FFWM - NASDAQ

Greetings and welcome to First Foundation’s First Quarter 2025 Earnings Conference Call. Today’s call is being recorded. Speaking today will be Thomas C. 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. And now, I would like to turn the call over to CEO, Thomas C. Shafer.

Thank you. Welcome and thank you for joining First Foundation’s first quarter earnings call. On today’s call, we’ll provide updates about our financial and operating performance for the first quarter in addition to discussing the strides we are taking towards our strategic initiatives. The first quarter was my first full quarter as CEO and I continue to be pleased with our productivity as we made continued progress on several capabilities in the various internal review processes that we began discussing last quarter. Starting with our financial results, net income of $6.9 million or $0.08 per share, our First Foundation has returned to profitability after posting a net loss of $14.1 million in the fourth quarter and a loss in the third quarter, driven by our having moved $1.9 billion of multifamily loans to held for sale. Improved results were driven by another 9 basis points of net interest margin expansion to 1.67%, a significant linked quarter reduction in our provision expense, favorable valuation marks on our held-for-sale loan portfolio and a $5 million reduction in our non-interest expense compared to the fourth quarter. We funded $180 million of new loan balances in the quarter, priced at an average yield of 7.09%, of which approximately 78% were C&I loans. Loans held for investment decreased in the first quarter primarily due to $354 million of payoffs, while loans held for sale were essentially unchanged at $1.3 billion with no loan sales taking place during the quarter. Our strategic focus on reducing our commercial real estate concentration and selectively exiting lower-yielding multifamily loans remains unchanged. In the fourth quarter, we completed a $489 million sale of multifamily loans at competitive pricing, and we are confident we will make additional progress during the second quarter. Our pipeline for loan sales and securitizations remains active, and we plan to continue reducing our loans held for sale over the balance of 2025. We have recaptured a portion of the original mark taken in the third quarter of 2024, and we remain focused on securing favorable execution going forward, which should benefit capital and profitability while the dispositioning of the loans will allow us to continue reducing our reliance on wholesale funding. On credit, our ACL position increased another 5 basis points during the first quarter to 46 basis points or $2.9 million to $35.2 million. Net charge-offs moderated compared to the linked quarter and were only 1 basis point. Most of the quarterly ACL build was the result of higher reserves for the equipment finance lease portfolio increased mode calculated loss factors in the commercial loan portfolio and an increase in the level of criticized assets due to continued stress testing for higher interest rates and higher expenses potentially impacting CRE cash flows. Despite the building ACL, we are optimistic about the credit portfolio’s performance. Asset migration trends during the quarter were positive with past due and nonaccrual loans falling 22% to $54.8 million. On our call in January, I mentioned our team was already reviewing our seasonal methodology to ensure we have standards in place to match our size and complexity, and I feel we are already making good progress in this initiative. We will adjust our methodology where we believe it is appropriate to do so. But all else being equal, as we have discussed before, we expect our efforts to reduce multifamily loans and replace them with higher-yielding C&I loans to result in an increasing ACL balance over time. While the first proof points of our five-point strategic plan focusing on largely on remixing our loan portfolio, improving our interest rate risk management and reviewing our seasonal methodology. We also continue to work hard at growing our non-interest income, not only through First Foundation Advisors and Private Banking, but also by taking a more holistic approach to how we service our commercial and consumer customers. Assets under management ended the quarter at $5.1 billion compared to $5.4 billion at the end of the year and trust assets under advisement closed at $1.2 billion compared to $1.1 billion in the prior quarter. As we think about First Foundation’s future and our value proposition to our clients, we believe our reenergized focus on private banking in our demographically attractive markets will build significant long-term value for our firm, our shareholders and bring added support to our wealth management clients. Our first – our efforts to further invest in client relationships also showed tangible progress during the first quarter with regard to our deposit mix. While overall deposits declined modestly to $9.6 billion, this was largely due to a $400 million decrease in high-cost brokered deposits so these deposits matured without replacement, partly offset by a $71 million increase in combined retail, specialty and digital banking deposit balances. Our total cost of deposits declined compared to 3.19% in the prior quarter, while our loan-to-deposit ratio continues to be steady at approximately 94%. Lastly, I also 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. With our common equity Tier 1 ratio at 10.6%, and our Tier 1 leverage ratio of 8.1%. I’ll now turn it over to Jamie for a more thorough review of our financial performance and to discuss our intermediate-term financial outlook. Jamie?

