Q2 2024 First Foundation Inc Earnings Call

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Operator: Greetings and welcome to First Foundation's second quarter 2020 earnings conference call. Today's call is being recorded.

Greetings and welcome to first Foundation's second quarter 2024 earnings Conference call. Today's call is being recorded speaking today will be Scott Kavanaugh first Foundation's Chief Executive Officer, Jamie Brittain first Foundation's Chief Financial Officer, and Chris now Hebei first Foundation's chief.

Scott Farris Kavanaugh: Speaking today will be Scott Kavanaugh, First Foundation's Chief Executive Officer, Jamie Britton, First Foundation's Chief Financial Officer, and Chris Naghibi, First Foundation's Chief Operating Officer. Also joining the call is Simone Lagomarsino, First Foundation Bank's President. 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. These forward-looking statements are made subject to the safe harbor statement included in today's earnings report.

<unk> Officer also joining the call is Simone Lagomarsino first foundation banks, President 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. These forward looking statements are made subject to the safe Harbor statement.

In today's earnings release. In addition, some of the discussion may include non-GAAP financial measures for more complete discussion of the risks and uncertainties that could cause actual results to differ materially from those from any forward looking statements and reconciliations of non-GAAP financial measures. Please see the company's filings with the Securities and Exchange Commission.

Scott Farris Kavanaugh: 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. Now, I would like to turn the call over to CEO Scott Kavanaugh. Hey, good morning, and welcome.

And now I would like to turn the call over to CEO Scott Kavanaugh.

Hey, good morning, and welcome.

Scott Farris Kavanaugh: Thank you for joining us for today's second quarter 2024 earnings call. Once again, First Foundation was able to generate earnings that were above consensus and exit the quarter with positive momentum. As I mentioned in previous calls, I believe our earnings troughed in the first quarter of 2024. This is significant when coupled with the backdrop of strengthening our balance sheet with the recently announced $228 million capital raise. I want to be clear, the board sought additional capital to support the growth of the company, not to satisfy any regulatory concerns. This race allows us to accomplish that goal. I also want to emphasize First Foundation has never had a credit problem. Our MPAs remain at remarkably low levels.

Thank you for joining us for todays second quarter 2024 earnings call. Once again first foundation was able to generate earnings that were above consensus and exited the quarter with positive momentum.

I had mentioned in previous calls I believer earnings trough in the first quarter of 2020 for.

This is significant when coupled with the backdrop of strengthening our balance sheet with the recently announced $228 million capital raise.

I want to be clear the board saw the additional capital to support the growth of the company not to satisfy any regulatory concerns.

This raise allows us to accomplish that goal I also want to emphasize first foundation has never had a credit problem or M. P. As remain at remarkably low levels.

Scott Farris Kavanaugh: Unchanged from last quarter, charge-offs were almost non-existent at 0.01%. A recent performance issue stemmed from an interest rate risk positioning of our balance sheet, which surfaced in 2022 when fixed rate lending surpassed historical levels while the Federal Reserve began aggressively raising rates. As you know, this put tremendous stress on our net income and reduced the flexibility we had to navigate the turbulent economic environment. With this capital raise, we will take actions to solve this issue and begin to expand into desirous geographic markets. We are already in and have a press conference. This will be outlined in our discussion by both Jamie and Chris.

Unchanged from last quarter charge offs were almost nonexistent and 0.01%.

Our recent performance issues stem from an interest rate risk positioning of our balance sheet, which surfaced in 2022, when fixed rate lending surpassed historical levels, while the federal reserve began aggressively raising rates.

As you know this puts tremendous stress on their net income and reduce the flexibility we had to navigate the turbulent economic environment with this capital raise we will take actions to solve this issue and to begin to expand into the desirous Jia.

Graphic markets.

We are already in and have a presence this will be outlined in our discussion by both Jamie and Chris.

Scott Farris Kavanaugh: I noted in the first quarter that we had taken great strides to increase recurring revenue and reduce core expenses to benefit future profitability, and those efforts continued in the second quarter. Once again, we were able to improve our loans to deposit ratio, increase our overall loan yield, and continue the process of improving the sensitivity of our balance sheet to changing rates. Capital Ratios were improved as well. First Foundation Advisors, once again, closed the quarter at near record assets under management, with profitability at FFA remaining strong.

No did in the first quarter that we have taken great strides to increase recurring revenue and reduce core expenses to benefit future profitability in those efforts continued in the second quarter.

Once again, we were able to improve our loans to deposit ratio increase our overall loan yield and continue the process of improving the sensitivity of our balance sheet to changing rates.

Capital ratios were improved as well.

First foundation advisers once again closed the quarter at near record assets under management with profitability at FSA remaining strong the depart Trust department posted another solid quarter as well.

Scott Farris Kavanaugh: The trust department posted another solid quarter as well. For the second quarter, we reported net income attributable to common shareholders of $3.1 million, or $0.05 per share for both basic and diluted shares. Tangible book value, which is a non-gap measure, ended the quarter up 0.8 cents from the first quarter of 2024 to 1643. Pre-tax, pre-provision revenue totaled $1.9 million compared to $467 million.

For the second quarter, we reported net income attributable to common shareholders of $3 1 million or <unk> <unk> per share for both basic and diluted shares.

Tangible book value, which is a non-GAAP measure ended the quarter up.

<unk> from the first quarter of 2024 to $16 43 pre.

Pre tax pre provision revenue totaled $1 9 million compared to 467.

Scott Farris Kavanaugh: Excuse me, $460,000 in the prior quarter. Interest income totaled $150.9 million for the quarter, relatively unchanged from $150.4 in the first quarter and up from $145.3 in the second quarter of 2023. Non-interest income as a percentage of total revenue was 23% for the quarter compared to 25% for the first quarter.

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Interest income totaled $150 9 million for the quarter relatively unchanged from the 154 in the first quarter and up from the $145 three in the second quarter 2023.

Noninterest income as a percentage of total revenue was 23% for the quarter compared to 25% for the first quarter.

Scott Farris Kavanaugh: Our net interest margin was 1.36% as compared to 1.17% for the first quarter of 2024. This was largely driven by the return of MSR deposits. Non-interest expense was $55.6 million in the quarter compared to $50.6 million in the prior quarter, again largely driven by an increase in customer service expense related to the seasonally returning MSR deposit. Despite the increase in non-interest expense, our efficiency ratio improved to 96.1 compared to 98.4 for the first quarter of 2024. Adjusted Return on Assets, a non-GAAP measure, increased to 0.10% compared to 0.03% as of March 31, 2024.

Our net interest margin was 136% as compared to $1 one 7% for the first quarter 2024. This was largely driven by the return of the MSR deposits.

Non interest expense was $55 6 million in the quarter compared to $50 6 million in the prior quarter again, largely driven by an increase in the customer service expense related to the seasonally returning MSR deposits.

Despite the increase in non interest expense, our efficiency ratio improved to $96 one compared to 98 four for the first quarter 2024.

Adjusted return on assets, a non-GAAP measure increased 210% compared to 0.03% as of March 31 2024.

Scott Farris Kavanaugh: Our loan to deposit ratio improved to 93.8% in the quarter compared to 94.8% as of March 31, 2024. This was largely driven by an increase in core deposits late in the quarter. We remain committed to continuing to improve this ratio through a combination of strategically lower, reducing lower yielding loan balance, and continuing to grow core relationships. Total deposits were $10.8 billion in the quarter, compared to $10.6 billion in the first quarter. Core non-broker deposits totaled 62% during the quarter compared to 64% in the first quarter of 2024. Non-interest-bearing demand deposits increased to 20% for the quarter compared to 17% of total deposits as of March 31, 2024.

Our loan to deposit ratio improved to 93, 8% in the quarter compared to 94, 8% as of March 31 2024.

It's largely driven by an increase in core deposits late in the quarter, we remain committed to continuing to improve this ratio through a combination of strategically lower reducing lower yielding loan balances and continuing to grow core relationship.

Deposits.

Total deposits were $10 8 billion in the quarter compared to $10 6 billion in the first quarter core non brokered deposits total to 62% during the quarter compared to 64% in the first quarter of 2024.

Noninterest bearing demand deposits increased to 20% for the quarter compared to 17% of total deposits as of March 31 2024.

Scott Farris Kavanaugh: Our insured and collateralized deposits remain relatively unchanged compared to the first quarter at 85% of total deposits. We maintained a strong liquidity position of $4.4 billion. These levels are available liquidity to uninsured and uncollateralized deposits ratio, slightly increased to 2.8. Borrowings remain flat, quarter over quarter, at $1.7 billion as of June 30. Average borrowings outstanding were down to $1.4 billion or 10.4% of total average assets for the quarter compared to $1.6 billion or 11.8% of total average assets for the quarter.

Our insured and collateralized deposits remained relatively unchanged compared to the first quarter and 85% of total deposits.

We maintained a strong liquidity position of $4 4 billion at these levels, our available liquidity to uninsured and uncollateralized deposits ratio slightly increased to two eight times.

Borrowings remained flat quarter over quarter at $1 7 billion as of June 30.

Average borrowings outstanding were down to $1 4 billion or 10.

4% of total average assets for the quarter compared to <unk>, one 6 billion or 11, 8% of total average assets for the quarter.

Scott Farris Kavanaugh: As I stated earlier, credit quality remains incredibly strong for our bank. Our non-performing assets to total assets remained at 0.18% quarter over quarter. Loan balances ended the quarter at $10.1 billion, flat from the first quarter.

As I stated earlier credit quality remains incredibly strong for our bank, our nonperforming assets to total assets remained at one 8% quarter over quarter.

Loan balances ended the quarter at $10 1 billion flat from the first quarter.

Scott Farris Kavanaugh: CNI loans totaled 83% of loan fundings during the quarter and 86% of total fundings year-to-date. Loan Yields Increase Nicely, to 4.77% in the second quarter from 4.70% in the first quarter. First Foundation Advisors, Assets under management were $5.5 billion, unchanged from the end of the first quarter. Our pipeline of new relationships remains strong. Assets under advisement at FFB's trust department were $1.1 billion for the quarter compared to $1.2 billion at the end of March 31, 2023.

<unk> loans totaled 83% of loan fundings during the quarter and <unk>, 86% of total fundings year to date loan yields increased nicely to $4, 77% in the second quarter from $4 seven zero percent in the first.

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First Foundation advisors.

Assets under management was $5 5 billion unchanged from the end of the first quarter.

Our pipeline of new relationships remained strong.

Assets under Advisement and <unk> Trust Department was one 1 billion for the quarter compared to $1 2 billion at the end of March 31 2023.

Scott Farris Kavanaugh: Once again, I would like to close by reiterating my appreciation for the incredible efforts and unwavering dedication of our entire team. I remain incredibly thankful to each of the company's wonderful employees. I will now turn the call over to Jamie to cover the financials in greater detail. Thank you, Scott.

Once again I would like to close by reiterating my appreciation for the incredible efforts and unwavering dedication of our entire team I remain incredibly thankful to each of the companies wonderful employees.

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

James Britton: Before diving into the capital raise and our strategic objectives, Chris and I will start with a brief review of, I'll begin with the balance sheet and the improvement in our net interest margin, which, as Scott mentioned, expanded 19 basis points during the quarter from 1.17% in the first to 1.36% in the second. Our Earning Asset Yield continues to improve, increasing to 4.71% in Q2, which is 7 basis points above the 4.64% reported in Q1, and 20 basis points above the year-ago period's 4.51%. After remaining relatively stable for the past several periods, loan yields made a larger contribution this quarter, increasing from 4.7% in Q1 to 4.77% in Q2.

