First Foundation, a Texas-based regional bank that puts more than half its loans into multifamily properties, is getting a $228 million capital infusion led by Fortress Investment Group. The investment comes as high interest rates have roiled the real estate market.
The bank has more than 30 branches in Texas, Florida, California, Hawaii and Nevada. Formerly based in California, it is now headquartered in Dallas and reported $13.6 billion in banking assets in March.
But the bank's performance was hurt by interest rates rising “too high, too fast,” said Sriram Villupram, a professor of finance and real estate at the University of Texas at Arlington. The bank's net income fell by more than 90% in the first quarter of this year.
Affiliates of the Fortress investment group will invest $115 million in First Foundation, roughly half of the total investment, according to a Fortress statement, while Canyon Partners will put in $46 million, Strategic Value Bank Partners and North Leaf Capital will each put in $22 million, with the rest coming from other investors.
Business Briefing
Investors will get common and preferred stock at $4.10 a share. The company's shares fell 24% on Tuesday.
“The Fed's rate hikes over the past few years have certainly hurt our bottom line to some extent,” First Foundation CEO Scott Kavanaugh said. “It's great to have a local company in Fortress that wants to be a cornerstone of our company.”
The investors behind the capital raise will own 49% of the bank, while existing shareholders will retain their 51% ownership. Fortress will own about 25% of the bank. The deal is expected to close around Monday.
“The last year or two have been really tough for regional banks” because they tend to be limited to interest-rate sensitive loans such as auto loans, home loans and commercial property loans, Professor Villupram said.
In 2022, the Federal Reserve raised interest rates in response to record-high inflation. But rising borrowing costs have sapped demand for real estate, and the remote work that became popular during the pandemic has also reduced demand for office buildings. Smaller banks that lend to commercial real estate, such as apartment complexes and office space, have been struggling.
Mr. Villupram said regional banks generally understand the risks of specializing in interest-rate-sensitive loans. They have responded by making more conservative loans, but they are still being hurt, and some are seeking help in a tough market.
“Everybody's trying to buy time,” Villupuram said. “The banks are giving the landlords time. Fortress is giving the banks time. What interest does Fortress have in that? Fortress sees an opportunity to get half the value of the bank at probably a significant discount.”
Villupuram doesn't believe interest rate cuts are guaranteed, and even if the Fed did cut rates, he doubts that would immediately ease the strain on real estate lending.
“We don't see any major relief in sight,” Villupuram said.
In 2023, Silicon Valley Bank collapsed, the largest in U.S. banking history, with rising interest rates after the pandemic contributing to its collapse. Regional bank New York Community Bancorp received an investor bailout in March and pledged to reduce its commercial real estate loans amid a turbulent New York market.
But in the case of First Foundation, investors stressed that the cash infusion was not a lifeline.
“It's not a credit issue. It's an interest rate issue,” Kavanaugh said.
Henchy Enden, a Fortress director and incoming director at First Foundation, said the cash infusion will allow the bank to sell some of its multifamily loans and “go on the offensive.”
“This is not a crisis situation,” said Tim Sloan, a former CEO of Wells Fargo who is now vice chairman at Fortress. “If we don't do anything, things will improve over time. Management and the board have said, 'OK, let's act aggressively and address our balance sheet concerns now, so we can grow.'”
Going forward, the bank will reduce its weighting in multifamily loans. First Foundation also plans to increase its focus on businesses and corporations and strengthen its reserves for credit losses.
As part of the deal, First Foundation will add four new directors and Simone Lagomarsino, a former chairman of the board of directors of the Federal Home Loan Bank of San Francisco and former CEO of Luther Burbank, will join the board and become president of the bank, according to a statement.
Even if interest rates don't fall, Enden believes the cash infusion will enable First Foundation to grow, with branches in Plano but also looking to expand in North Texas and other states.
“We hope to open new or additional branches throughout the Dallas-Fort Worth metropolitan area,” Cavanaugh said. “Given the growth in the region, we believe we have a great opportunity to expand into attractive markets.”
