First Foundation Inc

NYSE:FFWM

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to First Foundation's Third Quarter 2024 Earnings Conference Call. Today's call is being recorded. Speaking today will be Scott Kavanaugh, First Foundation's Chief Executive Officer; James Britton, First Foundation's Chief Financial Officer; and Chris Naghibi, First Foundation's 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 or reconciliations of non-GAAP financial measures, please see the company's filings with the Securities and Exchange Commission.

And with that, I would now like to turn the call over to CEO, Scott Kavanaugh.

[Scott Kavanaugh, executive]

Good morning, and welcome. Thank you for joining us for today's third quarter 2024 earnings call.

I would qualify this quarter as fairly noisy. As previously discussed early in the third quarter, the company completed the $228 million capital raise. The quarter was capped off with the recently announced balance sheet realignment moving $1.9 billion of multifamily loans from held for investment to available for sale. This move created a paper loss adjustment associated with the fair value adjustment of $117.5 million.

Income for the quarter for continuing operations during the quarter was $2.7 million, which excludes the LOCOM adjustment and other adjustments. As stated in our October 3, 2024, press release, this move allows First Foundation to methodically evaluate reducing our exposure to low coupon fixed rate loans and continue to reduce our exposure in CRE. By shrinking the balance sheet of these loans, we will auto-look to reduce the liability side of the balance sheet and cut our reliance on some of our high-cost wholesale funding. We have taken the steps to securitize with an agency approximately $0.5 billion of these loans, which should be completed in the fourth quarter. We are also currently continuing to evaluate other loan sales and will evaluate other securitizations in 2025.

I have previously discussed that we have taken great strides to increase reaping revenue and reduce core expenses to benefit future profitability, and those efforts continued in the third quarter. We were able to continue to increase our C&I lending during the quarter, providing nice spreads over our funding costs.

Late in the quarter, the Federal Reserve lowered Fed funds by 50 basis points. Although that provided little benefit in the third quarter, our cost of deposits decreased 8 basis points to 3.41%. We expect a more significant reduction in funding costs for the fourth quarter. Obviously, capital ratios were improved as well with the addition of the capital. First Foundation Advisors, once again, closed the quarter at near record assets under management, with profitability and FFA remaining strong. The trust department posted another solid quarter as well.

For the third quarter, we reported net loss attributable to common shareholders of $82.2 million or $1.23 per share for both basic and diluted shares. Tangible book value, which is a non-GAAP measure, ended the quarter at $15.71, down from the second quarter of 2024 of $16.43. Adjusted tangible book value per share, which we estimate in consideration of our remaining preferred shares, ended the quarter at $9.50.

Pretax pre-provision revenue totaled a negative $116.7 million compared to $1.9 million for the prior quarter. Interest income totaled $157.2 million for the quarter, which was an improvement from the $150.9 million in the first quarter and up from $144.8 million in the third quarter of 2023.

Our net interest margin increased to 1.5% during the quarter as compared to 1.36% in the second quarter of 2024. This was largely driven by the return of MSR deposits. Noninterest expense was $60.2 million in the quarter compared to $55.6 million in the prior quarter, again, largely driven by an increase in customer service expense related to seasonally returning MSR deposits. Our efficiency ratio was 98.1% compared to 96.1% for the second quarter 2024.

Adjusted return on average assets, again, another non-GAAP measure was 0.08 compared to 0.10 as of June 30, 2024. Our loan to deposit ratio ended the quarter at 95.9% compared to 93.8% as of June 30, 2024. Total deposits were $10.3 billion in the quarter compared to $10.8 billion in the second quarter. Core non-brokered increased to 64% during the quarter compared to 62% in the second quarter of 2024. Noninterest-bearing demand deposits increased to 21% for the quarter compared to 20% of total deposits as of June 30, 2024.

Our insured and collateralized deposits remained relatively unchanged compared to the second quarter at 85% of total deposits. We maintained a strong liquidity position of $4.3 billion. At these levels, our available liquidity to uninsured and uncollateralized deposits ratio slightly increased to 2.65x. Borrowings remained flat quarter-over-quarter at $1.7 billion as of September 30. Average borrowings outstanding were $1.7 billion, or 12.6% of total average assets for the quarter, compared to $1.4 billion or 10.4% of total average assets in the prior quarter.

Our nonperforming assets to total assets was 0.33% for the quarter versus 0.18% for the second quarter. This increase was largely driven by 2 single-family loans to the same borrower, one of which has already been made current. For the other, the borrower has already assured that imminent payment back to a current status. Both loans have extremely low loan to values.

Loan balances ended the quarter at $9.9 billion, down from the second quarter of $10.1 billion. Loan fundings totaled $366 million, offset by loan payments of $467 million. C&I loans totaled 90% of loan fundings during the quarter and 87% of total funding year-to-date. We had no loan sales during the quarter. Loan yields remained flat at 4.77% in the third quarter.

