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.