First Foundation's Strategic Turnaround and Path to Margin Expansion in 2025

In 2025, First Foundation Inc. (NYSE: FFWM) has embarked on a bold strategic transformation that positions it as one of the most compelling value plays in the regional banking sector. The company's calculated steps to reduce commercial real estate (CRE) exposure, rationalize deposit costs, and strengthen leadership represent a comprehensive approach to balance sheet optimization and long-term earnings recovery. For patient investors seeking undervalued institutions with clear paths to margin expansion, First Foundation's current trajectory offers a compelling opportunity to participate in its turnaround story.

Capital Efficiency and Balance Sheet Optimization

First Foundation's most significant move in 2025 has been the aggressive reduction of its CRE portfolio, a category that had become a drag on capital efficiency and risk-adjusted returns. In Q2 2025 alone, the company executed two major transactions, selling $858 million in CRE loans and reclassifying an additional $1.9 billion in multifamily loans from "held to maturity" to "held for sale." These actions reflect a strategic pivot away from high-risk, low-return assets toward a more diversified and balanced loan portfolio.

The CRE reduction strategy has had immediate financial implications. While the company reported a GAAP net loss of $7.7 million (-$0.09 per share) for Q2 2025, this was largely due to $12.1 million in pre-tax charges from the strategic loan sales. Excluding these one-time charges, First Foundation generated a net income of $1.0 million ($0.01 per share), demonstrating that the core operations remain fundamentally sound. The company's net interest margin (NIM) improved slightly to 1.68% for the quarter, and management projects a further increase to 1.8-1.9% by Q4 2025 and 2.1-2.2% by the end of 2026.

These projections are based on the company's ongoing efforts to reduce deposit costs. By exiting $540 million in higher-cost MSR deposits, First Foundation reduced total deposit costs by 14 basis points in Q2 2025. This shift in funding mix is expected to enhance capital efficiency and improve the NIM over time, as the company transitions to a lower-cost deposit base.

The company's strong capital position further supports its ability to execute this strategy. With a CET1 ratio of 11.08% and a liquidity coverage ratio of 2.70x, First Foundation maintains a robust capital buffer that allows it to withstand potential credit risks while continuing to de-risk its balance sheet. Additionally, 85% of its deposits are insured or collateralized, significantly reducing liquidity concerns.

Leadership Enhancements and Strategic Direction

First Foundation's strategic shift is being led by a newly appointed executive team with deep industry experience and a track record of successful turnarounds. In July 2025, Thomas C. Shafer was named Chief Executive Officer, succeeding Scott Kavanaugh, who retired after 14 years in the role. Shafer brings four decades of banking experience, including leadership roles at Huntington Bancshares and TCF Financial Corporation. His appointment signals a shift toward more traditional banking practices and a renewed focus on operational efficiency.

Complementing Shafer's leadership, Christopher M. Naghibi has been elevated to Executive Vice President and Chief Operating Officer. Naghibi, who has served as Chief Credit Officer since 2014, continues to oversee credit operations and commercial lending while taking on new responsibilities for product development and retail banking. Similarly, Hugo Nuño's appointment as Executive Vice President and Chief Banking Officer adds another layer of expertise in risk management and compliance.

These leadership changes are not merely symbolic but represent a deliberate effort to align executive talent with key business functions. By promoting from within and bringing in seasoned leaders, First Foundation is building a leadership team capable of executing its strategic vision while maintaining the company's community-focused values.

Path to Margin Expansion and Profitability

The combination of balance sheet optimization and leadership enhancements is expected to drive meaningful margin expansion and profitability for First Foundation. The company's projected NIM increase to 2.1-2.2% by the end of 2026 represents a significant improvement from its current 1.68%, and this margin expansion is likely to translate into higher net income. With an adjusted tangible book value per share of $9.34 versus a current stock price of $4.93, the company is trading at a substantial discount to its intrinsic value, suggesting that the market is not fully pricing in its potential.

The company's strong credit performance also supports this bullish outlook. With net charge-offs at less than 1 basis point (0.00%) and an allowance for credit losses on loans at 0.50%, First Foundation is maintaining a conservative approach to credit risk management. This prudence is particularly important as the company transitions its loan portfolio and reduces its exposure to CRE assets.

Moreover, the company's strategic focus on commercial banking and wealth management growth positions it to diversify its revenue streams. As the CRE portfolio is reduced, the company is expected to shift its focus toward higher-margin commercial and industrial (C&I) lending, which typically offers better risk-adjusted returns. This transition, combined with the projected improvement in NIM, creates a compelling case for long-term earnings growth.

Investment Thesis and Conclusion

For patient investors, First Foundation presents a compelling value opportunity. The company's strategic initiatives to reduce CRE exposure, optimize its balance sheet, and strengthen its leadership team are laying the groundwork for a meaningful rebound in net interest margin and profitability. With a strong capital position, improving credit metrics, and a clear path to margin expansion, First Foundation is well-positioned to deliver strong returns for shareholders over the next 12-18 months.

The current stock price of $4.93 represents a significant discount to the company's adjusted tangible book value of $9.34, suggesting that the market is underestimating the potential of First Foundation's strategic turnaround. For investors willing to take a long-term view, the company's disciplined approach to balance sheet management and its focus on margin expansion make it an attractive addition to a diversified portfolio of undervalued regional banks.