First Foundation Inc.

Greetings and welcome to FIRST Foundation's fourth quarter 2024 earnings conference call. Today's call is being recorded. Speaking today will be Thelma C. Schaefer, FIRST Foundation's Chief Executive Officer, and Jamie Britton, FIRST Foundation's Chief Financial Officer. Before I hand the call over to Mr. Schaefer, please note that management will make certain productive statements during today's call that reflects 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 CEO Thomas C. Schaefer.

Thanks, Kate. Good morning and welcome. Thank you for joining us today for our fourth quarter 2024 earnings call. Before we begin, I'd like to provide a few remarks on the fires that have devastated so many communities in Southern California. We have been fortunate. Though we closed several branches for brief periods, none of our locations have been damaged, and none of our team members have lost their homes. At this point, we have been in close contact with four customers whose properties have been impacted and all had replacement cost insurance. I want you to know our team is continuing to monitor the situation, and we're all committed to supporting our communities and customers. I was appointed CEO of our company in late November of last year and have used the last two months to learn more about our current operations, our skills, and the standards employed throughout our organization. In the fourth quarter, we also added another distinguished director, Alan Parker, who brings a wealth of corporate governance and regulatory knowledge to our company. I'm delighted to be working with Alan, the rest of our board, and our team to help build First Foundation's next chapter for the success of all constituents. We have previously articulated our goals to diversify our loan portfolio and reduce our commercial real estate concentration. During the quarter, we sold $489 million of the multifamily loans reclassified to loans held for sale in the third quarter. We continue to have approximately $1.4 billion of multifamily loans held for sale in our balance sheet, and we are actively reviewing opportunities to continue selling the portfolio. Reducing our CRE concentration and lessening our dependence on high-cost and wholesale funding is among our highest priorities. It will not only improve our risk profile, but also contribute to stronger financial performance going forward. Proceeds of our first sale went to paying down high-cost broker deposits. As sales continue, each of our high-cost deposit portfolios will be reviewed for reductions in 2025. As you know, another area of focus has been our ACL methodology. We exited the year with another quarterly increase in our reserves to 41 basis points, up from 36 basis points reported in the prior quarter. In addition to the reserve build, we also recorded $17.1 million in net charge-offs. $13.4 million was attributable to three longstanding commercial relationships, and of the total, only $657,000 was associated with one multifamily loan. I'm still early in my tenure with First Foundation, but I'm making meaningful strides in reviewing our historical practices, and I'm already working with our team to establish standards appropriate for a $13 billion bank. As we transition our business mix and improve our risk profile, it will be important for us to also develop an operating framework that will support our sustainability in future periods, regardless of the interest rate environment. A couple of examples I'd like to share are in the areas of credit risk and interest rate risk. The team had already initiated a review of our CECL methodology, but we must also ensure we have standards in place to match our size and complexity. Strengthening our credit processes, controls, and analytics will drive more consistent credit decisions and is fundamental to mitigating future risks as we reposition our credit portfolios. The same is true for how we manage interest rate risk. Over the past year, the company has invested in resources to meaningfully enhance our treasury capabilities and perform a bottom-up review of the assumptions and methodologies driving our modeling. Moving into 2025, we are more confident in our abilities to understand the risk we are taking, and we will be working to develop an operating model, processes, and tools needed to leverage this information in all of our pricing and investment decisions. Migrating our model and establishing the standards necessary for success will take time, but as I continue to learn, I am pleased with the progress we have been able to make together in my first 60 days at First Foundation. This is such a critical area for our company, and I look forward to sharing with you our success as we move forward. I'll let Jamie go into more detail on the financials, but I'm happy to note another modest improvement in our net interest margin, which moved from 1.5% in the third quarter to 1.58% in the fourth. We've spoken previously of our optimism on the rate environment, but that unfortunately subsided at the end of the year. We do expect continued margin improvement in 2025. The first few rate reductions are a supportive tailwind, and continued actions to exit the relatively low-yielding loans moved to held for sale will continue to chip away at these headwinds. I'd also like to take a moment to note the continued success of our wealth and trust business. Both have been stable sources of fee income for our company, and their performance in the fourth quarter was no different. I'm excited about the opportunities we see for the future here. Not only are we investing in strengthening our platforms, but we're also recommitting to a culture of integrated support for our clients. Looking back on 2024, we have a lot to be proud of. It was an important year, but also a challenging one. And I would like to take a moment to thank our team for their commitment to First Foundation, welcome our new stakeholders, including our new audit partner, Crow, and thank you again for your continued interest in our company. Now I'll hand it to Jamie to walk through the financials. Jamie?