Thank you, Tom, and good morning. My remarks today will be broken primarily into two parts: First, I’ll go into further detail on the first quarter’s financials; and then second, I’ll provide updated commentary about our forward outlook and how some of our in-flight strategic initiatives can benefit our financial performance. We remain steadfast in our goal to significantly improve our sustainable profitability over the intermediate term. Starting on Slide 4 of our investor presentation. Our first quarter pre-provision net revenue of $9.7 million or $0.11 per share increased relative to a pre-provision net revenue loss of $2.3 million in the fourth quarter, which was impacted in part by the unusual items that we discussed in January. Our PPNR return on average assets increased to 31 basis points. And as Tom mentioned, we returned profitability in the first quarter, even after adjusting for the benefit of $4.7 million in securities gains. Reported net interest margin for the first quarter of 167 basis points represented a 9 basis point increase relative to the linked quarter and was largely driven by a 15 basis point improvement in our total cost of deposits, which decreased to 3.04%. Yield on total earning assets decreased 5 basis points to 4.63%, driven mainly by a 17 basis point reduction in the yield on securities available for sale and a 2 basis point reduction in total loan yields, which were relatively stable quarter-over-quarter. As noted on Slide 5, we continue to see steady quarter-over-quarter improvement in our balance sheet contribution or net interest income, excluding customer service costs. This continues to be an important metric for us as we transition the balance sheet. On Slide 7 of our investor presentation, we once again provided visibility to the repricing opportunity in our held-for-investment multifamily loan portfolio, and we have supplemented it this quarter with information on recent borrower behavior. As noted on the bottom of the slide based on our portfolio’s weighted average spread where the portfolio to reprice the floating rate today, yields would improve by over 290 basis points. We have $456 million in multifamily loans with a weighted average yield of 3.45% that will reprice to floating, refinance with us or pay off at par in 2026 and another $906 million of multifamily loans with a weighted average yield of 4.18%, facing the same decision in 2027. Loan repricing volumes are lower in 2025, but looking ahead to the volume of repricing we see on the horizon, when coupled with CD maturities set to occur, we are optimistic about the opportunity and flexibility this provides. On Slide 8, we noted the maturity schedule and rates for our remaining brokered CDs, which when coupled with reductions in both the held for sale and held for investment in multifamily portfolios will reduce drag on the margin. To the extent any balances are needed for a short period to support the balance sheet transition, the deposit repricing alone would also benefit the margin. However, as we proceed through the year and make progress on exiting the loans held for sale portfolio, we do expect to be able to allow the brokered CD portfolio to mature without replacement. Total non-interest income during the quarter was $19.6 million, including a $4.7 million gain on the sale of securities resulting from repositioning the available-for-sale portfolio and a $2.8 million net gain on a favorable change in the held-for-sale portfolio valuation allowance and the swap we executed earlier in the quarter to hedge the valuation allowances sensitivity to market rates. Adjusting for these two items, non-interest income stable compared to the fourth quarter, wealth and trust-related fees were $8.9 million compared to $9.3 million. Performance losses and terminations impacted the quarter, but we remain optimistic about our wealth and trust pipelines. And as Tom noted, you see the potential for improved and client engagement and greater earnings contribution in the future. Moving