of regional banking, evidenced by our successes in Florida due to strong local leadership. Now, I will hand the call over to Chris, who will provide details on our balance sheet.

Chris Naghibi, Chief Operating Officer

Thank you, Scott. As Scott mentioned, it was a challenging quarter for financial services. But I am so proud of the First Foundation team for their dedication to our clients and to the communities which we serve. I recently embarked on a listening tour across nearly all of our branches to hear from our employees directly. It was a great way to see what's working well and areas where the organization can improve. Our management team and I simply wanted to connect and renew our commitment to our employees of a productive, collaborative culture of teamwork. Several new key initiatives have grown out of these visits as we look to improve the overall experience for our clients and our internal employees. I'm confident that we have the right business strategy in place to serve as a best-in-class regional bank. Moving to our lending operations, loan originations were $481 million for the quarter, which reflects the strategic downturn and slowdown that we have previously spoken about. Our net loan activity over the quarter was decreased by loan paydowns, scheduled payments, and prepayments. Looking at the breakdown of loans that we originated in the quarter, the percentages are as follows: commercial business loans, 89%; multifamily, 3%; single-family, 3%; land and construction is now at 4%; and CRE investment at 1%. It is always important to note that we accomplished this without changing our high underwriting standards. Our NPAs remain unchanged at 13 basis points for the quarter. This is also reflected in our conservative underwriting standards as evidenced by our LTVs of 55.2% for multifamily loans and 55% for single-family loans. This highlights the bank's consistent and disciplined lending practices during these uncertain financial conditions that have been the backbone of our success dating back to what helped propel us during the great recession. We have continued to tighten up and improve our underlying credit guidance to ensure the appropriate strength and risk appetite in the climate to come. We have continued to follow our strategy to pragmatically temper our loan originations. Speaking more specifically about our loan yields, we achieved a weighted average rate of 7.40% on new originations for the quarter, which compares to 5.72% for new originations in the fourth quarter. As mentioned, as of March 31, 2023, our loan portfolio is comprised of 50% multifamily loans, 32% commercial business loans, 7% non-owner-occupied commercial real estate, 9% consumer and single-family residence loans, and 2% of land and construction loans, which are selectively and carefully considered for only our most valued clients. Our commercial business portfolio is diversified with no sector comprising more than 30% of the portfolio, and 87% of the commercial business portfolio is attributable to commercial real estate. So we are focused on making more adjustable-rate loans, which should offset some of the pressures of the current rate environment. We are limited by a variety of factors, including funding constraints as the deposit market remains extremely competitive, and liquidity continues to drain from the financial system, along with limiting our exposure to higher-cost wholesale funding. The breakdown of our current deposits is as follows: Money market and savings at 30%. This gives a deposit of 24%, interest-bearing demand deposits at 24%, and noninterest-bearing demand deposits at 22%. As Scott mentioned, our percentage of insured deposits increased to 85% as of March 31, 2023, and are 85% as of April 12. Our deposit costs came in at 2.38% for the quarter. While our future deposit costs are closely tied to the actions of the Fed, we believe we will not be as sensitive as other banks to future rate increases. Before I hand it back over to the operator for Q&A, I want to reiterate Scott's comments. I am very grateful for our team's dedication to delivering excellent client service when it matters most. I can confidently say that we have incredible customers, and we continue to be excited about the growth in our future. I've touched on it several times, but I am very proud of our entire management team and all of our employees. So many clients and employees have been incredibly generous and thoughtful with their constructive suggestions on how to improve our delivery of our value proposition of excellent service. We are both committed to listening and executing on these wonderful ideas. Now more than ever, we are aligned and we have been collaboratively working hard day in and day out to accomplish our strategic objectives, no matter the environment. At this time, we are ready to take questions, and I will hand it back to the operator.

Operator, Operator

Our first question comes from David Feaster at Raymond James.

David Feaster, Analyst

Hi, good morning. Let's start with the deposits. I appreciate the insights you've provided. It's reassuring to see the stability and improvement in balances since mid-March. From the presentation, it seems much of the concern arose from the recent bank failures. However, with the stability you're experiencing, the strength of your balance sheet, and the available liquidity, I'm curious if you expect this trend to accelerate, particularly with opportunities to engage other insurance networks. Additionally, could you discuss your near-term deposit growth strategy more broadly?