Thanks, Tom, and good morning. Starting with the balance sheet, as Tom noted, we continue to make progress on our strategic initiatives, successfully executing a $489 million multifamily loan securitization in early December. We remain confident in the economics of our multifamily portfolio and we're pleased to execute at a price above 95, which was a premium to where the overall health for sale portfolio was marked at the end of both the third and fourth quarters, 93.8 and 93.4 respectively. I would also note that following the quarter, we entered into a swap that will help mitigate fair value-related earnings volatility as we work to disposition the remaining help-for-sale loans. As expected, the reduction in loan balances was a factor contributing to lower loan interest income in the quarter, but our team moved quickly in deploying the proceeds and exited a similar level of high-cost broker deposits shortly after the close. The transaction overall provided a net benefit to net interest income, and we remain laser-focused on continuing to drive similar benefits through additional transactions in the first half of 2025. Broker deposits and other high-cost deposits, such as those contributing to our monthly customer service costs, are all candidates for reductions, and we will consider each as we work to balance the transition of our balance sheet and minimize impacts to our clients. Whether it's through increased net interest income alone or a combination of higher net interest income and lower customer service costs, we expect each loan disposition to contribute to improved financial performance going forward. Though improvements from the December securitization were minimal in the fourth quarter, our net interest margin benefited from the first three moves in the Fed's rate-cutting cycle, improving to 1.58% in Q4. The eight basis points quarter-over-quarter increase left NIM 41 basis points above the 1.17% we reported in the first quarter of 2024, the year's low point, and 22 basis points above the year-ago period of Q4 2023. While the margin expanded and we realized a 19 basis point improvement in our interest-bearing liability cost, our earning asset yield declined in the quarter. decreasing to 4.68%, which is seven basis points below the 4.75% reported in Q3 and in line with the 4.69% reported for the full year. Driven primarily by balance and yield declines in our commercial portfolio, overall total loan yields decreased in the fourth quarter, down six basis points to 4.71%. The anticipated decline in our cash positions yield following the Fed's initial rate reductions 5.47% in the third to 4.82% in the fourth, also contributed to the earning asset yields decline. The average balance in that portfolio remains elevated but is expected to be managed modestly lower over time as we work through our loan sale initiative, reduce our reliance on high-cost and wholesale funding, and migrate our balance sheet to the desired long-term, more sustainable business mix. Partially offsetting the lower yields in loans and cash, the quarter's newly purchased investment security yield of 5.36%, coupled with those on investments in the third quarter, to support the nine basis point yield improvements seen in the available for sale portfolio. Unlike the prior couple of quarters, the available sale portfolio's balance ended the quarter lower than its average. As demonstrated, however, by the investment portfolio's year-over-year growth, we remain comfortable using safe, high-quality securities to support our liquidity position, improve the balance sheet's rate profile, grow recurring revenue, and support investments in new relationship bankers for our markets and a more holistic product suite for our clients. Turning to funding costs, our MSR escrow deposit portfolio's average balance unexpectedly grew this quarter. We have described in the past that annual seasonal inflows and outflows will drive changes in our net interest margin through the year. Whereas in most years, we would expect to see some pressure on the margin this time of year due to our needing to match non-interest-bearing MSR deposit outflows with higher cost interest-bearing funding, that was not the case in the fourth quarter. Entering the first quarter with elevated MSR deposits, we expect the normal first quarter trough to be somewhat muted as well. As expected, the Fed's 50 basis point rate cut in September and the two 25 basis point cuts that followed in the fourth quarter benefited the quarter's interest-bearing liability costs, which declined to 4.05%, 19 basis points below