First Foundation Inc. Q2 FY2023 Earnings Call

Greetings. And welcome to First Foundation’s Second Quarter 2023 Earnings Conference Call. Today’s call is being recorded. Speaking today will be Scott Kavanaugh, First Foundation’s President and Chief Executive Officer; and Chris Naghibi, Chief Operating Officer. 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, please see the company’s filings with the Securities and Exchange Commission. And now I would like to turn the call over to President and CEO, Scott Kavanaugh. Please go ahead.

Good morning and welcome. Thank you for joining today’s earnings conference call. Following the disruption in the financial industry in the first quarter, we have seen stabilization across the entire banking sector, and in the second quarter, we were able to squarely focus on executing against our strategy. We are extremely proud of the dedication and diligence of our team, as we experienced total deposit growth, loan portfolio average yield increases, and continued strength in our Advisory and Trust business. We were able to get our loan-to-deposit ratio back below 100% and our percentage of insured and collateralized deposits to 88% of total deposits as of June 30, 2023, which we believe is an exceptional number comparatively. For the second quarter, we reported a net loss attributable to common shareholders of $212.3 million, representing a loss of $3.76 per share, including a second-quarter 2023 result which includes a non-cash goodwill impairment charge totaling $215.3 million. The goodwill impairment is a non-cash charge and has no impact on regulatory capital ratios, cash flows, or liquidity position for the operations of the company and our ability to meet our clients’ needs. Goodwill is evaluated for impairment annually in the fourth quarter, but the drastic change in macroeconomic conditions and the Fed rate hikes that negatively impacted our market valuation triggered an updated assessment. Excluding the impact of the goodwill impairment charge and other adjustments, adjusted net income, which is a non-GAAP measure for the quarter totaled $3.7 million or $0.07 per share. Adjusted net income attributable to common shareholders, also a non-GAAP measure, was $3.7 million for the second quarter, which excludes the goodwill impairment and other adjustments compared to the $8.3 million for the first quarter of 2023. Total revenues were $61.1 million for the quarter, a decrease of 13%, compared to the $70.5 million for the first quarter due to a decrease in net interest income. Our adjusted return on average assets, a non-GAAP measure, ended the quarter at 0.11%, a decrease from the 0.25% in the prior quarter. Our operations remain stable and we remain confident in our business given that we are seeing significant improvements in our deposit and loan profiles, as well as stability in our liquidity and credit quality. As for our expectations for the year, I truly believe interest rate costs are troughing based on the fact that inflation is cooling and all indications are that the Fed is towards the end of the tightening cycle. If this is the case, we should start to see improvements in our balance sheet and earnings. Related to operational efficiencies during the quarter, we continued to focus on cutting costs, including a small reduction in staff. Reevaluations of all vendor management solutions and setting travel restrictions to manage costs better. In the quarter, we had $280,000 in severance costs recognized as a result of the reductions in force, achieving an estimated annualized cost savings of $2.5 million plus 15% benefits. Cost-saving initiatives along with the shrinking of the balance sheet remain a key focus in controlling expenses to improve our margin profile. We have also been working to achieve strategic alignment throughout our business with the significant synergies realized between our banking and Wealth Management teams that will lead to cost savings by trimming expenses. Our deposits increased from $10.1 billion in the first quarter to $10.8 billion in the second quarter, up from the $9.5 billion as of June 30, 2022. Deposit levels hit a low point in the prior quarter and increased by $755 million during the current quarter as our deposit inflows and outflows normalize. Of the $755 million increase in deposits for the quarter, brokered deposits accounted for $318 million, while $437 million were core deposits. This brings total brokered deposits to 20.4% of total deposits as of June 30, 2023, compared to the 18.8% as of March 31, 2023, whereas core deposits were 80% as of June 30, 2023, and 81% as of March 31, 2023. The digital banking channel continues to grow as a source of new depository accounts, with account balances totaling $913 million at June 30, 2023, accounting for over 90% of all new client accounts. Also, deposits increased to 2.85% for the second quarter of 2023, compared to 2.38% for the prior quarter and 0.28% for the second quarter of 2022. Insured and collateralized deposits accounted for approximately 88% of total deposits as of June 30, 2023, compared to 85% of total deposits as of March 31, 2023. Strong core deposits are very key to every bank in terms of building franchise value and our pipeline of our core deposits remain strong, while we continue to make significant strides on that front. We are encouraged by the levels of deposits that have continued to return. Chris will touch more on this in a minute. Our loan-to-deposit ratio has continued to fall; it was 97.9% as of June 30, 2023 and 93.1% as of July 20, 2023. This is a significant improvement from the 106.1% as of March 31, 2023. This ratio is now below 100%. We believe this will continue to improve