First Foundation Inc.

Greetings and welcome to First Foundation's second quarter 2024 earnings conference call. Today's call is being recorded. Speaking today will be Scott Cavanaugh, First Foundation's Chief Executive Officer, Jamie Britton, First Foundation's Chief Financial Officer, and Chris Nahibi, First Foundation's Chief Operating Officer. Also joining the call is Simone Legomarsino, First Foundation Bank's 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 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 CEO Scott Cavanaugh.

Hey, good morning and welcome. Thank you for joining us for today's second quarter 2024 earnings call. Once again, First Foundation was able to generate earnings that were above consensus and exit the quarter with positive momentum. As I had mentioned in previous calls, I believe our earnings troughed in the first quarter of 2024. This is significant when coupled with the backdrop of strengthening our balance sheet with the recently announced $228 million capital raise. I want to be clear. the board sought the additional capital to support the growth of the company, not to satisfy any regulatory concerns. This raise allows us to accomplish that goal. I also want to emphasize First Foundation has never had a credit problem. Our MPAs remain at remarkably low levels, unchanged from last quarter. Charge-offs were almost non-existent at .01%. A recent performance issue stemmed from an interest rate risk positioning of our balance sheet, which surfaced in 2022 when fixed rate lending surpassed historical levels while the Federal Reserve began aggressively raising rates. As you know, this put tremendous stress on our net income and reduced the flexibility we had to navigate the turbulent economic environment. With this capital raise, we will take actions to solve this issue and to begin to expand into the desirous geographic markets we are already in and have a presence. This will be outlined in our discussion by both Jamie and Chris. I noted in the first quarter that we had taken great strides to increase recurring revenue and reduce core expenses to benefit future profitability. And those efforts continued in the second quarter. Once again, we are able to improve our loans to deposit ratio, increase our overall loan yield, and continue the process of improving the sensitivity of our balance sheet to changing rates. Capital ratios were improved as well. First Foundation advisors, once again, closed the quarter at near record assets under management with profitability at FFA remaining strong. The trust department posted another solid quarter as well. For the second quarter, we reported net income attributable to common shareholders of $3.1 million, or $0.05 per share, for both basic and diluted shares. Tangible book value, which is a non-GAAP measure, ended the quarter up 0.8 cents from the first quarter of 2024 to 1643. Pre-tax, pre-provision revenue totaled $1.9 million compared to $460,000 in the prior quarter. Interest income totaled $150.9 million for the quarter relatively unchanged from the 150.4 in the first quarter and up from the 145.3 in the second quarter of 2023. Non-interest income as a percentage of total revenue was 23% for the quarter compared to 25% for the first quarter. Our net interest margin was 1.36% as compared to 1.17% for the first quarter of 2024. This was largely driven by the return of MSR deposits. Non-interest expense was 55.6 million in the quarter compared to 50.6 million in the prior quarter. Again, largely driven by an increase in the customer service expense related to the seasonally returning MSR deposits. Despite the increase, In non-interest expense, our efficiency ratio improved to 96.1 compared to 98.4 for the first quarter 2024. Adjusted return on assets, a non-GAAP measure increased to 0.10% compared to 0.03% as of March 31st, 2024. our loan-to-deposit ratio improved to 93.8% in the quarter compared to 94.8% as of March 31, 2024. 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. Total deposits were 10.8 billion in the quarter, compared to 10.6 billion in the first quarter. Core non-broker deposits totaled to 62% during the quarter, compared to 64% in the first quarter of 2024. Non-interest bearing demand deposits increased to 20% for the quarter, compared to 17% of total deposits as of March 31st, 2024. Our insured and collateralized deposits remain relatively unchanged compared to the first quarter at 85% of total deposits. We maintained a strong liquidity position of 4.4 billion. At these levels, our available liquidity to uninsured and uncollateralized deposits ratio slightly increased to 2.8 times. Borrowings remained flat quarter over quarter at 1.7 billion as of June 30th. Average borrowings outstanding were down to 1.4 billion or 10.4% of total average assets for the quarter compared to 1.6 billion or 11.8% of total average assets for the quarter. As I stated earlier, credit quality remains incredibly strong for our bank. Our non-performing assets to total assets remained at 0.18% quarter over quarter. Loan balances ended the quarter at 10.1 billion flat from the first quarter. CNI loans totaled 83% of loan fundings during the quarter and 86% of total fundings year to date. Loan yields increased nicely to 4.77% in the second quarter from 4.70% in the first quarter. First Foundation Advisors assets under management was 5.5 billion unchanged from the end of the first quarter. Our pipeline of new relationships remains strong. Assets under advisement at FFB's Trust Department was $1.1 billion for the quarter, compared to $1.2 billion at the end of March 31, 2023. Once again, I would like to close by reiterating my appreciation for the incredible efforts and unwavering dedication of our entire team. I remain incredibly thankful to each of the company's wonderful employees. I will now turn the call over to Jamie to cover the financials in greater detail.

