First Foundation Inc.

Greetings and welcome to FIRST Foundation's first quarter 2025 earnings conference call. Today's call is being recorded. Speaking today will be Salma C. Schaffer, FIRST Foundation's Chief Executive Officer, and Jamie Britton, FIRST Foundation's Chief Financial Officer. Before I hand the call over to Mr. Schaffer, 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 discussions 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 reconciliation of non-GAAP financial measures, please see the company's filing through the Securities and Exchange Commission. And now, I would like to turn the call over to CEO, Thomas C. Schaffer.

Thank you. Welcome and thank you for joining FIRST Foundation's first quarter earnings call. On today's call, we'll provide updates about our financial and operating performance for the first quarter, in addition to discussing the strides we are taking towards our strategic initiatives. The first quarter was my first full quarter as CEO, and I continue to be pleased with our productivity as we've made continued progress on several capabilities in the various internal review processes that we began discussing last quarter. Starting with our financial results, net income of $6.9 million, or $0.08 per share, our first foundation's return to profitability after posting a net loss of $14.1 million in the fourth quarter and a loss in the third quarter driven by our having moved 1.9 billion of multifamily loans to held for sale. Improved results were driven by another nine basis points of net interest margin expansion to 1.67%, a significant linked quarter reduction in our provision expense, favorable net valuation marks on our held for sale loan portfolio, and a $5 million reduction in our non-interest expense compared to the fourth quarter. We funded $180 million New loan balances in the quarter priced at an average yield of 7.09%, of which approximately 78% for C&I loans. Loans held for investment decreased in the first quarter primarily due to $354 million of payoffs, while loans held for sale were essentially unchanged at $1.3 billion with no loan sales taking place during the quarter. Our strategic focus on reducing our commercial real estate concentration and selectively exiting lower yielding multifamily loans remains unchanged. In the fourth quarter, we completed a $489 million sale of multifamily loans at competitive pricing, and we are confident we will make additional progress during the second quarter. Our pipeline for loan sales and securitizations remains active, and we plan to continue reducing our loans held for sale over the balance of 2025. We have recaptured a portion of the original mark taken in the third quarter of 2024, and we remain focused on securing favorable execution going forward, which should benefit capital and profitability while the dispositioning of the loans will allow us to continue reducing our reliance on wholesale funding. On credit, our ACL position increased another five basis points during the first quarter to 46 basis points, or 2.9 million to 35.2 million. Net charge-offs moderated compared to the linked quarter and were only one basis point. Most of the quarterly ACL build was the result of higher reserves for the equipment finance lease portfolio, increased model calculated loss factors in the commercial loan portfolio, and an increase in the level of criticized assets due to continued stress testing for higher interest rates and higher expenses potentially impacting CRE cash flows. Despite the building ACL, we are optimistic about the credit portfolio's performance. Asset migration trends during the quarter were positive, with past due and non-accrued loans falling 22% to $54.8 million. On our call in January, I mentioned our team was already reviewing our seasonal methodology to ensure we have standards in place to match our size and complexity, and I feel we are already making good progress on this initiative. We will adjust our methodology where we believe it is appropriate to do so, but all else being equal, as we have discussed before, we expect our efforts to reduce multifamily loans and replace them with higher yielding C&I loans to result in an increasing ACL balance over time. While the first three points of our five-point strategic plan focusing largely on remixing our loan portfolio, improving our interest rate risk management, and reviewing our season methodology, We also continue to work hard at growing our non-interest income, not only through First Foundation advisors and private banking, but also by taking a more holistic approach to how we service our commercial and consumer customers. Assets under management ended the quarter at $5.1 billion compared to $5.4 billion at the end of the year, and trust assets under advisement closed at $1.2 billion compared to $1.1 billion in the prior quarter. As we think about First Foundation's future and our value proposition to our clients, we believe a re-energized focus on private banking in our demographically attractive markets will build significant long-term value for our firm, our shareholders, and bring added support to our wealth management clients. Our efforts to further invest in client relationships also showed tangible progress during the first quarter with regard to our deposit mix. While overall deposits declined modestly to $9.6 billion, this was largely due to a $400 million decrease in high-cost broker deposits, so these deposits matured without replacement, partly offset by a $71 million increase in combined retail, specialty, and digital banking deposit balances. Our total cost of deposits declined to 3.04% compared to 3.19% in the prior quarter. while our loan to deposit ratio continues to be steady at approximately 94%. Lastly, I also wanted to highlight that we remain strongly capitalized following the common equity raise completed in July of last year, even after some of the moving parts on our balance sheet over the past few quarters, with our common equity Tier 1 ratio at 10.6% and our Tier 1 leverage ratio at 8.1%. I'll now turn it over to Jamie for a more thorough review of our financial performance and to discuss our intermediate term financial outlook. Jamie?

