8-K: First Foundation Inc. Reports Net Loss in Q3 2024 Due to Loan Reclassification, But Core Performance Shows Improvement

First Foundation Inc. reported a net loss of $82.2 million for the third quarter of 2024, primarily due to a $117.5 million adjustment from reclassifying a portion of its multifamily loan portfolio, but adjusted net income was $2.7 million.

Summary

• First Foundation Inc. reported a net loss of $82.2 million, or $1.23 per share, for the third quarter of 2024.
• This loss was primarily due to a $117.5 million Lower of Cost or Market (LOCOM) adjustment related to the reclassification of $1.9 billion in multifamily loans from held for investment to held for sale.
• Adjusted net income, excluding the LOCOM adjustment and other items, was $2.7 million, or $0.04 per share.
• The company raised approximately $228 million in gross proceeds through an equity capital raise during the quarter.
• Net interest income increased to $49.1 million, up from $43.8 million in the previous quarter.
• The net interest margin improved to 1.50%, a 14 basis point increase from the prior quarter.
• Total deposits decreased to $10.3 billion from $10.8 billion in the prior quarter.
• The company's total risk-based capital ratio increased to 14.21% from 12.60% in the prior quarter.
• Nonperforming assets increased to $44.4 million, up from $25.1 million in the prior quarter.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the significant net loss and the large LOCOM adjustment. However, there are some positive aspects such as the capital raise, improved net interest margin, and increased capital ratios, which prevent a more negative score.

Positives

• Net interest income increased to $49.1 million, up from $43.8 million in the prior quarter.
• Net interest margin improved to 1.50%, a 14 basis point increase from the prior quarter.
• Cost of deposits decreased to 3.41%, a decrease of 8 basis points from the prior quarter.
• The company's total risk-based capital ratio increased to 14.21% from 12.60% in the prior quarter.
• The company maintained a strong liquidity position with $4.3 billion in available resources.
• Unrealized losses on investment securities decreased significantly compared to the prior quarter.
• Average shareholders equity to average total assets ratio improved to 8.10% as of September 30, 2024, from 7.05% as of June 30, 2024.

Negatives

• The company reported a net loss of $82.2 million, or $1.23 per share, for the third quarter of 2024.
• The loss was primarily due to a $117.5 million LOCOM adjustment related to the reclassification of $1.9 billion in multifamily loans.
• Total deposits decreased to $10.3 billion from $10.8 billion in the prior quarter.
• Nonperforming assets increased to $44.4 million, up from $25.1 million in the prior quarter.
• Tangible book value per common share decreased to $15.71 from $16.43 in the prior quarter.
• The efficiency ratio increased to 98.1% from 96.1% in the prior quarter.

Risks

• The reclassification of $1.9 billion in multifamily loans to held for sale resulted in a significant LOCOM adjustment impacting earnings.
• The company's nonperforming assets have increased, indicating potential credit quality concerns.
• The decrease in deposits could impact the company's funding and liquidity.
• The company's efficiency ratio has increased, indicating higher operating costs relative to revenue.
• The company is exploring options for securitizing or selling the reclassified loans, which may not be successful or may result in further losses.
• The company's future performance is subject to risks related to changes in interest rates, economic conditions, and the financial services industry.

Future Outlook

The company is focused on improving earnings and performance, and is exploring options for securitizing or selling the reclassified loans. Management is optimistic about the future due to the recent capital raise and improving rate environment.

Management Comments

• Scott F. Kavanaugh, CEO, stated that the company is making progress executing its strategic plan and is pivoting to an offensive approach due to the recent capital raise.
• Scott F. Kavanaugh, CEO, noted that the decision to reclassify $1.9 billion of multifamily loans underscores the company's commitment to fortify its balance sheet.
• Jamie Britton, CFO, conveyed that the company is pleased with the stabilization in core performance and is confident in its ability to strengthen the balance sheet.
• Jamie Britton, CFO, stated that reclassifying a portion of the multifamily portfolio was a significant first step in strengthening the balance sheet.

Industry Context

The announcement reflects challenges faced by financial institutions in managing loan portfolios amid changing interest rates and economic conditions. The reclassification of loans and the subsequent LOCOM adjustment are indicative of the need for banks to adapt to market fluctuations and optimize their balance sheets. The capital raise suggests a proactive approach to strengthening the company's financial position.

Comparison to Industry Standards

• The company's net interest margin of 1.50% is below the average for many regional banks, which typically range from 2.5% to 3.5%.
• The reported net loss is significantly worse than the average performance of comparable financial institutions, which typically aim for consistent profitability.
• The increase in nonperforming assets to 0.33% of total assets is higher than the industry average, which is typically below 0.25%.
• The company's efficiency ratio of 98.1% is significantly higher than the industry average, which is typically between 50% and 60%, indicating higher operating costs relative to revenue.
• The capital raise of $228 million is a positive step, but the need for such a raise suggests potential balance sheet weaknesses compared to peers with stronger capital positions.
• Companies like PacWest Bancorp and Western Alliance Bancorporation have also faced challenges in managing their loan portfolios, but First Foundation's LOCOM adjustment is particularly large compared to their peers.
• The reclassification of $1.9 billion in multifamily loans is a significant move, and the company's ability to successfully securitize or sell these loans will be a key factor in its future performance, similar to how other banks have managed their loan portfolios during periods of economic uncertainty.

Stakeholder Impact

• Shareholders experienced a significant loss in the quarter, impacting the share price and tangible book value per share.
• Employees may be affected by the company's strategic changes and cost-cutting measures.
• Customers may be impacted by changes in loan offerings and deposit rates.
• Creditors may be concerned about the company's increased nonperforming assets and decreased deposits.
• Suppliers may be affected by changes in the company's financial position and spending.

Next Steps

• The company will explore options for securitizing or selling the reclassified multifamily loans.
• The company will continue to execute its strategic plan and focus on improving earnings and performance.
• The company will host a conference call on October 29, 2024, to discuss the financial results.

Key Dates

Keywords

financial results, earnings, net loss, loan reclassification, multifamily loans, LOCOM adjustment, capital raise, net interest margin, nonperforming assets, deposits, liquidity, risk-based capital, equity, banking, wealth management