Jan 31, 2022
Operator
Greetings, and welcome to the First Foundation’s Fourth Quarter 2021 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 your questions following the presentation. [Operator Instructions] 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 the management will make certain predictive statements during today’s call that reflect their current views and expectations about the company’s performance and financial results. These forward-looking statements are made subject to the Safe Harbor statement included in today’s earnings release.
In addition, some of the discussion may – include non-GAAP financial measures. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, see the company’s filings with the Securities and Exchange Commission.
And now, I would like to turn the call over to Scott Kavanaugh.
Scott Kavanaugh
Hello, and thank you for joining us. We would like to welcome all of you to our fourth quarter 2021 earnings conference call.
As highlighted in our earnings report, we had another strong quarter, which capped off a great year for First Foundation. And before I get into the details of the financial results we reported, let me share how impressed I am with what our team has been able to accomplish this quarter and frankly, for the entire year.
When the fourth quarter started, we had many initiatives underway and there were a lot of moving parts. We had several important projects planned for our completion, all at the same time.
Complicating these matters was the rise of cases due to Omicron, which hit many of our departments, we had to temporarily close some branches, and there were a couple of days where entire departments were out. Yet through this Herculean effort from our team, I am pleased to report we delivered on all of our projects, while still reporting the strong financial results we did today.
Before I get into the details of the financial metrics, let me touch on a few of those projects and what they mean for our organization. First, we closed on our transaction with TGR Financial in Florida.
This important transaction means a couple of things. We are now strategically positioned in another business-friendly state, with the ability to expand into some key met – markets within Florida.
We also have a team of experienced bankers, who knows the local community. Keeping the local team employees is something we are very pleased we were able to do.
In addition, this transaction gives us access to a very solid client base that we can offer complementary services to, whether it be additional banking solutions, wealth management or trust services. We are actively looking in – to recruit additional talent to build out these services from our Florida locations.
Another important project in 2021 was our expansion into Texas. We moved our principal office to Dallas in the second quarter, and opened an LPO in Irving.
And we are planning to open a retail branch in Plano in the first quarter of this year. Texas, which, as you know, is another business-friendly state, and has a ton of opportunity for our retail and commercial banking, as well as our wealth management and trust services.
You’ve heard me say it before, we are really excited about Texas. We continue to invest in our markets as well across Hawaii, Nevada and California.
We also launched our new mobile app in 2021. And the adoption of the app by our clients in the fourth quarter has been terrific.
This new app transforms how we deliver our banking experience, clients can now gain insights into all facets of their financial lives without leaving the First Foundation Bank environment. This solution will help our team better attract and target clients with complementary services.
We expect to deepen our client relationships with this important new tool. This is something you’re likely to hear more about in future quarters.
In addition, we recently announced the successful close of our $150 million sub debt offering to strengthen our capital position. This attractive source of capital will feel our future growth and allow us to continue to execute on our strategic plan without diluting our existing equity stakeholders.
During 2021, we also completed the following projects. The successful Freddie Mac securitization of multifamily loans, our preparedness for becoming a $10 billion bank, the kickoff of our Bitcoin project with NYDIG and Fiserv working through the majority of our remaining PPP loans, and the continuation of our Community Giving Program.
There were a host of other important projects we completed in 2021 that I didn’t cover. In fact, we have 35 strategic projects on our plan that are slated to be completed.
This reinforces our commitment to enhancing the client experience and our technology. I want to say the projects that I just mentioned would take most other banks years to complete.
We did it in 12 months. And much of this activity occurred in the past 90 days, which is truly remarkable.
So testament to the experienced team we have in place. Our ability to successfully operate and grow our bank is second to none in our industry, and I am pleased with everyone’s contributions.
Okay now, let me touch on some details related to our financial results for the quarter. Our earnings for the quarter were $23.9 million or $0.51 a share.
Total revenues were $75.8 million for the quarter, a 20% increase over the prior year fourth quarter. Return on average assets was 1.15%, return on average tangible equity was 13.4% and tangible book value per share remained strong at $14.92.
