First Foundation Inc.

greeting and welcome to the first foundation's second quarter 2025 earnings conference call today's call is being recorded speaking today will be thomas c schaefer first foundation's chief executive officer and jamie ritten first foundation's chief financial officer before i hand the call over to mr schaefer please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results. These forward-looking statements are made subject to the Safe Harbor Statement included in today's earnings release. In addition, some of the discussion may include non-GAAP financial measures. For a more complete discussion of the risks and uncertainties that could cause actual results to defer materially from any forward-looking statements and reconciliations of non-GAAP financial measures, we 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. Schaffer.

Thank you, Operator. Welcome and thank you for joining First Foundation's second quarter earnings call. On today's call, we'll provide updates about our financial and operating performance for the second quarter In addition to discussing the strides we are taking towards accomplishing our strategic initiatives, central to our remix of the balance sheet, during the quarter we executed two important transactions. In April, we sold $377 million of held for sale CRE loans, and in June we securitized an additional $481 million of held for sale CRE loans. These sales, along with planned CRE runoff, built on the success We've had since the fourth quarter and reduced our commercial real estate concentration to 365% of regulatory capital from a high of over 600%. Importantly, the transactions also allowed us to pay down $975 million of higher cost deposits. These balance sheet actions had a limited positive impact to net interest income this quarter, but will improve net interest margin moving forward and we are reiterating our NIM guidance of a 1.8 to 1.9% margin by the end of 2025. During the second quarter, we posted a net loss of 7.7 million after posting positive net income of 6.9 million in the first quarter. While the second quarter earnings were not where we'd like them to be, we believe this quarter's core financial performance was stronger than the headline indicates. And I would also like to highlight that From a strategic standpoint, this quarter was on plan and keeps First Foundation on a good path to delivering stronger earnings and more sustainable profitability in the future. As I previously mentioned, the bank was able to reduce its commercial real estate held for sale loans by a total of $858 million during the second quarter. The execution on the April loan sale was less favorable and impacted pre-tax income by $11.8 million during the quarter. We experienced a modest gain from the June securitization of 0.2 million. If we simply adjust our earnings for the net one-time impact of the two loan transactions and the losses from the related hedge, core after-tax net income was $1 million, or one cent per share. Adjusted pre-provision net revenue was $3.6 million, or a 12 basis point pre-provision net revenue return on assets. As of now, we have a high degree of visibility on executing and an additional securitization before the end of the year. And our expectation is to be fully out of the held for sale commercial real estate portfolio by the end of 2025 as we previously communicated. Given our favorable experience in the securitization market, first in December and again in June, we expect pricing on the incremental securitization to be competitive. Said differently, material upward movement rates aside, We believe the negative capital and earnings events from the rundown of these commercial real estate loans should mostly be behind us. We made additional progress in reducing our CRE concentration ratio during the second quarter to 365% versus over 400% in the prior quarter. And from a growth perspective, we funded $256 million of new loan balances in the quarter, priced at an average yield of 7.18%. of which approximately 80% were CNI loans. Loans held for investment decreased in the second quarter primarily due to $392 million of payoffs. Non-performing loans were stable at 35 basis points and net charge-offs remained low at just $135,000. Our ACL position on loans increased four basis points to 50 basis points when compared to the prior quarter. Most of the quarterly ACL build was the result of higher reserves for new C&I loan originations and increased model calculated loss factors in the commercial loan portfolio. A review of our CECL methodology is anticipated to be completed by the end of the year, and we expect our loan origination levels, mix, and overall credit performance to be the main drivers of our longer-term allowance levels. Our continued focus on reducing our CRE concentration and growing CNI loans should result in a higher ACL over time, all else being equal, as we have previously disclosed. We are excited to be spending an increased amount of time and energy on some of our previously communicated Phase II strategic initiatives, including fully leveraging our markets, improving core funding, and accelerating growth in FFA and private banking. Assets under management at the end of the quarter ended the quarter at $5.3 billion. which was up slightly versus the linked quarter and compared to $5.4 billion at the end of the year. Trust assets under advisement closed at $1.2 billion, relatively stable versus the prior quarter. During the second quarter, we saw positive cross-selling trends