and we look to modestly shrink the balance sheet while adding deposits. This improvement in liquidity comes primarily from our clients returning, with some of the change coming from broker deposits. Deposits have been a large focus for us on the front line and we are continuing to make steady progress. Many customers who left in the days following the regional banking panic have returned, in large part because of our attractive rates on deposits and exceptional client terms. The improvement in the loan-to-deposit ratio is a primary focus for us and we continue to monitor and manage this closely. We continue to have confidence in the markets we are in, notably, our new headers in Dallas, which continues to be a primary destination for many corporations evaluating relocation. In terms of our deposits by type, we remain balanced among non-interest-bearing, interest-bearing, money market and savings and certificates of deposits. Non-interest-bearing demand deposits measured 25% of deposits as of June 30, compared to 23% as of March 31. Certificates of deposits accounted for 26% of total deposits as of June 30, 2023 and 24% as of March 31, 2023. Borrowings were $976 million as of June 30, 2023, compared to $2.3 billion and $494 million as of March 31, 2023 and June 30, 2022, respectively. The decrease in borrowings compared to the prior quarter was primarily due to the paydown of $390 million in variable rate FHLB advances and $900 million in fixed rate FHLB advances. As deposit levels stabilize and began to return to previous levels during the second quarter of 2023, some of these additional borrowings were paid down. Borrowings have declined further to $584 million as of July 20, 2023. First Foundation continues to benefit from a growing liquidity position. Our on- and off-balance sheet liquidity increased to $4.3 billion for the quarter. To drill into a little bit our on-balance sheet liquidity as of June 30 was $926 million in cash and cash equivalents, representing 7.2% of total deposits on balance sheet. Our off-balance sheet consisted of available credit facilities of $2.3 billion with the Federal Home Loan Bank, $900 million with the Federal Reserve discount window, and $145 million available in uncommitted credit lines. The ratio of liquidity to uninsured and collateralized deposits is 3.3 times coverage, which is notable as our liquidity profile continues to be an important differentiator for First Foundation. Looking at our Wealth Management and Trust business, we are close to reaching our historical high for assets under management, as FFA has seen strong performance and secured new client relationships. This is especially impressive considering the tough times that we have experienced over the previous few years. We continue to experience meaningful contributions to the firm as evidenced by a combined business unit revenue of $9 million for the quarter. This includes $7.1 million in investment advisory fees and $1.9 million in trust administration and consulting fees. This combined business unit revenue coupled with other recurring sources of non-interest income from our banking unit accounted for 20% of the company’s total revenue for the quarter. Assets under management increased by $100 million during the second quarter to $5.3 billion, compared to $5.2 billion at the end of the first quarter. Trust assets under advisement ended the quarter at $1.2 billion, compared to $1.3 billion as of the first quarter, but we believe continues to have a very strong pipeline. We remain well capitalized with a Tier 1 risk-based capital ratio of 11.34% at quarter end, exceeding all Basel III regulatory requirements to be considered a well-capitalized deposit institution. Our risk-based capital ratios improved this quarter. We also declared an approved subject to regulatory improvement a second-quarter cash dividend of $0.02 per share. Tangible book value per share ended the quarter at $16.12, compared to $16.17 for the prior quarter. The difference of $0.05 per share resulted from a $0.02 dividend paid to shareholders and $0.03 in AOCI. I will close by saying again how appreciative I am for the team’s hard work and dedication. It’s been a challenging time, but I am confident that we have continued to take all the right measures to right size the business and put First Foundation on the current path going forward. We are able to weather these challenging times and emerge with increased deposits while maintaining our strong liquidity position. The credit quality of our portfolio remains a key differentiator for us and we continue to grow the Wealth and Trust business and exceed all minimum regulatory requirements to be considered a well-capitalized depository institution. All of our risk-based capital ratios improved, as did our ratio of uninsured to insured and collateralized deposits, which makes us proud of how far we have come in a short period of time. We recognize that there are aspects of our business we can and cannot control. We can control our revenues and expenses, but we can’t control the Fed’s decisions around interest rates. We are focusing on the areas of our business that we can control and remaining diligent in mitigating the risks in the aspects we can. As always, client service remains a top priority of First Foundation and is what draws clients to the bank. We remain proactive in helping clients manage all of these important financial decisions from everyday deposits to Wealth Management solutions. Navigating market conditions with a client-first mentality is the key to our business and core franchise and has only gotten stronger. Now I will turn the call over to Chris, and we will go over the portfolio in more detail.