I’m also pleased to announce that we increased our dividend payment by 22% from $0.09 to $0.11 per share in the prior quarter. Each of our business contributed to our success.
Our banking operations experienced another record quarter of growth, as loan originations in the fourth quarter hit $1.2 billion and $3.9 billion for the year, while deposits grew in the quarter by $2 billion, following the close of our acquisition of TGR Financial and $3 billion for the year. I’ve mentioned this before, but the transformation of our business model has really taken shape and the diversification of our offering has only strengthened our position as a premier regional bank.
This is evidence yet again by another strong quarter of high quality C&I originations, which reached a record $518 million in the quarter and accounted for 43% of the $1.2 billion total that we originated in the quarter. We also saw contributions from our equipment finance, public finance and builder finance teams, as these business – businesses continue to ramp up.
Our ability to generate high-quality loans is something I’m very proud of, and our underwriting team has done an incredible job to ensure MPAs remain industry-leading levels, decreasing to 14 basis points for the quarter. Looking at deposits, our core funding accounts for 99% of our total deposits, while our cost of funding continues to be favorable, with deposit costs remaining low at 15 basis points for the quarter.
Our loan to deposit ratio improved to 84% at the end of the quarter. Our attractive deposit profile continues to be attributable to a reduction in our broker deposits, and an increase in more business-related operating accounts.
Looking at our wealth management business, we had a strong quarter and year, both in terms of new clients and positive investment returns in our portfolios. Assets increased by 282 million in the fourth quarter, and assets under management ended the year at a record $5.7 billion.
Additionally, our wealth management and trust businesses saw a record combined pre-tax profitability of 25% for the quarter. Our – ability to maintain this level of profitability across several quarter now shows that we are hitting scale for this business.
Again, I would remind everyone that we accomplished all this even as we completed several very important projects to close out the year, Kevin will provide some adjusted numbers for ease of comparison. But our reporting numbers are strong even at face value.
I can’t say enough about how our team rose to the challenge and delivered great results. All of what I’ve mentioned, our services, our expansion, the projects we completed, our team and our commitment to technology positions us well as we serve our clients.
Our business model is designed to help clients wherever they are in their financial lives. And today’s results indicate that our model is working very well across the diverse and dynamic markets we serve.
It is truly an honor to be able to lead this organization, comprised of extraordinary professionals serving our wonderful clients. I continue to be very excited about our future.
Now, let me turn the call over to our CFO, Kevin.
Kevin Thompson
Thank you, Scott. Earnings per diluted share was $0.51 in the fourth quarter.
As Scott mentioned, the return on assets were strong at 1.15% with a return on tangible common equity of 13.4%. These were especially good metrics considering our one-time expenses related to closing the acquisition of TGR Financial.
These merger related expenses include a recognition of $1.1 million in non-interest expense as well as $5.6 billion related to the Day 1 CECL loan loss provision for Non-Purchase Credit Deteriorated loans. This is often called the CECL double count related to acquisitions.
Adjusting for these items, our return on assets would have been around 1.4% and our return on tangible common equity would have been approximately 16%. The TGR acquisition took place on December 17th, so there are only a few weeks of income statement impacts from the merger.
We’re very proud of our performance for the full year of 2021. Our return on assets was 1.41% and our return on tangible common equity was 16.9% for the full year.
Our investments in technology, talent and processes have really taken root and our operational leverage is evidenced in our metrics. A few quarters ago, we announced our strategic investment in NYDIG, which is an industry leader in providing Bitcoin related solutions to banks and institutions.
While we are very excited to continue to work with NYDIG to implement these services for our customers, we are very pleased that our strategic investment has increased in value and we recognized a $1.1 million gain on the investment this quarter. The net interest margin increased to 3.17% in the quarter, which was due to slightly improving loan yields, lower average cash balances, and a slightly improving cost of funds in the quarter.
