Q2 2025 First Foundation Inc Earnings Call

Operator: Greetings, and welcome to the First Foundation's second quarter 2025 earnings conference call. Today's call is being recorded. Speaking today will be Thomas Shafer, First Foundation's Chief Executive Officer, and Jamie Britton, First Foundation's Chief Financial Officer. Before I hand the call over to Mr. Shafer, please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today's earnings release. In addition, some of the discussion may include non-GAAP financial measures. For a more complete discussion of the risks and uncertainties that could cause actual results to 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.

Greetings, and welcome to the first foundation's. Second quarter 2025 earnings conference call. Today's call is being recorded.

Speaking today will be es caer first foundations chief executive officer and Jamie written first foundations. She financial officer

Before I hand the call over to Mr. Schaefer, please note that management will make certain predictive statements. During today's call that reflect their current views and expectations about the company's performance and financial results.

This forward-looking statements are made subject to the safe harbor statement included in today's earnings release.

in addition, some of the discussion may include non-gaap Financial measures,

Operator: And now, I would like to turn the call over to CEO Thomas C. Shafer.

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 companies filing with a Security and Exchange Commission.

Thomas Shafer: Thank you, operator. Welcome, and thank you for joining First Foundation's second quarter earnings call. On today's call, we'll provide updates about our financial and operating performance for the second quarter, in addition to discussing the strides we are taking towards accomplishing our strategic initiatives. Central to our remix of the balance sheet, during the quarter, we executed two important transactions. In April, we sold $377 million of held-for-sale CRE loans, and in June, we securitized an additional $481 million of held-for-sale CRE loans. These sales, along with planned CRE runoff, built on the success we've had since the fourth quarter and reduced our commercial real estate concentration to 365% of regulatory capital from a high of over 600%. Importantly, the transactions also allowed us to pay down $975 million of higher-cost deposits.

And now I would like to turn the call over to CEO Thomas C Shafer.

Thank you, operator, welcome and thank you for joining First Foundation. Second quarter earnings. Call on today's call, we'll provide updates about our financial and operating performance for the second quarter. In addition, to discussing the strides, we are taking towards, accomplishing our strategic initiatives,

Central to our remix of the balance sheet. During the quarter, we executed 2 important transactions in April, we sold 377 million of held for sale, CRA loans. And in June, we securitized an additional 481 million of held for sale series loans. These sails along with planned serial series runoff built on the success. We've had since the fourth quarter and reduced, our commercial real estate concentration to 365% of regulatory capital, from a high of over 600%.

Thomas Shafer: These balance sheet actions had a limited positive impact to net interest income this quarter, but will improve net interest margin moving forward, and we are reiterating our NIM guidance of a 1.8 to 1.9% margin by the end of 2025. During the second quarter, we posted a net loss of 7.7 million after posting positive net income of 6.9 million in the first quarter. While the second quarter earnings were not where we'd like them to be, we believe this quarter's core financial performance was stronger than the headline indicates. And I would also like to highlight that, from a strategic standpoint, this quarter was on plan and keeps First Foundation on a good path to delivering stronger earnings and more sustainable profitability in the future.

Importantly, the transactions also allowed us to pay down 975 million of higher cost deposits. These balance sheet actions at a limited positive impact to net interest income. This quarter, but will improve net. Interest margin moving forward and we are reiterating our Nim guidance of a 1.8 to 1.9% margin by the end of 2025.

During the second quarter, we posted a net loss of 7.7 million after posting positive net income of 6.9 million in the first quarter.

Thomas Shafer: As I previously mentioned, the bank was able to reduce its commercial real estate held-for-sale loans by a total of $858 million during the second quarter. The execution on the April loan sale was less favorable and impacted pre-tax income by 11.8 million during the quarter. We experienced a modest gain from the June securitization of 0.2 million. If we simply adjust our earnings for the net one-time impact of the two loan transactions and the losses from the related hedge, core after-tax net income was $1 million or 1 cent per share. Adjusted pre-provision net revenue was $3.6 million or a 12 basis point pre-provision net revenue return on assets.

As I previously mentioned, the bank was able to reduce its commercial real estate held for sale loans, by a total of 858 million during the second quarter.

The execution on the April loan sale was less favorable and impacted pre-tax income by 11.8 million. During the quarter. We experienced a modest gain from the June securitization of 0.2 million.

If we simply adjust our earnings for the net,

Thomas Shafer: As of now, we have a high degree of visibility on executing on an additional securitization before the end of the year, and our expectation is to be fully out of the held-for-sale commercial real estate portfolio by the end of 2025, as we previously communicated. Given our favorable experience in the securitization market, first in December and again in June, we expect pricing on the incremental securitization to be competitive. Said differently, a material upward move in rates aside, we believe the negative capital and earnings events from the rundown of these commercial real estate loans should mostly be behind us. We made additional progress in reducing our CRE concentration ratio during the second quarter to 365% versus over 400% in the prior quarter.

1-time impact of the 2 2 lanes and the losses from the related hedge core. After tax, net income was, $1 million or 1 cent per share adjusted pre-provision. Net revenue was 3.6 million or a 12 basis point, pre-provision net revenue return on assets.

As of now, we have a high degree of visibility on executing an additional securitization before the end of the year. Our expectation is to be fully out of the held-for-sale commercial real estate portfolio by the end of 2025, as we previously communicated.

Given our favorable experience in the securitization Market.

First in December and again in June we expect pricing on the incremental securitization to be competitive said differently material upward movement rates aside we believe the negative capital and earnings events from the rundown of these commercial. Real estate loans should mostly be behind us.

Thomas Shafer: And from a growth perspective, we funded $256 million of new loan balances in the quarter, priced at an average yield of 7.18%, of which approximately 80% were CNI loans. Loans held for investment decreased in the second quarter, primarily due to $392 million of payoffs. Non-performing loans were stable at 35 basis points, and net charge-offs remained low at just $135,000. Our ACL position on loans increased four basis points to 50 basis points when compared to the prior quarter. Most of the quarterly ACL build was the result of higher reserves for new CNI loan originations and increased model-calculated loss factors in the commercial loan portfolio. A review of our CISL methodology is anticipated to be completed by the end of the year, and we expect our loan origination levels, mix, and overall credit performance to be the main drivers of our longer-term allowance levels.