Thank you, Tom, and good morning. My remarks today will be broken primarily into two parts. First, I'll go into further detail on the first quarter's financials, and second, I'll provide updated commentary about our forward outlook and how some of our implied strategic initiatives can benefit our financial performance. We remain steadfast in our goal to significantly improve our sustainable profitability over the intermediate term. Starting on slide four of our investor presentation, our first quarter pre-provision net revenue of $9.7 million, or 11 cents per share, increased relative to a pre-provision net revenue loss of $2.3 million in the fourth quarter, which was impacted in part by the unusual items that we discussed in January. Our PPNR return on average assets increased to 31 basis points. And as Tom mentioned, we returned profitability in the first quarter, even after adjusting for the benefit of $4.7 million dollars in securities gains. Reported net interest margin for the first quarter of 167 basis points represented a nine basis point increase relative to the linked quarter and was largely driven by a 15 basis point improvement in our total cost of deposits, which decreased to 3.04%. Yield on total earning assets decreased five basis points to 463, driven mainly by a 17 basis point reduction in the yield on securities available for sale and a two basis point reduction in total loan yields, which were relatively stable quarter over quarter. As noted on slide five, we continue to see steady quarter over quarter improvement in our balance sheet contribution or net interest income excluding customer service costs. This continues to be an important metric for us as we transition the balance sheet. On slide seven of our investor presentation, we once again provided visibility to the repricing opportunity in our Health for Investment multifamily loan portfolio, and we have supplemented it this quarter with information on recent borrower behavior. As noted on the bottom of the slide, based on our portfolio's weighted average spread, were the portfolio to reprice the floating rates today, yields would improve by over 290 basis points. We have $456 million in multifamily loans with a weighted average yield of 3.45% that will reprice to floating, refinance with us or pay off at par in 2026, and another $906 million in multifamily loans with a weighted average yield of 4.18% facing the same decision in 2027. Loan repricing volumes are lower in 2025, but looking ahead to the volume of repricing we see on the horizon, when coupled with CD maturities set to occur, we are optimistic about the opportunity and flexibility this provides. On slide eight, we noted the maturity schedule and rates for our remaining broker CDs, which when coupled with reductions in both the held for sale and held for investment multifamily portfolios will reduce drag on the margin. To the extent any balances are needed for a short period to support the balance sheet transition, the deposit repricing alone would also benefit the margin. However, as we proceed through the year and make progress on exiting the loans held for sale portfolio, we do expect to be able to allow the brokered CD portfolio to mature without replacement. Total non-interest income during the quarter was $19.6 million, including a $4.7 million gain on the sales securities resulting from repositioning the available for sale portfolio and a $2.8 million net gain on a favorable change in the held for sale portfolio's valuation allowance and the swap we executed earlier in the quarter to hedge the valuation allowance's sensitivity to market rates. Adjusting for these two items, non-interest income was stable compared to the fourth quarter. Wealth and trust-related fees were $8.9 million compared to $9.3 million. Performance losses and terminations impacted the quarter, but we remain optimistic about our wealth and trust pipelines. And as Tom noted, we see the potential for improved and client engagement and greater earnings contribution in the