Thank you, Scott. As Scott mentioned, we are happy to see the stabilization in the financial services sector following one of the most challenging quarters in recent history. Moving to our lending operations, as of June 30, 2023, our loan portfolio is comprised of 50% multifamily loans, 33% commercial business loans, 9% consumer and single-family residential loans, 6% non-owner-occupied commercial real estate, and 2% land and construction loans, which are selectively and carefully considered for our most valued clients. The loan portfolio composition did not change materially from the first quarter of 2023. Loan portfolio average yield increased to 4.69% in the second quarter, compared to 4.54% in the prior quarter and 3.86% in the second quarter of 2022, respectively. Average yields on new loan fundings were 7.90% in the second quarter, compared to 7.4% in the prior quarter and 3.73% in the second quarter of 2022, respectively. We have continued to strategically temper loan originations. Loan originations were $474 million for the quarter, which were primarily high-quality adjustable rates, C&I, SBA, and mortgage lending. Loan balances decreased to $10.6 billion as of June 30, 2023, compared to $10.7 billion as of March 31, 2023, an increase of $1.6 billion or 18%, compared to $8.9 billion as of June 30, 2022. Loan fundings totaled $474 million, offset by loan payoffs of $559 million in the quarter. Our net loan activity over the quarter was decreased by line paydowns and scheduled payments and prepayments. Our cost of funds is stabilizing, which is moving our loan portfolio in the right direction. Looking at the breakdown of loans that we have originated so far year-to-date, the percentages are as follows: commercial business loans 91%, multifamily 3%, single-family 2%, and other investments at 4%. We have significantly decreased the number of multifamily originations this year as part of our strategy to halt fixed-rate lending. Our commercial business portfolio is diversified with no sector comprising more than a third of the portfolio and only 12% of the portfolio exposed to commercial real estate. It is always important to note that we accomplished this without changing our high underwriting standards and our NPAs increased to 12 basis points for the quarter. This is also reflected in our conservative underwriting standards, as evidenced by our LTV of 54% for multifamily loans and 49% for single-family loans. This highlights the bank’s high credit quality, conservative underwriting, and disciplined lending practices during these uncertain financial conditions. We have maintained an appropriate risk appetite. We continue to temper all fixed-rate lending in multifamily and, for the most part, in single-family, and remain focused on making adjustable rate loans, including C&I, MSR, and SBA. These are upper-tier credit instruments that give us good deposit opportunities. By higher yielding C&I straight adjustable loans, we are helping to offset our fixed-rate loans. Let’s pivot to multifamily. Although we have been originating far fewer multifamily loans, our multifamily loan portfolio remains a significant proportion of our loan portfolio and remains a best-in-class asset. Multifamily loans continue to be the strongest-performing asset class across all commercial real estate. Our loan-to-value ratio of our multifamily portfolio has fallen to 54%. Our multifamily portfolio is diversified across geographies, with the largest concentration in California. We have also been proactive in restructuring some of our multifamily portfolio, moving it to a weighted average portfolio in line with current market rates. This will take some time, but we have already started to see the benefits of these efforts. I am proud to reiterate that we have never defaulted on our multifamily loans in the history of this firm, and I want to remind everyone that we have very little to no exposure to construction, hotels, or commercial office space. Our credit quality remains pristine and our NPA ratio decreased to 12 basis points. Our total delinquent loans as a percentage of total loans decreased to 0.16% as of June 30, 2023, from 0.45% as of March 31, 2023. Maintaining