First Foundation Inc.

Greetings and welcome to First Foundation's third 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 Nahidi, First Foundation's chief operating officer. Justin Capposian, 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. Justin Capposian, 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 gap 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 or reconciliations of non-GAAP financial measures, please see the company's filings with the Securities and Exchange Commission. And with that, I would now like to turn the call over to CEO Scott Cavanaugh.

Good morning and welcome. Thank you for joining us for today's third quarter 2024 earnings call. I would qualify this quarter as fairly noisy. As previously discussed early in the third quarter, the company completed the $228 million capital raise. The quarter was capped off with the recently announced balance sheet realignment moving $1.9 billion of multifamily loans from held for investment to available for sale. This move created a paper loss adjustment associated with the fair value adjustment of $117.5 million. Income for the quarter for continuing operations during the quarter was $2.7 million, which excludes the LOCOM adjustment and other adjustments. As stated in our October 3, 2024 press release, this move allows First Foundation to methodically evaluate reducing our exposure to low coupon fixed rate loans and continue to reduce our exposure in CRE. By shrinking the balance sheet of these loans, we will also look to reduce the liability side of the balance sheet and cut our reliance on some of our high cost wholesale funding. We have taken the steps to securitize with an agency approximately a half a billion of these loans, which should be completed in the fourth quarter. We are also currently continuing to evaluate other loan sales and will evaluate other securitizations in 2025. I have previously discussed that we had taken great strides to increase recurring revenue and reduce core expenses to benefit future profitability, and those efforts continued in the third quarter. We were able to continue to increase our CNI lending during the quarter, providing nice spreads over our funding costs. Late in the quarter, the Federal Reserve lowered Fed funds by 50 basis points. Although that provided little benefit in the third quarter, our cost of deposits decreased eight basis points to 3.41%. We expect a more significant reduction in funding calls for the fourth quarter. Obviously, capital ratios were improved as well with the addition of the capital. 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 third quarter, we reported net loss attributable to common shareholders of $82.2 million, or $1.23 per share for both basic and diluted shares. Tangible book value, which is a non-GAAP measure, ended the quarter at $15.71. down from the second quarter of 2024 of $16.43. Adjusted tangible book value per share, which we estimate in consideration of our remaining preferred shares, ended the quarter at $9.50. Pre-tax, pre-provision revenue totaled a negative $116.7 million. compared to $1.9 million for the prior quarter. Interest income totaled $157.2 million for the quarter, which was an improvement from the $150.9 million in the first quarter and up from the $144.8 million in the third quarter of 2023. Our net interest margin increased to 1.5% during the quarter. as compared to 1.36% in the second quarter of 2024. This was largely driven by the return of MSR deposits. Non-interest expense was $60.2 million in the quarter, compared to $55.6 million in the prior quarter. Again, largely driven by an increase in customer service expense related to seasonally returning MSR deposits. our efficiency ratio was 98.1% compared to 96.1% for the second quarter of 2024. Adjusted return on average assets, again, another non-GAAP measure, was 0.08 compared to 0.10 as of June 30, 2024. Our loans to deposit ratio ended the quarter at 95.9%, compared to 93.8% as of June 30, 2024. Total deposits were $10.3 billion in the quarter compared to $10.8 billion in the second quarter. Core non-brokered increased to 64% during the quarter compared to 62% in the second quarter of 2024. Non-interest-bearing demand deposits increased to 21% for the quarter, compared to 20% of total deposits as of June 30, 2024. Our insured and collateralized deposits remain relatively unchanged compared to the second quarter at 85% of total deposits. We maintained a strong liquidity position of $4.3 billion. At these levels, our available liquidity to uninsured and uncollateralized deposits ratio slightly increased to 2.65 times. Borrowings remained flat quarter over quarter at 1.7 billion as of September 30th. Average borrowings outstanding were 1.7 billion or 12.6% of total average assets for the quarter compared to 1.4 billion or 10.4% of total average assets in the prior quarter. Our non-performing assets to total assets was 0.33% for the quarter versus 0.18% for the second quarter. This increase was largely driven by two single family loans to the same borrower. One of which, which has already been made current for the other, The borrower has already assured that imminent payment back to a current status. Both loans have extremely low loan-to-values. Loan balances ended the quarter at $9.9 billion, down from the second quarter of $10.1 billion. Loan fundings totaled $366 million. offset by loan payments of $467 million. CNI loans totaled 90% of loan fundings during the quarter and 87% of total fundings year to date. We had no loan sales during the quarter. Loan yields remained flat at 4.77% in the third quarter. Our net charge-off ratio remained low at 0.01% for the quarter, the same as the second quarter. First Foundation Advisors assets under management was $5.5 billion unchanged for the end of the second quarter. Our pipeline of relationship remains strong. Assets under advisement at FFB's Trust Company increased to $1.2 billion for the quarter compared to $1.1 billion at June 30, 2024. Once again, I will close by reiterating my appreciation for the incredible efforts and unwavering dedication to our entire team. I remain incredibly thankful to each of the company's wonderful employees and will always be thankful. We'll now turn the call over to Jamie to cover our financials in greater detail.