future. Moving to non-interest expense, outside of customer service costs, remaining categories totaled $46.7 million for the first quarter, a 5% reduction relative to the fourth quarter of 2024's $49.2 million. The largest contributor to the sequential decline was a reduction in occupancy and equipment costs of $2 million, driven largely by the fourth quarter's $1.1 million software development cost write-off. Compensation and benefits expense of $25.1 million moderated slightly compared to the fourth quarter, but was up 29% compared to the year-ago quarter. As we started 2025, we saw the normal impacts from seasonal items, such as payroll taxes and annual salary adjustments, but I would also note the year-over-year change reflects investments we are making to bring in talent and retain the institutional knowledge needed to organize around our strategic initiatives and strengthen the company going forward. We are remaining diligent around expense growth, but we would expect compensation and benefits to reset to these levels near term as we continue investing and transitioning the organization to our new business mix. Customer service costs total $15.1 million for the quarter compared to $17.8 million in the prior quarter and $10.7 million in the year-ago quarter. The decrease in customer service costs from the prior quarter was due to both a decrease in rates and a decrease in average balances. The decrease in rates reflects the full quarter benefit of the declines in the Fed Fund's target rate in the fourth quarter. And as we've noted, it is normal to see some modest seasonal outflow during the first quarter. Provision for credit losses was significantly lower this quarter, declining to $3.4 million from the $20.6 million we reported in the fourth. As Tom mentioned, our ACL increased five basis points to 46 basis points, and we remain focused on reviewing our CECL methodology and prepared to make adjustments as necessary to maintain confidence in our processes and controls going forward. Switching to First Foundation's financial condition, our balance sheet remains well capitalized with a 10.6% consolidated common equity Tier 1 ratio and an 8.1% Tier 1 leverage ratio. We also are operating with ample liquidity with nearly $3.7 billion of borrowing capacity and cash balances which compares favorably to our uninsured and uncollateralized deposits of $1.7 billion, a coverage ratio of over 2x. Tangible book value, as adjusted for the conversion of our remaining preferred shares to common, grew to $9.42 per share from $9.36 per share in the prior quarter. Slide 17 provides more detail. Forehanded callback to Tom. I also wanted to provide some thoughts about First Foundation's intermediate financial outlook, particularly given all the strategic updates we've discussed the past two quarters. Overall, we are optimistic about the financial future of First Foundation over the next 12 to 36 months. From a balance sheet perspective, we expect to see a modest reduction in total assets over the intermediate term as we work to reduce our loan sell-for-sale to zero from $1.3 billion today, bringing down our CRE concentration and reducing our broker deposit mix towards a more normalized level. We anticipate continued margin expansion, although we'd emphasize that the opportunities to reprice our loan portfolio will take time. More specifically, we expect an exit run rate for net interest margin in the fourth quarter of 2025 between 1.8 and 1.9 percent, with further improvement to 2.1 to 2.2 percent by the end of 2026. To the extent the Fed reduces rates more than we are anticipating, that could accelerate some of our expected margin improvement with deposits possibly repricing faster than we are currently modeling. And lastly, we expect to see positive growth trends in our core fee income while also remaining focused on limiting incremental expense growth from here to focused investments directly benefiting our transition. With that, I'll now turn it back over to Tom for his closing remarks.

