First Foundation Inc. (FFWM)

Executive Summary / Key Takeaways

• First Foundation (FFWM) is executing a multi-phase strategic transformation aimed at improving sustainable profitability and reducing balance sheet risk, following past challenges primarily related to interest rate sensitivity and fixed-rate asset concentration.
• Recent performance shows early signs of success, with Q1 2025 marking a return to profitability ($6.9M net income, $0.08 EPS) driven by net interest margin expansion (1.67%), reduced provision expense, and favorable held-for-sale loan valuation marks.
• Key strategic actions include the methodical disposition of approximately $1.3 billion in remaining lower-yielding multifamily loans held for sale, remixing the loan portfolio towards higher-yielding C&I assets, and reducing reliance on high-cost wholesale funding by growing core deposits.
• Management has provided explicit intermediate-term targets, aiming for a Q4 2025 exit NIM of 1.8%-1.9%, further expansion to 2.1%-2.2% by YE 2026, and by YE 2026, an ROA of 90-100 basis points, ROTCE of 10-12%, and CRE concentration below 400%.
• While facing competitive pressures from larger, more efficient banks and fintechs, FFWM leverages its personalized service model, integrated banking/wealth platform, and investments in digital technology to differentiate and capture market share in its key regional markets.

A Foundation Undergoing Transformation

First Foundation Inc. operates as a financial services holding company, primarily through its banking subsidiary, First Foundation Bank (FFB), and its wealth management arm, First Foundation Advisors (FFA). With a history dating back to its inception, the company has built a comprehensive platform offering banking, wealth management, and trust services across key markets in California, Nevada, Florida, Texas, and Hawaii. This integrated model, emphasizing personalized client relationships, has been a foundational strength, particularly in attracting high-net-worth individuals and businesses.

Historically, FFWM experienced periods of significant growth, expanding its geographic footprint and seeing substantial increases in its multifamily loan portfolio. Alongside this, it cultivated a long-standing C&I lending business, which has recently become a primary focus for new originations. However, like many in the banking sector, FFWM faced significant headwinds starting around 2022. Its balance sheet positioning, characterized by a concentration of fixed-rate assets and a reliance on higher-cost funding, became stressed as the Federal Reserve aggressively raised interest rates. This environment pressured net income and constrained financial flexibility.

Operating within a competitive landscape dominated by financial giants like JPMorgan Chase (JPM), Bank of America (BAC), U.S. Bancorp (USB), and PNC Financial Services Group (PNC), as well as disruptive fintech firms, FFWM's scale ($12.6 billion in assets as of March 31, 2025) positions it as a regional player. While larger competitors benefit from immense scale, brand recognition, and significant investments in technology leading to greater efficiency (e.g., JPM's digital platforms processing transactions faster with lower costs), FFWM differentiates through its high-touch service model and integrated platform. This approach fosters stronger customer loyalty, particularly in wealth management and specialized banking niches, providing a competitive moat against less personalized mass-market offerings.

Recognizing the need to address the structural challenges highlighted by the rising rate environment, FFWM embarked on a strategic transformation. A pivotal moment was the $228 million equity capital raise in July 2024, providing crucial capital to support this pivot. The core of the strategy involves a methodical balance sheet repositioning to reduce interest rate sensitivity and optimize the funding mix.

Central to this strategy is the decision to exit a portion of the lower-yielding, fixed-rate multifamily loan portfolio. In Q3 2024, approximately $1.9 billion of these loans were reclassified to held for sale, resulting in a $117.5 million fair value adjustment. This move, while impacting reported earnings in that quarter, was strategic, designed to provide flexibility for disposition and reduce exposure to both fixed rates and CRE concentration. In Q4 2024, FFWM successfully sold $489 million of these loans at competitive pricing (above 95, a premium to the held-for-sale mark), using the proceeds to pay down high-cost brokered deposits. An active pipeline for further sales and potential securitizations of the remaining $1.3 billion held-for-sale portfolio is expected to drive continued progress throughout 2025.

Complementing the asset side repositioning is a focused effort on optimizing the funding structure. The company aims to reduce reliance on high-cost wholesale funding, such as brokered deposits and FHLB advances, by prioritizing the growth of granular core deposits across its retail, specialty, and digital banking channels. This initiative is supported by investments in digital banking infrastructure, including online account opening and instant verification technology, which enhance efficiency and customer experience, positioning the digital bank competitively. Furthermore, the company is empowering its physical branches to drive core retail deposit growth through proactive community engagement. The decrease in deposits in Q1 2025 was strategically driven by a $400 million reduction in higher-cost brokered deposits, partially offset by a $71 million increase in core balances, demonstrating early traction in this effort.

