Q3 2024 First Foundation Inc Earnings Call
Speaker Change: Greetings and welcome to First Foundation's third quarter 2020-24 earnings conference call. Today's call is being recorded.
Speaker Change: First Foundation's Chief Executive Officer, Jamie Britton, First Foundation's Chief Financial Officer and Chris Nahibi, First Foundation's Chief Operating Officer.
Speaker Change: 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 release. In addition, some of the discussion may include non-gap financial measures.
Speaker Change: For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements or reconciliations of non-GAAP financial measures, please see the company's filings with the Securities and Exchange Commission.
Speaker Change: And with that, I would now like to turn the call over to CEO Scott Kavanaugh.
Scott Kavanaugh: Good morning and welcome. Thank you for joining us for today's third quarter 2024 earnings call. I would qualify this quarter as fairly noisy.
Scott Kavanaugh: As previously discussed, early in the third quarter, the company completed the $228 million capital raise.
Scott Kavanaugh: The quarter was capped off with the recently announced balance sheet realignment, moving $1.9 billion of multifamily loans from held for investment to available for sale.
Scott Kavanaugh: This move created a paper loss adjustment associated with the fair value adjustment of $117.5 million.
Scott Kavanaugh: Income for the quarter for continuing operations during the quarter was 2.7 million, which excludes the low-com adjustment and other adjustments.
Scott Kavanaugh: As stated in our October 3rd, 2024 press release,
Scott Kavanaugh: This move allows First Foundation to methodically evaluate reducing our exposure to low coupon fixed rate loans and continue to reduce our exposure in CRE.
Scott Kavanaugh: By shrinking the balance sheet of these loans, we will also look to reduce the liability side of the balance sheet and cut our reliance on some of our high-cost wholesale funding.
Scott Kavanaugh: which should be completed in the fourth quarter. We are also currently continuing to evaluate other loan sales and we'll evaluate other securitizations in 2025.
Scott Kavanaugh: I have previously discussed
Scott Kavanaugh: that we had taken great strides to increase recurring revenue and reduce core expenses to benefit future profitability. And those efforts continued in the third quarter.
Scott Kavanaugh: We were able to continue to increase our C&I lending during the quarter, providing nice spreads over our funding costs. Late in the quarter, the Federal Reserve lowered Fed funds by 50 basis points.
Scott Kavanaugh: Although that provided little benefit in the third quarter, our cost of deposits decreased 8 basis points to 3.41%. We expect a more significant reduction in funding costs for the fourth quarter.
Scott Kavanaugh: Obviously, capital ratios were improved as well with the addition of the capital.
Scott Kavanaugh: First Foundation Advisors, once again, closed the quarter at near record assets under management with profitability at FFA remaining strong. The Trust Department posted another solid quarter as well.
Scott Kavanaugh: For the third quarter, we reported net loss attributable to common shareholders of $82.2 million, or $1.23 per share, for both basic and diluted shares.
Scott Kavanaugh: Tangible book value, which is a non-GAAP measure, ended the quarter at $15.71, down from the second quarter of 2024 of $16.43.
Scott Kavanaugh: adjusted tangible book value per share, which we estimate in consideration of our remaining preferred shares, ended the quarter at $9.50.
Scott Kavanaugh: Pre-tax, pre-provision revenue totaled a negative $116.7 million, compared to $1.9 million for the prior quarter.
Scott Kavanaugh: Interest income totaled $157.2 million for the quarter, which was an improvement from the $150.9 million in the first quarter and up from the $144.8 million in the third quarter of 2023.
Scott Kavanaugh: Our net interest margin increased to 1.5% during the quarter, as compared to 1.36% in the second quarter of 2024. This was largely driven by the return of MSR deposits.
Scott Kavanaugh: Non-interest expense was $60.2 million in the quarter compared to $55.6 million in the prior quarter, again, largely driven by an increase in customer service expense related to seasonally returning MSR deposits.
Scott Kavanaugh: Our efficiency ratio was 98.1% compared to 96.1% for the second quarter 2024.
Scott Kavanaugh: Adjusted return on average assets, again another non-GAAP measure, was 0.08 compared to 0.10 as of June 30, 2024.
Scott Kavanaugh: Our loans to deposit ratio ended the quarter at 95.9% compared to 93.8% as of June 30, 2024.
Scott Kavanaugh: Total deposits were $10.3 billion in the quarter compared to $10.8 billion in the second quarter.
Scott Kavanaugh: CORE non-brokered increased to 64% during the quarter compared to 62% in the second quarter of 2024.
Scott Kavanaugh: Non-interest bearing demand deposits increased to 21% for the quarter compared to 20% of total deposits as of June 30, 2024.
Scott Kavanaugh: Our insured and collateralized deposits remain relatively unchanged compared to the second quarter at 85% of total deposits.
Scott Kavanaugh: We maintained a strong liquidity position of $4.3 billion. At these levels, our available liquidity to uninsured and uncollateralized deposits ratio slightly increased to 2.65 times.
Scott Kavanaugh: Borrowings remain flat quarter over quarter at $1.7 billion as of September 30th.
Scott Kavanaugh: Average borrowings outstanding were $1.7 billion, or 12.6% of total average assets for the quarter, compared to $1.4 billion, or 10.4% of total average assets in the prior quarter.
Scott Kavanaugh: are non-performing assets to total assets.