Our continued balance sheet discipline resulted in an increase in loan yields of 6 basis points and a decrease in cost of funding of 2 basis points. We earned $561,000 in net PPP fee income in the quarter, and we have $618,000 of fees remaining.
We added $23 million of PPP loans through the acquisition of TGR Financial, with the pay down of $20 million of legacy PPP loans in the quarter and the addition of the acquired loans $51 million of PPP loans remain. The allowance for credit losses for loans increased $12.8 million to $33.8 million or 0.49% of total loans in the quarter.
We recorded $15.1 million in additional allowance for credit losses associated with the acquisition of TGR Financial, of this, $9.5 million was related to Purchase Credit Deteriorated loans, and $5.6 million was related to Non-Purchase Credit Deteriorated Loans. This increase due to the acquisition was offset by a reduction in the allowance of $2.4 million related to the Bank’s legacy loan – loan portfolio due to improvements in the economic scenario outlook offset by an increase in legacy loan balances.
Asset management fees were strong with revenues of $9.6 million and our advisory and trust divisions achieved a record combined pre-tax profit margin of 25%. Non-interest expense increased $1.2 million to $39.6 million in the quarter, $1.1 million of professional fees and other expenses were related to the merger.
With only two weeks of TGR Financial in our results, the corresponding non-interest expense was very small at around $600,000. The efficiency ratio was very strong 51% for the quarter and 47.5% for the full year.
I will now turn the call over to David DePillo.
David DePillo
Thank you, Kevin. As Scott mentioned, our team did an incredible job addressing some very important projects and the completion of those projects in the fourth quarter really is a testament to the team we have in place.
The transformation of our balance sheet continues to develop nicely and today we are well positioned as a premier regional bank servicing a diverse client base. Overall, we generated a record $1.2 billion in loans in the fourth quarter.
As noted in previous calls, we anticipated higher fundings in the fourth quarter that’s our teams delivered. Consistent with last quarter, C&I loans continue to balance our overall fundings with $518 million or 43% of our total for this quarter.
Furthermore, 55% of those C&I loans that were generated this quarter were adjustable commercial revolving lines of credit, which is a strategic move for us and we continue to shift the balance sheet to be more – rate neutral. The remaining C&I loans were comprised of $130 million of commercial term loans, $46 million of public finance loans, $32 million of owner occupied commercial real estate loans, and $25 million of equipment finance loans.
These are all high quality business loans that generate strong yields, while continue to diversify our own portfolio. Looking more broadly at the $1.2 billion in loans we originated in the second quarter, the percentage breakdown is as follows.
Commercial 43%, multifamily 48%, single family 6% and 3% other. It is also worth noting that our Texas lending activities are gaining steam as we originated $156 million for this year in a state.
And as of year-end, we had $216 million of loans in Texas. We continue to focus on originating high quality loans – with high underwriting standards.
As has been mentioned, our NPA ratio remains very low at 14 basis points at year-end. I’m pleased to note that all forbearances and deferrals of our legacy portfolio were resolved this quarter, while forbearances and deferrals ended in the quarter at approximately $16 million or 22 basis points total loans.
These were all inherited from the acquisition of TGR Financial and will be resolved in consistency with our successful approach today. Let me touch briefly on PPP loans.
At the end of the quarter, 86% of our total PPP loans have been forgiven, and there’s only about $600,000 of net PPP fee income that remains to be recognized. Our total remaining PPP balance stands at $50.8 million, which includes $23.1 million of PPP loans added through the acquisition of TGR Financial.
Looking ahead, the overall pipeline remains strong as we enter the first quarter, and we expect production levels consistent with this quarter as our various lending teams continue to drive new business. Even despite record originations this quarter, we experienced only a slight dip in the weighted average rate at 3.3% on originations versus the third quarter which was at 3.46%.
We remain committed to achieving strong origination volumes, while still defending the yield on our portfolio. We experienced a weighted average portfolio yield of 3.8% for the quarter versus 3.74% last quarter, as the yield on payoffs have stabilized.