the third quarter's 4.24%, and 14 basis points below the year-ago period's 4.19%. Since the cost on our $1.4 billion in FHLB advances remained effectively fixed at 4.08%, the benefit was driven by improvements in deposit costs. The full benefit of the reductions in our interest-bearing deposit costs will be reflected in the first quarter of 2025, but for the fourth quarter of 2024, costs declined by 25 basis points to 4.04%. Importantly, Monthly trends were such that rates exited the quarter below quarterly average rates in all categories except brokered CDs, which remained stable at approximately 5%. As mentioned, the proceeds of our December securitization were focused on high-cost broker deposits, which helped drive December's monthly interest-bearing deposit costs to 3.92%, or 43 basis points below the monthly cost of 4.35% in August before the first before the Fed's first rate cut. Excluding traditional brokered CDs, monthly interest-bearing deposit costs exited the year at 3.58%, or 53 basis points below the monthly August rate of 4.11%. We are pleased with these trends and look forward to the full quarter benefits they will provide in Q1 2025. As we proceed through the year and make progress on exiting the loans held for sale portfolio, we expect to be able to allow the brokered CD portfolio to mature without replacement. Approximately 47% of the $1.9 billion year-end balance, which is being carried at a weighted average rate above 5%, is maturing in 2025. Given the loans held for sale portfolio's sub-4% yield, exiting a portion of the loans held for sale balances alongside 2025's Brokered CDs maturities will eliminate meaningful drags on both net interest margin and net interest income. We appreciate our team's proactive approach in serving our clients' needs. The initial rate cuts this cycle have offered some flexibility in how we do that on deposit costs, and we are encouraged by the balanced growth we have been able to achieve with our core clients since the Fed's first move in September. balances in the retail and digital channels have increased over $75 million from the end of August to the end of the year. Before moving to the income statement, I would note again that following the end of the quarter, we entered into our second swap focused on hedging the balance sheet. The hedge will help reduce any earnings volatility related to our remaining loan sell-for-sale portfolio while also improving our overall interest rate risk position. We did not add any new swaps in the fourth quarter, but we fully expect this to be a valuable risk management tool for us, and we will continue monitoring for opportunities to further stabilize our rate profile and earnings going forward. Turning to income, with only the securities portfolio showing quarter-over-quarter interest income growth, total interest income declined from $157.2 million in the third quarter to $152.5 million in the fourth quarter. a $6.9 million decrease in interest expense more than offset the decline, leading to a $2.2 million increase in net interest income. Deposit expense was the largest driver of the improvement, but interest expense on borrowings also contributed following the repaying of our $260 million bank term funding program borrowings, which were being carried at a rate of 4.76%. In addition to net interest income, overall balance sheet contribution remains a focus. Despite higher average MSR-related deposit balances in the quarter, customer service costs declined modestly by $1.2 million from $19 million in the third to $17.8 million in the second. Combined with the improvement in net interest income, balance sheet contribution increased by $3.4 million. All else being equal, we expect further benefits in the first quarter as we see the full quarter benefits of declining non-brokered CD deposit rates and the removal of $480 million of relatively low-yielding multifamily loans. Provision for credit losses was significantly higher this quarter, with the largest factor being $17.1 million in net charge-offs. Comprising $13.4 million of the total was the full write-off of three commercial relationships with inadequate pay performance, sustained operating losses, and insufficient collateral protection. As Tom described, an important part of our pivot to a more sustainable business will be the implementation of important standards to guide our execution. We remain competent in the loan portfolio's credit quality, but we will continue to strengthen our risk management practices and and assess the portfolio accordingly. Also contributing to the quarter's net