First Foundation, a commercial real estate-heavy bank that got rocked in the market earlier this year, has started to regain some confidence from investors.
The Dallas-based bank's management announced plans Thursday to go on offense as part of a strategy overhaul. The revised strategy involves reducing the bank's massive concentration in multifamily loans, increasing its allowance for credit losses, beefing up commercial and industrial lending, and expanding in parts of Texas and Florida.
First Foundation's makeover follows
While the investment will dilute shareholders' equity, First Foundation's stock price has rebounded since the raise was disclosed on July 3, after falling nearly 50% since January. Shares are now trading about 25% down year-to-date, at $7.11.
CEO Scott Kavanaugh said on the bank's second-quarter earnings call Thursday that the new money was brought on to help boost growth. He emphasized that the capital raise wasn't prompted by regulatory concerns, even though First Foundation is well above a key regulatory threshold that gauges banks' concentration in commercial real estate lending.
"I am incredibly proud of what we built at First Foundation over the course of the last 17 years," Kavanaugh said. "Much like our clients, we have evolved and have grown into the next chapter of the company's life."
First Foundation is turning the page after rapidly beefing up its exposure to multifamily housing in the early pandemic days to more than half of its loan book. It then watched the values of those fixed-rate loans dive after interest rates started rapidly climbing in 2022.
Kavanaugh estimated that the Fortress-led investment will help lift First Foundation's profitability over the next few years to twice what it would've been organically.
The bank is now shooting for a 10% to 12% return on tangible common equity and a 0.9% to 1% return on average assets by the end of 2026. Its return on tangible common equity and return on average assets were 1.3% and .09%, respectively, in the second quarter of 2024.
As part of its near-term plans, the $13.7 billion-asset bank will designate about 20% of its existing multifamily loans as held for sale, which could lead to losses as buyers look to buy those assets at a discount.
Chief Operating Officer Christopher Naghibi said First Foundation will "put in the time and work" to ensure the best possible price for those assets, which total more than $1 billion. He pointed to a relationship with Freddie Mac and also raised the possibility of private-party sales.
First Foundation is the latest bank to announce plans to reduce its involvement in real estate lending as
By the end of 2025, the bank is aiming to bring its commercial real estate exposure down below 400% of its total capital.
According to its latest call report, First Foundation's real estate loans were more than 600% of its total capital, as of March 31, 2024. Regulators give more scrutiny to banks with concentrations above 300%.
As part of First Foundation's strategy to diversify, the bank will focus on increasing C&I loans, Naghibi said. Although the C&I book currently accounts for less than 30% of the bank's $10 billion loan portfolio, it's made up nearly 90% of First Foundation's loan fundings so far this year.
"While historically, multifamily originations outpaced C&I lending, First Foundation has been deeply steeped in C&I lending dating back to the bank's inception," Naghibi said. "A more robust C&I team was built out nearly 10 years ago in order to help balance out the concentration risk in the underlying loan portfolio."
"First Foundation is not a real estate lender growing into the C&I business," he added. "C&I lending has been a long-standing and important part of the underlying franchise value."
First Foundation will use the large investment to shrink its multifamily loan portfolio, which has weighed down its earnings since interest rates began rising.
First Foundation also plans to push harder in current markets where it has limited business, such as North Texas and Southwest Florida. The bank moved its headquarters to Dallas in 2021 from Southern California, where it did most of its business, and it acquired a small bank in Naples, Florida, shortly thereafter. But those two markets, together, only make up 11% of First Foundation's loan portfolio.
"We really have not had much of a chance to really expand into the markets," Kavanaugh said. "We immediately found ourselves having to get into a defensive mode. … But we really believe that Texas and Florida [are] endless with [their] abilities to be able to grow."
First Foundation will also initiate a detailed review of its allowance for credit losses methodology to align with those of peers. The bank doesn't believe it has credit losses on the horizon, but it must prepare for "unprecedented" interest rate risk in the market, Naghibi said.
In the second quarter, First Foundation reported net income of $3.1 million, up from a $793,000 bottom line in the first quarter, as deposit cost pressures let up, and the bank reduced its provision for credit losses.