We made additional progress in reducing our CRA concentration ratio during the second quarter to 365% versus over 400%, in the pre prior quarter. And from a growth perspective, we funded 256 million dollars of new loan balances in the quarter priced at an average yield of 7.18%

Of which Approximately 80% were cni. Loans loans held for investment decreased in the second quarter primarily due to 392 million of payoffs.

Non-performing loans, were stable at 35 basis points, and net charge offs remained low at just 135,000.

Our ACL position on loans increased 4, basis points to 50 basis points when compared to the prior quarter.

Most of the quarterly ACL build was the result of higher reserves for new cni loan originations and increased model, calculated loss factors in the commercial loan portfolio.

Thomas Shafer: Our continued focus on reducing our CRE concentration and growing CNI loans should result in a higher ACL over time, all else being equal, as we have previously disclosed. We are excited to be spending an increased amount of time and energy on some of our previously communicated phase two strategic initiatives, including fully leveraging our markets, improving core funding, and accelerating growth in FFA and private banking. Assets under management at the end of the quarter ended the quarter at 5.3 billion, which was up slightly versus the link quarter and compared to 5.4 billion at the end of the year. Trust assets under advisement closed at 1.2 billion, relatively stable versus the prior quarter. During the second quarter, we saw positive cross-selling trends within FFA and our commercial banking platform.

A review of our Cecil methodology is anticipated to be completed by the end of the year. And we expect our loan origination levels, mix and overall credit performance to be the main drivers of our longer term allowance levels, our continued focus and reducing our Co concentration and growing cni loans should result in a higher ACL over time. All else being equal as we have previously disclosed

We are excited to be spending an increased amount of time and energy on some of our previously, communicated Phase 2, strategic initiatives, including fully leveraging, our markets improving core funding and accelerating growth in FFA and private banking.

Assets under management. At the end of the quarter, end of the quarter, at 5.3 billion, which was up slightly versus the link quarter and compared to 5.4 billion at the end of the year.

Thomas Shafer: We have a building pipeline of referrals that we have already onboarded new wealth management relationships as a result. As we think about First Foundation's future and our value proposition to our clients, we believe our re-energized focus on private banking and our demographically attractive markets will build significant long-term value for our firm and our shareholders and bring added support to our wealth management clients and teams. Our efforts to further invest in client relationships also continue to show tangible progress in our deposit base. Partly offsetting our high-cost categories and MSR deposit runoff was a modest increase in combined retail, especially in digital banking deposit balances. As a result of the quarter's growth, we are pleased to report that digital banking deposits surpassed $1 billion for the first time since the channel's launch and represent 12% of total deposits as of June 30th.

Trust assets under advisement closed at 1.2 billion, relatively stable versus the prior quarter. During the second quarter, we saw positive cross-selling Trends within FFA and our Commercial Banking platform.

We have a building pipeline of referrals that we have already onboarded. New wealth management relationships have resulted.

As we think about first foundation's future and our value proposition store clients. We believe are re-energized, focus on private banking in our demographically attractive markets, we'll build significant long-term value for our firm and our shareholders and bring added support to our wealth management clients and team.

Our reference to further, invest in client relationships. Also continue to show tangible progress in our deposit base, partly offsetting our high-cost categories.

Thomas Shafer: Our ability to grow our relationships in these four channels and exit higher-cost deposits elsewhere in the portfolio resulted in another quarter of moderation in our total deposit cost, which fell to 2.95% versus 3.04% in the prior quarter. Our loan-to-deposit ratio continues to be steady at approximately 94%. Lastly, I wanted to highlight that we remain strongly capitalized following the common equity raise completed in July of last year. Even after some of the moving parts on our balance sheet over the past few quarters and limited net income, our common equity tier one ratio is at 11.1%, and our tier one leverage ratio is at 8.3%. Since initiating our strategy in Q3 of last year, our CET1 ratio has improved approximately 140 basis points. You have no doubt seen our recent management departures. Change is expected, especially when you're changing your operating models.

And MSR deposit runoff was a modest increase in Combined retail specialty and digital banking deposit balances as a result of the quarter's growth. We are pleased to report that digital banking deposits surpassed 1 billion dollars for the first time since the Channel's launch and represent 12% of total deposits as of June 30th.

Our ability to grow a relationships in these 4 channels and exit higher cost. Deposits elsewhere in the portfolio resulted in another quarter of moderation. In our total deposit costs, which fell to 2.95% versus 3.04%. In the prior quarter, our loan to deposit ratio continues, to be steady at approximately 94%

1% and our Tier 1. Leverage ratio is at 8.3%.

Since initiating our strategy in Q3 of last year, our cet1 ratio has improved approximately 140 basis points.

Thomas Shafer: We're at the end of two important executive-level searches for the head of consumer private and small business banking, as well as chief credit officer. We're encouraged by the extraordinary talented leaders interested in joining our company who will help our team transition to the next chapter. I hope to announce their arrivals and tell you more about them in the very near future. I'll now turn it over to Jamie for a more thorough review of our financial performance and to discuss our intermediate-term financial outlook. Jamie.

You have no doubt seen our recent management. Departures change is expected. Especially when you're changing your operating models.

We're at the end of 2 important, executive level searches for the head of consumer private and small business banking, as well as Chief credit officer, we're encouraged by the extraordinary talented leaders interested in joining our company who will help our team transition to the next chapter. I hope to announce their arrivals and tell you more about them in the very near future.

Jamie Britton: Thank you, Tom. Before talking in greater detail about our second quarter financial performance and go-forward outlook, I wanted to first spend a few minutes detailing the impact of the two loan transactions on our income statement in the second quarter. Despite the net loss reported in the quarter, we remain steadfast in our goal to significantly improve our sustainable profitability over the intermediate term and expect to see additional benefits to earnings from the balance sheet actions taken during the quarter. On slide three of our investor presentation, we break out the impact of the loan transactions to second quarter earnings. As Tom mentioned, the bank completed a $377 million loan sale with an individual counterparty in April, with execution at a price lower than our prior quarter mark.