As of September 30th, 2021 – excuse me, December 31st, 2021, our held to maturity portfolio consists of 42% multifamily loans, 31% commercial business loans, 11% owner occupied CRE, 14% consumer, and 2% line of construction. Our deposit business also continues to perform well.
And our deposit profile continues to be very favorable. The $8.8 billion in deposits that we ended the quarter with represents a combination of closing the acquisition of TGR Financial, which contributed approximately $2.2 billion in deposits, offset slightly by typical year-end seasonal outflows in our commercial deposits service group.
Of note, our non-interest-bearing deposits accounted for – 37% of our total deposits. Commercial business deposits from our channel serving complex treasury management commercial customers, and from our business banking customers served by our retail branches were 71% of – core deposits as of December 31st.
Core deposits continue to improve now accounting for 99% of total deposits. As said, our – core deposits have continued to remain low and – core deposit costs have continued to remain low and have stabilized at 15 basis points consistent with the last quarter.
As Kevin mentioned, our NIM improved to 3.17% during the quarter, as excess liquidity from our legacy cash prior to the acquisition of TGR Financial was deployed. While loan funding yields are stabilizing, the additional excess liquidity inherited in the end of the fourth quarter from TGR Financial likely provide a short-term drag to NIM into the next quarter as we work to deploy the excess.
Finally, the success in the quarter could not have been achieved without the great team we have in place, like Scott, I’m very grateful for all the dedication and hard work. At this time, we’re ready to take questions.
I will hand it back to the operator.
Operator
And at this time, we are now open for questions. [Operator Instructions] And we will take our first question from David Feaster with Raymond James.
Please go ahead.
David Feaster
Hey. Good morning, everybody.
Kevin Thompson
Good morning.
Scott Kavanaugh
Good morning.
Kevin Thompson
Good morning, David.
David Feaster
Maybe just starting on the growth outlook. I mean, loan growth has been phenomenal.
Pipelines sound like they’re pretty good. We got expansion due to some higher-growth markets.
Just curious how do you think about organic growth as we head into ‘22? And just maybe could you touch on the pipeline and maybe how that composition has changed?
How much is from Texas and Florida and just the amount of non-multifamily loans in the pipeline?
Scott Kavanaugh
Dave?
David DePillo
Sure. Pipeline going into the year is at record levels across all product types, including multifamily.
So, proportionately we would expect fundings for the year to kind of fall in line with what we’ve seen for this year. So, probably about 50% to 55% multifamily and the remainder spread across our C&I and a little bit in our consumer platform.
We expect a little more traditional CRE to add into that mix next year due to the acquisition of TGR that was a primary focus along with C&I that they – and they also have some residential lending that we plan to continue to expand in the market. So, what I would say is, I would expect this year to track very closely to last year with C&I, continuing to round up at a very nice level.
Texas, we had some pretty good numbers coming out of not only income property, but equally or even greater – in the C&I channel due to the fact that we just added teams recently, but have traditionally C&I relationships in Texas that continue to build. So, our expectations are to continue to build those fundings in Texas, it’s going to take a while for Florida to really ramp to the levels that we expect on a long-term basis.
But what we would say is, we would like to be at a significantly higher run rate by the end of the year than we certainly have modeled to date. So, I would expect their numbers to increase from historical levels that they had previously achieved due to a larger balance sheet and a much of what we think a greater depth of product that they will now have to offer across a state that is pretty deep and wide as far as availability.
So, I would say, we’re very excited about heading into the year. Typically, the fourth quarter is a clean out of pipelines.
However, we entered this year with pipelines stronger than we’ve seen in the – in prior years.
David Feaster
Okay. That’s helpful color.
And then the – just maybe if you could give us an upgrade on the integration of the forward acquisition. Where do we stand with cost savings, it’s obviously still in the early innings.
And then just kind of how you think about expenses, just if you can give us a good core expense run rate, obviously, we’ve got inflationary pressures and some of the investments that we have going on just kind of how do you think about expense growth as we head throughout ‘22?
