First Foundation Inc.

Greetings and welcome to FIRST Foundation's first quarter 2024 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.

Hey, good morning and welcome, everyone. Thank you for joining us for today's first quarter 2024 earnings call. As the banking industry continues to face headwinds and a continued inverted yield curve, I am proud of our team for the effort put forth to make the company stronger. I have never felt as comfortable with a management team in my entire career as I feel with the team that we currently have in place. Once again, we were able to improve our loans to deposit ratio, maintain overall loan yield, and continued the process of improving the sensitivity of our balance sheet to changing interest rates. Most importantly, we took great strides to improve recurring revenue and reduce core expenses to increase future profitability. First Foundation advisors closed the quarter at near-record assets under management, and the Trust Department posted another good quarter. For the first quarter, we reported net income attributable to common shareholders of $793,000, or 1.4 cents per share for the basic and diluted shares. Tangible book value, which is a non-GAAP measure, ended the quarter up 5 cents from the fourth quarter of 2023 and ended at $16.35. Pre-tax, pre-provision revenue totaled a half a million dollars, essentially unchanged from the fourth quarter. Interest income totaled $150.5 million for the quarter, compared to $146.6 million as of December 31st, 2023, and $137 million for the first quarter of 2023. Non-interest income as a percentage of total revenue was 25% for the quarter compared to 25% for the fourth quarter of 2023. Our net interest margin was 1.17% as compared to 1.36% for the fourth quarter of 2023. This was largely driven by the return of MSR deposits returning later in the quarter as opposed to earlier in the quarter. Non-interest expense decreased to 50.6 million in the quarter compared to $55.9 million in the prior quarter. Our efficiency ratio improved to 98.4% compared to 98.5% for the fourth quarter of 2023. Adjusted return on assets, again, another non-GAAP measure, ended the quarter at 0.03% compared to 0.09% as of December 31, 2023. Our loan-to-deposit ratio improved to 94.8% in the quarter compared to 95.2% as of December 31, 2023. This was largely driven by an increase in core deposits late in the quarter. 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. I just returned from Florida visiting our branches, and I am extremely encouraged by the growth we are experiencing in many of those branches and throughout our entire branch network. Our deposit pipeline remains robust into the second quarter. Management made a strategic decision to exit the equipment finance operations late in the first quarter. As most of these loans were originated using third parties, we felt that it did not fit our overall goals of getting back to our roots of relationship banking. We still will be able to accommodate our value client's needs as necessary for any of their equipment financing needs. We currently plan to continue servicing the remaining loan portfolio, but exiting the space will provide approximately $1.5 million in annualized cost saves. Total deposits were $10.64 million in the quarter, compared to $10.69 million in the fourth quarter. Core non-brokered deposits increased to 64% during the quarter compared to 60% in the fourth quarter of 2023. Non-interest bearing demand deposits increased to 17% for the quarter compared to 14% of the deposits in the fourth quarter of last year. As indicated earlier, our deposit pipeline remains healthy with most of the pipeline being in non-interest bearing category. Our insured and collateralized deposits were at 85% of total deposits at the end of the quarter, compared to 87% of total deposits in the fourth quarter. We maintained a strong liquidity position of $4.4 billion. At these levels, our liquidity to uninsured and collateralized deposits ratio was 2.7 times. Borrowings were $1.7 billion as of March 31, 2024, compared to $1.4 billion at the end of the fourth quarter. Average borrowings outstanding were $1.6 billion, or 11.8% of total average assets for the quarter, compared to $1.1 billion, or 8.7% of total average deposits for the prior quarter. The increased average borrowings from the prior quarter were used to enhance on-balance sheet liquidity as cash and cash equivalents increased to 11.7% at the end of the first quarter from 10% at the end of the fourth quarter of last year. Credit quality continues to serve as a crucial differentiator for First Foundation. Our non-performing assets, the total assets, was 0.18% at the end of the first quarter, compared to 0.15% as of December 31, 2023. Loan balances ended the quarter at $10.1 billion, a reduction of $100 million compared to December 31, 2023. It is important to note that loans would have grown for the quarter but we had several CNI loans totaling approximately $200 million push into the second quarter. Many of these loans have already funded or will fund in the next several weeks. These additional CNI loans will have a net spread of over 3%. Multifamily remains a strong asset class for the bank. Our underwriting on these loans has never since the company's inception. This sector of the CRE gained refocused attention in the first quarter with events on the East Coast. Chris will provide significant detail on this segment later in the call. First Foundation advisors grew approximately $200 million to end the first quarter at $5.5 billion, compared to $5.3 billion at December 31st. Our pipeline of new relationships remained strong. Assets under advisement at FFB's Trust Department was $1.2 billion for the quarter compared to $1.3 billion in the fourth quarter. During the quarter, management worked diligently to build additional recurring revenue. Most of the revenue generation was added in the middle of the first quarter. or as I mentioned, funded at the beginning of the second quarter. So the full benefits were not reflected during the first quarter. This included adding investment securities to our AFS portfolio and swapping rates to fix a spread and adding additional CNI loans and core deposits. We will continue to strategically add hedges to both improve recurring revenues and reduce our interest rate sensitivity. Jamie will provide greater insight on this section. Once again, I will close by reiterating my appreciation for the incredible efforts and unwavering dedication of our entire team. I will now turn the call over to Jamie to cover the financials in greater detail.

