First Foundation (FFWM) is a community bank that operates 22 branches in California, Texas, Nevada and HI. The bank operates with $7.7 billion in total assets, $5.4 billion in assets under management and $1.3 billion in AAUs; it is known for its focus on providing exceptional customer services. First Foundation is a grassroots commercial bank, with diversified commercial loans representing approximately 30% of the loan portfolio. Multi-family commercial real estate is another big part of the loan book, accounting for ~48% of the loan book in Q3 ’21. The bank has successfully reduced exposure to traded deposits from a funding source perspective, and 98% of core deposits are attributable to core, not wholesale, deposits. 74% of the base deposit base comprises commercial enterprise deposits of which 44% are non-interest bearing, according to First-Foundation-Investor-Presentation-Q2-2021.pdf.
The bank has developed a strong advisory and trust franchise, representing approximately ~15% of the total revenue generated by the bank. With a strong regional presence, the bank will continue to leverage its exposure to relatively affluent markets with strong population growth in Dallas, TX and Naples, FL. First Foundation operates with a two-tiered strategy when approaching its clients. For the more affluent market, the bank has the opportunity to significantly increase the full range of services, both trust and advisory services. For a more stable secondary market, the bank will focus on generating profitable sources of deposits to help fund the underwriting of the loan portfolio.
First Foundation announced the acquisition of TGR Financial to expand its presence in Naples, Florida. This acquisition helps First Foundation diversify its geography, loan mix, funding base and revenue. TGR has a long history of strong underwriting and 0% NPA. This acquisition provided access to a high-growth market in Naples, FL; a region ranked among the top 20 for per capita income. The deal is very attractively structured, with earnings growth of 4.5% in FY22 and 9.5% in FY23, with a tangible book value payback period of 2.1 years.
From a profitability perspective, ROA and ROE have evolved positively over time. The bank has been able to grow through acquisition, acquiring Community First Bancorp in 2017 and PBB Bancorp in 2018. As an experienced acquirer and integrator, First Foundation has recently returned to the M&A market and is in the process of closing TGR Financials . The deal is attractive given the geographic exposure allowing First Foundation to access new markets.
The bank improved its efficiency ratio and streamlined its cost structure. By focusing on technology investments, the bank can provide services to customers more efficiently, in the future relying on its strong back office for future growth.
The stock is attractively priced on a P/E basis. The relatively expensive P/TBV will allow the bank to use its expensive currency to acquire other community banks to expand its footprint. As an experienced integrator, the bank will continue to invest in technology to reduce operating costs and create shareholder value.
From a risk perspective, it is difficult to manage a multi-state operation. The bank has a history of acquiring banks out of their footprint and has managed it successfully, eliminating concerns to some extent. Plus, integrating a merger can always be tricky. Given the bank’s successful track record as a consolidator, we are less worried than any first-time buyer.
From a compensation perspective, the acquisition of TGR Financial allows the bank to grow in a very wealthy market with a growing local economy. Investors should expect to see the bank continue to leverage its highly profitable commission income to cross-sell fiduciary and wealth management services in the Naples, Florida market. Future mergers and acquisitions will likely generate additional value in the future.
In summary, we believe FFWM presents an attractive risk/reward opportunity. The bank is focused on acquiring markets with a booming local economy without paying multiple nosebleeds. The strength of the Naples, Florida economy will drive organic loan growth for the bank, and mergers and acquisitions will bring future benefits. At 12x P/E, the stock is attractively priced.