Greetings and welcome to First Foundation's Fourth Quarter 2020 Earnings Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. Speaking today will be Scott Kavanaugh, First Foundation's Chief Executive Officer; Kevin Thompson, Chief Financial Officer; and David DePillo, President. Before I hand the call over to Scott, 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, see the company's filings with the Securities and Exchange Commission. And now, I would like to turn the call over to Scott Kavanaugh.

Hello and thank you for joining us. We would like to welcome all of you to our fourth quarter and full-year 2020 earnings conference call. We will be providing some prepared comments regarding our activities and then we will respond to questions. I'd like to say first and foremost that we had a new format and we worked very hard on it. I hope everybody appreciated the new format. We felt like it was a little more concise and provided numbers a little more in a straightforward manner. As highlighted in the earnings report, we experienced another strong quarter which capped off a great year for First Foundation. Our earnings for the fourth quarter were $22.4 million or $0.50 per share. For the full year, earnings increased by 50% over 2019 to $84.4 million or $1.88 fully diluted earnings per share. Total revenues were $63.1 million for the quarter and $251.3 million for the year, a 19% increase over 2019. We are pleased to report that our stockholders in 2020 enjoyed a payment of $12.5 million in the form of cash dividends. And as we announced in our earnings report this morning, we increased our quarterly dividend for 2021 by 29% from $0.07 to $0.09 per share. Our tangible book value per share ended the year at $13.44, a 16% increase during 2020. Combined with the dividend and the increase in market cap, we are proud to have returned $128 million to our shareholders during 2020 for a total return of 17%. In a year that was marked with uncertainty and macroeconomic challenges, we are extremely pleased at how our team came together to serve our clients and deliver the results that we are reporting today. Taking a look at our business lines, our banking operations experienced strong loan growth as loan production in the fourth quarter hit $715 million and $2.5 billion for the year, while deposits grew in the quarter by $449.6 million and $1.02 billion for the year. Wealth management business saw a strong year both in terms of new clients and positive investment returns in our portfolios. Assets increased by $403 million in the fourth quarter and ended the year at a record $4.9 billion. Our process for delivering sophisticated wealth planning strategies continues to help us uncover new opportunities to serve our clients including making introductions to our banking and trust teams. A metric that I'm very pleased about is our wealth management and trust business saw a combined pretax profitability of 19% for the quarter. We believe this signals that we are hitting scale for this business and is a metric that we can continue to strive to achieve in 2021 and beyond. In general, our business model of providing banking and private wealth management services has performed very well. Lending deposits, investments, wealth planning, and trust services are each contributing in meaningful ways. We continue to build strong relationships with our clients who turn to us for their banking and wealth management needs. This translates to client referrals and new business opportunities, as well as healthy pipelines for each of our businesses heading into 2021. Let me share other highlights for the year. Our commitment to enhancing our technology continued as we invested in new ways to serve our clients leveraging AI, biometrics, and automation. We added the ability to easily open and connect an online checking account with our online savings account. We increased the functionality to allow our clients to use convenient payment and account linking features. We enhanced our client portal for our wealth management clients who want real-time information on their portfolios. And we have started to build a digital wealth planning offering to help clients better understand their complete financial profile. In 2020, we also successfully completed the sale and securitization of $553 million of multifamily loans in the third quarter. This was our fifth such securitization. Since 2015 we have sold $2.6 billion in loans and we are already taking steps to prepare for our sixth securitization, which we expect to complete in 2021. We also received recognition in the media and in the community for our charitable giving efforts. This included our supporting our communities' nonprofit initiative, which was especially meaningful this year amidst the pandemic where many nonprofits needed our support to help further their mission. Related to our corporate giving efforts, we have taken the steps to create a charitable foundation in 2021 and we are excited about what the initiative could mean for all nonprofits we support. I'm so proud of the contributions of our entire team and I am grateful to our employees who work hard every day to deliver amazing results for our clients. Overall it has been a strong year. I believe that the strength of our offering in the favorable business environment ahead positions us well in 2021. Looking at 2021, we plan to expand our presence into the state of Texas. The opportunities for growth in Texas for our banking and wealth management businesses are strong. Specifically, the Dallas Metroplex is one of the largest markets for multifamily lending and the diversity of businesses there makes it a strong fit for us. It also aligns with our strategic goal of expanding into major markets that present great opportunities for us. The Board of Directors has approved a move of our holding company to Dallas, which we expect to occur in the first half of 2021. We will continue to maintain our presence in the markets we currently serve, including the existing bank and wealth management headquarters here in Irvine, California. Before I hand it off to Kevin, I want to remind everyone that our updated investor presentation can be found on our Investor Relations website and provides many of the details we are discussing on this call. As you will see, we've taken the opportunity to enhance the way we report our data and results. We hope you find it valuable. Let me turn it over to Kevin, our CFO.