Our net charge-off ratio remained low at 0.01% for the quarter, the same as the second quarter. First Foundation Advisors' assets under management was $5.5 billion unchanged for the end of the second quarter. Our pipeline of relationship remains strong. Assets under advisement, FFB's Trust Company, increased to $1.2 billion for the quarter compared to $1.1 billion at June 30, 2024.

Once again, I will close by reiterating my appreciation for the incredible efforts and unwavering dedication to our entire team. I remain incredibly thankful to each of the company's wonderful employees and will always be thankful.

I'll now turn the call over to Jamie to cover our financials in greater detail.

[Jamie Britton, executive]

Thank you, Scott, and good morning, everyone. I'll begin with the balance sheet and the improvement in our net interest margin, which increased again this quarter to 1.50%, up 14 basis points from the 1.36% we reported in the second quarter and 33 basis points above what we reported in the first quarter, our normal seasonal low point.

Our earning asset yield continues to improve, increasing to 4.75% in the third quarter, which is a 4 basis point above the 4.71% reported in Q2 and 19 basis points above the year ago period's 4.56%. The Loan yields maintained the improvement seen in the second quarter, holding steady at 4.77%. Though our gross loan ending balance declined $210 million for the quarter, due in large part to the fair value adjustment on the loans held for sale portfolio, the overall loan portfolio's quarterly average balance for margin purposes was down less than $45 million, thus keeping its contribution to interest income stable quarter-over-quarter.

New investment yields of 5.64% contributed to the 10 basis point improvement seen in the available for sale portfolio yield this quarter. And like last quarter, the portfolio's balance ended the quarter higher than its average balance. We remain comfortable using safe, high-quality securities to support our liquidity position, improve the balance sheet's rate profile and more efficiently enhance recurring revenue.

Turning to funding costs. As Scott mentioned and as expected, our MSR clients continue to build their deposit balances this quarter. As we have described in the past, the annual seasonal inflows and outflows in this portfolio will drive changes in our net interest margin through the year. With these noninterest-bearing balances continuing their build from first quarter lows, NIM is continuing to improve. Looking forward, we would expect this to continue for the first part of the fourth quarter as MSR balances build to their annual peak before beginning the decline and troughing in the first quarter.

While uncertainty in the rate environment remains, barring an increase in short-term rates from here, even with the MSR portfolio seasonal patterns continuing, we would not expect NIM to fall back to the 1.17% we reported in the first quarter of 2024.

The continued shift led to another quarterly improvement in net interest income. Similar to last quarter, net interest income increased $5.3 million from $43.8 million in the second to $49.1 million in the third. However, unlike last quarter, the quarterly increase in customer service costs, only $2.9 million this quarter, was not enough to offset the NII improvement, so the balance sheet's contribution to earnings increased by $2.4 million.

As we continue to note, we appreciate the holistic nature of these MSR relationships and are comfortable continuing to manage around their predictable seasonal inflows and outflows. Balances will continue to grow through the first part of the fourth quarter, but the Fed's recent reduction in rate will provide some offset to the increased volume's impact on overall costs.

For example, where the Fed to hold rates at these levels for the remainder of the year, we would expect customer service costs to be flat to down in the fourth quarter. Where the Fed to continue cuts in the fourth, we would, of course, expect additional savings.

The Fed's decision to cut rates in September, as expected, contributed only a modest benefit in the third quarter's interest-bearing liability costs. But coupled with the ongoing return of MSR deposit balances, costs declined 3 basis points this quarter, returning from the 4.27% reported in the second to be in line with the 4.24% reported in the first. The full benefit of the reductions in our interest-bearing liabilities rates will be reflected in the fourth quarter.

So for this quarter, both borrowing costs and interest-bearing deposit costs were modestly lower, borrowings saw an 8 basis point decline in cost from 4.12% in the second to 4.04% in the third, while interest-bearing deposits declined 1 basis point from 4.30% last quarter to 4.29% this quarter.

FHLB advances added late in the second quarter at a weighted average rate of 3.76% contributed to the quarter-over-quarter increase in average balances, but they were a driver of the cost improvement. As reported in our earnings release, our borrowings balance does not include our sub debt, but it does include our balance from the bank term funding program, which was $267 million at the end of the quarter and has a cost of 4.76%. We would expect further improvement in our borrowing costs once this matures in January of 2025, if not repaid sooner.

The reduction in deposit costs was allowed in part by the reductions we made in higher cost categories during the quarter as noninterest-bearing MSR escrow balances returned. As mentioned, we would expect to see the fourth quarter benefit of the Fed's rate cut in the fourth quarter.

