Does First Foundation’s Cheap Valuation Make it a Good Buy?

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Written By Nathan Goldstein

First Foundation has garnered significant attention in the banking sector due to its intriguing position in the market. Despite facing challenges over the past few years, including a contraction in net interest margin and declining deposits, the bank’s shares remain attractively priced relative to its net asset value.

However, recent financial performance trends and concerns about profitability have prompted a change in sentiment from many investors who have opted for more of a ‘wait and see’ approach.

Financial Performance Analysis

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First Foundation’s financial performance has encountered headwinds, as evidenced by the decline in net interest income and profitability. In the first quarter of 2024, the institution reported a substantial decrease in net interest income, falling from $58.3 million in the same period last year to $37.8 million.

Rising debt levels and a slight decline in the value of loans have contributed to this decline. Furthermore, a significant contraction in the net interest margin, from 1.83% to 1.17%, has exacerbated the challenges faced by the bank.

Despite a slight increase in non-interest income, net income plummeted from $8.5 million to $0.8 million year-over-year. This decline reflects the broader trend of profitability challenges encountered by First Foundation in recent years.

In 2023, the bank experienced a plunge in net interest income, resulting in negative net income of $199.1 million. Adjusting for impairment charges and using the same effective tax rate as in 2022, adjusted profits remained materially lower at $11.2 million.

Balance Sheet Dynamics

First Foundation has faced weakness on the balance sheet front, with deposits and loans experiencing declines. Deposits fell from $10.81 billion in the second quarter of 2023 to $10.64 billion in the first quarter of 2024.

Similarly, the value of loans decreased from $10.15 billion to $10.06 billion over the same period. While the value of securities and cash equivalents has increased, higher debt levels have offset these gains. The bank’s total debt rose to $1.88 billion, reflecting elevated borrowing costs amid rising interest rates.

Valuation Considerations

Despite the challenges faced by First Foundation, its shares trade at a significant discount to net asset value, with price-to-book and price-to-tangible-book ratios of only 0.39. While this suggests an attractive valuation proposition, concerns about profitability metrics and asset quality persist.

When compared to similar firms, First Foundation ranks unfavourably in terms of price-to-earnings ratio, indicating a potential overvaluation relative to its earnings.

Future Outlook

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The outlook for First Foundation has become more uncertain, prompting a shift in sentiment from bullish to cautious. While the stock remains cheap relative to its net asset value, ongoing challenges in profitability, deposit stability, and loan performance warrant a cautious approach from investors.

Investors should closely monitor the bank’s ability to navigate the evolving market conditions and address underlying operational issues. Ultimately, the speculative nature of First Foundation’s current position calls for a prudent approach, with the potential for significant upside or downside depending on future developments.

While First Foundation’s stock remains attractively priced relative to its net asset value, ongoing challenges in profitability warrant a more cautious stance.


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