First Foundation in Dallas reported a large quarterly loss after reclassifying a bundle of commercial real estate loans that it plans to sell under a strategy pivot announced earlier this year.
The bank swung to a net loss of $82.2 million in the third quarter, compared with net income of $2.2 million in the same period a year earlier. The results were hurt by an $117.5 million adjustment First Foundation took from reclassifying multifamily loans that it plans to offload, reflecting a decrease in the fair value of those loans.
After excluding that adjustment and others, the $13.4 billion-asset bank reported adjusted net income of $2.7 million, which was roughly flat from the third quarter of 2023.
First Foundation executives said Tuesday that they have now laid the groundwork to reposition the company’s balance sheet and stabilize its earnings.
“The pieces are in place, and now it’s all about execution, and we are focused on getting it done,” Chief Operating Officer Christopher Naghibi said during the company’s earnings call.
Still, the unadjusted quarterly net loss was larger than analysts polled by S&P had expected. First Foundation’s stock price, which has been hammered over the last two years, fell by 7% Tuesday to close at $7.23.
Since the summer, First Foundation has been making major moves in an effort to address problems caused by its large multifamily loan portfolio. That portfolio of fixed-rate loans became a major burden over the last couple of years, as interest rates rose and the cost of deposits needed to fund the loans also climbed.
In early July, a group of investors led by Fortress Investment Group agreed to inject $228 million into the bank. The revamped strategy is to use those proceeds to enable the bank to reduce its multifamily loan exposure, increase its footprint in commercial & industrial loans, attract lower-cost deposits and add to its allowance for credit losses.
During the third quarter, First Foundation’s allowance stayed roughly flat from the year-ago period at $29.3 million. But company executives said they are in the process of reviewing the bank’s methodology for establishing its allowance, indicating that the new formula will lead to higher allowances in the future.
Although First Foundation’s multifamily loans have traditionally had low losses, the bank’s allowance is lower than similarly situated peer lenders, executives said.
In explaining the planned overhaul of the bank’s methodology, Naghibi pointed to what he called “an element of interest rate risk in the market” that is “truly unprecedented.”
First Foundation also reported progress as it prepares to rid itself of the $1.9 billion of multifamily loans that it moved to held-for-sale status. By the end of the year, the bank is looking to finish a securitization of about $500 million, according to Chief Financial Officer Jamie Britton.
The bank plans to use the proceeds from loan sales to reduce its reliance on two higher-cost sources of funding: brokered deposits and advances from Federal Home Loan Banks.
“The real game-changer will be building up granular core deposits,” Naghibi said, “because that’s the foundation of sustainable, long-term success.”
First Foundation, which moved its headquarters from Southern California to Dallas in 2021, has operations in California, Texas, Florida and Hawaii. It’s planning to hire new bankers who, over time, are expected to land both more deposits and more C&I loans.
“We see significant untapped potential in the markets within these geographies,” Naghibi said. “We focus on relationships, not just transactions, but deposit growth is where it starts because deposits drive everything.”
“We’ve made it clear,” he added. “New bankers in these markets will have both loan and deposit goals, and they will be incentivized to build self-funding relationships.”