Scott Kavanaugh: was 0.33% for the quarter versus 0.18% for the second quarter.
Scott Kavanaugh: This increase was largely driven by two single-family loans to the same borrower.
Scott Kavanaugh: One of which, which has already been made current. For the other, the borrower has already assured that imminent payment back to a current status. Both loans have extremely low loan-to-values.
Scott Kavanaugh: Loan balances ended the quarter at $9.9 billion, down from the second quarter of $10.1 billion.
Scott Kavanaugh: Loan fundings totaled $366 million offset by loan payments of $467 million.
Scott Kavanaugh: C&I loans totaled 90% of loan fundings during the quarter and 87% of total fundings here today.
Scott Kavanaugh: We had no loan sales during the quarter. Loan yields remained flat at 4.77% in the third quarter.
Scott Kavanaugh: Our net charge-off ratio remained low at .01% for the quarter, the same as the second quarter.
Scott Kavanaugh: First Foundation Advisors' assets under management was $5.5 billion, unchanged for the end of the second quarter. Our pipeline of relationship remains strong.
Scott Kavanaugh: Once again, I will close by reiterating my appreciation for the incredible efforts and unwavering dedication to our entire team.
Scott Kavanaugh: I remain incredibly thankful to each of the company's wonderful employees and will always be thankful. We'll now turn the call over to Jamie to cover our financials in greater detail.
Jamie Britton: Thank you, Scott, and good morning, everyone. I'll begin with the balance sheet and the improvement in our net interest margin, which increased again this quarter to 1.50%, up 14 basis points from the 1.36% we reported in the second quarter, and 33 basis points from the 1.36% we reported in the first quarter.
Jamie Britton: Our earning asset yield continues to improve, increasing to 4.75% in the third quarter, which is a 4 basis point above the 4.71% reported in Q2, and 19 basis points above the year-ago period's 4.56%.
Jamie Britton: Loan yields maintain the improvement seen in the second quarter, holding steady at 4.77%. Though our gross loan ending balance declined $210 million for the quarter, due in large part to the fair value adjustment on the Loans Held for Sale portfolio, the overall loan portfolio's quarterly average balance for margin purposes would stand less than $45 million.
Jamie Britton: thus keeping his contribution to interest income stable quarter over quarter.
Jamie Britton: New investment yields of 5.64% contributed to the 10 basis point improvements seen in the available for sale portfolios yield this quarter, and like last quarter, the portfolio's balance ended the quarter higher than its average balance.
Jamie Britton: We remain comfortable using safe, high-quality securities to support our liquidity position, improve the balance sheet's rate profile, and more efficiently enhance recurring revenue.
Speaker Change: Turning to funding costs, as Scott mentioned, and as expected, our MSR clients continue to build their deposit balances this quarter.
Speaker Change: As we have described in the past, the annual seasonal inflows and outflows in this portfolio will drive changes in our net interest margin through the year. With these non-interest bearing balances continuing their build from first quarter lows, NIM is continuing to improve.
Speaker Change: Looking forward, we would expect this to continue for the first part of the fourth quarter as MSR balances build to their annual peak before beginning their decline and troughing in the first quarter.
Speaker Change: While uncertainty in the rate environment remains, barring an increase in short-term rates from here, even with the MSR portfolio's seasonal patterns continuing, we would not expect NIM to fall back to the 1.17% we reported in the first quarter of 2024.
Speaker Change: The continued shifts led to another quarterly improvement in net interest income.
Speaker Change: Similar to last quarter, net interest income increased $5.3 million from $43.8 million in the second to $49.1 million in the third. However, unlike last quarter, the quarterly increase in customer service costs, only $2.9 million this quarter, was not enough to offset the NII improvement, so the balance sheet's contribution to earnings increased by $2.4 million.
Speaker Change: As we continue to note, we appreciate the holistic nature of these MSR relationships and are comfortable continuing to manage around their predictable seasonal inflows and outflows. Balances will continue to grow through the first part of the fourth quarter, but the Fed's recent reduction in rate will provide some offset to the increased volumes impact on overall costs.
Speaker Change: For example, were the Fed to hold rates at these levels for the remainder of the year, we would expect customer service costs to be flat to down in the fourth quarter.
Speaker Change: were the Fed to continue cuts in the fourth, we would of course expect additional savings.
Speaker Change: The Fed's decision to cut rates in September, as expected, contributed only a modest benefit to the third quarter's interest-bearing liability costs. But coupled with the ongoing return of MSR deposit balances, costs declined three basis points this quarter, returning from the 4.27% reported in the second to be in line with the 4.24% reported in the first.
Speaker Change: The full benefit of the reductions in our interest-bearing liabilities rates will be reflected in the fourth quarter.
Speaker Change: But for this quarter, both borrowing costs and interest-bearing deposit costs were modestly lower. Borrowing saw an 8-basis point decline in costs from 4.12% in the second to 4.04% in the third, while interest-bearing deposits declined 1 basis point.
Speaker Change: from 4.30% last quarter to 4.29% this quarter.
Speaker Change: FHLB advances added late in the second quarter at a weighted average rate of 3.76% contributed to the quarter-over-quarter increase in average balances, but they were a driver of the cost improvement.
Speaker Change: As reported in our earnings release, our borrowings balance does not include our sub-debt, but it does include our balance from the bank term funding program, which was $267 million at the end of the quarter and has a cost of 4.76%.
