Shares of First Foundation (NYSE:FFWM), a Texas-based regional bank facing commercial real estate risks, fell sharply on Wednesday after receiving some much-needed help from a group of investors led by Fortress Investment Group.
The company's shares closed at $6.58 per share on Tuesday but fell 24.7% to $4.95 by midday Wednesday.
Investors including Fortress, Canyon Partners, Strategic Value Bank Partners and North Leaf Capital have agreed to buy a combined $228 million in common and preferred stock at $4.10 a share from the Dallas bank, which has about $14 billion in assets, according to The Wall Street Journal.
As part of the deal, Fortress will invest $115 million in First Foundation, while Canyon Partners will invest $46 million. Strategic Value and North Leaf Capital will invest $22 million each. After the deal closes, Fortress will own 24.9% of the bank, while other investors will own up to 10%.
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The cash injection is intended to give First Foundation time to sell off some of its loans, according to a person familiar with the matter.
The commercial real estate market has been hit by a steep decline in property values due to rising interest rates and an increase in remote work, raising fears of big losses for banks, especially smaller lenders with a high concentration of loans in this sector.
Rising interest rates have increased the amount of interest banks must pay to depositors and have caused the value of the fixed-income securities held by banks to fall.
The pressures have left some regional banks looking for ways to raise capital, and industry executives say they expect more banks to do similar deals to shore up their balance sheets, according to The Wall Street Journal.
Federal Reserve Chairman Jerome Powell said that while there may be more commercial real estate failures in the future, there is no risk to the financial system as a whole, The Wall Street Journal reported.
D.A. Davidson & Co. raised its outlook for First Foundation following the recapitalization announcement, upgrading the stock to buy from neutral and raising its price target to $9 from $6.57.
“While near-term profitability remains under pressure, this capital raise is a liquidation event and will give the company the ability to sell loans, reducing concentration and earnings pressures. [allowance for credit losses]”The announced $228 million equity investment provides balance sheet flexibility and recapitalization while maintaining robust capital levels,” analyst Gary Tenner said in a note Wednesday.
Bank retail exchange-traded funds also fell through mid-session trading on Wednesday.
The SPDR S&P Regional Banking ETF (NYSE:KRE) fell 1.29%, the Direxion Daily Regional Banks Bull 3X Shares ETF (NYSE:DPST) dropped 3.89% and the iShares US Regional Banks ETF (NYSE:IAT) fell 0.95%.
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