Company Overview
First Foundation Inc. (FFWM) is a financial services company with a diversified business model spanning commercial banking, wealth management, and trust services. The company's two wholly-owned operating subsidiaries, First Foundation Advisors (FFA) and First Foundation Bank (FFB), have established a strong presence across several key markets, including California, Nevada, Florida, and Texas.
Historical Background
Founded in 1990, First Foundation has evolved over the past three decades to become a regional banking powerhouse. The company's history is marked by strategic acquisitions, geographic expansion, and a steadfast commitment to serving the diverse financial needs of individuals, businesses, and organizations. First Foundation Inc. was formed in 2007 as the holding company for First Foundation Bank and its other subsidiaries.
A significant milestone in the company's growth trajectory was the 2015 acquisition of another regional bank, which substantially expanded First Foundation's commercial real estate and multifamily lending portfolios. This strategic move propelled the company's assets to over $10 billion by the end of 2020. However, the concentration of a significant portion of the loan portfolio in commercial real estate and multifamily properties would later present challenges for the company.
Recent Challenges and Transformation
In 2023, First Foundation faced a major setback when it recorded a $215.25 million goodwill impairment charge related to the 2015 acquisition. This one-time charge, driven by economic conditions and changes in the commercial real estate market, resulted in the company reporting a net loss for the year. The management team had to navigate this obstacle and work diligently to reposition the balance sheet and credit portfolios.
Despite these challenges, First Foundation has demonstrated resilience and adaptability throughout its history. From its origins as a small regional bank, the company has grown into a diversified financial services organization with over $13 billion in assets as of the end of 2023. This growth has been achieved through a combination of organic expansion and strategic acquisitions, allowing the company to establish a presence in key markets across California, Nevada, Florida, Texas, and Hawaii.
In 2024, First Foundation took a significant step in its transformation journey by reclassifying $1.9 billion of its multifamily loan portfolio from held-to-maturity to held-for-sale. This move, coupled with a $228 million equity investment from a consortium of investors led by Fortress Investment Group, Canyon Partners, Strategic Value Bank Partners, and North Reef Capital, has positioned the company to further diversify its asset mix, reduce its commercial real estate concentration, and bolster its balance sheet.
Financials
As of the company's most recent fiscal year end (2023), First Foundation reported annual revenue of $174.85 million and a net loss of $199.06 million. The company's annual operating cash flow was $5.82 million, while annual free cash flow stood at -$2.39 million. On a quarterly basis, the company's performance has been mixed, with the most recent quarter (Q3 2024) seeing revenue of $152.47 million and a net loss of $14.11 million.
First Foundation operates through two main business segments: Banking and Wealth Management. The Banking segment, which includes operations of First Foundation Bank, First Foundation Insurance Services, First Foundation Public Finance, and Blue Moon Management LLC, generated $458.52 million in interest income for the first nine months of 2024, with net interest income of $136.46 million after $327.19 million in interest expense. Noninterest income in the Banking segment totaled $101.00 million, excluding a $117.52 million lower of cost or market (LOCOM) adjustment related to the reclassification of $1.9 billion in multifamily loans from held for investment to held for sale.
The Wealth Management segment, operated through First Foundation Advisors, reported noninterest income of $22.84 million in the first nine months of 2024, up from $22.23 million in the prior year period. This increase was primarily due to a $0.60 million rise in fees earned on assets under management, which averaged $5.4 billion per month during the period.
Geographical Footprint and Diversification
First Foundation's footprint spans five states, with a strong presence in California, which accounts for approximately 85.9% of its loan portfolio as of September 30, 2024. The company also has a meaningful presence in Florida (8.0%), Texas (4.0%), and Nevada (1.1%), reflecting its strategic focus on high-growth regional markets.
In terms of loan composition, First Foundation's portfolio is diversified across residential properties (52.1%), commercial properties (11.8%), land and construction (1.0%), and commercial and industrial loans (35.1%). This diversification has been a key priority for the company as it seeks to reduce its historical reliance on the multifamily segment.
Wealth Management and Trust Services
Alongside its commercial banking operations, First Foundation's wealth management and trust services business, First Foundation Advisors (FFA), has been a stable source of fee income for the company. As of September 30, 2024, FFA had $5.4 billion in assets under management, highlighting its significant contribution to the company's overall financial performance.
Regulatory Landscape and Risk Management
As a regional bank with over $10 billion in assets, First Foundation is subject to increased regulatory scrutiny and must adhere to stringent capital requirements. The company's management team has been proactive in strengthening its risk management practices, including enhancing its credit underwriting processes, stress testing capabilities, and interest rate risk management strategies.
Liquidity
One of the key challenges facing First Foundation is the ongoing transition in its loan portfolio, particularly the reduction of its multifamily exposure. The company's ability to effectively manage this transition, while maintaining profitability and prudent risk management, will be crucial to its long-term success.
As of September 30, 2024, First Foundation reported $1.11 billion in cash and a total of $3.00 billion in unused borrowing capacity. This included $2.00 billion in available lines of credit with the Federal Home Loan Bank, $823 million in available borrowing capacity with the Federal Reserve Bank, $240 million in borrowing capacity through unsecured federal funds lines, and $20 million in available borrowing capacity through a line of credit arrangement with an unaffiliated lender.
Additionally, the company's reliance on high-cost and wholesale funding sources, such as brokered deposits, has presented headwinds to its net interest margin. First Foundation's efforts to reduce its dependence on these funding sources and grow its core deposit base will be a critical focus area moving forward.
Despite these challenges, First Foundation's strategic initiatives, including its geographic diversification, wealth management capabilities, and commitment to enhancing its risk management framework, position the company well to capitalize on emerging opportunities in the regional banking landscape.
Recent Performance and Future Outlook
In the fourth quarter of 2024, First Foundation sold $489 million of the multifamily loans that were reclassified to loans held for sale in the third quarter. The company executed this securitization at a price above 95%, which was a premium to where the overall held-for-sale portfolio was marked at the end of both the third and fourth quarters (93.8% and 93.4% respectively).
The company's net interest margin improved from 1.5% in the third quarter to 1.58% in the fourth quarter of 2024. While this was a modest improvement, it represented a 41 basis point expansion from the year's low point of 1.17% reported in the first quarter of 2024.
Looking ahead, First Foundation expects continued margin improvement in 2025, as the first few rate reductions are anticipated to provide a supportive tailwind. The company remains confident in the economics of its multifamily portfolio and expects to complete additional sales of the remaining $1.4 billion in multifamily loans held for sale in the first half of 2025.
As part of its ongoing transformation, First Foundation is working to develop an operating model, processes, and tools needed to enhance its credit risk management practices and interest rate risk management capabilities. The company views these enhancements as fundamental to mitigating future risks and expects further increases in its Allowance for Credit Losses (ACL) coverage ratio as the balance sheet mix shifts towards commercial loans.
Conclusion
First Foundation Inc. (FFWM) is a regional banking institution with a diversified business model and a strong footprint across several high-growth markets. The company's recent strategic actions, including the reclassification of its multifamily loan portfolio and the infusion of significant equity capital, have laid the foundation for its transformation and long-term sustainability.
As First Foundation navigates the evolving regulatory landscape and works to optimize its balance sheet and funding mix, investors will closely monitor the company's ability to execute on its strategic priorities and deliver consistent financial performance. The company's emphasis on risk management, geographic diversification, and its wealth management capabilities provide a solid platform for future growth and value creation.