First Foundation Inc.

Greetings and welcome to First Foundation's third quarter 2020 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. If you would like to ask a question at that time, please press star 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We ask that you please pick up your handset to allow optimal sound quality. Speaking today will be Scott Cavanaugh, First Foundation's Chief Executive Officer, Kevin Thompson, Chief Financial Officer, David DiPillo, President of First Foundation, and John Hakopian, President of First Foundation Advisors. Before I hand the call over to Scott, please note that management will make certain predictive statements during today's call, that reflect their current views and expectations about the company's performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today's earnings release. In addition, some of the discussion may include non-GAAP financial measures. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, the company's filings with the Securities and Exchange Commission. And now I would like to turn the call over to Scott Cavanaugh.

Scott Cavanaugh Hello, and thank you for joining us. We would like to welcome all of you to our third quarter 2020 earnings conference call. We will be providing some prepared comments regarding our activities, and then we will respond to questions. It was another strong quarter for First Foundation. Our business model of providing banking, private wealth management services has performed very well. Lending, deposits, investments, wealth planning, and trust services are each contributing in meaningful ways. While many other financial service firms have reduced activities due to the shutdowns, our team has used it as an opportunity to gain ground in the markets we serve. As we continue to find that our clients want to work with a single provider of services, which allows us to build long standing and meaningful relationships. This really speaks to the value proposition of our firm. As highlighted in the press release this morning, we delivered another quarter of strong financial results. Our earnings for the third quarter were 30.9 million or 69 cents per share. a 78% increase over the third quarter of 2019. Total revenues were $75.3 million for the quarter, an increase of 32% year-over-year. Our tangible book value increased to 13.05 cents per share. Our efficiency ratio for the third quarter improved to 40% and 49% year-to-date. As we mentioned on previous calls, our target efficiency ratio is 50% for the full year, so we were well on our way to reaching that important metric. We also declared and will pay our quarterly cash dividend of $0.07 per share and anticipate the continuation of the dividend in future quarters. Over the last nine months, we have experienced strong loan and deposit growth, and this quarter, our assets under management increased to pre-pandemic levels. Loan originations for the quarter were $414 million, and overall deposits have grown by $573 million year-to-date. We have also decreased our wholesale deposits by 56 percent, and our federal home loan bank advances 64 percent year-to-date. which is a part of the successful repositioning of the liability side of our balance sheet that we have spoken about in the past. Loan demand remains strong in our markets, and our pipeline and credit underwriting continue to be robust. We successfully completed a securitization of $553 million of multifamily loans, our fifth such deal to date, and we are already starting the process for next year's securitization. Our digital platforms continue to perform well, allowing us to deliver products and services to our clients in new and efficient ways. As mentioned in the past, we have made important investments in this area and are continuing to see a strong payback. This is highlighted by our year-to-date growth of over 323% and our online savings channel. This has become a valuable complement to our retail offering. Now our savings clients can engage with us online or in the branch, whatever is most convenient for them. The increase in assets under management for our private wealth management business was thanks in large part to our trust business. Our trust offering, which recently eclipsed $1 billion in assets, continues to differentiate us against other wealth managers and financial advisory firms. I also want to say I'm very grateful to our employees who have worked tremendously hard during these challenging circumstances. We know there is much uncertainty in their own lives with school closures, routines being upended, and everyday life put on hold, which makes the results we reported today that much more meaningful. It is truly a testament to the great work we have in place here at First Foundation. I would also like to thank all of our clients who entrust us with their financial needs. Now, let me turn the call over to our CFO, Kevin Thompson.

Thank you, Scott. With the successful execution of our securitization and the continued momentum of our customer-centric model, we experienced strong profitability in the quarter with a diluted EPS of $0.69 per share. Efficiency ratio decreased to 40% with a return on assets of 1.79% and a return on tangible common equity of 22%. We completed a securitization of $553 million of multifamily loans in the quarter, as is our practice to do annually, achieving a very healthy $15.1 million gain. As part of the transaction, we also recognized a mortgage servicing right of $3.9 million. Loans held for investment decreased in the quarter due to $513 million of loan balances being transferred to the held for sale category in preparation for a securitization next year. Absent this transfer, loan balances increased slightly in the quarter. The cost of deposits decreased from 84 to 57 basis points in the quarter and was 48 basis points in the last month of the quarter. our broker deposits have decreased over 670 million or 56% year to date. Our strategy of increasing core deposits has gained traction as our core deposits increased from 76% to 90% of our deposit base year over year. Deposits from PPP activity only accounted for 18.5 million of our deposits this quarter, as we are seeing that most of our PPP borrowers have already put that money to work to reopen or continue their business. We were also able to pay off $500 million of FHLB advances in the quarter at a rate of 1.77%, which, as Scott mentioned, is part of our successful strategy to reposition our liabilities. The net interest margin expanded seven basis points to 3.03% as a result of the success we have had in lowering deposit pricing. Credit metrics remain strong in all our loan portfolios, and the allowance for credit losses for loans decreased by $3.9 million, resulting in an allowance of 52 basis points of loans. This change was largely a result of the decrease in loans held for investment, as well as a slight improvement in the economic scenario we utilized for the CECL calculation. With the current interest rate environment and the increase we have experienced in prepayment speeds in our interest-only strip securities, we increased the allowance for credit losses for investments by $5.7 million, which represents the change in expected cash flows on these securities. Also related to prepayment fees, we recognized a $1.3 million valuation allowance of mortgage servicing rights. With strong expense management and the investments we have made in our infrastructure, we are seeing the benefits from improving operational leverage and efficiencies. We have also begun to take steps to improve our tax profile going forward, including investments in low-income housing tax credits, municipal lending, and other strategies. I will now turn the call over to David DeFillo, president of First Foundation. Thank you, Kevin.