Speaker Change: We would expect further improvement in our borrowings costs once this matures in January of 2025, if not repaid sooner.
Speaker Change: The reduction in deposit costs was allowed in part by the reductions we made in higher cost categories during the quarter as non-interest bearing MSRS grow balances returned. As mentioned, we would expect to see the full quarter benefit of the Fed's rate cut in the fourth quarter.
Speaker Change: On this point, monthly trends and deposit costs exited the quarter below quarterly averages in all categories except broker deposits, with our total interest-bearing deposit costs ending the quarter with the month of September at 4.15%, or 13 basis points lower than the monthly average of 4.28% for the month of June that we mentioned on last quarter's call.
Speaker Change: 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 and allowing us to maximize the benefits our liability-sensitive balance sheet will provide following any future reductions in market rates.
Speaker Change: Finally, as we've noted before, we took advantage of the market's early year optimism for declining rates via a cash flow hedge swap. We did not add any new swaps in the third quarter as optimism returned, but we expect this to be a valuable tool for us and we will continue to look for similar opportunities to both enhance revenue and stabilize our rate profile going forward.
Speaker Change: Moving on to the income statement, with loan interest income remaining stable, our securities and cash portfolios were able to drive not only an increase in average earning assets but also a more meaningful quarter-over-quarter increase in interest income this quarter.
Speaker Change: We reported $157.2 million for the third quarter versus $150.9 million in the second. Interest expense increased modestly as the decline in rate largely offset a slight increase in interest-bearing liability volume.
Speaker Change: Together, interest income and expense led to a quarterly increase in net interest income of $5.3 million, in line with the $5.4 million quarterly improvement reported last quarter.
Speaker Change: As mentioned, the quarterly increase in balance sheet contribution, which includes the partially offsetting increase in customer service costs, was $2.4 million.
Speaker Change: Provision expense returned this quarter following the negative expense reported in the second.
Speaker Change: The balance sheet balance for our ACL loans was flat the last quarter, but the coverage ratio to health or investment loans increased from 29 basis points in the second to 36 basis points in the third, as consideration for credit risk on the loan sell for sale portfolio is considered in its fair value adjustment instead of in the ACL.
Speaker Change: As Scott mentioned, asset quality remains stable.
Speaker Change: Wealth and trust related fees were stable this quarter, maintaining the increase seen from the first quarter to the second to end the quarter at $9.2 million. As Scott mentioned, AUM balances remain near record highs, ending the quarter at $5.5 billion.
Speaker Change: We remain pleased with the pipelines we see in the business and we are excited about the opportunity to accelerate growth in First Foundation Advisors and the Trust Department following the capital raise.
Speaker Change: New to our non-interest income line this quarter was a $117.5 million charge related to the fair value adjustment on the $1.9 billion in multifamily loans reclassified, excuse me, to help for sale.
Speaker Change: We will update the health for sale portfolio fair value quarterly going forward.
Speaker Change: Optimism in the rate environment heading into quarter end resulted in a price of just under $94.
Speaker Change: Given the portfolio's high credit quality and the interest we have already seen in these loans, we remain confident we will be able to secure final pricing execution at strong levels.
Speaker Change: And, in the meantime, we expect to be able to recover some of this initial mark as our clients make regular principal payments, take opportunities to make prepayments, and refinance their loans at par.
Speaker Change: were some of these clients to allow their loans to move to their floating rate periods.
Speaker Change: That would, of course, help pricing as well. As we have noted, the average horizon for our held-for-sale portfolios loans to reach their floating rate periods is two and a half to three years.
Speaker Change: Moving to non-interest expense, outside of customer service costs, remaining non-interest expense categories totaled $41.3 million for the quarter, up from $39.5 million in the second. Professional services and marketing costs were $1.4 million higher, as we recognized some additional legal expenses, which were in part related to prior quarters activities and the shareholder meeting following July's capital raise.
Speaker Change: Compensation and benefits expense was also higher for the quarter increasing by 0.9 million dollars.
Speaker Change: This line item declined significantly over the past two years as we took actions such as the reductions in force and the Elimination of annual incentive payments to offset our material declines in revenue But we would expect cost to increase from these levels as revenue normalizes
Speaker Change: Though that's the case, it is important to note that we are committed to maintaining our disciplined approach to core expenses.
Speaker Change: We will take on strategic investments for future growth following the capital raise. We are committed to controlling our discretionary costs and, as we mentioned on last quarter's call, we will ensure any plans for measured investments across our markets are both in line with our strategic objectives and supported by commensurate growth in revenue and profitability.
Speaker Change: Closing with capital, we expect to report improvements in all regulatory capital ratios this quarter, both at First Foundation Inc. and our bank. First Foundation Inc.'s common equity tier one capital will benefit further in the fourth quarter as part of our preferred shares, the series B preferred, convert to common equity following our recent shareholder vote.
Speaker Change: As a reminder, the shareholder vote did not result in a conversion of the Series A preferred.
Speaker Change: While neither regulatory capital nor a gap measure, tangible common equity also improved this quarter, not only due to the capital raise, but also due to an improvement in our accumulated other comprehensive loss.
Speaker Change: The quarter's decline in market rates drove a $15.9 million improvement in the line items balance rate related to our available for sale portfolio, which ended the quarter at only $0.7 million loss.