to non-interest expense. Outside of customer service costs, remaining categories totaled $46.7 million for the first quarter a 5% reduction relative to the fourth quarter of 2024 is $49.2 million. The largest contributor to the sequential decline was a reduction in occupancy and equipment costs of $2 million, driven largely by the fourth quarter’s $1.1 million software development cost write-off. Compensation and benefits expense of $25.1 million moderated slightly compared to the fourth quarter but was up 29% compared to the year ago quarter. As we started 2025, we saw the normal impacts from seasonal items such as payroll taxes and annual salary adjustments. But I would also note the year-over-year change reflects investments we are making to bring in talent and retain the institutional knowledge needed to organize around our strategic initiatives and strengthen the company going forward. We are remaining diligent around expense growth, but we would expect compensation and benefits to reset to these levels near term as we continue investing in transitioning the organization to our new business mix. Customer service costs totaled $15.1 million for the quarter compared to $17.8 million in the prior quarter and $10.7 million in the year ago quarter. The decrease in customer service costs from the prior quarter was due to both a decrease in rates and a decrease in average balances. The decrease in rates reflects the full quarter benefit of the declines in the Fed funds target rate in the fourth quarter and as we have noted, it is normal to see some modest seasonal outflow during the first quarter. Provision for credit losses was significantly lower this quarter, declining to $3.4 million from the $20.6 million we reported in the fourth. As Tom mentioned, our ACL increased 5 basis points to 46 basis points and we remain focused on reviewing our CECL methodology and prepared to make adjustments as necessary to maintain confidence in our processes and controls going forward. Switching to First Foundation’s financial condition. Our balance sheet remains well capitalized with a 10.6% consolidated common equity Tier 1 ratio and an 8.1% Tier 1 leverage ratio. We also are operating with ample liquidity with nearly $3.7 billion of borrowing capacity and cash balances, which compares favorably to our uninsured and un-collateralized deposits of $1.7 billion, a coverage ratio of over 2x. Tangible book value, as adjusted for the conversion of our remaining preferred shares to common, grew to $9.42 per share from $9.36 per share in the prior quarter. Slide 17 provides more detail. Before handing the call back to Tom, I also wanted to provide some thoughts about First Foundation’s to intermediate financial outlook, particularly given all the strategic updates we’ve discussed in the past two quarters. Overall, we are optimistic about the financial future of First Foundation over the next 12 to 36 months. From a balance sheet perspective, we expect to see a modest reduction in total assets over the intermediate term as we work to reduce our loans held for sale to 0 from $1.3 billion today, bringing down our CRE concentration and reducing our brokered deposit mix towards a more normalized level. We anticipate continued margin expansion, although we emphasized that the opportunities to reprice our loan portfolio will take time. More specifically, we expect an exit run rate for net interest margin in the fourth quarter of 2025 between 1.8% and 1.9%, with further improvement in 2.1% to 2.2% by the end of 2026. To the extent the Fed reduces rates more than we are anticipating, that could accelerate some of our expected margin improvement with deposits possibly repricing faster than we are currently modeling. And lastly, we expect to see positive growth trends in our core fee income while also remaining focused on limiting incremental expense growth from here to focus investments directly benefiting our transition. And with that, I’ll now turn it back over to Tom for his closing remarks.