Thank you, Scott. Before diving into the capital raise and our strategic objectives, Chris and I will start with a brief review of the quarter. I'll begin with the balance sheet and the improvement in our net interest margin, which, as Scott mentioned, expanded 19 basis points during the quarter from 1.17% in the first to 1.36% in the second. Our earning asset yield continues to improve. increasing to 4.71% in Q2, which is seven basis points above the 4.64% reported in Q1, and 20 basis points above the year-ago periods, 4.51%. After remaining relatively stable for the past several periods, loan yields made a larger contribution this quarter, increasing from 4.7% in Q1 to 4.77% in Q2. Though the available for sale portfolios yield improved modestly this quarter by two basis points due in part to new investment yields of approximately 5.8%, a mixed shift toward health and maturity led to a slight reduction in the overall investment portfolios yield, which was down this quarter from 4.16% in the first to 4% in the second. As we have noted in past calls, we are comfortable using safe, high-quality securities in the investment portfolio to support our liquidity position, improve the balance sheet's rate profile, and more efficiently enhance recurring revenue. In this vein, I'd note our ending balance for the quarter was higher than the quarter's average balance. Turning to funding costs, like last quarter, I'd like to start by highlighting the seasonal nature of our non-interest-bearing deposit portfolio and its MSR escrow balances, which, as expected, continued their return to the balance sheet this quarter following their normal annual outflows late in the fourth before beginning to rebuild late in the first. Whereas the first quarter's mix towards interest-bearing liabilities, which, as a reminder, are temporarily ramped each year to replace the seasonally declining non-interest MSR escrow balances weighed on our net interest margin in Q1, the opposite was true in the second. Coupled with the improvement in loan yields, the shift back to non-interest-bearing MSR deposits helped return the net interest margin to its Q4 level of 1.36%. These shifts led to an improvement in net interest income for the quarter, which increased from $38.4 million in the first to $43.8 million in the second. The shifts led to a commensurate increase in customer service costs as well, which also increased $5.4 million in the quarter. Net-net, the balance sheet's contribution to earnings remained stable. Before leaving this topic, as I mentioned last quarter, though these seasonal fluctuations cause shifts in our net interest margin and non-interest expense each year, we appreciate the holistic nature of these relationships and are comfortable continuing to manage around their predictable, seasonal inflows and outflows. I'd also note that given continued growth in these balances through the quarter, we would expect the third quarter's average balance and related customer service costs to be higher than the second quarter's by approximately 15%. As is typical in an elongated plateau during a rate cycle, we continue to experience modest pressure on interest bearing liability costs, which are up three basis points this quarter, from 4.24% in the first to 4.27% in the second. Both borrowing costs and interest bearing deposit costs were slightly higher. Though we reduced some of our higher cost deposits to account for the returning non-interest bearing MSR escrow balances, which on its own helps costs, we also took advantage of relatively attractive broker deposit costs and shifted the $350 million of balances underlying our recently initiated cash flow hedge from short-term FHLB advances to short-term broker deposits. The result of this move benefited net interest income, but it did cause a shift in costs towards deposits as well as a modest quarter-over-quarter increase in our broker deposit concentration, which, as Scott alluded to, slightly increased this quarter. As noted on last quarter's call, by taking advantage of the market's early year optimism for declining rates via this swap and additional securities balances, we were able to add new rate insensitive recurring revenue, and we will continue to look for similar opportunities to both enhance revenue and stabilize our rate profile going forward. Finally, I note that monthly trends in deposit costs exited the quarter consistent with quarterly averages, with total interest-bearing deposit costs ending the month of June at 4.28%. We appreciate the work our teams are doing in each deposit channel to remain responsive to our clients' needs while holding the line on costs. Shifting to the income statement, interest income grew again this quarter. On a slightly smaller average earning asset base, we reported $150.9 million for the second quarter versus $150.5 million in the first. Interest expense saw a decline, which as discussed, was due to lower balances resulting from the return of average non-interest bearing MSR escrow deposits. Combined with the slight improvement in net interest income, the $5 million decrease in interest expense benefited net interest income by $5.4 million. We reported a negative provision expense for the quarter, driven by reductions in both the reserve on our investment portfolio and the reserve on unused commitments. The balance for our ATL on loans, however, was stable again this quarter at 29 basis points, and as Scott mentioned, asset quality remained stable. Wealth and trust-related fees were higher in the quarter, up from $8.6 million in the first to $9.2 million in the second. As Scott mentioned, AUM ended the quarter at $5.5 billion, consistent with the first quarter's ending balance, and we are pleased with the pipelines we see in the business. As we'll discuss in a moment, we are excited about the opportunity to accelerate growth in First Foundation Advisors and the Trust Department following the capital raise. Moving to non-interest expense, outside of customer service costs, remaining non-interest expense categories total $39.5 million for the quarter, slightly lower than the first quarter's $39.9 million. Compensation and benefits expense was lowered by $0.3 million in the quarter, as the impacts of the annual tax recess that elevate the expenses in the first quarter each year were not as much of a factor in the second. In addition, we recognize the full quarter benefit of our decision late in the first to exit our equipment finance business. As shown again this quarter, we are maintaining our disciplined approach to core expenses, and we plan to continue to do so even as we make strategic investments for future growth following the capital raise. We are committed to controlling our discretionary investments and ensuring any plans for measured investments going forward across our markets are both in line with our strategic objectives and supported by commensurate growth in revenue and profitability. Moving finally to capital and liquidity, we are pleased to highlight another quarter's improvement in First Foundation Inc.' 's capital ratios. Our total risk-based capital ratio, which we estimate will be 12.6%, increased by 11 basis points in the quarter and by 84 basis points since Q2 of 2023. Our liquidity and funding positions also remain strong this quarter, as uninsured and uncollateralized deposits remain low, available liquidity remains high, our loan-to-deposit ratio declined, and our core deposit concentration remained relatively stable. Our capital ratios and liquidity position were strengthened further since quarter end by the announced capital raise, providing significant flexibility to further strengthen our balance sheet, capitalize on the opportunities ahead, and improve our earnings profile going forward. Before jumping into more detail on our plans here, I'll turn it over to Chris to provide our final thoughts on the quarter. Chris?