On this point, monthly trends in deposit costs exited the quarter below quarterly averages in all categories, except broker deposits, with our total interest-bearing deposit costs ending the quarter with the month of September at 4.15% or 13 basis points lower than the monthly average of 4.28% for the month of June that we mentioned on last quarter's call. We appreciate the work our teams are doing in each deposit channel to remain responsive to our clients' needs, while holding the line on costs and allowing us to maximize the benefits our liability-sensitive balance sheet will provide following any future reductions in market rates.

Finally, as we noted before, we took advantage of the market's early year optimism for declining rates via cash flow hedge swap. We did not add any new swaps in the third quarter as optimism returned, but we expect this to be a valuable tool for us, and we will continue to look for similar opportunities to both enhance revenue and stabilize our rate profile going forward.

Moving on to the income statement. With loan interest income remaining stable, our securities and cash portfolios were able to drive not only an increase in average earning assets, but also a more meaningful quarter-over-quarter increase in interest income this quarter. We reported $157.2 million for the third quarter versus $150.9 million in the second. Interest expense increased modestly as the decline in rate largely offset a slight increase in interest-bearing liability volume. Together, interest income and expense led to a quarterly increase in net interest income of $5.3 million, in line with the $5.4 million quarterly improvement reported last quarter. As mentioned, the quarterly increase in balance sheet contribution, which includes the partially offsetting increase in customer service cost, was $2.4 million.

Provision expense return this quarter following the negative expense reported in the second, the balance sheet balance for our ACL loans was flat to last quarter, but the coverage ratio to held for investment loans increased from 29 basis points in the second to 36 basis points in the third as consideration for credit risk on the loans held for sale portfolio is considered in its fair value adjustment instead of in the ACL. As Scott mentioned, asset quality remains stable.

Wealth and trust-related fees were stable this quarter, maintaining the increase seen from the first quarter to the second to end the quarter at $9.2 million. As Scott mentioned, AUM balances remain near record highs, ending the quarter at $5.5 billion. We remain pleased with the pipelines we see in the business, and we are excited about the opportunity to accelerate growth in First Foundation Advisors and the trust department following the capital raise.

New to our noninterest income line this quarter was a $117.5 million charge related to the fair value adjustment on the $1.9 billion of multifamily loans reclassified -- excuse me, to held for sale. We will update the held-for-sale portfolio fair value quarterly going forward. Optimism in the rate environment heading into quarter end resulted in a price of just under 94. Given the portfolio's high credit quality and the interest we have already seen in these loans, we remain confident we will be able to secure final pricing execution at strong levels. And in the meantime, we expect to be able to recover some of this initial mark as our clients make regular principal payments take opportunities to make prepayments and refinance their loans at par. Where some of these clients to allow their loans to move to their floating rate periods, that would, of course, help pricing as well. As we have noted, the average horizon for our held-for-sale portfolio loans to reach their floating rate periods is 2.5 to 3 years.

Moving to noninterest expense. Outside of customer service costs, remaining noninterest expense categories totaled $41.3 million for the quarter, up from $39.5 million in the second. Professional services and marketing costs were $1.4 million higher as we recognized some of additional -- some additional legal expenses, which were in part related to prior quarter's activities and the shareholder meeting following July's capital raise. Compensation and benefits expense was also higher for the quarter, increasing by $0.9 million. This line item declined significantly over the past 2 years as we took actions such as the reductions in force and the elimination of annual incentive payments to offset our material declines in revenue, but we would expect costs to increase from these levels as revenue normalizes.

Though that's the case, and it's important to note that we are committed to maintaining our disciplined approach to core expenses, we will take on strategic investments for future growth following the capital raise, but we are committed to controlling our discretionary costs. And as we mentioned on last quarter's call, we will ensure any plans for measured investments across our markets are both in line with our strategic objectives and supported by commensurate growth in revenue and profitability.

Closing with capital, we expect to report improvements in all regulatory capital ratios this quarter, both at First Foundation Inc. and Home Loan Bank. First Foundation Inc.'s Common Equity Tier 1 capital will benefit further in the fourth quarter as part of our preferred shares, the Series B preferred, convert to common equity following our recent shareholder vote. As a reminder, the shareholder vote did not result in a conversion of the Series A preferred.

While neither regulatory capital nor a GAAP measure, tangible cut equity also improved this quarter, not only due to the capital raise, but also due to an improvement in our accumulated other [indiscernible] of loss. The quarter's decline in market rates drove a $15.9 million improvement in the line items related to our available-for-sale portfolio, which ended the quarter at only $0.7 million loss. As Scott mentioned, tangible book value per common share ended the quarter at $15.71 per share. And as noted in our release, were all of our preferred shares to convert to common, our tangible book value per share for the third quarter would have been $9.50 per share.

And with that, I'll turn it over to Chris to provide our final thoughts on the quarter. Chris?