Thank you, Scott. I'll start with the balance sheet and our net interest margin. As Scott mentioned, NIM contracted 19 basis points during the quarter, from 1.36% in the fourth to 1.17% in the first. There was another slight improvement in our earning asset yield this quarter, which increased from 4.62% in Q4 to 4.64% in Q1. Earning asset yields begin with loan yields, which remain stable at 4.7%. The held to maturity portfolio's yield improved slightly by two basis points, while the yield on the available for sale portfolio declined modestly by seven basis points as we continued to reposition the investment portfolio to support our liquidity position, improve the balance sheet's rate profile, and more efficiently enhance recurring revenue. There were several factors contributing to the change in the AFS portfolio's yield, but the most noteworthy was taking advantage of the market's early quarter optimism for declining rates by adding securities in conjunction with new short-term funding, which we swapped to a more attractive longer-term fixed rate. This transaction provides additional rate-insensitive recurring revenue, and due to the execution timing several weeks into the first quarter, we expect it to provide additional benefit in the second and beyond. As I mentioned, we are open to acquiring safe, highly liquid securities at attractive yields and considering transactions that help us to achieve our desired long-term interest rate risk profile and mitigate the earnings risk of future short-term rate increases. To the extent we can use some of our improving capital position to also enhance recurring revenue in this type of safe and prudent way, all the better. Moving to the right-hand side of the balance sheet, the most important thing to highlight is the seasonal nature of our non-interest-bearing deposit portfolio and its MSR escrow balances. which began their normal annual outflows later in the fourth quarter before beginning to rebuild late in the first. As we noted on last quarter's call, amidst the seasonal transition, we also had some balances leave the bank due to our customers' desire to diversify their exposure across additional banks. This, too, drove some of the quarter-over-quarter decline we saw in average balances. We appreciate our customers' proactive approach to their own risk management and welcomed the improved diversification it provides in our own deposit portfolio as well. We believe the strong multi-product relationships we foster in this business are contributing to its overall growth and we fully expect more deposit balances to continue building in the second quarter. Accompanying the decline in average non-interest bearing deposits was another quarterly decline in customer service costs. which we have seen decline from $24.7 million in the third quarter of 23 to $16.4 million last quarter and only $10.7 million in the first. As we've discussed previously, the mix to interest-bearing liabilities, which we secure to replace declining non-interest-bearing balances, will weigh on our net interest margin, and it was a factor again this quarter. But the quarter's balance sheet actions overall were net accretive to earnings when considering both net interest income and customer service costs. Given the holistic nature of these relationships, we are comfortable with the seasonal fluctuations they will cause in our margin. Interest-bearing liability costs increased modestly this quarter from 4.19% in the fourth to 4.24% in the first. Though borrowing costs remain relatively stable, Interest-bearing deposit costs increased by 7 basis points to 4.28%. Factors included an increase in our mix of higher-cost deposits, which, as I mentioned a moment ago, were used to absorb the seasonal declines in non-interest-bearing MSR balances, additional client migration to higher-rate products such as CDs ahead of potential declines in short-term market rates, and continued competition in the market for balances driving rate accommodations in the retail channel. We remain pleased with our retail business's performance and believe it is an important driver of our long-term success, despite the modest increases it may continue to drive in the bank's deposit costs near term. Stepping back to consider overall deposit costs, monthly trends exited the quarter favorably. A majority of our products showed improvement throughout the quarter and March's total interest-bearing deposit costs were in line with the quarterly average of 4.28%. We have improved our monitoring and analytics in this area and our teams are working as proactively as possible to hold the line while we wait for greater certainty in the rate market. As you will see, we continue to make progress on strengthening our balance sheet. Both our on-hand liquidity and our capital positions are much stronger than they were before we entered this phase of market uncertainty. And as Scott mentioned, our focus on full relationship banking is paying dividends in terms of recurring revenue and earning stability. The new securities we added in