Will CRE defaults be enough to push the economy over the edge?
First Foundation plunges as ’unexpected’ fund raise puts real estate loans in focus
First Foundation shares slumped roughly 24% on Wednesday to their lowest since November after the Texas-based lender with a huge portfolio of multifamily real estate loans disclosed a $228 million “unexpected” capital raise.
The announcement illustrated the struggles of banks with large exposure to commercial real estate as the Federal Reserve’s aggressive interest rate hikes and lower occupancies due to a shift in office work patterns trigger default fears.
The deal also sparked concerns about excessive dilution of current shareholders’ ownership. It was struck at a 60% discount to the bank’s tangible book value per share and would cede 49% of its stake to the new investors, according to media reports.
- “Why hundreds of U.S. banks may be at risk of failure”:
- A study by consulting firm Klaros Group found that 282 U.S. banks face the dual threat of CRE loans and potential losses tied to higher interest rates. Most of these banks are smaller lenders with less than $10 billion in assets. While they aren’t insolvent, they are stressed, which could indirectly impact communities and customers.
- Read more
- “Nearly 300 Small Banks Cited as Worrying Amid CRE Debt Bubble”:
- The glut of CRE loans maturing by 2028 poses a risk for the financial sector. With nearly $1 trillion in loans coming due in 2024, payment delinquencies are rising, and distressed borrowers are expected to reach nearly 10 percent. This situation affects smaller banks significantly.
- “Bank Failures Are Coming: Here’s How It Could Play Out”:
- This article discusses how hundreds of small and regional U.S. banks are feeling stressed. Some face the dual threat of commercial real estate loans and potential losses tied to higher interest rates. While most of these banks aren’t insolvent, they are stressed, which could have indirect consequences for communities and customers.
- Read more
- “First Foundation Stock Plunges After $228M Fundraise: Regional Bank Has Heavy Commercial Real Estate Exposure”:
- This article highlights the challenges faced by regional banks, including First Foundation Bank, which recently experienced a significant stock plunge. Federal Reserve Chair Jerome Powell has warned of more failures related to commercial real estate, though there’s no risk to the broader financial system.
- Read more
- “The First Bank to Collapse in 2024: What Led to the Failure of Republic Bank”:
- This article discusses the collapse of Republic Bank, the first bank to fail in 2024. It highlights the challenges faced by smaller banks and their exposure to commercial real estate.
- Read more
Additionally, former FDIC head Sheila Bair has warned that regional bank failures may be ahead, and the SPDR S&P Regional Bank ETF (KRE) has seen significant declines in 2024. Fitch Ratings also expects continued challenges for U.S. regional banks in 2024, especially those lacking scale or focused on commercial loan growth.
h/t IllustriousError9476