Thanks, Jamie. I’m pleased with the progress we made during the first quarter. As we look ahead, we continue to remain optimistic that our performance can significantly improve in a variety of economic scenarios. We are well capitalized to plenty of liquidity and strong credit quality and have multiple levers to materially improve profitability over the next 2 to 3 years. We are 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, would you please begin the question-and-answer session? Thank you.

Operator, could we begin to take questions, please?

Yes, thank you. [Operator Instructions] And your first question comes from the line of David Feaster with Raymond James. Please go ahead.

Hey, guys. Good morning. This is Liam on for David.

Hey, Liam. Good morning.

Good morning.

So just wanted to ask, C&I loan fundings have really helped lead the way. How utilization rates trended thus far in 2025? And have you seen any broader uncertainty having an impact on those utilization levels?

Yes. I think the conversation around utilization and hesitancy is out there, the feedback from clients and our commercial team is that there is some hesitancy. It’s a good word with the economic backdrop that we have today for capital expenditures. We have seen actually some clients accelerate inventory purchases with the uncertainty of the trade conversations. So it’s a mix – it’s a little bit of a mixed story.

I appreciate the color there. Then on the expense side, you talked about your efforts to build out the franchise and hire some new teams. I noticed FTEs increased by about 2% sequentially. Did you invest in any particular markets in 1Q? And what level of portion do you anticipate from those individuals in 2025?

Yes. So we’ve added a couple in the Florida market, and we’re optimistic about that area in the economy, specifically in the commercial side. And it’s, I would say, in 2025, modest individual performance based upon joining the organization in the first year, but additive. Most of the production will come out of California at this point and we’re focused obviously on Southern California and the Florida markets on the commercial side.

Thank you. I appreciate that. And then last one for me, you noted that AUM declined in this quarter. Is that more due to the fluctuations in customer account balances? And how is new customer acquisition in the advisory business broadly?

Well, we are very optimistic about the pipeline, Liam. We did have some terminations, which is normal through the quarter. We had a little bit of turnover from some lower performing teammates, but we’re very optimistic about the pipeline going forward. We expect a little bit of volatility as we move forward from the market. But we – I think like everyone are holding PAT for now before jumping to any conclusions about where that could go.

I am very optimistic about the business though, but the market fluctuations had an impact on that.

Appreciate the color there. Thank you so much. I will step back.

You bet.

Your next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Thanks. Good morning. I wanted to ask a question regarding the NIM kind of outlook on Slide 10. I guess two questions. One, what rate environment does that assume in terms of the Fed? It may just be the forward curve that you could tell us otherwise. And then other than the held-for-sale dispositions impacting the size of the balance sheet, just any other context you could put around the balance sheet size or mix relative to your outlook there?

Hey. Good morning Gary. Thanks for the question. I think we are remaining fairly conservative on the rate outlook from what we have been monitoring over the last several weeks, the outlook bounces from three to four rate cuts in ‘25. I think I even saw five at one point pop in there. We are assuming only two rate cuts in ‘25. And I think we have got in there a total of six over the remaining horizon through the end of 2027. As you know, that can change at a moment’s notice. But we are – I would say we are slightly conservative to in line with the curve longer term, but a bit more conservative short-term. In terms of the balance sheet mix, we do have the dispositions, as you mentioned and as Tom mentioned in his prepared remarks, we expect to move through the process of getting those balances off the balance sheet this year in 2025. We will continue to support the earning asset base as necessary to be able to fund investments that we need. And we think that there could be opportunities to grow commercial, to grow consumer as we bring in new teammates, for instance, in Florida. But primarily, in 2025, there is really just the organic transformation of the balance sheet with the dispositions driving the NIM improvement from here.

Okay. Great. Thank you. And then second question, just in terms of expense. Sorry, your comments.

Yes. Go ahead.

Okay. On the expense side, in terms of the efforts to remediate some of the internal control issues that you have highlighted in the K, any expense impact this quarter or projected going forward?

I think you will see some professional service expenses from time-to-time. Nothing, I would say significant, but you will see pockets of some professional service expenses as we bring in some expertise to help us accelerate through the transition. I think we made it clear that we see a lot of opportunity in the franchise. We want to try to get to the point where our internal controls are in our processes and our capabilities are consistent with our size and complexity. We want to do that as fast as possible so that we can really shift all efforts towards growing the business. So, we will bring in some expertise as necessary to accelerate that. As I mentioned, we are also investing in some teammates that will help us drive that transition and better manage the bank going forward. But in the expense line, you will see some blip from professional services here and there just to help us work through that.

Got it. Thank you.

You bet.

Your next question comes from Andrew Terrell with Stephens Inc. Please go ahead.

Hey. Good morning. This is Jackson Laurent on for Andrew Terrell.

Good morning.