I'll now turn it over to Jamie for more thorough review of our financial performance and to discuss our intermediate term Financial Outlook. Jamie

Thank you Tom the 4 talking in Greater detail about our second quarter financial performance and go forward Outlook. I wanted to First spend a few minutes detailing the impact of the 2 loan transactions on our income statement in the second quarter.

Despite the net loss report in the quarter, we remain steadfast in our goal to significantly improve our sustainable profitability. Over the intermediate term and expect to see additional benefits to earnings from the balance sheet actions taking during the quarter.

Jamie Britton: This pricing variance resulted in approximately a $10.6 million loss in non-interest income, and we had foregone interest income of 1.2 million due to the timing of the loan sale, which weighed on net interest margin by four basis points. The second completed transaction was a securitization of $481 million of CRE loans completed in June with more favorable results. This transaction generated a modest gain of $227,000. If we remove the one-time impacts of these two transactions and the other transaction-related items, such as the hedge, from our second quarter earnings, net income was $1 million or positive 1 cent per share of earnings. As Tom mentioned, we expect to complete an additional securitization in the second half of 2025, and our target remains to be fully exited from the CRE held-for-sale portfolio by the end of the year.

On slide 3 of our investor presentation. We break out the impact of the loan transactions to second quarter. Earnings, as Tom mentioned, the bank completed, a 377 million loan sale, with an individual counterparty in April with execution, at a price lower than our prior quarter. Mark, this pricing variance.

Resulted in approximately 10.6 million loss and non-interest income.

And we have foregone interest income of 1. Million, 1.2 million due to the timing of the loan sale, which weighed on net interest margin by 4 basis points,

The second completed transaction was a securitization of 481 million of CRA. Elite of CRA loans, completed in June with more favorable results. This transaction. Generated a modest gain of 227,000

If we remove the 1-time impacts of these 2 transactions and the other transaction related items, such as the Hedge from our second quarter earnings, net income was 1 million or positive 1 cent per share of earnings.

As Tom mentioned, we expect to complete an additional securitization in the second half of 2 2025.

Jamie Britton: We remain focused on limiting incremental earnings and capital impacts, and execution is more competitive in the securitization market, as seen by the differences we've highlighted between the two transactions completed during the quarter. Moving to slide four, reported net interest in margin for the second quarter of 168 basis points represented a one basis point increase relative to the link quarter and was largely driven by a nine basis point improvement in our total cost of deposits, which decreased to 2.95%. If we adjust for the one-time $1.2 million of foregone interest income related to the April loan sale, net interest margin for the quarter would have been approximately 172 basis points.

And our Target remains to be fully exited from the CRA held for sale portfolio by the end of the year.

We remain focused on limiting, incremental earnings and capital impacts and execution is more competitive in the securitization Market as seen by the differences. We've highlighted between the 2 transactions. Depleting completed during the quarter,

Moving to slide 4 reported, net interesting margin for the second quarter of 168 basis points. Represented a 1 basis point increase relative to the link quarter and was largely driven by a 9 basis, point improvement in our total cost of deposits, which decreased to 2.95%

If we adjust for the 1-time, 1.2 million of foregone interesting, come related to the April loan sale, that interest margin for the quarter would have been approximately 172 basis points.

Jamie Britton: Yield on total earning assets decreased two basis points to 4.61%, driven mainly by a 10 basis point reduction in the yield on securities available for sale and a five basis point reduction in total loan yields, which were generally stable quarter over quarter. And as noted on slide five, we continue to see quarter over quarter improvement in our balance sheet contribution, or net interest income excluding customer service costs. We expect this key metric to improve even further in the third quarter due to the loan transactions and the corresponding exit of a similar amount of high-cost deposits, most of which were MSR deposits. On slide seven of our investor presentation, we continue to provide visibility to the repricing opportunity in our help for investment multifamily portfolio. While it remains significant, the repricing is a catalyst that will take some time to play out.

Yield on total, earning assets, decreased 2 basis points to 4.61% driven mainly by a 10 basis point reduction in the yield on Securities available for sale and a 5 basis. Point reduction in total loan yields which were generally stable a quarter over quarter.

And as noted on slide 5, we continue to see quarter over quarter improvement, in our balance sheet contribution or net interest income. Excluding customer service costs. We expect this key metric to improve even further in the third quarter, due to the loan transactions and the corresponding exits of a similar amount of high cost deposits, most of, which were

MSR deposits.

On slide 7 of our investor presentation. We continue to provide visibility to the repricing opportunity and our help for Investment multifamily Portfolio.

Jamie Britton: But based on our portfolio's weighted average spread, where the portfolio to reprice to floating rates today yields would improve meaningfully. We have $455 million in multifamily loans with a weighted average yield of 3.45% that were repriced to floating, refinanced with us, or pay off at par in 2026, and another $895 million in multifamily loans with a weighted average yield of 4.18% facing the same decision in 2027. Loan repricing volumes are lower in the remainder of 2025, but looking ahead to the volume of repricing we see on the horizon, when coupled with CD maturity set to occur, we remain optimistic about the opportunity and flexibility this provides. On slide eight, we noted the maturity schedule and rates for our remaining brokered CDs, which, as we've noted, when coupled with reductions in both the held-for-sale and held-for-investment multifamily portfolios, will reduce drag on the margin.

While it remains significant, the rep. The repricing is a catalyst that will take some time to play out.

uh, but based on our portfolios weighted average spread where the portfolio to repriced to floating rates today yields would improve meaningfully

We have 4505 million in multifamily loans. With the weighted average yield of 3.45% that were repriced, the floating re refinance with us.

Or pay off at par in 2026, and another 895 million in multifamily loans. With a weighted average yield of 4.18% facing the same decision in 2027

Are lower in the remainder of 2025, but looking ahead to the volume of our pricing. We see on the horizon, when coupled with CD maturity set to occur. We remain optimistic about the opportunity and flexibility this provides.

