Q1 2024 First Foundation Inc Earnings Call

April 25, 2024

Greetings and welcome to first Foundation's first quarter 2024 earnings Conference call today's call is being recorded.

Speaking today will be Scott Kavanaugh, first Foundation's President and Chief Executive Officer, Jamie Brittain first Foundation's Chief Financial Officer increase the Hebei Chief operating officer before I hand, the call over to Scott. Please note that management will make certain predictive statements strength of the skull that reflect their current eastern.

James Britton: 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.

James Britton: And now I would like the parent that call over to President and CEO Scott Kevin. Please go ahead.

Scott Farris Kavanaugh: Hey, good morning, and welcome everyone. Thank you for joining us for today's first quarter 2024 earnings call.

Scott Farris Kavanaugh: As the banking industry continues to face headwinds and it continues the inverted yield curve I am proud of our team for the effort put forth to make the company stronger I have never felt as comfortable with a management team in my entire career.

Scott Farris Kavanaugh: I feel with the team that we currently have in place.

Scott Farris Kavanaugh: Once again, we were able to improve our loans to deposit ratio maintained overall loan yield and continued the process of improving the sensitivity of our balance sheet to changing interest rates.

Scott Farris Kavanaugh: Most importantly, we took great strides to improve recurring revenue and reduce core expenses to increase future profitability.

First foundation advisors closed the quarter at near record assets under management and the Trust Department posted another good quarter.

For the first quarter, we reported net income attributable to common shareholders of 793000 or one four per share for the basic and diluted shares.

Scott Farris Kavanaugh: Tangible book value, which is a non-GAAP measure ended the quarter up five.

Scott Farris Kavanaugh: For for the from the fourth quarter of 2023 and ended at $16 35.

Scott Farris Kavanaugh: Pre tax pre provision revenue totalled a half a million dollars essentially unchanged from the fourth quarter.

Scott Farris Kavanaugh: Interest income totaled $155 million for the quarter compared to $146 6 million as of December 31, 2023, and $137 million for the first quarter of 2023.

Scott Farris Kavanaugh: Non interest income as a percentage of total revenue was 25% for the quarter compared to 25% for the fourth quarter of 2023.

Scott Farris Kavanaugh: Our net interest margin was 117% as compared to 136% for the fourth quarter of 2023. This was largely driven by the return of MSR deposits. Returning later in the quarter as opposed to earlier in the quarter.

Scott Farris Kavanaugh: Noninterest expense decreased to 50 $556 million in the quarter compared to $55 9 million in the prior quarter.

Scott Farris Kavanaugh: Our efficiency ratio improved to 98, 4% compared to 98, 5% for the fourth quarter 2023.

Scott Farris Kavanaugh: Adjusted return on assets again, another non-GAAP measure ended the quarter at 0.03% compared to 0.09% as of December 31 2023.

Scott Farris Kavanaugh: Our loan to deposit ratio improved to 94, 8% in the quarter compared to 95, 2% as of December 31, 2023. This was largely driven by an increase in core deposits late in the quarter.

Scott Farris Kavanaugh: We remain committed to continuing to improve this ratio through a combination of strategically reducing lower yielding loan balances and continuing to grow core relationship deposits.

Speaker Change: I just returned from Florida, visiting our branches and I am extremely encouraged by the growth we're experiencing in many of those branches and throughout our entire branch network, our deposit pipeline remains robust into the second quarter.

Scott Farris Kavanaugh: Management made a strategic decision to exit the equipment finance operations late in the first quarter.

Scott Farris Kavanaugh: As most of these loans were originated using third parties we felt.

Scott Farris Kavanaugh: That it did not fit our overall goals of getting back to our roots of relationship banking, we still will be able to accommodate our valued clients needs as necessary for any of their equipment financing needs we have.

Scott Farris Kavanaugh: Currently planned to continue servicing the remaining loan portfolio, but exiting the space will provide approximately $1 5 million in annualized cost saves.

Scott Farris Kavanaugh: Total deposits were 10, six 4 million in the quarter compared to $10 six 9 million in the fourth quarter.

Scott Farris Kavanaugh: Core non brokered deposits increased to 64% during the quarter compared to 60% in the fourth quarter of 2023.

Scott Farris Kavanaugh: Non interest bearing demand deposits increased to 17% for the quarter compared to 14% of the deposits in the fourth quarter of last year.

Scott Farris Kavanaugh: As indicated earlier, our deposit pipeline remains healthy with most of the pipeline being in noninterest bearing category.

Scott Farris Kavanaugh: Our insured and collateralized deposits were at 85% of total deposits at the end of the quarter compared to 87% of total deposits in the fourth quarter we.

Scott Farris Kavanaugh: We maintained a strong liquidity position of $4 4 billion at these levels our liquidity to uninsured.

Scott Farris Kavanaugh: Collateralized deposits ratio was two seven times.

Scott Farris Kavanaugh: Our wings were $1 7 billion as of March 31, 2024, compared to $1 4 billion at the end of the fourth quarter.

Scott Farris Kavanaugh: Average borrowings outstanding were $1 6 billion or 11, 8% of total average assets for the quarter compared to $1 1 billion or eight 7% of total average deposits for the prior quarter.

Scott Farris Kavanaugh: The increased average borrowings from the prior quarter were used to enhance on balance sheet liquidity as cash and cash equivalents increased to 11, 7% at the end of the first quarter from 10% at the end of the fourth quarter of last year.

Scott Farris Kavanaugh: Credit quality continues to serve as a crucial differentiator for first foundation, our nonperforming assets to total assets was one 8% at the end of the first quarter compared to <unk>, 5%.

Scott Farris Kavanaugh: As of December 31, 2023.

Scott Farris Kavanaugh: Loan balances ended the quarter at $10 1 billion a reduction of $100 million.

Scott Farris Kavanaugh: Compared to December 31, 2023.

Scott Farris Kavanaugh: It is important to note.

Scott Farris Kavanaugh: Net loans would have grown for the quarter, but we had several CNI loans.

Scott Farris Kavanaugh: Totaling approximately 200 million push into the second quarter.

Scott Farris Kavanaugh: Many of these loans have already funded or will fund in the next several weeks. These additional C&I loans will have a net spread of over 3%.

Scott Farris Kavanaugh: Multifamily remains a strong asset class for the bank our underwriting on these loans has never wavered since the company's inception. This sector of the CRE gain refocused attention in the first quarter with events on the East coast.

Scott Farris Kavanaugh: Chris will provide significant detail on this segment later in the call.

Scott Farris Kavanaugh: First Foundation advisors grew approximately 200 million to end the first quarter at $5 5 billion compared to $5 3 billion at December 31.

Scott Farris Kavanaugh: Our pipeline of new relationships remained strong.

Scott Farris Kavanaugh: Assets under Advisement and Ffbe's Trust Department was $1 2 billion for the quarter compared to $1 3 billion in the fourth quarter.

Scott Farris Kavanaugh: During the quarter management worked diligently to build additional recurring revenue.

Scott Farris Kavanaugh: Most of the revenue generation was added in the middle of the first quarter.

Scott Farris Kavanaugh: Or as I mentioned funded at the beginning of the second quarter. So the full benefits were not reflected during the first quarter. This included adding investment securities to our <unk> portfolio and swapping rates to a fixed fixed to a spread and adding additional.

Scott Farris Kavanaugh: C&I loans and core deposits, we will continue to strategically add hedges to both improved recurring revenues and reduce our interest rate sensitivity.

Scott Farris Kavanaugh: Jamie will provide greater insight on this section.

Scott Farris Kavanaugh: Once again I will close by reiterating my appreciation for the incredible efforts and unwavering dedication of our entire team.

Scott Farris Kavanaugh: I will now turn the call over to Jamie to cover the financials in greater detail.

James Britton: Thank you Scott I'll start with the balance sheet and our net interest margin as Scott mentioned NIM contracted 19 basis points during the quarter from 136% in the fourth the 117% in the first there was another slight improvement in our earning asset yield this quarter, which increased from $4 six 2% in Q4.

