Dallas regional bank First Foundation’s ( FFWM ) stock fell sharply after a $228 million infusion from investors, the latest reminder that the commercial real estate challenges for some regional lenders are far from over.
First Foundation said the investment from private equity giant Fortress and other firms announced Tuesday will help it reduce its concentration of multifamily apartment loans. About 52% of its portfolio is tied to properties in places like Texas, Florida and California.
Its shares closed up 24% on Wednesday.
“We’ve been honest about the fact that some of these multifamily loans are on the lower yielding side, which has led to a decline in our revenue,” First Foundation CEO Scott Kavanaugh told analysts Tuesday.
The CEO assured analysts that “there has been no downgrade in our credit.”
The market’s reaction to developments at the $13 billion bank is the latest example of the underlying concerns investors have about the ability of some regional banks to weather this challenging period.
More than a year after several large regional banks were seized by regulators, many mid-sized financial institutions are still struggling with high interest rates, high funding costs and their exposure to weaknesses in the commercial real estate industry. .
Investors have reduced the stocks of other regional banks this year as problems or concerns emerge.
It happened in May when an analyst report highlighted debt held by OZK Bank ( OZK ) on a life sciences construction project in San Diego and a multi-use project in Atlanta. It also happened in June when a short seller targeted Axos Financial ( AX ) over its property loan portfolio.
And earlier this year, New York Community Bancorp (NYCB) stock fell sharply after the bank allocated more money to real estate loan losses related in part to rent-regulated apartment complexes in the New York City area. York.
NYCB was able to calm the market with an emergency infusion of capital from a group that included former Treasury Secretary Steven Mnuchin.
Bank stock investors will be on the lookout for more weakness in the coming weeks as many regional banks report their first-quarter earnings and discuss challenges related to everything from profit margins to lending.
Read more: 7 signs that it’s time to ditch the bank
“We expect loan loss provisions to be higher than the street expects this year, especially as banks build provisions for CRE,” regional bank Morgan Stanley analyst Manan Gosalia said in a note on Tuesday.
There is “increasing pressure on the balance sheets of some banks, especially smaller banks,” Apollo chief economist Torsten Sløk said last month. (Disclosure: Apollo Global Management is the parent company of Yahoo Finance.)
According to Sløk, medium and small regional banks have almost four times more exposure to commercial real estate than the largest domestic commercial banks.
Regulators have warned banks that they must reduce their exposure to commercial real estate. At the same time, supervisors are also allowing lenders the flexibility to take on problem loans with borrowers and, in some cases, extend maturities before refinancing.
However, the extension of fixed-term loans that were made before the Federal Reserve began raising interest rates sharply two years ago also means less profit for banks.
In the first quarter First Foundation set aside $577,000 for loan losses, while its net income was $38 million.
“We believe our reserves are adequate, ultimately,” the bank’s CEO, Kavanaugh, said Tuesday. “But in this cycle that the banking sector seems to be in right now, I think most people would say that our reserves look low.”
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 a fifth seat in the future.
After the transaction closes, which is 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 very subdued capital growth,” Piper Sandler managing director Matthew Clark said in a note on Tuesday evening.
The bank’s analyst said the transaction would dilute the value of First Foundation’s shares by 50%.
“Not the result shareholders were looking for,” Clark added.
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto and other areas in finance.
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