First Foundation Inc.

Greetings and welcome to the FIRST Foundation's fourth 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, 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 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, 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. Please go ahead.

Good morning and welcome. Thank you for joining us for today's fourth quarter 2023 earnings call. Although the entire banking industry faced substantial headwinds throughout 2023, I am extremely proud of the Herculean efforts our entire First Foundation team put forth to work together and make the company stronger. As I look forward into 2024, I am optimistic that the efforts put forth will continue to improve the loan to deposit ratio, increase the overall loan yield, and improve the sensitivity of the loan portfolio to changing rates. Our teams at both the RIA and trust departments were also able to weather a very uncertain outlook in both the stock market and real estate markets. Balance remains strong at both divisions with strong pipelines. The interest rate environment appears to have pivoted with the Fed's fight against inflation nearing its end. Whether rates stay higher for longer or short-end interest rates start to decline, We believe First Foundation is well positioned with our liability sensitive balance sheet. Most of our fixed rate loans are short duration and continue to ride the curve down with each passing quarter. We still believe the third quarter was a troughing quarter as we continue to reposition the balance sheet. Multifamily remains particularly strong as an asset class and it is showing no signs of weakness. As I stated earlier, I am exceptionally proud of the commitment and diligence exhibited by our entire team. From investment management, trust, and banking, deposits and lending, our team is dedicated to delivering exemplary results. As we reflect upon the last quarter, we are delighted to report increased AUM of approximately $200 million for the quarter at First Foundation Advisors, improved PPNR quarter over quarter, industry low MPA ratios, and continued improvements to our capital ratios. For the fourth quarter, we reported net income attributable to common shareholders of $2.5 million, or $0.045 per share for basic and diluted shares. Tangible book value, which is a non-GAAP measure, ended the quarter at $16.30, an increase of 11 cents from the $16.19 at September 30, 2023. Pre-tax, pre-provision net revenue totaled to half a million compared to the negative $400,000 for the third quarter. Interest income totaled $146.6 million for the fourth quarter of 2023 compared to the $144.8 million for the prior quarter. Net interest income as a percentage of total revenue was 25% for the quarter compared to the 18% for the prior quarter. Our net interest margin was 1.36% for the quarter as compared to 1.66% as of September 30, 2023. However, non-interest expense decreased to $55.9 million compared to the $64.2 million in the prior quarter, a decrease of $8.3 million largely driven by the expected seasonal declines in customer service costs. which was discussed at the last earnings call. Our efficiency ratio improved to 98.5 as compared to 99.7 as of September 30th, 2023. Our adjusted return on average assets, again, a non-GAAP measure, ended the quarter at 0.09%, up from the 0.08% reported as of September 30th, 2023. Our loans to deposit ratio remained relatively flat at 95.2% as of December 31st, 2023 versus 95.1 as of September 30th, 2023 and 103.5 from December 31st 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 core relationship deposits. Our deposit pipeline remains robust as we look into the new year. 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 making 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 the opportunities that support sustainable growth. Our deposits were at $10.7 billion in the fourth quarter versus third quarter balance of $10.8 billion and increased from the $10.4 billion as of December 3rd, 31st, 2022. Core non-broker deposits accounted for 60% of total deposits as of September 31st, 2023. Following the seasonal runoff in the MSR deposit portfolio, non-interest bearing deposits accounted for 14% of total deposits as of December 31st, 2023. Our deposit pipeline remains robust heading into the first quarter of 2024. Our branch network remains key to the success of our deposit strategy, but we also continue to see strength in our digital banking channel. The platform has continued to serve as an invaluable source of new and ongoing depository relationships, 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 the markets, as well as to digitally forward prospects across the country. We continue to search for more ways to reach new and existing clients through this channel. Our insured and collateralized deposits remained at 87% of total deposits as of December 31st, 2023, as compared to 87% as of September 30th, 2023. We maintained a strong liquidity position of approximately $4 billion at December 31st, 2023. Our liquidity to uninsured and uncollateralized deposit ratio was three times. Borrowings were $1.4 billion as of December 31, 2023, compared to $984 million and $1.2 billion as of September 30, 2023, and December 31, 2022. Most of the increase in the quarter was from the Fed's BTFP, a new program established to support banks' liquidity needs at rates more in line with future expectations for Fed funds as opposed to prevailing rates, which in today's environment is accretive to earnings. On-balance sheet liquidity remains strong at $1.3 billion in cash and cash equivalents and another $1.5 billion in investment securities at the end of the year. We will continue to look for opportunities to capitalize on market opportunities and position the balance sheet for strength going forward. Turning to loans, credit quality continues to serve as a crucial differentiator for First Foundation. Our non-performing assets to total assets were 0.15% as of December 31st, 2023, as compared to 0.10% for September 30, 2023, and 0.12% as of June 30, 2023. Loan balances continued to decrease to $10.2 billion, a reduction of $100 million during the quarter, as compared to $10.3 billion for September 30, 2023. As I stated previously, multifamily remains strong as an asset class, and we are not seeing any cracks in the sector. Chris will give a further breakdown of the loan activity during the quarter. Looking at our wealth management and trust business, FFA has seen strong performance and secured new client relationships throughout the quarter. The business benefited further as markets slightly increased towards the end of 2023. First Foundation Advisors had $5.2 billion AUM as of December 30, 2023. This was up $200 million from the $5 billion in AUM as of September 30, 2023. The increase was largely due to improvement in the market. Trust assets under advisement increased during the quarter as well by approximately $100 million to $1.3 billion, as compared to the $1.2 billion noted in September 30, 2023. Margins for our fee-based divisions remain high, and our new client prospects are as promising for both the advisory and trust services as I have seen in some time. as we head into 2024. I continue to be surprised that the value of both the advisory and trust departments do not seem to be recognized in the value of First Foundation stock. 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 do feel that the sentiment has changed and pressures will continue to subside. Our commitment to our clients and their financial success has only strengthened over time. We proudly believe that by putting your 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. I'll start with the balance sheet and our net interest margin. As Scott mentioned, NIM contracted 30 basis points during the quarter, from 166 in the third to 136 in the fourth. There was a slight improvement in our earning asset yield, which increased from 456 in Q3 to 462 in Q4, and partially offset impacts elsewhere. While loan yields declined modestly, three basis points, and the held to maturity portfolio's yield was unchanged, the yield on excess cash increased 74 basis points during the quarter, and the yield on the available for sale portfolio improved 49 basis points. Most of the AFS portfolio's increase was due to the full quarter benefit of securities purchased in the third quarter, short-dated U.S. Treasuries, and Ginnie Mae Agency mortgage-backed securities. As I mentioned last quarter, we are open to taking advantage of opportunities to acquire safe, highly liquid securities at attractive yields. To the extent our liquidity objectives are achieved, we will also look for assets that help us achieve our desired long-term interest rate risk profile and mitigate the earnings risk of future short-term rate increases. Moving to the right-hand side of the balance sheet, I'll first note the expected seasonal decline in our non-interest-bearing deposit portfolio. As discussed last quarter, customer service costs came down with balances, but the mix back to interest-bearing liabilities, which we secured to replace the runoff, weighed on the fourth quarter's net interest margin. This $680 million shift in balances from non-interest-bearing to interest-bearing contributed meaningfully to our quarter-over-quarter decline in NIM. The remainder of NEMS decrease was a result of increased interest-bearing liability costs, which rose 18 basis points this quarter to 4.19%. As a result of actions taken in the third quarter to pull some of our liability sensitivities balance benefits forward using puttable advances with the Federal Home Loan Bank, fourth quarter borrowing costs improved by nine basis points. Offsetting this net benefit was a quarter-over-quarter increase in interest-bearing deposit costs, which rose from 4% in Q3 to 421 in Q4. Factors included the full quarter impact of the July rate increase, client migration to higher rate products such as CDs ahead of a potential decline in short-term market rates, and continued competition in the market for balances driving rate accommodations, particularly in the retail channel. While our retail relationships have led to modest cost increases this quarter, the portfolio's cumulative beta all-in cost this cycle has remained below 50%. We remain pleased with the portfolio's performance and believe it continues to be an important driver of our long-term success. As we exited the year more optimistic about the rate environment, we saw stabilizing trends in asset yields. The December average yield for loans was 470, equal to the fourth quarter's average, and the yield on the combined securities portfolio, both ASS and HTM, was 381, only slightly below the quarterly average of 384. On the right-hand side of the balance sheet, December's interest-bearing liability rates were slightly higher than quarterly averages as short, high-cost deposits were used to meet declines in customer service deposits. As the customer service deposits portfolio's balances rebuild, interest-bearing deposit and liability costs will decline. After a challenging year, we're pleased with the progress