Jamie Britton: To the extent any balances are needed for a short period to support the balance sheet transition, even the deposit repricing from legacy rates to new rates will also benefit the margin. While we continue to target the reduction of our brokered CD portfolio, during the second quarter, we had an opportunity to significantly reduce some other higher-cost and more concentrated deposits given the completed loan sale activity. More specifically, we exited $784 million of specialty deposits, including the $540 million of MSR deposits with a blended average ECR rate of approximately 4.6% in customer service costs, and $191 million of comparably high-cost non-CD brokered deposits. For broader context, the $858 million of commercial real estate loans we dispositioned had a blended average yield of approximately 3.92%.

On slide 8, we noted the maturity schedule and rates for our remaining broker CDs which as we've noted, when coupled with reductions in both the help for sale and held for investment multi-family portfolios will reduce drag on the margin to the extent. Any balance is are needed for a short period to support the balance sheet transition. Even the, the deposit repricing from Legacy rates to new rates will also benefit the margin.

While we continue to target the reduction of our brokerage CD portfolio, during the second quarter, we had an opportunity to significantly reduce some higher-cost and more concentrated deposits given the completed loan sale activity. More specifically, we exited $707 million of specialty deposits, including $540 million of MSR deposits with a blended average ECR rate of approximately 4.6%, and customer service costs, as well as $199 million of comparably high-cost, non-CD broker deposits.

Jamie Britton: Though the first loan transaction closed in April, a majority of the go-forward benefit, particularly in the customer service cost line, was not realized until late in the quarter. Moving to non-interest items, adjusting for loan transaction-related items, non-interest income was approximately $12 million for the quarter, with slight moderation in investment advisory, trust, and consulting fees related to the decline in AUM we saw coming out of the first quarter. Market performance and new relationship onboarding of $83 million in our wealth business helped drive overall AUM growth of $234 million this quarter, which will benefit fees in the third. We remain optimistic about our wealth and trust pipelines, and we have already seen the potential for improved client engagement and greater earnings contributions as a result of our renewed focus on improving partnership across our platform.

For broader context, the 858 million of commercial real estate loans. We dispositioned had a blended average yield of approximately 3.92%.

Though, the first loan transaction closed in April, a majority of the go forward benefit particularly in the customer service cost line, was not realized until late in the quarter.

Moving to non-interest items adjusting for loan transaction related items. Non-interest income was approximately 12 million for the quarter with slight. Moderation investment advisory trust and Consulting fees related to the decline in AUM. We saw coming out of the first quarter.

Market performance in new relationship on boarding of 83 million and our wealth business helped Drive overall AUM. Growth growth of 234 million this quarter which will benefit fees in the third.

We remain optimistic about our wealth and Trust pipelines. And we have already seen the potential for improved client engagement and greater earnings contributions as a result of our renewed Focus.

On improving partnership across our platform.

Jamie Britton: On non-interest expense, outside of customer service costs, remaining categories totaled $47 million for the first quarter compared to $46.7 million in the prior quarter. The largest contributor to the sequential increase was higher professional service costs resulting from our focus on strengthening our internal capabilities. We expect professional services expense to remain elevated in the third as we close out several key initiatives before normalizing by the end of the year. The moderation in compensation and benefits this quarter was a function of reduced impacts of early-year seasonal items and our continued diligence around replacement positions and net adds to staff. We are willing to continue investing in talent to drive our strategy going forward, and we expect the majority of these investments over the coming quarters to be focused on client-facing roles.

Non-interest expense, outside of customer service costs, totaled $47 million for the first quarter, compared to $46.7 million in the prior quarter.

The largest contributor to the sequential increase was higher. Professional service costs resulting from our focus on strengthening our internal capabilities.

We expect Professional Services expense to remain elevated in the third. As we close out several key initiatives before. Normalizing by the end of the year.

The moderation and compensation and benefits. This quarter was a function of reduced impacts of early year, seasonal items and our continued diligence around replacement positions and net adds to staff.

We are willing to continue investing in Talent to drive our strategy going forward. And we expect the majority of these Investments over the coming quarters to be focused on client facing roles.

Jamie Britton: Customer service costs totaled $12.9 million for the quarter compared to $15.1 million in the prior quarter and $17.8 million at year-end 2024. The decrease in customer service costs from the prior quarter was due primarily to the $540 million decrease in MSR deposits. With these exits coming later in the quarter, the second quarter did not include the full benefit, so we expect additional moderation in this line item in the third absent any movement in rates. As Tom mentioned, overall credit quality remains stable. We booked a $2.4 million provision expense due primarily to changes in our ACL balance, which, as Tom mentioned, increased our ACL coverage ratio to 50 basis points, a four basis point improvement when compared to the link quarter.

Customer service costs, total 12.9 million for the quarter. Compared to 15.1 million in the prior quarter and 17.8 million at year. End 2024

The decrease in customer service costs from the prior quarter was due primarily to the 540 million decrease in MSR deposits.

With these exits coming later in the quarter. The second quarter did not include the full benefit so we expect additional moderation in this line, item in the third absent, any movement and rates,

As Tom mentioned, overall credit quality.

Jamie Britton: Switching quickly to First Foundation's financial condition on slide nine, our balance sheet remains well capitalized with an 11.1% consolidated common equity tier one ratio and an 8.3% leverage ratio. We also are operating with ample liquidity, with nearly $3.5 billion of borrowing capacity and cash balances, which compares favorably to our uninsured and uncollateralized deposits of $1.3 billion, which is down from $1.7 billion in the prior quarter. Tangible book value has adjusted for the conversion of our preferred shares to equity shares, as we note in slide 17 of the deck, finished the quarter at $9.34 per share versus $9.42 per share in the prior quarter. Before handing the call back to Tom for his closing remarks, I also wanted to provide some thoughts about First Foundation's intermediate financial outlook, particularly given all the strategic updates you've shared over the past two quarters.

Remains stable. We booked a 2.4 million provision expense due primarily to changes in our ACL balance, which is Tom mentioned, increased our ACL coverage ratio to 50 basis points, a 4 basis, point Improvement when compared to the link quarter.

