First Foundation Inc. (NASDAQ:FFWM), a leading wealth management and commercial banking institution, has faced its fair share of headwinds in recent years, but the company is now poised to embark on a transformative journey, armed with a strategic capital raise and a renewed focus on diversification and profitability.

Financials

The company's financial performance in 2023 reflected the challenges it has navigated. For the full year, First Foundation reported annual net income of -$199.064 million, annual revenue of $174.850 million, annual operating cash flow of $5.820 million, and annual free cash flow of -$2.391 million. While these numbers paint a sobering picture, the company's management team has been proactive in addressing the underlying issues and charting a course for a stronger future.

In the second quarter of 2024, First Foundation reported net income attributable to common shareholders of $3.1 million, or $0.05 per share for both basic and diluted shares. This marked a significant improvement from the first quarter of 2024, where the company reported net income of $793,000. The company's tangible book value also increased to $16.43 per share, up $0.08 from the previous quarter.

One of the key drivers behind First Foundation's recent performance has been its focus on improving its net interest margin. In the second quarter, the company's net interest margin expanded to 1.36%, up from 1.17% in the first quarter. This was largely due to the return of MSR deposits, which helped offset the pressure on interest-bearing liability costs.

The company's loan portfolio remained relatively stable, with total loans of $10.1 billion at the end of the second quarter, flat from the first quarter. However, the company has been actively working to reposition its loan mix, with C&I loans now accounting for 83% of loan fundings during the quarter and 86% of total fundings year-to-date.

First Foundation's wealth management division, First Foundation Advisors (FFA), continued to perform well, with assets under management (AUM) remaining at $5.5 billion, unchanged from the end of the first quarter. The company's trust department also maintained a solid presence, with assets under advisement of $1.1 billion for the quarter.

The company's credit quality remained strong, with nonperforming assets to total assets holding steady at 0.18% quarter-over-quarter. Loan yields increased to 4.77% in the second quarter, up from 4.70% in the first quarter.

Recent Developments

Looking ahead, First Foundation has announced a transformative $228 million capital raise, which the company believes will provide the necessary resources to strengthen its balance sheet, reduce its reliance on wholesale funding, and position the bank for future growth and diversification.

As part of the near-term strategic plan, the company intends to move approximately 20% of its existing multifamily loans to a held-for-sale designation, allowing it to reduce its exposure to this asset class and improve the overall risk profile of the balance sheet. Additionally, First Foundation will undertake a comprehensive review of its allowance for credit losses (ACL) methodology to ensure it is aligned with industry peers and adequately addresses any potential interest rate risk.

The second phase of the company's strategic plan focuses on offense, with a goal of further diversifying its geographic footprint and loan portfolio. The company sees significant untapped potential in its existing markets, including Florida, Texas, and California, and plans to strategically invest in these regions to drive core deposit growth, reduce reliance on wholesale funding, and enhance its revenue mix with a greater emphasis on stable, recurring fee income.

Outlook

First Foundation's management team, led by CEO Scott Kavanaugh, is confident that these initiatives will position the company for long-term success. By the end of 2026, the company aims to achieve a return on assets (ROA) of 90 to 100 basis points, a return on tangible common equity (ROTCE) of 10% to 12%, and reduce its commercial real estate concentration to below 400%.

Business Overview

The company's geographic footprint is primarily concentrated in California, which accounts for 36% of total deposits, followed by Florida at 36% and Texas at 10%. The remaining 18% of deposits are spread across Nevada, Hawaii, and other states.

From a revenue perspective, First Foundation's primary sources of income include net interest income, fees from its deposit and trust services, gains on the sale of loans and investment securities, and consulting fees. The company's wealth management division, FFA, also contributes a significant portion of its noninterest income through asset management fees.

In the second quarter of 2024, the company's noninterest income as a percentage of total revenue was 23%, compared to 25% in the first quarter. This slight decrease was primarily due to a reduction in gains on the sale of loans and investment securities.

Liquidity

The company's liquidity position remains strong, with $4.4 billion in available liquidity and an available liquidity to uninsured and uncollateralized deposits ratio of 2.8 times as of the end of the second quarter. Borrowings remained flat quarter-over-quarter at $1.7 billion, representing 10.4% of total average assets for the quarter.

First Foundation's capital ratios have also improved, with the company's total risk-based capital ratio estimated to be 12.6% as of the end of the second quarter, up 11 basis points from the previous quarter and 84 basis points since the second quarter of 2023.

Conclusion

The company's strategic initiatives, coupled with the recent capital raise, have positioned First Foundation for a renewed focus on growth and profitability. By addressing its balance sheet challenges, diversifying its loan portfolio, and investing in its existing markets, the company aims to deliver sustainable long-term value for its shareholders.

As First Foundation navigates the evolving financial landscape, investors will be closely watching the company's execution of its strategic plan and its ability to capitalize on the opportunities ahead. With a strengthened balance sheet, a renewed focus on core business lines, and a commitment to disciplined expense management, First Foundation appears poised to emerge as a stronger, more resilient institution in the years to come.