charge-offs were additional delinquent equipment finance loans with little to no collateral and the first loss in the history of our multifamily portfolio for $657,000. While our delinquencies remain relatively low today, we will continue to enhance our stress testing and adjust loan grading across the portfolio as appropriate. As a result of the moves in credit, our ACL balance increased from $29.3 million or 0.36% of total loans in the third quarter to $32.3 million or 0.41% of total loans in the fourth quarter. As our balance sheet mixes towards commercial loans and as we continue ensuring our credit risk management practices are appropriate for an institution of our size and complexity, further increases in the ACL coverage ratio are expected going forward. As a reminder, credit risk on the loan sell-for-sale portfolio is considered in its fair value adjustment instead of in the allowance for credit losses. Next, wealth and trust-related fees were $9.3 million during the quarter, in line with last quarter's $9.2 million. Assets under management were modestly lower for the quarter, ending at $5.4 billion. We remain pleased with the pipelines we see in businesses, and as mentioned previously, Investments in First Foundation Advisors and our Trust Department remain a strategic priority going forward. New investments will occur alongside our continued efforts to better serve clients by strengthening the integration between our banking and wealth offerings. Following the increase in market rates since the end of the third quarter, we recorded a $3.3 million fair value charge on the remaining multifamily loans reclassified to help for sale. This was more than offset, however, by the $4.4 million gain on sale recorded following the securitization. Given the continued interest we see in these loans, we remain confident we will be able to secure final pricing execution at strong levels. We expect to complete additional sales in the first half of 2025, but we expect to also recover some of our fair value mark as our clients make regular principal payments and and take advantage of opportunities to make prepayments or refinance their loans at par. Moving to non-interest expense, outside of customer service costs, remaining non-interest expense categories totaled $49.2 million for the quarter, up from $41.3 million in the third. The largest contributor to the $7.9 million increase was compensation and benefits expense, which finished $5.4 million higher than in the third. Tire production-related incentives were a factor, but the primary driver was year-end awards for our internally-focused, non-executive officer team members. Accruals for year-end awards were concentrated in the fourth quarter, but we felt it important to recognize our teammates for their continued efforts and dedication to our company. Occupancy and depreciation expense was impacted by a write-off of software development costs. And the remaining quarter-over-quarter increase was related to year-end property taxes and charges related to terminating the lease on a previously exited loan production facility. Increases in professional services and marketing fees were primarily driven by normal year-end activity and the resolution of a one-off legal dispute. As we move forward, we will continue making strategic investments for future growth, but we are committed to controlling our discretionary costs. And as we mentioned on last quarter's call, we'll ensure any plans for measured investments across our markets are both in line with our strategic objectives and ultimately supported by commensurate growth in revenue and profitability. Closing with capital, though we expect to report modest declines in regulatory capital this quarter, First Foundation Inc.' 's Common Equity Tier 1 capital benefited as part of our preferred shares, the Series B preferred, converted to common equity following our recent shareholder vote. The shift, however, reduced tangible book value for common share, which ended the quarter at $11.68 per share, or $2.11 per share lower than reported at the end of the third. As noted in our release, were all our remaining preferred shares, the Series A preferred, to convert to common equity, Our tangible book value per share for the fourth quarter would have been $9.36 per share. As Tom has noted, 2024 was a really challenging year for First Foundation, but an important one. And as always, I'd like to send a tremendous thank you to our team for the hard work you put in to make it a success. And with that, I'll turn it over to the operator to begin the Q&A session.