Thank you Scott before diving into the capital raise and our strategic objectives, Chris and I will start with a brief review of the quarter.

I'll begin with our balance sheet and the improvement in our net interest margin, which as Scott mentioned expanded 19 basis points during the quarter from $1, one 7% in the 1st% to 136% in the second our earning asset yield continues to improve increasing to 471% in Q2, which is seven basis points above the $4.

Six 4% reported in Q1, and 20 basis points above the year ago periods $4 five 1%.

After remaining relatively stable for the past several periods loan yields made a larger contribution this quarter increasing from four 7% in Q1 to 477% in Q2.

James Britton: Though the available-for-sale portfolio yield improved modestly this quarter by two basis points, due in part to new investment yields of approximately 5.8%, a mixed shift toward health and maturity led to a slight reduction in the overall investment portfolio yield, which was down this quarter from 4.06% in the first to 4% in the second. As we have noted in past calls, we are comfortable using safe, high-quality securities in the investment portfolio to support our liquidity position, improve the balance sheet's rate profile, and more efficiently enhance recurring revenue.

Though the available for sale portfolios yield improved modestly this quarter by two basis points due in part to new investment yields of approximately five 8% a mixed shift toward held maturity led to a slight reduction in the overall investment portfolio yield which was down this quarter from four 6% in the first 2% to 4% in the second.

As we have noted in past calls we are comfortable using safe high quality securities in the investment portfolio to support our liquidity position improved the balance sheet rate profile and more efficiently enhance recurring revenue.

James Britton: In this vein, I'd note our ending balance for the quarter was higher than the quarter's. Turning to funding costs, like last quarter, I'd like to start by highlighting the seasonal nature of our non-interest-bearing deposit portfolio and its MSR escrow balances, which, as expected, continued their return to the balance sheet this quarter following their normal annual outflows late in the fourth before beginning to rebuild late in the first. Whereas the first quarter's mix towards interest-bearing liabilities, which, as a reminder, are temporarily ramped up each year to replace the seasonally declining non-interest MSRS scroll balances, weighed on our net interest margin in Q1, the opposite was true in the second quarter.

In this vein.

Our ending balance for the quarter was higher than the quarter's average balance.

James Britton: Coupled with the improvement in loan yields, the shift back to non-interest-bearing MSR deposits helped return the net interest margin to its Q4 level of 1.36%. These shifts led to an improvement in net interest income for the quarter, which increased from $38.4 million in the first to $43.8 million in the second. This shift led to a commensurate increase in customer service costs as well, which also increased $5.4 million in the quarter. However, net net, the balance sheet's contribution to earnings remains stable.

Turning to funding costs like last quarter I'd like to start by highlighting the seasonal nature of our noninterest bearing deposit portfolio and its MSR escrow balances, which as expected continue their return to the balance sheet. This quarter following their normal annual outflows late in the fourth before beginning to rebuild late in the <unk>.

Whereas the first quarter's mix towards interest bearing liabilities, which as a reminder, our temporarily ramp each year to replace the seasonally declining non interest MSR ESCO escrow balances weighed on our net interest margin in Q1, the opposite was true in the second.

Coupled with the improvement in loan yields the shift back to noninterest bearing MSR deposits helped return that net interest margin towards Q4 level of 136%.

These shifts led to an improvement in net interest income for the quarter, which increased from $38 4 million in the first to $43 8 million in the second.

The shifts led to a commensurate increase in customer service costs as well, which also increased five $4 million in the quarter net net the balance sheet contribution to earnings remained stable.

James Britton: Before leaving this topic, as I mentioned last quarter, though these seasonal fluctuations cause shifts in our net interest margin and non-interest expense each year, we appreciate the holistic nature of these relationships and are comfortable continuing to manage around their predictable seasonal inflows and outflows. I'd also note that given continued growth in these balances through the quarter, we would expect the third quarter's average balance and related customer service costs to be higher than the second quarter by approximately 15%.

Before leaving this topic as I mentioned last quarter, though these seasonal fluctuations cost shifts in our net interest margin and noninterest expense each year. We appreciate the holistic nature of these relationships and are comfortable continuing to manage around their predictable seasonal inflows and outflows I'd also note that given.

Continued growth in these balances through the quarter, we would expect the third quarter to average balance and related customer service cost to be higher than the second quarters by approximately 15%.

James Britton: As is typical in an elongated plateau during a rate cycle, we continue to experience modest pressure on interest-bearing liability costs, which are up three basis points this quarter, from 4.24% in the first to 4.27% in the second. Both borrowing costs and interest-bearing deposit costs were slightly higher.

As is typical in an elongated plateau during a rate cycle. We continue to experience modest pressure on interest bearing liability costs, which are up three basis points. This quarter from $4 two 4% in the first to four 7% in the second.

With borrowing cost and interest bearing deposit costs were slightly higher.

James Britton: Though we reduced some of our higher-cost deposits to account for the returning non-interest-bearing MSR escrow balances, which on its own helps costs, we also took advantage of relatively attractive broker deposit costs and shifted the $350 million of balances underlying our recently initiated cash flow hedge from short-term FHLB advances to short-term broker deposits. The result of this move benefited net interest income, but it did cause a shift in costs towards deposits, as well as a modest quarter-over-quarter increase in our brokered deposit costs, which, as Scott alluded to, slightly increased this quarter.

Although we reduced some of our higher cost deposits to account for the returning noninterest bearing MSR escrow balances, which on its own helps cost.

We also took advantage of relatively attractive broker deposit costs and shifted the $350 million of balances underlying our recently initiated cash flow hedge from short term <unk> advances to short term brokered deposits.

The result of this move benefited net interest income, but it did cause a shifting cost towards deposits as well as a modest quarter over quarter increase in our brokered deposit concentration, which as Scott alluded to slightly increased this quarter.

James Britton: As noted on the last course call, by taking advantage of the market's early year optimism for declining rates via this swap and additional securities balances, we were able to add new rate-insensitive recurring revenue. And we will continue to look for similar opportunities to both enhance revenue and stabilize our rate profile going forward. Finally, I'd note that monthly trends and deposit costs exited the quarter consistent with quarterly averages, with total interest-bearing deposit costs ending the month of June at $4.28. We appreciate the work our teams are doing in each deposit channel to remain responsive to our clients' needs while holding the line on credit.

As noted on last quarters call by taking advantage of the market's early year optimism for declining rates via this swap and additional securities balances, we were able to add new rate insensitive recurring revenue and we will continue to look for similar opportunities to both enhance revenue and stabilize our rate.

While going forward.

Finally, I would note that monthly trends in deposit costs exited the quarter consistent with quarterly averages with total interest bearing deposit costs ending the month of June at $4 two 8%.

We appreciate the work our teams are doing in each deposit channel to remain responsive to our clients needs, while holding the line on costs.

James Britton: Shifting to the income statement, interest income grew again this quarter. On a slightly smaller average earning asset base, we reported $150.9 million for the second quarter versus $150.5 million in the first. Interest expense saw a decline, which, as discussed, was due to lower balances resulting from the return of average non-interest bearing MSR escrow deposits.

Shifting to the income statement interest income grew again this quarter on a slightly smaller average, earning asset base, we reported $150 9 million for the second quarter versus $155 million in the first.

Interest expense saw a decline, which as discussed was due to lower balances, resulting from the return of average noninterest bearing MSR escrow deposits combined with the slight improvement in net interest income the $5 million decrease in interest expense benefited net interest income by $5 $4 million.

James Britton: Combined with a slight improvement in net interest income, the $5 million decrease in interest expense benefited net interest income by $5.4 million. We recorded a negative provision expense for the quarter driven by reductions in both the reserve on our investment portfolio and the reserve on unused commitments. The balance for our APL loans, however, was stable again this quarter at 29 basis points. And, as Scott mentioned, asset quality remains stable. Wealth and trust-related fees were higher in the quarter, from $8.6 million in the first to $9.2 million in the second.

We recorded a negative provision expense for the quarter driven by reductions in both the reserve on our investment portfolio and the reserve on unused commitments the balance for our ACL on loans. However was stable again this quarter at 29 basis points and as Scott mentioned asset quality remains stable.

Wealth and trust related fees were higher in the quarter up from $8 6 million in the first to $9 2 million in the second as Scott mentioned AUM ended the quarter at $5 5 billion consistent with the first quarter's ending balance and we are pleased with the pipelines we see in the business.

James Britton: As Scott mentioned, AUM ended the quarter at $5.5 billion, consistent with the first quarter's ending balance, and we are pleased with the pipelines we see in the. As we'll discuss in a moment, we are excited about the opportunity to accelerate growth in First Foundation Advisors and the Trust Department following the Capitol. Moving to non-interest expense, outside of customer service costs, remaining non-interest expense categories totaled $39.5 million for the quarter, slightly lower Compensation and Benefits Expense was lowered by $0.3 million in the quarter as the impacts of the annual tax resets that elevate the expenses in the first quarter each year were not as much of a factor in the spending.

As we will discuss in a moment, we are excited about the opportunity.

To accelerate growth and first foundation advisors and the Trust Department following the capital raise.

Moving to noninterest expense outside of customer service costs remaining noninterest expense categories totaled $39 5 million for the quarter slightly lower than the first quarter's $39 9 million compensation.

Compensation and benefits expense was lower by <unk> 3 million in the quarter as the impacts of the annual tax reset that elevate the expenses in the first quarter, each year, where not as much of a factor in the second.

James Britton: In addition, we recognize the full quarter benefit of our decision late in the first quarter to exit our equipment. As shown again this quarter, we are maintaining our disciplined approach to core expenses, and we continue to do so, and we plan to continue to do so, even as we make strategic investments for future growth following the capital crisis. We are committed to controlling our discretionary investments and ensuring any plans for measured investments going forward across our markets are both in line with our strategic objectives and supported by commensurate growth in revenue and profit.

In addition, we recognized a full quarter benefit of our decision late in the first to exit our equipment finance business.

As shown again this quarter, we are maintaining our disciplined approach to core expenses and we continue to do so we plan to continue to do so even as we make strategic investments for future growth following the capital rates.

Speaker Change: We are committed to controlling our discretionary investments and ensuring any plans for measured investments going forward across our markets are both in line with our strategic objectives and supported by commensurate growth in revenue and profitability.

James Britton: Moving finally to capital and liquidity, we are pleased to highlight another quarter's improvement in First Foundation Inc.'s capital ratio. Our total risk-based capital ratio, which we estimate will be 12.6%, increased by 11 basis points in the quarter and by 84 basis points since Q2 of 2023.

Speaker Change: Moving finally to capital and liquidity, we are pleased to highlight another quarter's improvement in first foundation <unk> capital ratios, our total risk based capital ratio, which we estimate will be 12, 6% increased by 11 basis points in the quarter and by 84 basis points since Q2 of 2023.

Christopher M. Naghibi: Our liquidity and funding positions also remain strong this quarter, as uninsured and uncollateralized deposits remain low, available liquidity remains high, our loan-to-deposit ratio declined, and our core deposit concentration remained relatively low. Our capital ratios and liquidity position were strengthened further since quarter end by the announced capital rates, providing significant flexibility to further strengthen our balance. Capitalize on the opportunities ahead and improve our earnings profile going forward. Before jumping into more detail on our plans here, I'll turn it over to Chris to provide our final thoughts on the quarter. Thank you, Jamie. Good morning.

Speaker Change: Our liquidity and funding positions also remained strong this quarter as uninsured and uncollateralized deposits remained low available liquidity remains high our loan to deposit ratio declined and our core deposit concentration remained relatively stable.

