First Foundation Inc.

Greetings and welcome to FIRST Foundation's second quarter 2022 earnings conference call. Today's call is being recorded. At this time, all participants have been placed in the 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, and David DiPillo, President. Before I hand the call over to Scott, please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results. These forward-looking statements are made subject to the Safe Harbor Statement 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.

Good morning and welcome. Thank you for joining our second quarter 2022 earnings conference call. Today, we will be delivering some prepared remarks highlighting our activities and accomplishments this quarter. At the conclusion of the prepared remarks, we will open the mind for questions. This quarter, we delivered strong results as our business model continues to perform well. Our earnings for the second quarter were 33.3 million, or 59 cents per share, which represents a 7% increase over the first quarter of 2022. Total revenues were 95.2 million for the quarter, a 6% increase from the first quarter of 2022, and a 32% increase year over year. Our tangible book value per share ended the quarter higher at $15.61. We also declared and paid our second quarter cash dividend of 11 cents per share. As you are well aware, there are a lot of headwinds facing our industry and the economy right now, yet each of our lines of business have continued to perform well, and we have contributed in meaningful ways to this quarter's results. Our strong financial performance is a testament to the dedication of our employees who continue to deliver across all areas of the company. It also is a demonstration of the quality of our clients and our pipeline across banking, wealth management, and trust services. We continue to strategically build upon our growth story via organic opportunities while we also capitalize on our recent M&A activities. Furthermore, core deposits continue to increase so that we remain largely self-funded, a strategic advantage in the current environment. The favorable results we reported today reflect the strength of our institution and our continued positive outlook that our business model is working very well across the diverse and dynamic markets we serve. Loan originations hit record levels with $2.2 billion in new loans for the quarter, a truly remarkable feat. Another highlight in the quarter was our impressive balance sheet growth, which expanded from $10.4 billion to $11.2 billion. And we would have even been greater had we not put our excess cash to use. NPAs. continue to remain low at 15 basis points for the quarter as our lending team does a fantastic job maintaining our high credit standards. We have established a well-balanced loan portfolio that continues to perform very well. Dave will touch more on that later in the call. Our deposit profile remains diversified and attractive with core deposits at 99% of total deposits. Deposits increased by $581 million for the quarter, driven by our ability to continue to attract high-quality clients from online, retail, and commercial channels. All of this speaks to the strength of our deposit team and the attractiveness of our offerings. Our wealth management and trust business continue to provide meaningful contributions to the firm and have been successful in retaining existing clients and attracting new ones. Assets under management ended the quarter at $4.8 billion, largely due to market conditions expanding the first months of the quarter. The all-weather portfolios we manage for our clients performed well with respect to their benchmarks, even as the S&P and NASDAQ saw significant declines during the quarter. It is times like these that our investor clients seek our advice more than ever. We are actively working with each one of them. We successfully expanded our wealth management and trust offering into Florida with the addition of talented new team members, and we are pleased at the initial results we are seeing. As I have mentioned in the past, It's an excellent market for private wealth management services. We also secured trust powers in both the state of Texas and the state of Florida, which will allow us to offer a full suite of trust services to clients in these important markets. Looking more at our expansion efforts, the final step in the acquisition of First Florida Integrity Bank occurred when we converted our core systems in May. Florida is now up and running on our industry-leading technology platform, and we are successfully working with these new client base as we work to deepen these relationships and acquire new ones. To that end, we have already begun discussions with many of our Florida clients and have uncovered additional ways we can support them, whether it is through additional banking services or wealth planning investment management, or trust services. It's been a tremendous effort by the team, and I am so grateful for everyone who has worked hard to make this happen, especially all of our colleagues in Florida. Texas continues to present unparalleled opportunity for us. It produces 9% of U.S. GDP, second only to California. As the nation's largest annual state population growth, And in 2022, the number of businesses moving into Texas are on the rise. We officially opened the doors to our de novo branch in the city of Plano, Texas. This will serve as a valuable banking center to serve clients in one of the most business friendly regions as we operate. We expect great things from this branch and we are pleased at the warm reception we have received by the community of Plano. During the quarter, we also repurchased $2.5 million of stock at a weighted average price of $21 per share. Management will continue to utilize this stock buyback option should it be warranted. Also, we continue to invest in technologies to enhance our operational efficiency, which as important as ever as we expand and grow our team across multiple states and time zones. In this tight labor market, we have taken additional steps to ensure our employees are engaged and thriving. This includes offering advanced training for our future leaders, hybrid work setups for those who can work remotely, ongoing employee recognition and constant benchmarking of salaries to ensure we stay competitive in our markets. One of our best assets is our people, and we strive to make First Foundation a great place for our employees to call home. As we look ahead to a continuing rising rate environment and a transitioning economic cycle, First Foundation remains well positioned with a strong balance sheet and excellent credit quality. Demand for our services is at peak levels, and our pipelines across all business lines are very robust. I'm very grateful for all that we've accomplished in the quarter and the first half of the year. I want to conclude my opening remarks by saying how pleased I am with the entire team at First Foundation. We have a group of talented and dedicated professionals who are very committed to serving clients and building a valuable business. We also have amazing clients who entrust us with their financial wellbeing. It is truly an honor to be able to lead this organization. And now I'll turn the call over to our CFO, Kevin Thompson.

