First Foundation Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Capital Raise and Balance Sheet Realignment: Completed a $228 million capital raise. Moved $1.9 billion of multifamily loans from held for investment to available for sale, creating a $117.5 million fair value adjustment. This allows evaluation of reducing exposure to low coupon fixed rate loans and core expenses reduction.
• Business Lending: Continued to increase C&I lending during the quarter, providing spreads over funding costs.
• Funding Costs: Cost of deposits decreased 8 basis points to 3.41% during the quarter, with expectation of more significant reduction in funding costs for the fourth quarter due to the Federal Reserve's rate cut.
• First Foundation Advisors and Trust Department: First Foundation Advisors closed the quarter at near record assets under management, and the trust department posted a solid quarter with assets under advisement increasing to $1.2 billion.
• Financial Metrics: Reported a net loss attributable to common shareholders of $82.2 million or $1.23 per share. Tangible book value ended the quarter at $15.71, down from $16.43 in the second quarter of 2024. Adjusted tangible book value per share ended at $9.50.

Segment Performance

• Loans: Loan balances ended the quarter at $9.9 billion, down from $10.1 billion in the second quarter of 2024. C&I loans accounted for 90% of loan fundings during the quarter. Loan yields remained flat at 4.77%. Non-performing assets to total assets were 0.33% for the quarter.
• First Foundation Advisors: Ended the quarter with near record assets under management at $5.5 billion, unchanged from the second quarter of 2024, with profitability and FFA remaining strong.
• Trust Department: Assets under advisement increased to $1.2 billion for the quarter compared to $1.1 billion in the second quarter of 2024.
• Net Interest Margin: Increased to 1.5% during the quarter, up from 1.36% in the second quarter of 2024. Interest income totaled $157.2 million for the quarter. The cost of deposits decreased 8 basis points to 3.41% during the quarter, with expectations of more significant reduction in funding costs for the fourth quarter.

Guidance

• Rate Cuts: Expect a more significant reduction in funding costs for the fourth quarter as a result of the Federal Reserve's 50 basis point rate cut in September.
• Loan Sales and Securitization: Plan to securitize approximately $0.5 billion of loans with an agency in the fourth quarter. Evaluate other loan sales and consider other securitizations in 2025.
• Capital Ratios: Capital ratios improved with the addition of capital, and expect further improvement in the fourth quarter, including from the conversion of preferred shares to common equity.

Risks

• Interest Rate Risk: Navigating a complex interest rate environment, need to respond to volatility.
• Credit Risk: Monitoring non-performing assets, with a recent increase largely due to two single-family loans, but confident in low loan to values and conservative underwriting.
• Liquidity and Funding: Need to reduce reliance on wholesale funding (broker deposits and Federal Home Loan Bank advances) and focus on strengthening core deposit base.

Question and Answer

• **Q: David Feaster asked about the timeline for loan optimization, ECR deposits, and growth.

A: Jamie Britton stated they have flexibility to get best execution, expect to finish $0.5 billion securitization by year-end, and Chris Naghibi discussed ECR deposits' beta and growth plans with adding bankers in key markets.

• **Q: Gary Tenner asked about ACL review and yield on HFS loans.

A: Chris Naghibi mentioned it's a pragmatic review process, and Jamie Britton said to use weighted average yield of the portfolio for modeling.

• **Q: Matthew Clark asked about proceeds from securitization, loan yields, deposit rates, and reserve ratios.

A: Scott Kavanaugh said to reduce wholesale funding, Jamie Britton discussed deposit rates and reserve ratio between 65-70 basis points.