If I can just start off on expenses. You guys – I appreciate the color on the comp line item with the elevation over the last two quarters, and you touched about normalization going forward. And I was just wondering if you could kind of quantify the seasonal impact you guys saw in 1Q on that line item. And then I would appreciate any additional color on how you expect that to trend throughout the year with the investments you guys are making currently?

Sure. Great question. I think some of the changes or some of the actions that we took in the fourth quarter, for instance, I think the important decision to fund the non-executive annual bonus pool, very important decision for us, but that did have some tail in the first quarter as it led to additional payroll taxes, additional 401(k) match expense, etcetera. I think all in from the seasonal items, it was about $1.5 million, let’s say, is a good number for that. And as you know, that starts to trend down almost immediately as you proceed into the second and then through the rest of the year. As the other items, some of the things that we have invested in to bring in new teammates, to bring in expertise and retain the institutional knowledge necessary to the transition, those are – they are not one-time events, meaning they only impact one quarter, but they are limited in their impact on the financials. They just take a little longer to do through. As we do work those down and those normalize back to really just sort of base numbers, we will, at the same time, be investing in growth and making sure that we are continuing to bring in new bankers in our markets in California and Florida. We are making sure that we bring in folks that can help us build out a private banking capability to partner with our wealth and trust businesses to drive more contribution there. So, we are obviously focused on profitability. So, we will remain diligent with our expense growth. But at the same time, we do want to make sure that we are making the investments necessary to drive longer term value and get the organization or unlock the potential that we know is here.

Great. That’s very helpful. Thank you. And then if I could just switch over to the margin and kind of the puts and takes of the 180 to 190 4Q ‘25 exit NIM, that deck on Slide 10 or that deck on Page 10 is very helpful. And you guys obviously have the brokered CD benefit as well as the natural multifamily re-pricing that becomes a more material in 2026? And kind of the last factor that you guys put down was the commercial growth. And it looks like new funding yields came down pretty hard quarter-over-quarter. So, I was just wondering what you guys are seeing from competition standpoint for new C&I loans and if you guys are seeing any pricing pressure from competitors right now?

I would say that the – with the, I would say, not so long, but people are being careful out there. So, there is competition for transactions. We are seeing it in all of our markets right now. But with $180 million of fundings, it’s – we are building our pipelines there and it’s probably more deal-centric than larger trends.

Understood. Great. Thank you. And then just lastly on credit, a very impressive credit quarter, non-accruals came down pretty nicely with what has happened over the last 1.5 months and the uncertainty in the market currently and just the conversations that you have been having with your borrowers. Is there any credit bucket that you guys are keeping a closer eye on going forward?

I think you know as there is questions about the economy and we have got to be very careful and thoughtful about the credit portfolios. I noted in my comments were the stress testing of kind of the fixed rate portfolio, making sure that we are being thoughtful about re-pricing impact and what we are going to keep on our balance sheet. The CRE portfolio continues to perform extraordinarily well. But we are being thoughtful about stress testing in the kind of the next environment for these assets. I think we all need just to keep an eye on the larger economy and where that goes at this point. But I would say the performance of our portfolios has been very strong, and we continue to believe that we have got a strong credit portfolio.

Understood. That’s all I had. Thank you for taking the questions.

The next question comes from Adam Butler with Piper Sandler. Please go ahead.

Hey everybody. This is Adam on for Matthew Clark. Thanks for taking the questions. Just first on the expense side of things. I noticed in the segmented expenses that wealth management related expenses stepped up, I think around $2.5 million. I know that the FTE count also came up. So, I was just curious with wealth management-related revenue kind of stable, why that went up and if the FTE hires, maybe was the reason behind that?

Some of that – good morning Adam. Some of that was just the seasonal items, some – and then we did have some annual compensation expense related there as well. I would expect that part of it will continue for the next several quarters as that expense accrues over time. But a portion of it – but a portion of it was one-time, let’s say, a meaningful portion of it was one-time expense that should normalize going forward.

Okay. That’s helpful. And then I guess just overall, like maybe like a run rate guide, including customer service costs, how you are thinking about that overall run rate for expenses going forward? And given probably the conservative outlook of two cuts that you have in the NIM guide?