[Christopher Naghibi, executive]

Thank you, Jamie. As Jamie and Scott emphasized, our strategic actions during the third quarter of 2024 have laid the groundwork for repositioning our balance sheet and stabilizing earnings. While these efforts involve moving loans to held-for-sale status and thoroughly reviewing our ACL methodology, the focus is now on executing the loan sales to unlock value.

As you know, we have taken a bold and responsible action to reposition our balance sheet, highlighted by our reclassification of $1.9 billion of multifamily portfolio loans to held-for-sale status, as outlined in our recent October 3 press release and noted by both Scott and Jamie earlier. These efforts are designed to reduce exposure to fixed rate assets, while unlocking capital to fund more strategic, relationship-driven opportunities in commercial and industrial lending.

As [indiscernible] in relationships as well as potential private party sales. Historically, First Foundation has successfully completed numerous securitizations, and it has once again ex a term sheet for a potential securitization for approximately $500 million to be with a named partner. Third-party outside counsel has been engaged along with a placement agent. The bank has begun the due diligence process, with credit approval and settlement anticipated to occur late in the fourth quarter of 2024. While this deal time line can shift, executing in the time line identified is a priority. As a reminder, final pricing is dependent on settlement at the time of close.

As Jamie has noted, management has finalized the process of working with an outside third party to determine the potential mark as a result of a fair market value analysis. But I will reiterate again that we are committed to best execution as we work to ultimately disposition the assets and reduce our multifamily real estate and fixed rate asset exposures.

To this end, the bank is also simultaneously exploring direct private party loan sales as well. While these sales should be smaller in size, they will allow for more flexible positioning of assets over time to flow into the market and essentially blunt any rate impacts in response to the changing Fed policy landscape. As a reminder, the loans moved to held for sale focused on those with balances approximately between $1.5 million and $4.5 million, and which are set to reprice in the next 18 to 36 months. Reducing these balances will mute the impact of the historical loan growth we saw in 2022 and the repricing uncertainty they could introduce over the horizon.

The market needs to be able to model this pivot and we, as management, have provided additional detail of our findings on this earnings call in order to assist in facilitating proper expectations. Despite the noteworthy strength of the loan portfolio and the historical lack of loan losses since the bank's inception, management recognizes the bank is a statistical outlier when compared to similarly situated peers. Because First Foundation's concentration in commercial real estate is narrowly tailored in the traditionally lower loss end of the multifamily asset class, the historic loss factor has not led to the bank setting aside large reserves under the current expected credit loss model.

We do believe, however, that there is an element of interest rate risk in the market, which is truly unprecedented, and that First Foundation needs to continue its detailed review of its ACL methodology as a result. I want to be clear, as has been the thematic position on all of our preceding earnings calls to date, we do not believe we have material credit losses on the horizon.

As we have always done, we intend on providing confidence that our reserves are adequate to address any changes in credit quality or interest rate risk that may be present in the market. And we believe that to do so, the aforementioned holistic review of our methodology is appropriate as the industry continues to indicate challenges with other asset classes and underwriting methodologies. As a result of this review, will likely conclude in an increase to the bank's reserve to be more in line with similarly sized and concentrated peers over time with a simultaneous and pragmatic shift in our lending originations and portfolio concentrations, particularly, as the bank continues its strategic diversification and its concentration to index plus margin-based pricing on more C&I lending activity as part of our continued growth initiatives.

It is worth noting that while reducing our fixed rate asset exposure and diversifying into index plus margin-based pricing is not a new goal and has been part of our strategic plan for nearly a decade. We are not new to C&I lending, and our existing teams are well seasoned and very experienced. As always, we are focused on conservatively underwritten C&I lending where we prioritize deep cross-platform relationships. The year-to-date results highlight a dramatic pivot, as 91% of our lending through the third quarter has been an adjustable C&I product.

As we do this, you can anticipate the continually referenced increase in our CECL reserves as a byproduct of the asset class and historical data, which supports it. We believe this will be a strong early step in positioning the company in line with the risk profile of peers. All of our teams have worked together to manage the strategic direction of our diverse and strong loan portfolio, which as of September 30, 2024, remains comprised of 52% multifamily loans, 32% commercial business loans, 9% consumer and single-family residence loans, 6% non-owner-occupied commercial real estate and approximately 1% of land and construction loans.

From an operational perspective, we continue to challenge our lending departments and adapt to a heavy focus on asset quality review. If there are cracks coming in the economy, we want to spot them proactively. Obviously, we continue to maintain our steadfast cautious yet proactive approach to growing with strong asset quality. Loan fundings continue to be comprised primarily high-quality adjustable rate C&I SBA and mortgage lending totaling $366 million for the third quarter, offset by loan payoffs of $467 million for the quarter. Despite regional pressures and rhetoric around certain geographical challenges, in multifamily housing, we remain confident in the asset class as we have underwritten it, particularly our unique workforce housing exposure within the broadly defined sector.