Scott Kavanaugh, President and CEO

I'll address the first part. Chris will elaborate on our deposit growth strategy moving forward. To answer your question, I believe many deposits will return. The Fed and Treasury Secretary didn’t effectively communicate their support for deposits. As Jamie Dimon from JPMorgan pointed out, this situation negatively impacts all banks. There needs to be a period for confidence to return in the support for regional banks, and I firmly believe that will occur. When that happens, I expect a significant return of our deposits. We are also forming new relationships with solid clients and will continue to focus on that. Now, I’ll hand it over to Chris to discuss our current deposit strategies.

Chris Naghibi, Chief Operating Officer

Looking back to November when we began examining liquidity cards, we developed strategies that we have implemented and will continue to implement over the coming months. There are untapped opportunities and significant potential in our current branch network. We emphasize small businesses and middle-market clients, and we recognized missed opportunities with our digital presence. We have a substantial digital footprint, including an online account opening process that we are currently revamping with new technology. To transition from a transactional service to a relationship-driven model, which is the foundation of our business, we need to make some adjustments and engage with clients to showcase our customer service. While competitive rates are important, we've found that exemplary service can lead to greater loyalty. The complexity of our wealth advisory and trust services allows us to build and sustain long-term relationships. We are leveraging digital networks and expanding our branch focus. I aim for consistency in branding across both branches and digital channels to ensure a uniform client experience. This includes reaching out to small businesses and individuals. While we will maintain our focus on high-net-worth clients, there remains significant untapped potential among them. I anticipate an increase in our engagement in the coming months and years.

David Feaster, Analyst

Okay. That's extremely helpful. And then maybe could you help us just think about the margin trajectory and how this all plays into that? Obviously, the increase in cash balances and rising borrowings and stuff late in the quarter probably weighs on the NIM in the short run, but as we look out, I mean, origination yields in the mid-7s. Opportunity to improve the earning asset mix and deploy that cash, it seems like there's a real opportunity for expansion and you alluded to that kind of in the back half of the year. But I was just hoping maybe you could help us think through the margin trajectory here in the second quarter and then how things might look in the back half of the year as things stabilize and some of these deposit initiatives play out?

Scott Kavanaugh, President and CEO

I'm glad you asked that question because we added almost $500 million in loans last quarter. There was a significant increase in the weighted average coupon of the loans we funded compared to the previous quarter. The increase was about 170-180 basis points, moving from 570 to 740. The focus has been on maintaining liquidity, which is why our balance sheet remains strong. Over the last several quarters, we've aimed to shift more towards adjustable-rate loans and a bit more commercial and industrial lending to reduce our exposure to fixed-rate lending. I believe we are nearing the low point in net interest margin, which I expect to expand again as we continue to increase our loan yields. Regarding deposits, we experienced an early increase in beta, which received some criticism, but now that rates are around 5%, we've absorbed most of that change. We're already at that point on the deposit side. If the Fed raises rates again, our deposit costs will increase, but at a more moderate pace than our competitors. I feel we are in a strong position to start expanding net interest margin in the latter half of the year. As liquidity pressures ease, which I believe they have already begun to do, we will be positioned to start improving that margin sooner rather than later.

David Feaster, Analyst

Okay. That makes sense and helpful color. And then maybe just, let's touch on originations and loan growth. Not surprised to see the slowdown in multifamily. We've kind of talked about that. Originations primarily driven by the commercial business segment. Just I'm curious what you're seeing there. Where are new loan yields today? Are they kind of still in that mid-7s? Just how is demand in that segment? Where are you seeing good opportunities and just your overall appetite for growth? I mean would you expect just continued remix funding up basically replacing maturing loans with new originations? Or just curious how you think the loan portfolio might shake out.

Scott Kavanaugh, President and CEO

It's really more about maintaining the balance sheet as is. So I want to say we just got an update. I want to say there's probably $50 million, $60 million that is projected to pay off in the next month to six weeks. We'll replace that with higher-yielding stuff. I was just looking at a payoff report. There was, I don't know, a $22 million loan that paid off at 4.5%, a $16 million loan that was 4.25%. We probably had $10 million or $12 million that paid off with three handles on the coupon somewhere between 3.5% and 3.75%. We're going to take that opportunity to modestly replace some of those yields. But again, I'm going to go back and reiterate how important it is to think about liquidity first. The pause is basically going to really be determined by what the Fed's actions are and what the banking crisis looks like as we continue to progress.

