Company Overview

First Foundation Inc. (FFWM) is a diversified financial services company that has undergone a strategic transformation in recent years, positioning itself for long-term success. With two wholly-owned subsidiaries, First Foundation Advisors (FFA) and First Foundation Bank (FFB), the company provides a comprehensive suite of wealth management, banking, and related services to individuals, businesses, and organizations across multiple states.

Founded in 1990, First Foundation has established a strong presence in key markets, including California, Nevada, Florida, Texas, and Hawaii. The company's history is marked by steady growth, prudent risk management, and a commitment to serving its clients with excellence. As the financial landscape has evolved, First Foundation has demonstrated its ability to adapt and capitalize on emerging opportunities, maintaining its position as a trusted provider of financial solutions.

Historical Growth and Development

First Foundation's journey began with a focus on wealth management and investment advisory services through FFA. Over the next decade, the company expanded its footprint by opening additional offices in California, Nevada, and Hawaii. In 2001, First Foundation took a significant step in diversifying its service offerings by establishing FFB, its commercial banking subsidiary. This move allowed the company to provide a full suite of financial services, including commercial and consumer banking products such as loans, deposits, and cash management solutions.

The company's growth strategy has included both organic expansion and strategic acquisitions. In 2015, First Foundation acquired a regional bank in Florida, extending its reach into the Southeast and enabling it to leverage its wealth management expertise to serve the banking needs of high-net-worth clients in the Florida market. This acquisition played a crucial role in the company's geographic diversification and client base expansion.

Resilience in Economic Challenges

Throughout its history, First Foundation has demonstrated resilience in the face of economic challenges. During the 2008 financial crisis, the company's conservative underwriting approach and diversified loan portfolio allowed it to navigate the turbulent times relatively unscathed, while many of its peers struggled. More recently, in 2023, the company faced a significant challenge when it recorded a $215 million goodwill impairment charge related to its Florida acquisition, resulting in a net loss for the year. Despite this setback, First Foundation remained focused on serving its clients and positioning itself for long-term success.

Strategic Initiatives

In recent years, First Foundation has taken bold steps to strengthen its financial foundation and enhance its market positioning. The company's strategic roadmap has involved reducing exposure to certain asset classes, diversifying its revenue streams, and investing in digital capabilities to better serve its clients. These initiatives have been crucial in navigating the complexities of the current economic environment, characterized by rising interest rates, heightened competition, and increased regulatory scrutiny.

One of the notable actions taken by First Foundation was the reclassification of $1.9 billion in multifamily loans from the held-to-maturity portfolio to the held-for-sale category. This move, announced in October 2024, was a strategic decision to reduce the company's exposure to fixed-rate assets and unlock capital to fund more relationship-driven opportunities, particularly in the commercial and industrial (C&I) lending space. The company has also explored various avenues for the disposition of these loans, including securitization and direct private party sales, demonstrating its commitment to optimizing its balance sheet and positioning itself for future growth.

Concurrent with the loan reclassification, First Foundation announced the conversion of its Series B Noncumulative Convertible Preferred Stock into common stock, a move that further strengthened its capital position and signaled the company's confidence in its long-term prospects. This conversion, approved by shareholders in September 2024, simplifies the capital structure and enhances the company's financial flexibility.

Risk Management and Asset Quality

First Foundation's prudent approach to risk management is reflected in its asset quality metrics. As of the third quarter of 2024, the company's non-performing assets to total assets ratio stood at 0.33%, a slight increase from the prior quarter but still well below industry benchmarks. The company's management team has highlighted its commitment to proactively addressing any changes in credit quality or interest rate risk, ensuring that its reserves remain adequate to address potential challenges.

Diversified Business Model

The company's diversified business model, encompassing both banking and wealth management operations, has been a key driver of its resilience. First Foundation Advisors, the company's wealth management subsidiary, continued to deliver strong performance, with assets under management (AUM) reaching $5.5 billion as of the end of the third quarter of 2024. The consistent growth in AUM, coupled with robust fee income, has been a reliable source of revenue for the company, complementing its interest-earning activities.

In the banking segment, First Foundation has doubled down on its efforts to expand its commercial and industrial (C&I) lending portfolio, which now accounts for the majority of its loan fundings. This strategic shift aligns with the company's goal of reducing its concentration in fixed-rate assets and embracing a more flexible, index-based pricing structure. The bank's seasoned C&I lending team has continued to deliver solid results, underscoring the company's expertise in this area.

Digital Transformation

First Foundation's digital transformation initiatives have also been a key focus, as the company seeks to enhance its client experience and operational efficiency. The implementation of instant account opening and funding capabilities, coupled with targeted digital marketing campaigns, has positioned the company's digital banking platform as a competitive offering in its markets.

Financials

First Foundation's financial performance reflects its ongoing strategic initiatives and the challenging macroeconomic environment. The company's diversified revenue streams from both banking and wealth management operations have contributed to its overall financial stability.