good credit quality is a cornerstone of our business model. As Scott mentioned, our percentage of insured and collateralized deposits increased to 88% as of June 30, 2023, an increase from 85% as of last quarter end. We are pleased to see continued growth in our insured and collateralized deposits. Our deposit costs increased to 2.85% for the second quarter, compared to 2.38% for the prior quarter and 0.28% for the second quarter of 2022. Unlike many other banks that were defending their low rates on deposits, we were willing to move client funds commensurate with how the Fed was moving rates, an important distinction as people have realized they can make money on their deposits. Therefore, our deposit costs have already reflected the current economic environment, whereas other banks have or will have to play catch up to the Fed. The breakdown of our current deposits is as follows: money market and savings 29%, certificates of deposit 26%, interest-bearing demand deposit 21%, and non-interest-bearing demand deposits of 25%. Our deposits are diversified geographically, with California accounting for 36% of total deposits, Florida at 19%, and Texas at 9%, which makes up the majority of our deposit portfolio with other states making up 32% of the total. Moving to NIM, net interest income was $49 million for the second quarter of 2023, compared to $59 million in the prior quarter. Interest income increased from $137 million in the first quarter to $145 million in the second quarter of 2023 due to increases in both average interest-earning asset balances, as well as average yields earned on such balances. Interest expense was $96.3 million for the second quarter of 2023, compared with $78.2 million for the prior quarter. This increase was due to increases in both average interest-bearing liability balances, as well as average rates paid on such balances. Our NIM for the second quarter was 1.51%, compared to 1.83% for the prior quarter, which reflects the interest rate environment and the continued pressure from the Fed's actions. We will continue to strategically strengthen the balance sheet slightly to regain profitability. Non-interest income was $12.1 million for the second quarter, compared to $11.7 million in the first quarter and $13.4 million in the second quarter of 2022. Non-interest expense was $272.8 million in the second quarter, which included a $215.3 million goodwill impairment charge. Excluding goodwill impairment charges, non-interest expense was $57.5 million in the second quarter, compared to $59.3 million for the first quarter and $48.8 million in the second quarter of 2022. Our efficiency ratio for the second quarter was 92.5%, compared to 84.5% for the first quarter. The quarter increase in the efficiency ratio is largely attributable to the aforementioned reduction in net interest income during the quarter, as the ratio is a measure of non-interest expense to revenue, net interest income plus non-interest income on an adjusted basis. Compensation and benefits were $21 million in the second quarter of 2023, compared to $25.3 million in the first quarter and $207.6 million in the second quarter of 2022. The decrease in compensation and benefits is the result of efforts to maximize efficiency and optimize the workforce in the face of slowing loan growth and higher interest expense. Now let’s briefly touch on our securities portfolio. Our securities portfolio totaled $1 billion, with HTM of $815 million and AFS of $201 million, down from $1.1 billion from the prior quarter. The allowance for credit losses for investments was $8.5 million for the quarter, compared to $12.3 million in the prior quarter and $11.2 million for the second quarter of 2022. The decreases from the prior quarter were primarily due to the reversal of $4 million in allowances for credit losses recorded on several interest-only strip securities that were fully written off during the quarter, resulting in a net income statement impact of only $15,000. Investment securities portfolio average yield decreased to 2.39% in the quarter, compared to 2.73% in the prior quarter. At this time, we are ready to take questions, and I will hand it back to the Operator.