Switching quickly to First foundations, Financial condition on slide 9, our balance sheet remains well, capitalized with an 11.1% Consolidated, common Equity, Tier 1 ratio and an 8.3% leverage ratio. We also are operating with ample liquidity with nearly 3 and a half billion dollars of borrowing capacity and cash balances, which compares favorably to our uninsured and UNC collateralized deposits of 1.3 billion which is down from 1.7 billion in the prior quarter.

42 cents per share in the prior quarter.

Beforehand and a call back to Tom for his closing remarks. I also wanted to provide some thoughts about first foundations, intermediate Financial Outlook, particularly given all the Strategic updates,

Jamie Britton: Overall, we are very optimistic about the financial future of First Foundation over the next 12 to 36 months. As noted on slide 10, we anticipate continued margin expansion and reiterate our expectation for net interest margin to exit 2025 in the fourth quarter between 1.8 and 1.9% and 2.1 and 2.2% by the fourth quarter of 2026. To the extent the Fed reduces rates more than we are anticipating, that could accelerate some of our expected margin improvement in '26 and '27, with deposits possibly repricing faster than we are currently expecting. I would also note we expect to see positive medium-term growth trends in our core fee income while also remaining focused on limiting incremental expense growth from here to focused investments directly benefiting our transition. With that, I'll now turn it back to Tom for his closing remarks.

We've shared over the past 2 quarters overall. We are very optimistic about the financial future of First Foundation, over the next 12 to 36 months.

As noted on slide 10, we anticipate continued margin expansion and reiterate our expectation for net. Interest margin to exit 2025 in the fourth quarter between 1.8 and 1.9% and 2.1 and 2.2% by the fourth quarter of 2026.

To the extent, the FED reduces rates more than we are anticipating. That could accelerate some of our expected margin Improvement in 26 and 27 with the posits, possibly repricing faster than we are currently expecting.

I would also know we expect to see Positive medium-term Growth Trends in our core fee income. While also remaining focused on limiting incremental expense growth from here.

To focused Investments directly benefiting our transition.

Thomas Shafer: Thanks, Jamie. Well, the headline earnings were not where we wanted them to be in the second quarter. First Foundation's employees deserve credit for all the hard work put into accomplishing several critical components of our strategic plan during the quarter. As we look ahead, we continue to remain optimistic that our performance can significantly improve in a variety of economic scenarios. We're well capitalized, plenty of liquidity. We're making progress in adding considerable talent to the organization, which we hope to have more concrete details in the near future. We're laser-focused on unlocking the embedded value in the First Foundation franchise by executing on our relationship-focused initiatives in Florida and California. This concludes our prepared remarks. Operator, will you please begin the question and answer session?

With that, I'll now turn it back to Tom for his closing remarks.

Thanks Jamie.

Well, the headline earnings were not where we want them to be in the second quarter. First foundations employees deserve credit for all the hard work, put into accomplishing. Several critical components of our strategic plan. During the quarter. As we look ahead, we continue to remain optimistic, that our performance can significantly improve in a variety of economic scenarios.

We're all capitalized plenty of liquidity. We're making progress and adding considerable talent to the organization which we hope to have more concrete details in the near future. We're laser focused on unlocking, the embedded value in the First Foundation. Franchise by executing on a relationship focused initiatives in Florida in California. This concludes our prepared, remarks operator, will you please begin the question and answer session?

Operator: At this time, I would like to remind everyone, in order to ask a question, press star at the number one on your telephone keypad. We ask that you limit your question to one and one follow-up. We will pause for just a moment to compile the Q&A roster. The first question comes from David Pfister from Raymond James. Your line is open.

In order to ask a question, press start and the number 1 on your telephone keypad.

We ask that you limit your question to 1 and 1 follow up.

We will pause for just a moment to compel the community of roster.

David Pfister: Hey, good morning, everybody.

The first question comes from David. Pfister from Raymond James, your line is open.

Thomas Shafer: Morning, David.

Jamie Britton: Morning, David.

Hi, good morning everybody.

David Pfister: Well, you guys have been really active, you know, optimizing the balance sheet and working through some of these initiatives. You did a little bit more than I was thinking you were going to get done this quarter, which is great. You know, as you've gone through, you know, a large majority of the HFS loans, have you found anything else that you'd like to optimize and maybe sell quicker or maybe increase the size of that securitization? I'm just kind of curious how you think about that, given you guys have been, you know, ahead of schedule, perhaps.

Morning, David morning, David. Um, well, you guys have been really active, uh, you know, optimizing the balance sheet and working through some of these initiatives. Um, did a little bit more than I was thinking you were going to get done this quarter, which is great, you know, as you've gone through, you know, a large, majority of the HFS loans, have you found anything else that you'd like to optimize and maybe sell quicker or, or maybe increase the size of that securitization? I just kind of curious how you think about that given, you know, you guys have been

Thomas Shafer: Yeah. So, David, thanks for the question. You know, I think about the, you know, the makeup of the balance sheet. We're obviously focused on reducing our CRE concentration. You know, we actually like the asset class. We just had too much of it on the balance sheet. So, you know, once we, you know, begin to head towards the end of the year, I think we're going to be in a position where we can stabilize that focus on, you know, making sure that we're driving earning assets onto the balance sheet focused on on EPS and our funding costs. So I think that really this is the portfolio that we're focused on and also want to get rid of just the volatility of the held-for-sale asset class.

You know, ahead of schedule perhaps.

Yeah, so David, thanks for the question. You know. I think about the

David Pfister: Okay. Okay. So there's nothing else to accelerate there. It's kind of more just focusing on the strategic initiatives after this last tranche.

the uh you know the makeup of the balance sheet. Uh we're obviously focused on reducing our CRA concentration. Uh, you know, we actually like the asset class. We just had too much of it on the balance sheet. So, you know, once we uh, you know, begin to head towards the the end of the year, I think we're going to be in a position where we can stabilize that, uh, focus on, you know, making sure that we're we're, we're, uh, driving earning assets onto the balance sheet focused on on, uh, on EPs and, uh, and our funding costs. So, I think that really, this is the portfolio that we're focused on, uh, and also want to get rid of the, the just, the volatility of the health for sale asset class.