At this time, I would like to remind everyone, in order to ask a question, press star and then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Gary Tanner with DA Davidson. Please go ahead.

Thanks. Good morning. I wanted to start off with a question about the commercial charge-offs. Maybe some background here. Were they previously on non-accrual? Was this part of a bit of a portfolio scrub, Tom, since you came on board? Any background color you could give us on those charge-offs?

Sure. There was a number of credits that had been monitored closely for quite some time, and You know, one of the first areas I began looking at was some of our high-risk assets. There was, I would say, a change in performance in these or enough change in performance where it was time to take a step forward and charge them off. There were, you know, the team had monitored them for a period of time. It wasn't, you know, something that was, you know, It just happened in the fourth quarter, but it was an appropriate time period for us to address them.

Okay, thank you. And then, Jamie, in terms of expenses, I guess in terms of the customer service-related deposit balances, it sounds like those were probably a little bit over $15 billion just kind of given an assumed Fed funds effective rate for the quarter period. As you talked about selling more of the multifamily, you made a comment that you'll kind of determine which deposit segment you should reduce, and the obvious is the brokered piece with the maturities coming. But how do you think about that customer service-related deposit business? Would you de-emphasize it? How would you go about kind of moderating that line item over time?

Well, thanks for the question, Gary, and good morning. That's been an important business for us. We value those clients. We're comfortable with the seasonality. But over the years, we have grown probably more concentrated in certain relationships than we'd be comfortable with. we may start to reduce those balances. But, you know, we recognize also that there are important client considerations. We've, you know, again, valued those relationships, and we want to make sure that we're supporting them as we can. We'll have conversations with them as we move forward. Our overall risk profile, for instance, including the loan-to-deposit ratio, is an important factor for us, and we'll balance – We'll balance maturities in the broker CD portfolio with what we can do on other high-cost deposits, including the customer service costs. But there are other relationships that... that have higher costs as well. And so we'll monitor progress as we move through dispositioning the loan sale for sale portfolio, work with our clients, and really try to maximize or optimize the benefits that we can drive in our risk profile and earnings while maintaining support for clients going forward. I know it's not a great answer, but it's something that we'll be focused on month by month as the left-hand side of the balance sheet shifts, either through normal changes and fluctuations in non-held-for-sale portfolios or dispositions in the held-for-sale portfolio.

Okay. No, that's good, Jamie. I appreciate just hearing the thought process. And then if I could ask just one last related expense question. Given the spike in the comp line this quarter, can you talk about kind of the net result of the elevated fourth quarter level and first quarter resets, just in terms of kind of where maybe that line would shake out to start the year?

Well, there's, I mean, a few factors to consider. I mean, you always have the resets in the first quarter due to taxes and whatnot. The concentration of the year in bonus accrual for our non-executive teammates we felt was really important. I would expect that to be lower in the first quarter, no question. And, you know, as we've tried to imply from our remarks and different conversations over time, we do want to make sure that we're laser focused on expense management and increasing that as revenue returns increase. We do have some tailwinds from the rate cuts that were in the fourth, the disposition of the $489 million that were being carried at a net loss. And so we do expect for more revenue to return in the first, but, you know, how much returns and where we see progress on some of our strategic initiatives will continue to guide the expense line and, you know, for instance, accruals as we move forward. I don't have a... a specific level for you. I do think it'll be lower, but the trajectory going forward through the year will depend on our success in other areas.

Thank you. You bet.

Our next question comes from the line of David Pfister with Raymond James. Please go ahead.

Hey, good morning, everybody. Morning. Hey, David. Maybe just starting high level. Tom, I know you've only been there a couple months at this point. You touched on a couple of things that you focused on initially. It's extremely encouraging, the Cecil methodology. You know, I'm just curious, how do you think about the balance sheet strategy and maybe opportunities to accelerate that? Or is the plan still kind of like a slow and steady pace to minimize losses on the runoff and And just kind of any other commentary you can provide on where you're focusing your attention initially. Sure. David, thank you.

As I indicated in my comments, I've spent my time over the last couple of months just learning about our methodologies. I'm still steep in the learning curve. And how do we approach the business? What standards we're using throughout the organization? making sure that they're appropriate not only for the scale of the company today, you know, as a larger than $10 billion organization with the obligations that go along with that, but making sure that we're really setting ourselves up for success as we think about repositioning the balance sheet, remixing the credit portfolios so that we've got the both the interest rate risk skills, the credit monitoring skills, underwriting policies that support new lines of business as we move into 2025. So that review continues. We're going to hold ourselves to high standards and make sure that we have a very sustainable organization, as I mentioned, regardless of interest rate environment, but also Even as the economy might turn, we want to make sure that we're building a very sustainable, organic, profitable company.