Thank you, Scott. As mentioned, earnings per diluted share was 59 cents in the second quarter. The return on assets was strong at 1.24%, with the return on tangible common equity of 15.5%. The debt and interest margin expanded 18 basis points to 3.18% in the quarter. The NIM increase was driven by our strong loan production as we utilized our excess liquidity and by an increase in the yield on interest earning assets, which expanded to 3.5%. This was offset partially by an increase in our cost of deposits from 15 to 28 basis points, as customer deposit rates have been adjusting to the rising rate environment. Credit metrics remain strong in all our loan portfolios. The allowance for credit losses for loans increased by $339,000 in the quarter to $33.2 million, primarily as a result of increased loan balances, offset by the release of specific reserves related to purchase credit deteriorated loans from prior acquisitions. The reserve ratio decreased from 44 to 37 basis points of total loans. Our non-interest income for the quarter was $13.4 million, driven primarily by wealth management revenues of $7.7 million, $2.1 million in trust administration and consulting fees, and the balance in banking-related fees. Our advisory and trust divisions achieved a combined pre-tax profit margin of 24%. Non-interest expense was $48.8 million for the quarter, which represents a slight uptick of 2.5% from the first quarter. Customer service costs increased by $2.8 million due to increases in the earnings credit rates paid on the related deposit balances. We saw a decrease in compensation and benefits primarily due to merit increases and annual bonus and commission payouts that took place in the first quarter. The efficiency ratio for the quarter was 50.7%. With strong expense management and the investments we have made in our infrastructure, we continue to realize benefits from operational leverage and efficiencies. Finally, our effective tax rate for the second quarter was 27.9% compared to 28.4% for the prior quarter. We are just beginning to realize benefits from our tax strategy that should continue to grow over the next several years. I will now turn the call over to David DiPillo. Thank you, Kevin.

