First Foundation gets Wall Street dress-down amid strategy remix

First Foundation, a Dallas-based bank that’s overhauling its business model, presented a two-steps-forward, one-step-back progress report on Thursday, dismaying investors, who sold off the bank’s stock en masse.

The company wrote off $17.1 million in bad debts last quarter — including the first-ever loss in the history of its multifamily loan portfolio — offsetting progress it’s made in remixing its revenue streams. First Foundation reported a net loss of $14.1 million, or $0.17 per share, a massive miss from consensus analyst estimates of net income of $0.07 per share, according to S&P.

The bank’s stock price was down 13% by Thursday afternoon, trading at $5.45. 

First Foundation launched a strategy pivot after landing a $228 million capital infusion in July. It’s in the process of rehabbing its balance sheet by shedding some of its outsized multifamily portfolio and reducing its concentration of high-cost deposits.

In November, the bank replaced longtime CEO Scott Kavanaugh with Thomas Shafer, who has a history of taking over banks at inflection points and priming them to sell. Shafer said on Thursday’s earnings call — his first since taking the reins — that he has made “meaningful strides in reviewing” First Foundation’s practices, and is working with the team to establish standards “appropriate” for a bank with $13 billion of assets.

“It was a little bit of an unusual quarter for us,” Shafer said. “But I think we’re making significant progress. We’re spending a lot of time both [on] … the standards of the organization [and] culture and engagement. And [we’re] looking forward to continuing to go through redeveloping the revenue for the organization as we march forward.”

Shafer said that the bank’s top priorities are reducing its commercial real estate concentration and lessening its dependence on high-cost funding. After interest rates started rising rapidly in 2022, First Foundation’s deposit expenses outweighed the income from its loans.

While the bank saw its net interest margin expand slightly during the fourth quarter, its previous optimism for a boon from Federal Reserve rate cuts subsided, as the central bank hit pause on such slashes.

First Foundation sold $489 million of multifamily loans last quarter — about one-quarter of the $1.9 billion book it reclassified as held for sale in the fall — at a higher price than previously expected. The bank used the proceeds from the deal to pay down high-cost brokered deposits — a game plan First Foundation could run back as it sells more loans, Shafer said.

Chief Financial Officer Jamie Britton said on the call that the bank has seen strong demand for those loans, but he didn’t provide color on when they will sell, or for how much.

First Foundation has also been recalibrating its process for calculating its necessary cushion for credit losses. 

Of the bank’s massive credit losses this quarter, more than $13 million resulted from three commercial relationships with “inadequate pay performance, sustained operating losses and insufficient collateral protection,” Britton said. Delinquent equipment finance loans comprised another chunk of the bad debt. 

The bank’s first-ever credit hit to its multifamily book came from $657,000 tied to a small property in San Francisco. Shafer said the real estate had been owned by someone who died and then mismanaged by a trustee. He added that the chargeoff wasn’t “indicative of other things that we’re seeing in the portfolio.”

Britton and Shafer both said the year had been “challenging,” but “important.” The bank cut its staff in 2024 by about 9% from the previous year.

Still, First Foundation will keep chugging ahead on the blueprint it laid out in the fall. “We want to make sure that we’re building a very sustainable, organic, profitable company,” Shafer said.