Scott Kavanaugh
Kevin, why don’t you touch on the expenses?
Kevin Thompson
Yeah, you bet. And Dave can talk more about the integration.
First part of your question, the integration is going very well, a very strong team at TGR Financial that adds a lot of talent to our team, very pleased to have been able to retain a higher number of employees than we normal – normally would in this type of transaction, because they’re across country, in a market that we want to grow in. And so very pleased with the integration so far with a lot of work to go as we finished much of that out in May.
So from an expense perspective, we had modeled 30% expense reductions, I believe we’re on track for that. And hope we can improve that over time.
But again, we’ve retained talent as we dip into the $10 billion asset mark, we want to make sure that we’re prepared from a regulatory and logistics perspective to be ready for that, so we’ve retained a lot of talents. Their run rate was $8 million a quarter or so.
And so we do expect to save many of those expenses. Our run rate going forward for the year, we’re currently expecting $46 million to $47 million in non-interest expense for the year, and we’ll see how that plays out based on loan growth, et cetera.
David DePillo
So from a – look, first of all, from an efficiency standpoint, we still expect to be around 50% efficiency, even with the combination and being over $10 billion. So our expectation is our revenues will grow – commensurate with our expenses.
So unlike some other financial institutions that are reporting outsized expense growth, we expect to be relatively in line to what we’ve seen traditionally as a percentage. As Kevin mentioned, we acquired this for growth.
So we did have some initial cost saves due to some management turnover and some legacy costs that will now be absorbed the platform migration. Our plan is still to do our core system conversion in May, we still have some additional employees that are on retention through that time that will probably roll off after that.
But we would say, that’s probably not significant in the overall cost structure as we planned to add additional resources in the market, and most likely would offset any of those cost savings that we would have going forward from there. But being involved in many, many acquisitions over the year, our ability to do this are at a very efficient cost structure.
It’s – it was very low on a relative basis to what we see for an institution of this size. And we’ve been able to find additional costs saves in some of the restructuring of contracts and migrations.
So, so far, so good just from…
Scott Kavanaugh
Also – yeah, I’m also very pleased, look, we made a decision that the –some of the management team, in particular, Gary Tice is remained on the Board. Garrett Richter, who was their CEO, is now the Area Market President in Florida.
And I think that’s really important for the retention of clients. Those guys were very strong in knowing who their clients were and maintaining those relationships.
And along with the cost saves that Kevin and Dave just talked about, we modeled just like everybody does some loss of relationships and deposits, et cetera, I think we’re going to do better than the average as well. So I’m very optimistic on that.
David Feaster
That’s great, that’s extremely helpful color. And then maybe just touching on the margin, it was a lot better than expected and appreciate the commentary about the liquidity drag from – from TGRF.
Could you maybe just walk us through some of the puts and takes with the margin. It sounds like new loan yields you know hopefully or at least the decline is slowing hopefully we’re at a trough and maybe seeing some inflection just given the move into 10-year.
Just any thoughts on the margin? And could you just remind us of the pro forma rate sensitivity?
David DePillo
You know it’s interesting the margin is sensitive to obviously two areas. One is, if we’re – if we have cash effectively earning, I don’t know what on average 25 basis points, if we can redeploy those into loans yielding anything or securities, we have a tremendous amount of pickup.
So you’ll see a lot of the margin pickup related to that. The other is, there was a little bit of margin drag when we had higher yielding loans paying off on a relatively rapid basis from a few years ago, due to the low interest rate environment that we ran.
So the benefit we got several years ago for those loans were – were now starting to impact our margin, not significantly as much as our liquidity overhang, but still had a impact. So, loans in that we’re saying the mid 4s were refinancing into assets in the mid 3s, you’d lose 100 basis points on those as they cycled through, a significant portion and the majority of those have already cycled through the portfolio.
