Fortress pours $228M into Dallas regional bank

Investment comes at a time when regional banks are under scrutiny due to their commercial real estate loan portfolios

First Foundation Bank Gets $228M Investment From Fortress
Fortress Investment's Drew McKnight and Joshua Pack; First Foundation's Scott Kavanaugh (Getty, fortress, firstfoundationinc)

A regional bank in Dallas with significant exposure to commercial real estate is receiving a $228 million financial injection from investors led by Fortress Investment Group.

First Foundation Bank is selling common and preferred shares, resulting in the transfer of a 49 percent stake in the bank when the deal closes, the Wall Street Journal reported. The investor group also includes Canyon Partners, Strategic Value Bank Partners, and North Reef Capital.

Existing shareholders will retain 51 percent ownership.

Real estate loans constitute approximately 72 percent of First Foundation’s total loan portfolio as of the first quarter, the outlet reported. This cash infusion aims to provide the bank with sufficient time to offload certain loans, stabilizing its financial footing.

A substantial portion of First Foundation’s loan portfolio is tied to multifamily properties, particularly in California, where state rent regulations implemented in 2020 pose additional challenges. Nearly 75 percent of the bank’s loans are concentrated in California, highlighting its exposure to the state’s stringent rental laws.

This investment comes at a time when regional banks are under increasing scrutiny due to their commercial real estate loan portfolios. Last month, Moody’s placed six regional U.S. banks under review for potential ratings downgrades, citing their significant CRE loan exposure.

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Widespread failures among small and regional banks are almost a certainty, economists and real estate power players have predicted

Barry Sternlicht of Starwood Capital Group in May predicted a regional bank failure “every day or every week.” Soon after, Newmark Chair Howard Lutnick warned, “Every single weekend a regional bank is going to go bye-bye,” and predicted 500 to 1,000 failures in 2025 and 2026.

The pressure on banks with heavy CRE investments is mounting, as evidenced by the doubling of nonperforming CRE loans in U.S. banks’ portfolios, which reached 0.81 percent at the end of last year, up from 0.4 percent in 2022, according to the International Monetary Fund’s semiannual global financial stability report.

The infusion from Fortress and its partners is a strategic move to stabilize First Foundation Bank amid growing concerns over CRE loan performance and regulatory pressures. This capital injection is expected to provide the necessary liquidity for the bank to manage and potentially divest its riskier assets, ensuring its long-term viability in a volatile market.

—Rachel Stone

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