Thanks, Jamie. I'm pleased with the progress we made during the first quarter. As we look ahead, we continue to remain optimistic that our performance can significantly improve in a variety of economic scenarios. We are well capitalized, have plenty of liquidity and strong credit quality, and have multiple levers to materially improve profitability over the next two to three years. We are laser focused on unlocking the embedded value in the First Foundation franchise by executing on our relationship-focused initiatives in Florida and California. This concludes our prepared remarks. Operator, would you please begin the question and answer session? Thank you.

Operator, could we begin to take questions, please?

Yes, thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker in your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And your first question comes from the line of David Feaster with Raymond James. Please go ahead.

Hey, guys. Good morning. This is Liam on for David. Hey, Liam. Good morning. Good morning. So just wanted to ask, you know, C&I loan fundings have really helped lead the way. How have utilization rates trended thus far in 2025? And have you seen any broader uncertainty having an impact on those utilization levels?

Yeah, I think that, you know, the conversation around utilization and hesitancy is out there. The feedback from clients and our commercial team is that There is some hesitancy, I'd say it's a good word, with the economic backdrop that we have today for capital expenditures. We have seen actually some clients accelerate inventory purchases with the uncertainty of the trade conversations. So it's a little bit of a mixed story.

I appreciate the color there. Then on the expense side, you talked about your efforts to build out the franchise and hire some new teams. I noticed FTEs increased by about 2% sequentially. Did you invest in any particular markets in 1Q, and what level of production do you anticipate from those individuals in 2025?

Yeah, so we've added a couple people in the Florida market, and we're optimistic about that area in the economy, specifically in the commercial side. And I would say in 2025, modest individual performance based upon joining the organization first year, but additive. Most of the production will come out of California at this point, and we're focused, obviously, on Southern California and the Florida markets on the commercial side.

Thank you. I appreciate that. The last one for me, you noted that AUM declined in this quarter. Is that more due to the fluctuations in customer account balances, and how is new customer acquisition in the advisory business broadly?

We're very optimistic about the pipeline, Liam. We did have some terminations, which is normal through the quarter. We had a little bit of turnover from some lower performing teammates, but we're very optimistic about the pipeline going forward. We expect a little bit of volatility as we move forward from the market. But we, you know, I think like everyone, are holding Pat for now before jumping to any conclusions about where that could go.

Very optimistic about the business, though, but the market fluctuations had an impact on that.

I appreciate the color there. Thank you so much. I'll step back. You bet.

Your next question comes from Gary Tanner with DA Davidson. Please go ahead.

Thanks. Good morning. I wanted to ask a question regarding the NIM kind of outlook on slide 10. I guess two questions. One, what rate environment does that assume in terms of the Fed? It may just be the forward curve, but you can tell us otherwise. And then other than the held for sale dispositions impacting the size of the balance sheet, just any other

context you could put around the balance sheet size or mix relative to your outlook there hey good morning gary uh thanks for the for the question i think we're remaining fairly conservative on the the rate outlook um you know from what we've been monitoring over the last several several weeks um the outlook bounces from uh three to four rate cuts in 25 I think I even saw five at one point pop in there. We're assuming only two rate cuts in 25, and I think we've got in there a total of six over the remaining horizon through the end of 2027. As you know, that can change at a moment's notice. But I'd say we're slightly conservative to in line with the curve longer term. bit more conservative short term. In terms of the balance sheet mix, we do have the dispositions, as you mentioned, and as Tom mentioned in his prepared remarks, we expect to move through the process of getting those balances off the balance sheet this year in 2025. We'll continue to support the earning asset base as necessary to be able to fund investments that we need. And we think that there could be opportunities to grow commercial, to grow consumer as we bring in new teammates, for instance, in Florida. But primarily in 2025, There's really just the organic transformation of the balance sheet with the dispositions driving the NIM improvement from here.

Okay, great. Thank you. And then second question, just in terms of expense. Oh, sorry. Your comment. Go ahead. Okay. On the expense side. In terms of the efforts to remediate some of the internal control issues that you've highlighted in the K, any expense impact this quarter or projected going forward?

I think you'll see some professional service expenses from time to time. Nothing, I'd say, significant, but you will see pockets of some professional service expenses as we as we bring in some expertise to help us accelerate through the transition. I think we made it clear that we see a lot of opportunity in the franchise. We want to try to get to the point where our internal controls are in our processes and our capabilities are consistent with our size and complexity. We want to do that as fast as possible so that we can really shift all efforts towards growing the business. So we will bring in some expertise as necessary to accelerate that. As I mentioned, we're also investing in some teammates that will help us drive that transition and better manage the bank going forward. But in the expense line, you will see some blip from professional services here and there just to help us work through that.

Got it. Thank you.

Your next question comes from Andrew Terrell with Stevens Inc. Please go ahead.

Hey, good morning. This is Jackson Loren on for Andrew Terrell.

Good morning.