David Feaster, Analyst

That makes sense. I can appreciate all the color. Thanks, everybody.

Operator, Operator

Our next question comes from Gary Tenner, D.A. Davidson.

Gary Tenner, Analyst

Good morning. A couple of questions. So on the deposit growth, since March 21, I apologize if I missed this, is that all four as opposed to any additional use of borrowed or, excuse me, brokered funds or anything?

Scott Kavanaugh, President and CEO

Well, we've continued to enhance using brokered funds, but what we referred to in our commentary was our core.

Gary Tenner, Analyst

In terms of cash liquidity on the balance sheet, you're at 10% of assets at the end of March compared to 5%, and historically, you've been around 5% to 8%. How long do you think you'll maintain the excess liquidity, even if it doesn't typically negatively impact net interest income? There is obviously some pressure on net interest margin, so I'm interested in your thoughts on how long you'll keep that excess liquidity.

Scott Kavanaugh, President and CEO

It's a negative situation. Whenever you hold cash and sell it, there's a bid-ask spread, which is generating additional revenue for First Foundation the longer it remains idle. For nearly two years, I've been hesitant to expand our securities portfolio due to concerns about having fixed-rate assets and rising interest rates. We haven't increased our securities holdings in quite some time. In discussions with our regulators, I've gathered that their comfort level is typically over 10% to 12% or more in on-balance sheet liquidity, whether in securities or cash. Generally, we wouldn't keep this much cash, but given the current economic landscape, it makes sense to hold on to cash until we feel more secure. We've started to reduce our on-balance sheet cash a bit in the last two weeks and plan to keep doing so. We maintain ongoing communication with regulators to ensure we have plenty of cash both on and off the balance sheet. This has been beneficial in discussions with the FDIC and the Federal Reserve Bank, and we keep a close watch on that. We haven't used the BTPH program yet, but it's set up and ready to go if needed. So far, we haven't had to utilize those lines. Does that address your question?

Gary Tenner, Analyst

I appreciate that. Yes, it does, Scott. Just one last question for me. I've noticed that the Florida franchise remains a significant source of net funding, with approximately $2.2 billion in deposits compared to around $1.1 billion in loans. From a pricing perspective and considering deposit availability and success, could you describe the differences between Florida and California from a First Foundation perspective?

Scott Kavanaugh, President and CEO

I don't think there are any differences. Regarding rates, it's one thing when they were at 1% or 1.5% or even 2%, but now at 5%, I can't think of any clients I talk to who aren’t aware of Google or Yahoo! and know where the rates stand. Many banks are receiving calls about the rising yields, but we haven't experienced many of those inquiries because our betas have been high. When I mentioned Florida, I genuinely meant it. We had a challenging start there, and I've shared that before. However, we empowered our team in Florida, and they've done an outstanding job. Just like everyone else in the company, but we did face some difficulties initially, and they have truly excelled.

Chris Naghibi, Chief Operating Officer

And Gary, I'll add a little more color as well. With the influx in Florida and I would say the general kind of feel that Florida is more of a business-friendly state, I think that certainly helps a lot of the direction of where the company is going, focusing on C&I in business. We have this extremely well-seasoned leadership in the banking community there who really are well known and ingratiated into that community. Strategically, that acquisition and those relationships are dovetailing to our model well. The growth was not unexpected; it was just a little bit slower because we had to embrace culture.

Scott Kavanaugh, President and CEO

And one last point that I would say is we were planning on expanding in Texas a lot more until we saw the Fed's action plans and what happened. We curtailed a lot of that, call it, mid-last year. But at some point, just like Chris talked about in Florida and the opportunities there, Texas, from our perspective, is wide open. Even though we had some pretty good relationships, or not pretty good, I would say great relationships. I think it's wide open. It's something that we really need to get ourselves geared up to move forward in the state of Texas.

Operator, Operator

Our next question comes from Andrew Terrell, Stephens.

Andrew Terrell, Analyst

Hey, good morning. Maybe on the margin, just to start. I appreciate all the commentary around some of the deposits and the cost. Can you help us out maybe with the spot cost of deposits, either interest-bearing or total at the end of the period? And then do you have the monthly margin in the month of March?

Scott Kavanaugh, President and CEO

Yes. I'm going to rely on Amy for this, but I want to say the month of March NIM was about 1.64%. Amy, do you know what the spot cost was at the end of the quarter?

