First Foundation Inc.

Greetings, and welcome to the First Foundation's first quarter 2023 earnings conference call. Today's call is being recorded. Speaking today will be Scott Cavanaugh, First Foundation's president and chief executive officer, and Chris Nahebe, chief operating officer. Before I hand the call over to Scott, please know that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results. These forward-looking statements are made subject to the safe harbor statements including in today's earnings release. In addition, some of the discussion may include non-GAAP financial measures. For a more complete discussion of the risk and uncertainties that could cause actual results to differ materially from any four liquid statements and reconciliation of non-GAAP financial measures, please see the company's filings with the Security and Exchange Commission. Additionally, First Foundation intends to file a proxy statement and related proxy materials with the Security and Exchange Commission in connection with the company's 2023 annual meetings of stockholders and the company's directors and certain of the executive officers are participants in the solicitation of proxies from our stockholders in connection with the annual meeting. Stockholders of First Foundation are strongly encouraged to read such proxy statements and all other related materials filed in Security and Exchange Commission carefully and in their entirely when they become available as they will contain important information about the 2023 annual meeting. And I now would like to turn the call over to President and CEO, Scott Cavanaugh. Please go ahead, sir.

Good morning and welcome. Thank you for joining today's earnings conference call. Let me start by saying how humbled I am by the unprecedented events over the last quarter. For me personally, this is the toughest period I've experienced in my professional career. Yet during this history defining quarter for the financial services industry, First Foundation team has demonstrated immense and unwavering commitment to our clients and our company. I want to emphasize the resiliency of our business in the middle of the current economic . We are a diversified regional financial services company with a scale and a proven business model. Our core business is providing a variety of exceptional financial services to our clients, and our core strategy remains strong. It is only because every employee at every level of our organization works so diligently this quarter that First Foundation remains resilient, well-capitalized, and continues to generate strong, sustainable results despite the industry challenges. I cannot thank our employees enough. Their decision is illustrated in the financials we reported. Despite significant headwinds, and I am proud to say that our earnings per share for the quarter was 15 cents. Additionally, we generated 70.5 million in revenue, a 14% sequential decline due to a decrease in net interest income, caused primarily by an increase in the interest expense paid on deposits and borrowings. Net income was $8.5 million for the quarter, compared to $17.4 million for the fourth quarter of 2022. Our adjusted return on average assets ended the quarter at 0.25%. We are proud of our results. Now I'd like to take a moment to discuss the recent extraordinary events and how we are currently positioned, the current banking environment. As we all know, during the first quarter, the impact of the Fed's interest rate actions came to a dramatic end. We witnessed a bank run and a capital crisis that led to the second largest failure of a financial institution in U.S. history. We saw customers withdraw a staggering $42 billion of deposits from a single institution in record time. Well-established banks found themselves in compromised positions due to the deposit concentrations and dubiously structured securities portfolios. Abrupt changes by the Fed forced the entire banking sector and the regional banks in particular to reevaluate mid-quarter every aspect of their business while also attempting to restore client confidence and believe that deposits were safe, liquidity was available, security portfolios were diversified, and appropriate risk management was in place. They say hindsight is 20-20. And looking back, when we started seeing continued signs of the Fed's interest rate moves in the last quarter of 2022, we took proactive steps to mitigate the effects of our business model, which served us very well this quarter. We are grateful that those strategic moves allowed us to be what we feel is a step ahead in actively positioning the bank for long-term stability and success. More specifically, Beginning in October of last year, we implemented a liquidity funding strategy where members of management met twice a week for an extended period to discuss ways the organization could begin to increase deposits, reduce our loans to deposit ratio, and suspend almost all lending activities. Our leadership across the organization remains committed to the proactive hard work required to prepare for and face the challenging interest rate environment. The great news is our deposits have stabilized since the March banking crisis. In the early days, we saw our fair share of outflows. In fact, following the collapse of Silicon Valley Bank and others, $844 million in deposits left First Foundation. seeking a sense of institutional safety, and without any assurance that deposits at all regional banks would be backstopped, most of the outflows we experienced went to top-tier global institutions considered too big to fail, not to our regional competitors. However, I am pleased to share that we have fared much better than some banks And we have seen many of the deposits that initially left return to first foundation once the banking sector stabilized. This is a trend we expect to continue in the coming quarters. Of the 844 million in outflows we experienced, 129 million has since returned to the bank. We also know that during this time, several bank clients moved money from their FFB bank accounts to our subsidiary, First Foundation Advisors. And while the money is still coming over, this total is estimated to be approximately 100 million. This