First Foundation (FFWM) Q2 2025: $975M High-Cost Deposit Exit Pivots Balance Sheet for Margin Recovery
First Foundation’s Q2 was defined by decisive asset sales and a $975 million reduction in high-cost deposits, setting the stage for margin expansion and a strategic portfolio shift toward commercial and industrial lending. Management’s focus on CRE reduction, digital deposit growth, and leadership renewal signals a business in transformation, with NIM and core profitability set to improve as balance sheet repositioning plays out into 2026.
Summary
- CRE Concentration Reset: Commercial real estate exposure dropped sharply, clearing the way for a more balanced loan portfolio.
- Deposit Cost Relief: High-cost deposit runoff and digital deposit growth are easing funding pressure.
- Leadership and Strategic Hires: Management turnover is paving the way for new talent aligned to the next phase of growth.
Performance Analysis
First Foundation’s headline net loss this quarter masks underlying progress on its multi-quarter strategic reset. The bank executed two major CRE (commercial real estate) loan transactions—selling $377 million and securitizing $481 million—that together reduced CRE concentration to 365% of regulatory capital, down from over 600% at its peak. These moves, while generating a net one-time pre-tax hit of $11.8 million, enabled the bank to retire $975 million in high-cost deposits, a critical step to restore margin health. Adjusting for these items, core after-tax net income was positive, and pre-provision net revenue improved sequentially.
Deposit cost management and loan mix shift are now central levers. Total deposit costs fell to 2.95% from 3.04% last quarter, with digital deposits surpassing $1 billion for the first time and now representing 12% of total deposits. New loan origination was $256 million, 80% of which was C&I (commercial and industrial), reflecting an intentional pivot away from CRE. Non-performing loans and net charge-offs remained low, and the allowance for credit losses (ACL) rose slightly to 50 basis points, reflecting the higher-risk profile of new C&I lending.
- CRE Reduction Drives Balance Sheet Reset: $858 million in CRE loans exited, with further runoff and one more securitization planned for 2025.
- Margin Inflection Point: Net interest margin (NIM) ticked up one basis point to 1.68%, with further expansion expected as high-cost deposits roll off.
- Digital and Core Deposit Growth: Digital channel deposits now exceed $1 billion, offsetting runoff in higher-cost categories and supporting funding stability.
While reported results remain pressured by restructuring costs, the underlying earnings power is poised to improve as the portfolio remix and funding optimization gain traction.
Executive Commentary
"These sales, along with planned CRE runoff, built on the success we've had since the fourth quarter and reduced our commercial real estate concentration to 365% of regulatory capital from a high of over 600%. Importantly, the transactions also allowed us to pay down $975 million of higher cost deposits."
Thomas C. Schaefer, Chief Executive Officer
"Despite the net loss reported in the quarter, we remain steadfast in our goal to significantly improve our sustainable profitability over the intermediate term and expect to see additional benefits to earnings from the balance sheet actions taken during the quarter."
Jamie Ritten, Chief Financial Officer
Strategic Positioning
1. CRE Exposure and Portfolio Diversification
Reducing CRE concentration is the linchpin of First Foundation’s strategy shift. Management executed nearly $860 million in CRE loan exits this quarter, and expects to be fully out of held-for-sale CRE by year-end. This rapid downsizing is designed to lower regulatory risk and free capital for higher-yielding, diversified lending opportunities, particularly C&I loans, which now make up the majority of new originations.
2. Deposit Base Transformation and Digital Channel Scale
Funding cost optimization is underway, with a clear pivot to lower-cost, granular deposits. The runoff of $975 million in high-cost deposits, especially MSR (Mortgage Servicing Rights) and specialty deposits, is being partially offset by growth in digital and retail channels. Digital deposits crossing the $1 billion mark signals early traction in building a more stable, scalable funding base. This shift is critical for long-term NIM recovery and competitive positioning.