Hey, Jackson. If I could just start off on expenses. You guys are, I appreciate the color on the comp line item with the elevation over the last two quarters. And you touched about normalization going forward. And I was just wondering if you could kind of quantify the seasonal impact you guys saw in one queue on that line item. And then would appreciate any additional color on how you expect that to trend throughout the year with the investments you guys are making currently.

Oh, sure. Great question. You know, I think some of the changes or some of the actions that we took in the fourth quarter, for instance, you know, I think the important decision to fund the non-executive annual bonus pool. um very important decision for us but that did have some tail in the first quarter as there it led to additional payroll taxes additional 401k match expense etc i think all in from the seasonal items it was about a million and a half i'd say is a good a good number for that and as you know that that starts to trend down almost immediately as you proceed into the second and then through the rest of the year As the other items, some of the things that we've invested in to bring in new teammates, to bring in expertise and retain the institutional knowledge necessary to the transition, those are not one-time events, meaning they only impact one quarter, but they are limited in their impact on the financials. they just take a little longer to chew through um as we as we do work those down and those those normalized back to uh really just sort of base numbers we will you know at the same time be investing in growth and making sure that we're continuing to bring in new bankers in um in our markets in california and florida we're making sure that we bring in folks that can help us build out a private banking capability to partner with our wealth and trust businesses to drive more contribution there. We are obviously focused on profitability, so we'll remain diligent with our expense growth. But at the same time, we do want to make sure that we're making the investments necessary to drive longer-term value and and get the organization or unlock the potential that we know is here.

Great. That's very helpful. Thank you. And then if I could just switch over to the margin and kind of the puts and takes of the 180 to 190 4Q25 exit NIM, that deck on slide 10 or that deck on page 10 is very helpful. And you guys obviously have the brokered CDE benefit as well as the natural multifamily repricing that becomes more material in 2026. And kind of the last factor that you guys put down was the commercial growth. And it looked like new funding yields came down pretty hard quarter over quarter. So I was just wondering what you guys are seeing from a competition standpoint for new CNI loans and if you guys are seeing any pricing pressure from competitors right now.

I'd say that the, you know, with the, you know, with the, I'd say, not slowing, but, you know, people are being careful out there. So there is competition for transactions. We're seeing it in all of our markets right now. But with $180 million of fundings, it's, you know, we're building our pipelines there. And it's probably more, deal-centric than larger trends.

Understood. Great. Thank you. And then just lastly on credit, very impressive credit quarter. Non-accruals came down pretty nicely with what has happened over the last month and a half and the uncertainty in the market currently. and just the conversations that you've been having with your borrowers. Is there any credit bucket that you guys are keeping a closer eye on going forward?

I think, you know, Jay, as, you know, there's questions about the economy, I think you've got to be very careful and thoughtful about the credit portfolios. You know, and noted in my comments were, you know, the stress testing of kind of the fixed rate portfolio to make sure that we're being thoughtful about, you know, repricing impact and what we're going to keep on our balance sheet. The CRE portfolio continues to perform extraordinarily well. But, you know, we're being thoughtful about stress testing in the kind of the next environment for these assets. I think we all need to just keep an eye on the, you know, the larger economy and where that goes at this point. But I'd say the performance of our portfolios has been very strong, and we continue to believe that we've got a strong credit portfolio.

Understood. That's all I had. Thank you for taking the questions.

The next question comes from Adam Butler with Piper Center. Please go ahead.

Hey, everybody. This is Adam on for Matthew Clark. Thanks for taking the questions. Just first on the expense side of things, I noticed in the segmented expenses that wealth management related expenses stepped up, I think, around two and a half million. I know that the FTE count also came up, so I was just curious, with wealth management-related revenue kind of stable, why that went up, and if the FTE hires maybe was the reason behind that?