Thank you, Scott. Earnings per diluted share of $1.88 in 2020 is a 50% increase over 2019. As a result of this momentum, our tangible book value per share increased 16% to $13.44 in the year. The full year return on assets was a strong 1.26% with a return on tangible equity of 15.5% as our business model has helped us to navigate these uncertain times with great flexibility and success. The net interest margin expanded seven basis points to 3.19% in the quarter as a result of the progress we have made in lowering deposit pricing and maintaining discipline in loan production. In addition, we recognized $1 million of net PPP fee income, which is approximately 26% of the total expected fee income in our PPP loans originated. Excluding the effects of PPP, our NIM increased to 3.13% in the quarter. Loan fundings in the quarter of $715 million were a record for First Foundation with full year fundings of $2.5 billion. The loan yield increased 10 basis points in the quarter to 4.01% as we have maintained strong underwriting discipline and saw some remix in loan fundings towards multifamily production. The cost of deposits decreased from 57 to 41 basis points in the quarter. Our strategy of increasing core deposits has gained traction as our core deposits increased from 75% to 94% in 2020. Total deposits increased by over $1 billion in the year to an all-time high with 39% growth in non-interest-bearing accounts. Credit metrics remained strong in all our loan portfolios and the allowance for credit losses for loans remained essentially flat resulting in an allowance of 50 basis points of loans. This was a result of higher balances in loans held for investment and net charge-offs partially offset by a slight improvement in the economic scenario we utilized for the CECL calculation. Net charge-offs were only 2 basis points for the full year and nonperforming assets remain low at 30 basis points of total assets. Through this cycle, First Foundation's credit performance relative to the industry has been a key differentiator. Asset management fees were strong with revenues of $7.6 million and our Advisory and Trust divisions achieved a combined pretax profit margin of 19% in the quarter. Assets under management at FFA increased to $4.9 billion while Trust assets under advisement at FFB increased to $1.1 billion. The efficiency ratio for both the quarter and the full year was 49%. With strong expense management and the investments we have made in our infrastructure we are seeing growing benefits from operational leverage and efficiencies. I will now turn the call over to David DePillo, President of First Foundation.

