First Foundation Inc.

Greetings, and welcome to First Foundation's third quarter 2023 earnings conference call. Today's call is being recorded. Speaking today will be Scott Kavanaugh, First Foundation's President and Chief Executive Officer, Jamie Britton, First Foundation's Chief Financial Officer, and Chris Nahibi, Chief Operating Officer. Before I hand the call over to Scott, please note that management will make certain predictive statements today 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 Harbour 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 material, Materially, from any forward-looking statements and reconciliations of non-GAAP financial measures, please see the company's filings with the Securities and Exchange Commission. And now, I would like to turn the call over to President and CEO, Scott Cavanaugh.

Howdy, howdy from Dallas, Texas. Thank you for joining us for today's third quarter 2023 earnings call. The turbulence that rocked the financial industry in the first quarter has largely abated across the entire banking sector. With stability normalizing, we dedicated the entirety of our third quarter to unwaveringly executing our strategic initiatives of improving our loan to deposit ratio, increasing overall loan yield, and improving the sensitivity of the loan portfolio against higher interest rates. Although we have made great strides in our achievements, there remains much work to continue to solidify earnings, further reduce our loans to deposit ratio, and further decrease the overall sensitivity of our balance sheet. Although there remains much uncertainty with the Fed's fight against inflation and the geopolitical events that recently transpired, management believes This is a troughing quarter for pre-tax provision net revenue, or PPNR, based on the events as we presently know them. If this is the case, we should continue to see improvements in our balance sheet and core earnings. I'm exceptionally proud of the commitment and diligence exhibited by our entire team, from investment management, trust, banking deposits and lending, our team is dedicated to delivering exemplary results during what I believe to be the most challenging time I've experienced in my professional career. As we reflect upon the last quarter, we are delighted to report continued improvements in our loan to deposit ratio, increased average yields on our loan and securities portfolios, and improvements in our capital ratios. For the third quarter, we reported net income attributable to common shareholders of 2.2 million, or 4 cents a share, for both basic and diluted shares. Tangible book value, which is a non-GAAP measure, ended the quarter at $16.19, an increase of 7 cents from the $16.12 at June 30th, 2023. Total revenues were $63.8 million for the quarter, an increase of 4.4% from the $61.1 million as of June 30th, 2023. Net interest income increased to $52.1 million or by 6.3% as compared to the $49 million as of June 30th, 2023. Non-interest income was $11.7 million for the quarter compared to $12.1 million as of June 30th, 2023. Our net interest margin was 1.66% for the quarter as compared to 1.51% as of June 30th, 2023. Our efficiency ratio was 99.7% during the quarter as compared to 92.5% as of June 30th, 2023. Our adjusted return on average assets, a non-GAAP measure, ended the quarter at 0.08% down from the 0.11% reported as of June 30th, 2023. Our loan to deposit ratio showed continued improvement, decreasing to 95.1% as of September 30th, 2023, from the 97.9% as of June 30th, 2023, and 108.4% from September 30th of 2022. We remain committed to continuing to improve this ratio through a combination of strategically reducing lower yielding loan balances and continuing to grow deposits. Our deposit pipeline remains robust as we look into the fourth quarter. We firmly believe that this favorable trend will continue. Related to operational efficiencies during the quarter, we have remained laser focused on cost saving initiatives and proactively shrinking our loan balances. As you are aware, we were early in the making of extremely difficult decisions to reduce our workforce and terminate projects that were slated for completion. These deliberate actions and strategic decisions have been instrumental in controlling expenses and managing their impact on earnings. By diligently managing costs and streamlining our operations, we have been able to optimize our resources and capitalize on opportunities that support sustainable growth. Our deposits remained at $10.8 billion in the third quarter versus the second quarter, an increase from the $9.5 billion as of September 30, 2022. Core deposits totaled 8.1 billion for the third quarter. Non-interest bearing demand deposits accounted for 22% of total deposits as of September 30th, 2023, compared to 25% and 37% as of June 30th, 2023 and September 30th of 2022. Brokered deposits accounted for 24.6% of total deposits as of September 30, 2023, compared to 20.4 as of June 30, 2023. As I said, our deposit pipeline remains robust heading into the fourth quarter. Our branch network remains key to the success of our deposit strategy. Chris will discuss initiatives we have to expand our core deposits and our branch network. We also continue to see resilience in our digital banking channel. The platform has continued to serve as an invaluable source of new depository accounts, allowing us to expand our client base both demographically and geographically across the country. With limited branches across the markets we serve, this product allows easy access to our clients in our markets, as well as to digitally forward prospects across the country. We recently completed an upgrade utilizing Mantle for our front-end opening process. Early indications have shown fairly significantly increased pull-through rates for account opening while requiring less of our personnel's direct involvement. We are truly encouraged by this ongoing trend as it reinforces our commitment to providing accessible and convenient banking solutions to our valued clients. We have continued to improve our insured and collateralized deposits to approximately 87% of total deposits. as of September 30, 2023, as compared to the 88% as of June 30, 2023. We maintained a strong liquidity position of