Okay. That's helpful. And then, Jamie, you touched on, you mentioned allowing the brokered CDs to mature and not replace them this year. I think that's about $900 million maturing this year. I guess I'm just curious, how do you think about funding that? Would you expect a commensurate amount of decline in the HFS book? Or are there other deposit issues that you think could bridge that gap?

Yeah, thanks for that question, David. That's a really important one and an area we're focused on with several of our strategic initiatives. And I think the short answer is both and all of the above. We expect to make meaningful progress on the health for sale portfolio in the first half of 2025 and the full year as a whole. But we also are investing in deposit growth. We've seen a change in the trajectory on some of our core deposits following the first cut in the Fed's rate cycle this quarter. or sorry, in the fourth quarter. But the initiatives that we're putting in place should continue to drive growth. We're making investments in new commercial bankers that will be focused on relationship banking going forward, which should bring deposits. We are doing more to empower the folks in our branches to network and build relationships in our communities, which we think will continue to bring in deposits. And we're seeing nice growth in the digital bank sector. following the initial rate cuts as we've been able to position ourselves more competitively amongst peers in the digital space. And so I think as we move forward, we'll see reductions in the loan sell-for-sale portfolio in the first half of the year. We expect and we're already seeing growth in our core deposit portfolios. And, you know, I think there will continue to be some runoff in legacy multifamily balances over time. You know, we're moving in – we're starting to move into the belly of the curve for our rate resets. We didn't have much in rate resets before. In 2024, we have quite a bit more in 2025, and in 2026 and 2027 is where you really see the concentration of those. And so as clients start to consider the rate environment and their opportunities, I think we'll start to see a lot more activity on that front in the

uh the the remaining 3.2 billion the multi-family on the balance sheet as well okay that's that's really good color thank you and then maybe just touching on on the multi-family segment broadly i mean the securitization the the pricing was extremely encouraging you know and like you alluded to previously it's better than what we've marked the book at and better than what we've seen you know other larger transactions going at i'm curious How's demand for that product today? What are you hearing from other folks? If you could just touch on kind of, you know, that, and then, you know, we have the multifamily losses quarter. You know, it's obviously small. Just curious if you could touch on that, you know, just given it's the first one we've seen.

Yeah. I'll start with the health for sale portfolio. We were very pleased with where we executed in the securitization. Obviously, 95.1 was better than both where we marked in the third and at the end of the year for the remaining loans. I think there's a difference in private transactions that will – we'd likely see if we were to execute on something other than a securitization. But demand's been very strong. We've had many productive conversations. I think we have over 30 different parties under NDAs and actively working to review the portfolio and do their diligence. And I think we're still a little early to start uh providing any sort of color on where we think pricing will come in um but based on the interest i think we're optimistic that we'll be able to continue securing um you know strong final execution pricing uh you know where where it is relative to the 90 uh the 95 one um you know i i don't want to offer uh offer a guess on that. A lot of it depends, too, on the rate environment, which continues to bounce around a bit. But we're confident we'll get strong execution pricing going forward and really optimistic about what we're seeing in terms of interest.

That's great. And then if you could just touch on, you know, the loss that we saw, and, you know, again, obviously it's the first one and it's small, but just curious what was going on there and, you know, just whether that's indicative of anything else or kind of just one-off.

You know, David, I think it's a one-off. It's the first loss I think we've taken in that portfolio in our company's history, you know, $650,000-ish. And It was a property in the San Francisco market that had an owner that passed away, and it had been handled by a trustee that hired a property manager that probably could have done better. But it was also a small property, and I don't think it's indicative of other things that we're seeing in the portfolio.