Thank you, Scott, and good morning, everyone. I'll begin with the balance sheet and the improvement in our net interest margin, which increased again this quarter to 1.50% of 14 basis points from the 1.36% we reported in the second quarter and 33 basis points above what we reported in the first quarter, our normal seasonal low point. Our earning asset yield continues to improve, increasing to 4.75% in the third quarter, which is a four basis point above the 4.71% reported in Q2, and 19 basis points above the year-ago period's 4.56%. Loan yields maintain the improvement seen in the second quarter, holding steady at 4.77%. Though our gross loan ending balance declined $210 million for the quarter due in large part to the fair value adjustment on the loans held for sale portfolio, the overall loan portfolio's quarterly average balance for margin purposes was down less than $45 million, thus keeping its contribution to interest income stable quarter over quarter. New investment yields of 5.64% contributed to the 10 basis point improvements seen in the available for sale portfolios yield this quarter, and like last quarter, the portfolio's balance ended the quarter higher than its average balance. We remain comfortable using safe, high-quality securities to support our liquidity position improve the balance sheet's rate profile, and more efficiently enhance recurring revenue. Turning to funding costs, as Scott mentioned and as expected, our MSR clients continue to build their deposit balances this quarter. As we have described in the past, the annual seasonal inflows and outflows in this portfolio will drive changes in our net interest margin through the year. With these non-interest bearing balances continuing their build from first quarter lows, NIM is continuing to improve. Looking forward, we would expect this to continue for the first part of the fourth quarter as MSR balances build to their annual peak before beginning their decline and troughing in the first quarter. While uncertainty in the rate environment remains, barring an increase in short-term rates from here, even with the MSR portfolio's seasonal patterns continuing, we would not expect NIM to fall back to the 1.17% we reported in the first quarter of 2024. The continued shifts led to another quarterly improvement in net interest income. Similar to last quarter, net interest income increased $5.3 million from $43.8 million in the second to $49.1 million in the third. However, unlike last quarter, the quarterly increase in customer service costs Only $2.9 million this quarter was not enough to offset the NII improvement, so the balance sheet's contribution to earnings increased by $2.4 million. As we continue to note, we appreciate the holistic nature of these MSR relationships and are comfortable continuing to manage around their predictable seasonal inflows and outflows. Balances will continue to grow through the first part of the fourth quarter, but the Fed's recent reduction in rate will provide some offset to the increased volumes impact on overall costs. For example, were the Fed to hold rates at these levels for the remainder of the year, we would expect customer service costs to be flat to down in the fourth quarter. Were the Fed to continue cuts in the fourth, we would, of course, expect additional savings. The Fed's decision to cut rates in September, as expected, contributed only a modest benefit to the third quarter's interest-bearing liability costs. But coupled with the ongoing return of MSR deposit balances, costs declined three basis points this quarter, returning from the 4.27% reported in the second to be in line with the 4.24% reported in the first. The full benefit of the reductions in our interest-bearing liabilities rates will be reflected in the fourth quarter. But for this quarter, both borrowing costs and interest-bearing deposit costs were modestly lower, Borrowings saw an 8 basis point decline in costs from 4.12% in the second to 4.04% in the third, while interest-bearing deposits declined one basis point from 4.30% last quarter to 4.29% this quarter. FHLB advances added late in the second quarter at a weighted average rate of 3.76% contributed to the quarter-over-quarter increase in average balances, but they were a driver of the cost improvement. As reported in our earnings release, our borrowings balance does not include our sub debt, but it does include our balance from the bank term funding program, which was $267 million at the end of the quarter and has a cost of 4.76%. We would expect further improvement in our borrowings cost once this matures in January of 2025, if not repaid sooner. The reduction in deposit costs was allowed in part by the reductions we made in higher cost categories during the quarter, as non-interest-bearing MSR escrow balances returned. As mentioned, we would expect to see the full quarter benefit of the Fed's rate cut in the fourth quarter. On this point, monthly trends in deposit costs exited the quarter below quarterly averages in all categories except broker deposits, with our total interest-bearing deposit costs ending the quarter with the month of September at 4.15%, or 13 basis points lower than the monthly average of 4.28%, for the month of June that we mentioned on last quarter's call. 