Speaker Change: Our capital ratios and liquidity position was strengthened further since quarter end by the announced capital rates, providing significant flexibility to further strengthen strengthen our balance sheet capitalize on the opportunities ahead and improve our earnings profile going forward.

Speaker Change: Before jumping into more detail on our plans here I'll turn it over to Chris to provide our final thoughts on the quarter Chris.

Christopher M. Naghibi: Today, I will quickly touch on our second quarter 2024 lending operations, deposits, and the strength of our assets. As Jamie mentioned, before concluding the call, the management team and I want to provide further detail and insight into our newly announced capital raise initiative and discuss both near-term strategic implications for the forthcoming third quarter, as well as our longer-term vision. Let's first focus on the institution's lending operations. First Foundation continues to maintain a sharp focus on remediating our fixed-rate lending portfolio's position in the current interest rate environment.

Chris: Thank you Jamie good morning today, I will quickly touch on our second quarter 2020 for lending operations deposits and the strength of our assets.

Chris: As Jamie mentioned before concluding the call the management team and I want to provide further detail and insight into our newly announced capital raise initiatives and discuss both near term strategic implications for the forthcoming third quarter as well as our longer term vision, let's.

Speaker Change: Let's first focus on the institutions lending operations first foundation continues to maintain a sharp focus on remediated, our fixed rate lending portfolio is positioned in the current interest rate environment. Our goal has been and continues to be to reduce that exposure and diversify into index plus margin based pricing focusing on conservatively underwritten.

Christopher M. Naghibi: Our goal has been and continues to be to reduce that exposure and diversify into index plus margin-based pricing, focusing on conservatively underwritten C&I lending where we prioritize relationships. I want to be clear that, historically, multifamily originations outpaced C&I lending, First Foundation has been deeply immersed in C&I lending dating back to the bank's inception. A more robust C&I team was built out nearly 10 years ago in order to help balance out the concentration risk in the underlying loan portfolio. First Foundation is not a real estate lender growing into the C&I business.

Speaker Change: C&I lending, where we prioritize relationships.

Speaker Change: I want to be clear that while historically multifamily originations outpaced C&I lending first foundation has been deeply steeped in C&I lending dating back to the bank's inception.

Speaker Change: Robust C&I team was built out nearly 10 years ago in order to help balance out the concentration risk in the underlying loan portfolio first foundation is not a real estate lender growing into the C&I business C&I lending has been a longstanding and important part of the underlying franchise value to that effect.

Christopher M. Naghibi: C&I lending has been a longstanding and important part of the underlying franchise value. To that effect, I would be remiss if we did not highlight how amazing this team has been. Over 85% of our loan origination volume this year has been from the maturation of a prolonged strategy building on C&I relationships. From our former C&I Chief Credit Officer, who is now our Chief Lending Officer, David Mitsuchi, to Eric Graham, our Corporate Banking Director, to Riaz Kamari, our Chief Commercial Credit Officer, to Lillian Gavin, our Chief Credit Officer, our C&I team has done incredible work.

Speaker Change: I would be remiss, if we did not highlight how amazing. This team has been over 85% of our loan origination volume. This year has been from the maturation of a prolonged strategy building on C&I relationships from our former C&I Chief Credit Officer, who is now our chief lending officer, David Mitsubishi to Erik <unk>.

Speaker Change: Our corporate banking director to re ask Tomorrow, our chief commercial credit officer to Lillian Galvin, our Chief Credit Officer. Our C&I team has done incredible work are middle market focused teams are exceptional as well from Scott nor in our commercial banking manager to Tobias haul dimer, our director of guaranteed lending our teams have put in the work.

Christopher M. Naghibi: Our middle market focus teams are exceptional as well. From Scott Noren, our Commercial Banking Manager, to Tobias Hallbemer, our Director of Guaranteed Lending, our teams have put in the work and have really helped drive relationship-focused C&I growth when we needed it most. As I've stated on previous calls, C&I lending growth in the future, outpacing that in commercial real estate lending, will provide justification for a continued increase in our CECL reserves as a byproduct of the asset class and historical data that support it.

Speaker Change: And have really helped drive relationship focused C&I growth when we needed it most.

Speaker Change: As I have stated on previous calls C&I lending growth in the future outpacing that in commercial real estate lending will provide justification for a continued increase in our Stifel reserves as a byproduct of the asset class and historical data that supports it.

Speaker Change: This will be notable in both the growth of the reserve as a percentage of the portfolio as well as the total dollar amount of the reserve one of the many complexities of the market is still adapting to is navigating seasonal future forecast of life of loan losses at origination or acquisition of loans in the wake of 14 years of artificial intelligence.

Christopher M. Naghibi: This will be notable in both the growth of the reserve as a percentage of the portfolio as well as the total dollar amount of the reserve. One of the many complexities the market is still adapting to is navigating CECL's future forecast of life of loan losses at origination or acquisition of loans in the wake of 14 years of artificial interest rate deflation and a lack of meaningful historical loss data in some asset classes to support additional reserves.

Speaker Change: Right deflation and a lack of meaningful historical loss data in some asset classes to support additional reserves. We continue to believe this increase in loan loss reserves will be a strong step in positioning the company in line with the Roche risk profile of peers.

Christopher M. Naghibi: We continue to believe this increase in loan loss reserves will be a strong step in positioning the company in line with the risk profile of peers. As a reminder, given the relatively short duration of the multifamily asset class and the cash flow focus of most investors, we anticipate a future benefit from anticipated repricing activity. In the long term, we aim to diversify our asset base, which will gradually increase our CECL reserves as a more balanced portfolio will naturally require higher reserves.

Speaker Change: As a reminder, given the relatively short duration of the multifamily asset class and the cash flow focus of most investors, we anticipated future benefit from anticipated repricing activity long term, we aim to diversify our asset base, which will gradually increase our seasonal reserves as a more balanced.

Leo: Leo will naturally require higher reserves to.

Christopher M. Naghibi: To help facilitate this transformation in the near term, First Foundation's strategic plan includes the thoughtful and strategic sale and or securitization of loans into the market. This systematic and careful reduction in our multifamily concentration will provide some noteworthy and meaningful benefits.

Speaker Change: To help facilitate this transformation in the near term first foundation strategic plan does include the thoughtful and strategic sale <unk> securitization of loans into the market. This systematic and careful reduction and our multifamily concentration will provide some noteworthy in meaningful benefits.

Christopher M. Naghibi: First, it will allow the bank to blunt its interest rate risk exposure to the looming maturities in the portfolio, Specifically, reducing lower-yielding assets that mature during 2025, 2026, and potentially 2027, maturities that came from unprecedented growth in the bank's multifamily balance sheet over the last three years. Second, it will allow the bank to redeploy this capital into higher-yielding loans much sooner than waiting for the organic maturity of the underlying asset.

Speaker Change: First it will allow the bank to blunt its interest rate risk exposure to the looming maturities in our portfolio, specifically, reducing lower yielding assets that mature during 2025, 2026, and potentially 2027 maturities that came from unprecedented growth in the bank's multifamily balance sheet over the last three years.

Speaker Change: Here's second it will allow the bank to redeploy this capital into higher yielding loans much sooner than waiting for the organic maturity of the underlying assets the management team and I will further elaborate on this nuance. In addition to identifying how we plan on leveraging our new capital to highlight our commitment to aligning our reserves.

Christopher M. Naghibi: The management team and I will further elaborate on this nuance in addition to identifying how we plan on leveraging our new capital to highlight our commitment to aligning our reserves with peers prior to the conclusion of this call. Our loan portfolio, as of June 30, 2024, can be summarized with the following composition. 51% multifamily loans, down from its height of approximately 54% as of Q3 of 2022. 32% commercial business loans, including owner-occupied commercial real estate and equipment finance, compared to approximately 28% as of Q4 of 2022. 9% for consumer and single-family residence loans.

Speaker Change: With peers prior to the conclusion of this call.

Speaker Change: Our loan portfolio as of June 32024 can be summarized with the following composition, 51% multifamily loans down from its height of approximately 54% as of Q3 of 2022, 32% commercial business loans, including owner occupied commercial real estate and equipment finance compared to.

Speaker Change: Approximately 28% as of Q4 of 2022, 9% consumer and single family residents loans, 6% non owner occupied commercial real estate and approximately 1% of land and construction loans.

Christopher M. Naghibi: 6% of non-owner-occupied commercial real estate and approximately 1% of land and construction loans. From an operational perspective, we continue to challenge our lending departments and adapt to a heavy focus on asset quality. We want to ensure the assets we do have on the books continue to remain as strong and are as reflective of the same credit culture today as they were at origination. If there are cracks coming in the economy, we want to spot them proactively.

Speaker Change: From an operational perspective, we continue to challenge our lending departments and adapt to a heavy focus on asset quality, we want to ensure the assets. We do have on the books continue to remain as strong and are as reflective of the same credit culture today as they were at origination if there are cracks.

Speaker Change: And the economy, we want to spot them proactively.

Christopher M. Naghibi: We continue to maintain our steadfast, cautious, yet proactive approach to growing with best-in-class asset quality, as indicated by our historical performance. As you would expect, loan fundings continue to be comprised of primarily high-quality, adjustable-rate C&I, SBA, and mortgage lending, totaling $516 million for the second quarter, offset by loan paydowns and payoffs of $515 million for this quarter.

Speaker Change: We continue to maintain our steadfast cautious yet proactive approach to growing with best in class asset quality as indicated by our historical performance as you would expect loan fundings continue to be comprised of primarily high quality adjustable rate C&I SBA and mortgage lending totaling five.

Speaker Change: $516 million for the second quarter.

Speaker Change: <unk> by loan Paydowns and payoffs of $515 million for this quarter.

Christopher M. Naghibi: Moving quickly to deposit operations, the bank continues to focus on deeper relationships with our clients, which we believe, combined with our value proposition of service, distinguishes us in the marketplace. This ethos will be pivotal to the execution of deposit growth as we focus on greater organic growth and lessen the interest rate impacts from higher-cost deposits and non-core funding. This will also be aided by the aforementioned multifamily concentration reductions and will assist in limiting exposure to changes in the deposit franchise.

Speaker Change: Moving quickly to deposit operations. The bank continues to focus on deeper relationships with our clients, which we believe combined with our value proposition of service distinguished distinguishes us in the marketplace. This E bills will be pivotal to the execution of deposit growth as we focus on greater organic growth.

Speaker Change: <unk> and lessening the interest rate impacts from higher cost deposits and noncore funding.

Speaker Change: It will also be aided by the aforementioned multifamily concentration reductions and will assist in limiting exposure to changes in the deposit franchise. As you have heard on previous calls we are still keeping a close eye on liquidity and funding in the near term, but have already begun to refocus on our core funding growth.

Christopher M. Naghibi: As you have heard on previous calls, we are still keeping a close eye on liquidity and funding in the near term but have already begun to refocus on our core funding growth efforts and have made sizable changes that were reflected in the quarter. Continued improvement in funding and the additional capital will allow us to allocate more attention to driving down any over-dependence on broker deposits and wholesale borrowing. The breakdown of our current deposits is as follows: money market and savings at 30 percent, certificates of deposits at 29 percent, interest-bearing demand deposits at 27 percent, and non-interest bearing demand deposits at 14 percent.

Speaker Change: Efforts and have made sizable changes to reflect that reflected in the quarter continued improvement in funding and the additional capital will allow us to allocate more attention to driving down any overdependence on broker deposits and wholesale borrowings.

Speaker Change: The breakdown of our current deposits is as follows money market and savings at 30%.

Speaker Change: If it gets of deposits, 29% interest bearing demand deposits 27%.

Speaker Change: And noninterest bearing demand deposits at 14%.