As Scott mentioned, we originated a record amount of loans with loan originations totaling $2.2 billion for the quarter, which is a 96% increase from the first quarter and a 98% increase year over year. Looking at the breakdown of loans that were originated in the quarter, the percentages are as follows. Commercial, including owner-occupied commercial real estate, 51%. Multifamily, 40%. Single family, 4%. Land and construction, 2% and 3% other. Contributing to loan originations during the quarter, our commercial business division funded a record $1.2 billion of new commercial loans during the second quarter of 2022, which is a 30% with 30% of those being financed adjustable commercial revolving lines of credit. Of note, CNI originations included 518 million of public finance loans, 289 million of commercial term loans, 33 million of owner-occupied commercial real estate loans, and 32 million of equivalent finance loans. The large increase in public finance loans was driven by an increase in demand for bank loans away from the bond market by public municipalities. Following dramatic interest rate movements in the second quarter, We expect this increase in demand to be somewhat temporary given our unique positioning in the channel. We anticipate heightened originations in this channel through July as we fund out the majority of the pipeline and return to our historical run rates starting in August. Our public finance division has become a strategic component of our business originations benefiting both from credit quality with historically low loan losses while also offering and ability to lower our effective tax rate over time in providing a compelling tax equivalent return. Looking ahead to overall loan pipeline, we see continued strong demand heading into the third quarter in all lending channels. It is always important to note that we accomplished this record quarter of originations without changing our high underwriting standards as our NPAs fell to below 15 basis points for the quarter. Speaking more specifically about loan yields, we achieved a weighted average rate of 3.73% on originations, which increased from the first quarter that was 3.36%. This quarter, we started to see the impact of higher rate funding due to increases in the long end of the yield curve over the past few months. As of June 2022, our loans held for maturity consist of the following. 44% multifamily loans, 35% commercial business loans, 8% nonowner-occupied CRE, 11% consumer and SFR loans, and 2% land and construction. Our deposit business also experienced a strong growth during the quarter. Deposits increased by $581 million for the quarter, which is a 6.5% increase from the first quarter and an increase of 34.2% year over year. Deposit growth during the second quarter of 2022 compared to the first quarter of 2022 was primarily driven by an increase of $291 million or 8.8% in non-interest-bearing demand deposits, largely attributed to our commercial deposit services division, and an increase in money market and savings accounts of $277 million or 10.7% largely attributed to our retail branch and digital bank channels. Our noninterest bearing deposits account for 38% of our total deposit balances. Our loans deposit ratio measured 98.8% as of June 30th compared to 88.2% as of March 31st and 86.6% as of June of last year. This represents an increase from historical low levels experienced during the past few quarters as we have successfully deployed excess liquidity but still have a manageable ratio for a bank of our size. All the success in the quarter could not have been achieved without the great team we have in place. I am so grateful for their dedication and hard work. At this time, we are ready to take questions, and I'll hand it back to the operator.

The floor is now open for questions. At this time, if you'd like to ask a question, please press star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one to ask a question. We'll take our first question from Matthew Clark from Piper Sandler. Hey, good morning.

Good morning, Matt.

Good morning. Maybe starting on the margin, do you happen to have the spot rate on interest bearing for total deposit at the end of June? And what's your expectation for the cumulative deposit beta for this cycle?

Scott, I can take that first part. The spot rate on total deposits dipped into the mid-30 basis point area near the end of the quarter.

Okay.

And then, go ahead. In terms of beta, we are seeing, as you know, an unprecedented increase in the rate environment, and banks and bank customers are adapting very quickly to that. So the Where the last rate cycle, the beta was quite slow on deposits, we're seeing the opposite this time. And loans, as you know, take longer to get through a pipeline. So in the last cycle, loan betas were much quicker than deposit betas. In this particular cycle, for all banks, what we're seeing is the opposite. And we need a little time for the loan betas to catch up with those deposit betas.

What I would say, Matthew, is I don't think there's a bank in this country that's not having to raise rates somewhat similar. It's a very competitive environment. Deposits, and I've noted this in reading a lot of the reports that even you have stuck out, that deposits have declined at many banks. So it's expected that the Fed will increase rates tomorrow, I believe, is the next Fed rate meeting. And, you know, we will meet shortly thereafter. What the beta is off that is anybody's guess. But I don't think anybody's been through a cycle where you've seen 100 basis points or more move in less than 60 days. So the answer is deposit costs will go up. But by how much, we're not exactly sure.

Matthew, we are benefiting somewhat from our consumer retail channel, especially in Florida and some of our legacy branches. Those tend to move slower than certainly money available on the margins. So as we continue to experience large growth, marginal deposits will obviously be more expensive.

the uh the betas at our branch level are pretty consistent with what we see in the market okay and then just switching over to the loan yields um you know a little bit of an uptick but nice increase in the new um production in terms of rate um any update on pricing and multi-family these days and um It sounds like we should see kind of an acceleration in loan yields here beginning next quarter.