On previous calls, you have heard our teams speak to the value of workforce housing in the face of record low housing affordability. As a reminder, California is a rent-controlled state and is where approximately 88% of our multifamily loans are located. The bank has limited exposure to the Sunbelt region, the Midwest and the Northeast markets.

Looking at our entire portfolio. Its strength is evident in both its continued credit quality metrics and the low NPAs to total assets ratio for the third quarter of 33 basis points compared to 18 basis points from the prior quarter and 10 basis points from the third quarter of 2023.

Our current NPAs are largely the byproduct of a single relationship specifically. None of the NPAs are multifamily assets. Further, the noted relationship has subsequently paid 1 of its 2 loans current shortly after the end of the third quarter. The bank anticipates the second loan will be paid current as well within the coming weeks, as Scott noted earlier.

While this borrower has exhibited this pattern in practice historically, we are confident in the underlying assets have incredibly low loan to values. Otherwise, our NPAs are rooted in properly margin collateral with a healthy reserve relative to the specific asset and no meaningful or material anticipated risk of loss.

Our underwriting remains largely unchanged and staunchly conservative, with weighted average LTVs of 53% for multifamily loans and 54% for single-family loans. We are well into the second phase of our strategic plan and are transitioning to a more offensive and measured strategy to capitalize on what will surely be market opportunities ahead.

To kick off this transition, First Foundation, like many of its peers, was a benefactor of a 50 basis point rate cut as a result of the FOMC's September meeting. This start to the anticipated rate cutting cycle allowed the bank to mitigate its liability sensitivity quickly by reducing rates across the portfolio. We continue to navigate a complex interest rate environment shaped by these recent FOMC actions, and we'll continue to visually respond to volatility.

During this quarter, we implemented the following rate adjustments for ICS deposits, retail deposits, digital deposits and larger, more specialized deposit channels to position us for stronger earnings as these changes take full effect in Q4 of 2024. ICS in retail, 50 basis point reductions for balances with current rates over 2.5%, and 30 basis points for accounts between 1% and 2.5%. No changes were made to deposits below 1%. As a reminder, ICS, or insured cash sweep deposits, allow customers, typically businesses or municipalities, to access FDIC insurance for large deposits over the $250,000 insurance limit by spreading funds across multiple banks within a network.

Customers still receive 1 consolidated statement and access their funds through their primary banking relationship at First Foundation. CDs, we adjusted 9-month APYs from 5% to 4.75% and 12-month APYs from 4.85% to 4.6%, ensuring competitive but sustainable offerings. ECR deposits, reductions in earnings credit payouts were also approximately 50 basis points across the board. Earnings credit rate, or ECR, is a noninterest compensation mechanism for business clients with commercial accounts. With ECR, First Foundation clients earn credits based on the balances they maintain in their accounts, which can offset banking fees like wire transfer or treasury management services. This allows businesses to reduce operating costs without earning taxable interest. ECR accounts are essential in deepening relationships at First Foundation with our larger business clients. They allow us to offer attractive deposit options that help clients manage liquidity efficiently, while also benefiting from the fee offsets. This supports our treasury management growth strategy and encourages businesses to consolidate more of their financial activities with us.

Digital Bank customers. To build momentum before year-end, the bank leveraged a target motion offering higher interest rates for new customers who open accounts and meet specific deposit thresholds. The long-term strategy can and will be paired with digital marketing campaigns, emphasizing the ease of online account opening vis-a-vis our new instant account verification, funding technology and competitive rates, positioning First Foundation's digital bank among the top tier offerings.

These adjustments are already contributing to our cost efficiency and will be more prominently reflected in the coming quarter's full earnings as we did not inure the benefit of a full quarter of cost savings during the third quarter as a result of the FOMC meeting late September kickoff to a rate-cutting cycle. These moves in rates, as described, are designed to blunt the impact of rate cuts, while preserving liquidity and ensuring a smooth pivot towards increased profitability.

As you know, First Foundation has a broad geographic footprint, Florida, Texas, Nevada, California and even Hawaii. We see significant untapped potential in the markets within these geographies. With our physical presence in mature C&I lending infrastructure, we're well positioned to grow. And frankly, the opportunity is right in front of us.

Our strategy is simple. We focus on relationships, not just transactions, but deposit growth is where it starts because deposits drive everything. We're going to leverage these markets heavily, offering a full platform to clients who want long, true banking partnerships. We've made it clear, new bankers in these markets will have both loan and deposit goals, and they will be incentivized to build self-funding relationships.

This isn't just about loans or chasing deposits, it's about creating a balanced, stainable portfolio that fuels growth and profitability across regions. The pieces are in place, and now it's all about execution, and we are focused on getting it done. We remain laser-focused on service as our core value proposition. It's what sets us apart in the marketplace.