Scott Farris Kavanaugh: To 464% in Q1.

Scott Farris Kavanaugh: Earning asset yields begin with loan yields which remained stable at four 7%.

Scott Farris Kavanaugh: Held to maturity portfolio yield improved slightly by two basis points, while the yield on the available for sale portfolio declined modestly by seven basis points as we continued to reposition the investment portfolio to support our liquidity position improved the balance sheets right profile and more efficiently enhanced recurring revenue there were.

Scott Farris Kavanaugh: Several factors contributing to the change in the <unk> portfolio yield, but the most noteworthy was taking advantage of the markets early quarter optimism for declining rates by adding securities in conjunction with new short term funding, which we swapped to a more attractive longer term fixed rate. This transaction provides additional rate.

Scott Farris Kavanaugh: Insensitive recurring revenue and due to the execution timing several weeks into the first quarter, we expected to provide additional benefit in the second and beyond.

Scott Farris Kavanaugh: As I mentioned, we are open to acquiring safe highly liquid securities at attractive yields and considering transactions that helped us to achieve our desired long term interest rate risk profile and mitigate the earnings risk of future short term rate increases to the extent, we can use some of our improving capital position to also enhance recurring revenue.

Scott Farris Kavanaugh: In this type of safe and prudent way all the better.

Scott Farris Kavanaugh: Moving to the right hand side of the balance sheet. The most important thing to highlight is the seasonal nature of our noninterest bearing deposit portfolio and its MSR escrow balances, which began their normal annual outflows later in the fourth quarter before beginning to rebuild late in the first as we noted on last quarter's call.

Scott Farris Kavanaugh: Just the seasonal transition. We also had some balances leave the bank due to our customer's desire to diversify their exposure across additional banks.

Scott Farris Kavanaugh: This two drove some of the quarter over quarter decline. We saw on average balances. We appreciate our customers' proactive approach to their own risk management and welcomed the improved diversification. It provides in our own deposit portfolio as well we.

Scott Farris Kavanaugh: We believe the strong multi product relationships, we foster in this business are contributing to its overall growth and we fully expect more deposit balances to continue building in the second quarter.

Scott Farris Kavanaugh: Accompanying the decline in average noninterest bearing deposits was another quarterly decline in customer service costs, which we have seen decline from $24 7 million in the third quarter of 2003 to $16 4 million last quarter and only $10 7 million in the first.

Scott Farris Kavanaugh: As we've discussed previously the mix to interest bearing liabilities, which we secure to replace declining noninterest bearing balances will begin will weigh on our net interest margin and it was a factor again this quarter, but the quarters balance sheet actions overall, we're net accretive to earnings when considering both net interest income.

Scott Farris Kavanaugh: And customer service costs.

Scott Farris Kavanaugh: Given the holistic nature of these relationships, we are comfortable with the seasonal fluctuations they will cause in our margin.

Scott Farris Kavanaugh: Interest bearing liability costs increased modestly this quarter from $4 one 9% in the fourth to four 4% in the first.

Scott Farris Kavanaugh: The borrowing costs remained relatively stable interest bearing deposit cost increased by seven basis points to 428%.

Scott Farris Kavanaugh: Factors included an increase in our mix of higher cost deposits, which as I mentioned, a moment ago, we're used to absorb the seasonal declines in noninterest bearing MSR balances.

Scott Farris Kavanaugh: Additional client migration to higher rate products, such as Cds ahead of potential declines in short term market rates.

Scott Farris Kavanaugh: And continued competition in the market for balances driving rate accommodations in the retail channel.

Scott Farris Kavanaugh: We remain pleased with our retail business is performance and believe it is an important driver of our long term success. Despite the modest increases it may continue to drive in the banks' deposit costs near term.

Scott Farris Kavanaugh: Stepping back to consider overall deposit cost monthly trends exited the quarter favorably.

Scott Farris Kavanaugh: 40 of our products showed improvement throughout the quarter and march's total interest bearing deposit costs were in line with the quarterly average of four 8%.

Scott Farris Kavanaugh: We have improved our monitoring and analytics in this area and our teams are working as proactively as possible to hold the line, while we wait for greater certainty in the right market.

Scott Farris Kavanaugh: As you will see we continued to make progress on strengthening our balance sheet, both our on hand liquidity and our capital positions are much stronger than they were before we entered this phase of market uncertainty and as Scott mentioned, our focus on full relationship banking is paying dividends in terms of recurring revenue and earnings stability.

Scott Farris Kavanaugh: The new Securities we added in conjunction with swapped fixed rate funding over $150 million of outstanding loan balances fully self funded by customer deposits at 3% spread.

Scott Farris Kavanaugh: And the savings gained by exiting the equipment finance business will generate almost $13 million of recurring annualized pre provision net revenue.

Scott Farris Kavanaugh: We will continue to monitor the rate environment for opportunities to take advantage of a liability sensitivity and pivot towards a more sustainable long term interest rate risk profile, but our continued focus on relationship banking and day to day execution will continue to be the keys to driving long term shareholder value we're incur.

Scott Farris Kavanaugh: <unk> by our successes in the first quarter as well as here in the start of the second and we remain optimistic on the year ahead.

Scott Farris Kavanaugh: Moving to the income statement interest income continued to grow ending the quarter at $1 $55 million versus $1 $46 6 million realized in the fourth.

Scott Farris Kavanaugh: As discussed interest expense was added to account for quarterly declines in average noninterest bearing MSR deposit balances.

Scott Farris Kavanaugh: Though this drove a 19 basis point reduction in our net interest margin and a $4 $1 million decline in net interest income when considering the concurrent $5 $7 million decline in customer service costs, the balance sheets overall contribution to pretax pre provision net revenue improved for the quarter, we expect the net.

Scott Farris Kavanaugh: Interest income to benefit from increasing noninterest bearing deposit balances in the second quarter, but more importantly, we believe the actions we are taking to improve recurring revenue will continue to enhance balance sheet contribution.

Scott Farris Kavanaugh: Moving to the rest of the income statement wealth and trust related fees were flat for the quarter at $8 6 million as Scott mentioned, However, AUM continued its strong performance increasing point to point again, this quarter and exceeding the $200 million of growth seen in the fourth.

Scott Farris Kavanaugh: AUM ended the quarter at $5 $5.300 billion higher than at year end, 2023, and $500 million higher than at the end of the third quarter we.

Scott Farris Kavanaugh: We are encouraged by the SFA team's continued success and look forward to taking our history of exceptional proven customer service to the high growth, Texas and Florida markets.

Scott Farris Kavanaugh: Outside of customer service costs remaining noninterest expense categories totaled $39 9 million for the quarter modestly higher than the fourth quarter's $39 5 million as expected compensation and benefits increased this quarter as a result of annual adjustments in tax resets, while all other categories saw modest quarter.

Scott Farris Kavanaugh: Over quarter declines.

Scott Farris Kavanaugh: Maintaining core expenses that responsible levels remains a focus and as I mentioned, we expect the decisions made to exit equipment finance to mitigate growth year as Scott as Scott and I have mentioned several times. The entire organization is laser focused on improving operating efficiency and controlling these discretionary costs.

Scott Farris Kavanaugh: First foundation made some very difficult decisions in 2023 to reduce expense during the market's volatility.

Scott Farris Kavanaugh: As profitability returns taking advantage of the opportunities available in North, Texas, and southwest, Florida will require measured investment, but holding aside customer service costs, we intend to maintain our best in class expense to asset ratio.

Scott Farris Kavanaugh: Moving finally to capital and liquidity, we expect another significant improvement in first foundation <unk> total risk based capital ratio, which we estimate will be $12, 49% or 22 basis points higher than that in Q4, and 105 basis points higher than Q1 2023 level.

Scott Farris Kavanaugh: We believe our strong capital base positions us well for growth once the uncertainty around the economic environment Subsides. It also provides a relatively strong risk capital balance versus peer when considering our held to maturity portfolios favorable after tax unrealized loss position of $60 one.