Speaker Change: As Scott mentioned, Tangible Book Value for Common Share ended the quarter at $15.71 per share. And, as noted in our release, were all of our preferred shares to convert to Common, our Tangible Book Value per share for the third quarter would have been $9.55.
Speaker Change: Cents per share
Speaker Change: And with that, I'll turn it over to Chris to provide our final thoughts on the court. Chris.
Chris Nahibi: Thank you, Jamie. As Jamie and Scott emphasized, our strategic actions during the third quarter of 2024 have laid the groundwork for repositioning our balance sheet and stabilizing earnings. While these efforts involve moving loans to held for sale status and thoroughly reviewing our ACL methodology, the focus is now on executing the loan sales to unlock value.
Chris Nahibi: As you know, we have taken a bold and responsible action to reposition our balance sheet, highlighted by our reclassification of $1.9 billion of multifamily portfolio loans to held for sale status.
Chris Nahibi: as outlined in our recent October 3rd press release and noted by both Scott and Jamie earlier.
Chris Nahibi: These efforts are designed to reduce exposure to fixed-rate assets while unlocking capital to fund more strategic, relationship-driven opportunities in commercial and industrial lending.
Chris Nahibi: As stated on our previous call, First Foundation intends to explore every avenue to ensure best execution, including options through its existing relationships as well as potential private party sales.
Chris Nahibi: Historically, First Foundation has successfully completed numerous securitizations, and it has once again executed a term sheet for a potential securitization for approximately $500 million to be with a to-be-named partner.
Chris Nahibi: Third-party outside counsel has been engaged along with a placement agent.
Chris Nahibi: The bank has begun the due diligence process with credit approval and settlement anticipated to occur late in the fourth quarter of 2024.
Chris Nahibi: While this deal timeline can shift, executing in the timeline identified is a priority. As a reminder, final pricing is dependent on settlement at the time of close.
Speaker Change: As Jamie has noted, management has finalized the process of working with an outside third party to determine the potential mark as a result of a fair market value analysis.
Speaker Change: 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 asset exposures.
Speaker Change: To this end, the bank is also simultaneously exploring direct private party loan sales as well.
Speaker Change: While these sales should be smaller in size, they will allow for more flexible positioning of assets over time to flow into the market and essentially blunt any rate impacts in response to the changing Fed policy landscape.
Speaker Change: As a reminder, the loans moved to held-for-sale focused on those with balances approximately between $1.5 million and $4.5 million, and which are set to reprice in the next 1836 months.
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 over the horizon.
Speaker Change: The market needs to be able to model this pivot and we, as management, have provided additional detail of our findings on this earnings call in order to assist in facilitating proper expectations.
Speaker Change: Despite the noteworthy strength of the loan portfolio and the 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: Because First Foundation's concentration in commercial real estate is narrowly tailored in the traditionally lower loss end of the multifamily asset class, the historic loss factor has not led to the bank setting aside large reserves under the current expected credit loss model.
Speaker Change: 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 continue its detailed review of its ACL methodology as a result.
Speaker Change: I want to be clear, as has been the thematic position on all of our preceding earnings calls to date, we do not believe we have material credit losses on the horizon.
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.
Speaker Change: and we believe that to do so, the aforementioned holistic review of our methodology is appropriate as the industry continues to indicate challenges with other asset classes and underwriting methodologies.
Speaker Change: As a result of this review, we'll likely conclude in an increase to the bank's reserve to be more in line with similarly sized and concentrated peers over time with a simultaneous and pragmatic shift in our lending originations and portfolio concentrations.
Speaker Change: particularly as the bank continues its strategic diversification in its concentration to index plus margin based pricing on more C&I lending activity as part of our continued growth initiatives.
Speaker Change: It is worth noting that while reducing our fixed rate asset exposure and diversifying into index plus margin-based pricing is not a new goal and has been part of our strategic plan for nearly a decade. We are not new to C&I lending and our existing teams are well-seasoned and very experienced.
Speaker Change: As always, we are focused on conservatively underwritten C&I lending where we prioritize deep, cross-platform relationships.
Speaker Change: The year-to-date results highlight a dramatic pivot as 91% of our lending through the third quarter has been an adjustable C&I product.
Speaker Change: As we do this, you can anticipate the continually referenced increase in our CECL reserves as a byproduct of the asset class and the historical data which supports it.
Speaker Change: We believe this will be a strong early step in positioning the company in line with the risk profile of peers.
Speaker Change: All of our teams have worked together to manage the strategic direction of our diverse and strong loan portfolio, which as of September 30, 2024, remains comprised of 52% multifamily loans.
Speaker Change: 32% commercial business loans, 9% consumer and single-family residence loans, 6% non-owner occupied commercial real estate, and approximately 1% of land and construction loans.
Speaker Change: From an operational perspective, we continue to challenge our lending departments and adapt to a heavy focus on asset quality review. If there are cracks coming in the economy, we want to spot them proactively.
Speaker Change: Obviously, we continue to maintain our steadfast, cautious, yet proactive approach to growing with strong asset quality.
Speaker Change: Loan fundings continue to be comprised of primarily high-quality, adjustable-rate CNI, SBA, and mortgage lending totaling $366 million for the third quarter, offset by loan payoffs of $467 million for the quarter.