So, you know, obviously the book of business is relatively large, and even though we're starting to fund out at higher levels than we have historically, if you look at our current run rate, it's, you know, significantly higher than what we've seen in the past. That being said, as you noted, we did have some movement during the quarter on uh our yields going up which was nice um you know in june we were you know getting close to that four percent number but we were funding out a lot of loans that were rate locked in previous you know before that uh dramatic rate increase that we saw so we had to work through those portions of the pipeline uh current rates on multifamily we've been averaging uh i would say mid force right now so you know, about 150 base points higher than what we saw at the trough when rates were significantly lower, where competition was close to 3% or close to 4.5%. We will start seeing the benefit of that in the third and fourth quarter, but really, that really starts to gain momentum going into next year as we see a larger portion of our overall balances. So, from that perspective, That's a net-net positive to us. The other benefit we're seeing on rate yields movement is certainly in our commercial book. A lot of that is either prime, LIBOR, or SOFR-based. And, you know, those we expect to see also those settling in in the mid-to-upper-fours, depending on the business line, and in some cases, you know, in 5% to 6%. The good news is going into the latter half of the year, loan yields should be coming on at a significantly higher rate than what we've seen certainly in the first half of the year.

Okay. That's encouraging to hear your loan yield was tracking close to four in June. So putting it all together, is it fair to assume some, you know, a little more modest NIM expansion from here and try to hold the line with with new loan yields or excuse me, loan yield expansion kind of mitigating or offsetting the deposit increase?

So the way we've kind of seen it right now is we'll probably have maybe a little bit of catch up on the cost, but it should start to stabilize and then expand out. So as we've already told you, we kind of operate in like the three to three and a quarter range Near term, we may see a little bit of compression on that as we're waiting for some of these newer loans to come on.

It depends on what the Fed has to do. It all depends on the Fed. But the reality is I think you're fairly accurate, Matthew. Yeah.

Okay. Great. And then maybe for Kevin. Can you give us what you're assuming for customer service costs in terms of dollars for this year, full year, and next year?

Yeah, we have forecasted that, and it depends on many factors, what the Federal Reserve does. So, I don't think that's something we want to give an exact number on, but the Fed is moving quickly. We'll find out next Wednesday. this next move is and it's it really will be the telling factor we like other banks are seeing a a strong deposit beta up front in these moves and we will we will continue we uh you know in this quarter you saw a fed increase in mid-may in june those still aren't fully baked into our customer service numbers as there's some impact to those and depending on what happens next week All those will play out, and we will see an increase in customer service costs over the year. It won't be 100% beta. We still have good relationships with these clients. We have technology that's unusual for a bank our size that they couldn't find at other banks. So we will manage it well, and I think you'll see it play out, as we talked about, in our net interest margin.

So, yeah, and I think the way we view it is, you know, when rates are low, our efficiency ratio operates at the lower percentage. end of the spectrum. When rates are higher, we look closer to what an efficiency ratio would see at a typical commercial bank. So part of it's a trade-off of NIM versus G&A ratio. So we expect some near-term pressure on our efficiency ratio over the next couple quarters, and then that'll kind of subside as our balance sheet growth and earnings kind of lever into that. But, you know, if In the next couple of quarters, you'll probably see a little more impact, certainly, than we'll see next year and beyond.

Okay. And then just any updated thoughts on the current run rate of non-interest expense in the third quarter?

Yes, so you saw that we had, other than our customer service costs, we're actually, as expected, are down a little bit in the second quarter. First quarter is our seasonally high area. So we plan to, most importantly, keep our efficiency ratio low for the full year to the low, mid-50s. And we will see some increase in that expense line as, first of all, with customer service, but also as our business is expanding rapidly. We do have some investments in employees and other things over time, but maintaining that efficiency ratio in the low to mid-50s for the year.

Matthew, we are, from an employee standpoint, trying to be very careful during this time frame to make sure that We don't expand too much into certain areas. Stuff that we had built into the budget, you know, from an employee standpoint or whatever, we're pushing those out, you know, if at all possible. But when it comes to compliance, BSA, those types of things, we will always make sure that we have the proper staff to manage that properly.

Our next question comes from Andrew Terrell from Stevens.