Thank you, Kevin. It was indeed a very successful year for First Foundation. We are seeing the benefits of scale and efficiency as evidenced by the financial results we reported this morning. We are able to accomplish this all while supporting our colleagues, clients, and communities during some very challenging times. In 2020 as mentioned we originated $2.5 billion of loans, a record year for us. In the year we maintained our focus on our core multifamily business which has performed exceptionally well throughout the pandemic as well as to continue to diversify into high-quality commercial business lines. The composition of our loan originations during the year was as follows: 53% multifamily; 37% C&I; 8% single-family; and 2% other. As of December 31, our loan portfolio consists of 52% multifamily loans; 32% business loans; 15% consumer and single-family loans; and 1% land and construction loans. It's worth mentioning that even with record originations in the fourth quarter of $715 million we achieved a weighted average interest rate of 3.61% on originations compared to 3.67% for the third quarter. This demonstrates our ability to achieve robust volumes while still defending the yields on our portfolio. The credit quality of our loan portfolio is strong as evidenced by a low level of delinquencies and our NPA ratio declining to 30 basis points as of December 31. As we had mentioned in recent quarters we have low exposure to industries hardest hit by the pandemic specifically hospitality and restaurants. Our variances are down by 54% or $30 million to only $25 million since last quarter which represents 48 basis points of our loan portfolio. There were no forbearances in our multifamily consumer or land or construction portfolios. And there is only $4.5 million of first-round forbearances and $9.6 million of second-round forbearances still outstanding. During the quarter we forgave $27 million or 16% of our PPP loans originated. Our loan pipeline remains strong and the bank continues to be consistent with the levels of activity we have seen in recent quarters. Deposit growth for the year was strong with a $1 billion increase in balances in 2020. We experienced a $523 million increase at the branch level and a $979 million increase in specialty deposits. The growth of our deposits business during the year was also attributed to the success we experienced in attracting new affluent clients through our digital channels. Digital banking deposits, which were launched in the fourth quarter of 2019 increased $402 million in 2020 to finish the year at $550 million. The growth in our retail digital and specialty deposits has contributed to the success of our strategy to increase core deposits. As Kevin mentioned, our core deposits grew to 94% of total deposits in the quarter, up from 90% from last quarter and up from 75% from the year-end 2019. As Scott mentioned, we are seeing the investments that we have made in our digital delivery of both our client-facing and back-office operations of our offering pay off. This is most apparent by looking at our efficiency ratio, which, as Kevin highlighted, continues to improve to the best levels we have seen to date. But we are also starting to see the benefit of our growth strategy, being able to offer an end-to-end digital solution to attract clients through our existing branch network and through our digital delivery capabilities will continue to be a powerful differentiator of our growth going forward. For 2021, we are focused on creating seamless delivery of our solutions, with clients engaged with us through our traditional branch network or digitally through a computer, smartphone, or tablet. In addition, we have planned enhancements for our commercial lending platform, our business online solution, our consumer online banking, and our consumer banking app. This will help define the user experience that is uniquely catered to our clients' needs. All the success in 2020 could not have been achieved without the great team we have at First Foundation. I am so grateful for their dedication and hard work. At this time, we are ready to take questions and I'll hand it back to the operator.

Thank you. The floor is now open for questions. Our first question comes from the line of David Feaster of Raymond James.

Hi. Good morning, everybody. First of all, I like the new format a lot. I think you guys did a great job and congrats on the expansion into Texas. It's exciting. It makes a ton of strategic sense. I'm just curious, if you could kind of give us a roadmap maybe a timeline for the expansion, just regarding the infrastructure necessary from both a location and personnel perspective. And maybe any impacts you expect on your growth trajectory and just appetites for even M&A to potentially accelerate the build-out?

Yes, we're always looking at M&A. The one thing I would say is, Texas is riddled with banks everywhere. And frankly, I hope that there are some opportunities out there. I've already started talking to investment bankers to see what the landscape looks like. But one thing I can say is, if you've been looking at the press, many companies of all different kinds have moved to the Dallas Metroplex area and continue to announce. So, I think it's a great expansion for us. Frankly, I've already purchased a home. It's under construction and it probably won't be done until April. I'm hoping that we can complete this by the March-April time frame. And I think we'll be holding our Annual Shareholder Meeting, which I think is in May, in Dallas. So we're really optimistic about it. I think there's a great opportunity just to enhance geographically our expansion in loans, deposits. One of the things I want to do David is, also get our Trust - Texas Trust powers. And you can't really do that until you have a branch out there, at least one branch. So we're already sending our facilities person, Mark Gordon, out there to try to look around and see if we can find some place to start the expansion. So initially, it's going to be de novo. But I would hope that there is an opportunity to do some type of acquisition.

I would say, David, for financial modeling purposes, we really haven't included much benefit or expense load in 2021 and are looking at this year as a positioning year as we form teams and start deploying them in the years to come. So for us, it's really a long-term strategy of diversification.

Okay. That's helpful. And then, just any thoughts on growth near term? And maybe – I mean, it's great to see record production in the fourth quarter. What's the pulse of the multifamily market? What are you seeing there? And then just thoughts on C&I. It's great to see the C&I strength in the quarter and maybe just expectations for growth as we're looking out to 2021?