within FFA and our commercial banking platform. We have a building pipeline of referrals that we have already onboarded new wealth management relationships as a result. As we think about First Foundation's future and our value proposition for our clients, we believe our re-energized focus on private banking and our demographically attractive markets will build significant long-term value for our firm and our shareholders and bring added support to our wealth management clients and team. Our efforts to further invest in client relationships also continue to show tangible progress in our deposit base, partly offsetting our high-cost categories and MSR deposit runoff was a modest increase in combined retail, specialty, and digital banking deposit balances. As a result of the quarter's growth, we are pleased to report that digital banking deposits surpassed $1 billion for the first time since the channel's launch and represent 12% of total deposits as of June 30th. Our ability to grow our relationships in these core channels and exit higher cost deposits elsewhere in the portfolio resulted in another quarter of moderation in our total deposit costs. which fell to 2.95% versus 3.04% in the prior quarter. Our loan-to-deposit ratio continues to be steady at approximately 94%. Lastly, I 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 and limited net income, our common equity Tier 1 ratio is at 11.1%, and our Tier 1 leverage ratio is at 8.3%. Since initiating our strategy in Q3 of last year, our CET1 ratio has improved approximately 140 basis points. You have no doubt seen our recent management departures. Change is expected, especially when you're changing your operating models. We're at the end of two important executive-level searches for the head of consumer, private, and small business banking, as well as chief credit officer. We're encouraged by the extraordinary talented leaders interested in joining our company who will help our team transition to the next chapter. I hope to announce their arrivals and tell you more about them in the very near future. 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. Before talking in greater detail about our second quarter financial performance and go-forward outlook, I wanted to first spend a few minutes detailing the impact of the two loan transactions on our income statement in the second quarter. Despite the net loss reported in the quarter, we remain steadfast in our goal to significantly improve our sustainable profitability over the intermediate term and expect to see additional benefits to earnings from the balance sheet actions taken during the quarter. On slide three of our investor presentation, we break out the impact of the loan transactions to second quarter earnings. As Tom mentioned, the bank completed a $377 million loan sale with an individual counterparty in April, with execution at a price lower than our prior quarter mark. This pricing variance resulted in approximately $10.6 million loss in non-interest income, and we had foregone interest income of $1.2 million due to the timing of the loan sale, which weighed on net interest margin by four basis points. The second completed transaction was a securitization of $481 million of CRE loans completed in June with more favorable results. This transaction generated a modest gain of $227,000. We removed the one-time impacts of these two transactions and the other transaction-related items, such as the hedge, from our second quarter earnings Net income was $1 million or positive one cent per share of earnings. As Tom mentioned, we expect to complete an additional securitization in the second half of 2025, and our target remains to be fully exited from the CRE health for sale portfolio by the end of the year. We remain focused on limiting incremental earnings and capital impacts, and execution is more competitive in the securitization market. as seen by the differences we've highlighted between the two transactions completed during the quarter. Moving to slide four, reported net interest rate margin for the second quarter of 168 basis points represented a one basis point increase relative to the linked quarter and was largely driven by a nine basis point improvement in our total cost of deposits, which decreased to 2.95%. If we adjust for the one-time $1.2 million of foregone interest income related to the April loan sale, that interest margin for the quarter would have been approximately 172 basis points. Yield on total earning assets decreased two basis points to 4.61%, driven mainly by a 10 basis point reduction in the yield on securities available for sale and a five basis point reduction in total loan yields, which were generally stable quarter over quarter. And as noted on slide five, we continue to see quarter-over-quarter improvement in our balance sheet contribution or net interest income excluding customer service costs. We expect this key metric to improve even further in the third quarter due to the loan transactions and the corresponding exit of a similar amount of high-cost deposits, most of which were MSR deposits. On slide seven of our investor presentation, we continue to provide visibility to the repricing opportunity in our Help for Investment multifamily portfolio. While it remains significant, the repricing is a catalyst that will take some time to play out. But based on our portfolio's weighted average spread, were the portfolio to reprice to floating rates today, yields would improve meaningfully. We have $455 million in