First Foundation gets $228 million infusion amid troubled real estate market – The Dallas Morning News

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First Foundation, a Texas-based regional bank with more than half its loans in multifamily residential properties, is getting a $228 million capital infusion, led by Fortress Investment Group. The investment reflects a troubled market for real estate amid high interest rates.

The bank has more than 30 locations across Texas, Florida, California, Hawaii and Nevada. Previously based in California, the company is now headquartered in Dallas and reported $13.6 billion in bank assets in March.


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But the bank’s performance was hurt by interest rates that went up “too high, too soon,” according to Sriram Villupuram, a professor of finance and real estate at The University of Texas at Arlington. The bank’s net income was down more than 90% in this year’s first quarter.

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According to a statement from Fortress, the investment group’s affiliates are expected to invest $115 million in First Foundation, around half of the total infusion. Canyon Partners is expected to invest $46 million and Strategic Value Bank Partners and North Reef Capital are expected to put in $22 million each, with the remaining infusion coming from other investors.

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The investors will get common and preferred shares for $4.10 a share. On Tuesday, the company’s stock was down 24%.

“There is no doubt that the Fed raising rates over the last several years definitely hurt our earnings to a certain degree,” Scott Kavanaugh, First Foundation’s CEO, said. “It’s fantastic that we’ve got a local company in Fortress that wants to be a cornerstone.”

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The investors behind the infusion will own 49% of the bank while existing shareholders will retain 51% ownership. Fortress will own nearly 25% of the bank. The deal is expected to close on or around Monday.

Professor Villupuram said that because regional banks tend to be limited to loans that are sensitive to interest rates, such as car, home and commercial real estate loans, “the last year or two has been really trying years for them.”

In 2022, the Federal Reserve raised interest rates in a response to record-high inflation. But a higher cost of borrowing reduces demand for real estate, and pandemic-popularized remote work has reduced demand for office buildings. Smaller banks that give loans for commercial real estate, like multifamily property and office space, are feeling the pinch.

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Villupuram said regional banks largely understand the risk of specializing in loans that are sensitive to interest rates. They responded by giving more conservative loans, but they still took a hit, and some banks are looking for help amid a tough market.

“Everyone is trying to buy time,” Villupuram said. “The bank is giving time to the landlords. Fortress is giving time to the banks. What is Fortress interest in it? Fortress is seeing an opportunity to get half the value of a bank at probably a steep discount.”

Villupuram doesn’t think a decrease in rates is promised, and even if the Fed were to bring rates down, he’s doubtful it would alleviate the burden on real estate lending anytime soon.

“I don’t see much relief coming,” Villupuram said.

In 2023, Silicon Valley Bank collapsed in one of the largest failures in U.S. banking history. Raised post-pandemic interest rates contributed to their collapse. Regional bank New York Community Bancorp got thrown an investor lifeline in March and pledged to reduce commercial real estate loans amid a tumultuous New York market.

But in First Foundation’s case, investors emphasized that the injection was not a lifeline.

“We don’t have a credit issue, we had an interest rate issue,” Kavanaugh said.

The injection will help the bank sell some of their multifamily loans and start “playing on offense,” said Henchy Enden, a director at Fortress and incoming board member at FIrst Foundation.

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“This is not a distress situation,” said Tim Sloan, former CEO of Wells Fargo and a current vice chairman at Fortress. “If they did nothing, over time, this would correct itself … This was a management team and a board that said, ‘Hey, let’s be proactive and try to address any of our balance sheet concerns right now … so we can grow.’”

Going forward, the bank will deemphasize their multifamily property loans. First Foundation also plans to enhance its focus on businesses and corporations and strengthen its allowance for credit losses.

As part of the deal, First Foundation will add four new directors, according to a statement, and Simone Lagomarsino will become the bank’s president in addition to joining the board. Lagomarsino is the former chair of the board of the Federal Home Loan Bank of San Francisco and former CEO of Luther Burbank.

Even if interest rates don’t come down, Enden believes the injection will allow First Foundation to grow. The bank has a branch in Plano, but seeks to grow in North Texas and other states.

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“Hopefully we can start to create new branches or additional branches throughout the Dallas-Fort Worth metroplex,” Kavanaugh said. “I think there is an absolute monstrous opportunity, given the growth in this community, to be able to expand into attractive markets.”

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