Chris Naghibi, Chief Operating Officer

Amy stepped away. Spot costs at the end of the quarter was 238 for the average deposit cost.

Andrew Terrell, Analyst

I mean that was the average of the quarter. You have the...

Scott Kavanaugh, President and CEO

When Amy gets back, we'll get you that number, okay?

Chris Naghibi, Chief Operating Officer

252.

Andrew Terrell, Analyst

Okay. Perfect. I appreciate it. On the expense side, I believe you mentioned $14 million of relief on the expense run rate due to some actions taken over the past couple of quarters. I'm trying to understand how much of that is...

Scott Kavanaugh, President and CEO

$3 million of executive bonus that we've agreed not to take.

Andrew Terrell, Analyst

Okay. Just with a lot of moving parts. Can you help us out with kind of thinking about an expense run rate going into the second quarter?

Chris Naghibi, Chief Operating Officer

So I think you’re asking about what the expense management run rate will be?

Andrew Terrell, Analyst

Correct. Yes.

Chris Naghibi, Chief Operating Officer

Yes. I think you can see that pretty much in what we've done this quarter. The only difference is those annualized figures that we saw from the previous month will just be carried forward. So I don't think there will be a tremendous amount of deviation.

Scott Kavanaugh, President and CEO

A lot of the cost cuts were taken until late March or mid-March. So it's obviously going to be reduced from an employee standpoint. Is Amy back, I hate this.

Amy Djou, CFO

Yes. Yes, Scott, I'm here.

Scott Kavanaugh, President and CEO

Yes. So what do you think?

Amy Djou, CFO

Looking at the next few quarters, our compensation and benefits will likely benefit from the risk we encountered in March. On an annualized basis, we expect a decrease of approximately $3 million to $4 million in the compensation and benefits line per quarter. Everything has remained quite consistent as we work to minimize our costs, expenditures, and operational costs. Moving into 2024, we anticipate continued slight downward trends in our operational expenses.

Andrew Terrell, Analyst

Okay. I appreciate the color there. That's helpful. And then for the deposit growth, I think since the quarter that you might have referenced, have you seen the ECR-related deposit balances build back since quarter-end?

Scott Kavanaugh, President and CEO

Yes and no. Typically, this is a cyclicality point that reaches its lowest point around April due to tax payments. To be honest, they have remained quite stable. Although we have reinstated some of the balances, we have noticed tax payments, including property taxes and federal and state taxes, being withdrawn from the bank. However, our mortgage servicing rights are beginning to rebuild their balances. The two months that are generally the lowest are April and October.

Andrew Terrell, Analyst

Okay. And if I could sneak one more in there around just the dividend. I was hoping to maybe get some incremental color on kind of what prompted the dividend change. And then would you view this as kind of temporary and understanding kind of the glide path for margin and profitability improvement? Moving forward, I guess, should we expect the dividend to kind of walk back up as that occurs? And is there a targeted payout ratio you're looking at?

Scott Kavanaugh, President and CEO

With the decrease in net income, we recognized that we were not adequately covering our obligations. In our conversations with regulators, it became clear that capital preservation is critical. We decided to lower the dividend from $0.11 to $0.02, resulting in a coverage ratio of about 20% to 25%, which we believe is sufficient. This change is temporary, and we anticipate returning to a higher dividend as our net interest margin begins to improve, ensuring we have enough income to support it. While it's difficult to predict when we will return to $0.11, I believe that as our net interest margin expands in the latter half of the year, we will gradually increase the dividend again.

Andrew Terrell, Analyst

Understood. Okay, thanks for the time.

Operator, Operator

Our next question comes from Adam Butler, Piper Sandler.

Adam Butler, Analyst

Hey, good morning, everybody. This is Adam on for Matthew Clark. Just switching over to the deposit side. I appreciate the color. So during the quarter and in March, there were about $450 million in outflows in deposits and about $120 million came back to the bank before quarter end. The advisory business saw roughly $100 million of that come back at quarter end too and that accounts for about half the...

Scott Kavanaugh, President and CEO

What flowed over to FFA largely was allocated into structured treasury or other types of fixed income securities for our clients, who felt these were yielding more than most deposits in the country, particularly at the short end of the curve where treasuries were offering better yields.