multifamily loans with a weighted average yield of 3.45% that were repriced to floating, refinanced with us, or pay off at par in 2026. And another $895 million in multifamily loans with a weighted average yield of 4.18% facing the same decision in 2027. Loan repricing volumes are lower in the remainder of 2025 But looking ahead to the volume of repricing we see on the horizon, when coupled with CD maturity set to occur, we remain optimistic about the opportunity and flexibility this provides. On slide 8, we noted the maturity schedule and rates for our remaining brokered CDs, which as we've noted, 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 even the deposit repricing from legacy rates to new rates will also benefit the margin while we continue to target the reduction of our brokered cd portfolio during the second quarter we had an opportunity to significantly reduce some other higher cost and more concentrated deposits given the completed loan sale activity more specifically we exited 70 784 million of specialty deposits including the 540 million of MSR deposits with a blended average ECR rate of approximately 4.6% in customer service costs, and 191 million of comparably high-cost non-CD broker deposits. For broader context, the 858 million of commercial real estate loans we dispositioned had a blended average yield of approximately 3.92%. Though the first loan transaction closed in April, A majority of the go-forward benefit, particularly in the customer service cost line, was not realized until late in the quarter. Moving to non-interest items, adjusting for loan transaction-related items, non-interest income was approximately $12 million for the quarter, with slight moderation in investment advisory, trust, and consulting fees related to the decline in AUM we saw coming out of the first quarter. Market performance and new relationship onboarding of $83 million in our wealth business helped drive overall AUM growth of $234 million this quarter, which will benefit fees in the third. We remain optimistic about our wealth and trust pipelines, and we have already seen the potential for improved client engagement and greater earnings contributions as a result of our renewed focus on improving partnership across our platform. On non-interest expense, outside of customer service costs, remaining categories totaled $47 million for the first quarter compared to $46.7 million in the prior quarter. The largest contributor to the sequential increase was higher professional service costs resulting from our focus on strengthening our internal capabilities. We expect professional services expense to remain elevated in the third as we close out several key initiatives before normalizing by the end of the year. The moderation in compensation and benefits this quarter was a function of reduced impacts of early-year seasonal items and our continued diligence around replacement positions and net adds to staff. We are willing to continue investing in talent to drive our strategy going forward, and we expect the majority of these investments over the coming quarters to be focused on client-facing roles. Customer service costs totaled $12.9 million for the quarter, compared to $15.1 million in the prior quarter, and $17.8 million at year end 2024. The decrease in customer service costs from the prior quarter was due primarily to the $540 million decrease in MSR deposits. With these exits coming later in the quarter, the second quarter did not include the full benefit, so we expect additional moderation in this line item in the third, absent any movement in rates. As Tom mentioned, overall credit quality remains stable. We booked a $2.4 million dollar provision expense due primarily to changes in our ACL balance, which as Tom mentioned, increased our ACL coverage ratio to 50 basis points, a four basis point improvement when compared to the link quarter. Switching quickly to First Foundation's financial condition on slide nine, our balance sheet remains well capitalized with an 11.1% consolidated common equity tier one ratio and an 8.3% leverage ratio. We also are operating with ample liquidity with nearly three and a half billion dollars of borrowing capacity and cash balances, which compares favorably to our uninsured and uncollateralized deposits of 1.3 billion, which is down from 1.7 billion in the prior quarter. Tangible book value as adjusted for the conversion of our preferred shares to equity shares, as we note in slide 17 of the deck, finished the quarter at $9.34 per share versus $9.42 per share in the prior quarter. Before handing the call back to Tom for his closing remarks, I also wanted to provide some thoughts about First Foundation's intermediate financial outlook, particularly given all the strategic updates we've shared over the past two quarters. Overall, we are very optimistic about the financial future of First Foundation over the next 12 to 36 months. As noted on slide 10, we anticipate continued margin expansion and reiterate our expectation for net interest margin to exit 2025 in the fourth quarter between 1.8 and 1.9 percent and 2.1 and 2.2 percent by the fourth quarter of 2026. To the extent the Fed reduces rates more than we are anticipating, that could accelerate some of our expected margin improvement in 26 and 27. with deposits possibly repricing faster than we are currently expecting. I would also note we expect to see positive medium-term 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 to Tom for his closing remarks. Thanks, Jamie.