Speaker Change: Despite regional pressures and rhetoric around certain geographical challenges in multifamily housing, we remain confident in the asset class as we have underwritten it.
Speaker Change: particularly our unique workforce housing exposure within the broadly defined sector.
Speaker Change: The bank has limited exposure to the Sunbelt region, the Midwest, and the Northeast markets.
Speaker Change: Looking at our entire portfolio, its strength is evident in both its continued credit quality metrics and the low NPAs to total assets ratio for the third quarter of 33 basis points compared to 18 basis points from the prior quarter and 10 basis points from the third quarter of 2023.
Speaker Change: Our current MPAs are largely the byproduct of a single relationship specifically.
Speaker Change: None of the MPAs are multifamily assets.
Speaker Change: Further, the noted relationship has subsequently paid one of its two loans current shortly after the end of the third quarter. The bank anticipates the second loan will be paid current as well within the coming weeks as Scott noted earlier. While this borrower has exhibited this pattern in practice historically, we are confident in the underlying assets have incredibly low loan-to-values.
Speaker Change: Otherwise, our NPAs are rooted in properly margined collateral with a healthy reserve relative to the specific asset and no meaningful or material anticipated risk of loss.
Speaker Change: Our underwriting remains largely unchanged and staunchly conservative, with weighted average LTVs of 53% for multi-family loans and 54% for single-family loans.
Speaker Change: We are well into the second phase of our strategic plan and are transitioning to a more offensive and measured strategy to capitalize on what will surely be market opportunities ahead.
Speaker Change: To kick off this transition, First Foundation, like many of its peers, was a benefactor of a 50 basis point rate cut as a result of the FOMC's September meeting.
Speaker Change: This start to the anticipated rate cutting cycle allowed the bank to mitigate its liability sensitivity quickly by reducing rates across the portfolio.
Speaker Change: We continue to navigate a complex interest rate environment shaped by these recent FOMC actions.
Speaker Change: and we'll continue to vigilantly respond to volatility.
Speaker Change: During this quarter, we implemented the following rate adjustments for ICS deposits, retail deposits, digital deposits, and larger, more specialized deposit channels to position us for stronger earnings as these changes take full effect in Q4 of 2024.
Speaker Change: ICS and retail, 50 basis point reductions for balances with current rates over 2.5% and 30 basis points for accounts between 1% and 2.5%.
Speaker Change: No changes were made to deposits below 1%. As a reminder, ICS or insured cash sweep deposits allow customers, typically businesses or municipalities, to access FDIC insurance for large deposits over the $250,000 insurance limit by spreading funds across multiple banks within a network.
Speaker Change: Customers still receive one consolidated statement and access their funds through their primary banking relationship at First Foundation.
Speaker Change: CDs we adjusted 9 month APYs from 5% to 4.75% and 12 month APYs from 4.85% to 4.6% ensuring competitive but sustainable offerings.
Speaker Change: ECR deposits, reductions in earnings credit payouts were also approximately 50 basis points across the board. Earnings credit rate or ECR is a non-interest compensation mechanism for business clients with commercial accounts.
Speaker Change: This allows businesses to reduce operating costs without earning taxable interest.
Speaker Change: ECR accounts are essential in deepening relationships at First Foundation with our larger business clients. They allow us to offer attractive deposit options that help clients manage liquidity efficiently while also benefiting from the fee offsets.
Speaker Change: This supports our treasury management growth strategy and encourages businesses to consolidate more of their financial activities with us.
Speaker Change: digital bank customers.
Speaker Change: To build momentum before year-end, the bank leveraged a targeted promotion offering higher interest rates for new customers who open accounts and meet specific deposit thresholds.
Speaker Change: The long-term strategy can and will be paired with digital marketing campaigns, emphasizing the ease of online account opening vis-a-vis our new instant account verification, funding technology, and competitive rates, positioning First Foundation's digital bank among the top peer offerings.
Speaker Change: These moves in rate, as described, are designed to blunt the impact of rate cuts while preserving liquidity and ensuring a smooth pivot towards increased profitability.
Speaker Change: As you know, First Foundation has a broad geographic footprint. Florida, Texas, Nevada, California, and even Hawaii.
Speaker Change: We see significant untapped potential in the markets within these geographies.
Speaker Change: With our physical presence and mature C&I lending infrastructure, we're well positioned to grow and frankly, the opportunity is right in front of us. Our strategy is simple. We focus on relationships, not just transactions. Deposit growth is where it starts because deposits drive everything.
Speaker Change: We're going to leverage these markets heavily, offering a full platform to clients who want long-term banking partnerships.
Speaker Change: We've made it clear, new bankers in these markets will have both loan and deposit goals, and they will be incentivized to build self-funding relationships.
Speaker Change: This isn't just about loans or chasing deposits, it's about creating a balanced, sustainable portfolio that fuels growth and profitability across regions.
Speaker Change: The pieces are in place, and now it's all about execution, and we are focused on getting it done.
Speaker Change: We remain laser focused on service as our core value proposition. It's what sets us apart in the marketplace. In the near term we're keeping a close watch on liquidity and funding. That's just smart management.
Speaker Change: We're not waiting around. We have already taken meaningful steps to strengthen our core funding base.
Speaker Change: Loan sales will help us reduce reliance on broker deposits in federal home loan bank advances.