conjunction with swapped fixed rate funding, over $150 million of outstanding loan balances fully self-funded by customer deposits at 3% spread, And the savings gained by exiting the equipment finance business will generate almost $13 million of recurring annualized pre-provision net revenue. We will continue to monitor the rate environment for opportunities to take advantage of our liability sensitivity and pivot towards a more sustainable long-term interest rate risk profile. But our continued focus on relationship banking and day-to-day execution will continue to be the keys to driving long-term shareholder value. We're encouraged by our successes in the first quarter as well as here in the start of the second, and we remain optimistic on the year ahead. Moving to the income statement, interest income continued to grow, ending the quarter at $150.5 million versus $146.6 million realized in the fourth. As discussed, interest expense was added to account for the quarterly declines in average non-interest-bearing MSR deposit balances, Though this drove a 19 basis point reduction in our net interest margin and a $4.1 million decline in net interest income, when considering the concurrent $5.7 million decline in customer service costs, the balance sheet's overall contribution to pre-tax, pre-provision net revenue improved for the quarter. We expect the net interest income to benefit from increasing non-interest bearing deposit balances in the second quarter, but More importantly, we believe the actions we are taking to improve recurring revenue will continue to enhance balance sheet contribution. Moving to the rest of the income statement, wealth and trust related fees were flat for the quarter at $8.6 million. As Scott mentioned, however, AUM continued its strong performance, increasing point to point again this quarter and exceeding the $200 million of growth seen in the fourth. AUM ended the quarter at $5.5 billion, $300 million higher than at year end, 2023, and $500 million higher than at the end of the third quarter. We are encouraged by the SFA team's continued success and look forward to taking our history of exceptional, proven customer service to the high-growth Texas and Florida markets. Outside of customer service costs, remaining non-interest expense categories totaled $39.9 million for the quarter, modestly higher than the fourth quarter's $39.5 million. As expected, compensation and benefits increased this quarter as a result of annual adjustments and tax resets, while all other categories saw modest quarter-over-quarter declines. Maintaining core expenses at responsible levels remains a focus, and as I mentioned, we expect the decisions made to exit equipment finance to mitigate growth here. As Scott and I have mentioned several times, the entire organization is laser focused on improving operating efficiency and controlling these discretionary costs. First Foundation made some very difficult decisions in 2023 to reduce expense during the market's volatility. As profitability returns, taking advantage of the opportunities available in North Texas and Southwest Florida will require measured investment. Holding aside customer service costs, we intend to maintain our best-in-class expense-to-assets ratio. Moving finally to capital and liquidity, we expect another significant improvement in First Foundation Inc.' 's total risk-based capital ratio, which we estimate will be 12.49%, or 22 basis points higher than that in Q4, and 105 basis points higher than its Q1 2023 level. We believe our strong capital base positions us Well, for growth, once uncertainty around the economic environment subsides. It also provides a relatively strong risk capital balance versus peer when considering our held to maturity portfolios favorable after tax unrealized loss position of $60.1 million or only 6.6% of tangible common equity, which is slightly higher than last quarter, but still well positioned relative to peer. And second, our strong liquidity position and low levels of uninsured and uncollateralized deposits, which, as a reminder, are those that prove to be the most vulnerable during times of significant stress. As noted, our uninsured and uncollateralized deposits stand at only 15% of total deposits, and this will continue to improve through the year as MSR-related deposit balances return. As I mentioned before, we are pleased with the stability we have achieved in our liquidity position and we are comfortable with the level of on-balance sheet liquidity we are holding today and confident our total available liquidity of 2.7 times uninsured and uncollateralized deposits is more than sufficient to mitigate risk should market volatility return. I echo Scott's comments on the team's continued efforts and dedication to First Foundation, and I remain confident we are positioned for success moving forward. With that, I'll now turn it over to Chris to provide additional detail on our loan portfolio, asset quality, and the important distinctions and opportunities within our multifamily portfolio. Chris?