Hey, good morning. Good morning. Hey, so one, congratulations on a really kind of phenomenal production quarter this quarter. Just wanted to kind of get a sense of kind of across business lines where we're kind of new loan pipelines. We're at going into the third quarter and And kind of your thoughts on how production volume should trend throughout the balance of this year.

Sure. If you looked at our run rate and backed out some of the bulge that we had for the municipal finance group, you would probably see a run rate that's closer to a billion three to a billion and a half run rate, which for us has put us on a run rate that's effectively almost double what we've seen. So the current pipelines are continuing to show robust demand across all business lines, including multifamily commercial, even in some of our more specific smaller lines of business, such as equipment finance. We are starting to see positive impact from our SBA division. We've kind of retooled that and revamped it and their pipeline is growing nicely. So, you know, we will have some benefit from some smaller, smaller balance CNI as well. So, unlike what we've seen potentially in other slowdowns in the economy, We expect that to be a little more consumer driven. At least that's what the market's telling us based on activity. It should have less of an impact on our commercial customers in the segments that we tend to focus on as well as the multifamily and CRE sectors that we typically see a benefit in demand during various cycles. What I would say is we expected a little more of a slowdown as rates moved up precipitously from where we saw, but given the market activity, the demand is still at a very, very high level.

Great. That's encouraging. And I guess maybe could you speak to, it sounds like, I mean, still kind of positive loan growth trends. Could you speak to kind of the growth you're expecting on the other side of the balance sheet? Do you expect to kind of fully core fund this level of loan growth or perhaps kind of need to go to the broker market for funding in future quarters? Just can you talk through the deposit growth dynamics?

I think we have a pipeline that can hold up pretty well, I will say. that the loan originations that we put forth the first two quarters and definitely the third quarter is trending very favorably as well has definitely put a stress on trying to make sure that we stay quarter funded. That being said, our pipeline is pretty robust on the deposit side. So I don't think at this time that we will need to go to the brokered market. If we did have to, it would be minimal.

We have, I would say, you know, between our branch delivery, our online delivery, our commercial deposit areas, it'll probably keep us out of the higher costing broker market for a while. And as Scott said, there's, you know, big opportunities. Unfortunately, in this this cycle, marginal costs are more expensive. So we don't have the luxury because of our large outsized growth of, you know, relying on a low growth, low beta environment that some banks, you know, may experience. However, you know, profit is profit and we brand the models and, you know, we've looked at should we slow down growth or continue to to grow on the margin, and even though it may have some metric compression in the near term, the forecast looks much more favorable to continue with a large-scale growth.

Got it. Okay. And we should still expect kind of no securitizations this year?

No. Yeah, not at this point.

Okay, great. I'll step back in the queue. Thanks for taking the questions.

Our next question comes from David Feaster from Raymond James.

Hey, good morning, everybody. How are you doing? Maybe just I'd like to get a sense of the competitive landscape that you're seeing. Obviously, you guys are taking share, but I'd especially like to hear your thoughts on some of the newer markets in Texas and Florida. I mean, these are both highly competitive markets. What are you finding that's your competitive advantage that's allowing you to gain share both on the loan side as well as the new lender side?

Sure. So let's start with Florida. Part of our focus has been to refocus and remix some of their activity. They were a little more heavily focused on non-owner-occupied CRE away from multifamily, and they certainly had a a foothold, about an equal foothold in the commercial business lending. So that continues year to date. They're on pace to do about the same as what they did last year, plus or minus. But what we've seen is we've redirected efforts. And I think you'll see in the latter half of the year that there is a strong demand for our multifamily product in the Florida as well as the Texas market. Specifically in Florida, we're gaining good traction. So we're seeing, you know, I would say significant pipeline growth on a relative basis out of Florida. So strong demand for that. I would say the commercial business lending is no more competitive than what we see in California and some of our other major markets. So I think we're given some of the tenure of the originators in the market that we have. in the legacy of the bank, we still see demand there. So I think we feel good about the fact that we're still seeing, you know, good originations as we kind of retool and fold the organizations together, because that does tend to create some level of disruption. So good positive activity there. In Texas, it's been, I would say, equally as favorable. We actually outfunded in year to date in Texas than we have in Florida. And I think that's a testimony to the teams that we've put in place, and they're just starting to hit levels of stride. So that's been a little more focused in the CNI side of the business, but we still are seeing good demand and good penetration on the multifamily. So we will continue to see our product being successful in those markets. Texas is unique in the fact that The agencies came in several years ago with kind of the small balance product and really started to gain significant market share. And our product competes very well against the agencies. So it's a model that we've seen across the country. So we've been able to kind of push our product into the market, get good visibility and good demand for it. And we're starting to see some of the fruits of that labor pay off. I would say net-net, both markets seem to be going in a positive direction and a lot of market acceptance.

