A group of investment firms led by Fortress Investment Group is injecting $228 million into First Foundation Inc., which has been grappling with a massive multifamily real estate portfolio that's stressing its balance sheet amid a tricky interest rate environment.
Dallas-based First Foundation said Tuesday that the influx of cash will offer flexibility to increase its allowance for credit losses, reduce its multifamily concentration over time and grow its commercial and industrial loan book.
Canyon Partners, Strategic Value Bank Partners and North Reef Capital were among the other investment firms that participated in the capital raise. The bank's stock price, which has been sensitive to chatter about the direction of interest rates, sank 24% after the deal was announced to $5.00 in after-hours trading. Its shares are down some 70% from two years ago.
First Foundation President and CEO Scott Kavanaugh said on an investor call that the investment firms performed months of due diligence before concluding that "with a significant strengthening of [the bank's] balance sheet and capital position," First Foundation could "return to being a high-performance regional bank."
"The fact that Fortress, Canyon and many other investors came to this conclusion is an incredible vote of confidence, not only in our leadership team and reconstituted board, but also in our ability to transform the bank in a current challenging environment and take advantage of the many opportunities in our market," Kavanaugh said. "This capital infusion will provide us the opportunity to return to a posture towards offense."
First Foundation rapidly grew its exposure to multifamily in 2021 and 2022, when interest rates were near zero, ballooning the asset class to more than half its loan portfolio. But the fixed-rate loans became more burdensome as rates rose, and the deposits to fund those loans grew more expensive. As a result, the $13.6 billion-asset bank's net interest margin was crunched, shrinking from around 3% in the first quarter of 2022 to 1.17% in the same period this year.
First Foundation was barely profitable in the first quarter of this year, bringing in $793,000 in net income, down from $8.5 million in the same period of 2023.
The capital injection, slated to close early next week, will dole out common and preferred shares to the investment firms at $4.10 per share. For the bank, the money will buy flexibility, Kavanaugh said.
"When you look at FFWM's stock price, it's been battered for some time," Kavanaugh said. "As the earnings decreased, I was presented with the opportunity to engage with some high profile and extremely experienced bank investors. … .The opportunity to put ourselves back to strong profitability over a shorter period of time — the board felt like that was a prudent thing to do."
First Foundation will classify some of its multifamily loans as "available for sale," which could mean taking a loss, but could also offer wiggle room to assess the best way to boost profitability, Kavanaugh said. He added that the bank will release a more detailed business plan on its second-quarter earnings call in a few weeks.
Though First Foundation is working to shrink its multifamily portfolio, bank executives doubled down Tuesday on their confidence in the lender's credit quality. The bank operates in Texas, Florida, California, Hawaii and Nevada, with about three-quarters of its loan book in the Golden State. Kavanaugh said there's been "no degradation" in credit, but First Foundation is shoring up reserves because of pressure from Wall Street.
Commercial real estate has been casting a pall on the banking industry for months, especially as some banks' balance sheets have taken major hits.
This year, New York Community Bank in Long Island saw its stock price fall some 70% after it surprised investors with a major loss provision due to the value of its loans plummeting. The bank, which has an outsized exposure to rent-regulated multifamily properties in New York City, required a $1 billion lifeline investment led by Former Treasury Secretary Steven Mnuchin to stabilize. Even following a management and strategy overhaul, New York Community hasn't seen a huge stock-price rebound.
The Long Island bank plans to balance its loan mix and fix its risk controls. But following a large capital injection led by two former Trump administration officials, the new leadership is asking for more time to formulate its strategy.
First Foundation also announced Tuesday that it will mix up its governance, tapping Simone Lagomarsino, the former CEO of two California banks, as both its new president and a member of its board. Lagomarsino has served as CEO of Luther Burbank Savings and Heritage Oaks Bancorp, and she is also the former chair of the board of directors of the Federal Home Loan Bank of San Francisco.
Also expected to join First Foundation's board are Henchy Enden of Fortress Investment Group, which will have the option to add another board member; Sam Edelson, who was designated by Canyon Partners; and Ben Mackovak of Strategic Value Bank Partners. Despite the additions, the bank said that it's reducing the size of its board to nine members for now.
"With the appointment of Simone Lagomarsino as President further bolstering a strong management team, and the addition of exceptionally talented individuals to the company's Board of Directors, we believe First Foundation is well-positioned to capitalize on opportunities for growth and value creation in the years ahead," said Drew McKnight, co-CEO of Fortress Investment Group, in a prepared statement.