So now that we see you know the portfolio yield’s bottoming out and actually starting to stabilize and rise with higher expectations of interest rates that’ll probably impact us more, I would say in the second quarter, we’ll start to see our asset yield starting to increase again you know somewhat offset by cost of funds increases as those start to impact us. But, we would expect not as much rate sensitivity going into this cycle as we experienced in the last cycle due to the lack of wholesale funding, the low beta on a lot of the deposits that we’ve gathered and through acquisition of TGR.
So, I think we’re in a much, much better position to maintain our margin. And our – you know current forecast is probably our margin will stabilize about where we’re at now.
Maybe a little bit –
David Feaster
Okay. That’s helpful.
Thank you.
Operator
And our next question will come from Steve Moss with B. Riley Securities.
Please go ahead.
Steve Moss
Good morning.
Scott Kavanaugh
Good morning, Steve.
Steve Moss
Maybe just – maybe just circling back to the origination pipeline here, $1.2 billion are kind of the production level it sounds like for the first quarter you expect with the pipe – with things growing as the year goes, so I guess it sounds like implying north of $5 billion in originations for 2022 is what you guys are thinking?
David DePillo
I would say you know, we always look at modeling around you know $4 billion to [$4.4] [ph] billion is kind of our expectations, the one that – if we could accelerate beyond that depending on the reactions of what happens with the Fed, if they start raising rates relatively rapidly, we may see a little bit of low in some of the activity in the market as people’s expectations start to catch up to a new rate environment, but I would say $5 billion is probably an aspirational number, but I would certainly think our run rate is a little over $4 billion.
Scott Kavanaugh
Here’s the good thing is Steve, CPRs are declining. So you know hopefully that that helps us a little bit.
If there is a law with raising rates –
David DePillo
Got to get us something to be –
Steve Moss
All right, that’s helpful. And then maybe just in terms of you know the expansion activity.
Just kind of curious you guys touched a little bit on expanding into additional markets in Florida. Kind of curious the markets you’re thinking of – excuse me – expanding into and maybe the pace of hires for both Florida and Texas?
Scott Kavanaugh
Yeah. So definitely we are going to continue to look for M&A activity, predominantly in Florida and Texas you know there.
I mean, we’re always hopeful that we can you know find something, there’s no doubt that one way or another we’re going to continue to expand in both Texas and Florida. I would say, California, Nevada, Hawaii you know we felt like we’ve got pretty good coverage in those markets.
And that won’t – probably won’t see us do a whole lot there unless something just falls on our lap. But you know we’re continuing to look for teams in all our markets.
You know, in particular, I feel like we’re starting to gain some traction on the investment management and trust services. I think had previously said that we’re looking to gain our trust powers in Florida.
We can’t get it till we in Texas, until we have our branch operational, which will be later in this quarter or first part of the second quarter. But we are going to be seeking trust powers there.
But we’ve turned up what we think are some pretty good candidates in both those – those sectors. You know, we’re starting to find some good C&I teams.
So we’re going to continue to you know try to ramp up and either –
David DePillo
Strategically –
Scott Kavanaugh
[technical difficulty] M&A deal.
David DePillo
Strategically, Scott I think we talked in Florida really kind of migrating north along the west coast first, strategically, and a lot of opportunity in the panhandle on and so west coast of Florida is probably we would see the little – little bit of easy lifting. Dallas, Metroplex is obviously our focus of growth right now.
But we’re looking at adjacent markets such as Austin and San Antonio as great markets for us to find additional resources and grow.
Steve Moss
Okay, great. Well, thank you very much for all the color.
Nice quarter.
Scott Kavanaugh
Thank you.
Operator
And our next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark
Hey. Good morning, guys.
Scott Kavanaugh
Good morning.
Kevin Thompson
Good morning.
David DePillo
Good morning.
Matthew Clark
First one for me on the C&I loan growth this quarter. How much of that was from higher line utilization and how’s that ratio compared to pre-pandemic at this point?
David DePillo
I don’t have the exact numbers for review, but we could probably get them. There was a big chunk from line expansion or – or larger renewals accordions.