Speaker Change: which are fine tools when needed but not where we want to live long term. The real game changer will be building up granular core deposits because that's the foundation for sustainable long-term success. We know it and we're going after it with focus and discipline.
Speaker Change: The breakdown of our current deposits is as follows. Money market and savings, 34 percent. Certificates of deposit, 25 percent. Interest bearing demand deposits, 20 percent. Non-interest bearing demand deposits, 21 percent.
Speaker Change: Our deposits are diversified by geographic distribution, with California accounting for 30% of total deposits, Florida at 20%, and Texas at 7%, which make up the majority of our deposit portfolio, with Nevada, Hawaii, and other states making up 43% of the remaining total.
Speaker Change: Since the FOMC's decision to cut rates by 50 basis points, we have seen a palpable uptick in the growth of our digital branch.
Speaker Change: The investments in its online account opening infrastructure and technology have really given us an opportunity to leverage the RAID environment.
Speaker Change: The seamless instant account opening and funding with real-time risk mitigation and fraud detection is already deployed into our physical branches
Speaker Change: being utilized for consumer accounts at first and, in short order, for business accounts as well. This will allow more efficient usage of FTE while freeing up more time to focus on the high-touch needs of our business clients and the complexities of their banking relationship.
Speaker Change: As we noted last quarter, we have begun to change the culture of our physical branches to empower and incentivize employees to aggressively grow our granular core retail deposit franchise with proactive outbound participation and engagement in the community.
Speaker Change: They have risen to the challenge of being the front line and the backbone of our institution because the growth of our retail channel is integral to our resilience and continued success.
Speaker Change: For this reason, and for countless more, I can tell you unequivocally that the employees of First Foundation are our greatest asset. As we grow core deposits
Speaker Change: We're going to keep a sharp eye on concentrations across the deposit portfolio just like we do with the loan portfolio.
Speaker Change: It's not just about growth, it's about balance and discipline. This means reducing reliance on non-core and wholesale funding, along with cutting back on high-cost deposits, goals we've been talking about for several quarters now.
Speaker Change: We've made solid progress, but let's be clear. We are not satisfied yet.
Speaker Change: There's more room to improve and we're focused on getting it right.
Speaker Change: We are fully committed to executing our strategy with precision, reducing fixed-rate exposure, strengthening liquidity, and expanding our core deposit base.
Speaker Change: The sale of performing loan concentrations combined with our investments in digital infrastructure will keep us on a path to strong profitability, while the ongoing rate cuts create new opportunities for growth.
Speaker Change: Looking ahead, our focus is clear. Discipline growth, proactive risk management, and delivering long-term value for our shareholders.
Speaker Change: As we navigate these strategic shifts, we remain confident in our ability to adapt to the changing landscape and capitalize on new opportunities.
Speaker Change: But none of this happens without the incredible people we have working tirelessly every day.
Speaker Change: I want to take a moment to thank the folks on the front lines, our loan servicing group, treasury management team, digital banking team, and all the unsung heroes who work behind the scenes and rarely get the recognition they deserve.
Speaker Change: Your hard work and dedication are the reason we can execute on these strategies and continue driving results for our clients and shareholders. We see you and we appreciate everything you do. Thank you. I'll now turn it back over to Scott.
Scott Kavanaugh: Thank you. Thank you.
Scott Kavanaugh: I'll jump in here Chris. Yeah, there you go.
Speaker Change: Thank you, Scott. Chris, thank you for your comments. And ladies and gentlemen, we're now in the Q&A portion of our call. If you would like to ask a question on today's call, simply press star followed by the number one on your telephone keypad. If you want to withdraw your question, hit star followed by the number one again.
Speaker Change: Our first question for today comes from the line of David Feaster.
Speaker Change: Your line is live.
David Feaster: Hey, good morning, everybody.
Speaker Change: Hey, David Lee Davis.
David Feaster: I wanted to touch on the timeline that you guys are thinking on some of these initiatives. You guys have made a lot of progress. You moved more loans to HFS than we had.
David Feaster: initially talked about. You talked about the upcoming securitization, so that's kind of, you know, $500 million of it. You know, you're exploring a lot of different options. But I was just hoping if you could maybe walk through a sense of maybe the timeline for continuing to optimize these loans.
David Feaster: over the next, you know, is it, you know, 6, 12, 18 months? Just kind of curious how you think about that.
Speaker Change: Hey David, thanks for joining today. I appreciate the question. We've tried to reiterate along the way that we're willing to take our time here. We've moved the loans over that we want to disposition ultimately.
Speaker Change: We think taking the mark right away gives us the flexibility to really dig in with
Speaker Change: potential buyers considered things like the securitization we mentioned.
Speaker Change: and it really makes sure that we're getting.
Speaker Change: the best final execution for our shareholders.
Speaker Change: We don't have a set timeline on that. We've gotten a lot of interest already, and we're already working with multiple parties to understand their interest in our loans. And we're really looking to find teams that are willing to roll up their sleeves.
Speaker Change: understand the credit quality and economics of our portfolio similar to what our new investors did during the capital raise process.
Speaker Change: And we know that'll take a little bit of time. But again, we think moving the loans to help for sale, going ahead and taking the mark on those provides us a little flexibility and affords us the time to make sure that we get best execution.
Speaker Change: We're looking to finish the securitization of approximately $500 million by the end of the year.
