First Foundation Inc. Q2 FY2024 earnings call

• The company completed a $228 million capital raise to support growth and address interest rate risk.
• Credit quality remains strong with low NPAs and charge-offs.
• Efforts to improve net interest margin, loan-to-deposit ratio, and efficiency ratio.
• Focus on growing core deposits and reducing multifamily loan concentration.
• Plans for strategic sale and securitization of loans, and review of allowance for credit losses (ACL) methodology.
• Offensive strategy to expand into existing geographic markets and diversify product offerings, aiming for growth in core funding and recurring fee income.

For the second quarter, First Foundation reported net income attributable to common shareholders of $3.1 million or $0.05 per share. Tangible book value, a non-GAAP measure, ended at $16.43. Pretax pre-provision revenue totaled $1.9 million. Interest income was $150.9 million, relatively unchanged from the first quarter. Noninterest income was 23% of total revenue. The net interest margin was 1.36%. Noninterest expense was $55.6 million, with the efficiency ratio improving to 96.1%. Adjusted return on assets, a non-GAAP measure, increased to 0.10%. The loan-to-deposit ratio improved to 93.8%. Total deposits were $10.8 billion. Core non-brokered deposits were 62%. Liquidity was $4.4 billion. Borrowings were $1.7 billion. Loan balances were $10.1 billion. First Foundation Advisors assets under management were $5.5 billion, and the trust department had assets under advisement of $1.1 billion.

• Aim to have ROA back to 90-100 basis points, ROTCE to 10-12%, and CRE concentration below 400% by end of 2026.
• Capital raise will strengthen balance sheet and support growth.
• Expect improvements in net interest margin and core profitability to enable strategic investments.

• Interest rate risk from balance sheet positioning.
• Uncertainty around CECL reserves due to lack of historical loss data in some asset classes.
• Dependence on wholesale funding and potential market conditions affecting funding costs.

Q: Wanted to touch on the potential for optimization of the balance sheet, specifically securitization. Could you help think about size of potential transactions and market appetite?

A: Chris Naghibi said they would aim for up to $500 million in securitization, typically up to that size with efficiencies, and would explore private party sales.

Q: Gary Tenner asked about the allowance methodology review timeline and impact.

A: Chris Naghibi said the review is ongoing, committed to doing it right, and Scott Kavanaugh expected it to be completed this quarter.

Q: Gary Tenner inquired about customer service costs related to MSR deposits.

A: James Britton said the average customer service deposits, including MSR escrow balances, were close to 1.2 for the second quarter.

Q: Matthew Clark asked about shareholder vote date and share count.

A: Scott Kavanaugh said the shareholder vote is in September, and James Britton discussed share count considerations and proxy statement timeline.