illustrates the value of our business model and our ability to keep client funds within our enterprise-wide offerings. This is also a reflection of the incredible efforts of our entire organization, our robust platform, and the incredible client service delivered this quarter. We are now seeing net positive days from our deposit channels, and retail and online banking have performed particularly well. We can confidently say that our deposit levels hit a trough related to the financial market disruption on March 21st. And since March 31st, we have added 80 million in total deposits across all channels, which speaks to the team and products we have in place. Throughout this quarter, our team has been proactive in helping clients navigate the uncertainties and restoring confidence in our bank and banking system. The steps we took were instrumental. We have been working closely with each deposit relationship to ensure clients understand the options available to them, such as pairing their deposit balances, adding beneficiaries, utilizing products such as insured cash sweeps, ICS accounts, and strategically repositioning accounts to ensure full FDIC and coverage. Related to operational efficiency during the quarter, management and the board made it difficult but proactive decision to reduce staffing. We conducted two reductions in force, one in January and one in March, resulting in an approximate 15% staff reduction. We made this decision in the interest of our shareholders to help us weather the current lending environment. The positions that were impacted were primarily in our sales, lending, and credit divisions, and there was no material impact in the areas of risk, operations, or client service. The reductions in force will save approximately $14 million in annualized compensation expenses. Further, I, along with our entire executive management team, and support of our aggressive expense management efforts have elected to forego any cash bonus for the fiscal year 2023. This will reduce about $3 million in annualized executive compensation expenses, which would have been realized paid out in February of 2024. On deposits, I am also pleased to report that our uninsured deposits have decreased significantly. At the end of the quarter, total insured deposits represented 85 percent, meaning uninsured deposits represented just 15 percent of total deposits, which has further improved since the quarter end. This is well above industry standards when compared to the 100 largest banks. It is worth noting that as of April 12th, our uninsured deposits were $1.517 billion slightly below 15%. Our deposits declined slightly in the first quarter from the $10.4 billion in the fourth quarter of 2022 to $10.1 billion as a result of the mid-March outflows. In terms of our deposits by type, we were balanced among non-interest-bearing, interest-bearing, money market, and savings and certificate of deposits. Our deposits are diversified by geographic distribution with California, Florida, and Texas making up the majority of our core business deposits, but other states making up 23% of the total. Additionally, our loans to deposit ratio had been heading in the right direction over the past six months. falling from 103.5 to 97% just prior to the, quote, acute catalyst induced by the Fed. However, following Fed actions that caused outflows, our loans-to-deposit ratio moved up to 106.1. Since then, we have successfully recovered deposits, and we have already seen our loans-to-deposit ratio begin to decrease. As of April 12th, our loans to deposit ratio was 105.6 and trending better weekly. We are constantly monitoring and managing this ratio as a strategic priority. I would also like to touch on deposit costs to reiterate how thankful I am that we were early when it came to betas in our deposit costs. First Foundation began raising interest rates and lockstep with the Fed last year when Fed rates were only 1%. Therefore, our costs are much more in line with where the Fed is now and where it is headed. Now, that is not to say that our funding costs will not go up, but it is to say that we will not need to adjust our rates abruptly trying to play catch up to the Fed an issue some of our competitors are currently contending with. On liquidity, next, First Foundation maintained and continues to benefit from a strong liquidity position. Our liquidity position remained at $3.5 billion. To drill in a little bit, our on-balance sheet liquidity as of March 31st was $1.3 billion in cash and securities. which helped us get through the tumultuous and unprecedented quarter. Our liquidity profile has long been an important differentiator for First Foundation, providing much needed stability. Immediately available liquidity exceeds uninsured deposits with a coverage ratio of 223% as of April 12th. As of March 31st, this includes 1.3 billion in cash and cash equivalents representing 10% of total assets on the balance sheet. Available credit facilities of 930 million with the Federal Home Loan Bank and 843 million with the Federal Reserve discount window. 245 million available and uncommitted credit lines and a market value of unpledged securities of $130 million. On the securities portfolio, our securities portfolio has a current market value of $1.1 billion for both HTM and AFS, unchanged from the prior quarter. And we ended the quarter with unrealized and unrecognized losses on the portfolio at only $71.5 million on a tax-affected basis. The average yield of our investment securities portfolio decreased to 2.73% or increased, I'm sorry, increased to 2.73% from 2.5 last quarter. We also continue to focus on efforts beyond stabilizing and growing our deposits, including managing our loan portfolio, ensuring pristine credit quality, identifying operational efficiencies and reducing expenses while maintaining our client first mentality. We are rebuilding from a difficult March, which will take time, perhaps even several quarters. And we plan to focus on maintaining margin so that we are well positioned for 2024. We believe that we are in a position to expand NIM once the banking and liquidity pressures abate let's look at our lines of business in more detail as we mentioned in our last quarter we