Our first question comes from David Feaster with Raymond James. Please go ahead.

Hi. Good morning, everybody.

Hi.

David, how are you doing?

I am doing great. Congratulations on a great quarter. It's nice to see the stock responding positively. I wanted to discuss some of the deposit trends observed in the quarter. If you could clarify how the flows trended, as you mentioned earlier, Scott, it seems that some clients are coming back. I would appreciate your insights on how flows performed this quarter and your outlook on deposit growth moving forward. It appears that we observed growth later in the quarter, and this trend has continued into the third quarter, especially with your note that borrowings are decreasing. I am curious about what you are witnessing in the current environment.

We are fortunate to have excellent clients. After the failures of several banks, many people understandably became concerned and reacted by moving their funds. However, over time, as they reconsidered, some clients started returning to larger banks where they weren't receiving favorable rates, but they began to bring back some of their deposits. Many clients never fully withdrew their balances; they took out a significant portion but have started to reinvest those deposits gradually. While this has contributed to our growth, we are also building a strong pipeline for new deposits. In terms of lending, we are focusing on acquiring more deposit relationships, and I believe our pipeline looks quite robust. I expect August to be promising, with additional relationships anticipated in September. It's important to note that while we experienced strong growth from the end of the last quarter to July 20th, this rate may not be sustainable on an annualized basis, so we wouldn't anticipate 70% growth to continue. However, I do think deposit trends will persist, even as our loan balances decline. Our objective remains to pay down any outstanding borrowings and reduce them in order to shift our focus to decreasing brokered deposit balances. Recently, we secured a $100 million advance from the Home Loan Bank for five years, which will save us about 120 basis points in interest costs starting in the third quarter. Additionally, we partnered with the Federal Home Loan Bank for another $200 million, which will lower our overall interest expenses by approximately 170 basis points, benefiting our future financial position.

That’s very helpful. Let’s explore that further. We received the Fed hike yesterday, right? If we assume that deposit costs stabilize and the Fed pauses, could you assist us in understanding the roll-off rates of the loan portfolio? You mentioned that new loan yields are around 7.90%, but I’m interested in the pace of roll-off over the next 12 months and the current roll-off rates. I’m trying to gauge the asset repricing aspect and identify where the net interest margin could bottom out, as well as how to consider the pace of expansion moving forward as deposit costs stabilize and we continue to reprice higher.

I will provide some insight into the yields we are experiencing. Last quarter, the average yield was at 7.90%, which has since improved to approximately 8.25% or slightly higher overall. This is expected to increase along with some deposit costs. Initially, some deposits are likely to rise in line with this, but I anticipate that our betas will trend down compared to previous quarters, which is very important for us. This also indicates that we may see a trough, with incoming yields at higher levels. Currently, in terms of payoffs, the multifamily segment has seen a seasonal slowdown in prepayments. We are still observing some payoffs in the range of $3.5 million to $3.75 million, which may surprise some. Recently, we had single-family payoffs of $2 million and $5 million. Historically, our payoffs have been between $550 million and $600 million. The summer months typically experience a slowdown, but we expect activity to pick up again in late August or early September, leading to an increase in prepayments. I anticipate this quarter's funding will be slightly lower than last quarter, but payoffs should remain about the same. Therefore, it is likely that we will see some reduction in the loan balance this quarter. Chris, would you like to contribute anything?

I believe I addressed this earlier; the seasonality aspect is quite intriguing. Additionally, if you are looking to make future projections, it's important to consider the historical growth factors. We've experienced significant growth over the past several years, and moving into 2024, we can expect to see more payoffs coming due from industrial rate mortgage loans within the multifamily portfolio.

Okay. Okay. That’s helpful. And then maybe just staying on the multifamily side. Chris, you touched on it a bit, but it feels like maybe there’s some misperceptions out there when I talk to investors on multifamily and differences in rent control versus non-rent control and just the health of the multifamily market maybe on the West Coast. Could you maybe just expound on kind of what you were talking about, what you are seeing out there, what you are hearing from clients, and just any other commentary on the multifamily book and the health of it from a credit perspective on those loans?

Yeah. Thank you for asking the question. I mean, this is something we spend a lot of time on and I don’t want to go as far as to say we’re some kind of experts on it, but we spend a lot of time and effort and energy really understanding behavioral economics and the implications of the nuanced business of multifamily in different regions and markets that we are in. There are only, I believe, five rent control states, truly California being one of them. And with such a majority of our multifamily properties in that space, rent control offers the benefits, if you will, of acting as a buffer both upward and downward in price. It almost gives you a little bit of stability. For a really rudimentary explanation, the income approach to value is really what drives multifamily, particularly workforce multifamily housing, which is the ponderance of our portfolio. Because of that driven path, most people are unwilling to move to have to re-rent at a much higher rental rate for a similarly situated property somewhere else. And as a result of the high interest rate market, it’s economically unviable for most people who are renting right now to pivot over to homeownership unless they completely leave the state. Because of the slowdown we are seeing both in migration in and out of the state on some level, and because of the construction units coming online largely in the Sunbelt region being high-end luxury deliveries, our workforce housing is actually not seeing any impact whatsoever. As a matter of fact, the numbers remain strong and this is echoed in the data provided by Moody’s Analytics, which have filed recently, as well as what we are seeing in the portfolio trending now. Does that answer the question, David?

