First Foundation Inc. Q1 FY2025 earnings call

Key Points - Thomas Shafer as new CEO is pleased with productivity and progress on internal review processes. - Financial results: Returned to profitability with net income of $6.9 million, driven by net interest margin expansion, reduced provision expense, favorable valuation marks on held-for-sale loan portfolio, and non-interest expense reduction. - Loan activity: Funded $180 million of new loan balances, with approx 78% C&I loans. Loans held for investment decreased due to payoffs. Loans held for sale unchanged. - Strategic focus: Continue to reduce commercial real estate concentration and exit lower-yielding multifamily loans. Pipeline for loan sales and securitizations active. - Credit: ACL position increased to 46 basis points, net charge-offs moderated. Quarterly ACL build due to higher reserves in equipment finance lease portfolio, commercial loan portfolio, and criticized assets. - Assets under management: Ended at $5.1 billion, trust assets under advisement at $1.2 billion. Deposit mix: Decline in brokered deposits offset by increase in other deposits. - Capital: Strongly capitalized with common equity Tier 1 ratio at 10.6% and Tier 1 leverage ratio at 8.1%. ### Jamie Britton's remarks - Detailed on first quarter financials: Pre-provision net revenue increased, net interest margin improved, non-interest income had certain items, non-interest expense reduced excluding customer service costs, provision for credit losses significantly lower. - Forward outlook: Optimistic about sustainable profitability, expects modest reduction in total assets, continued margin expansion with expected exit run rate for net interest margin in Q4 2025 between 1.8% - 1.9% and further improvement to 2.1% - 2.2% by end of 2026, positive growth trends in core fee income, and focus on limiting incremental expense growth.

Net income was $6.9 million or $0.08 per share. Net interest margin expanded by another 9 basis points to 1.67%. Pre-provision net revenue in the first quarter was $9.7 million or $0.11 per share, up from a pre-provision net revenue loss of $2.3 million in the fourth quarter. Reported net interest margin for the first quarter was 167 basis points, a 9 basis point increase from the previous quarter. We funded $180 million of new loan balances in the quarter, priced at an average yield of 7.09%, with approximately 78% being C&I loans. Loans held for investment decreased due to $354 million in payoffs. Loans held for sale were essentially unchanged at $1.3 billion with no loan sales during the quarter. Assets under management ended the quarter at $5.1 billion, down from $5.4 billion at the end of the year, while trust assets under advisement closed at $1.2 billion, up from $1.1 billion in the prior quarter. Overall deposits declined modestly to $9.6 billion, with a $400 million decrease in high-cost brokered deposits offset by a $71 million increase in combined retail, specialty and digital banking deposit balances. The total cost of deposits declined, and the loan-to-deposit ratio remained steady at approximately 94%.

• Expect modest reduction in total assets over intermediate term as working to reduce loans held for sale from $1.3 billion to 0. - Anticipate continued margin expansion, with expected exit run rate for net interest margin in Q4 2025 between 1.8% and 1.9%, and further improvement to 2.1% to 2.2% by end of 2026. - Expect positive growth trends in core fee income while remaining focused on limiting incremental expense growth.

• Uncertain economic backdrop could impact C&I loan utilization rates. - Potential professional service expenses related to remediating internal control issues. - Macro-economic conditions could affect the credit portfolio, especially stress testing of fixed rate portfolios and CRE portfolios.

Q: How did C&I loan fundings utilization rates trend in 2025 and any impact from broader uncertainty?

A: There is some hesitancy from clients due to economic backdrop for capital expenditures, but some clients accelerated inventory purchases with trade conversation uncertainty.

Q: Did you invest in particular markets in 1Q and anticipated portion of individuals' performance in 2025?

A: Added a couple in the Florida market, optimistic about that area. Modest individual performance in 2025 based on joining in first year, with most production from California on commercial side.

Q: Is AUM decline due to customer account balance fluctuations and new customer acquisition in advisory business?

A: Had terminations and turnover from lower performing teammates, but optimistic about pipeline. Market fluctuations impacted AUM.

Q: What rate environment does NIM outlook assume and balance sheet size/mix context?

A: Assuming only two rate cuts in 2025, slightly conservative to in line with curve longer term. Expect balance sheet mix transformation with dispositions driving NIM improvement in 2025.

Q: Any expense impact from remediating internal control issues this quarter or projected?

A: May see some professional service expenses from time-to-time to bring in expertise for transition, but nothing significant.

Q: Seasonal impact on expense line item in 1Q and trend throughout year?

A: Some changes due to seasonal items like funding non-executive annual bonus pool leading to additional payroll taxes, etc. Expect part of expense to normalize going forward with investments in transition.

Q: Pricing pressure for new C&I loans from competition?

A: Competition for transactions in all markets, but $180 million fundings are deal-centric.

Q: Any credit bucket to keep closer eye on?

A: Need to keep eye on larger economy, with stress testing of fixed rate portfolio and being thoughtful about re-pricing impact on CRE portfolio.

Q: Why did wealth management-related expenses step up and relation to FTE hires?

A: Partly due to seasonal items and annual compensation expense, with part being one-time expense expected to normalize.

Q: Thoughts on customer service costs and NIM going forward, and spot rate on deposits at end of quarter?

A: Customer service costs will come down due to Fed rate cuts and reducing reliance on concentrated high-cost deposits. Total interest-bearing deposits monthly average in March was 381, down from over 390 in December.

Q: Thoughts on overall loan balances going forward?

A: Expect modest growth over time, with contraction in existing multifamily book, amortization in municipal portfolio, reduction in equipment finance portfolio, and growth in other portfolios as investing in new C&I bankers.