continue to strategically manage our loan growth loan balances remain flat at 10.7 billion compared to the prior quarter loan portfolio average yield to 4.54 percent in the quarter compared to the fourth quarter oh, it increased, I'm sorry, to 4.54 in the quarter from the fourth quarter of 2022. Our fundamentals remain strong with excellent credit quality. Notably, our credit quality remains pristine and our MPA ratio remained at 13 basis points. Our total delinquent loans as a percentage of the total loans increased from 0.29% as of December 31st, 2022, to 45 basis points as of March 31st, 2023. Our multifamily loan portfolio remains a best-in-class asset. And multifamily loans continue to be the strongest performing asset class across all commercial real estate. As many of you have heard me say, CRE is a very broad category. And our CRE portfolio is comprised of workforce and essential housing in the form of multifamily apartments located in extremely attractive markets. We think this positions us well in light of potential pending recession or economic downturn as this asset class holds its value compared to other asset classes within the commercial real estate. Our loan-to-value of our multifamily portfolio remains at less than 55.2%. Our multifamily portfolio is diversified across geographies with the largest concentrations in California, a state with limited housing and rent control in many of the cities we operate in. We have also been proactive in restructuring some of our multifamily portfolios. moving it to weighted average portfolio in line with current market rates. This will take some time, but we have already started to see the benefits of these efforts. I am proud to reiterate that we have never taken a charge off in our multifamily loans in the history of this firm. And I want to remind everyone that we have very little or no exposure to construction, hotels, or commercial office space. While this is a challenging macroeconomic cycle, we are executing on a very solid business plan and expect the results to follow once they experience a more normalized rate environment. On NIM, net interest income was 58.8% for the first quarter of 2023 compared to 74.7 million for the prior quarter. interest income increased from $126 million in the fourth quarter of 2022 to $137 million in the first quarter of 2023 due to the increase in both average interest earning asset balances as well as average yields earned on such balances. Interest expense was $78.2 million for the first quarter of 2023 compared to $51.3 million in the prior quarter. This increase was due to the increases in both average interest-bearing liability balances as well as interest rates paid on such balances. Our NIM for the quarter was 1.83% compared to 2.45% for the prior quarter which reflects the interest rate environment and the continued pressure from the Fed's actions. We expect this to normalize to pre-crisis levels as soon as the Fed eases or market conditions settle. I won't predict the actions of the Fed, but on a broad basis, we continue to more evenly diversify our portfolio. Non-interest income of $11.7 million for the first quarter compares to $7.2 million in the fourth quarter of 2022. Non-interest expense was $59.3 million in the first quarter of 2023 compared to 59.8% million in the prior quarter. Our efficiency ratio in the first quarter of 2023 was 84.5 compared to 70.9 for the fourth quarter of 2022. The increase in the efficiency ratio is largely attributable to the aforementioned reduction in net interest income during the quarter. On the wealth management and trust services side, looking at our wealth management and trust business, we continue to experience meaningful contributions to the firm as evidenced by continued business unit revenue of $8.8 million for the quarter. This combined business unit revenue, coupled with other recurring sources of non-interest income from the banking unit, accounted for 16% of the company's total revenue for the quarter. We have also been successful in retaining existing clients and attracting new ones. It is important to note that FFA saw very little turnover this quarter from existing clients. We continue to experience an inflow of assets from existing and new clients. Assets under management increased $200 million in the quarter and ended the quarter at $5.2 billion. Trust assets under advisement ended the quarter at $1.3 billion. Our capital position. Let me touch on a few more data points before I hand the call over to Chris. We remain well capitalized with a Tier 1 risk-based capital ratio of 10.82% at quarter end and exceeding all Basel III well capitalized regulatory requirements. Our tangible book value per share ended the quarter at $16.17 compared to $16.20 per share in the previous quarter, which reflected the payment of our fourth quarter's dividend. We also declared and will pay a first quarter cash dividend at $0.02 per share. We are pleased to maintain a dividend in light of the current banking environment, and while we have to reduce it for the quarter, we expect that we can bring it back to historic level. I will close my opening remarks by saying over the last month, like many months before, I've had an opportunity to connect and speak with many of our clients, and in my conversations, I was able to reiterate the strengths of working with a regional bank like First Foundation. Among those is having direct access to leadership and being on a first-name basis with us and having the ability to connect with us during challenging times to ask questions. This personal touch is special to the regional banking industry and is why many choose to bank with us. This is evidenced by the successes we are now having in Florida, thanks to the leadership of Garrett Richter and all the relationships the Florida team has built over time. I would be remiss not taking the moment to publicly recognize our leadership across all regions who are instrumental in helping us navigate the recent market conditions and who dedicate their careers to serving our clients exceptionally well every single day. Now, I will turn the call over to Chris, who will go over our balance sheet.

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