Thomas Shafer: Yeah, that's right.

David Pfister: Okay. And then maybe touching on the private banking initiative, you know, where are we at in that expansion? And you know, you touched on some talent adds. I'm just kind of curious where you're focused on. Is there any systems and capabilities that we need to add? And then just kind of how much in terms of loan and deposit growth do you think this could add maybe a timeline for maybe some more material contribution in, you know, kind of as we look to next year?

Okay. Okay. So there's there's nothing else to accelerate their it's got a more just focusing on the Strategic initiatives after after this last tranche. Yeah, that's right. Okay.

Thomas Shafer: Yeah. So I'm very optimistic about this. We've had a team kind of building it out before we, you know, there's a couple of things. We've got an outstanding wealth group. Our team is very sophisticated. They've got tremendous, you know, tenure and client base. And whatever we offer to that group, we want to make sure it really matches the skills and capabilities of what they already have. So we had a team working on this for the last probably four months. And so the program's designed part of the initiative of recruiting a new head of consumer, which is consumer bank, retail, business banking, and private banking, is to bring on a level of sophistication in our leadership to help us both attract talent and engage our wealth team. So we're, you know, we've, I'd say, left the starting block.

And then maybe touching on on the private banking initiative, you know, I where are we at in that expansion and you know you touched on some Talent ads? Um, just kind of curious where you're focused on is, is there any systems and capabilities that we need to add? And then just kind of how much in terms of loan and deposit growth? Do you think this could add maybe a timeline for maybe some more material contribution and, you know, kind of as we look to next year

team working on this, uh, for the last probably 4 months and

Thomas Shafer: We've got some referrals coming in from our commercial and retail channel. We actually closed some new wealth management clients because of that initiative. But I don't want to get too far ahead of a new leader who's going to be asked to really put the final details on it.

Um uh so it's uh the programmes designed part of the initiative of recruiting a new head head of consumer which is consumer Bank. Retail business banking, private banking is to bring on a, a a level of sophistication in our leadership to help us both attract talent and engage our wealth team. So, we're, you know, we've, I'd say left the starting block, we've got some referrals coming in, from our, from our commercial and Retail Channel. We actually closed some wealth new me, New Wealth Management clients because of that initiative, but, uh, I I don't want to get too far ahead of a new leader who's going to be asked, to, to, uh, really put the final details on it.

Operator: The next question comes from Gary Tenner from DA Davidson. Your line is open.

Gary Tenner: Thanks. Good morning. A bit of a follow-up, maybe to David's first question. You know, the balance sheet's down a little over $2 billion from the peak in terms of total assets, obviously a little more in the way of sales the back half of this year. As you think about, you know, the time deposit maturities that continue over the course of next year, where's your line of sight in terms of where you think the balance sheet bottoms and kind of timing? Is that fourth quarter of this year and roughly kind of ballpark on total assets?

The next question comes from Gary tenner from d8, Davidson your line is open.

Uh, thanks. Good morning, a bit of a follow-up, maybe to David's first question. Uh, you know, the balance sheet down a little over 2 billion dollars from the peak, um, in terms of total assets, obviously a little more in the way of sales back, half of of this year. As, as you think about,

uh, you know the time deposit maturities, that continue over the course of next year uh where where

Jamie Britton: Hey, Gary. Thanks for the question. I think the end of the year is a good target for the trough on the balance sheet. I think you may see a little bit more contraction in the third before we start to build up into the end of the year and going into '26. You know, one of our focuses during the transition is on maintaining earning assets. And so to the extent that we can do that with attractively priced securities, we will. If we, of course, we prefer loan opportunities, so we're pursuing that aggressively. But I would say the end of the year is a good trough for assets. I wouldn't expect us to contract much from here in the third, maybe a little before growing into the fourth again.

Where's your line of sight in terms of where you think the balance sheet bottoms and kind of timing, uh, is that fourth quarter this year and and roughly kind of ballpark on total assets?

Hey Gary. Uh, thanks for the question. Um, I I think the, the end of the year is a good Target for, for the trough, on the balance sheet.

Jamie Britton: And then, you know, I think coming out of 2025 with a restructured balance sheet complete and some new leadership in place and, you know, ideally a track of some new hires in client-facing roles, we'll have a lot of momentum going into '26.

I think you may, uh, you may see a little bit more contraction in the third, um, before we start to build up, uh, into the into the end of the year and going into 26, you know, 1 of our, our focuses during the transition, is on maintaining earning assets. And so, uh, to the extent that we can do that with attractively priced Securities. Um, we will, if we, um, of course we would prefer our loan opportunities. Uh, so we're pursuing that aggressively, but, um, I would say, the end of the year is a good trough for assets. I wouldn't expect this to, uh, contract much from here in the third, uh, maybe a little before growing into the fourth, uh, again. And then, you know, I think coming out of coming out of 2025, with, uh, a restructured, balance sheet, um, complete and, uh, some new, uh, leadership in place. And

Gary Tenner: Appreciate it. And then it sounded to me like, you know, the commentary around the additional securitization sounds like you're talking singular and not plural. So is it kind of a reasonable assumption to expect maybe the held-for-sale sticks around until the fourth quarter and then there's one transaction, or do you think it's still piecemeal over the back half of the year?

You know, ideally uh um, attract of of some new hires and and client facing roles. Uh, we'll have a lot of momentum going into 26.

Appreciate it and then it sounded to me like, you know, the commentary around the additional securitization. It sounds like you were talking singular or not plural. So is it kind of reasonable assumption to expect, maybe the held for sale sticks around into the fourth quarter and then there's 1 transaction or do you think it's

Thomas Shafer: Two ways. One is there's the natural runoff that's part of the portfolio, and I see one additional securitization during the second half of the year closer to the fourth quarter.

Still piecemeal over the back half of the year.

Uh, 2 ways 1 is there's the natural natural runoff that's part of the portfolio and I I I see 1 additional security uh during the second half of the year uh closer closer to the fourth quarter.