Chris Naghibi, Chief Operating Officer

It's not uncommon for us to get network conversations because we have the wealth advisory arm that we can recommend that rather than leading institutions to chase mine somewhere else, we can keep them in the company and that happens throughout the month. That's not just a leave and come back situation.

Scott Kavanaugh, President and CEO

Yes. To be fair, all I'm trying to say is most of those are in later maturities. We believe that at some point, they will return as a deposit. But currently, I would tell you they are in treasuries that are laddered out a year to two years.

Adam Butler, Analyst

Okay. That makes sense. And then since April, I think that $80 million in deposit increase was core. So I'm assuming that was a recovery from the outflow as well. I was just trying to get a sense of that remaining roughly $150 million, do you assume that comes back throughout the remainder of the year?

Scott Kavanaugh, President and CEO

We do. In those first few days, most people acted quickly and asked questions later. Chris and I, along with many of our employees, followed up with clients. They mostly conveyed the same message: they appreciate us, but they will reconnect when things stabilize. What that means is uncertain, but I believe we have strong relationships even with those who have left. I understand their apprehension, especially since I wish the Board of Governors had taken a firmer position to reassure that they would support regional bank deposits. However, I am optimistic that we will regain those clients. Rebuilding confidence will take time.

Chris Naghibi, Chief Operating Officer

It takes about two or three months of experience kind of the services institutions that went to. Some of them went through sort of execution that are probably not as strong as they thought. As they go through that life cycle and experience the value proposition of the brand, they typically come back because we can give them things that they need and they want.

Adam Butler, Analyst

Okay. That's great to hear. And then just briefly touch on some credit metrics. I think you mentioned it on the call, but I was curious that you may have mentioned that you don't have any office CRE exposure. Is that correct?

Chris Naghibi, Chief Operating Officer

Yes. We've never really operated in that area. Any involvement we might have there is likely due to an acquisition and is negligible compared to our overall portfolio.

Scott Kavanaugh, President and CEO

On the hotel side, I think we have two loans, maybe a handful with the acquisition of Florida. We have no office space, very few strip centers, no malls. When you think about commercial real estate, we tend to focus on owner-occupied, non-owner-occupied multifamily. That's really the focus of our impetus. If you look back over history, especially '08, '09, and '10, you saw delinquencies and defaults in the 11 basis point range, which was by far and away the lowest category in the commercial real estate space.

Chris Naghibi, Chief Operating Officer

Let me give you an idea of how things have progressed from then until now. The new margin on the additional risk you would take for what we consider different types of commercial real estate shows that our focus on multifamily was only marginal. You were assuming extra risk for a relatively small rate of return, and we've never been inclined to compromise credit quality for a better rate.

Adam Butler, Analyst

Okay. I appreciate the color there. And then just briefly touching on one more thing. I saw the delinquency loans increased about $16 million, $16.5 million during the quarter. I was just curious if you could touch on the nature of that increase, any commentary there.

Chris Naghibi, Chief Operating Officer

Yes. That's related to single-family loans that had increased, but it's a very high-net-worth borrower. They had some issues and they're going to bring the loan current; they've already made one payment, health issues. They were unreachable due to those health issues. Other than working through their financial manager, I'm not expecting any challenges or losses in the current time.

Operator, Operator

We have no further questions in the queue at this time. I would now like to turn the call back over to today's speakers.

Scott Kavanaugh, President and CEO

The events of this quarter were humbling for many banks, including us. We sold the negative impacts of the actions by the past. Fortunately, for all our stakeholders, we took decisive and immediate action and we were not caught flat-footed. I want to leave you with a few key points to take away from the quarter. We are proud of our financial performance for the quarter given the extraordinary list across the industry and believe we are well positioned. Second, our deposit base remains strong as depositors have overwhelmingly chosen to return. We will also have grown our percentage of insured deposits and are working closely to ensure clients have the maximum coverage. Third, we have a strong liquidity position that gives us confidence in navigating uncertain times. Fourth, our securities portfolio allows us to actively manage our interest rate risk and gives us flexibility on our balance sheet. Finally, we believe that once we emerge from this liquidity crunch, our bank will emerge as a leader given our credit quality. I'm very pleased that our entire team responded and believe we are well positioned to weather this current crisis and ready to emerge as a leader among our regional bank peers. 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

This does conclude today's program. Thank you for your participation. You may disconnect at any time.