Operationally, FFWM is sharpening its focus on risk management. This includes a detailed review of its CECL methodology and strengthening credit processes, controls, and analytics. While management maintains confidence in the underlying credit quality of its portfolio, acknowledging its historical low losses (though noting it's a statistical outlier compared to peers, partly due to its multifamily concentration), they anticipate the ACL coverage ratio will increase over time as the portfolio mixes towards C&I loans, aligning reserves more closely with similarly sized and concentrated peers. The Q1 2025 ACL build, partly reflecting increased criticized assets from stress testing, underscores this ongoing focus. The company is also actively addressing a material weakness in internal controls over financial reporting through increased personnel and enhanced oversight.

Financial Performance Reflecting Strategic Momentum

The financial results for Q1 2025 provide the first clear evidence of the strategic pivot yielding positive outcomes. The company returned to profitability, reporting net income of $6.9 million, or $0.08 per share, a significant improvement from the $14.1 million net loss in Q4 2024 and the $793 thousand net income in Q1 2024.

This turnaround was primarily driven by a notable expansion in the net interest margin (NIM), which reached 1.67% in Q1 2025, up from 1.58% in Q4 2024 and 1.17% in Q1 2024. The NIM expansion was largely attributable to a decrease in interest expense on interest-bearing liabilities, which outpaced a smaller decrease in interest income on interest-earning assets. Average interest-bearing liability balances decreased by 11.5% year-over-year, and the average rate paid on these balances declined to 3.88% in Q1 2025 from 4.24% in Q1 2024. This reduction in funding costs was significantly aided by the planned decrease in higher-cost brokered deposits. While average interest-earning assets also decreased year-over-year (down 5.3%), yields remained relatively stable (4.63% in Q1 2025 vs. 4.64% in Q1 2024), allowing the lower funding costs to drive margin expansion.

Noninterest income saw a substantial increase in Q1 2025, totaling $19.6 million compared to $12.7 million in Q1 2024. This increase was primarily fueled by a $4.5 million increase in gains on the sale of available-for-sale securities and a $2.0 million increase in capital markets income, reflecting favorable valuation changes in the held-for-sale loan portfolio (offset by associated derivative losses). Wealth Management noninterest income remained stable year-over-year at $7.5 million, despite a modest decrease in average assets under management (AUM) to $5.3 billion in Q1 2025 from $5.4 billion in Q1 2024, reflecting market fluctuations and some client terminations offset by new accounts.

Noninterest expense increased to $61.7 million in Q1 2025 from $50.6 million in Q1 2024. This was largely due to higher compensation and benefits ($25.1 million vs. $19.4 million), reflecting annual salary adjustments and strategic investments in talent to support the organizational transition. Customer service costs also increased ($15.1 million vs. $10.7 million), tied to higher balances receiving earnings credits (seasonal in mortgage servicing accounts), though partially offset by lower rates paid on these balances due to Fed rate reductions. Management expects core expenses (excluding customer service costs) to remain relatively stable to slightly declining over time, with targeted investments in growth initiatives.

Credit quality metrics showed some positive trends in Q1 2025, with nonaccrual loans decreasing to $38.7 million from $40.4 million in Q4 2024. The ratio of nonaccrual loans to total loans (including HFS) remained stable at 0.43%. The provision for credit losses was significantly lower at $3.4 million in Q1 2025 compared to $20.6 million in Q4 2024 (which included elevated charge-offs). The Q1 2025 provision reflected higher reserves for the commercial loan portfolio, including equipment finance and substandard loans, and an increase in criticized assets due to stress testing. The Allowance for Credit Losses (ACL) on loans held for investment increased to $35.2 million, or 0.46% of total loans held for investment, up from $32.3 million and 0.41% at December 31, 2024.

Liquidity remains robust, with $1.0 billion in cash and cash equivalents and total available liquidity (including borrowing capacity) of $3.7 billion at March 31, 2025, providing strong coverage (over 2x) for uninsured and uncollateralized deposits ($1.7 billion). The available liquidity ratio of 38.0% is well above the minimum policy requirement. Capital levels are strong, with a consolidated CET1 ratio of 10.6% and Tier 1 leverage ratio of 8.1%, comfortably exceeding regulatory minimums and positioning the bank as well-capitalized.