In the most recent fiscal year (2023), First Foundation reported revenue of $174.85 million, with a net loss of $199.06 million. The company's operating cash flow (OCF) for the year was $5.82 million, while free cash flow (FCF) was negative at -$2.39 million.

For the most recent quarter (Q3 2024), the company reported revenue of $51.576 million, with a net loss of $82.174 million. The significant decrease in net income was primarily due to a $117.5 million lower of cost or market (LOCOM) adjustment related to the reclassification of $1.9 billion of multifamily loans from held for investment to held for sale. Despite this, the company's operating cash flow improved to $13.913 million, with free cash flow reaching $15.449 million.

Year-over-year, revenue increased while net income decreased significantly due to the aforementioned LOCOM adjustment. This strategic move, while impacting short-term profitability, is expected to improve the company's long-term financial position by reducing exposure to fixed-rate assets and unlocking capital for more profitable opportunities.

Liquidity

First Foundation's liquidity position has been bolstered by its strategic actions, including the reclassification of multifamily loans and the conversion of preferred stock. These moves have enhanced the company's financial flexibility and its ability to navigate market fluctuations.

As of the most recent reporting period, First Foundation's debt-to-equity ratio stood at 1.74, reflecting the company's leverage position. The company held $1.11 billion in cash and cash equivalents, providing a solid liquidity buffer. Additionally, the Bank has access to substantial unused borrowing capacity, with $2 billion available from the Federal Home Loan Bank (FHLB) and $823 million from the Federal Reserve Bank.

The company's current ratio and quick ratio both stand at 0.60, indicating that while there may be some pressure on short-term liquidity, the company has taken steps to address this through its strategic initiatives and capital raising activities.

In July 2024, First Foundation completed a $228 million capital raise, which has significantly strengthened its balance sheet and regulatory capital ratios. The company plans to use these proceeds to support strategic growth initiatives and optimize its asset/liability mix, further enhancing its liquidity position.

Business Segments

First Foundation operates through two main business segments: Banking and Wealth Management.

The Banking segment, which includes the operations of First Foundation Bank (FFB), First Foundation Insurance Services (FFIS), First Foundation Public Finance (FFPF), and Blue Moon Management LLC, provides a comprehensive platform of financial services. As of September 30, 2024, the bank had $8.09 billion in total loans held for investment, net of deferred fees and allowance for credit losses. Additionally, the bank held $1.79 billion in loans held for sale, primarily in the multifamily loan portfolio. The total deposits stood at $10.30 billion.

The Banking segment offers a variety of loan products, including loans secured by real estate (residential, commercial, and construction), commercial and industrial loans, and consumer loans. On the deposit side, the bank provides demand deposits, money market and savings accounts, and certificates of deposit. The segment also generates noninterest income from trust and consulting fees, loan-related fees, deposit charges, gains on sale of loans and securities, and capital market activities.

The Wealth Management segment, operated through First Foundation Advisors (FFA), provides asset management, financial planning, and consulting services to high net worth clients. As of September 30, 2024, FFA had $5.50 billion in assets under management (AUM), up from $5.02 billion a year earlier. This increase was driven by $241.41 million in new accounts and $437.21 million in performance gains, partially offset by $249.21 million in terminations and net withdrawals.

The Wealth Management segment earns fees based on the balance of AUM and generates additional noninterest income from financial planning and consulting services provided to clients. This segment provides diversification and a stable source of fee-based revenue for the company.

Outlook and Guidance

Looking ahead, First Foundation has provided several key points of guidance for the near future:

- The company expects to see a more significant reduction in funding costs in Q4 2024 due to the recent 50 basis point Federal Reserve rate cut. - Improvements in all regulatory capital ratios are anticipated in Q4 2024 as part of the preferred shares conversion to common equity. - A securitization of approximately $500 million of multifamily loans is expected to be completed in late Q4 2024. - The company is exploring direct private party loan sales of multifamily loans in addition to the securitization, though these would be smaller in size. - An increase in CECL reserves is expected over time to align more closely with similarly sized and concentrated peers, as part of reviewing the ACL methodology. - The net interest margin is not expected to fall back to the 1.17% level seen in Q1 2024, even with the seasonal patterns of MSR deposit balances. - Further improvement in borrowing costs is anticipated once the $267 million bank term funding program matures in January 2025.

These guidance points reflect First Foundation's proactive approach to managing its balance sheet, improving its funding mix, and positioning itself for improved profitability in the evolving interest rate environment.

Conclusion

Despite the challenging macroeconomic environment, First Foundation has demonstrated its resilience and adaptability. The company's proactive measures to address interest rate risk, strengthen its balance sheet, and diversify its revenue streams have laid the groundwork for long-term sustainability and growth. As the company continues to execute on its strategic roadmap, investors will be closely monitoring its ability to capitalize on emerging opportunities and navigate the evolving financial landscape. With a strong focus on optimizing its loan portfolio, enhancing its deposit base, and leveraging its wealth management expertise, First Foundation is well-positioned to overcome near-term challenges and drive long-term value for its shareholders.