Scott Farris Kavanaugh: Or only six 6% of tangible common equity, which is slightly higher than last quarter, but still well positioned relative to peer and second our strong liquidity position and low levels of uninsured and uncollateralized deposits, which as a reminder, our those that proved to be the most vulnerable.

Scott Farris Kavanaugh: During times of significant stress as.

Scott Farris Kavanaugh: As noted our uninsured and uncollateralized deposit stand at only 15% of total deposits and this will continue to improve through the year is MSR related deposit balances return.

Scott Farris Kavanaugh: As I mentioned before we are pleased with the stability we have achieved in our liquidity position and we are comfortable with the level of on balance sheet liquidity, we are holding today and confident our total available liquidity of two seven times uninsured and uncollateralized deposits is more than sufficient to mitigate risk should market volatile.

Scott Farris Kavanaugh: So the return.

Speaker Change: I Echo Scott's comments on the team's continued efforts and dedication of first foundation and I remain confident we are positioned for success moving forward.

Scott Farris Kavanaugh: With that I'll now turn it over to Chris to provide additional detail on our loan portfolio asset quality and important distinctions and opportunities within our multifamily portfolio Chris.

Scott Farris Kavanaugh: Chris.

Chris: Thank you Jamie I'll be spending a fair amount of time addressing our multifamily portfolio, our reserves and the benefits of rent control in the marketplace that are being wildly misunderstood by the market.

Chris: I will also speak to the stability and growth of our deposit franchise.

Chris: As quarter over quarter comparison illustrates we continue to reduce our multifamily concentration exposure by leveraging our existing robust C&I platform to diversify into index plus margin based product. This renewed relationship prioritized focus has yielded quarter over quarter deposit growth and truly signals the strategic pivot and written.

Chris: Turn to our core ethos of our franchise value driven by relationships and not transactions.

Chris: We continue to be committed to a healthy gradual cadence of an increasing seasonal reserve, which will be a natural byproduct of greater C&I growth in the portfolio.

Chris: Eric <unk> of the C&I asset class as well as the historical data supports greater reserves for C&I product in those for multifamily real estate.

Chris: I will be discussing this specifically as it relates to multifamily in detail shortly for now let us quickly summarize the metrics of our diverse and strong loan portfolio, which as of March 31, 2024 remains composed of 51, 9% multifamily loans down from its height of approximately 54% as of.

Chris: Q3 2022.

Chris: 32% commercial business loans, including owner occupied commercial real estate and legacy equipment finance compared to approximately 28% as of Q4 2022.

Chris: 9% consumer and single family residential loans, 6% non owner occupied commercial real estate and approximately 1% of land and construction loans.

Chris: Loan fundings continue to be comprised of primarily high quality adjustable rate C&I, SBA and mortgage lending totaling $302 million for the first quarter offset by loan Paydowns and payoffs of $393 million in the quarter as lower yielding fixed rate loans continue to pay down you can.

Chris: Anticipate seeing the benefits in the net interest margin as well as the aforementioned reserve increasing.

Chris: Driving down our commercial real estate exposure to yield a greater balance between fixed and variable rate lending will take a measured long term approach as a reminder, over the near term we are taking a cautious protection dairy lending approach with our existing multifamily portfolio and as a result of the fixed rate portion of the portfolio will comprise a smaller and smaller.

Chris: Percentage of the whole given.

Chris: Given the relatively short duration of the multifamily asset class, which is less than two years with.

Chris: On the cash flow focus of most investors, we anticipate a future benefit of anticipated repricing activity as shown in our new slide within the Investor presentation, We believe the repricing opportunity and a higher rate environment is meaningful and we are proactively working with our clients to ensure they are prepared well in advance of considering their alternatives.

Chris: On a long term basis, we need to be and we will be more diversified overall on all our underlying assets.

Chris: Despite reasonable regional pressures and rhetoric around certain geographical challenges in multifamily housing we remain confident in the asset class, particularly our unique workforce housing exposure within the broadly defined sector on previous calls you have heard our teams speak to the value of workforce housing in the face of record low housing affordability.

Chris: <unk>.

Speaker Change: I want to spend some time here and break down the nuances of the asset class with a focus on our California concentration and specifically, Los Angeles County, where approximately 51% of our multifamily real estate portfolio is concentrated as a proxy for the widespread misunderstanding contributing to unbound and comparisons to different mark.

Chris: That's.

Chris: Workforce housing refers to residential units that are affordably priced for middle income workers, such as teachers firefighters and health care workers, who are essential to the functioning of the local economy in our primary lending area.

Chris: Housing units are typically priced to be affordable for individuals and families, earning between 60% and 120% of the area median income looking at Los Angeles County, as an example as of 2023. The area median income for a four person household was set to $100900 by the Los.

Chris: This accounting planning authority. The goal of workforce housing is to provide housing options that are within a reasonable cost range, allowing these workers to live near their places of employment. This is not only beneficial for the employees, but also supports the overall economic health and sustainability of our communities as a financial institution or.

Chris: Investment in workforce housing represents a strategic opportunity to foster community development, while stabilizing our asset base with real estate that historically has evidenced steady demand through economic cycles.

Chris: Going on the real estate offensive Blackstone's 10 billion dollar acquisition of private apartment income REIT and owner of upscale apartment buildings is blackstone's largest transaction in the multifamily market. According to the Wall Street Journal.

Chris: AI our communities touts a portfolio of underlying assets, primarily in coastal communities like Boston, Miami and Los Angeles.

Chris: As I mentioned, a moment ago, approximately 51% of first foundation bank portfolio of multifamily residential is located in Los Angeles County.

Chris: These assets have a current weighted average loan to value of 54, 8% with a conservative best in class underwritten weighted average current principal and interest debt service coverage ratio of 136 X.

Chris: If we can learn anything from the behaviors in the market right now does that CRE and multifamily pricing indices based on stock prices are not always the best proxies for real world valuations.

Chris: Blackstone and CEO, Jon Gray has even gone so far in recent months to make the case that commercial real estate prices were bottoming and that now is a quote good time to buy end quote.

Chris: You that according to rental housing economist J Parsons is increasingly accepted in multifamily where the consensus outlook now seems to be that multifamily is well positioned for growth by 2025 through 2026 after working through a multi decade high supply wave. This is on the heels of U S apartments, posting the strongest Q1 leasing demand in <unk>.

Chris: <unk> plus years following a healthier than anticipated Q4 2023, according to real data.

Chris: From a historical perspective, Moody's analytics data highlights that the lowest occupancy rate in Los Angeles. Since 2007 has been $95 two zero percent, which occurred in 2009 and as of 2023, the occupancy rate was approximately $96 eight zero percent.

Chris: During this time asking rents have increased in all but three years 2009, 2020, and 2023, which saw decreases of negative 4% negative, 4% and negative two 3% respectively.

Chris: Asking rents in aggregate from 2007 to 2023, including these decreases totaled approximately 59, 3% or an average increase of 349% per year.

Chris: Strong occupancy and steady rent increases are obviously very positive for multifamily in a couple of the reasons first Foundation bank has never experienced a loss in its multifamily portfolio.

Chris: Across the same 17 year Moody's analysis period for all California commercial banks average net losses in multifamily were reported in only five years 2008, 2009, 2010, 2011, and 2012 with losses of 0.03% points, 2% to nine.

Chris: Percent, one, 3% and 0.03% respectively.

Chris: These losses came at a time when the great recession had exposed some liberal underwriting standards, including underwriting our pro forma rents underwriting to low or even breakeven debt service coverage ratios and or underwriting to the subject property without considering sponsorship at no point in first Foundation's history has the bank ever underwritten with anything other than it's stable <unk>.

Chris: <unk> time tested methodology. This includes the lower of in place or market rents, averaging historical repairs and maintenance of a period no less than two years, the greater of actual vacancy or market vacancy and grossed up expense costs.

Chris: Underwrites to full full principal and interest payments, even for interest only loans and the bank underwrites a sponsorship on all non recourse loans now as a reminder, California is a single action state under California's one action rule, a lender can only take one action against you whether it is to conduct a trustee sale Sue on the promissory note for the balance of the.

