FIRST Foundation (FFWM) Q1 2025: NIM Expands 9bps as CRE Runoff and Deposit Shift Drive Profitability Reset

2025-04-30 | By EarningsIQ Research

FIRST Foundation’s first quarter marked a decisive turn back to profitability, propelled by net interest margin expansion, disciplined expense controls, and methodical de-risking of its balance sheet. Management’s focus on reducing CRE exposure and remixing the loan book is yielding tangible results, with further NIM gains and capital relief expected as legacy portfolios run off and deposit costs decline. As the franchise pivots toward higher-yielding C&I lending and private banking, investors should watch for execution on loan sales and margin targets amid a still-uncertain macro and competitive lending landscape.

Summary

• CRE Reduction Accelerates: Multifamily loan runoff and held-for-sale execution remain central to balance sheet transformation.
• Margin Expansion Underway: Deposit cost management and asset repricing are beginning to restore core profitability.
• Expense Discipline and Franchise Investment: Cost control offsets growth investments as the bank retools for commercial and private banking focus.

Performance Analysis

FIRST Foundation posted a return to profitability in Q1, reversing consecutive prior quarter losses as net interest margin (NIM) expanded by nine basis points to 1.67%. The improvement was driven by a deliberate reduction in high-cost brokered deposits, a favorable mix shift toward higher-yielding C&I loans, and a sharp decrease in provision expense as credit quality stabilized. Non-interest expenses were trimmed by $5 million sequentially, reflecting both structural cost actions and the absence of prior quarter one-time charges.

Loan portfolio dynamics remain in flux, with $354 million in payoffs and no multifamily loan sales this quarter, but the pipeline for asset disposition remains active. The loan-to-deposit ratio held steady at 94%, while total deposit costs fell to 3.04%. Wealth management and trust fee income was stable despite AUM volatility, and management continues to see upside in deepening client engagement and cross-selling through private banking initiatives.

• Net Interest Margin Inflection: NIM improvement was primarily driven by lower deposit costs, partially offset by modest yield compression on earning assets.
• CRE and Multifamily Runoff: Held-for-sale multifamily loans remain at $1.3 billion, with further sales and securitizations targeted for 2025.
• Expense Base Realignment: Non-interest expense fell 5% QoQ, with normalization expected as investments in talent and controls are absorbed.

Credit performance was solid, with net charge-offs at just one basis point and non-accrual loans down 22% QoQ, supporting a cautious but constructive outlook on asset quality.

Executive Commentary

Strategic Positioning

1. CRE and Multifamily Exit Strategy

Reducing commercial real estate (CRE) and multifamily loan exposure is the cornerstone of FFWM’s risk and capital management plan. The bank executed a $489 million multifamily loan sale last quarter and is actively working to bring the $1.3 billion held-for-sale portfolio to zero by year-end. These moves free up capital, reduce regulatory risk, and pave the way for a more diversified and resilient loan book.

2. Deposit Cost Optimization and Funding Mix

FFWM is methodically lowering its reliance on expensive wholesale and brokered deposits, which declined by $400 million in Q1. The resulting improvement in deposit costs supported NIM expansion and will provide further benefit as maturing brokered CDs are not replaced. The shift toward retail, specialty, and digital deposits is key for sustainable funding cost reduction.

3. Commercial and Private Banking Growth

The bank is pivoting its lending focus to higher-yielding commercial and industrial (C&I) loans, with 78% of new production in this segment. Strategic hires in Florida and ongoing investment in California position the bank to capture growth in demographically attractive markets. Private banking initiatives are expected to deepen client relationships and drive cross-sell in wealth management.

4. Expense Management Amid Strategic Investment

While expense discipline is evident, FFWM is investing in talent, internal controls, and operational infrastructure to support the business model transition. Compensation and benefits are resetting at higher levels due to new hires and retention costs, but management expects overall expense growth to remain contained, with pockets of professional services spend for control remediation.

5. Asset Quality and Credit Vigilance

Credit quality remains a bright spot, with non-accrual loans and past dues declining and net charge-offs minimal. Management is proactively stress-testing portfolios, especially fixed-rate CRE and equipment finance, to ensure resilience in a potentially volatile macro environment.

Key Considerations

FFWM’s Q1 marks a pivotal inflection point, as the bank’s strategy to de-risk and reposition the balance sheet begins to translate into improved earnings power and capital flexibility. Investors should weigh the following:

Key Considerations:

• Loan Book Transition Pace: Speed and pricing of multifamily and CRE loan sales will determine capital release and NIM trajectory.
• Deposit Cost Levers: Execution on brokered deposit runoff and retail deposit growth is critical for margin sustainability.
• Expense Normalization: Investments in controls and talent are necessary, but ongoing discipline is needed to protect profitability as the business scales.
• Commercial Lending Competition: New C&I production faces competitive pricing, with management noting deal-centric rather than market-wide pressure.
• Wealth Management Upside: AUM volatility is a near-term headwind, but pipeline optimism and cross-sell potential could drive future fee income growth.

Risks

Key risks include execution uncertainty around the pace and pricing of multifamily loan dispositions, potential for deposit outflows or repricing in a shifting rate environment, and competitive pressure on new loan yields. Expense creep related to control remediation and franchise investment could offset margin gains if not tightly managed. Macroeconomic volatility and borrower hesitancy remain ongoing watchpoints for credit performance.

Forward Outlook

For Q2 2025, FFWM expects:

• Further reduction in held-for-sale loan balances via sales or securitizations
• Continued NIM expansion as deposit costs decline and asset repricing opportunities materialize

For full-year 2025, management maintained guidance:

• Targeting NIM exit run rate of 1.8% to 1.9% in Q4, rising to 2.1% to 2.2% by end of 2026
• Modest asset base reduction as CRE and multifamily portfolios run off

Management highlighted several factors that could accelerate improvement:

• Faster-than-expected Fed rate cuts would lower deposit costs more quickly
• Successful execution on loan sales and deposit remix would unlock capital and margin upside

Takeaways

FIRST Foundation’s Q1 results signal early success in its pivot away from legacy CRE toward a more balanced, higher-margin franchise.

• Margin Expansion in Motion: Lower deposit costs and asset repricing are restoring core profitability, but sustained execution on loan sales is necessary to maintain momentum.
• Expense and Credit Discipline: Investments in talent and internal controls are balanced by cost containment, and credit performance remains robust despite macro uncertainty.
• Strategic Execution is Key: Investors should monitor the pace of CRE runoff, deposit mix improvement, and the scaling of commercial and private banking initiatives for long-term value creation.

Conclusion

FIRST Foundation’s Q1 marks a turning point as margin expansion and expense discipline take hold, but ultimate success hinges on continued balance sheet transformation and strategic execution amid a competitive and uncertain environment.

Industry Read-Through

FFWM’s experience underscores the imperative for regional banks to aggressively de-risk CRE concentrations and optimize funding costs as the rate cycle turns. Margin recovery is possible, but requires disciplined asset runoff, deposit remixing, and operational control investments. Other banks with similar CRE and brokered deposit exposures will face comparable margin and capital management challenges. Competition for C&I lending remains intense, and only those able to balance growth with credit and expense discipline will achieve sustainable profitability improvement in the current cycle.

FFWM Financials Regional banks CRE Net interest margin Deposit costs Expense management Wealth management