In the near term, we're keeping a close watch on liquidity and funding that's just smart management. We're not waiting around. We have already taken meaningful steps to strengthen our core funding base. Loan sales will help us reduce reliance on broker deposits and Federal Home Loan Bank advances, which are fine tools when needed, but not where we want to live long term. The real game changer will be building up granular core deposits because that's the foundation for sustainable, long-term success. We know it, and we're going after it with focus and discipline.

The breakdown of our current deposits is as follows: money market and savings, 34%; certificates of deposit, 25%; interest-bearing demand deposits, 20%; noninterest-bearing demand deposits, 21%. Our deposits are diversified by geographic distribution, with California accounting for 30% of total deposits, Florida at 20% and Texas at 7%, which make up the majority of our deposit portfolio, with Nevada, Hawaii and other states making up 43% of the remaining total.

Since the FOMC's decision to cut rates by 50 basis points, we have seen a palpable uptick in the growth of our digital branch. The investments in its online account opening infrastructure and technology have really given us an opportunity to lever rate environment. The seamless [indiscernible] account opening and funding with real-time risk mitigation and fraud detection is already deployed into our physical branches, being utilized for consumer accounts at first and in short order for business accounts as well. This will allow more efficient usage of FTE, while freeing up more time to focus on the high-touch needs of our business clients and the complexities of their banking relationship.

As we noted last quarter, we have begun to change the culture of our physical branches to empower and incentivize employees to aggressively grow our granular core retail deposit franchise with proactive outbound participation and engagement in the community. They have risen to the challenge of being the front line and the backbone of our institution because the growth of our retail channel is integral to our resilience and continued success.

For this reason and for countless more, I can tell you unequivocally that the employees of First Foundation are our greatest asset. As we grow core deposits, we're going to keep a sharp eye on concentrations across the deposit portfolio, just like we do the loan portfolio. It's not just about growth, it's about balance and discipline. This means reducing reliance on noncore and wholesale funding, along with cutting back on high-cost deposits goals we've been talking about for several quarters now.

We've made solid progress, but let's be clear, we are not satisfied yet. There's more room to improve, and we're focused on getting it right. The changes we're making to the balance sheet will limit exposure to expensive deposits and profitability will improve with these adjustments. And of course, the recent rate cuts are already giving us a tailwind, with more upside if additional cuts are on the horizon whenever the Fed does decide to move again.

We are fully committed to executing our strategy with precision, reducing fixed rate exposure, strengthening liquidity and expanding our core deposit base. The sale of performing loan concentrations, combined with our investments in digital infrastructure, will keep us on a path to strong profitability, while the ongoing rate cuts create new opportunities for growth.

Looking ahead, our focus is clear: disciplined growth, proactive risk management and delivering long-term value for our shareholders. As we navigate these strategic shifts, we remain confident in our ability to adapt to the changing landscape and capitalize on new opportunities. But none of this happens without the incredible people we have working tirelessly every day.

I want to take a moment to thank the folks on the front lines, our loan servicing group, treasury management team, digital banking team and all the unsung heroes who work behind the scenes and rarely get the recognition they deserve. Your hard work and dedication are the reason we can execute on these strategies and continue driving results for our clients and shareholders. We see you, and we appreciate everything you do. Thank you.

I'll now turn it back over to Scott.

[Operator]

I'll jump in here, Chris.

[Scott Kavanaugh, executive]

Yes, there you go.

[Operator]

Thank you, Scott. Chris, thank you for your comments.

[Operator]

[Operator Instructions] Our first question for today comes from the line of David Feaster.

[David Feaster, analyst]

I wanted to touch on the time line that you guys are thinking on some of these initiatives. You guys made a lot of progress. You moved more loans to HFS than we had initially talked about. You talked about the upcoming securitizations, that's kind of $500 million of it. You're exploring a lot of different options.

But I was just hoping if you could maybe walk through a sense of maybe the time line for continuing to optimize these loans over the next -- is it 6, 12, 18 months? Just kind of curious how you think about that.

[Jamie Britton, executive]

David, thanks for joining today. I appreciate the question. We've tried to reiterate along the way that we're willing to take our time here. We've moved the loans over that we want to disposition. Ultimately, we think taking the mark right away gives us the flexibility to dig in with potential buyers, consider things like the securitization we mentioned and really make sure that we're getting the final execution for our shareholders.

We don't have a set time line on that. We've gotten a lot of interest already and we're already working with multiple parties to understand their interest in our loans, and we're really looking to find teams that are willing to roll up their sleeves understand the credit quality and economics of our portfolio, similar to what our new investors did during the capital raise process.

And we know that will take a little bit of time. But again, we think moving the loans to held for sale going ahead and taking the mark on those provides us a little flexibility and affords us the time to make sure that we get best execution.