Good morning. Some of that was just the seasonal items, and then we did have some annual compensation expense related there as well i would expect that um that to part of it will continue uh for the next several quarters as uh as as that expense uh accrues over time but um a portion of it um but a portion of it was one time let's say a meaningful portion of it was one time uh one time expense that should normalize going forward

Okay, that's helpful. And then I guess just overall, like, maybe like a run rate guide, including customer service costs, how you're thinking about that overall run rate for expenses going forward. And given probably the conservative outlook of two cuts that you have in the NIM guide,

Yeah, if you don't mind, I'd like to break those apart. I mean, in addition to the NIM guidance, which does not, by the way, include the customer service cost component, the customer service cost will come down along with market rates. So we, as I mentioned, assumed two cuts, so we would expect that to come down. Ending the quarter, we had, you know, call it billion three. We've got that broken out on slide. Sorry, Adam. That's available on slide eight. So we had a little over a billion in MSR deposits, and there's another, call it 250, 300 million or so in other customer service cost-related deposits. the Fed rate cuts will almost immediately reduce customer service costs with those clients. I'd say in addition to that, as we continue to see, as we continue to make progress on reducing our CRE concentration, for instance, selling or securitizing the health for sale portfolio, in addition to focusing on broker deposits, We're also focused on reducing reliance on concentrated high-cost deposits. And, you know, some of that will, some of that focus and those efforts will lead to reduced balances in the customer service cost portfolio more generally. So customer service costs will come down because of both of those levers. In the rest of the expense base, as I mentioned before, there may be pockets of expense that we'll see on the professional service line as we work to transition some of the more complex processes and capabilities and get those up and running more quickly. But overall, I would expect the expense level to remain outside of customer service costs to remain relatively stable to slightly declining over time. But there could be, you know, again, just pockets of investment that we'll see in order to accelerate and facilitate the transition.

Okay, I appreciate the color there. That commentary helps with regard to how you guys are thinking about the customer service costs going forward and related balances. And then I guess just leaning back over to the NIM, I appreciate all the color that you guys provided on slide 7, 8, and 10, and your related forward rate outlook. But I was just curious to help with modeling. Do you guys have a spot rate on deposits at the end of the quarter? maybe the average in March?

I do have the rate for March monthly average on total interest-bearing deposits was at 381, which was down from just over 390 monthly average in December, and I believe we were at call it 435 monthly average in August before the Fed loosening cycle began.

Okay. Helpful, helpful. And then just one more for me on the loan balance side of things. I know that you guys are in the process of replacing lower yielding multifamily with higher yielding CNI. I was just curious how you guys are thinking about overall loan balances going forward, maybe through the year. And I know it's hard to predict how CNI production will come in, just given the uncertain macroeconomic conditions. But just some help on how you're thinking about overall loan balances going forward.

Well, we certainly want to drive the mix. Taking the help for sale portfolio aside, I would expect us to see modest growth over time. We'll continue to focus on levers we can pull to reduce the CRE concentration. So the existing multifamily book, even outside of help for sale, we would expect to see some contraction there over the coming years. The municipal portfolio, we're not in the process of seeking new opportunities there, so I would expect some, albeit slow, some amortization on that book, which is between 900 and a billion. I'd expect to see continued reduction in the equipment finance portfolio, which is just over $100 million. That'll continue to come down over time since we've, for all intents and purposes, exited that business. And then as we invest in new CNI bankers, as we start to... to organize around our private banking initiative. There'll be some opportunities there. So I expect to see some growth in the other portfolios. But as you think about that transition, I think we're adding density to the loan portfolio over time and stronger yielding portfolios. but because of the transition out of CRE and some of our legacy assets, I think the growth in the loan portfolio will be relatively modest over the next two and a half years.

Okay. Yeah, no, I appreciate the various dynamics that are going on there, and thanks for the help there. Those were all my questions. I appreciate it. Okay, thank you.

There are no more questions. I will now turn the conference back over to Tom for closing remarks.

Thanks for joining us today. Hopefully this has been helpful. We had a very positive, you know, shift in earnings during the first quarter. I think the investment and the initiatives that we're making are beginning to show light. And as we reposition the balance sheet, trending out of some of the historical portfolios that are not productive for us today, continue to focus on improving our margin, focused on expense management and profitability. So thanks for your time and questions today.

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