From the multifamily side, I think what we saw was a strong pullback in the market at the end of the first quarter and through the second quarter and then starting to service some of that pent-up demand into the third and obviously into the fourth quarter. There still is a significant pent-up demand in the market for both purchase and refi. We've seen the purchase market come back. So people have operated, call it close to a year in this environment. We are one of the most locked down or the most locked down state in the union. However, people have navigated very well and the strength of the product has brought the confidence back. So our expectation is 2021 trajectory should mirror what we saw in the fourth quarter which is continued strong demand. We don't necessarily see that dissipating anytime in the future. Even though the yield curve has deepened slightly, rates are still on a historical basis very competitive. And obviously for us, the ROE on that is probably higher than it's been since we've seen in quite some time. On the C&I side it's very interesting. It's a tale of the haves and have not. We've been focusing on businesses that have been very successful or repositioned themselves through the pandemic and have insulated themselves. We've tended to go a little bit upstream to companies that are a little bit larger that have access to capital and fortified balance sheets. And I think that served us very well. And it's certainly proved itself out in the numbers and we're going to continue to stay diversified and disciplined but our expectation on the C&I side is consistent growth as what we've seen in the latter half of 2020. So also on the residential mortgage side even though that's not a huge business for us, our demand is way outstripping our ability to provide our customer base. So we're adding some additional resources around that. Equipment finance is back to levels that we saw prepandemic and continues to grow. So I would say we're hitting on all cylinders on the production side and we just don't see anything near term, especially in the fact that with – it appears to be easing restrictions in California as far as the rest of the country on some of the shutdowns and lockdowns our expectations are it could potentially get better from here as well.

Okay.

I'll add David that our municipal financing division, we launched that a little over a year ago, it's done incredibly well. And we're very thankful that we got the talent that we have there. And frankly, there's frankly, I don't care whether it's a trust business, assets under management, pipelines, loans, deposits, I feel like our pipelines are just so robust right now that I'm very optimistic for 2021.

That's great. That's great, color. And then just like to talk about your rate sensitivity. I mean this rate environment has really played right into your hands, as you've just totally been pretty liability-sensitive but just curious how that may have changed in light of the liquidity build and the deposit remix and impacts of floors? And maybe just how you plan to manage your sensitivity going forward?

This is Kevin. I can start off. And you're right that the sensitivity has changed somewhat in this rate environment as it has for many banks. We are in – at least from an academic perspective, when you shock your interest rate risk scenarios by 100 basis points, 200 basis points, we're liability sensitive. Now that often plays out differently in reality as you have different types of yield curves and the dynamics and we model that as well. From an academic perspective, we are a little less liability-sensitive. As a result of some of the changes in mix we are still somewhat liability-sensitive. But we monitor this very closely and really manage the balance sheet in a very flexible way in order to take advantage of different interest rate environments.

The one thing I would add, David, is that we have $100 million of home loan bank advances maturing sometime in April. Our position is that we plan to retire these advances upon maturity. At that point, I don't anticipate having any home loan bank advances outstanding. As you've noticed, our restructuring of broker deposits has significantly decreased. We've been very successful in repositioning the deposit side, and I expect that trend to continue into 2021.

On the asset side, several factors have likely influenced our relative duration, which has shortened from historical levels. Our portfolios are starting to mature. As you might have observed from 2015 to 2019, our growth rates were compounded at 30% to 40%, with relatively unseasoned products in an increasing interest rate environment. Now that our growth rates are closer to around 10% to 12% on the loan portfolio, our CPR has increased accordingly. Consequently, the duration of those assets has decreased, and a stronger focus on commercial and industrial loans has also contributed to a shorter duration for the portfolio. We are witnessing benefits on both sides of this, which aligns with Kevin's comment about our interest rate sensitivity being lower compared to historical levels.

And the last thing I will add is our shift to more core deposits benefits our interest rate profile as well with that relationship-based approach.

Okay. So, taking that all together, it sounds like probably further room for modest core NIM expansion exclusive of PPP?

Yeah. Look, I think loan yields are holding up. We've got some room on the deposits. Our strategy is we've loaded up on liquidity. We're effectively going to be deploying that liquidity. Some of that as Scott mentioned is paying down higher cost of deposits in the way of brokered, as well as we still have a few home loan bank advances that are maturing. They're not at the levels and rates we saw before, but it does give us a lot of room. So I would say deploying excess cash for the first quarter on the form of additional fundings and pay down of other borrowings will probably have a near-term impact and then it will be the gradual effect of declining rates as we re-price going forward. Assuming asset yields stay where they're at, we should have some positive impact going forward on NIM.