Outlook and Strategic Execution

Management is optimistic about the financial future over the next 12 to 36 months, driven by the ongoing execution of its strategic plan. The outlook is centered on achieving significant improvements in sustainable profitability and further strengthening the balance sheet.

A key component of the forward outlook is continued NIM expansion. Management explicitly targets an exit run rate for net interest margin in Q4 2025 between 1.8% and 1.9%, with further improvement projected to 2.1% to 2.2% by the end of 2026. This is expected to be driven by the benefits of lower funding costs as higher-cost brokered deposits mature without replacement (47% of the $1.9 billion YE 2024 balance maturing in 2025) and anticipated Fed rate cuts. Additionally, significant repricing opportunities in the retained multifamily portfolio, particularly in 2026 and 2027, are expected to contribute to future margin gains.

The balance sheet is expected to see a modest reduction in total assets over the intermediate term as the held-for-sale loan portfolio is reduced to zero. This will contribute to the target of bringing CRE concentration below 400% by the end of 2026. While overall loan growth (excluding HFS) is expected to be modest due to planned reductions in certain legacy portfolios, the focus is on increasing the portfolio's yield and improving the risk profile by remixing towards higher-yielding C&I loans. New C&I fundings in Q1 2025 had an average yield of 7.09%, and C&I loans constituted 78% of total fundings in the quarter, demonstrating the shift in origination focus.

The strategic investments in talent and technology are expected to support future growth in core deposits and C&I lending. The digital banking platform, with its instant account opening capabilities, is seen as a key tool for attracting new clients and enhancing efficiency. The reenergized focus on private banking and integrated service is intended to deepen client relationships and drive growth in both banking and wealth management fee income.

By the end of 2026, management is confident in achieving significant profitability targets: a return on average assets (ROA) of 90-100 basis points and a return on tangible common equity (ROTCE) of 10-12%. These targets reflect the expected benefits from NIM expansion, controlled expense growth, and a more optimized balance sheet and business mix.

Risks and Challenges

While the strategic direction is clear and early results are promising, FFWM faces several risks and challenges that could impact the execution of its plan and its financial outlook.

• Interest Rate Risk: Despite efforts to reduce sensitivity, the company remains liability sensitive. The pace and magnitude of future interest rate changes, particularly unexpected increases or non-parallel shifts in the yield curve, could impact NIM and the valuation of assets and liabilities differently than modeled.
• Credit Risk: While historical losses have been low, the economic environment and potential stress on certain loan segments (e.g., CRE) could lead to increased delinquencies, nonaccruals, and charge-offs. The ACL relies on macroeconomic forecasts and collateral valuations, which are subject to change. The planned increase in the ACL coverage ratio as the portfolio shifts to C&I will impact earnings.
• Execution Risk: Successfully executing the disposition of the remaining held-for-sale loan portfolio at favorable pricing depends on market conditions and buyer appetite. Delays or unfavorable pricing could impact the timeline for balance sheet optimization and funding cost reduction. The ability to grow core deposits and C&I lending in competitive markets is also subject to execution risk.
• Operational and Control Risks: The identified material weakness in internal control over financial reporting requires effective remediation. Failure to strengthen controls and processes could impact financial reporting reliability and operational efficiency. Integrating new talent and capabilities also carries execution risk.
• Competitive Pressures: Competition from larger, more efficient banks and agile fintechs could constrain pricing power, impact market share gains, and require ongoing investment in technology and talent.

Conclusion

First Foundation is at a critical juncture, actively transforming its balance sheet and business model to address past interest rate risk vulnerabilities and position itself for future sustainable profitability. The Q1 2025 results provide tangible evidence that the strategic pivot is beginning to yield positive financial outcomes, marked by NIM expansion and a return to profitability.

The path forward involves the continued methodical execution of key initiatives: reducing the held-for-sale loan portfolio, remixing the balance sheet towards higher-yielding C&I assets, optimizing the funding mix by growing core deposits, and strengthening risk management practices. Management's explicit intermediate-term targets for NIM, profitability, and CRE concentration underscore a clear vision for the company's future financial profile.

While challenges remain, including navigating a competitive landscape and effectively managing execution and operational risks, FFWM's integrated service model, investments in technology, and focused approach in its core markets provide foundational strengths. For investors, the story is one of a company actively working to unlock embedded value by transitioning to a more resilient and profitable operating model, with the success of this transformation hinging on disciplined execution against its stated strategic objectives.