Christopher M. Naghibi: Our core deposits are geographically largely unchanged, with California accounting for 36% of total deposits, Florida at 36%, and Texas at 10%. Outside of this majority, Nevada, Hawaii, and other states make up the remaining 18% of the total.

Speaker Change: Our core deposits are geographically largely unchanged with California accounting for 36% of total deposits, Florida at 36% and Texas at 10% outside of this majority, Nevada, Hawaii and other states make up the remaining 18% of the total.

Christopher M. Naghibi: The internal culture has seen a galvanized pivot from a defensive-focused stance to an offensive-leaning one where our teams in the digital branch and our physical branches can focus on delivering service and organically growing our business, the timing of which could not be better. While we operate with a rate-neutral mindset, we have begun preparing for a changing landscape ahead of potential rate cuts during the 2024 calendar year by strategically deprioritizing marketing based on rate and instead highlighting relationships, community, and service. If we are fortunate enough to see a rate cut in 2024, the benefits to First Foundation's earnings will be felt quickly given the company's liability sensitivity.

Speaker Change: The internal culture has seen a galvanized pivot from a defensive focused stance to an offensive leaning one where our teams in the digital branch in our physical branches can focus on delivering service and organically growing our business the timing of which could not be better while we operate with a rate neutral mindset, we have begun.

Speaker Change: Repairing for a changing landscape ahead of potential rate cuts during the 2024 calendar year by strategically de prioritizing marketing based on rate and instead, highlighting relationships community and service.

Speaker Change: We are fortunate enough to see a rate cut in 2020 for the benefits to first foundation's earnings will be felt quickly given the company's liability sensitivity.

Christopher M. Naghibi: A lot is changing about the way we do business, and I would like to thank every single contributor at First Foundation for their support and commitment to improving what we do. I continue to be grateful for so many wonderful colleagues who genuinely care about the long-term viability of the company. We have endured a lot in the last two years, but now it is time to shift our focus to offense.

Speaker Change: A lot is changing about the way, we do business and I would like to thank every single contributor at first foundation for their support and commitment to improving what we do I continue to be grateful for so many wonderful colleagues, who genuinely care about the long term viability of the company we have endured a lot the last two years, but.

Speaker Change: Now it is time to shift our focus to offense if adversity builds character. This team has developed a tremendous amount of character and I can proudly tell you. They are ready to prove what they can do next.

Christopher M. Naghibi: If adversity builds character, this team has developed a tremendous amount of character, and I can proudly tell you they are ready to prove what they can do next. Okay, what a terrific way to wrap up the quarter. As we continue to say First Foundation success is certainly a result of its people and Chris's sentiment couldn't be a better way to kick off discussion of the capital race and where we see the company going for, Because, importantly, we value the culture our team has built and nurtured over the years, and we believe our focus on customer experience, providing a holistic set of banking opportunities and Leaning Into Our Expertise to Help Build Our Bank and Support Our Communities have been foundational to our success.

Speaker Change: Yes.

Speaker Change: Okay terrific way to wrap up the quarter as we continue to say first foundation success is certainly a result of its people and Christmas sentiment couldnt be a better way to kick off discussion of the capital raise and where we see the company going from here.

Speaker Change: Importantly, we valued the culture, our team has built and nurtured over the years and we believe our focus on customer experience, providing a holistic set of banking options and leading leaning into our expertise to help build our bank and support our communities have been foundational to our success.

Christopher M. Naghibi: Rather than using the capital raise as an inflection point to focus on new businesses or materially change our old ones, we hope to use it as an opportunity to get back to what we do best, leading with our people, and sharing with our markets the hallmarks that have made First Foundation such a valued partner to our clients and a trusted steward of our shareholders' capital. Before we can pivot entirely to offense, however, there are some near-term actions we would like to take to further strengthen the balance sheet and stabilize our earnings.

Rather than using the capital raise as an inflection point to focus on new businesses or materially change our Ole we hope to use it as an opportunity to get back to what we do best leading with our people and sharing with our markets. The hallmarks that have made first foundation, such a valued partner to our clients and <unk> trusted steward of.

Speaker Change: Shareholders' capital.

Speaker Change: Before we can pivot entirely to offense. However, there are some near term actions, we would like to take to further strengthen the balance sheet and stabilize our earnings profile in this first phase, which we expect to complete this quarter, we set out to successfully complete our capital raise which we've done move a portion of our lower yielding multifamily loans to held for.

Christopher M. Naghibi: In this first phase, which we expect to complete this quarter, we set out to successfully complete our capital raise, which we will move a portion of our lower yielding multifamily loans to help for sale. Initiate a detailed review of our ACL methodology to address once and for all various stakeholder concerns and begin ensuring that, once we fully pivot back to offense, we will be ready with cascading organizational goals and incentive alignment necessary to ensure our measured investments achieve their goals.

Speaker Change: Sale.

Speaker Change: Initiate a detailed review of our ACO ACL methodology to address once and for all various stakeholder concerns and began ensuring that once we fully pivot back to offense, we will be ready with cascade organizational goals and incentive alignment necessary to ensure our measured investments achieve their goals.

Christopher M. Naghibi: Together, we believe these actions set us up for success, leaving us with a strengthened capital and liquidity position, a reduction in our multi-family concentration, and an ACL within the range of similarly situated peers. Greater flexibility to decrease our reliance on wholesale funding going forward, and, of course, improvements to our net interest margin and core profitability that are necessary to make the investments available across our footprint, which we believe will lead to further geographic and product diversification, growth in core funding, and an Improved Revenue Mix based even more largely on stable recurring fee income, and, most of all, reduce through-cycle earnings variability that will lower our cost of equity and enhance long-term Now, the near-term actions are not without hard work. We have already initiated our detailed ACL methodology review, and we are confident it will be completed this quarter.

Speaker Change: Together, we believe these actions set us up for success, leaving us with our strengthened capital and liquidity position.

Speaker Change: A reduction to our multifamily concentration and ACL within range of similarly, situated peers gray.

Speaker Change: Greater flexibility to decrease our reliance on wholesale funding going forward and of course improvements to our net interest margin and core profitability that are necessary to make the investments available across our footprint, which we believe will lead to further geographic and product diversification.

Speaker Change: Growth in core funding and.

Speaker Change: An improved revenue mix base, even larger part on stable recurring fee income.

Speaker Change: And most of all reduced through cycle earnings variability that will lower our cost of equity and enhance long term shareholder value.

Speaker Change: Now that near term actions are not without hard work, we have already initiated our detailed ACL methodology review and we are confident it will be completed this quarter, but simply moving some of our lower yielding multifamily loans to held for sale. This quarter does not mean, we are done.

Christopher M. Naghibi: But simply moving some of our lower-yielding multifamily loans to help for sale this quarter does not mean we are done. As we did with our new investors during the capital raise, we believe it is important to engage with those willing to dig into our portfolio, understand why we hold such conviction in its credit quality, model through the loan's repricing characteristics, and arrive at a fair execution price that we would be comfortable ultimately sharing on these calls with you. That takes time.

Speaker Change: As we did with our new investors during the capital raise we believe it is important to engage with those willing to dig into our portfolio understand why we hold such conviction in its credit quality model through the loans repricing characteristics and arrive at a fair execution price that we would be comfortable ultimately sharing on these calls with you.

Speaker Change: That takes time.

Christopher M. Naghibi: But we are committed to best execution, and our team is willing to do the hard work to ensure we. As an organization, I can assure you we are excited to pivot again to offense. We are thrilled for the growth opportunities this will provide for our teammates who have already invested so much. We are honored for the opportunities to grow our existing relationships and build new ones across our markets, and we look forward to the opportunity to return our financial performance to levels our shareholders deserve.

Speaker Change: But we are committed to best execution and our team is willing to do the hard work to ensure we get it.

Speaker Change: As an organization I can assure you we are excited to pivot again. The offense. We are thrilled for the growth opportunities. This will provide to our teammates who have already invested so much we are honored for the opportunities to grow our existing relationships and build new ones across our markets and we look forward to the opportunity to rich.

Speaker Change: Our financial performance to levels, our shareholders shareholders deserve.

Christopher M. Naghibi: By investing our resources in these strategic objectives, success will not occur overnight, but by the end of 2026, we are confident we can get First Foundation's ROA back to 90 to 100 basis points, ROTC-E back to 10-12%, and our CRE concentration below 400%.

Speaker Change: By investing our resources in these strategic objectives success will not occur overnight, but by the end of 2026. We are confident we can get first foundation's ROA back to 90 to 100 basis points RPE back to 10%, 12% and our CRE concentration below 400%.

Christopher M. Naghibi: Coupled with the improvements we expect in our liquidity, interest rate, and credit risk profiles, a long-term Tier 1 risk-based capital ratio in the 12 to 13 percent range will ready First Foundation with a strong risk capital balance poised for further growth in 2027. With that, I'd like to turn to Chris to provide further, Thank you again, Jamie.

Speaker Change: Coupled with the improvements we expect in our liquidity interest rate and credit risk profiles are long term tier one risk based capital ratio in the 12% 13% range. We're ready first foundation with a strong risk capital balance poised for further growth in 2027 and beyond.

Speaker Change: With that I'd like to turn to Chris to provide further detail.

Chris: Thank you again Jamie.

Chris: As Jamie noted.

Christopher M. Naghibi: And, as you can see on page three of the provided investor deck, the near-term actions in the third quarter of 2024 will be about repositioning the balance sheet and stabilizing earnings. A big part of the mechanics around achieving this goal will come from moving loans to held-for-sell, as well as a thorough review of the bank's current ACL methodology. First Foundation intends to move approximately 20% of its existing multifamily loans to a held-for-sale designation.

Chris: And as you can see on page three of the provided investor deck. The near term actions in the third quarter of 2024 will be about repositioning the balance sheet and stabilizing earnings a big part of the mechanics around achieving this goal will come from moving loans to held for sale as well as a thorough review of the bank's current ACL methodologies.

Chris: <unk>.

Chris: First foundation intends to move approximately 20% of its existing multifamily loans to held for sale designation.

Christopher M. Naghibi: I would caution against looking at recent market transactions as the sole indicator of the potential marks we could see on the move. And I would certainly emphasize this point when considering final execution prices. As Jamie mentioned a moment ago, we are willing to put in the time and work here. First Foundation intends to explore every avenue to ensure the best execution, including options through its relationship with Freddie Mac, as well as potential private party sales. First Foundation is a Freddie Mac seller servicer and has successfully completed numerous securitizations with Freddie in the past.

Speaker Change: I would caution against looking at recent market transactions as the sole indicator of the potential marks we could see on the move and I would certainly emphasize this point when considering final execution prices.

As Jamie mentioned, a moment ago, we are willing to put in the time and work here first foundation intends to explore every avenue to ensure best execution, including options through its relationship with Freddie Mac as well as potential private party sales first foundation is a Freddie Mac seller servicer and has successfully complete.

Speaker Change: Numerous securitizations with Freddie in the past while this is no longer a part of our normal business. We still have the expertise to invest and we have historically found that upon doing so execution and settlement can contrast market pricing based on the desirability of the bank's underlying of affordable housing multifamily loan.

Christopher M. Naghibi: While this is no longer a part of our normal business, we still have the expertise to invest, and we have historically found that upon doing so, execution and settlement can differ from market pricing based on the desirability of the bank's underlying affordable housing multifamily loan characteristics. The characteristics I detailed on last quarter's earnings call that support our credit quality, such as low-income housing components, rent-controlled properties, and others, assist in Freddie's duty-to-serve requirements as well.