That’s super helpful. That’s super helpful. Thank you.

The next question comes from Andrew Terrell with Stephens. Please go ahead.

Hey. Good morning.

Good morning.

Chris, if I could revisit the dynamics of our loan portfolio. Considering the commentary on new originations at a low eight percentage and the payoffs potentially remaining at high-three to low-four percentages, these factors combined suggest a possible 15-basis-point increase in loan yields each quarter, assuming no significant shifts in the interest rate environment or further actions from the Fed. As you evaluate the model, does it seem reasonable to you that in a stable environment, loan yields could increase by about 10 to 15 basis points per quarter without any changes from the Fed?

I am sure Scott will want to opine on this. We spend a lot of time looking at that same question. But, yes, the short answer is that, that’s about what we pick it as well and that is actually what we believe will be the plan, which is why we have been very methodical and pragmatic about the paydowns and putting new loans on the books and that’s the business strategy. Scott?

No, I agree with that. I would say that if my understanding is correct, there is some seasonality where there are fewer payoffs in the multifamily sector during the summer months. I believe that this will improve in the fall and winter months, and you might see even slightly better month-to-month improvements.

Okay. Got it. And then on the deposit front, do you have what the spot cost of deposit was exiting the second quarter, either interest-bearing or the total?

Amy, do you have that?

Yes, good morning. If you are looking at the weighted average rate on the deposits, it's approximately 3.72% for the quarter.

Yeah. So that was 3.72% weighted average interest-bearing costs for the quarter. Do you have that equivalent number at June 30th at the end of the quarter or where it’s at to start July?

Oh! Yeah. You are looking at 1.58% and…

1.

You are looking at 1.58% for the quarter for June.

Yeah.

That’s like net interest, hold on one second, let me see, yeah, 3.86%.

3.86%.

3.

I understand. With the rate at 3.86% and considering your comments about the reduction in borrowings, it seems that the cost of funds could remain stable or even decrease in the third quarter. Coupled with your insights on loans, we should expect a significant increase in the margin as we move into the third quarter. Is that correct?

I believe so. Those trends are all heading in the right direction. Yeah. That’s what I think.

I have one more question about the operating expense line item. Considering the actions you've implemented in the past quarter regarding the headcount reduction and the increase in customer service costs observed this quarter, I suspect those might rise further into the third quarter. Overall, what is your outlook for customer service costs and the overall operating expense line item as we approach the third quarter?

Amy, you want to, yeah, I will say.

Yeah.

Go ahead and answer that question and then I will talk about the risks and whatever else.

We are projecting that the compensation and benefits will decrease a bit in the third quarter and even more in the fourth quarter. Occupancies and other professional costs are expected to remain stable. We anticipate an increase in customer service costs, likely due to the recent Federal Reserve rate hike. Overall, this should result in a minimal increase in the third quarter.

The third risk we addressed, Andrew, occurred recently, about two weeks ago. We didn't see any benefits from this in the second quarter. It's evident that this was not something we wanted to do, but it was necessary to manage our way through this situation. However, it should have an impact. We are still identifying some programs, IT initiatives, and other projects that we had put on hold or canceled, which may not seem significant, but costs of 40 thousand a month and similar amounts can accumulate. Therefore, we continue to seek out any potential cost savings.

Yeah. Okay. I appreciate the color there and if I could ask one more, Scott, just on the dividend. It does feel like we have hit maybe an inflection point in earnings, taking some of the commentary here together. The dividend is obviously a lot lower today. But just as the earnings profile improves over time, how are you thinking about the dividend rising? Should it be, I guess, in line with that or will it be kind of sporadic? I guess, can you help us think about how the dividend should improve from here?

