Neal Arnold is promising a new mindset for First Foundation Inc., the battered company that’s being bought by FirstSun Capital Bancorp, parent of Dallas-based Sunflower Bank.
“There’s a great team here and they have had to play too much defense and it’s a lot more fun to play offense,” said Arnold, CEO of FirstSun.
FirstSun Capital on Oct. 27 announced its intention to acquire First Foundation in an all-stock deal worth $785 million. The combined banks will have total assets of approximately $17 billion. The name First Foundation will transition to Sunflower Bank.
Arnold and First Foundation CEO Tom Shafer, in an exclusive interview with the Business Journal, outlined their plans to expand into Southern California, particularly Orange County.
They said that First Foundation, which is known for loans for apartment complexes, will be increasing its commercial and industry loans in Southern California.
“Our bread and butter are the middle market companies, and the big banks tend not to do a great job with them,” said Arnold while sitting in First Foundation’s office overlooking the San Diego (405) Freeway. “They tend to think process rather than people.
“Middle market clients are the best segment in banking. Most of them have succeeded in business because of perseverance. And to us, they’re the lifeblood of our communities, and so we love helping them out. I tell people the best part of my job is hearing these clients’ stories.”
Since the acquisition was announced on Oct. 27, shares of First Foundation have remained relatively stable at $5.44 a share with a $451 million market cap. FirstSun trades at $34.47 and a $951 million market cap.
The $228M Equity Raise
First Foundation traces its origins to 1990 when Rick Keller began a fee-based investment advisory firm with three other co-founders. In 2007, they started a bank, First Foundation, saying that financial crisis that was unfolding at that time gave them a golden opportunity to pick up assets that had fallen in value.
First Foundation became a Southern California fixture, reaching $13.3 billion in assets on its banking side and more than $5.2 billion in its wealth management unit. The company went public with a market cap that topped $1.5 billion and where Keller served for 17 years as its executive chairman before leaving last year.
In the past three years, the bank side of the business ran into trouble as interest rates soared, and its loans lost value. Because of problems in its low rate multifamily portfolio of loans, the bank reported a loss of $199 million in 2023, a dramatic swing from 2022 when it reported $110.5 million net income.
Last year, shares of First Foundation fell 24% in the trading session after it announced it intended to raise $228 million from investors including Fortress Investment Group and Canyon Partners. After the capital raise, Keller and other prominent executives and directors resigned.
Shafer said the problems with the multifamily loans are being worked out.
“The product itself is perfectly good,” Shafer said. “We love the small multifamily loans. We can put them on our balance sheet. We can sell them to Freddie Mac. There are a lot of alternatives. It’s a great product with unlimited demand. There’s not enough housing. So, the issue was not the product. We just had too much of it.”
Shafer, who has 40 years of banking experience, joined the bank a year ago.
“We made our living mostly off of multifamily in Southern California on the asset side,” Shafer said. “But when I joined the company a year ago, the intention was to become a commercial bank. That means strong retail presence, strong C&I presence. These haven’t been our core skill sets in the past.”
Since his arrival from the Midwest, Shafer said he’s been impressed by Southern California’s economy.
“It’s the biggest economy I’ve ever seen,” he said. “It’s diversified. It’s deep. It produces high-paying jobs. The resilience of the economy is staggering.
“Intellectual talent keeps moving here. There’s an ecosystem to develop economies around people’s skills and passion.
“It’s also beautiful. The weather’s fantastic.”
Shafer said the acquisition, scheduled to be completed in the second quarter, is speeding up the move towards C&I lending by about four years.
SunFlower in the past 18 months has tried to expand into Southern California by hiring a team of 15 to 17 bankers for San Diego and Los Angeles counties.
“They are salivating to get into more activity in Southern California,” Shafer said. “Our needs and their needs met beautifully, and that’s what creates a good partnership.”
After the deal is completed, Shafer will serve as vice chairman of the combined company.
Arnold will continue as CEO of the bank as well as serve on the board. Five current First Foundation directors will be invited to join the combined company’s board of directors following the closing.
SunFlower
While Arnold said there may be a reduction in redundant jobs, he said he isn’t planning large layoffs for First Foundation’s 300 employees in Orange County. He also intends to expand the bank’s branches by adding products like mortgages.
“We will continue to grow in Orange County, I promise you,” said Arnold, adding that the bank is currently recruiting.
“At the end of the day, it looks like we’re in the business of loans and deposits, but we’re in the business of people. It’s really about recruiting the right kind of people that are hungry to help people.
“We will be adding to a number of different sales functions.”
Arnold is interested in manufacturing industries, particularly medtech, technology and exporters.
“We love the people who make things,” Arnold said. “One of the things I appreciate the most about the West is there’s an entrepreneurial DNA. You have these incredible entrepreneurs who’ve built companies over decades, and they’re businesses that you’re like, wow, where did that come from?”
First Foundation Suing Co-Founder Keller
Bad blood still exists between First Foundation and its co-founder Rick Keller.
The bank and wealth manager is suing Keller, who in July co-founded his own wealth management firm, Ducere Wealth, which already has more than $400 million in assets under management.
“He was our chairman for a long time,” Shafer said. “He has all kinds of internal knowledge, and we just have to make sure it’s used in a way that doesn’t disadvantage us as he’s starting his new business.”
Shafer said the lawsuit still hasn’t been resolved.
Keller didn’t respond to a request for comment.