Chris: <unk> or judicially foreclose this saves a tremendous amount of time in the worst case scenario of a default when compared to many other states.

Chris: Another question, we received is whether we stressed expenses enough during the underwriting as there has been a lot of conjecture about expense increases in the state of California, particularly insurance and taxes, which many falsely believe will guarantee to greater cash flow overtime I wish I could say that California has ever been the chief state to ensuring it has not.

Chris: Wildfires flooding and earthquakes of long impacted the state and insurance costs have reflected this for decades regions like Florida, and Texas have seen significant increases with average insurance costs per unit growing approximately 37% and 43% respectively from 2020 to 2022, California.

Chris: California is insurance market is tightly regulated with proposition 103 passed by voters on November $8 1988, requiring insurers to obtain state approval for rate changes.

Chris: This regulation can and does influence the overall insurance cost landscape, but it didn't stop the average insurance cost per unit for multifamily apartments from jumping approximately 33% over the three year period from 2020 to 2022, while impactful the bank's underwriting pro forma insurance coverage in California assumes no less than a 20% or more increase.

Chris: Per year for a new loan.

Chris: When it comes to taxes proposition 13 passed by California voters in 1978 significantly impacts all real estate properties in California, including multifamily apartments. It's primary effects are on the property tax rate assessment procedures, and reassessment timelines, which are broad implications for property owners, including first foundation's customers owning.

Chris: And managing multifamily apartment buildings.

Chris: Opposition 13 cap the annual real estate property tax at 1% of the assess value plus any voter approved local taxes and assessments.

Chris: This cap applies to multifamily apartments, providing a predictable tax expense for property owners by limiting how much property taxes can increase each year proposition 13 has made it somewhat more feasible for investors to hold onto multifamily properties over the long term without facing significant tax hikes, providing for predictable future expense figures and.

Chris: He has an incentive to hold assets long term.

Chris: The proposition also restricts the assessment of property values to when the property is bought newly constructed our undergoes a change in ownership for multifamily apartments. This means that the property tax basis is essentially set at the time of purchase and only increases at a maximum of 2% per year until the property is sold or significantly renovated. This also means.

Chris: That the repairs and maintenance figures for capital expenditures averaged over two years or more generally captures units being renovated as units turnover to.

Chris: To answer directly those asking whether we sufficiently stress expenses during our underwriting yes, we assume enough stress in our underwriting.

Chris: With stabilized predictable expenses and conservatively underwritten gross potential income clarifying the elephant in the room as it relates to multifamily in California is the unwarranted stigma around rent control laws I will say it here clearly when underwritten appropriately rent control insulates lenders from risk and potential downside. It also.

Chris: For stable predictable returns for multifamily investors rent.

Chris: Rent control laws in the United States exhibit significant variance influenced by state specific legislations and the autonomy granted to local governments, notably 31 states restrict local authorities from enacting rent control measures underscoring a complex national landscape of housing regulations. Unfortunately to understand how this impacts multifamily loans.

Chris: And those making them requires a deep regional and nuanced based understanding of each sub market.

Chris: For example, California, and New York, which offer two distinct approaches to rent control in California. The statewide rent control law signed by Governor Newsome in 2019 caps rent increases at 5% plus inflation subject to certain conditions and exceptions. This legislation empowers local jurisdictions to adopt stricter controls <unk>.

Chris: Lighting, California's layered response to rent controlled deeply rooted in its housing history.

Chris: Angelus for instance has been grappling with rent control and affordability housing since the 19 forties, marking a significant legislative milestone in the early 19 forties and in the late 19, seventies, which are far more restrictive than the recent state wise statewide legislature.

Chris: Conversely, New York's rent controlled paradigm is notably more localized and intricate with a focus on New York City. The states Legislative framework distinguishes between rent controlled and rent stabilized units, reflecting a tailored approach to address the city's unique housing market dynamics.

Chris: The housing stability and tenant protection Act of 2019 further expanded tenant protections, indicating new York's progressive stance on housing regulation all of this to say that the changes made to New York city's rent control appeared to have been the catalyst for the challenges in their multifamily market the loose landlord friendly regulation in place for more than 20 years before 2019.

Chris: <unk> gateway to what appears to have been some degradation of lending and underwriting standards by market area banks, which is contributing to hypothetical unrealized potential losses today weaker underwriting requirements closely tracked what was allowable under the law instead of the more conservative and more normalized practices for similarly, situated properties in other states.

Chris: As money poured into the market to take advantage of the pre 2019 regulations. It is impossible to say whether underwriting to rents in place alone would have contained the asset price bubble that developed over time, but it certainly would have helped those holding the loans today differ.

Chris: Differences between the two states is rent control measures can be characterized by the scope and application of their respective laws the presence or absence of vacancy bonuses and vacancy decontrol and their historical context, California statewide policy broadly applies to most rental properties with local jurisdictions capable of enforcing stricter laws and has done so for.

Chris: Decades, New York's rent regulation is deeply ingrained within New York city's housing market, highlighting our long standing commitment to tenant protections and housing affordability, which after a period of flexibility got significantly more restrictive in 2019, the historical evolution of rent control in both states reflects their unique responses to housing crisis.

Chris: <unk> with California, adopting a more uniform approach in recent years, while New York maintains a complex city focused regulatory environment when underwriting in California for workforce housing. It is clear to see that in one respect, California has a more predictable consistent approach to rent control on buildings that are also generally not as old as those in New York, which require a much.

Chris: Greater investment in repairs and maintenance and capital expenditures to stay competitive all of this explains why when you look at our portfolio, it's strength as evidenced in both the continued credit quality metrics in the low NPA to total assets ratio for the first quarter of 18 basis points compared to 15 basis points from the prior quarter the.

Chris: The bank's return to profoundly deeper relationships with our clients has been fruitful.

Chris: And we continue to believe that when combined with our value proposition of service will both distinguish us in the marketplace, while making the clients stickier, maintaining a close eye on our near term liquidity and funding we have begun to see a return on our investments in culture and growth quarter over quarter with in our core funding up from $9 4 billion.

Chris: As of fiscal yearend 2023 to over $9 7 billion as of Q1 2020 for this growth can be attributed to both the return of our seasonal MSR deposit tax and insurance impound account outflows in Q4 of 2023 as well as both growth of existing relationships and new relationships to the organization.

Chris: Our strategy to drive down any long term overdependence on broker deposits and home loan bank advances is taking shape. The breakdown of our current deposits is as follows money market and savings, 29% certificates of deposits, 28% interest bearing demand deposits, 23% noninterest bearing demand deposits at 20%.

Chris: Our core deposits are diversified geographically with California accounting for 28% of total core deposits, Florida at 24% in Texas at 6% outside of its majority of Nevada, Hawaii Other states make up the remaining total we believe both the Texas and Florida markets have tremendous untapped upside potential for additional.

Chris: Deposit growth in the near future. We continue to be pleased with the growth of our digital branches online account opening infrastructure and technology.

Chris: Seamless account opening and funding with real time risk mitigation and fraud detection is already prepared for deployment in our physical branches. It will initially be utilized for consumer account. So that we can free up more time to focus on the high touch needs of our business clients and the complexities of their banking needs. As we noted last quarter, we have begun to change the.

Chris: <unk> of our physical branches to empower and incentivize employees to aggressively grow our granular core retail deposit franchise, we want to foster and enable an outbound network of active participants in the communities. We serve we also want to ensure that parts of first foundation are properly compensated and incentivize to grow.

Chris: The franchise from a timing perspective, we have begun preparing for a challenging landscape ahead of potential rate cuts. During the 2024 calendar year. However, we are prepared for a worst case scenario in which there may be none we continue to strategically prioritize marketing based on rate and instead highlighting relationships community.

Chris: And service a trend we have seen in the marketplace as several large banks have already begun cutting their deposit rates in.

Chris: In the ever evolving landscape of banking regardless of size. We are proud of how our teams have been able to pivot and adjust during challenging times in 2023, we learned how resilient. We were however in 2024, we strive to highlight our team's ability to grow and pivot to an offensive growth strategy, while there are certainly volatile and challenging.