And all this will depend on the performance of the yield curve and how we manage prepayments over the next few years.

Of course. Thanks everybody.

Thank you.

Thank you.

Your next question comes from the line of Matthew Clark of Piper Sandler.

Hi, good morning all. Can you update us on the remaining amount of net PPP fees that are left just to close the loop on the margin outlook?

Yeah. So we started off with net PPP fees that were being deferred of about $4 million and there's about $2 million left at this point.

Okay, great. And on the wealth management pre-tax margins, they were up again nicely to 21% or so. What's the outlook for those margins this year? Can we continue to grind higher, or do you think we kind of stabilize at this level?

I believe we have the potential to improve slightly, but historically, this will largely be influenced by the growth in assets under management. We have implemented several new systems that have lessened our need for employee infrastructure. While we will occasionally need to hire a new person, the technology should help reduce our overhead costs. There is still room for improvement, but I wouldn't expect it to be a significant increase.

Okay. Regarding reserves at 50 basis points, assuming the macro model remains unchanged, should we anticipate stabilization here? Do you believe it might drift slightly lower?

That's – we kind of model around 50. As you've seen, we've kind of vacillated between 48 and 50. Quite honestly, the only probably larger effect we have are really the securities adjustments that we have from quarter to quarter, because we tend to have a little more market sensitivities than our loans do. The models continue to get better. We are increasing our qualitative reserves during the quarter. By and large, given the fact that we've still got a pandemic going on and we're trying to be relatively conservative, but we kind of model around 50 basis points as kind of the low end and then do our best to justify continuing to reserve at that level. Some of it also is mix-related too, as we do more C&I that could have an impact on driving that slightly higher. But I would say, all in all 50 is probably about where I would model it out today.

Okay. Great. And last one for me. In other fee income, anything unusual there this quarter that might come out next quarter of the run rate?

There were a few unusual items. We are experiencing higher prepayment fees. So we were about $2.2 million this quarter versus $1.1 million last quarter. And then, we also had a benefit from our MSR or our mortgage servicing right valuation about $300,000.

It was a milestone.

Yeah. I would say on the preface, because there's good velocity in the market that will probably be consistent at least for the next several quarters.

Okay. Thank you.

Your next question comes from the line of Steve Moss of B. Riley Securities.

Hi. Good morning, guys.

Good morning, Steve.

Yeah. Good quarter here. And I guess, just in terms of originations for 2021. I just want to tie that a little further David. Do we think about it staying close to the $2.5 billion number we saw for this year or maybe a bit higher?

Yeah. I would say, $2.5 billion is probably our low end right now. Our expectations are we should have some increase from there. As you know, we typically talk about $1.8 billion to $2 billion. Now we're talking about $2.5 billion plus as kind of a benchmark. But I would say, since the pipelines are starting off strong and we probably won't knock on wood have a freeze-up of the market that we saw at the end of the first quarter and in the second quarter you can kind of do the math that $2.5 billion should be kind of at the low end of our expectations, if that makes sense.

Yes that does. David, then in terms of just expense growth for full year 2021 just kind of curious as to any changes or updated thoughts you guys may have around expenses?

We kind of modeled a little bit higher than – each year. So we're probably looking at – I'll make sure I don't screw up the math probably about 5% growth on expenses. I think that's about right.

Yeah, that's about right. Well, we do merit increases right at the beginning of the year for employees. So we averaged about 3% around merit increases. We'll have some additional costs associated with additional funding some of those variable costs.

New employees.

Yeah, new employees throughout the year, but still experiencing some benefits from the efficiencies we put in place.

Okay. Great. Thank you very much. That's all for me.

Thank you.

Thank you, Steve.

Your next question comes from the line of Gary Tenner of D.A. Davidson.

