First Foundation Inc.

Greetings and welcome to First Foundation Third Quarter 2022 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 touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star, then 2. 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 through the company's filings with the Securities and Exchange Commission. And now I would like to turn the call over to CEO, Scott Cavanaugh.

Good morning and welcome. Thank you for joining our third quarter 2022 earnings conference call. The results we reported this morning reflect the strength of our core businesses and the meaningful relationships that we have built with our clients. That said, there is no question the Fed's actions over the last six months have had a notable impact on the banking sector. It is against that backdrop that I am pleased to report our earnings for the third quarter were 29 million or 51 cents per share. Total revenues were 99.9 million for the quarter, a 5% increase from the second quarter of 2022, and an 11% increase year over year. Our tangible book value per share ended the quarter higher at $15.96. We also declared and paid our third quarter cash dividend of 11 cents per share. Our fundamentals remain strong with excellent credit quality. Our NIM for the quarter was 3.10% for the quarter. We continue to experience a steady pipeline across banking, wealth management, and trust services. Our clients' success is our success, and we are grateful for the trust they continue to place in us. Our strategic focus heading into the fourth quarter is centered around protecting the balance sheet, building liquidity, competitively pursuing deposits, and the continued retention of valuable clients. Our lending activity for the quarter was strong with loan originations coming in at 1.6 billion. MPAs remain low at 14 basis points for the quarter as our lending team does a fantastic job maintaining our high credit standards. We have established a balanced loan portfolio that continues to perform well. As we look ahead for the next few quarters, we intend to bolster liquidity and preserve capital by strategically managing our loan growth going forward. With that, I must emphasize we anticipate loan growth will be slower in the coming quarters than what we have experienced in recent record quarters. This is a prudent decision given the macroeconomic cycle, and it is certainly not a reflection of our clients, the industries we serve, or the products we offer. Dave will touch more on the current composition of the loan portfolio later in the call. Looking at deposits, as I have mentioned before, it's tough out there. and we recognize it's a dogfight. There's no question there are outflows in the overall banking sector. However, I am proud that our team has been able to maintain our base of $9.5 billion, and we're continuing to fight to attract new clients through some very attractive channels, including online, retail, and commercial. Our wealth Management and trust business continue to provide meaningful contributions to the firm. We have been successful in retaining existing clients and attracting new ones. It's times like these when the market is most volatile that clients turn to us for guidance. We have been proactively communicating with them and strategically managing their portfolios as necessary. As a result, we are seeing strong client retention across our entire wealth management platform. Assets under management ended the quarter at 4.6 billion. The all-weather portfolios we manage for our clients performed relatively well with respect to their benchmarks, even as the S&P 500 and the NASDAQ composite saw significant declines during the quarter. Let me take a minute to discuss our responses to Hurricane Ian which made landfall in our newly acquired location of Naples, Florida. Upon first learning about the storm, we immediately activated our business continuity and disaster recovery plans. I am pleased to report that we performed extremely well. Once all of our employees were accounted for and safe following the storm, we reopened all our locations with the exception of our Fifth Avenue branch in Naples, which will be closed for the foreseeable future as we repair from the damages. As it relates to our clients, we do not expect to see a meaningful impact to our portfolio and are only setting aside small provisions for potential loan losses. While our initial assessment looks good, we want to be helpful to any clients who might have been impacted. Along these lines, we have also been in contact with our deposit clients to assist with any way we can while the community rebuilds. We have been touched by the outpouring of generosity among our employees, clients, and within the local community. And we are fully resolved to help navigate the road to recovery. To conclude my opening remarks, I want to reiterate that this leadership team has been through many economic cycles, including a rising rate environment like the one we are experiencing. Many interest rate environments, although I believe where the Fed Fund actions are the most aggressive that we've perhaps ever seen. Our business model of offering clients financial solutions whenever they might be in their financial journey is designed to deliver results in any market conditions. And finally, I want to take a moment to note that this month marks the 15th anniversary of FIRST Foundation, and over that time we have established a great group of talented and dedicated professionals committed to serving our amazing clients and building a valuable business. It continues to be an honor to lead this organization. Now let me turn the call over to our CFO, Kevin Thompson.

Thank you, Scott. As mentioned, earnings per diluted share was 51 cents in the third quarter. The return on assets was 98 basis points, with the return on tangible common equity of 13.2%. During the third quarter, the balance of loans held for sale was transferred to loans held for investment, as we no longer intend to sell the loans due to the current rising rate environment. Credit metrics remain strong in all our loan portfolios. The allowance for credit losses for loans decreased by $265,000 in the quarter to $32.9 million, primarily as a result of the release of specific reserves related to purchased credit deteriorated loans from prior acquisitions, offset by increased loan balances. The reserve ratio decreased from 37 to 32 basis points of total loans. The net interest margin declined 8 basis points to 3.1% in the quarter. With the unprecedented increases in interest rates, our cost of deposits increased 36 basis points to 0.64%, while our average loan yield increased 21 basis points to 4.07%. Our net interest income grew 7% to $87.7 million. Customer service costs also increased from $4.6 million to $13.6 million in the quarter. due to the increasing rate environment. Our non-interest income for the quarter was $12.2 million, driven primarily by wealth management revenues of $6.8 million, $2.1 million in trust administration and consulting fees, and the balance and banking-related fees. Wealth management revenues decreased $900,000 as a result of lower assets under management balances. Our advisory and trust divisions achieved a combined pre-tax profit margin of 11 percent in the quarter, Excluding a $313,000 expense related to a trading error, the profit margin would have been 14%. Noninterest expense was $60.3 million, up $11.5 million from the second quarter. Customer service costs increased by $8.9 million due to the increase in the earnings credit rates paid on the related deposit balances. Compensation and benefits expense increased $1.9 million, primarily due to a decrease in deferred loan costs as a result of lower loan originations in the quarter. Efficiency ratio for the quarter increased to 60%, primarily as a result of the higher funding costs. Finally, our effective tax rate decreased to 26.6% compared to 27.9% 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 DePillo.