First Foundation Inc (FFWM) 2025 Q2 法說會逐字稿

Greetings and welcome to the First Foundation second-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 measure, 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, operator. Welcome and thank you for joining First Foundation second-quarter earnings call. On today's call, we will 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.

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.

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 to 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 $0.01 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 in executing 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, material upward movement 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. 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 C&I 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 C&I loan originations and increased model-calculated loss factors in the commercial loan portfolio. A review of our CECL methodologies 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 on reducing our CRE concentration and growing C&I 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 -- ended the quarter at $5.3 billion, which was up slightly versus the linked 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. We have a building pipeline of referrals, and 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 continued to show tangible progress in our deposit base. Partly offsetting our high-cost categories in 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 30.

Our ability to grow relationships in these core 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%.

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 1 ratio is at 11.1%, 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.

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 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 extraordinarily 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?

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 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 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 4 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 $0.01 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. 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 4, reported net interest margin for the second quarter of 168 basis points represented a 1-basis-point increase relative to the linked 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 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.

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 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 exit 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 in our held-for-investment multifamily portfolio. While it remains significant, the repricing is a catalyst that will take some time to play out, but based on our portfolio's weighted average spread, were 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 will reprice to floating, refinance with us, or pay off at par in 2026, and another $895 million of 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. Looking ahead to the volume of repricing we see on the horizon, when coupled with CD maturities set to occur, we remain optimistic about the opportunity and flexibility this provides.

On slide 8, 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. 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 $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%. 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.

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 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.

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 4-basis-point improvement when compared to the linked quarter.

Switching quickly to First Foundation's 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 $3.5 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, as 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 we shared over the past two 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 deposits possibly repricing faster than we are currently expecting.

We also 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 focus investments directly benefiting our transition.

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

Thanks, Jamie. While the headline earnings were not where we want 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 are well-capitalized, plenty of liquidity, and are making progress in adding considerable talent to the organization, which we hope to have more concrete details in the near future. 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, will you please begin the question-and-answer session?

(Operator Instructions)

David Feaster, Raymond James.

Well, you guys have been really active optimizing the balance sheet and working through some of these initiatives a little bit more than I was thinking you were going to get done this quarter, which is great. As you've gone through 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? Just kind of curious how you think about that given you guys have been ahead of schedule perhaps.

Yeah, so David, thanks for the question. I think about the makeup of the balance sheet, we're obviously focused on reducing our CRE concentration. We actually like the asset class, we just had too much of it on the balance sheet. So once we 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 making sure that we're driving earning assets onto the balance sheet, focused on EPS and our funding costs. So I think that really this is the portfolio we're focused on, and we also want to get rid of the volatility of the held-for-sale asset class.

Okay, so there's nothing else to accelerate there. It's more just focusing on the strategic initiatives after this last tranche.

Yeah, that's right.

Okay. And then maybe touching on the private banking initiative, where are we at in that expansion? You touched on some talent adds. 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 more material contribution as we look at next year.

Yeah, so I'm very optimistic about this. We've had a team kind of building it out before. There's a couple things. We've got an outstanding wealth group. Our team is very sophisticated, they've got tremendous 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 is designed. Part of the initiative of recruiting a new Head of Consumer, which is consumer bank, retail business bank, 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 I'd say we've left the starting block. 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.

Gary Tenner, D.A. Davidson.

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

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. 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. 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 that to contract much from here in the third, maybe a little before growing into the fourth quarter again. And then I think coming out of 2025, with a restructured balance sheet complete and some new leadership in place and ideally attract some new hires in client-facing roles, we’ll have a lot of momentum going into 2026.

Appreciate it. And then it sounded to me like 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 into the fourth quarter and then there's one transaction, or do you think it's still piecemeal over the back half of the year?

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.

Matthew Clark, Piper Sandler.

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

Sure, thanks for the question, Mattie. As I said in my prior comments, turnover and change is expected when you're making the level of changes to the operating model that we are. We've gone from being known for the multifamily, and 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 appreciate the effort and energy and the impact that our former leaders had in 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. So I think the turnover reflects some planned turnover and just a little bit of turnover that's caused by the rate of change. All good people, but it creates that -- that turn creates opportunity for us to accelerate some of the changes that might have been in the works.

And I can tell you this, the people that Simone and I have spent most of the time on the recruitment process, the level of talent that wants to come to Southern California is staggering. Great organizations, extraordinarily developed people, and we're thrilled with the engagement that we've had.

Great, thanks for the color. And the other one for me, just on the ECR deposits and your plans to potentially reduce the amount further. 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.

I'll have Jamie help me with this, but I'd say that it's really high cost. There's nothing necessarily wrong with the deposits, it's just, again, the scale that we had and the costs. So as a funding mechanism, it's a large pool that many banks have, but we're focused on replacing high-cost, high-concentration deposits with more granular, lower-cost. That's a journey, but everything we can do to address the high-cost categories, we're focused on.

And I would just add to that, Matthew, in that we don't have many relationships in 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 I mentioned, just in general on high-cost deposits, 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’ll use some of that dry powder to help offset the outflows of those deposits.

And so if we end up with a few relationships, I think we're very comfortable with that. We just want them to be more manageable sizes. I think you could see another couple hundred million dollars coming out of that portfolio by the end of the year. As I mentioned, and 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.

And I think as you move into the third quarter, you’ll see customer service costs drop below $10 million or so, and then as we continue to focus on managing down high-cost deposits with the final securitization, you’ll see that come down even further.

Andrew Terrell, Stephens.

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

Oh, sure. Total loan yields exited just under 4.70%, Andrew.

Okay, and that was at the end of the quarter?

Correct. And that does include the multifamily loans, which our multifamily portfolio overall is just under 4% at this point, so not a meaningful portion anymore. But that does include the final $500 million of held-for-sale loans from multifamily.

Got it. Okay. And then on the cash position, still around 9% or 10% of assets, you called out the schedule of brokered deposit maturity, and I think expectations are clear about some of the higher-cost ECR deposits. But some of the brokered are also a little bit higher cost. Just curious about your comfortability with the cash position, because we see you managed that lower going into 2026, is that kind of earmarked for brokered deposit reduction?

Or you also gave some comments about maintaining earning asset base and maybe investing in some securities. How should we think about the puts and takes there as it relates to the cash position?

Yeah, there's obviously a lot of moving parts on the balance sheet. We're comfortable right now with the level of liquidity. That will, of course, fluctuate through the quarter due to the timing of different moves, especially when you're moving off such large pieces of the asset portfolio. So that 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 where a reasonable level is going into 2026. But I would expect the cash position to remain relatively stable on an average basis for the rest of the year.

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

Thank you. I'd like to thank everyone for joining us today and the questions that were 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 is capable of executing the needs that we have in our strategic plan and returning the company to profitability levels that we all expect. Thank you.

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