Okay. When we were talking through our pipelines the other day, we kind of had some numbers of what Florida and Texas look like.

Yeah, yeah. I would say from a pipeline standpoint, we're seeing, you know, extremely good growth in those markets and the momentum there.

is certainly over a hundred million in each market.

Oh, several hundred million in each market is yeah. Uh, uh, current pipeline, but that was just one channel alone.

So that we're, we're actually seeing some decent inroads and to both Florida.

That's great. And maybe just kind of taking all this growth commentary together. I mean, it sounds like this was not just a pull forward of demand, that this is true core demand and market share gains. Could you just help us maybe think about how to think about net organic growth going forward, just given the combination of new hires, market expansion, pipeline growth? as well as expectations for potentially slowing payoffs and paydowns. Just as we put all this together, how do you think about organic growth going forward?

Well, to be quite honest, David, M&A is nice, but I think if you look back at the history of First Foundation and you see the transactions we've done, none of them have amounted to enough to really, other than possibly First Florida Integrity, to really grow the balance sheet tremendously. I think it's a real testament to our team to have gone from a $1.1 billion origination quarter to $2.2 billion. And we have a third quarter that's shaping up nicely. You know, if we did nothing but grow organically, I think you would continue to see the balance sheet expand at a greater growth pace than most banks in this country. So what Dave's put together on the lending team and the team that we have out there in all those markets just shows that we can step up to the plate and continue to fund at pretty high paces.

Yeah, we would expect, you know, low to mid-20s on a loan growth rate for next year. And that slows down slightly in the outer years because the denominator is larger, and we're not forecasting significant growth beyond what we're achieving today. But we're probably looking at kind of a mid-20s loan book organic growth year over year.

Yeah, that's incredible. And then maybe just touching on something else that I know you guys have been working on, just wanted to get an update on the NYDAG partnership and where we are with that rollout. Obviously, you know, the partnership's gone extremely well. You know, there's been some volatility in crypto, but just curious, you know, where we are there and, you know, any updates you could provide.

Sure. So, We're now to the point where the. The workflows completed the integration is ready to go and we're now doing an internal employee pilot. You know, kind of our first test on a go live basis, so everything is kind of on track. I would say we delayed it a few months given all the activity that we had going along in relation to integrating TGR into our environment. But we've got an internal beta going, and then our next will be a public beta. And that should be rolling out shortly after our internal beta. And then after that, it'll be a go live.

And it's specifically Bitcoin related. And despite the compression in Bitcoin prices over time, we still believe there's good consumer demand for customers to work through their trusted bank to access the Bitcoin markets. And we also believe that this, the blockchain technology is very important and that having our legacy systems have the ability to plug into this modern technology that works differently would be really important for banking going forward.

Honestly, David, I would say that, uh, You've seen some bankruptcies and other things recently. I think there's been positioning that whatever client coins were out there weren't their coins. I think this would make it even stronger for people to want to work through their trusted bank than through a company that they don't know what happens in turbulent times like what we're seeing right now. So I'm actually very optimistic on this.

Yeah, I think that's a very good point, Scott, and the fact that some of these exchange bankruptcies, you're deemed an unsecured creditor and went through their user agreements. It was you didn't really have a perfected interest in your asset that you thought you had. In this case, you have a a unilateral right through cold storage to access your ownership position. So the fact that it's going to bank rails and it's probably the industry standard for cold storage, I would say, to your point, Scott, it would be an advantage to the market given the turbulence. Thanks. Thanks, everybody.