Speaker Change: Characteristics the characteristics I detailed on last quarter's earning call that support our credit quality, such as low income housing components rent controlled properties and others assist and Freddie duty to serve requirements as well our asset quality remains strong. So given there is an increasing likelihood.

Christopher M. Naghibi: Our asset quality remains strong, so given there is an increasing likelihood of rate cuts to end 2024 and through 2025, we anticipate that the environment for execution will only improve through this process. Management is currently in the process of working with an outside third party to determine the potential mark as a result of a fair market value analysis. But I will reiterate again that we are committed to best execution as we work to ultimately dispose of the assets and reduce our multifamily real estate and fixed rate asset exposures. Despite the noteworthy strength of the loan portfolio and historical lack of loan losses since the bank's inception, management recognizes the bank is a statistical outlier when compared to similarly situated peers.

Speaker Change: The rate cuts to end 2024, and through 2025, we anticipate that the environment for execution will only improve through this process.

Speaker Change: Management is currently in the process of working with an outside third party to determine the potential mark as a result of a fair market value analysis, but I will reiterate again that we are committed to best execution as we work to ultimately disposition the assets and reduce our multifamily real estate and fixed rate <unk>.

Speaker Change: <unk> exposures.

Speaker Change: Despite the noteworthy strength of the loan portfolio and historical lack of loan losses since the bank's inception management recognizes the bank is a statistical outlier when compared to similarly, situated peers because first foundation's concentration in commercial real estate is narrowly tailored in the historically.

Christopher M. Naghibi: Because First Foundation's concentration in commercial real estate is narrowly tailored to the historically lower-loss end of the multifamily asset class, the historical loss factor has not led to the bank setting aside large reserves under the current expected credit loss model. We do believe, however, that there is an element of interest rate risk in the market, which is truly unprecedented, and that First Foundation needs to initiate a detailed review of its ACL methodology as a result.

Speaker Change: Lower loss and of the multifamily asset class. The historical loss factor has not led to the bank setting aside a large reserves under the current expected credit loss model. We do believe however that there is an element of interest rate risk in the market, which is truly unprecedented and that first foundation knee.

Speaker Change: <unk> to initiate a detailed review of its ACL methodology as a result.

Christopher M. Naghibi: I want to be clear; we do not believe we have credit losses on the horizon. As part of the months-long due diligence, Fortress not only conducted a thorough internal due diligence of the bank's underlying loan portfolio, but it also engaged a nationally recognized, independent, third-party due diligence and credit review.

Speaker Change: I want to be clear, we do not believe we have credit losses on the horizon as part of the months long due diligence fortress not only conducted a thorough internal due diligence of the bank's underlying loan portfolio, but also engaged a nationally recognized independent third party due.

Speaker Change: <unk> and credit review if there is one thing I can assure the market needed at the confidence in our underlying credit quality relative to our peers is shared by management and our new investors and helps that almost 70% of our portfolio is focused on relatively safe multifamily one to four single family.

Christopher M. Naghibi: If there is one thing I can assure the market, it is that the confidence in our underlying credit quality relative to our peers is shared by management and our new investors. It helps that almost 70% of our portfolio is focused on relatively safe, multifamily, one-to-four single-family, and municipal loans. But our success is another testament to the incredible team we have built and the seriousness with which our culture approaches credit. As we have always done, we intend to provide confidence that our reserves are adequate to address any changes in credit quality or interest rate risk that may be present in the market. And we believe that to do so, a holistic review of our methodology is appropriate.

Speaker Change: Municipal loans, but our success is another testament to the incredible team, we have built and the seriousness with which our culture approaches credit.

Speaker Change: As we have always done we intend on providing confidence that our reserves are adequate to address any changes in credit quality or interest rate risk that may be present in the market and we believe that to do so a holistic review of our methodology is appropriate a result of this review will likely conclude and an increase to the <unk>.

Christopher M. Naghibi: A result of this review will likely conclude in an increase to the bank's reserve to be more in line with similarly sized and concentrated peers. Regarding the loans we are moving to be held for sale, the move will focus on loans with balances approximately between $1.5 million and $4.5 million and which are set to reprice in the next 18 to 36 months. Reducing these balances will mute the impacts of the historical loan growth we saw in 2022 and the repricing uncertainty they could introduce over the horizon.

Speaker Change: <unk> reserve to be more in line with similarly sized and concentrated peers.

Speaker Change: Regarding the loans, we are moving to held for sale. The move will focus on loans with balances of approximately between $1 5 million and $4 $5 million and which are set to reprice in the next 18 to 36 months reducing.

Speaker Change: Reducing these balances will mute the impacts of the historical loan growth, we saw in 2022 and the repricing uncertainty they could introduce an over the horizon the.

Christopher M. Naghibi: The market needs to be able to model this pivot, and we, as management, will provide additional detail of our findings during our Q3 earnings call. The second phase of our strategic plan is the most exciting, and we hope that it gives the market, our employees, and our shareholders the confidence and the strategic vision for the medium and long-term strength of First Foundation. Frankly put, we are going to go on the offensive with measured investments to capitalize on what will surely be market opportunities ahead.

Speaker Change: The market needs to be able to model. This pivot and we as management will provide additional detail of our findings during our Q3 earnings call.

Speaker Change: The second phase of our strategic plan is the most exciting and we hope that it gives them market our employees and our shareholders the confidence in our strategic vision for the medium and the long term strength of first foundation frankly put we're going to go on the offensive with measured investments to capitalize.

Speaker Change: On what will surely be market opportunities ahead.

Christopher M. Naghibi: Before going into detail, it is important to note that the prolonged due diligence and capital-raised discussions led by Fortress and Canyon also allowed for a thoughtful and strategic collaboration in which management, the legacy board, and our investors were all involved. It is the proud result of active and ongoing planning that began as far back as the beginning of the second quarter of 2024. As you know, First Foundation currently has a wide geographical presence, spanning from Florida to Texas, to Nevada and California, and all the way to Hawaii.

Speaker Change: Before going into detail. It is important to note that the prolonged due diligence and capital raise discussions led by fortress in Canyon also allowed for a thoughtful and strategic collaboration in which management the legacy Board and our investors were all steeped. It is a proud result of active and ongoing <unk>.

Speaker Change: <unk> that began as far back as the beginning of the second quarter of 2024.

Speaker Change: As you know first foundation currently has a wide geographical presence spanning from Florida to Texas to Nevada, and California, and all the way to Hawaii.

Christopher M. Naghibi: Collectively, we believe there is tremendous untapped potential in these geographies we currently serve. Given that we have a physical presence in these locations and the mature infrastructure in our C&I lending business, the strategic vision anticipates the further diversification of the underlying loan portfolio. This diversification into C&I lending, which leverages the existing C&I infrastructure and enterprise, will improve core funding, further reduce multifamily commercial real estate concentrations, increase loan yields, and bolster deposit growth with a heavy focus on offering our platform to relationships and not transactions.

Speaker Change: <unk>, we believe there is tremendous untapped potential in these geographies we currently serve.

Speaker Change: Given that we have a physical presence in these locations and the mature infrastructure in our C&I lending business. The strategic vision anticipates. The further diversification of the underlying loan portfolio. This diversification into C&I lending, which leverages the existing C&I infrastructure and enterprise will improve core.

Speaker Change: Ending further reduce multifamily commercial real estate concentrations increased loan yields and bolster deposit growth with a heavy focus on offering our platform to relationships and not transactions new bankers in these markets will have loan goals and deposit goals. So they will be properly <unk>.

Christopher M. Naghibi: New bankers in these markets will have loan goals and deposit goals, so they will be properly incentivized to focus on relationships that are at least partially self-funding. As core deposits grow, we will, of course, want to focus on the concentrations in the underlying deposit portfolio as much as we do the loan portfolio. This will mean a reduced reliance on non-core funding and wholesale funding, as well as a reduction in high-cost deposits, goals that we have spoken about strategically for several quarters now. While we have made strides toward these objectives, we are far from satisfied that we have maximized these improvements.

Speaker Change: <unk> to focus on relationships, which are at least partially self funding.

Speaker Change: As core deposits grow we will of course want to focus on the concentrations in the underlying deposit portfolio as much as we do the loan portfolio. This will mean, a reduced reliance on noncore funding and wholesale funding as well as a reduction in high cost deposits goals you have heard us speak about.

Speaker Change: Strategically for several quarters now while we have made strides towards these objectives. We are far from satisfied that we have maximize these improvements the proposed balance sheet changes should limit exposure to high cost deposits and the enhancement to profitability will only be further bolstered by the tailwind of rate cuts whenever they do come.

Christopher M. Naghibi: The proposed balance sheet changes should limit exposure to high-cost deposits, and the enhancement to profitability will only be further bolstered by the tailwinds of rate cuts whenever they do come. With that, I will turn it back over to Scott to now cover wealth advisory, trust services, and address some of the changes in the board structure. Thanks, Chris.

Speaker Change: With that I will turn it back over to Scott to now cover wealth Advisory Trust services and address some of the changes in the board structure.

Scott: Thanks, Chris.

Scott Farris Kavanaugh: First, sorry that the script is taking longer than normal, but we frankly believe that the emphasis of this call needs to be on the capital raise, so sorry, please bear with us. We hope that all the strategic direction detail provided by Jamie and Chris and summarized in the provided investor presentation gives everyone some insight and how transformative we believe this capital has already been and is going to be. The benefits will also inure to the Wealth Advisory Platform, First Foundation Advisory.

Scott: First sorry that the script is taking longer than normal, but we frankly believe that.

Scott: The emphasis of this call needs to be on the capital raise so sorry, please bear with us.

Speaker Change: We hope that all of the strategic direction detail provided by Jamie and Chris and summarized in the provided an investor presentation gives everyone. Some insight and how the transformative. We believe this capital has already been and is going to be.

Jamie: The benefits will also in newer to the wealth Advisory platform first Foundation advisors as.

Scott Farris Kavanaugh: As a logical and natural byproduct of the steps we have detailed for the bank, you can anticipate accelerated FFA growth and further increases in fee income. While FFA has continued to hit its growth milestones over the course of the last two years, management believes that First Foundation's expansion deeper into the existing markets will only benefit FFA as these markets have significant high net worth household concentrations and Attractive In-Migration Demographics. It should also be noted that having a wealth advisory arm is a very valuable thing for the bank and serves to make relationships stickier and longer-lasting across the First Foundation platform.

Speaker Change: As a logical and natural byproduct of the steps we have detailed for the bank you can anticipate accelerated FFA growth and further increases in fee income.

Speaker Change: <unk> has continued to hit its growth milestones over the course of the last two years management beliefs that first foundation's expansion deeper into the existing markets, while only benefit FFA as these markets with significant high net worth household concentrations.

Speaker Change: An attractive and migration demographics.

Speaker Change: Demographics.

Speaker Change: It should also be noted that having a wealth advisory arm is a very valuable thing for the bank and serves to make relationship stickier and longer lasting across the first foundation platform.

Scott Farris Kavanaugh: Speaking of which, the Bank's Trust Division will continue to grow, seasonally in these markets, as bankers and Wealth Advisors identify the need for their services and the growth of the client base. I am proud that the enterprise value of this franchise has been and will continue to be our ability to provide an unparalleled value position of service. Service that comes from the talent and abilities of our team so that we can capture and grow with our target demographic as they age and even as they relocate through chapters of their lives. I am incredibly proud of what we have built at First Foundation over the course of the last 17 years.

Speaker Change: Speaking of which the banks Trust Division will continue to grow and season in these markets as bankers and wealth advisors identified the need for their services and the growth of the client based compounds.

Speaker Change: I am proud that the enterprise value of this franchise has been and will continue to be our ability to provide an unparalleled value position of service service that comes from the talent and abilities of our team. So that we can capture and grow with our target them.