3. Leadership Renewal and Talent Strategy
Recent executive departures reflect the bank’s evolving business model and need for new skillsets. Searches are underway for heads of consumer, private, and small business banking, as well as a new chief credit officer. Management emphasizes that this turnover is both expected and necessary to accelerate the bank’s transition toward relationship-focused banking and wealth management, especially in demographically attractive markets like Florida and California.
4. Wealth and Private Banking Expansion
Cross-selling momentum between commercial banking and wealth management is building. Assets under management (AUM) rose to $5.3 billion, aided by new client onboarding and internal referrals. The bank is investing in private banking capabilities to deepen relationships and diversify fee income, with new leadership hires expected to drive further growth and integration in this segment.
5. Margin and Earnings Power Restoration
Management reiterates its target for NIM to reach 1.8 to 1.9% by year-end, and 2.1 to 2.2% by late 2026. The combination of portfolio remix, deposit cost reduction, and loan repricing opportunities in multifamily loans sets up a multi-year path to higher core profitability. The bank’s capital and liquidity remain strong, supporting continued investment and strategic flexibility.
Key Considerations
This quarter marks a turning point in First Foundation’s transformation, with several key themes shaping the road ahead.
Key Considerations:
- CRE Exit Execution: The pace and pricing of the final securitization will determine how quickly residual risk and earnings drag are eliminated.
- Deposit Mix Evolution: Sustaining digital and retail deposit growth is essential to offset runoff in high-cost categories and maintain funding stability.
- Loan Repricing Opportunity: Multifamily loan repricing in 2026 and 2027 presents a potential tailwind for asset yields and NIM, assuming market rates hold.
- Leadership Transition: The success of new executive hires will be critical in driving cultural and operational alignment with the bank’s strategic vision.
- Expense Discipline: Professional services and talent investments are expected to remain elevated near-term, but management targets normalization by year-end to support operating leverage.
Risks
Execution risk remains high as First Foundation navigates portfolio runoff, leadership turnover, and a competitive deposit environment. Unexpected rate movements, further asset quality deterioration, or delays in digital and core deposit growth could undermine the pace of margin recovery. Regulatory scrutiny around CRE concentrations and ongoing expense management also present material uncertainties for the next several quarters.
Forward Outlook
For Q3 2025, First Foundation expects:
- Further moderation in customer service costs, with the full benefit from MSR deposit runoff realized.
- Net interest margin expansion as high-cost funding is replaced by lower-cost channels.
For full-year 2025, management reiterated guidance:
- Net interest margin exiting the year between 1.8 and 1.9%.
Management highlighted several factors that will shape results:
- Completion of the final CRE securitization and continued runoff in high-cost deposits.
- Incremental benefit from loan repricing and digital deposit growth, with expense normalization expected by year-end.
Takeaways
First Foundation’s Q2 underscores a business in active transformation, trading near-term earnings pain for long-term margin and risk improvement.
- Balance Sheet Overhaul: The rapid reduction in CRE and high-cost deposits is setting up a more resilient, diversified franchise.
- Margin Recovery Path: Management’s NIM guidance is credible if digital deposit growth and loan repricing trends continue as planned.
- Leadership and Execution Watch: Investors should monitor the impact of new executive hires and the pace of deposit mix evolution for signs of sustainable turnaround.
Conclusion
First Foundation’s Q2 results reflect the heavy lifting of a strategic reset, with tangible progress on CRE reduction, deposit cost management, and franchise repositioning. The next phase hinges on successful execution of the final CRE exit, digital deposit scaling, and leadership integration to unlock the earnings power embedded in the new business model.
Industry Read-Through
First Foundation’s aggressive CRE de-risking and digital deposit push mirror broader trends among regional banks seeking to reduce regulatory risk and funding costs in a volatile rate environment. The bank’s experience highlights the earnings drag and capital volatility that can accompany rapid portfolio shifts, but also demonstrates the necessity of business model adaptation. Competitors with heavy CRE exposure or legacy funding structures face similar pressures to accelerate balance sheet remix, invest in digital channels, and attract new leadership talent to remain viable as industry dynamics evolve.