If you want to know what a “challenging interest rate environment” looks like, just ask First Foundation Inc. (Nasdaq: FFWM).
The environment caused the Irvine bank and wealth manager to report second-quarter adjusted profit of 24 cents a share, below the 28-cent consensus of four analysts. On a GAAP basis, the bank reported 12 cents a share, compared with 28 cents a year earlier.
The result was a 13% decline in share price during the three trading sessions following the July 30 report, wiping out more than $105 million in market cap to $690 million and putting the stock at its lowest price since May 2017.
“We’re pretty happy with our result, but we were surprised by the market reaction,” David DePillo, president of the company’s banking unit, said in an interview.
The First Foundation results capped a seven-day period when the five largest publicly traded banks based in Orange County reported generally positive second-quarter results with increasing profits and more loan originations.
However, First Foundation missed the analyst consensus by the widest margin, and its share plunge was by far the steepest among the five biggest banks in the past two weeks.
NIM Problem
The problem was its net interest margin, or NIM, a core measure of profitability that fell nine basis points to 2.83%, whereas some analysts had projected an increase.
“The combination of rising deposit costs and just a modest increase in loan yields resulted in greater than expected NIM compression for the quarter,” DA Davidson analyst Gary Tenner wrote in a note to investors.
Because the Federal Reserve is raising its key rate, depositors are demanding higher market interest rates of 1.5% to 2%, compared with 0.5% to 1% a year ago, DePillo said.
“It’s a tougher environment in general for banks.”
By contrast, lending rates are rising from 3.5% to 3.75% a year ago to about 4.51% in the most recent quarter, he said.
The bank is taking steps, such as selling more multifamily loans, in order to remove lower yielding loans from its portfolio, a move that affected second-quarter profitability.
It anticipates its net interest margin in the coming year to be 2.85% to 2.95%. The margin is the lowest among Orange County’s biggest locally based banks because First Foundation lends to lower-risk borrowers who can get lower interest rates, DePillo said. By contrast, Orange County’s largest bank, Pacific Premier Bancorp Inc. (Nasdaq: PPBI) boasts a 4.29% core net interest margin.
Despite increasing rates, the bank reported a 27% bump in loan production in the second quarter and boosted its 2018 loan production estimate from $1.7 billion to $2 billion.
In June, First Foundation completed the acquisition of PBB Bancorp, parent of Premier Business Bank, giving it $6 billion in assets, up from $4.5 billion in December.
The company is still hiring this year, planning to boost employment from 480 to 500. It employed 375 a year ago.
Orange County’s economy “is doing great,” DePillo said. “Real estate continues to boom. We are seeing new business formations.”
Two smaller banks also issued their results. On July 25, Irvine-based CommerceWest Bank (OTCBB: CWBK) reported second-quarter net income decreased 4% to $1.03 million due to a decline in deposits. On July 30, Garden Grove-based US Metro Bank (OTC Pink: USMT) saw net income drop 24% to $860,000 because of one-time expenses from the acquisition of a location for a new branch. Both banks are lightly traded.