Speaker Change: Graphic as they age and even as they relocate three chapters of their lives.

Speaker Change: Im incredibly proud of what we build at first foundation over the course of the last 17 years.

Scott Farris Kavanaugh: Much like our clients, we have evolved and grown into the next chapter of the company's life. With growth comes change, and it is with a heavy heart and a tremendous amount of gratitude that I thank some of our departing legacy board members for their tenure and commitment to helping us build First Foundation into what it is today. At the same time, I'm grateful for the gift of fresh eyes and perspectives from our incoming cohort of directors, who, I can tell you, have already aligned with our culture.

Speaker Change: Much like our clients, we have evolved and have grown into the next chapter of the company's life.

Speaker Change: With growth comes change and it is with a heavy heart and niche remained tremendous amount of gratitude that I think some of our departing legacy board members for their tenure and commitment to helping US build first foundation into what it is today at the same time.

Speaker Change: I am grateful for the gift of fresh eyes, and perspectives from our incoming cohort of directors, who I can tell you already aligned with our culture.

Scott Farris Kavanaugh: Together, management and I know that we have found the right partners with this capital raise, and we are thankful for their commitment to preserving our enterprise value and honoring the legacy of First Foundation. Lastly, I cannot thank our team of employees enough. The tellers on the front lines of challenging discussions during volatile times in the stock market. The managers who consoled concerned customers calling to hear whether First Foundation was strong.

Speaker Change: Together management and I know that we have found the right partners with this capital raise.

Speaker Change: And we are thankful for their commitment to preserving our enterprise value and honoring the legacy first foundation.

Speaker Change: Lastly.

Speaker Change: I cannot thank our team of employees enough.

Speaker Change: <unk> on the front lines of challenging discussions during volatile times in the stock market.

Speaker Change: The managers, who consoled concern customers, calling to here in the first foundation was strong.

Scott Farris Kavanaugh: The Management Team and I want you to know that this capital raise and the resulting strategic plan will position us all to be on the offense again. And I want you all to know that we appreciate your commitment. Thank you for being a part of our team.

The management team.

Speaker Change: And I want you to note that this capital raise and the resulting strategic plan will position us all to be on the offense again and I want you all to know that we appreciate your commitment. Thank.

Speaker Change: Thank you for being a part of our team. Thank you for trusting us and to execute and deliver a strong stronger bank.

Operator: Thank you for trusting us and for executing and delivering a stronger bank. And now, I will turn the call back to the operator for questions. Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.

Speaker Change: And now I will turn the call back to the operator for questions.

Thank you we will now begin the question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue. If you would like to withdraw your question simply press Star one again.

Unknown Executive: Your first question comes from a line David Feaster from Raymond James. Your line is open. All right, good morning, everybody. Hey, David. Hey, David.

Speaker Change: First question comes from the line of David Feaster from Raymond James Your line is open.

David Pipkin Feaster: Hi, good morning, everybody.

Speaker Change: Hey, David David.

Unknown Executive: Hey. Wanted to touch on, I mean, you guys gave a lot of color, and it was, it was great. Um, but just kind of touching on the potential for optimization, the balance sheet, you know, just kind of read between the lines. It sounds like a securitization could be a near-term opportunity, especially given your experience, your track record. Um, could you just help think about, you know, prior to securitizations in the four to 500 million realm, would you expect a couple tranches, or do you think you could do a larger transaction and, just, I guess, as you've tested the market and are kind of curious about your sense of, you know, appetite for it and and what the secondary markets like right. Always a pleasure. It's Chris.

David Pipkin Feaster: Wanted to touch on I mean, you guys gave a lot of color and it was it was great, but just kind of touching on the digital for optimization of the balance sheet, just kind of read between the lines. It sounds like a securitization could be a near term opportunity just especially just given your experience and track record.

Speaker Change: Could you just help think about I mean, given given the prior to securitizations in the $4 million to $500 million realm would you expect a couple tranche is or do you think you could do a larger transaction and just I guess as you've tested the market.

Speaker Change: Kind of curious your sense of <unk>.

Speaker Change: Advertising for it and what the secondary markets like right now.

Speaker Change: Or how is always a pleasure it's Chris.

Speaker Change: So.

Christopher M. Naghibi: So, I think the maximum they generally allow at Freddie would typically be up to $500 million. We've obviously done a little bit more than that historically, but I would expect that we would aim for something that size. Again, this is somewhat speculative in that there would have to be pricing and some initial conversations and work that goes into it, but typically speaking, we would always aim for the max. And the reason why is there's efficiencies of time and usage, so you want to do as much as you can as G fees associated with the transaction.

Speaker Change: I think the maximum they generally allow at Friday would typically be up to $500 million. We've obviously done a little bit more than that historically, but I would expect that we would aim for something that size.

Speaker Change: Again, this is somewhat speculative and that they would have to be pricing and some initial conversations and work that goes into it but.

Speaker Change: Typically speaking that would be the we always aim for the Max and the reason why is there is efficiencies of time and usage. So you wanted to do as much as you can as G fees associated with the transaction. So we would aim for about half a billion dollars is my target and then private party sales anything else, we will explore as an opportunity presents itself.

Christopher M. Naghibi: So we would aim for about half a billion as my target, and then private party sales and everything else we would explore as an opportunity presents itself. Yeah, I've had some pretty good inquiries out to other financial institutions, as well as possibly the Freddie Mac outlet. We've also had some recent reverse inquiries. I'm pretty confident amongst everything that we will really test the marketplace and determine The Best Execution. Okay, that's helpful.

Speaker Change: Yes, I'd add some.

Speaker Change: Pretty good inquiries out to other financial institutions as well as possibly the Freddie Mac outlet.

Speaker Change: We've also had some.

Speaker Change: Recent reverse inquiries.

Speaker Change: So im pretty confident.

Speaker Change: Most everything that.

Speaker Change: So we will.

Speaker Change: Really test the marketplace and determine.

Speaker Change: First execution round.

James Britton: Maybe just I'm curious about the size of the balance sheet, right? We've used some excess equity this quarter to buy some securities, you know, got the securitization to potentially free up some excess equity. I guess, what your priorities would be, you obviously got some loan growth coming. And I'm just curious, would your priorities be to deliver the balance sheet and shrink and reduce wholesale funding or maybe help, you know, drive some of the CNI remix more quickly? Hey, David. Good morning. This is Jamie.

Okay. That's helpful.

Just I am curious how you think about the size of the balance sheet right I mean, you.

Speaker Change: We've used some excess liquidity this quarter to buy some securities.

Speaker Change: The securitization to potentially free up some excess liquidity I guess would your priorities be you, obviously got some some loan growth coming.

Speaker Change: And I'm, just curious would your priorities be to delever, the balance sheet, and shrink and reduced wholesale funding or.

Speaker Change: Maybe help drive some of the C&I remix more quickly.

James Britton: Absolutely, the first thing that we would do with any transactions on the multifamily would be to focus on the wholesale funding on the right-hand side of the balance sheet, that and potentially some higher-cost core deposits. But the lean would be towards wholesale funding. We have an excess there, in our opinion, and some of it, a majority of it, on the deposit side, as in broker CDs with different maturity links.

Speaker Change: Hey, David Good morning, this is Jamie.

David Pipkin Feaster: Absolutely. The first thing that we would do with any transactions on the multifamily would be to focus on the wholesale funding on the right hand side of the balance sheet that and potentially some higher cost core deposits, but.

David Pipkin Feaster: But the lean would be towards wholesale funding we have.

David Pipkin Feaster: And excess there in our opinion and.

David Pipkin Feaster: Though some of it majority of it.

David Pipkin Feaster: On the deposit side is in brokerage Cds with <unk>.

James Britton: We would focus on exiting the wholesale funding first. I think over time, as we move forward, we do want to make sure the earning asset base continues to support the investments we want to make. We don't want to be in the business anymore of low earnings.

David Pipkin Feaster: Different maturity.

Links we would that we would focus on on exiting the wholesale funding <unk> think over time as we move forward, we do want to make sure that earning asset base continues to support the investments we want to make.

David Pipkin Feaster: We don't want to be in the business anymore.

David Pipkin Feaster: Of low earnings we want to see growth from here.

James Britton: We want to see growth from here, so we will look to keep earning assets in either cash or high-quality liquid securities to support the investments we want to make. And as we get more into it, I think we'll have a better understanding of the timing as we start to talk with different lenders and teams in the markets, identifying when it may be possible to bring people in. We'll balance that and those expenses and those investments with our decisions on the size of the balance sheet and whether we need anything outside of loans to support the investments that we want to make.

David Pipkin Feaster: So we will we will look to keep earning assets in.

David Pipkin Feaster: Cash are high quality.

David Pipkin Feaster: Liquid securities to support the investments we want to make.

David Pipkin Feaster: And as we get more into it I think we'll have a better understanding of the timing as we start to talk with different lenders and teams in the markets.

David Pipkin Feaster: Identifying when it may be possible to bring people in.

David Pipkin Feaster: We'll balance that.

David Pipkin Feaster: Those expenses and those investments with our decisions on the size of the balance sheet and whether we need.

David Pipkin Feaster: Anything outside of loans to <unk> to support the investments that we want to make.

James Britton: Okay. That's terrific. And to that point, I guess, I mean, it seems like a lot of the focus is in Florida and Texas, because as you talk, as Chris, you talked about, you know, the untapped potential in some of the newer geographies. Could you maybe elaborate a bit on what you're expecting to do?

David Pipkin Feaster: Okay that's terrific.

David Pipkin Feaster: And <unk>.

Speaker Change: To that point I guess I mean, it seems like a lot of the focus is in Florida and Texas.

Speaker Change: As you talk as Chris you talked about the untapped potential in some of the newer geographies could you maybe elaborate a bit on what you're expecting to do and it sounds like we're going to we're looking for some new hires are there any new markets that you're focused on I'm just kind of curious if you could just elaborate a bit on the strategy and what you guys are considering.

Christopher M. Naghibi: It sounds like we're going to, we're looking for some new hires. Are there any new markets that you're focused on? I'm just kind of curious if you could just elaborate a bit on the strategy that you guys are considering. Yeah, so obviously, we have our corporate headquarters located in Texas, and we have unlimited potential in the market.

Speaker Change: Yes. So obviously, we have our corporate headquarters located in Texas, and we we have unlimited tapped potential in the market. There's a lot of business there that we need to really capture our plan as it is right now with entailed growth. There. It would also consider really tapping in heavily into south Florida mouthwash.

Christopher M. Naghibi: There's a lot of business there that we need to really capture; our plan as it is right now would entail growth there. It would also consider really tapping heavily into the south for southwestern Florida markets where we have a geographic presence, but one of the things I can tell you that we haven't done is allocated people on the front lines to originate business. Obviously, the last two years were really a defensive focus, as the narrative really alluded to.

Speaker Change: And Florida markets, where we have geographic presence, but.

Speaker Change: One of the things I can tell you that we haven't done it allocated diebold in frontline's do originate business. Obviously the last two years, we're really a defensive focus as the.

Speaker Change: The narrative really alluded to so getting people there that can originate relationships and focus on those franchises I think will help bolster significantly, but there's still potential in California, as well I don't want to minimize where we are here.

Christopher M. Naghibi: So getting people there that can originate relationships and focus on those franchises, I think, will help boost the company significantly. But there's still potential in California as well. I don't want to minimize where we are here. Northern California, Southern California, in particular, has a pretty growing expansion.

Speaker Change: Northern California, Southern California in particular has a pretty growing expansion.