Yes. If you don’t mind, I would like to break those apart. I mean in addition to the NIM guidance, we – which does not, by the way, include the customer service cost component. The customer service costs will come down along with market rates. So, we have – as I mentioned, it’s seen two cuts. So, we would expect that to come down. Ending the quarter we had, call it, $1.3 billion. We have got that broken out on slide – sorry, Adam, that’s available on Slide 8. So, we had a little over $1 billion in MSR deposits, and there is another, call it, $250 million, $300 million or so of their customer service cost-related deposits. But the Fed rate cuts will almost immediately reduce customer service costs with those clients. I would say, in addition to that, as we continue to see – as we continue to make progress on reducing our CRE concentration, for instance, selling or securitizing the held for sale portfolio in addition to focusing on broker deposits, we are also focused on reducing reliance on concentrated high-cost deposits. And some of that will – some of that focus and those efforts will lead to reduce balances in the customer service cost portfolio more generally. So, customer service costs will come down because of both of those levers. In the rest of the expense base, I – as I mentioned before, there may be pockets of expense that we will see on the professional service line as we work to transition some of the more complex processes and capabilities and get those up and running more quickly. But overall, I would expect the expense level to remain outside of customer service costs to remain relatively stable to slightly declining over time. But there could be, again, just pockets of investment that we will see in order to accelerate and facilitate the transition.

Okay. I appreciate the color there. That commentary helps with regards to how you guys are thinking about customer service costs going forward and related balances? And then I guess, just leaning back over to the NIM, I appreciate all the color that you guys provided on Slide 7, 8 and 10 and you related forward rate outlook. But I was just curious to help with modeling. Do you guys have a spot rate on deposits at the end of the quarter and maybe the average NIM in March?

I do have the rate for March, monthly average on total deposit, our total interest-bearing deposits was at 381, which was down from just over 390 monthly average in December. And I believe we are at, call it, 435 monthly average in August before for the Fed loosening cycle begin.

Okay. Helpful. And then just one more for me on the loan balance side of things, I know that you guys are in the process of replacing lower-yielding multifamily with higher-yielding C&I production. I was just curious how you guys are thinking about overall loan balances going forward maybe through year-end. And I know it’s hard to predict how C&I production will come in just given the uncertain macroeconomic conditions, but just some help on how you are thinking about overall loan balances going forward?

Well, we certainly want to drive the mix. Taking the held for sale portfolio aside, I would expect us to see modest growth over time. We will continue to – we will continue to focus on levers we can pull to reduce the CRE concentration. So, the existing multifamily book, even outside of held for sale, we would expect to see some contraction there over the coming years. The municipal portfolio, we are not in the process of seeking new opportunities there. So, I would expect some, albeit slow, some amortization on that book, which is between $900 million and $1 billion. I would expect to see continued reduction in the equipment finance portfolio, which is just over $100 million. That will continue to come down over time since we have – for all intents and purposes, exited that business. And then as we invest in new C&I bankers as we start to organize around a new – our private banking initiative. There will be some opportunities there. So, I see – I expect to see some growth in the other portfolios. But as you think about that transition, I think we are adding density to the loan portfolio over time and stronger yielding portfolios, but because of the transition out of CRE and some of our legacy assets, I think the growth in the loan portfolio will be relatively modest over the next 2.5 years.

Okay. Yes. No, I appreciate the various dynamics that are going on there, and thanks for the help there. Those were all my questions. I appreciate it.

Okay. Thank you.

There are no more questions. I will now turn the conference back over to Tom for closing remarks.

Thanks for joining us today. Hopefully, this has been helpful. We had a very positive shift in earnings during the first quarter. I think the investment and the initiatives that we are making are beginning to show light and as we reposition the balance sheet trending out of some of the historical portfolios that have – are not productive for us today, continue to focus on improving our margin focused on expense management and profitability. So, thanks for your time and questions today.