approximately $4.3 billion as of September 30, 2023. Our liquidity to uninsured and uncollateralized deposits ratio was 3.1 times. Borrowings were 984 million as of September 30, 2023, as compared to 802 million and 1.3 billion as of June 30, 2023, and September 30, 2022. I think it is interesting to note that the average borrowings for the quarter were 587 million for the quarter compared to the $1.7 billion for the prior quarter. The decrease in average borrowings was due to the continued paydown of additional borrowings, which were used to increase on-balance sheet liquidity following the banking industry's events that occurred during the first quarter and into the second quarter. As the deposit levels have stabilized and begun to return to previous levels, Some of the additional borrowings were paid down. During the quarter, we added an additional $800 million of term FHLV advances that were putable. The average cost of borrowing was reduced by over 1% versus the overnight rate. Jamie will provide greater insight to our borrowing activity. Turning to loans, credit quality continues to serve as a crucial differentiator for First Foundation. Our non-performing assets, the total assets, were 0.10% as of September 30, 2023, as compared to 0.12% as of June 30, 2023. Loan balances were $10.3 billion, a reduction of $302 million for the quarter. as compared to $10.6 billion for June 30, 2023. Chris will give a further breakdown of loan activity during the quarter. Looking at our wealth management and trust businesses, although markets have remained volatile, FFA has seen strong performance and secured new client relationships throughout the quarter. First Foundation's advisors had $5 billion in assets under management as of September 30, 2023. This is down $300 million from the $5.3 billion in AUM as of June 30, 2023. The decline was largely due to the volatility in the market. Trust assets under advisement ended the quarter at $1.2 billion as compared to the same in June 30th, 2022. Margins for our fee-based divisions remain high, and our new client prospects remain promising for both advisory and trust services as we head into the fourth quarter. In the third quarter, I am pleased that CNBC and Barron's recognize First Foundation advisors amongst the top wealth advisors in the country. Jamie will provide more detail on the trust and advisory businesses. I will close by reiterating my heartfelt appreciation for the incredible efforts and unwavering dedication of our entire team. It has been an undoubtedly challenging year, but their hard work and commitment have played an instrumental role in our continued success. We recognize that there are factors beyond our influence including the Federal Reserve's decisions on interest rates. However, we remain steadfast in focusing on the aspects of our business that we can control. In navigating through the ever-changing market conditions, our client-first mentality remains a foundation of our business and core franchise. Our commitment to our clients and their financial success has only strengthened over time. We proudly believe that by putting our clients' needs at the forefront, we can successfully navigate the challenges of the market and continue to thrive. Now, I will turn the call over to Jamie to cover the financials in greater detail. Jamie?

Thank you, Scott, and good morning. Before continuing to discuss the quarter, I'd first like to say how excited I am to be joining First Foundation at such an important time for the company and the industry. Though unprecedented market volatility has presented challenges not faced in a generation, as our most recent results suggest, I believe we have the right team in place to weather the environment and merge as an even stronger institution for our clients, our teams, and our communities. I've been fortunate enough to spend time with many of our teammates over the past couple of months, and I've been nothing short of impressed. We have more work to do as we continue building on FIRST Foundation's success But I want to thank each of you for your commitment so far and say I look forward to working with you on the challenges and great opportunities we have ahead. OK, moving back to the quarter, I'll start with the balance sheet and our net interest margin, which, as Scott mentioned, improved 15 basis points from 1.51% in the second quarter to 1.66% in the third. This was influenced by several dynamics. Loan yields improved modestly, four basis points, as did yields on both the available for sale and held the maturity portfolios, 76 basis points and 18 basis points, respectively. When coupled with a mixed shift to loans, these yield improvements drove a quarter-over-quarter increase of five basis points on our earning asset yield. Contributing to the 76 basis point improvement in the available for sale portfolios yield were new securities purchases, 400 million of which were short-dated U.S. Treasuries. We also purchased some Ginnie Mae agency mortgage-backed securities, which helps to explain the difference between the available for sale portfolios period end and period average balances. The full quarter benefits of these purchases to our net interest margin will be captured in the fourth. We maintain a cautious posture amid recent volatility in the longer end of the curve, but we are open to taking advantage of opportunities to purchase high quality securities at attractive yields should they present themselves. On the right-hand side of the balance sheet, net interest margin benefited from seasonal growth in our non-interest bearing deposit portfolio, which I'll touch on more in a moment, and interest bearing liability costs increasing by only four basis points despite the full quarter impact of the FOMC's 25 basis point increase in early May and the partial quarter impact of the most recent 25 basis point move here at the end of July. On the interest-bearing liabilities, continued increases in interest-bearing deposit costs from 3.72% in the second quarter to 4% this quarter were partially offset by not only by a reduction in average borrowings balances, some of which did move to broker deposits, but also by a decrease in the cost of borrowings, which decreased from 5.14% in the second quarter to 4.16% in the third. Our balance