Thanks. Good morning. On the topic of loan growth for 2021, and I guess for 2022 in a sense, the mix has been pretty stable in terms of production in the last couple of years with commercial business 37%. As you move to Texas or expand to Texas, it would seem to me that maybe it would initially be easier to grow multifamily in that market. So, how do you think of kind of the mix maybe developing initially with that move?

Yeah. I mean, real estate lending is usually easier to build. However our expectations are we would have a diversified offering consistent to what we're doing in all our other states. The amount that we would expect near term probably we wouldn't have much in the way of adjusting our mix and the fact that because we have such a large base to start on. But yes, I would say, it would probably initially start with real estate and then start layering in C&I and consumer as we go along. But I wouldn't expect it to have a dramatic change in our funding mix.

The one thing I will say about multifamily in the Metroplex area is, it's a little more fragmented in lending patterns than it is here in California. Currently, I think JPMorgan Chase has not even landed in the Metroplex. So we're hoping that that may be a small benefit to being in the marketplace. As you know they're a very formidable lender out here in the state in California.

Great. That was my only other question. Everything else was answered. Thank you.

Hey, thank you.

Your next question comes from the line of David Chiaverini of Wedbush Securities.

Hi, thanks. Good morning, a couple of questions for you. I guess first on that last point about Texas. How aggressive do you guys plan to be in terms of the de novo expansion there? Are we talking one to two branches per year for the next couple of years? Just talk about the pace of growth there.

I think initially it's going to be one and we may put another one. Right now, we're trying to pick a location that we think will be a reasonable location. That would probably be in the areas where most of the companies seem to be moving to. So that could be like Westlake, Southlake, Plano some of those areas. As you know, I mean we only have 21 branches total. So it's not like we're going to be branch-heavy in the state of Texas. We're still going to continue to work on our digital channel and those types of things.

Which is a great point Scott. We have experienced some decent deposit growth already in the state of Texas through our digital delivery channel. I don't have the statistics in front of us, but I think it's one of our larger major metro markets from gathering deposits digitally. So this will be more of a support de novo bricks and mortar around that digital channel.

I believe that whenever we have entered a new market, we have consistently ensured that we bring in experienced individuals who understand that marketplace. This time will be no different; we will seek to hire people with extensive experience in these markets. We are confident that we can generate a significant amount of production as a result. I am very optimistic about this, and I agree with Dave that this year, we should not expect it to significantly impact our balance sheet or revenue. However, I believe that in the following years, specifically 2022 and 2023, it could have a considerable effect.

And will there be much in terms of tax savings? Clearly Texas is more tax-friendly than California. Can you talk about that?

The tax savings we will definitely realize as we have loan production within Texas. That's what really drives it and what will be subject to the safe tax rates of Texas which are much better than California where most of our loan production is today.

Yes. Just to give you a little bit of an update. We have 27.5 million or 588 clients already in Texas under our digital channel currently.

Great. You mentioned that once you have at least one branch operational, you'll be able to utilize the Texas Trust powers. Can you explain what capabilities that will provide for your team and how it compares to California trusts?

Yes, certainly. Currently, we hold trust powers in three states: Hawaii, Nevada, and California. Texas has a significantly large population. Notably, approximately 40% of the total assets managed by our Trust department come from our Nevada Trust. We are actively collaborating with CPAs and attorneys for document drafting. Through our partnership with First Foundation Advisors and their connection with Charles Schwab, we've leveraged Schwab's trust powers, which are more straightforward, while we are equipped to manage more complex cases. As seen in California and Nevada, we believe we can gain substantial traction in this area.

Great. Thanks very much.

This concludes our allotted time for today's question-and-answer session. I will now turn the call back to Mr. Kavanaugh for closing remarks.

Thank you, everyone. I'm so proud of what we accomplished in 2020 and I'm very excited about the year ahead. There are great opportunities related to our geographic expansion and I'm pleased to see the investments in technology pay off. Everyone on the team is working hard to deliver an excellent client experience and we are committed to producing strong results for shareholders. We believe we've built a valuable franchise and look forward to the year ahead. As a reminder, our earnings report and investor presentation can be found on our Investor Relations website. Thank you again for participating in today's call. Have a great remainder of your day.

Thank you. That does conclude First Foundation's fourth quarter 2020 earnings conference call. You may now disconnect.