Yeah. Provided that NIM starts increasing, which we believe it’s going to, that is trough. As our earnings continue to grow, we will do an analysis of the dividend and make sure that we have the support to increase the dividend. But is fully within my wanting to bring the dividend back to where it was post this nightmare that I will call it. So I think, as you know, I guess what I am saying is, yeah, we did the prudent thing by bringing the dividend from $0.11 down to $0.02. But I believe as our revenues start on the way back up, you will see us look to increase the dividend commensurately in alignment with the revenues.

Understood. Okay. Thank you for taking the questions and congrats on a good quarter.

Thank you.

Thanks.

The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Thanks. Good morning.

Good morning.

Good morning.

Hey. So lots of questions asked and answered. Just as you talk about, Scott, the further decline in borrowings that you flagged through July 20th. Is there any shift in kind of the on-balance sheet cash liquidity from that or is that really just a function of deposit inflows being used to pay down in March?

We reduced our on-balance sheet cash from $1.3 billion in the first quarter to around $600 million or $700 million, specifically $790 million in the second quarter. This cash was used to pay down some obligations. We had provided extra collateral to the Federal Reserve Bank and the Federal Home Loan Bank to access additional borrowings. In the early days of the banking issues, it was crucial for us to hold a significant amount of on-balance sheet cash. However, as we had alternative borrowings available, which are quicker to access than selling securities, we decided that maintaining $1.3 billion in cash was not necessary as the market stabilized. We lowered it to a more manageable level, which also saved about $700,000 in interest expenses. We will continue monitoring this and adjust our on-balance sheet cash as needed based on any events that might present challenges or opportunities. We are being careful to assess where our cash levels should be, particularly in relation to our ability to access Home Loan Bank and Federal Reserve Bank facilities. I believe that having $1.3 billion in the first quarter was a prudent decision, and our current position seems appropriate given the current environment.

I appreciate it. Regarding your comments about potential continued decline in loans, could you provide any insight on where loan balances might level off? Are you considering a target loan-to-deposit ratio? How do you approach balancing loan amounts with funding?

Well, I don’t know that we have set a specific number for the total loan amount. As you know, we have significantly reduced our multifamily lending; it's nearly nonexistent. In fact, I would say it is nonexistent. Our main focus right now is on equipment finance, SBA, and truly adjustable C&I production. We are not looking to engage in single-family or multifamily lending, which tend to be more fixed-rate, at this time. So, the answer is that our lending will continue to decrease. We are very focused on the loan-to-deposit ratio, which is crucial. I am proud that we brought it down to 93.1% as of July 20th, and I want to continue lowering that number. I don't have a specific target, but my objective in the near term is 90%, and I wouldn't be surprised if we aim to go a bit lower than that over time.

Appreciate it. You flagged in your comments the $100 million FHLB term events, the five-year events that saved $120, and then you mentioned $200 million more that reduces your cost by that 170 basis points. How long is that fixture?

That particular one had a different structure and it was a five-year put-able for six months. The Home Loan Bank has the right to return it to us in six months. I believe now is the ideal time to do this, considering the Federal Reserve seems to be finished with raising rates. If the market expectations for the Fed rate cycle are correct, that was established at a 3.62%. So it was a five-year put-able for six months, meaning it would be put-able. I’d prefer to think of it as a call, but it is put-able in January.

Okay. Great. And then last question. Obviously, the focus over the last four months by investors has been pretty squarely on deposits. But there are questions, obviously, around asset quality for the industry overall. And as it relates to First Foundation, obviously, your allowance is pretty low on a relative basis of 30 basis points of loans, even if you assume multifamily is a zero-loss asset, that translates to 60 basis points in the rest of the portfolio. So can you talk a little bit about the allowance as it relates to the non-multifamily portfolio and comfort with that level you are at?

