Shares of Dallas regional bank First Foundation (FFWM) plummet after a $228 million infusion from investors, a sign that the commercial real estate challenge is far from over for some regional financial institutions. I was reminded again.
First Foundation said investments announced Tuesday from private equity giant Fortress and other companies will help reduce concentration in multifamily mortgages. Approximately 52% of the company’s portfolio is tied to such properties in places like Texas, Florida and California.
The stock closed down 24% on Wednesday.
“We need to be honest about the fact that some of these multifamily loans have low yields and that’s leading to lower returns,” First Foundation CEO Scott Kavanaugh told analysts on Tuesday. ” he told analysts.
“Our credibility has not deteriorated at all,” the CEO assured analysts.
The market’s reaction to the $13 billion bank’s move is the latest example of fundamental concerns investors have about the ability of some local banks to weather this difficult period.
More than a year after several large regional banks were seized by regulators, many mid-sized financial institutions are still grappling with rising interest rates, high funding costs and weaknesses in the commercial real estate industry. There is.
Investors have dragged down the stocks of other local banks this year as problems and concerns surfaced.
The story began in May, when an analyst report highlighted debt held by OZK Bank (OZK) on a life sciences construction project in San Diego and a mixed-use project in Atlanta. Short sellers also targeted Axos Financial (AX) in June over its real estate loan portfolio.
And earlier this year, New York Community Bancorp (NYCB )’s stock price plummeted.
NYCB was able to calm the market with an emergency stock injection from a group that included former Treasury Secretary Steven Mnuchin.
Investors in bank stocks will be watching for further vulnerabilities in the coming weeks, as many local banks report first-quarter results and discuss everything from profit margins to lending.
Read more: 7 signs it’s time to quit banking
Steven Mnuchin, founder and managing partner of Liberty Strategic Capital and former Treasury secretary, led the rescue of NYCB this year. Reuters/David Swanson (Reuters/Reuters)
“Loan loss reserves will likely be higher than public expectations this year, especially as banks increase their CRE reserves,” Manan Gosalia, an analyst at Morgan Stanley Regional Banks, said in a note Tuesday. said.
“There is increasing pressure on the balance sheets of some banks, especially the smaller ones,” Torsten Slok, chief economist at Apollo, said last month. (Disclosure: Apollo Global Management is the parent company of Yahoo Finance.)
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Small to medium-sized regional banks have nearly four times as much exposure to commercial real estate as large national commercial banks, Slok said.
Regulators have warned banks that they need to reduce their exposure to commercial real estate. At the same time, regulators are giving lenders more flexibility to resolve troubled loans with borrowers and, in some cases, extending maturities before refinancing.
But the extension of maturing fixed loans, made before the Federal Reserve began sharply raising interest rates two years ago, also means lower profits for banks.
In the first quarter, First Foundation had a net income of $38 million, while setting aside $577,000 for credit losses.
“We believe our reserves will ultimately be sufficient,” the bank’s CEO Kavanaugh said on Tuesday. “But I think most people would say that our reserves appear to be low as the banking sector appears to be in this cycle right now.”
First Foundation CEO Scott Kavanaugh attends the 2012 awards ceremony in Beverly Hills, Calif. (Photo by Jesse Grant/Getty Images for the Arthritis Foundation) (Jesse Grant via Getty Images)
Outside investors include $115 million from Fortress Investment Group, $46 million from Canyon Partners, and $22 million each from Strategic Value Bank Partners and North Reef Capital.
First Foundation will also add four new seats to its board of directors and give Fortress the right to add five seats in the future.
After the transaction closes (expected early next week), First Foundation plans to use the capital infusion to potentially sell some of its multifamily loans.
“We are surprised by the highly dilutive capital raise,” Piper Sandler Managing Director Matthew Clark said in a note Tuesday evening.
Analysts at the bank said the deal would dilute the value of First Foundation’s shares by 50%.
“This was not the result that shareholders were looking for,” Clark added.
David Hollerith is a senior reporter at Yahoo Finance, covering banking, cryptocurrencies, and other financial areas.
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