Christopher M. Naghibi: The interesting thing from a dynamic perspective is that we see a lot of people in relationships leave the state of California and go into states that are typically tax shelters like Texas and Florida. And because of that, we've been able to follow them there. That's a great entry point into introductions and additional business there. So we have a very warm handoff in those two states, and it makes the most logical sense for growth in the immediate future. Okay, the only thing I would add, David, is that you know, we expanded into Texas, we expanded into Florida, and then COVID. And, of course, challenging economic times started to happen.

Speaker Change: The interesting thing from a dynamic perspective is we see a lot of people from our relationship.

Speaker Change: <unk> leave the state of California go into states that are typically tax shelters, like Texas, and Florida and because of that we've been able to follow them. There. That's a great entry point into introductions and additional business. There. So we have a very warm handoff in those two states and it makes the most logical sense for growth in the immediate future.

Speaker Change: The only thing I would add David is.

Speaker Change: We expanded into Texas, we expanded into Florida, and then Covid.

Speaker Change: And of course, the challenging economic times started to happen. So we really have not had much of a chance to really expand into the markets. We immediately found ourselves having to.

Scott Farris Kavanaugh: So we really have not had much of a chance to really expand into the markets; we immediately found ourselves having to get into a defensive mode. So, as Chris alluded to, we still see huge opportunity in the California marketplace. But we really believe that Texas and Florida are endless with their abilities to be able to grow, in terms of your question about other markets.

Speaker Change: Get into a defensive mode. So we're as Chris alluded to we still see huge opportunity in the California marketplace.

Chris: But we really believe that.

Chris: Texas, and Florida as enlist with its abilities to be able to grow in terms of your question about other markets.

Scott Farris Kavanaugh: We have a lot to focus on just in those markets. So right now, I don't see us really expanding into any other markets than the ones we already serve. Okay. And just one quick follow-up, you know, appreciate the profitability targets. I was curious, do you have a timeline to achieving those or getting closer to approaching those?

Speaker Change: You got a lot to focus on just with those market. So right now I don't see us really.

Speaker Change: Expanding into any other markets in the markets we already serve.

Speaker Change: Okay.

And just one quick follow up I appreciate the profitability targets I was curious do you have a timeline to achieving those are getting approaching those obviously somewhat dependent on the ability to execute on.

James Britton: Obviously, somewhat dependent on the ability to execute on the, you know, securitization and selling some of the multifamily ones, but I didn't know if you had a... I think we were targeting towards the end of 2026. I appreciate that question, and as a finance geek, I look forward to the next few months of planning and budget season. We'll be getting into the markets and starting to talk to more folks here in terms of the hiring we just talked through.

Speaker Change: Securitization in selling some of the.

Speaker Change: Multifamily loans, but I don't know if you had a.

Speaker Change: I think we were targeting.

Speaker Change: Towards the end of 2026.

Speaker Change: Alright, I appreciate that question.

Speaker Change: As a finance geek look forward to the next few months of planning and budget season.

Speaker Change: We'll be we'll be getting into the market and start starting to talk to more multi year in terms of the hiring we just talked through we're.

James Britton: We're going to take the high-level plans and really do a bottom-up budget process, which I think will help provide some timing on the trajectory for profitability improvements. But like you said, a lot of it on the restructuring of the balance sheet and the improvements that come from that will depend on the work we do on the multifamily loans that we move to help for sale and how quickly we can arrive at the best execution and prices we're comfortable with there.

Speaker Change: We're going to take.

Speaker Change: The high level plans and really do a bottoms up budget process.

Speaker Change: Which I think will help provide some some timing on the trajectory and the trajectory for for profitability improvements, but like you said I mean, a lot of it.

Speaker Change: On the restructuring of the balance sheet.

Speaker Change: And the improvements that come from that will depend on on the work we do on the on the multifamily loans that we moved to held for sale and how quickly we can arrive at best execution and prices were comfortable with there. So.

James Britton: So probably a bit too soon to start talking through definitive trajectories on the profitability side. But we do feel comfortable with the goals we laid out for exiting 26 and where we want to be long term with regard to our multifamily concentration, CRE Concentration overall, and where, and profitability, and where we want to hold capital longer. That's great.

Speaker Change: Probably a bit too soon.

Speaker Change: To start to start talking through definitive.

Speaker Change: Trajectories on the profitability side, but we do feel comfortable.

Speaker Change: With with the goals, we laid out for for exiting 'twenty, six and where we want to be long term with regard to our multifamily concentration.

Speaker Change: And CRE concentration overall and where in profitability and profitability.

Speaker Change: And where we want to hold capital longer term.

James Britton: Thanks, everybody, for the call. Thank you, Dan. Thank you, Dan. Your next question comes from a line from Gary Tenner from D.A. Davidson.

Speaker Change: That's great. Thanks, everybody for the color. Thank.

Speaker Change: Thank you Dave Thank you Dan.

Gary Peter Tenner: Your line is open. Thanks. Good morning, guys.

Speaker Change: Your next question comes from the line of Gary Tenner from D. A Davidson your line is open.

James Britton: I'll just follow up on that profitability question. As you laid it out in the deck towards the end of 2026, what would be the contemplated kind of asset size would you have at that period of time? Seems like 12 and a half to 13 billion doesn't seem unreasonable, but just wanted to set a check. Yeah, I think you're in the ballpark there, Gary.

Gary Peter Tenner: Thanks, Good morning, guys.

Gary Peter Tenner: I'll just follow up on the profitability question.

Speaker Change: As you've laid it out in the deck towards the end of 2026.

Speaker Change: It would be the contemplated.

Speaker Change: Kind of asset size would you think at that point in time in channels like 12% 13 billion doesn't seem unreasonable, but just wanted to sanity check that.

Speaker Change: Yes, I think you're in the ballpark there Gary.

Speaker Change: We've gone through the initial planning process and we come up we came up with targets for growth in <unk>.

James Britton: We've gone through the initial planning process, and we came up with targets for growth and what we think is available in new markets, for instance. But we do think that there is a lot of opportunity, as Chris and Scott have mentioned before, and I think as we get into it, we could find that there's more than expected. And perhaps the balance sheet's a little larger than what you mentioned, but I think the target that you laid out, and that 12 12 to 13 12, that's a good target, probably a good place to start.

Speaker Change: What we think is available in new markets for instance, but.

Speaker Change: But we do think that there is a lot of opportunity as is.

Speaker Change: As Chris and as Scott mentioned before and.

Chris: I think as we get into it we could find that theres more than expected.

Speaker Change: And perhaps the balance sheets, a little larger than than what you mentioned, but I think the target that you laid out and that 12 513 is probably.

Speaker Change: A good a good place to start at this point anyway.

Yes.

Speaker Change: Okay I appreciate that and then as you talk about doing.

James Britton: I appreciate that. And then, as you talk about... doing a review of your allowance methodology in the third quarter. Is that something that would be more of a kind of longer-term guidepost for you, or would you anticipate it would be sort of an immediate adjustment in the third or maybe slips into the fourth quarter on the ACI level? Well, under the auspices of full disclosure, that's one of those things for which there are more ramifications.

Speaker Change: During our review of your allowance methodology in the third quarter.

Speaker Change: Is that something that would be more of a kind of longer term.

Speaker Change: Guidepost for you or would you anticipate it would be sort of an immediate adjustment in the third or maybe some assumptions on the fourth quarter on the on the <unk> level.

Well under the auspices of full disclosure Thats one of those things that they are more ramifications there is several different.

James Britton: There are several different people and concerns to think about. Obviously, you have the regulator's perspective on it; you have outside accountants and auditors' perspectives on it. We think the risk in the market right now is there, and we want to address it, and we want to address it in a timely manner, but the proper methodology will take part as part of the review. So, I'm not being dodgy just to say that we're committed to getting it there.

Speaker Change: People in concern to think about obviously you have the regulators perspective on it yet outside accountants and auditors perspective on it.

Speaker Change: We think the risk in the market right now as it exists and we want to address it and we want to address it in a timely manner, but the proper methodology will take part as part of the review so im not being dodgy just to say that we're committed to getting it there we'd like to do it as soon as reasonable and feasible, but we wanted to make sure we do it the right way.

James Britton: We'd like to do it as soon as is reasonable and feasible, but we want to make sure we do it the right way. We expect it to be completed this quarter, though, Gary, to be Okay, Jamie, in terms of your comments on the MSR deposits and customer service costs. Could you give us the average of those deposits that impacted the customer service line in the second quarter? The total for customer service deposits, and this is MSR, escrow balances, as well as others like 1031 exchange, the average was close to 1.2 for the second quarter.

Speaker Change: We expect information related to this quarter, though Gary debate.

Speaker Change: Firm on that.

Speaker Change: Okay.

Speaker Change: Jamie in terms of your comments on the.

Jamie: The MSR deposits and customer service costs could you give us the average of those deposits that impacted the customer service line in the second quarter.

Speaker Change: The total for a customer service deposits and this is.

Speaker Change: Our escrow balances as well as as others like 10 31 exchange was the average was close to one to four.

Speaker Change: For the for the second quarter.

Okay. Thank you.

James Britton: OK, thank you. And then, if I guess just one last question, Simone, with you kind of having a couple of weeks under your belt, First Foundation.

And then if I could ask just one one last question Simona.

Speaker Change: And kind of having a couple of weeks under our belt that first foundation.

Simone Lagomarsino: Just, you know, kind of would love to hear your updated thoughts, perhaps in terms of the opportunities and kind of how you see that. The bank got situated. Thank you, Gary. Yes, sorry. Yes, I am on.

Speaker Change: Kind of love to hear your.

David Pipkin Feaster: David thoughts, perhaps in terms of the opportunities and kind of how you see that.

Simona: The bank situated here.

Gary Peter Tenner: Thank you Gary.

Gary Peter Tenner: Okay.

David Pipkin Feaster: Yes, sorry, yes, I online and so thank you for the question yes.

Simone Lagomarsino: And so, thank you for the question. Yes, this is the end of my third week, or coming close to the end of my third week. And it is really a privilege to work with Scott, whom I've known for many years, and also with Jamie and Chris, and to work with them and our legacy board and the new investors in developing a plan and focusing on how we reposition the organization, a lot of the details of which were discussed earlier.

Speaker Change: And then my third week are coming close to the end of my third week and it is really a privilege to work with Scott and I have known him for many years and also with Jamie and Chris and to work with them and our legacy board and the new.

Speaker Change: Investments in developing our plan and focusing on how we reposition the organization a lot of the details of which were discussed earlier.

Simone Lagomarsino: So I'm excited about the future. And thank you for the question. That's about as much as I'll go into, because I think a lot of detail was covered earlier in the call about our focus on repositioning and moving forward. Your next question comes from the line of Andrew Terrell from Stevens. Your line is open. Hey, good morning.

Speaker Change: I'm excited about the future and thank.

Speaker Change: Thank you for the question Thats about as much as I'll go into because I think a lot of detail as covered earlier in the call about how our focus on repositioning and moving forward.

Alright, thank you.

Speaker Change: Your next question comes from the line of Andrew Charles from Stephens. Your line is open.

Andrew Charles: Hey, good morning.

Andrew Charles: Hey, Andrew.

Unknown Executive: [inaudible] Hey, I just wanted to ask them the profitability targets, the 90 to 100 basis points for Q26 ROA. You know, as you kind of compare that pre and post capital raise, what could you have gotten to organically without the capital raise by 4Q26? It'd be much more muted.

Andrew Charles: Hey.

Andrew Charles: I just wanted to ask on the profitability targets.

Speaker Change: 90 to 100 basis point <unk> 26 ROA.

