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First Foundation Faces Proxy Battle

Activists says bank needs 'Hail Mary'

First Foundation Inc. (Nasdaq: FFWM) hasn’t gotten the Texas welcome it expected when it officially moved its headquarters from Irvine to Dallas in 2021.

In the past four months, the bank has lost its president, chief financial officer and chief operating officer. Since it’s moved to the Lone Star State, the shares are down about a third; the company now sports an $850 million market cap.

Now it’s facing a proxy battle from Driver Management LLC, a New York-based hedge fund with a history of shaking up regional banks.

“This company has a very big problem,” Driver Principal Abbott Cooper told the Business Journal. “It looks like a train wreck. There’s no quick fix here. They’re in Hail Mary territory.”

The bank still has a formidable presence in Orange County, ranking No. 7 on the Business Journal’s annual list of the largest banks operating here; its OC deposits grew 11% to $6.08 billion for the 12-month period ended June 30 (see story, page 26). It continues to lease over 72,000 square feet of space at its former headquarters space at the Lakeshore office campus in Irvine, giving it one of the larger office presences of a bank in OC.

Dallas Move

First Foundation, which began in 1990 as a wealth manager and started its bank in 2007, promoted Scott Kavanaugh to chief executive in 2009. He grew it to the third-largest bank headquartered in Orange County with more than $7 billion in assets. The company also has a wealth management unit that currently has $5 billion in assets under management.

Two years ago, the company decided to move its headquarters to Dallas to expand into the Texas market. Kavanaugh was the only executive who initially relocated.

“I’ll go out and get the office set up,” Kavanaugh told the Business Journal at that time. “Anyone who wants to consider the move can do so. The bulk of our employees are still housed here.”

Activist Cooper declined to reveal the dollar amount in assets that his firm manages, saying “our fund is small but big enough to make a difference.”

Cooper specializes in equity investments in regional banks, saying he’s been involved in nine proxy battles in the last five years, winning such fights like Codorus Valley Bancorp Inc. (Nasdaq: CVLY) and Republic First Bancorp Inc. (Nasdaq: FRBK).

Last October, he noticed that First Foundation’s loans to deposit ratios “jumped a ton” in the third quarter, going from 98.8% to 108.4% from the prior quarter. That ratio declined to 103.5% in the fourth quarter.

When a bank issues more loans than its deposits, it may borrow from other lenders or the Federal Reserve, which can increase its costs.

Cooper also found that almost half of the bank’s loan portfolio was for apartment complexes. Cooper said First Foundation hasn’t disclosed how much of its multifamily sector has fixed-rate loans, which can squeeze a bank’s profits in a rising interest rate environment.

“Their liquidity position was going the wrong way,” Cooper said. “It became pretty clear that they have taken some oversized risks.”

Exec Turmoil

After the recent third-quarter results, First Foundation President David DePillo resigned in November and his interim replacement, Chief Financial Officer Kevin Thompson, left later that same month. In December, Lindsay Lawrence resigned as chief operating officer.

Christopher Naghibi, who has served as chief credit officer at the bank since 2014, was named Chief Operating Officer of the bank in December. Additionally, Hugo Nuño, who has served as chief risk officer since 2012, was named chief banking officer, a newly created position.

“There is tremendous management turmoil,” Cooper said. “That says to me something is not right with the management team.”

First Foundation has issued its own press release rejecting Cooper’s bid.

“Driver is running what we view as an opportunistic campaign while First Foundation is in the midst of a management transition and internal reorganization to optimize our workforce, identify the right talent for critical positions and realign First Foundation to best execute on behalf of our clients and stockholders,” the company said.

Hellish Podcasts

Driver Management, which owns 327,000 shares, or less than 1% of First Foundation, wanted to name two directors to the 10-member board: Allison Ball, an investment partner at Hanover Technology Investment Management, and Lila Flores, a U.S. commercial leader for Palantir Technologies Inc.

Ball and Flores have a podcast called “Hell or High Ranch Water,” which describes itself as “two badass babes and hilarious best friends” discussing “wild successes to total dumpster fires.”

“I didn’t know about the podcast” before soliciting the pair, Cooper said. “I’m on the lookout for good director nominees.”

Cooper said the podcasts aren’t controversial and said the pair have extensive business backgrounds, including at Goldman Sachs and Facebook.

Their local ties should help the bank find more customers in Texas; Cooper said he wants “homegrown” Texans with financial services experience added to the bank’s board and says First Foundation “needs Texas-based members with connections to high-net-worth individuals,” according to a January report in the Dallas Morning News.

In late breaking developments last week, First Foundation rejected Cooper’s nominees because of a failure “to provide a completed written questionnaire.” While rejecting that claim, Cooper revealed that Flores decided to pull her name from consideration. Cooper accused the company of “ongoing harassment” of Flores’ husband, Chad Flores, who was the lawyer who incorporated the podcast as a business.

Cooper isn’t interested in taking over the entire board. Rather, he wants to see changes such as a strategic review that might entail a spinoff of the wealth management unit.

The two sides have exchanged customary proxy accusations.

“Driver has shown no interest in constructive engagement with the company and appears to be focused only on publicly disseminating misinformation and defamatory attacks to help promote its social media profile, gain notoriety in the media, and advance its other investment objectives,” First Foundation said in a Feb. 3 statement.

 

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Peter J. Brennan
Peter J. Brennan
Peter J. Brennan has been a journalist for 40 years. He spent a decade in Latin America covering wars, narcotic traffickers, earthquakes, and business. His resume includes 15 years at Bloomberg News where his headlines and articles sometimes moved the market caps of companies he covered by hundreds of millions of dollars. His articles have been published worldwide, including the New York Times and the Washington Post; he's appeared on CNN, CBC, BBC, and Bloomberg TV. He was awarded a Kiplinger Fellowship at The Ohio State University.
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