KBRA Affirms Ratings for First Foundation, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Dallas, Texas-based First Foundation, Inc. (NASDAQ: FFWM) ("the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for First Foundation Bank, the main subsidiary. The Outlook for the long-term ratings is Negative.

Key Credit Considerations

Following a multi-year period of challenged earnings performance (the product of an acutely liability sensitive balance sheet entering the Federal Reserve’s rate hike campaign beginning in 2022), on July 2, 2024, FFWM announced a $228 million equity raise from a consortium of institutional investors (the largest being Fortress Investment Group and Canyon Partners). The proceeds from the transaction are intended to provide the company with the flexibility to restructure its balance sheet, improve earnings, reduce concentration in multifamily lending, increase its optically low LLR, and bolster its below-peer capital ratios. The maintenance of the Negative Outlook continues to reflect our opinion that FFWM’s earnings performance will remain challenged in the short-term. While KBRA certainly appreciates that FFWM’s distinctly creditor friendly capital raise provides the company the ability to complete strategic initiatives (including a possible securitization/sale of low-yielding multifamily loans) needed to structurally improve prospective earnings, we believe a reversion to peer-like level of returns is a multiyear initiative that will take time, and management currently forecasts an ROA of 0.9% - 1.0% by 4Q26. Furthermore, given currently rather thin pre-provision net revenues, we are cognizant of the risk that anything other than continued pristine asset quality — which, in fairness, has always been a staple of the company’s ratings profile — could constrain earnings further.

That said, we equally believe there are few banks in our rated universe who stand to benefit greater than FFWM from Federal Reserve rate cuts. Declining short-term interest rates should provide near immediate relief to the company’s higher cost/high beta funding model, while the yield on its largely fixed-rate loan portfolio should remain more stable. Though the Fed’s 50 bp rate cut occurred late in 3Q24, and therefore, did not have time to materially impact FFWM’s quarterly results, we think the worst of pre-provision earnings pressure is behind the company, and 4Q24 core earnings could be their strongest in recent memory (albeit still subdued vs. peer).

Unsurprisingly, KBRA views FFWM’s July capital raise as an incremental positive for its creditor profile. The capital raise provided FFWM with an important buffer to absorb $118 million of negative fair value marks on its 3Q24 transfer of $1.9 billion of multifamily loans to held-for-sale without depleting core capital ratios. Additionally, following a vote by shareholders to convert $14.5 million of FFWM's noncumulative convertible preferred stock into common equity, the company’s CET1 capital ratio is expected to rise to ~10.7% by YE24. While KBRA recognizes that FFWM’s core capital metrics compare less favorably to rating category peers, we continue to assess FFWM’s capital as adequate for the rating category and acknowledge that lower than peer capital is not necessarily inconsistent with FFWM's risk profile, which includes a loan portfolio that we consider more conservative than most. Should the company’s asset quality performance differ from our expectations, our assessment of FFWM’s currently adequate capital profile could change.

Rating Sensitivities

The execution of FFWM's strategic plan to restructure its balance sheet, improve earnings, and reduce interest rate sensitivity, if achieved with a continued appropriate credit, capital, and liquidity profile, could result in a revision of the Outlook to Stable . Alternatively, the failure of the company to maintain core profitability would likely lead to a downgrade of FFWM's ratings. Additionally, considering that FFWM's ratings are tied to our belief that the company will outperform on the credit front, a greater than peer deterioration in credit quality could also lead to a downgrade.

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