Speaker Change: Like Chris mentioned, we have some other very interested parties that are considering smaller sales that we may see soon after that, and like Scott mentioned, we're willing to consider additional securitizations in 2025, but we don't have a set timeline at this point.
Speaker Change: And to be clear, all those conversations, it sounded like we're at better than the discount that you assumed in the transfer.
Speaker Change: That's correct.
Speaker Change: Okay.
Speaker Change: And then, you know, one thing that it seems like is the market may be underappreciating the benefit to expenses from, you know, the ECR side. I was hoping you could...
Speaker Change: Chris, you touched on it a bit, but could you just help us think through the ECR deposits? How much of your deposit base is tied to that today, and to what magnitude? What's the beta on those, and how quickly will they respond to rate cuts?
Speaker Change: I'll answer the betas and I'll let Chris take over.
Speaker Change: But yeah, as you guys are aware on the way up, you know, the betas were 100% and they were pretty much instantaneous every time the Fed moved
Speaker Change: Fed reducing rates
Speaker Change: We, the next morning, reduced those compensating balances by 50 basis points. So, it was an instantaneous reduction. Chris.
Chris Nahibi: Yeah, look, if you're looking to kind of get an idea to better understand where we're going, I would say look at the seasonality of the balances historically.
Chris Nahibi: and then understand that they do reprice pretty aggressively downward. They're expecting it, as much as they expected the reprice up when rates were going up, they fully expect the similar rate cuts on the way down. So, they reprice pretty aggressively. And if you follow and track the balances historically, you'll see some...
Chris Nahibi: increases in the ECR cost as balances increase, obviously, but as they decrease over time with a lower rate, you'll see some pretty significant benefits. What were our balances?
Speaker Change: We're around $1.4 billion, $1.5 billion going into the end of the quarter and as I mentioned those will continue to increase as they seasonally do into the fourth before before they start their the regular outflows troughing in the first.
Speaker Change: Okay
Speaker Change: Okay, terrific. And then maybe just touching on the growth side, you know exclusive of the the you know multifamily move I'm just kind of curious. How do you think about growth? Obviously, you know, you've got a pretty significant organic growth engine originations have been solid They may you know, maybe slowed a little bit this quarter, but I'm just kind of curious. How do you think about
Speaker Change: Organic growth, obviously you talked about leading with deposits, but you know, I'm curious how you think about the organic growth trajectory as we look forward on kind of the HFI book.
Speaker Change: Thank you. Bye.
Speaker Change: Well, part of our strategic plan is to add bankers in the key markets that we serve. We have the C&I engine, as you know about, for a greater portion of a decade now, and we've been nurturing those relationships accordingly. One of the things that I think we're doing a better job now is reaching out to people and really taking it...
Speaker Change: what I think would otherwise be a simple relationship and deepening it, which usually comes with lending opportunities.
Speaker Change: What I like to think about for growth is as we add new bankers in these markets It's generally a six to twelve month kind of cycle for the CNI bankers to get over get trained up get into the markets and Really understand things so I would expect to see our growth
Speaker Change: especially as we head into the second quarter of 2025, be a little bit more significant in the C&I space, but we're focused on it. It's our priority and building on those relationships are important, but we are gonna need to add bankers in key markets, which we have planned for the future.
Speaker Change: Okay, terrific. Thanks everybody.
Speaker Change: Thank you for your question
Speaker Change: Our next question comes from the line of Gary Tenor. Your line is live.
Gary Tenor: Thanks. Good morning, everybody.
Gary Tenor: First, I had a question first on the ACL, obviously, you know, higher this quarter as a percentage, just given the smaller denominator of HFI loans.
Speaker Change: Chris, based on what you were saying, you know, I think coming out of the capillary as we would have assumed.
Speaker Change: you know, maybe more of a step up in a given quarter in the ACL just from that review of the methodology. But it sounds like what you're saying now is maybe just a reversion back to
Speaker Change: what we would have previously assumed, which is a bleed up of the ACL over time as the mix changes is the more likely outcome. Is that fair? It just seems like there's a little bit of a shift in the kind of commentary around the ACL and the review process.
Speaker Change: I think it's fair. One of the things obviously is I think we all understand is that it's a gentle fulcrum balance between the regulatory world and the accounting world.
Speaker Change: Being as if there is no underlying error in our ACL methodology, it's one of those things we have to be strategic and pragmatic and thoughtful about over time. We have the benefit, obviously, of moving loans held for sale, and we were able to keep the balances where they were in the ACL, which shows effectively a net increase when you think about the risk of loss.
Speaker Change: But to your point, it will be a little bit more pragmatic than we had hoped over time to get to the stated goals.
Speaker Change: Okay, I appreciate that.
Speaker Change: And then the second question was, sorry,
Speaker Change: The yield on the loans that were moved to Help for Sale, was that kind of the average of the mortgage warehouse, or excuse me, of the multifamily portfolio yield, or how to think about that as it relates to modeling for disposal?
Speaker Change: I think that's the best assumption to use, Gary, the weighted average for the overall portfolio. It may have been a little bit higher, but I think that kind of 370, 375 range is a good number going forward.
Speaker Change: Got it. Thank you.
Speaker Change: Thank you for your questions.
Speaker Change: Ladies and gentlemen, once again, if you do want to ask a question, it is star followed by the number one on your telephone keypad. We have our next.