Speaker Change: As you kind of compare that premium post capital raise.

Speaker Change: What could you have gotten to organically without the capital raise by <unk> 26.

Unknown Executive: I don't know that. Gosh, we'd have to go back to the old forecast and try to figure it out. But I would say it would probably be cut in half.

Speaker Change: It would be much more muted I don't know that.

Speaker Change: Cash we'd have to go back to old forecast and try to figure it out, but I would I would say it would probably be cut in half.

Unknown Executive: Yeah, okay. And then my only other one is that I've gotten a lot of questions from investors this morning around, You know, under phase one of the near-term actions, the piece setting goals and aligning incentives through the organization. Could you maybe expand a little bit on what you mean by this, and the specific question would be, are there any kind of set management payouts as you hit certain parts of the phase two actions? Thanks. So this is Chris.

Speaker Change: Yes, Okay, and then my only other one I have gotten a lot of questions from investors. This morning around.

Speaker Change: Under phase one of the near term actions, the peace setting goals and aligning incentives through the organization.

Speaker Change: Could you maybe expand a little bit on what you mean by this and the specific question would be what are there they're kind of set management payouts as you had certain certain parts of the phase two actions.

Christopher M. Naghibi: We were thinking, really, in the context that it would be more driven down to the bottom lines. One of the things incentive-wise and financial, frankly, and compensation-wise is you want to have people who are equally motivated to bring in deposits as well as loans, and you want to have them driven in line with the bank's ultimate success and profitability according to its strategic plan. That being said, with the very clear strategic plan that we are putting in place, obviously with the new cohort of board members and a very clear vision of where we want to be, we want to make sure that the compensation down to the front line is equally as clear and drives those results.

Speaker Change: So this is Chris we were thinking really with a context, though it would be more driven down to the bottom line is one of the things incentive wise and financial frankly compensation wise as you want to have people, who are equally motivated to bring in deposits as well as loans and you want to have them driven in line with.

Speaker Change: The bank's ultimate success and profitability according to our strategic plan.

Speaker Change: That being said with the very clear strategic plan that we are putting in place obviously with the new incoming cohort of board members and a very clear vision of where we want to be we want to make sure that the compensation down to the frontline is equally as clear and drive those results and frankly people will do what you compensate them appropriately to do and Thats, what we want to maintain.

Christopher M. Naghibi: And frankly, people will do what you compensate them appropriately to do. And that's what we want to maintain, if that makes sense. Okay. Thank you. Your next question comes from the line of Matthew Clark from Piper Sandler. Your line is open. Hey, thank you. Good morning, everyone.

If that makes sense.

Speaker Change: Yeah, Okay. Thank you.

Speaker Change: Thank you <unk>.

Speaker Change: Next question comes from the line of Matthew Clark from Piper Sandler Your line is open.

Matthew Clark: Thanks for the questions; want to ask about the share count going forward. You know, should we assume the share accounts are fully loaded with the warrants now that they're in the money? Um, and knowing that your gap numbers are likely going to differ from non-gap, assuming you show both, ahead of the shareholder vote. But is that a fair assumption, assuming you'll show both going forward? Hey Matthew, this is Jamie.

Matthew Clark: Okay. Thank you and good morning, everyone. Thanks for the questions.

Speaker Change: Just wanted to ask.

Matthew Clark: I asked about the kind of share count going forward.

Matthew Clark: Should we assume the share counts fully loaded with the warrants now that theyre in the money.

Speaker Change #100: And knowing that your GAAP numbers are likely going to differ from non-GAAP, assuming you show both.

Speaker Change #100: Ahead of the share shareholder vote.

Speaker Change: But is that a fair assumption, assuming youll show both going forward.

James Britton: We absolutely will. We're still getting everything ticked off and tied in the books. There is net settlement on the warrants, so that'll come into play as the stock price moves. But we will be extra clear on share counts, and I think we want to take some time to make sure we're clearly providing trajectories on EPS and ROTCE, both on an actual basis but also on a fully diluted basis. As you know, the timing will shift there as the different types of preferred and the non-voting common equivalents, if those were to come into play, move from the existing investors to two other investors.

Hey, Matthew this is Jamie we absolutely will we were still getting every everything ticked and tied in the books.

Speaker Change: There is net settlement on the warrants so that will that will come into play at the stock price moves, but but.

Speaker Change #108: But we will be extra clear on on share counts and I think we wanted to take some time to make sure we're clearly.

Speaker Change #101: Biding trajectories on EPS on Aro TCE.

Speaker Change #101: Both on an actual but also on a fully diluted basis as you know the timing will shift there as the different types of preferred in the nonvoting common equivalence if those were.

Speaker Change #101: To come into play.

James Britton: But that will be a focus of ours. As we get into it, we would certainly appreciate any feedback that you'd be willing to offer so that we make sure that we are being clear and it's coming. Okay, great. And then do you have a date set for the shareholder vote? It's in August. I believe it's going to be Oh, September. Sorry.

Speaker Change #101: You move from the existing investors to two other investors.

Speaker Change #102: But that will be a focus of ours and as we as we get into it would certainly appreciate any feedback that you'd be willing to offer.

Speaker Change #101: So that we make sure that we're we are being clear and is coming.

Speaker Change #105: Coming across to the investment committee and investment community NTT and to you guys.

Speaker Change #105: Okay, Great and then do you have a date set for the shareholder vote.

Speaker Change #103: It's in August.

Speaker Change #104: I believe it's going to.

<unk> September sorry.

James Britton: I believe the proxy statement, which I believe we were finalizing yesterday, should be going out fairly soon. But I think you'll probably see something pretty soon from our attorneys. But it'll be held in. Yeah, I can't I can't say enough about how much support we've gotten from our team on the legal side. They're still working around the clock to get everything buttoned up and ready. As Scott mentioned, the proxies, http://TheBusinessProfessor.com, But we'd hope to get that out to shareholders in August. A shout out to Josh Dean at Shepard Mullen.

Speaker Change #104: I believe that.

Speaker Change #104: The proxy statement.

Speaker Change #104: I believe we were finalizing yesterday shouldnt be going out fairly soon but.

Speaker Change #104: I think youll, probably see something pretty soon from our attorneys.

Speaker Change #104: But it will be held in September.

Speaker Change #107: Yes, I can't I can't say enough about how my support we've gotten from.

Speaker Change #104: From our team on the legal side they are still working.

Speaker Change #104: Around the clock to get everything buttoned up and ready as Scott mentioned the proxies.

Speaker Change #106: Draft is getting ready to go out there is.

Speaker Change #106: Period, where the SEC asked to review.

Speaker Change #106: But we would hope to get that out to shareholders in August and then.

Boat and the special meeting.

Speaker Change #113: In September a shout out to Josh Dean net Shepherd Marlin.

James Britton: Great, and then. On your customer service cost outlook, what are you assuming for 4Q just based on the seasonality and the number of rate cuts that you might be assuming there as well? Yeah, that's the big question about the rate cuts. A couple at this point. We saw some big names come out in the last few days that are arguing for the Fed to get on with it and maybe even consider one next week.

Speaker Change #106: Great.

Speaker Change #106: And then.

On your customer service cost outlook, what are you assuming for <unk> just based on the seasonality.

Speaker Change #109: And the number of rate cuts might be that you might be.

Speaker Change #109: Coming there as well.

Speaker Change #110: Yes, that's the big the Big question is the rate cuts the forward curve is showing.

Speaker Change #111: A couple at this point.

Speaker Change #112: We saw some some big names come out in the last few days that are arguing.

Speaker Change #112: For the fed to get on with it and maybe even consider one next week. So I think there's still some uncertainty there.

James Britton: I think there's still some uncertainty there. I don't want to provide you with a target at this point, but a couple of things to think about is the trajectory as we've come into the second has gone up and to the right has grown as we expected. As I mentioned in my comments, we would expect some more growth in the third, and we'd expect to see normal seasonal declines in the fourth and then again in the first.

Speaker Change #112: I don't want to provide you with with a target at this point, but a couple of things to think about is the.

Speaker Change #112: The trajectory as we've come into the second half.

Speaker Change #114: It has gone up into the right has grown as we expected as I mentioned in my comments, we would expect some more growth in the third and we would expect to see normal seasonal declines in the fourth and then and then again in the first and.

James Britton: And those declines should be consistent with what we've seen in the past. But maybe a little lower on a percentage basis than what we saw at the end of 2023, just because, as I think we mentioned, maybe on the January call or on the April call, we did have one client that had assessed their concentrations with their banks, and they decided to pull out a little more than they normally would have, which, you know, as I mentioned, we appreciate it.

Speaker Change #114: Those declines should be consistent with what we've seen in the past.

Speaker Change #114: But maybe a little lower on a percentage basis than what we saw in the end of 2023.

Speaker Change #114: Just because as.

Speaker Change #114: I think we mentioned maybe on the January call or on the April call. We did have one client that.

Speaker Change #115: That had assessed their concentrations of their with their banks and they decided to pull out a little more than.

Speaker Change #115: Than they normally would have which as I mentioned, we appreciate it.

James Britton: And then there was another client during the fourth quarter that was going through their risk review and decided to take out some balances while that process was going on. So there were a couple of just items in the fourth of 2023 that may have, Unknown Executive, Robert Terrell, James Britton, First Foundation Inc Okay, and then just on the margin, you have the average margin in June and the spot rate on deposits at the end of the month. Margin, we were at 142 in June, and the spot rate for total deposits was, um, worked on the the the the the the the the the the the the

Speaker Change #115: And then there is another client during the fourth quarter that was going through their risk review in.

Speaker Change #115: Decided to.

Speaker Change #115: Take out some balances while that process is going on.

Speaker Change #115: So there were a couple of just items in the fourth of 2023.

Speaker Change #115: Exacerbated the runoff that we've seen historically, but for Q4 'twenty four I expect it to return return to normal historical trends.

Speaker Change #115: Okay and then just on the margin you have the average margin in June and the spot rate on deposits at the end of June.

Speaker Change #115: Yes.

Speaker Change #116: The second.

Speaker Change #116: Yes.

Speaker Change #117: The margin we were at 140 <unk> in June.

And the spot rate for.

Speaker Change #118: Total deposits.

Speaker Change #117: Was.

Speaker Change #117: For 2008.

Speaker Change #117: Yes.

For 2008.

Speaker Change #117: On <unk>.

Speaker Change #117: On interest bearing.

James Britton: Correct. Yeah. Okay. Thank you. You bet.

Speaker Change #119: Correct, yes, okay.

Thank you.

Speaker Change #120: You bet.

Scott Farris Kavanaugh: And that concludes our question and answer session. I will now turn the call back over to CEO Scott Kavanaugh for some final closing remarks. Thank you for attending today's conference call. We hope it was informative. So, as I said previously, we are super excited to have our new partners with the investment of $228 million in capital. We're going to continue to work with them and our new, newly reconstituted board to continue to build upon the foundation of what we put in place. So with that, we thank you again and hope you have a great remainder of the day. And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Speaker Change #120: And that concludes our question and answer session I will now turn the call back over to CEO, Scott Kavanaugh for some final closing remarks.

Scott Farris Kavanaugh: We thank you for attending today's conference call, we hope it was informative.

Scott Farris Kavanaugh: As I said previously we are super excited to have our new partners with the investment of $228 million of capital, we're going to continue to work with them and our new newly reconstituted board to continue to build upon the foundation of what we've put in place.

Scott Farris Kavanaugh: So with that we thank you again and hope you have a great remainder of the day.

Speaker Change #122: This concludes today's conference call. Thank you for your participation you may now disconnect.

Speaker Change #122: [music].

Speaker Change #122: Yes.