A Dallas bank is confident its losses will pay off

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A Dallas-based bank is on the rocky road to fixing its financial performance, but bumps along the way haven't derailed its plan, yet.

First Foundation said Thursday that it posted another bottom-line loss in the second quarter — its third loss of the past four quarters. But the hit came from loan sales that the bank executed this spring, which management said will pay off in the long run.

After the rapid rise of interest rates in 2022 and 2023, banks saw profits squeezed by deposit costs that outpaced loan yields. But three years later, many community and regional banks have been able to steadily expand their margins in the last year, with most now topping 3%. 

First Foundation, an $11.6 billion-asset bank, has lagged. The bank built a massive portfolio of fixed-rate multifamily loans when rates were near zero, leaving its margin to get crunched when the deposits to fund the loans grew more expensive. 

In the latest quarter, First Foundation posted a net interest margin of 1.68%, up from its 1.17% trough at the start of 2024, but still a far drop from its margin from before rates rose in 2022, of 3.18%.

The company logged diluted loss per share of $0.09, compared with consensus analyst estimate of $0.02. 

Still, the bank is in transformation mode. Last year, First Foundation landed a $228 million capital infusion, a new CEO and a revamped strategy. First Foundation has since prioritized selling nearly $2 billion of low-yielding commercial real estate loans, reducing its concentration of expensive deposits and beefing up its private banking and wealth management businesses.

Thomas Shafer, who came out of retirement in November to fix the bank's balance sheet, said on a Thursday call with analysts that the second-quarter performance "keeps First Foundation on a good path to delivering stronger earnings and more sustainable profitability in the future."

"I think that we've made some significant moves during the second quarter that will help us as we move forward," Shafer said. "And [I'm] confident that the team is capable of executing the needs that we have in our strategic plan and returning the company to the profitability levels that we all expect."

As First Foundation repositions its balance sheet — an often-painful strategy that many banks have been utilizing to curb their sensitivity to interest rates and trim commercial real estate concentrations — the bank is projecting its net interest margin to land between 1.8% and 1.9% by the end of 2025, and then inch up to 2.1% to 2.2% by the end of next year.

Read more earnings coverage here: Earnings | American Banker

Outsized commercial real estate exposure has put dozens of banks in a pickle in recent years. The asset class has landed banks in the crosshairs of contracting margins, increased regulatory scrutiny and investor frustration. But most companies with such issues have been spurned by office loans that are challenged by the post-pandemic work environment.

First Foundation's problems, in contrast, were less about the credit quality of its multifamily book, and more focused on a classic loan-to-deposit mismatch.

The bank's loan-to-deposit ratio in the second quarter decreased to 93.4%, compared with the average ratio of 85% among banks with $10 billion to $50 billion of assets. First Foundation has exited more than two-thirds of the loan portfolio it has slated to sell in the fall, and expects to offload the rest of the book by year-end. 

David Chiaverini, an analyst at Jefferies, wrote in a Thursday note that First Foundation could be a good investment opportunity, since the bank's stock is trading at less than half its tangible book value, and he thinks the bank is on its way to stronger performance.

"First Foundation is nearing an inflection point on its path to long-term profitability," Chiaverini wrote. "The capital base has been strengthened, credit quality remains robust, and the net interest margin is poised for significant expansion in the coming years."

The company's share price was down more than 4% at points on Friday, trading around $4.66. First Foundation's stock has fallen nearly 30% in the last year, while the KBW Regional Banking Index is slightly up.

Faster rate cuts from the Federal Reserve could help speed up the bank's margin improvement, but Fed Chair Jerome Powell has continually reiterated that the central bank will move with caution. The agency chose earlier this week to keep the federal funds rate unchanged, at a target range between 4.25% and 4.5%.