Speaker Change: Actually, it looks like our, there we go. We have another question from the line of Matthew Clark.
Speaker Change: Your line is live.
Matthew Clark: Hey, good morning, everyone. Thanks for the questions.
Matthew Clark: First on the on the planned securitization of these loans, I guess what do you plan to do with the proceeds? Do you plan to pay down brokered CDs and borrowings or do you plan to just sit in cash and use it to fund loan growth over time?
Speaker Change: No, we definitely intend to reduce our exposure.
Speaker Change: Wholesale funding, whether it comes from broker deposits or unloaned bank advances, our goal is to shrink those balances over time.
Speaker Change: So I think you would see, you know, almost a significant or dollar-for-dollar reduction, hopefully, with those, with the proceeds by reducing wholesale.
Speaker Change: Yeah, we have enough in brokered deposits currently outside of the traditional brokered CDE portfolio to where the first securitization that we're planning for the fourth could be met with almost immediate, within 30-day reduction of...
Speaker Change: broker-deposit balances.
Speaker Change: The brokered CD portfolio has more than half of its
Speaker Change: deposits repricing before the end of 2025. So to the extent that we have additional sales or securitizations starting the year and into 2025, we'll focus on that traditional portfolio and allow those balances to mature without replacements.
Speaker Change: and those are those are an average of maybe 5-10 right now those those CDs that are maturing between now and the end of next year.
Speaker Change: And the brokered CD amount, dollar-wise, roughly $3.7 billion, or did you just confirm that number?
Speaker Change: That's about right. Part of that $350 million is underlying the cash flow hedge swap that we did.
Speaker Change: So those will stay in place and could bounce back and forth between broker deposits and
Speaker Change: and FHLP Advances, but that's a good number.
Speaker Change: And like I said, we have some that are outside the brokered CD portfolio that will be targeted first with the securitization work.
Speaker Change: planning to to complete the fourth.
Speaker Change: Okay, and then can you just confirm the amount of what percent of your loan book is truly floating rate?
Speaker Change: at the end of the quarter.
Speaker Change: I'd say adjustable rate is probably 20%, but they're not adjusting on a monthly basis. The adjusting periods extend. They vary. Yeah, they vary between a month, and I think even some go out as long as a year, maybe.
Speaker Change: But that excludes, too, the multifamily portfolio, which, as you know, adjusts after its fixed-rate period.
Speaker Change: Okay, excluding adjustables, what do you have in truly floating rate loans?
Speaker Change: I don't understand the question. I mean, those do adjust. The 20% that I mentioned, we have revolving lines that are close to a billion, I would say.
Speaker Change: Okay, so that I'm just trying to get a sense for the impact on loan yields in the upcoming quarter from the 50 base points I'd cut and how much is repriced right away.
Speaker Change: but that 20% is is that that's the amount you expect to that adjust right away or is that those are hype those are hybrids yeah I would say anywhere from coming up to six months
Speaker Change: No problem.
Speaker Change: And then the spot rate on deposits at the end of the quarter, interest-bearing or on the interest-bearing side.
Speaker Change: So we didn't offer a spot rate, but I mentioned that the rate on deposits in September was $4.15, down from $4.28 that we reported in June.
Speaker Change: Okay.
Speaker Change: Do you have the average?
Speaker Change: I'm sorry, Matthew, go ahead.
Matthew Clark: you expect additional relief I assume yeah and then the average average margin in the month of September if you had it
Matthew Clark: Thank you.
Speaker Change: I believe we ended around 1.52.
Speaker Change: Okay.
Speaker Change: And then, I think in your prepared comments...
Speaker Change: There was some suggestion that you're not going to get back down to a 117 margin.
Speaker Change: like you were in the first quarter of 24 but it does sound like
Speaker Change: You anticipate maybe some NIM pressure from the seasonal runoff of the ECR deposits in one cue. Is that fair or am I interpreting that incorrectly?
Speaker Change: I wouldn't think so. I mean it obviously depends significantly on your rate expectations. Were the Fed to hold from here, we would see additional pickup in deposit costs. As I mentioned before, we would see a little bit of offsetting on the left-hand slide like you're getting at, but even with the increase in volumes from the ECR MSR deposits in the fourth quarter.
Speaker Change: And then coming off in the late fourth quarter in the first, I would still expect NIMM to kind of hold from, to not drop from Q3 levels from here.
Speaker Change: But, and that's assuming no further rate cuts. I mean, I think we're still, the market's still expecting just under 50 between now and year-end, not to mention what's expected in 2025.
Speaker Change: Yep, got it. And then just lastly on the reserve, where's the peer reserve ratio that you're using right now?
Speaker Change: I think we identified Alaska somewhere between 65 and 70 basis points.
Speaker Change: Okay, thank you.
Speaker Change: Thank you for your questions. Ladies and gentlemen, that will conclude our Q&A session for today. I'd like to turn it back over to Scott Kavanaugh for any closing remarks. Thank you.
Scott Kavanaugh: Thank you everyone for participating in today's earnings call. I once again want to thank each and every employee for the hard work that they do. I will
Scott Kavanaugh: I'll always remember that and I really appreciate it. And lastly, Go Vols!
Scott Kavanaugh: Thank you, everybody. Have a great day.
Speaker Change: Please wait, the conference will begin shortly. Please wait, the conference will begin shortly.