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 and allowing us to maximize the benefits our liability-sensitive balance sheet will provide following any future reductions in market rates. Finally, as we've noted before, we took advantage of the market's early year optimism for declining rates via cash flow hedge swap We did not add any new swaps in the third quarter as optimism returned, but we expect this to be a valuable tool for us, and we will continue to look for similar opportunities to both enhance revenue and stabilize our rate profile going forward. Moving on to the income statement, with loan interest income remaining stable, our securities and cash portfolios were able to drive not only an increase in average earning assets, but also a more meaningful quarter-over-quarter increase in interest income this quarter. We reported $157.2 million for the third quarter versus $150.9 million in the second. Interest expense increased modestly as the decline in rate largely offset a slight increase in interest-bearing liability volume. Together, interest income and expense led to a quarterly increase in net interest income of $5.3 million, in line with the $5.4 million quarterly improvement recorded last quarter. As mentioned, the quarterly increase in balance sheet contribution, which includes the partially offsetting increase in customer service costs, was $2.4 million. Provision expense returned this quarter following the negative expense reported in the second. The balance sheet balance for ACL loans was flat last quarter, but the coverage ratio to health or investment loans increased from 29 basis points in the second to 36 basis points in the third. as consideration for credit risk on the loan sell-for-sale portfolio is considered in its fair value adjustment instead of in the ACL. As Scott mentioned, asset quality remains stable. Wealth and trust-related fees were stable this quarter, maintaining the increase seen from the first quarter to the second to end the quarter at $9.2 million. As Scott mentioned, AU imbalances remain near record highs, ending the quarter at $5.5 billion. We remain pleased with the pipelines we see in the business, and we are excited about the opportunity to accelerate growth in First Foundation Advisors and the Trust Department following the capital raise. New to our non-interest income line this quarter was a $117.5 million charge related to the fair value adjustment on the $1.9 billion of multifamily loans reclassified to held for sale. We will update the held for sale portfolio fair value quarterly going forward. Optimism in the rate environment heading into quarter end resulted in a price of just under 94. Given the portfolio's high credit quality and the interest we have already seen in these loans, we remain confident we will be able to secure final pricing execution at strong levels. And in the meantime, we expect to be able to recover some of this initial mark as our clients make regular principal payments, take opportunities to make prepayments, and refinance their loans at par. Were some of these clients to allow their loans to move to their floating rate periods, that would of course help pricing as well. As we have noted, the average horizon for our health for sale portfolios loans to reach their floating rate periods is two and a half to three years. Moving to non-interest expense, outside of customer service costs, remaining non-interest expense categories totaled $41.3 million for the quarter, up from $39.5 million in the second. Professional services and marketing costs were $1.4 million higher, as we recognized some additional legal expenses, which were in part related to prior quarters activities and the shareholder meeting following July's capital raise. Compensation and benefits expense was also higher for the quarter, increasing by $0.9 million. This line item declined significantly over the past two years as we took action, such as the reductions in force and the elimination of annual incentive payments to offset our material declines in revenue. But we would expect costs to increase from these levels as revenue normalizes. Though that's the case, it is important to note that we are committed to maintaining our disciplined approach to core expenses We will take on strategic investments for future growth following the capital raise, but we are committed to controlling our discretionary costs. And as we mentioned on last quarter's call, we will ensure any plans for measured investments across our markets are both in line with our strategic objectives and supported by commensurate growth in revenue and profitability. Closing with capital, we expect to report improvements in all regulatory capital ratios this quarter. both at First Foundation Inc. and our bank. First Foundation Inc.' 's common equity Tier 1 capital will benefit further in the fourth quarter as part of our preferred shares, the Series B preferred, convert to common equity following our recent shareholder vote. As a reminder, the shareholder vote did not result in a conversion of the Series A preferred. While neither regulatory capital nor a gap measure of tangible common equity also improved this quarter, not only due to the capital raise, but also due to an improvement in our accumulated other comprehensive loss. The quarter's decline in market rates drove a $15.9 million improvement in the line items balance rate related to our available for sale portfolio, which ended the quarter at only $0.7 million loss. As Scott mentioned, tangible book value for common share ended the quarter at $15.71 per share. And as noted in our release, were all of our preferred shares to convert to common, our tangible book value per share for the third quarter would have been $9.50 per share. And with that, I'll turn it over to Chris to provide our final thoughts on the quarter. Chris?