There’s some of that was, so I would say it’s probably 50% new credits. But a lot of the new credits were borrowing bass related expansions by companies needing more access.
So, I would say the significant portion of it was really expansion of – company expansion for – for borrowings based on higher levels of productivity.
Matthew Clark
Okay, great. And then on your rate sensitivity you know relatively neutral.
Not sure what deposit beta you’ve assumed though in that analysis in your filings, but maybe you could let us know what you know the deposit beta is that you’ve assumed in that? And how do you think it might play out you know, the cycle?
Scott Kavanaugh
Kevin?
Kevin Thompson
Yes. And are you talking our merger related beta or our overall company beta?
Matthew Clark
Well, I guess it would be the deposit data that’s in your filings you know what you assumed maybe for the first 100 basis points. And then you know how you – you know, I would – I would think we’d take the under on the cycle, but we just want to get your thoughts on kind of the – the – you know sensitivity or margin on the deposit side?
Kevin Thompson
Understood. Yes.
So we model and I think this is fairly consistent – consistent with other banks, we model about 15% to 20%, decay, as well as a beta of 10% now, our numbers that we’re currently using, we’re not assuming yet a rate increase until we start seeing that happen. But to your point, we believe much like the last rate cycle, the deposit betas will be quite low, and will be extended over a period of time.
Add that to our transition of balance sheet having more core deposits, more relationship based deposits, we anticipate that deposit – being slow over time, and the loan beta, colonial beta, outpacing the deposit yield beta over time, we still need time to model the current environment, it depends on how the yield curve plays out. And whether we actually see these rate increases – and increase – happen this year.
But I think we’re set up to your point in a fairly neutral position to be able to handle it either way.
David DePillo
I guess the good news is the long end of the curve and salary reacted to expectations of buyer rates. So we should have some run rate on the loan side before the deposit side starts to adjust.
Kevin Thompson
Agreed.
Matthew Clark
It also sounds like you have a remix opportunity knowing you have the loan growth that should help too, I would think. And then just shifting to expenses.
How should we think about that you know $2.1 million run rate of customer service costs with – with each right – rate hike in that you know included in your $46 million to $47 million run rate of expenses this year?
David DePillo
That’s fairly static, right, Kevin. That would increase although we don’t, I think it’s going to go hike for hike.
But because it’s – it’s a little artificially higher than what we didn’t bottom out to zero on those costs. So we have a little bit of room on the way up.
That’s right –
Kevin Thompson
And those are static numbers you know average, we made $47 million in non-interest expense for the year is assuming the current interest rate environment. So we will see some deposit beta in those as we – as we said, I think it’s the somewhat extended and low over time.
David DePillo
Yeah maybe model half of the rate adjustments into it.
Matthew Clark
Okay. And then just on the tax rate, how should we think about that rate with your growing presence in Florida and Texas?
Kevin Thompson
We anticipate 28% or so for this year and then moving down over time as we have more loan production out of California.
Matthew Clark
Okay, thank you.
Operator
[Operator Instructions] And we’ll take our next question from Gary Tenner with DA Davidson. Please go ahead.
Gary Tenner
Thanks. Good morning.
I just had a follow-up on rate sensitivity. I just wonder you know you gave some thoughts on deposits just thinking about the loan side now you know on the consolidated balance sheet.
Can you kind of give us a sense of you know the percent of floating rate loans in the portfolio today and then any impact of floors that’ll – that’ll lag reaction to the rate acts?
David DePillo
Do you have the breakdown Kevin of our actuals which is float rate loans?
Kevin Thompson
Yeah. So we have about 16% fixed, the rest is adjustable.
Many of those adjustable however –within their first five year –
David DePillo
[Technical difficulty] period.
Kevin Thompson
Yeah, periods. So, in fact, the majority of it is, so we – we shouldn’t see the existing portfolio moving too much you know add to that quick, that’s a low durations, it’s really the new production that I anticipate moving the needle more and that depends a lot on the yield curve.