Speaker Change: Gnomic times ahead, the management team and I are incredibly grateful for the support and confidence of our clients and our employees I will now hand, the call back to the operator for questions.

Speaker Change: Thank you at this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.

Speaker Change: We will pause for just a moment to compile the Q&A roster.

Speaker Change: Okay.

Speaker Change: Your first question comes from the line of David Feaster from Raymond James. Please go ahead.

David Pipkin Feaster: Hey, good morning, everybody.

David Pipkin Feaster: Hey, Hey, Dave Hey, David.

David Pipkin Feaster: That was a lot of great color, Chris I really appreciate that and the slide that you gave on the contractual repricing is extremely helpful.

Speaker Change: We've talked in the past about how oftentimes borrowers are interested in refinanced ahead of it.

Speaker Change: Actual terms.

Speaker Change: When loan ship the full P&I just given the.

Speaker Change: Just given the significant amount of growth that was originated in 2021 and 2022 we're going to be coming up on some of that rate.

Speaker Change: First I guess my question is am I thinking about that correctly and secondarily are you hearing that youre starting to see this from borrowers and maybe how do you think a realistic pace of repricing that would be coming in the next 12 to 18 months, so rather than relative to that $700 million or so that is scheduled.

Speaker Change: Well, yes, I think you are thinking about it the right way look I know that there is a lot of concern in the market about the behaviors that we're seeing and there has been a bit of a pause. These are real estate investors who've been doing this for decades in some cases multi generations. So theyre looking at the volatility in the market and they're saying to themselves I'm going to wait and see what happens.

Speaker Change: If you start to see the 10 year rise, which I expect us to see and you start to see pricing in this particular space start to creep up theyre going to start locking in and being thoughtful and proactive as of right now they arent concerned enough with what they're seeing in the repricing market to be.

Speaker Change: Hyper aggressive with locking in these guys also we're going from P&I effort from US are interest only in some cases, the principal interest they're going to be really interested in locking backend interest only so yes, I think you think about it the right way I think you're going to see a pretty normal cadence of refinance activity.

Speaker Change: They're not going to get quite the casual they once did certainly as rates of change, but they'll all cash flow fine and there'll be very happy to do so.

Speaker Change: Well, Dave I'll, just add a day sorry just to.

Speaker Change: Kind of.

Speaker Change: Put some real.

Speaker Change: Stuff in your question there.

Speaker Change: I would tell you that.

Speaker Change: When it looked like at the start of this year that interest rates were going to decline precipitously a lot of people were holding out.

Speaker Change: Some of the data that's come out recently as maybe suggested that the fed's going to pause.

Speaker Change: For a period of time rather than reduce rates.

Speaker Change: And talking to our chief lending officer yesterday.

Speaker Change: We in.

Speaker Change: Our pipeline just to give you an anecdote.

Speaker Change: As.

Speaker Change: About 20 million that is now coming into the pipeline or in the pipeline I should say.

Speaker Change: That is going to be exiting in the very low threes and coming back on in the mid to low sixes.

Speaker Change: That's terrific.

Speaker Change: I guess the way I'm thinking about it. It's like this is almost the baseline of what's going to be repricing, it's probably actually higher than what we've laid out in this slide.

Speaker Change: Julia.

Speaker Change: Thank the.

Speaker Change: The slide that we put in there and those are the absolute role periods that somebody has to do something or rolls, but I think as Chris described.

Speaker Change: A couple of minutes ago.

Speaker Change: Youre going to see some people will start to step up and want to lock in.

Speaker Change: Again, I would tell you and Chris would tell you that.

Speaker Change: Multifamily borrowers are really all about cash flow.

Speaker Change: And they're trying to figure out what their cash flow can be so.

Speaker Change: Them locking it in right now.

Speaker Change: I think it was very prudent on their part and for us.

Speaker Change: Youre seeing margins improve somewhere around three over 3% just on those that are being refinanced.

Speaker Change: David.

Speaker Change: Al.

Speaker Change: That one of the things we started doing well over a year ago was we started looking at asset quality review financials that come in re underwriting this stuff and calling people proactively and say hey look let's talk about refinancing your loan well in advance and letting them know what their scenarios were so we know what their financial positions are we know what their refinance would look like in <unk>.

Speaker Change: We're very confident in those numbers.

Speaker Change: I would just add David not to pile on but all of these outcomes are beneficial for our first foundation they either move to floating which is illustrated on the slide they refinance at a higher fixed rate again like Scott described and we would hate to lose the customer, but even if those relationships designed to re.

Speaker Change: Finance alone are two elsewhere, that's a benefit to us as well because we're able to.

Speaker Change: Extinguish higher cost funding from the balance sheet. So that we see these as all of these as attractive options in benefits to the to the bank.

Speaker Change: Absolutely that was kind of my point is it seems like this is.

Speaker Change: The opportunity could be even larger than what is laid out on that slide okay.

Speaker Change: That's great and then maybe touching on on the deposit side. It was great to see the NII growth in the quarter I appreciate the color on the seasonal dynamics and the customer diversification, but I am curious how are things heading into the second quarter.

Speaker Change: And you talked you alluded to a healthy deposit pipeline, but just curious what strategies, you're most focused on and where you're having the most success at this point and how you think about deposit trends going forward.

Speaker Change: Chris.

Chris: Yes, so obviously everything we're talking about right now is relationship focused you heard it in the narrative of quite a few times from all three of us.

Speaker Change: With that we're really really highlighting the C&I business growth, both the middle markets small balanced off and all the way up to your larger corporate credits and and the reason why as those come with compensating balances those come with a holistic relationship.

Speaker Change: We still have an entire wealth advisory business with a ton of high net worth individuals who are still in very much in business today and they're looking at this current economic climate as an opportunity to grow so anything we can do to help expand those relationships and bring deposits. In we are strategic strategically you heard me talk a little bit about the.

Speaker Change: Moving to more of an outbound really client focused deposit gathering network out of one branch managers in the branches I want them physically outgoing to talk to clients and being proactive.

Speaker Change: And it really differentiates one bank from another these days is the value proposition of service, we want to be out in front of people and bank thats in front of them asking for their business and give them what they need.

Speaker Change: So our pipeline right now is about 300 million to be more specific.

Speaker Change: And it's pretty definitive that those deposits are going to come back and we as we.

Speaker Change: Thank all three of US we are really refocusing our energy just on relationships on people.

Speaker Change: I went through a presentation of one of our loan clients. The other day as I was talking to the treasurer.

Speaker Change: I actually asked do we have a deposit relationship with you I was there with a couple of our credit folks and he said well no you never asked.

Speaker Change: And I said, well im asking while we just set up those.

Speaker Change: Accounts, two days ago, and they are transferring the funds in which is part of that $300 million.

Speaker Change: We have another client that is doing something similar that.

Speaker Change: We've had loans outstanding and <unk>.

Speaker Change: Never before that we really go after those clients and shame on us for.

Speaker Change: Not being more.

Speaker Change: Canada.

Speaker Change: But now were.

Speaker Change: Circling back with a lot of our great relationships.

Speaker Change: And.

Speaker Change: Me too I'm, making outbound calls as much as anybody.

Speaker Change: And we're having great success doing it.

Speaker Change: That's terrific.

Speaker Change: Glad to hear it and then last one from me.

Speaker Change: Scott you talked about an increase in C&I fundings in the second quarter, So far which is encouraging curious maybe where are you seeing opportunity how is demand trending and then I'm just curious maybe broadly what youre seeing in Texas, and Florida, and whether this timing issue originations were down in those markets I'm just curious whether it is <unk>.

Speaker Change: <unk> issue was a part of that so just kind of curious about the C&I pipeline, where you're seeing opportunities in Texas and Florida specifically.

Scott: Well, our C&I has been pretty diversified overall, we've got great teams in California frankly.

Speaker Change: Frankly, we've got good teams in Nevada, I will tell you.

Speaker Change: Florida, we've got some pretty good teams, but I would say that.

Speaker Change: Leading up to and recently when I was in Florida, just a week or so ago I sat down with our C&I teams and I would say.