Yeah. It’s Chris. Yeah. It’s a great question and one we spend a lot of time thinking about, obviously, having started the bank with the loss history that we have. We have to rely a lot on the outside data for CECL and stress testing purposes. We run a combination of scenarios with Moody’s Analytics being the backdrop for that. And the scenarios are weighted for their baseline and the Fed Severe Adverse Case scenario, as well as the potential upside. Obviously, as you would imagine, we even played it much heavier towards the Severe Adverse scenario and taking a more conservative approach, and that’s really reflected in the overall number. But we feel really strongly about our portfolio. Look, our credit portfolio has been very conservative for a long period of time, and we don’t really sacrifice credit quality for rates, which is really the interest rate risk position that led us to where we are at today. Even the C&I lending that we have done has been equally as conservative and strong underwriting characteristics are there. Do we expect to see some degradation over time? Possibly. But that’s accounted for with the stress test and an equally conservative approach. So we do feel confident that the numbers are more than enough to backstop our position, and we are not seeing degradation in the credit cycle yet. We are hopeful that as we continue to go in this business, we are maintaining credit standards at the same degree, and I don’t expect it to be a challenge. But over time, you may see that number increase as the C&I base of the model grows.

I want to be clear about this, Gary. As our multifamily sector performs well and we increase our commercial and industrial lending, it's certain that our loan loss reserves will rise as a result. We've experienced some increases and decreases in our portfolios, but I am confident that as we expand our C&I lending, which will require higher loan loss reserves, that percentage will continue to grow. It did increase this quarter, though only slightly, but it's worth noting that our loan portfolio also shrank.

Great. Thanks, guys. Appreciate the color.

Thank you.

The next question comes from Adam Butler with Piper Sandler. Please go ahead.

Hey. Good morning, everybody.

Good morning.

I would like to follow up on expenses. I'm aware that the customer service deposit line is linked to the earnings credit rate on non-interest-bearing deposits. Could you provide some insights on what percentage of the non-interest-bearing growth this quarter is associated with those rates? Additionally, what percentage of the current non-interest-bearing deposits are related to those rates and what are their current pricing?

Well, the non-interest-bearing deposits only went from 24-point something to 25-point. So whatever the increase was, my bet would be that a majority of that would be in that center that we pay credits to.

Okay. And…

Yeah. When we pay the payment.

Also, I was just curious if we look at the forward curve and we get about 100 basis points impact next year. Could you see some relief in that expense line? And I like to confirm...

I am trying to… Sure. I am trying to tell everybody that when it comes to those types of deposits, when we have Fed rate increases, it is pretty much basis point for basis. When we have Fed decreases, which a lot of people are starting to point to that, it is also basis point for basis. So to the extent that the Fed reduces rates, you will see a commensurate drop basis point for basis that the Fed drops rates should they do so.

Okay. Great. Those are all my questions. Congrats on the good quarter.

Thank you.

Thank you.

It appears there are no further questions at this time. I will now hand it back over to Scott Kavanaugh for any additional remarks.

We continue to work through some of the challenges stemming from the disruption of the financial industry earlier in the year and we are encouraged by the quick rebound in the market and our business. I’d like to use the analogy that we are a big ship and we are starting to find our return. We are thankful for the continued support of our stockholders as they continue to believe in our long-term strategy during a pivotal time for the industry, demonstrated by electing all 10 of the company’s nominees for the Board of Directors at our 2023 Annual Meeting, while rejecting the activist nominee by a substantial margin. Going into the back half of the year, we are more focused than ever on growing deposits, remaining selective on loans, identifying efficiencies, reducing expenses, and continuing to serve our clients well. We have a strong liquidity position that provides financial flexibility, limited exposure to uninsured deposits, and a securities portfolio that allows us to actively manage our interest rate risk and gives us balance sheet flexibility. We are able to give personalized attention to our clients, and that they remain our First Foundation priority. As a regional bank, we remain nimble and able to provide first-class white-glove service to our clients. We are proud of the continued resiliency by our team and the loyalty of our customers as we navigate through this challenging macroeconomic environment. There have been a lot of people that have stood up and gone above and beyond for First Foundation and I look forward to all that we will accomplish in the second half of 2023 and into 2024. As a reminder, our earnings report and investor presentation can be found on the Investor Relations section of our website. Thank you and have a great remainder of your day.

This does conclude today’s program. Thank you for your participation. You may disconnect at any time.