It depends on competition you know a lot of banks have high deposit balances to deploy. So that may be a little delayed as well, but I still anticipate loan yields moving quicker than deposit rates.
David DePillo
Yeah, I would – I would say on the floor issue, since the majority of our C&I loans have had floors anywhere between 25 basis points and 50 basis points. There may be a slight lag on some of those, not – I would say not tremendous.
The – I think the bigger issue for us is, as Scott mentioned, our prepays are starting to slow and those higher yielding loans that we’re paying off, will have a much – more dramatic impact to loan yields than any adjustments to the short end of the curve. Because those – those rates were probably 100 wider to the previous environment now that those have kind of cycled through, we’ll start to get the net benefit of new loans coming on at higher rates.
Gary Tenner
Okay. Thank you.
And then second question in terms of the increase in borrowed funds at 12/31. Is there any portion of that that would be kind of repaid as a result of you know some that you just issued or any changes in terms of kind of the – the full –
Scott Kavanaugh
We’ve tried to repay everything – we – we’ve tried to repay everything that we could. Correct me if I’m wrong, Kevin, but most of what came on the balance sheet was to TGRF borrowings.
Kevin Thompson
That’s – that’s correct.
Scott Kavanaugh
But we had a next bank loan at the holding company. And we paid it down the – the very day that we received the proceeds from the sub debt deal.
So I think we’ve paid everything down that we could.
David DePillo
Yeah, you wanted to give a recap of the environment that you’re around?
Kevin Thompson
Yeah, you bet. At year end, there was to Scott’s point, $6 million of a holding company line.
The remaining came from TGR, $25 million is subordinated debt that we inherited in the acquisition and the rest are actually repurchase agreements with customers that are much like a different way of doing deposits that some of the TGR customers really appreciate doing.
David DePillo
I think that’s the majority.
Kevin Thompson
That’s the Majority of it.
Gary Tenner
Okay, appreciate the color. Thank you.
Kevin Thompson
Thanks.
Operator
And we’ll take the next question from Brad [Neff] [ph] with [Coral Capital] [ph]. Please go ahead.
Unidentified Participant
Yeah, thank you. You just reminded me what your profitability goals are, say, in a clean year, so maybe like in 2023 on our ROE and ROA basis?
Scott Kavanaugh
I don’t think it’s changed much. I mean, I would hope that we could generate somewhere between 15% and 17% return on average common equity, and you know probably somewhere between 1.35% to 1.55% on – on assets, Dave, Kevin, you disagree?
David DePillo
Probably 1.25% ROA is kind of our you know normalized number is some more extraneous items.
Kevin Thompson
That’s right.
David DePillo
But yeah like mid-teens ROE and 1.25% ROA is you know also depends how – how quickly the Fed moves and what reaction our deposit costs will have but in a stabilized environment that’s pretty much where we kind of attract to.
Unidentified Participant
So the range seems kind of big. So from a normalized ROA from 1.25% to upwards to 1.55%.
Is that what I’m hearing?
David DePillo
Could be as high as that depending on outside securities gains potentially that we’ve had historically that have helped bolster that some other items that could have an impact. We’ve had some – because of those outside securities gains has some pretty dramatic swings in our – our ROA, ROE.
So, depending on strategy with or without that that’s where you’d probably see the biggest swing.
Unidentified Participant
Yeah, okay, so possibly – okay should I think of it possibly 1.25%. But with security gains, it could be upwards to 1.55%?
Scott Kavanaugh
150% yeah.
Unidentified Participant
Okay, got it. Thank you.
Appreciate it.
Scott Kavanaugh
Thank you.
Operator
And this concludes our allotted time for today’s questions-and-answer session. I will now turn the call back over to Mr.
Scott Kavanaugh for closing remarks.
Scott Kavanaugh
Thank you again for participating in today’s call. Very proud of our results that we reported.
Our business lines are doing well and I’m very pleased that the path we’re on. 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
Thank you. And this does conclude today’s program.
Thank you for your participation. You may disconnect at any time.