Speaker Change: There was a period as Chris described we were playing a bit defense and we were probably a little too restrictive.

Speaker Change: So conversations have been being have between credit our lending teams.

Speaker Change: And I think Theres a lot of opportunities for instance, I want to say we have like.

Speaker Change: Eight or nine C&I bankers in Florida.

Speaker Change: We're re.

Speaker Change: Invigorating sitting back down with them talking to.

Speaker Change: Say you know, yes, probably we were a little bit restrictive at the time.

Speaker Change: If you remember it was six months or so ago that I was basically telling everybody, we're going to shrink the balance sheet and.

Speaker Change: We've kind of pivoted since that point in time, and we're looking to expand and the only way to do that is to set our teams free so I'm very.

Speaker Change: Of the belief that.

Speaker Change: Florida has the capacity definitely in California, as the capacity I will tell you Dallas we are lacking.

Speaker Change: C&I teams and as we continue to improve our recurring revenue.

Speaker Change: That is going to be a major major focus for us I mean I'm sure you guys have read the same thing that I have.

Speaker Change: The Dallas Fort worth Metroplex is supposed to be the largest metro products in the country in the next 10 years.

Speaker Change: We came here for a reason and we want to expand in this marketplace and.

Speaker Change: I feel like we're on the precipice of being able to do that.

Speaker Change: That's great and so just this growth that youre talking about just taking kind of all of this commentary together. It seems like you think you're going to be able to fund your growth with core deposits.

Speaker Change: Yes.

Speaker Change: Okay terrific alright, thanks, everybody.

Speaker Change: Thank you David.

Speaker Change: Your next question comes from the line of Gary Tenner from D. A Davidson. Please go ahead.

Gary Peter Tenner: Thanks, Good morning.

Gary Peter Tenner: I wanted to ask a little bit about the.

Gary Peter Tenner: The non customer service costs expenses, I think Jamie you may have alluded to this a little bit in your comments, but I.

Gary Peter Tenner: Obviously.

Gary Peter Tenner: A lot of attention on pushing down.

Gary Peter Tenner: Or excuse me expenses over the past year or so.

Gary Peter Tenner: And you've made this push into.

Gary Peter Tenner: C&I lending as you think of the runway of.

Gary Peter Tenner: C&I growth opportunities with your existing.

Gary Peter Tenner: Workforce or business development people, just wondering how youre thinking about growing that over time and what that revenue looks like.

Gary Peter Tenner: From an expense perspective as well.

Speaker Change: Hey, Gary I think we're going to like I mentioned, we're going to remain really prudent and measured on this and as Scott said as recurring revenue returns and were able to.

Speaker Change: Two basically are for investing in those teams will start to do so so I would expect the expenses to grow modestly hopefully that.

Speaker Change: Through this year.

Speaker Change: As as we see recurring revenue improve and knock on wood, if we do get some benefit from the rate environment.

Speaker Change: But either way, we will make sure that investments.

Speaker Change: Remain in line with with recurring revenue and profitability.

Speaker Change: Welcome to the Conference Center. Please wait for the next available operator.

Speaker Change: Hi, thank you for holding. May I have the name of your conference, please?

Speaker Change: Name of conference is First Foundation Incorporated, earnings call.

Speaker Change: All right, thank you. May I have your name?

Speaker Change: Sure, this is going to be for Rachel Smith.

Speaker Change: Okay, I'm just put a Rachel Smith.

Rachel Smith: Yes, this is going to be for her.

Speaker Change: Okay, thank you. I'll join you now.

Speaker Change: Thank you so much.

Speaker Change: Thank you for watching.

Speaker Change: ? ? ? ? ? ? ? ? ?

Speaker Change: Greetings and welcome to First Foundation's first quarter 2024 earnings conference call. Today's call is being recorded.

Speaker Change: Speaking today will be Scott Kavanaugh, First Foundation's President and Chief Executive Officer, Jamie Britton, First Foundation's Chief Financial Officer, and Chris Naghibi, Chief Operating Officer. Before I hand the call over to Scott, please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results.

Speaker Change: These forward-looking statements are made subject to the Safe Harbor Statement included in today's earnings release.

Speaker Change: In addition, some of the discussion may include NAND GAAP financial measures.

Speaker Change: 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 NAND GAAP financial measures, please see the company's filings with the Securities and Exchange Commission.

Speaker Change: And now, I would like to turn the call over to President and CEO , Scott Kavanaugh. Please go ahead.

Scott Farris Kavanaugh: Hey, good morning and welcome everyone. Thank you for joining us for today's first quarter 2024 earnings call.

Scott Farris Kavanaugh: As the banking industry continues to face headwinds and a continued inverted yield curve, I am proud of our team for the effort put forth to make the company stronger.

Scott Farris Kavanaugh: I have never felt as comfortable with a management team in my entire career as I feel with the team that we currently have in place.

Scott Farris Kavanaugh: Once again, we were able to improve our loans-to-deposit ratio, maintain overall loan yield, and continued the process of improving the sensitivity of our balance sheet to changing interest rates.

Scott Farris Kavanaugh: Most importantly, we took great strides to improve recurring revenue and reduce core expenses to increase future profitability.

Scott Farris Kavanaugh: First Foundation Advisors closed the quarter at near-record assets under management, and the Trust Department posted another good quarter.

Scott Farris Kavanaugh: For the first quarter, we reported net income attributable to common shareholders of $793,000, or 1.4 cents per share for the basic and diluted shares.

Scott Farris Kavanaugh: Tangible book value, which is a non-gap measure, ended the quarter up 5 cents from the fourth quarter of 2023 and ended at $16.35.

Scott Farris Kavanaugh: Pre-tax, pre-provision revenue totaled a half a million dollars, essentially unchanged from the fourth quarter.

Scott Farris Kavanaugh: Interest income totaled $150.5 million for the quarter, compared to $146.6 million as of December 31, 2023, and $137 million for the first quarter of 2023. Non-interest income as a percentage of total revenue was 25% for the quarter, compared to 25% for the fourth quarter of 2023.

Scott Farris Kavanaugh: Our net interest margin was 1.17% as compared to 1.36% for the fourth quarter of 2023. This was largely driven by the return of MSR deposits returning later in the quarter as opposed to earlier in the quarter. Interest expense decreased to $50.6 million in the quarter compared to $55.9 million in the prior quarter.

Scott Farris Kavanaugh: Our efficiency ratio improved to 98.4% compared to 98.5% for the fourth quarter of 2023.

Scott Farris Kavanaugh: Adjusted return on assets, again another non-GAAP measure, ended the quarter at 0.03% compared to 0.09% as of December 31st, 2023.

Scott Farris Kavanaugh: Our loan to deposit ratio improved to 94.8% in the quarter compared to 95.2% as of December 31st, 2023. This was largely driven by an increase in core deposits late in the quarter.

Scott Farris Kavanaugh: We remain committed to continuing to improve this ratio through a combination of strategically reducing lower-yielding loan balances and continuing to grow core relationship deposits.

Speaker Change: I just returned from Florida visiting our branches, and I am extremely encouraged by the growth we are experiencing in many of those branches and throughout our entire branch network. Our deposit pipeline remains robust into the second quarter.

Speaker Change: Management made a strategic decision to exit the equipment finance operations late in the first quarter.

Scott Farris Kavanaugh: As most of these loans were originated using third parties, we felt that the

Scott Farris Kavanaugh: that it did not fit our overall goals of getting back to our roots of relationship banking. We still will be able to accommodate our value clients needs as necessary for any of their equipment financing needs.

Scott Farris Kavanaugh: We currently plan to continue servicing the remaining loan portfolio, but exiting the space will provide approximately $1.5 million in annualized cost saves.

Scott Farris Kavanaugh: Total deposits were $10.64 million in the quarter compared to $10.69 million in the fourth quarter.

Scott Farris Kavanaugh: Core non-brokered deposits increased to 64% during the quarter compared to 60% in the fourth quarter of 2023.