Operator: The next question comes from Matthew Clark from Piper Sandler. Your line is open.

The next question.

Matthew Clark: Hey, good morning. Thanks for the questions. I wanted to ask about the recent turnover among the management ranks, the CBO, COO, and it sounds like now the chief credit officer. Just, you know, what's driving this and what's your plan to fill those roles?

From Piper Sandler, your line is open.

Yeah, good morning. Uh, thanks for the questions. Um,

wanted to ask about the recent turnover among the management ranks, um the CBO Co and it sounds like now that she credit officer just you know what's what's driving this and

Thomas Shafer: Sure. Thanks for the question, Matthew. You know, as I said in my prepared comments, turnovers and change is expected when you're making the level of changes to the operating model that we are. You know, we've gone from, you know, being known for the multifamily. We're bringing that down significantly, I think, appropriately. We're spending a lot of time on the deposit side of the balance sheet. And while we, you know, appreciate, you know, the effort and energy and the impact that our former leaders had on the company, the skills that we need for the next chapter are a little different, and the experience of the leaders, some of these leaders for the next chapter is different. And so I think the turnover reflects, you know, some planned turnover and just a little bit of turnover that's caused by rate of change.

Um, and what's your, what's your plan to to fill those roles?

Sure, thanks for the question. Uh Matthew. You know the as I said, my prepared comments. Uh uh,

Turnovers and change is expected. When you're making the level of changes to the operating model that we are, you know, we've gone from, you know, being known from for the multi-family. Uh, we're bringing it down significantly. I think appropriately. We're, we're spending a lot of time. On the deposit side of the balance sheet.

Thomas Shafer: And, you know, all good people, but, you know, it creates, you know, that turn creates opportunity for us to accelerate some of the changes that might have been, you know, in the works. And I can tell you this: that the people that Simone and I have spent most of the time on the recruitment process, the level of talent that wants to, you know, come to Southern California is staggering. Great organizations, extraordinarily developed people, and we're thrilled with the engagement that we've had.

Uh, some of these leaders for the next chapter is different. And so, the, I think the turnover reflects, um, uh, you know, some plan turnover, uh, and, and just a little bit of of, uh, turnover that's caused by rate of change and, um, you know, all good people. But, uh, you know, it creates, you know, that that turn creates opportunity for us to accelerate some of the changes that might have been, you know, in the, in the works. Um, and, uh, I can tell you this, that the, the people that, um, Simone and I have spent most of the time, on the recruitment process, the level of talent that wants to, you know, come to Southern. California is staggering, uh, great organizations, extraordinary developed people. And we're, we're, uh, we're thrilled with, uh, the engagement that, uh, that we've had

Matthew Clark: Great. Thanks for the color. And the other one for me, just on the ECR deposits and your plans to potentially reduce that amount further, or just trying to get a sense for whether or not you're going to deliberately run off more of those ECR deposits and at what magnitude over what period of time and how we should think about the related rate.

Great. Thanks for the color and the other 1 for me, just on the ECR deposits and your plans to

potentially reduce

uh, that amount further just trying to get a sense for

Thomas Shafer: I'll have Jamie help me with this, but I'd say that it's really high cost. So there's nothing necessarily wrong with the deposits. It's just, again, scale that we had and cost. So as a funding mechanism, it's a large pool that, you know, many banks have. But we're focused on replacing high-cost, high-concentrated deposit with more granular, lower cost. And that's a journey, but everything we can do to address the high-cost categories we're focused on.

Whether or not you're going to deliberately run off more of those ECR deposits, and at what magnitude, over what period of time, and how we should think about the related rate.

Jamie Britton: And I would just add to that, Matthew, I mean, that we don't have many relationships left in the MSR portfolio. There's still around $500 million in total balances, but we would like to reduce concentration. So we will spend time focusing there, as Tom mentioned, just in general on high-cost deposits. But even just reducing some of the remaining more concentrated relationships, we may focus on those. And I would expect those reductions and those conversations to take place over the next several months as we lead into the securitization. We'd use some of that dry powder to help offset the outflows of those deposits. And so, you know, if we end up with a few relationships still, I think we're very comfortable with that. We just want them to be more manageable sizes.

I love Jamie helped me with this but I I'd say that it's it's it's really high cost so it's there's nothing necessarily wrong with the deposits. It's just again scale that we had in costs, so as a funding mechanisms it's it's a it's a large pool that you know many banks have but we're focused on replacing high cost, High concentrated deposit with more granular lower cost and that's a that's a journey but um everything we can do to address the high cost categories. We're focused on

And I, I would just add to that, uh, Matthew, I mean that we don't have many relationships left in the MSR portfolio. There's still around 500 million in total balances, um, but uh, but we would like, to reduce concentration. So, we will spend time focusing there, as Tom mentioned, just in general, on high cost deposits. Um, but even just reducing some of the, the remaining more concentrated, uh, relationships. Uh, we may focus on those and I, I would expect those, uh, those reductions, um, and those conversations to take place over, uh, over the the next several months as we lead into the securitization, um, we'd use some of that dry powder to

Jamie Britton: And so I think you could see another couple hundred million dollars coming out of that portfolio by the end of the year. As I mentioned, I'm sure you caught it, but just the transaction in the second quarter that allowed us to help exit some of the MSR deposits already, that happened late in the quarter in June. And so the benefits to the customer service cost line weren't fully reflected in the second. I think as you move into the third quarter, you'll see customer service costs drop below, yeah, $10 million or so. And then, you know, as we continue to focus on managing down high-cost deposits with the final securitization, you'll see that come down even further.

To, um, to help offset the outflows of those, uh, those deposits. And so, you know, if we, if we end up with a few relationships still, I think we're, uh, very comfortable with that. We just want them to be more, uh, more manageable sizes. Um, and so I think you could see another couple hundred million dollars, um, coming out of that portfolio by the end of the year. Um, as I mentioned, I'm sure you caught it but just um, the, the transaction um, in the second in the second quarter that allowed us to to help exit some of the the MSR deposits already that happened uh in late in the quarter in June. And so the benefits uh to the customer service cost line weren't fully reflected in the, in the second. I think as you move into the to the third quarter you'll see customer service costs, uh, drop below. Yeah, 10 million or so. Um, and then, you know, as we

Continue to to focus on managing down high cost deposits uh with the the final security. Uh you'll see that come down even further?