We're looking to finish the securitization of approximately $500 million by the end of the year. Like Chris mentioned, we have some other very interested parties that are considering smaller sells that we may see soon after that. And like Scott mentioned, we're willing to consider additional securitizations in '25, but we don't have a set time line at this point.

[David Feaster, analyst]

And to be clear, all those conversations, it sounded like we're better than the discount that you assumed in the transfer?

[Scott Kavanaugh, executive]

That's correct.

[David Feaster, analyst]

Okay. And then one thing that seems like as the market may be underappreciating the benefit to expenses from the ECR side, I was hoping you could can walk through -- touch on it. Chris, you touched on it a bit, but could you just help us think through the ECR deposits? How much of your deposit base is tied to that today? And how quickly will those -- into what magnitude, like what's the beta on those? And how quickly will they respond to cuts?

[Scott Kavanaugh, executive]

The I'll answer the betas, and then I'll let Chris take over. But yes, as you guys are aware, on the way up, the betas were 100%, and they were pretty much instantaneous every time the Fed move on the way back down, like on the latest turn, the Fed reduced rates. We, the next morning, reduced those compensating balances by 50 basis points. So it was an instantaneous reduction. Chris?

[Christopher Naghibi, executive]

Yes. Look, if you're looking to kind of get an idea to better understand what's going, I would say, look at the seasonality of the balances historically, and then understand that they do reprice pretty aggressively downward. They're expecting it as much as they expected the reprice up when rates were going up, they fully expect the similar rate cuts on the way down. So they reprice pretty aggressively. If you follow and track the balances historically, you'll see some increases in the ECR cost as balances increase, obviously. But as they decrease over time with a lower rate, you'll see some pretty significant benefits.

[Scott Kavanaugh, executive]

What we're our balances?

[Jamie Britton, executive]

We're around $1.4 billion, $1.5 billion going into the end of the quarter. And as I mentioned, those will continue to increase as they seasonally do into the fourth before they start the regular outflows troughing in the first.

[David Feaster, analyst]

Okay. Terrific. And then maybe just touching on the growth side, exclusive of the multifamily move. I'm just kind of curious, how do you think about growth? Obviously, you've got a pretty significant organic growth engine, originations have been solid. They maybe slowed a little bit this quarter. But I'm just kind of curious, how do you think about organic growth? Obviously, you talked about leading with deposits. But I'm curious, how do you think about the organic growth trajectory as we look forward on kind of the HFI book?

[Christopher Naghibi, executive]

Well, part of our strategic plan is to add bankers in the key markets that we serve. We have the C&I engine, as you know about for a greater portion of a decade now. and we've been nurturing those relationships accordingly. One of the things that I think we're doing a better job now is reaching out to people and really taking what I think would otherwise be a simple relationship in deepening it, which usually comes with lending opportunities.

What I'd like to think about for growth is as we add new bankers in these markets, it's generally a 6- to 12-month kind of cycle for the C&I bankers to get over, get trained up, get to markets and really understand things. So I would expect to see our growth, especially as we head into the second quarter of 2025, be a little bit more significant in the C&I space. But we're focused on it. It's our priority in building those relationships are important, but we are going to need to add bankers in key markets, which we have planned for the future.

[Operator]

Our next question comes from the line of Gary Tenner.

[Gary Tenner, analyst]

I had a question first on the ACL. Obviously, higher this quarter as a percentage, just given a smaller denominator of HFI loans. Chris, based on what you were saying, I think coming out of the call areas, we would have assumed maybe more of a step up in a given quarter in the ACL just from that review of the methodology. But it sounds like what you're saying now is maybe just a reversion back to what we would have previously assumed, which is a bleed up of the ACL over time as the mix changes is the more liquid outcome. Is that fair? Just it seems like there's a little bit of a shift in the kind of commentary around the ACL and the review process?

[Christopher Naghibi, executive]

I think it's fair. One of the things, obviously, I think we all understand is that it's a gentle fulcrum balance between the regulatory world and the accounting world. Getting -- being that there is no underlying error in our ACL methodology, it's one of those things we have to be strategic and pragmatic and thoughtful about over time. We have the benefit, obviously, of moving as held for sale, and we're able to keep the balances where they were in the ACL, which shows effectively a net increase when you think about the risk of loss.

But to your point, it will be a little bit more pragmatic than we had hoped over time to get to the stated goals.

[Gary Tenner, analyst]

Yes. Okay. I appreciate that. And then just the second question was -- sorry, the yield on the loans that were moved to held for sale, was that kind of the average of the mortgage warehouse -- or excuse me, the multifamily portfolio yield? Or how to think about that as it relates to modeling for disposal?

[Jamie Britton, executive]

I think that's the best assumption to use, Gary, the weighted average for the overall portfolio. It may have been a little bit higher, but I think that kind of 3 70, 3 75 range is a good number going forward.

[Operator]

[Operator Instructions] We have another question from the line of Matthew Clark.