we've achieved on strengthening our balance sheet. Concentrations in our loan portfolio continue to right-size, and we continue enhancing our on-hand liquidity improving our capital. As I've noted before, we will continue to monitor the rate environment for opportunities to pivot towards a more sustainable long-term interest rate risk profile and mitigate the earnings risk of future short-term rate increases. And I look forward to the progress we'll make in 2024. Moving to the income statement and net interest income, though we saw average earning assets remain stable for the quarter, the 30 basis point decline in net interest margin drove a $9.6 million decrease in net interest income. A portion of the decline in net interest income, as Scott mentioned, $8.3 million, was offset by the decline in customer service costs, and we would expect this dynamic to play out in reverse as customer service deposit balances begin to return in the first part of 2024. Unlike the higher than quarterly average funding rates noted for December, the opposite was true for customer service costs. December expense was approximately $3 million compared to the quarter's monthly average of $5.5 million. While interest on loans declined $4.2 million from $124.4 million in Q3 to $120.2 million in Q4, Income on securities and other liquid assets increased by a combined $6 million to $26.4 million. The shift in balances out of non-interest-bearing deposits drove both higher average rates and higher average volumes in interest-bearing liabilities, which together increased interest expense by $11.4 million. Again, as customer service deposits begin their seasonal rebuild, higher cost wholesale balances will decline, with the net effect being higher customer service expense and lower interest-bearing deposit costs. Wealth and trust-related fees declined slightly for the quarter, from $8.8 million in Q3 to $8.6 million this quarter. We saw a decline in quarterly average AUM, but as Scott mentioned, AUM increased point-to-point, ending the quarter approximately $200 million higher than at September 30. We are excited to enter 2024 with momentum in these businesses and continue growing, and such an exciting time for the industry. As you know, the high-growth Texas and Florida markets represent significant opportunity for us, and we look forward to engaging with our clients and prospects there. Customer service costs aside, other non-interest expense categories total $39.5 million for the quarter, in line with the $39.5 million reported a quarter ago. We expect compensation and benefits to increase slightly entering the first part of 24 as a result of annual adjustments and tax resets, but we recognize the need to remain diligent on expense growth and continue benefiting from the very difficult decisions made in 2023. As Scott's mentioned several times, we remain laser focused on improving operational efficiency and controlling our discretionary costs. This is imperative as we work to reestablish operating leverage and long-term steady growth in net interest income. Our expense to assets ratio, excluding customer service costs, compares very favorably to peers, and we do not intend to relinquish that advantage. Continuing down the income statement, the income tax provision was a benefit to net income again this quarter, increasing from a $600,000 benefit in Q3 to a $2.3 million benefit this quarter. The main driver for the additional benefit was a decrease in our state blended tax rate, which is a result of our expanding into Florida and Texas. The non-taxable goodwill impairment made for a noisy 2023, but as profitability normalizes, we expect an effective tax rate around 28%. Moving finally to capital liquidity, we expect another significant improvement in First Foundation Inc.' 's total risk-based capital ratio, which we estimate will be 12.27% or 38 basis points higher than Q3 and 98 basis points higher than its Q4 2022 level. This type of improvement is noteworthy and positions us well for growth once uncertainty around the economic environment subsides. Our tangible common equity to tangible asset ratio declined slightly to 691 due to this quarter's larger ending balance sheet, which was primarily due to additional risk for liquidity. As I noted last quarter, however, we believe our capital position provides a relatively strong risk capital balance versus peers when considering, first, our held maturity portfolio's favorable after-tax unrealized loss position of $56.3 million, or only 6.2% of tangible equity, which is down from $75.2 million, or 8.2% of tangible equity last quarter. And second, our strengthening liquidity position in relatively continued low levels of uninsured and uncollateralized deposits, which as a reminder are those that proved to be the most vulnerable during times of significant stress. As noted, our uninsured and uncollateralized deposits stand at only 12.6% of total deposits. As I mentioned before, we're pleased with the stability we've achieved in our liquidity position and we're comfortable with the level of on-balance sheet liquidity we're holding today and confident our total available liquidity of 3x uninsured and uncollateralized deposits is more than sufficient to mitigate risk should market volatility return. I echo Scott's comments on what great work the team did for First Foundation last year, and I share his conviction that we're positioned for success moving forward. With that, I'll now turn it over to Chris to provide additional detail on our asset quality, loan portfolio, and deposit operations. Chris?