Okay. Great. Thanks, everybody. Thanks, David.

Your next question comes from the line of Adam Bettler with Piper Sandler. Please go ahead.

Hey, good morning, everyone. This is Adam on for Matthew Clark. Hey, good morning, Adam. Good morning. Just first, just to help put some pieces together on the NIM expansion outlook, I was wondering if you had the timing of the loan sale this quarter and then also the timing of the payoff of brokerage CDs. Just want to understand if we had a full quarter impact in 4Q or if that's going to bleed over into the first quarter as well.

No, good question. The execution was in early December. The Treasury team moved as quickly as possible to exit the broker CDs and our broker deposits, and I think they were fully out a week and a half or so after. And so I would put the securitization, if I recall, was around, I think the proceeds were around December 10th or 11th, and then We were out of the brokered deposits, call it, just before the year-end holidays.

Okay. That's very helpful. And then just on the remaining loan help for sale portfolio, do you happen to have a current loan yield, average loan yield on that?

I don't have the exact one, Adam. I want to say it's similar to the remaining multifamily portfolio, though, and the loan yield offered there I would say the loan yield there is around 375.

Okay, so pretty consistent with the overall portfolio as of last quarter. Thank you. And then just retouching on the customer-related deposit costs, I appreciate that the average balance was seasonally higher in 4Q, but the cost was lower. I was just trying to – I was hoping to get some clarity going forward, especially in 1Q as these deposits tend to bottom. what percentage or what kind of decrease we could see in the run rate heading into 1Q from the $17.8 million level in 4Q?

Well, a couple factors I would offer for that. The benefit in customer service costs that we saw in the quarter was driven primarily by the reductions in market rates. With the higher average balance, you know, otherwise we would have seen an increase. So the reduction in rates was able to drive a benefit, an overall net benefit there. And we would expect the first quarter to be advantaged by a full quarter benefit of that. And so those deposits, as a reminder, move pretty much in lockstep with the Fed. I mean, they're essentially indexed. And so you'll see the full 100 basis point reduction going into the first. I'd also say that there will continue to be some seasonality. We're a little elevated from where we thought we would be, as I mentioned. But going into the first, I think you'll still see... If we have a billion one on the balance sheet at the end of the year, I think you would see maybe a 20 or so percent reduction in the first quarter. A majority of that is related to the seasonality. There may be a little more reduction as we work to reduce some balances on outsized clients. Kind of back to David's question about the reduction in those portfolios going forward. So I think if you think about the pace of rate cuts in September and the 4th, and then recognizing that we'll get the full benefit of those in the 1st, combine that with some seasonal runoff, Call it 20% to 25%. That should give you an idea of where we'll come in for the first quarter.

Okay. That's super helpful commentary. Helps me get to an outlook. And then lastly for me, on the reserve, outside of some elevated seemingly one-off charge-offs, The reserve still went up this quarter. I was just hoping to maybe get some updated commentary from you guys on where you may, on your comfortability with the reserve, where it's at today, or if you have any targets for where you'd like to see that ratio trend over a longer period of time.

Yeah, to me, you know, we were able to, even with the kind of outsized charge-off, in the quarter increase it, you know, part of the commentary on Cecil analysis is we're continuing to go through that. I think that, you know, as we kind of look at a kind of a higher rate environment for an extended period of time that, you know, there'll be a bias for it moving up from where it's at right now.

Okay. Very helpful. And I'll step back. Thanks for taking my questions. Thank you. Thank you, Adam.

I will now turn the call back over to Thomas Schaefer for closing remarks.

Thank you. Thanks for joining today. You know, it was a little bit of an unusual quarter for us, but I think we're making significant progress. We're spending a lot of time both not only on the underpinnings of the standards of the organization, but culture and engagement, engagement for clients, and looking forward to continuing to go through, you know, redeveloping the revenue for the organization as we march forward. So I appreciate your time today, and thank you very much.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.