[Matthew Clark, analyst]

First on the planned securitization of these loans. I guess what do you plan to do with the proceeds? Do you plan to pay down brokered CDs and borrowings? Or do you plan to just sit in cash and use it to fund loan growth over time?

[Scott Kavanaugh, executive]

No, we definitely intend to reduce our exposure wholesale funding, whether it comes from broker deposits or loan bank advances our goal is to shrink those balances over time. So I think you would see almost a significant or dollar-for-dollar reduction hopefully, with those -- with the proceeds by reducing wholesale.

[Jamie Britton, executive]

Yes, we have enough in brokered deposits currently outside of the traditional brokered CD portfolio to where the first securitization that we're planning for the fourth could be met with almost immediate within 30-day reduction of broker deposit balances. The brokered portfolio has more than half of its deposits repricing before the end of 2025.

So to the extent that we have additional sales or securitization starting the year and into '25, we'll focus on that traditional portfolio and allow those balances to mature without replacement. And those are an average of maybe 5, 10 right now, those CDs that are maturing between now and the end of next year.

[Matthew Clark, analyst]

Okay. And the brokered CD amount dollar-wise roughly $3.7 billion? Or can you just confirm that number?

[Jamie Britton, executive]

That's about right. Part of that $350 million is underlying the cash flow hedge swap that we did. So we'll stay in place and could bounce back and forth between broker deposits and FHLB advances. But that's a good number. And like I said, we have some that are outside the brokered CD portfolio that will be targeted first, with the securitization work planning to complete in the fourth.

[Matthew Clark, analyst]

Okay. And then can you confirm the amount of what percent of your loan book is truly floating rate at the end of the quarter?

[Jamie Britton, executive]

I'd say adjustable rate is probably 20%, but they're not adjusting on a monthly basis. These the adjusting periods extend. Yes, they vary between a month and I think even some go out as long as a year maybe. But that excludes to the multifamily portfolio. which, as you know, adjust after his fixed rate period.

[Matthew Clark, analyst]

Okay. Excluding adjustables, what do you have in truly floating rate loans?

[Jamie Britton, executive]

I don't understand the question. I mean those do adjust the 20% that I mentioned. We have revolving lines that are close to $1 billion, I would say.

[Matthew Clark, analyst]

Okay. So that -- I'm just trying to get a sense for the impact on loan yields in the upcoming quarter from the 50 basis point Fed cut and how much is repriced right away. But that 20% is -- that's the amount you expect to that adjust right away? Or is that -- those are hybrids?

[Scott Kavanaugh, executive]

Yes. I would say anywhere from coming up to 6 months where a majority believe more the 3- and 6-month adjustable.

[Matthew Clark, analyst]

Okay. And then the spot rate on deposits at the end of the quarter, interest-bearing or on the interest-bearing side?

[Jamie Britton, executive]

So we didn't offer a spot rate, but I mentioned that the rate on deposits in September was 4 15, down from 4 28 that we reported in June.

And we would expect -- sorry, Matthew. Go ahead.

[Matthew Clark, analyst]

You expect additional relief, I assume. Yes. And then the average margin in the month of September, if you had it?

[Scott Kavanaugh, executive]

I believe we ended around 1 32.

[Matthew Clark, analyst]

Okay. And then I think in your prepared comments, there was some suggestion that you're not going to get back down to a 1 17 margin like you were in the first quarter of '24, but it does sound like you anticipate maybe some NIM pressure from the seasonal runoff of the ECR deposits in 1Q. Is that fair? Or am I interpreting that incorrectly?

[Jamie Britton, executive]

I wouldn't think so. I mean it obviously depends significantly on your rate expectations were the Fed to hold from here we would see additional pickup in deposit costs. As I mentioned before, we would see a little bit of offsetting on the left-hand side, like you're getting at.

But even with the increase in volumes from the ECR, MSR deposits in the fourth quarter and then coming off in the late fourth quarter and the first, I would still expect NIM to cattle from -- to not draw in Q3 levels from here. But -- and that's assuming no further rate cuts. I mean I think there's still -- the market is still expecting just under 50 between now and year-end, not to mention what's expected in 2025.

[Matthew Clark, analyst]

Yes. Got it. And then just lastly, on the reserve. Where is the peer reserve ratio that you're using right now?

[Scott Kavanaugh, executive]

I think we identified last quarter somewhere between 65 and 70 basis points.

[Operator]

Thank you for your questions. Ladies and gentlemen, that will conclude our Q&A session for today. I'd like to turn it back over to Scott Kavanaugh for any closing remarks. Thank you.

[Scott Kavanaugh, executive]

Thank you, everyone, for participating in today's earnings call. Once again, I want to thank each and every employee for the hard work that they do. I will always remember that, and I really appreciate it. And lastly, go Bulls.

[Operator]

Thank you, everybody. Have a great day.