Thank you. Thank you.

Our next question comes from Steve Moss from B. Reilly Securities.

Good morning, Steve. Good morning. Just maybe following up on, you know, on expense plans, and I heard Scott mention, you know, pushing some things out. Kind of curious if that impacts any of your hiring plans in Texas and Florida or, you know, what thoughts you may have there?

Well, I don't know. I mean, to the extent that we find people good production people that can continue to expand in the marketplace. We will not step back and refrain from hiring people. We will always continue to try to expand into additional marketplaces as we deem necessary. So I don't want to give that impression, but there are initiatives, some on the technology side, just some on the hiring side, where instead of going through the normal channels, we can live without having to have that added employee for another six months or something. So the answer is we're trying to manage expenses as best we can, but we're going to continue to expand into marketplaces. Look, it all depends on the teams that you find out there. And I'll say that First Foundation has had some great opportunities to hire production people, and we have not slowed that process down at all. And I think, again, it shows to the testament of how the balance sheet has grown. But that being said, I think the management team owes it to shareholders to try to manage expenses as best as possible during a time where the Fed's giving us great uncertainty.

I would say, Steve, outside of our recent expansion in SBA, we really haven't contemplated any significant ramp-up of new business lines or anything that would have a longer payback period. So when we talk about of managing expenses is do we you know do we need that absolute additional higher on the margin or those nice stats or is there a way to create additional efficiencies around our processes to create scale and growth i think you know going through a conversion uh down in florida and getting all those new customers on board it put a lot of pressure on us to to get through that gauntlet and now that kind of subsided at the end of this quarter. So customers are now, by and large, converted to our mobile and desktop platforms and are now integrated into the company. That did create a little bit of near-term pressure on some of our current staff, as well as our staffs in the market. So expectations are, now that we're kind of through that, we can look for more efficiencies and other operations. And to Scott's comments and his opening remarks, we're constantly looking at refining our business model to create efficiencies where we may not have seen opportunities before, but we are going through a lot of refinement right now. Some of that is technology driven through some of our AI and robotics to get rid of a lot of manual process. Some of it is just getting rid of paper and processes that have been around for a while that are always challenging. So, you know, it's incumbent upon us to become more efficient over time, and we're certainly dedicated to do that.

Okay, that's helpful. And then just on the reserve here, you know, meaningful decline in land loss reserve ratio, just maybe any color you can give around. the inputs or the assumptions going forward here?

So it's kind of interesting. We held our kind of baseline model constant this quarter. Last quarter, we shifted a little more to downside risk just because of the thought of the economy. And Kevin, correct me if I'm wrong, are we 55 base, 45 downside? That's right. In Moody's modeling. The results of that keep coming back more positive every quarter. And in the business lines that we focus on, know the metrics keep getting better and better so i would say that although we thought we would probably you know have a a little bit of provision we have been getting some nice recoveries on the uh purchase impaired loans that we acquired previously so um but all the metrics are coming back as good or better than we've seen so uh you know we're still trying to balance that how much uh qualitative reserve we can continue to maintain. And we kind of, every quarter, kind of just model around a baseline percentage of where we ended up in the quarter before. So that's kind of where it's coming out. But all the metrics, and correct me if I'm wrong, nothing showed any negative decline based on the new production in the existing portfolio.

That's right. The economic scenario is trending nicely. That may change. We're able to We've used some conservative measures because of the interest rate environment and value chain issues in the economy, et cetera, but we're very comfortable with the approach we've taken.

Great. Thank you very much, guys. Appreciate all the comments. Thanks, Steve.

Our next question comes from Gary Tenner from DA Davidson.

Thanks. Good morning. Morning, Gary. Hey, I wanted to ask about the CNI portfolio of the $2.6 billion at quarter end. What amount of that is prime, LIBOR, or SOFR-based? And then was there any delays in repricing over the course of the second quarter, whether it be floors or just timing of repricing?