sheet remains liability sensitive but to pull some of the benefit forward, we entered into additional puttable advances with the Federal Home Loan Bank. As Scott has described in the past, the FHLB retains the option to put these back to us once their lockout period is clear, but in the meantime, we can benefit from the market's expectations for rate reductions in the future. Since the new advances were added to the balance sheet after the midpoint of the third, as with the available for sale portfolios balance, average borrowings balances are expected to increase in the fourth. As I mentioned, the quarter's net interest margin improved in part due to the seasonal growth in our non-interest-bearing deposit portfolio. As we've discussed previously, a portion of this portfolio is from relationships receiving compensation through customer service costs, which increased $5.7 million, or 30%, quarter over quarter. As we move into the fourth quarter, outside of market share capture or relationship growth, we fully expect seasonal trends to continue and balances to decline from period-end balances at September 30th. Assuming a stable short-term rate environment, customer service costs would come down in lockstep with balances. This would benefit quarterly non-interest expense, but the mix back to interest-bearing liabilities as a result of the balances we will secure to replace the runoff will weigh on the fourth quarter's net interest margin. Outside of this dynamic, which is an important one for the NIM and net interest income, we would expect a flat rate environment to maintain favorable momentum on other important factors. Loans exited the quarter with a September average yield of 4.75%, only two basis points above the quarterly average of 4.73%, but due to the yield improvements in the securities portfolio and in on-balance sheet cash, earning asset yields closed the quarter at 4.66%. or 10 basis points above the quarterly 4.56% yield. Interest-bearing deposit rates averaged 4.03% in September as compared to a 4% average for the quarter and a 3.86% average in June. We are pleased with the balance sheet's improvements. Though we continue to manage concentrations in our loan portfolio, we grew the balance sheet by $211 million in the quarter from $12.8 billion in the second to $13.1 billion in the third as we took advantage of opportunities to improve our interest rate position and support near-term earnings. We will continue to monitor the rate environment for opportunities to shift the balance sheet to a more sustainable long-term interest rate risk profile and mitigate the earnings risk of future short-term rate increases. Moving to the income statement and net interest income, Though we saw modest quarterly decrease in average earning assets, the 15 basis point lift in the net interest margin drove a $3.1 million or 6.3% increase in net interest income. A slight reduction in excess liquidity drove a modest $560,000 decrease in interest income, while the shift to non-interest bearing deposit balances and the $600 million decline in interest bearing liabilities overall provided a more impactful $3.7 million reduction in interest expense. Non-interest income declined by $381,000 this quarter, from $12.1 million in the second to $11.7 million in the third. As Scott mentioned, we saw a quarterly decline in AUM, the income's primary source, which contributed to the reduced fee income. Market volatility and net withdrawals were factors in the quarterly results, but we are very pleased with FFA's performance. We continue to benefit from new accounts, $77 million this quarter and businesses maintaining its efficiency and recent operating margin improvements. Outside of customer service costs, which I discussed before, other non-interest expense categories totaled $39.5 million for the quarter, as compared to $38.5 million in the second quarter. Importantly, compensation and benefits, which declined by $1.4 million this quarter, was only $19.6 million as compared to $29.5 million in the third quarter of 2022. This is reflective of the very difficult decisions made earlier in the year and, as Scott mentioned, our recognition of the importance of remaining laser-focused on improving operating efficiency and controlling our discretionary costs as we regain operating leverage and long-term steady growth in net interest income. Moving finally to capital and liquidity, continued management of the loan portfolio led to a 22 basis point improvement in First Foundation's total risk-based capital ratio, which now stands at 11.98%. Our tangible common equity to tangible asset ratio ended the third quarter at 7%, which is also in line with peer levels, but importantly provides a relatively strong risk capital balance versus peer when considering First. are held in maturity portfolios relatively favorable after tax unrealized loss position of $75.2 million, which is only 8.2% of tangible equity and only 58 basis points of tangible assets. And second, our strengthening liquidity position in relatively low levels of uninsured and uncollateralized deposits, which proved to be the most vulnerable during the significant market turbulence we saw earlier in the year. Further on these points, insured and collateralized deposits represent more than 87% of total deposits. Cash and cash equivalents of $819 million represent 6.3% of total assets at September 30th. And total available liquidity stands at 4.3 billion, or 3.1 times our uninsured and uncollateralized deposits. We are pleased with the stability we've achieved in our liquidity position and when considering both pledged and unpledged securities are comfortable with the level of on-balance sheet liquidity we are holding today. We will continue to monitor for opportunities to improve our structural interest rate position, but we are confident in where we stand. Before turning it over to Chris to provide additional detail and color on our loan portfolio, our deposit portfolio, and the initiatives underway to expand our core deposits and strengthen our balance sheet position even further, I just want to say thank you again to our team and your commitment to our company. The work you've done this year has made a difference and I look forward to supporting your continued success. Chris?