Scott Farris Kavanaugh: Non-interest bearing demand deposits increased to 17% for the quarter, compared to 14% of the deposits in the fourth quarter of last year. As indicated earlier, our deposit pipeline remains healthy, with most of the pipeline being in non-interest bearing category.

Scott Farris Kavanaugh: Our insured and collateralized deposits were at 85% of total deposits at the end of the quarter, compared to 87% of total deposits in the fourth quarter.

Scott Farris Kavanaugh: We maintained a strong liquidity position of $4.4 billion. At these levels, our liquidity to uninsured and collateralized deposits ratio was 2.7 times.

Scott Farris Kavanaugh: Borrowings were $1.7 billion as of March 31, 2024, compared to $1.4 billion at the end of the fourth quarter.

Scott Farris Kavanaugh: Average borrowings outstanding were $1.6 billion, or 11.8% of total average assets for the quarter, compared to $1.1 billion, or 8.7% of total average deposits for the prior quarter.

Scott Farris Kavanaugh: The increased average borrowings from the prior quarter were used to enhance on balance sheet liquidity as cash and cash equivalents increased to 11.7% at the end of the first quarter from 10% at the end of the fourth quarter of last year.

Scott Farris Kavanaugh: Credit quality continues to serve as a crucial differentiator for First Foundation. Our non-performing assets, the total assets, was 0.18 percent at the end of the first quarter compared to 0.15 percent

Scott Farris Kavanaugh: as of December 31st, 2023.

Scott Farris Kavanaugh: Loan balances ended the quarter at $10.1 billion, a reduction of $100 million compared to December 31, 2023. It is important to note that loans would have grown for the quarter, but we had several C&I loans.

Scott Farris Kavanaugh: totaling approximately $200 million push into the second quarter.

Scott Farris Kavanaugh: Many of these loans have already funded or will fund in the next several weeks. These additional C&I loans will have a net spread of over 3%.

Scott Farris Kavanaugh: Multifamily remains a strong asset class for the bank. Our underwriting on these loans has never wavered since the company's inception. This sector of the CRE gained refocused attention in the first quarter with events on the East Coast.

Scott Farris Kavanaugh: Chris will provide significant detail on this segment later in the call.

Scott Farris Kavanaugh: First Foundation Advisors grew approximately $200 million to end the first quarter at $5.5 billion, compared to $5.3 billion at December 31st.

Scott Farris Kavanaugh: Our pipeline of new relationships remains strong. Assets under advisement at FFB's Trust Department was $1.2 billion for the quarter compared to $1.3 billion in the fourth quarter.

Scott Farris Kavanaugh: During the quarter, management worked diligently to build additional recurring revenue. Most of the revenue generation was added in the middle of the first quarter.

Scott Farris Kavanaugh: Or, as I mentioned, funded at the beginning of the second quarter, so the full benefits were not reflected during the first quarter. This included adding investment securities to our AFS portfolio and swapping rates to a Fix-A spread and adding additional C&I loans and core deposits.

Scott Farris Kavanaugh: We will continue to strategically add hedges to both improve recurring revenues and reduce our interest rate sensitivity.

Scott Farris Kavanaugh: Jamie will provide greater insight on this section.

James Britton: Once again, I will close by reiterating my appreciation for the incredible efforts and unwavering dedication of our entire team.

James Britton: I will now turn the call over to Jamie to cover the financials in greater detail.

James Britton: Thank you, Scott. I'll start with the balance sheet and our net interest margin. As Scott mentioned, NIM contracted 19 basis points during the quarter, from 1.36% in the fourth to 1.17% in the first. There was another slight improvement in our earning asset yield this quarter, which increased from 4.62% in Q4 to 4.64% in Q1.

Scott Farris Kavanaugh: Earning asset yields begin with loan yields, which remain stable at 4.7%. The held to maturity portfolios yield improved slightly by two basis points, while the yield on the available for sale portfolio declined modestly by seven basis points as we continue to reposition the investment portfolio to support our liquidity position, improve the balance sheet's rate profile, and more efficiently enhance recurring revenue.

Scott Farris Kavanaugh: There were several factors contributing to the change in the AFS portfolio's yield, but the most noteworthy was taking advantage of the market's early quarter optimism for declining rates by adding securities in conjunction with new short-term funding, which we swapped to a more attractive longer-term fixed rate. This transaction provides additional rate-insensitive recurring revenue, and due to the execution timing several weeks into the first quarter, we expect it to provide additional benefit in the second and beyond.

Scott Farris Kavanaugh: As I mentioned, we are open to acquiring safe, highly liquid securities at attractive yields and considering transactions that help us to achieve our desired long-term interest rate risk profile and mitigate the earnings risk of future short-term rate increases.

Scott Farris Kavanaugh: To the extent we can use some of our improving capital position to also enhance recurring revenue in this type of safe and prudent way, all the better.

Scott Farris Kavanaugh: Moving to the right-hand side of the balance sheet, the most important thing to highlight is the seasonal nature of our non-interest bearing deposit portfolio and its MSR escrow balances, which began their normal annual outflows later in the fourth quarter before beginning to rebuild late in the first.

Scott Farris Kavanaugh: As we noted on last quarter's call, amidst the seasonal transition, we also had some balances leave the bank due to our customers' desire to diversify their exposure across additional banks.

Scott Farris Kavanaugh: This, too, drove some of the quarter-over-quarter decline we saw in average balances.

Scott Farris Kavanaugh: We appreciate our customers' proactive approach to their own risk management and welcome the improved diversification it provides in our own deposit portfolio as well.

Scott Farris Kavanaugh: We believe the strong multi-product relationships we foster in this business are contributing to its overall growth, and we fully expect more deposit balances to continue building in the second quarter.

Scott Farris Kavanaugh: Accompanying the decline in average non-interest bearing deposits was another quarterly decline in customer service costs, which we have seen decline from $24.7 million in the third quarter of 23 to $16.4 million last quarter and only $10.7 million in the first.

Scott Farris Kavanaugh: As we've discussed previously, the mix to interest-bearing liabilities, which we secure to replace declining non-interest-bearing balances, will weigh on our net interest margin, and it was a factor again this quarter. But the quarter's balance sheet actions overall were net accretive to earnings when considering both net interest income and customer service costs.

Scott Farris Kavanaugh: Given the holistic nature of these relationships, we are comfortable with the seasonal fluctuations they will cause in our margin.

Scott Farris Kavanaugh: Interest bearing liability costs increased modestly this quarter from 4.19% in the fourth to 4.24% in the first.

Scott Farris Kavanaugh: Though borrowing costs remain relatively stable, interest-bearing deposit costs increased by seven basis points to 4.28%.

Scott Farris Kavanaugh: Factors included an increase in our mix of higher cost deposits, which, as I mentioned a moment ago, were used to absorb the seasonal declines in non-interest bearing MSR balances.

Scott Farris Kavanaugh: Additional client migration to higher-rate products, such as CDs, ahead of potential declines in short-term market rates, and continued competition in the market for balances driving rate accommodations in the retail channel.

Scott Farris Kavanaugh: Stepping back to consider overall deposit costs, monthly trends exited the quarter favorably. A majority of our products showed improvement throughout the quarter and March's total interest bearing deposit costs were in line with the quarterly average of 4.28 percent.

Scott Farris Kavanaugh: We have improved our monitoring and analytics in this area, and our teams are working as proactively as possible to hold the line while we wait for greater certainty in the rate market.

Scott Farris Kavanaugh: As you will see, we continue to make progress on strengthening our balance sheet.

Scott Farris Kavanaugh: Both our on-hand liquidity and our capital positions are much stronger than they were before we entered this phase of market uncertainty. And as Scott mentioned, our focus on full relationship banking is paying dividends in terms of recurring revenue and earning stability.

Scott Farris Kavanaugh: The new securities we added in conjunction with swapped fixed-rate funding, over $150 million of outstanding loan balances fully self-funded by customer deposits at 3% spread.

Scott Farris Kavanaugh: And the savings gained by exiting the equipment finance business will generate almost $13 million of recurring, annualized, pre-provisioned net revenue.