You know, I don't have the – and we can probably get that for future calls, Gary. You know, there's been a significant shift. in our CNI portfolio from historical from kind of term medium term lending to more you know straight adjustable you know in previous quarters we were running about a 70 30. that was a little bit shifted this quarter because of the municipal finance area which tends to be medium term to longer so typically running about 70-30 if you exclude the owner occupies. As far as floors, a lot of those, because we've grown the portfolio fairly significantly during times where floors became much more important that we're not burning through a lot of floors on that side, but we will have some that we need to burn through. The prime the book right now, and I don't think we have the statistics in front of us, Kevin. Historically, a lot of it was prime-based because they were smaller to medium-sized credits. A lot of our larger credits are LIBOR-SOFR-based, and a lot of those have had floors in place for a while, so we're getting kind of the direct benefit of the movements, you know, subsequent to the previous moves by the Fed. I think we're going to see some more positive momentum probably in the latter half of the year and going into next year as those start to cycle through. And we shifted away from LIBOR. Yeah, we're SOFR-based now. So I guess the long story short, I don't have the metrics in front of me to give you that breakdown today. About a billion of our portfolio is variable.

It is variable right now. And most of that SOFR and prime.

Okay. Thanks for that. On the funding side, to revisit that a bit, obviously this quarter you were able to really use the liquidity on the balance sheet to fund the immense loan growth you had. Even at a slower pace of net growth, let's say in the third quarter, although it sounds certainly as though it's going to be a good quarter, you would need to effectively double the pace of deposit growth versus what it was in the second quarter to fund that dollar for dollar and keep that loan deposit ratio in the ballpark where it is. To be clear, you're suggesting your different channels can support that amount of deposit growth without resorting to wholesale market or otherwise?

Well, I wouldn't go too far out in the future on that, but I would say in the third quarter, I feel fairly positive that we can fund that with deposits that are in our pipeline. I will say deposits tend to be sometimes lumpy. stuff that we thought would hit in the second quarter didn't hit in the second quarter, but I am optimistic they'll hit in the third quarter. Beyond that, it could be that we have to have some reliance on something less core, provided that our loan growth continues at the toward pace that it's been at.

I think what Scott's alluding to is Typically, in the fourth quarter, we have some seasonality around some of our commercial deposits that tend to run down during tax. A lot of the MSR-related deposits where people are paying their taxes, that's historically where we see that there may be a need to kind of plug that gap for a short period of time, and then those balances build back up. But, you know, there's plenty of deposits in the market available. They are more expensive at the margin. So, you know, it will cost us more to fund at the margin. But there is some of the channels that we're taking advantage now that we don't necessarily want to go into on a call give us cheaper opportunities than some of the others that are available and certainly seem to be cheaper than anything in the wholesale side of the business.

Well, I appreciate that. those thoughts. And then, so to put that all together, I guess, in a sense, you know, the balance of growth is certainly going to drive, at least I would expect it to certainly drive pretty robust NII growth, but it seems reasonable to think we may be possibly at the peak NIM for this rate cycle here in the second quarter. Is that something you'd be thinking of?

I would say, you know, we're, again, we're somewhat range-bound, but yeah, I would say that growth on the margin is could have some impact there near term, but we expect it to kind of normalize. Again, we always expect to normalize between three and three and a quarter. We don't know where the Fed's going, you know, if they continue to increase. We've modeled, we've looked at the sensitivity around that. If we see the economy slow down rapidly and the Fed, you know, turns, turns course, and obviously that creates a lot more tailwind. So we kind of run, you know, kind of typical forward curves based on market information. And based on that, you know, future periods margins start to expand out. But, yeah, I would say maybe a little bit of near term, but within a range.

Thanks very much.

This does conclude our allotted time for today's question and answer session. I will now turn the call back over to Mr. Scott Cavanaugh for closing remarks.

Thank you again for participating in today's call. I just would like to take a moment to thank all the First Foundation employees for the hard work that they have put forth in the last several quarters, especially the integration of First Lord Integrity. As we enter the second half of 2022, I am optimistic about the opportunities ahead of us. Thank you and have a great remainder of your day.

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