Operator: The next question comes from Andrew Terrell from Stephens. Your line is open.

The next question comes.

Gary Tenner: Hey, good morning.

From Andrew Terrell from stiffens, your line is open.

Thomas Shafer: Morning, Andrew.

Jamie Britton: Morning, Andrew.

Hey, good morning.

Gary Tenner: Most of mine have been addressed already, but quick one on the margin, Jamie. Just, you know, obviously, like a lot of moving pieces throughout the second quarter from a loan yield perspective. And I know you guys give some color on the deposit front in terms of exit costs, but I'm hoping you could help out a little bit with kind of the loan portfolio and just, you know, holding any future rate cuts aside. Like, where did loan yields exit the quarter at? I'm just, you know, trying to have some help getting to the 4Q margin.

Morning, Andrew.

Um, most of mine have been addressed already, but quickly on on the margin Jamie just, um, you know, obviously like a lot of moving pieces throughout the second quarter from a loan yield perspective. And I know you guys give some color on on the deposit front in terms of exit costs. But I'm I'm hoping you could help out a little bit with kind of the loan portfolio and just

Jamie Britton: Oh, sure. Total loan yields exited just under $470, Andrew.

you know, holding any future rate Cuts aside like where did loan yields exit the quarter at? I'm just you know trying to have some help getting to the the 4q margin.

Oh sure. Um, total loan yields exited.

uh, just just under 470 Andrew

Gary Tenner: Okay. And that was at the end of the quarter?

Jamie Britton: Correct. And that does include the multifamily loans, which are, so the multifamily portfolio overall is just under $400 at this point. And so not a meaningful portion anymore, but that does include the final $500 million of held-for-sale loans from multifamily.

Okay. And that was that was at the end of the quarter.

multifamily loans which are um,

so the multifamily portfolio overall is is just under 4 at this point and so not a meaningful portion anymore, but that does include the the final 500 million of of help for sale loans and

Gary Tenner: Got it. Okay. And then on the cash position still, you know, right around 9 or 10 percent of assets. You call out the kind of schedule of brokered deposit maturity, and I think expectations are clear about some of the higher-cost ECR deposits, but some of the brokered is also a little bit higher cost. And just curious on, like, one, comfortability with the cash position. You know, could we see you manage that lower going into 2026? And is that kind of earmarked for brokered deposit reduction? Or I guess, you know, you also gave some comments about maintaining earning asset base and maybe investing in some securities. I guess, how do we think about the puts and takes there as it relates to the cash position?

Uh, from multifamily.

Got it. Okay. Um, and then on the

Jamie Britton: Yeah. It's obviously a lot, there's obviously a lot of moving parts on the balance sheet. You know, we're comfortable right now with the level of liquidity. That'll, of course, fluctuate through the quarter due to the timing of different moves, especially when you're moving off, you know, such large pieces of the asset portfolio. So that may, it may tick up for a period during the quarter. The billion-dollar level is where we're comfortable today. I think as we move forward, however, with the balance sheet transition complete, with a large focus on the highly concentrated, high-cost deposits and brokered deposits coming down meaningfully since their peaks, I think we'll be able to reassess coming out of the end of 2025 and determine, you know, where's a reasonable level going into '26.

The cash position still, you know, right around 9 or 10% of assets. Um, you call out the, the kind of schedule of of brokered deposit maturity. And I, I think expectations are clear about some of the, the higher cost ECR deposits put in some of the brokerages. Also a little bit higher costs and just curious on, like, 1 comfort with the cash position. You know, could we see you manage that lower going into 2026? And is that kind of earmarked for broker deposit reduction? Or I guess, you know, you also give some comments about maintaining earning asset base and maybe investing in some Securities, I guess. How how do we think about the puts and takes their as it relates to the cash position?

Yeah, it's obviously a lot, there's obviously, a lot of, a lot of moving Parts on the balance sheet. You know, we're comfortable right now with the level of liquidity, that'll of course, fluctuate. Through the quarter, due to the timing of different moves, especially when you're, uh, moving off. Um,

You know, start such large pieces of the, of the asset portfolio. Um, you know, so that may it may take up for, uh, for a period during the quarter. Um, the billion dollar level is where we're, we're comfortable today. I think as we move forward. However, uh, with the balance sheet, transition complete, um,

Jamie Britton: But I would expect the cash position to remain relatively stable on an average basis for the rest of the year.

With a large focus on the, the high, highly concentrated high cost, deposits, and and, and broker deposits coming down meaningfully. Um, so since their peaks, I think we'll be able to reset, uh, reassess coming out of the, the end of 2025 and, and determine, you know, where is a, where's a reasonable level going into 26. But I would expect, um, the cast position to remain um, relatively stable on an average basis uh, for the rest of the year.

Operator: And that concludes our Q&A session. I will now turn the call over to Thomas Shafer for closing remarks.

Thomas Shafer: Thank you. I'd like to thank everyone for joining us today and the questions that we received. I'd also like to thank you for your interest in First Foundation. I think that we've made some significant moves during the second quarter that will help us as we move forward. I'm confident that the team's capable of executing the needs that we have in our strategic plan and returning the company to the profitability levels that we all expect. Thank you.

And that concludes our Q&A session. I will now turn the call over to SAS Schaefer for closing remarks.

Thank you. Um, I'd like to thank everyone for joining us today and the questions that we received. Uh, I'd also like to thank you for your, uh, interest in First Foundation. I think that we've made some significant moves during the second quarter, that will help us as we move forward, in confident, that the teams capable of executing the, uh, the needs that we have in our strategic plan and, and, uh, returning the company to the profitability levels that we'll expect.

Thank you.

Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

ladies and gentlemen, that concludes today's call think of joining and you may now disconnect