Scott Farris Kavanaugh: We will continue to monitor the rate environment for opportunities to take advantage of our liability sensitivity and pivot towards a more sustainable long-term interest rate risk profile. But our continued focus on relationship banking and day-to-day execution will continue to be the keys to driving long-term shareholder value. We're encouraged by our successes in the first quarter, as well as here in the start of the second, and we remain optimistic on the year ahead.

Scott Farris Kavanaugh: Moving to the income statement, interest income continued to grow, ending the quarter at $150.5 million versus $146.6 million realized in the fourth. As discussed, interest expense was added to account for the quarterly declines in average non-interest bearing MSR deposit balances.

Scott Farris Kavanaugh: Though this drove a 19 basis point reduction in our net interest margin and a 4.1 million decline in net interest income, when considering the concurrent $5.7 million decline in customer service costs, the balance sheet's overall contribution to pre-tax, pre-provision, net revenue improved for the quarter. We expect the net interest income to benefit from increasing non-interest bearing deposit balances in the second quarter, but more importantly, we believe the actions we are taking to improve recurring revenue will continue to enhance balance sheet contribution.

Scott Farris Kavanaugh: Moving to the rest of the income statement, wealth and trust-related fees were flat for the quarter at $8.6 million. As Scott mentioned, however, AUM continued its strong performance, increasing point to point again this quarter and exceeding the $200 million of growth seen in the fourth.

Scott Farris Kavanaugh: AUM ended the quarter at $5.5 billion, $300 million higher than at year-end 2023, and $500 million higher than at the end of the third quarter.

Scott Farris Kavanaugh: We are encouraged by the FFA team's continued success and look forward to taking our history of exceptional, proven customer service to the high-growth Texas and Florida markets.

Scott Farris Kavanaugh: Outside of customer service costs, remaining non-interest expense categories totaled $39.9 million for the quarter, modestly higher than the fourth quarter's $39.5 million. As expected, compensation and benefits increased this quarter as a result of annual adjustments and tax resets, while all other categories saw modest quarter-over-quarter declines.

Scott Farris Kavanaugh: Maintaining core expenses at responsible levels remains a focus, and as I mentioned, we expect the decisions made to exit equipment finance to mitigate growth here. As Scott and I have mentioned several times, the entire organization is laser-focused on improving operating efficiency and controlling these discretionary costs.

Scott Farris Kavanaugh: First Foundation made some very difficult decisions in 2023 to reduce expense during the market's volatility.

Scott Farris Kavanaugh: As profitability returns, taking advantage of the opportunities available in North Texas and Southwest Florida will require measured investment, but holding aside customer service costs, we intend to maintain our best-in-class expense-to-assets ratio.

Scott Farris Kavanaugh: Moving finally to capital and liquidity, we expect another significant improvement in First Foundation Inc's total risk-based capital ratio, which we estimate will be 12.49%.

Scott Farris Kavanaugh: or 22 basis points higher than that in Q4 and 105 basis points higher than its Q1 2023 level.

Scott Farris Kavanaugh: We believe our strong capital base positions us well for growth once uncertainty around the economic environment subsides. It also provides a relatively strong risk capital balance versus peer when considering our held to maturity portfolios favorable after-tax unrealized loss position of $60.1 million, or only 6.6% of tangible common equity, which is slightly higher than last quarter but still well-positioned relative to peer, and second, our strong liquidity position and low levels of uninsured and uncollateralized deposits, which as a reminder, are those that prove to be the most vulnerable during times of significant stress.

Scott Farris Kavanaugh: As noted, our uninsured and uncollateralized deposits stand at only 15% of total deposits, and this will continue to improve through the year as MSR-related deposit balances return.

Scott Farris Kavanaugh: As I mentioned before, we are pleased with the stability we have achieved in our liquidity position and we are comfortable with the level of on-balance sheet liquidity we are holding today and confident our total available liquidity of 2.7 times uninsured and uncollateralized deposits is more than sufficient to mitigate risk should market volatility return.

Scott Farris Kavanaugh: I echo Scott's comments on the team's continued efforts and dedication to First Foundation, and I remain confident we are positioned for success moving forward.

Scott Farris Kavanaugh: With that, I'll now turn it over to Chris to provide additional detail on our loan portfolio, asset quality, and the important distinctions and opportunities within our multifamily portfolio.

Scott Farris Kavanaugh: Chris?

Chris: Thank you, Jamie. I will be spending a fair amount of time addressing our multifamily portfolio, our reserves, and the benefits of rent control in the marketplace that are being wildly misunderstood by the market.

Christopher M. Naghibi: I will also speak to the stability and growth of our deposit franchise.

Christopher M. Naghibi: As Quarter Over Quarter Comparison illustrates, we continue to reduce our multifamily concentration exposure by leveraging our existing, robust C&I platform to diversify into index plus margin-based product. This renewed relationship-prioritized focus has yielded quarter-over-quarter deposit growth and truly signals the strategic pivot and return to our core ethos of a franchise value driven by relationships and not transactions.

Scott Farris Kavanaugh: We continue to be committed to a healthy, gradual cadence of an increasing CECL reserve, which will be a natural byproduct of greater C&I growth in the portfolio.

Scott Farris Kavanaugh: Characteristics of the C&I asset class as well as the historical data supports greater reserves for C&I product than those for multifamily real estate.

Scott Farris Kavanaugh: I will be discussing this specifically as it relates to multifamily in detail shortly. For now, let us quickly summarize the metrics of our diverse and strong loan portfolio, which as of March 31, 2024, remains composed of 51.9% multifamily loans, down from its height of approximately 54% as of Q3 2022.

Scott Farris Kavanaugh: 32% commercial business loans, including owner-occupied commercial real estate and legacy equipment finance, compared to approximately 28% as of Q4 2022.

Scott Farris Kavanaugh: 9% consumer and single-family residential loans, 6% non-owner occupied commercial real estate, and approximately 1% of land and construction loans.

Scott Farris Kavanaugh: Loan fundings continue to be comprised of primarily high-quality, adjustable-rate C&I, SBA, and mortgage lending totaling $302 million for the first quarter, offset by loan paydowns and payoffs of $393 million in the quarter. As lower-yielding, fixed-rate loans continue to pay down, you can anticipate seeing the benefits in the net interest margin as well as the aforementioned reserve increasing.

Scott Farris Kavanaugh: Driving down our commercial real estate exposure to yield a greater balance between fixed and variable rate lending, we'll take a measured long-term approach. As a reminder, over the near term, we are taking a cautious protectionary lending approach with our existing multifamily portfolio. And as a result, the fixed rate portion of the portfolio will comprise a smaller and smaller percentage of the whole. Given the relatively short duration of the multifamily asset class, which is less than two years,

Scott Farris Kavanaugh: The cash flow focus of most investors, we anticipate a future benefit of anticipated repricing activity. As shown in a new slide within the investor presentation, we believe the repricing opportunity in a higher rate environment is meaningful. And we are proactively working with our clients to ensure they are prepared well in advance of considering their alternatives. On a long term basis, we need to be, and we will be more diversified overall on all our underlying assets.

Scott Farris Kavanaugh: Despite regional pressures and rhetoric around certain geographical challenges in multifamily housing, we remain confident in the asset class, particularly our unique workforce housing exposure within the broadly defined sector. On previous calls, you have heard our team speak to the value of workforce housing in the face of record low housing affordability.

Scott Farris Kavanaugh: I want to spend some time here and break down the nuances of the asset class with a focus on our California concentration and specifically Los Angeles County where approximately 51% of our multifamily real estate portfolio is Concentrated as a proxy for the widespread misunderstanding contributing to unfounding comparisons to different markets

Scott Farris Kavanaugh: Welcome to the Conference Center. Please wait for the next available operator.

Scott Farris Kavanaugh: Raising Your Stomach

Speaker Change: Hi, thank you for holding. May I have the name of your conference, please?

Speaker Change: Name of conference is First Foundation Incorporated, earnings call.

Speaker Change: All right, thank you. May I have your name?

Scott Farris Kavanaugh: Sure, this is going to be for Rachel Smith.