8-K: First Foundation Secures $228 Million Equity Investment Led by Fortress, Canyon, and Strategic Value Bank Partners

First Foundation Inc. has announced a $228 million equity investment from a consortium of investors including Fortress Investment Group, Canyon Partners, and Strategic Value Bank Partners.

Summary

• First Foundation Inc. has secured a $228 million equity investment from Fortress Investment Group, Canyon Partners, Strategic Value Bank Partners, North Reef Capital and other investors.
• The investment includes the sale of 11,308,676 shares of common stock at $4.10 per share, 29,811 shares of Series A preferred stock, and 14,490 shares of Series B preferred stock.
• Investors will also receive warrants to purchase 22,239 shares of Series C preferred stock at an exercise price of $5.125 per share.
• The Series A and B preferred stock are convertible into common stock, with the Series A converting upon a qualifying transfer and the Series B converting upon receipt of stockholder approvals.
• If stockholder approvals are not obtained within 210 days, investors will receive cash-settled warrants with coverage increasing by 20% every 60 days, up to a maximum of 180%.
• The company plans to seek stockholder approval to increase the number of authorized shares of common stock to 200,000,000 and to approve the issuance of shares of common stock in excess of 19.9% of the total voting power of the company's securities.
• The transaction is expected to close on or around July 8, 2024, subject to customary closing conditions.

Sentiment

Score: 8

Explanation: The document conveys a positive sentiment due to the significant equity investment, the addition of experienced board members, and the strategic plan to improve the company's financial position. However, there are some risks and uncertainties associated with the transaction, which prevent a perfect score.

Positives

• The equity investment will allow First Foundation to refocus its balance sheet, reduce multi-family concentrations, and grow C&I platforms.
• The investment will increase the allowance for credit losses and materially strengthen earnings.
• The addition of experienced board members, including Simone Lagomarsino as President of the Bank, is expected to enhance the company's leadership.
• The new capital will provide the company with financial strength and flexibility to improve its net interest margin and strengthen its balance sheet.
• The investment will allow the company to refocus on opportunities to profitably build its deposit base, loan portfolio, and wealth management business.

Negatives

• The company needs to obtain stockholder approval to increase the number of authorized shares of common stock and to approve the issuance of shares of common stock in excess of 19.9% of the total voting power of the company's securities.
• If stockholder approvals are not obtained within 210 days, the investors will receive cash-settled warrants that become exercisable 60 days after issuance, which could dilute existing shareholders.

Risks

• The company may not be able to obtain the required stockholder approvals.
• The company may not be able to close the transaction by the expected date.
• The company may not be able to achieve the expected benefits from the investment.
• The company may be subject to risks and uncertainties that are often difficult to predict and beyond its control, which could cause actual results to differ materially from those expressed in forward-looking statements.

Future Outlook

The company expects to refocus its balance sheet, reduce multi-family concentrations, grow C&I platforms, increase ACL, and materially strengthen earnings with this investment.

Management Comments

• Scott F. Kavanaugh, President and CEO of the Company stated, 'On behalf of the entire Board of Directors and all of our outstanding employee partners at the Company, I want to welcome the very experienced and talented people who will be joining the Board of Directors and investing in our valuable franchise. With this meaningful strategic equity raise, I am confident we will be able to refocus our balance sheet, reduce multi-family concentrations over time, grow C&I platforms, increase ACL and materially strengthen earnings.'
• Simone Lagomarsino stated, 'With more than three decades in bank leadership roles in Southern California, which includes serving as the CEO of three institutions, I am very familiar with First Foundation and with the value proposition that First Foundation offers to its customers and investors. As I join the Bank Board and its leadership team, Im also investing in First Foundation. Ive had the privilege of knowing Scott F. Kavanaugh for many years, and I look forward to joining the team and working with Scott to continue to build value for the stakeholders of First Foundation.'
• Drew McKnight, co-CEO of Fortress Investment Group stated, 'We are pleased to anchor this over $225 million recapitalization of First Foundation, which we believe will further position the Company for long term growth and profitability. Our due diligence over the past few months confirms First Foundation has built a banking franchise with significant competitive advantages, including a leading presence in dynamic and expanding markets in Texas, California and Florida. We are deeply familiar with First Foundations leadership and business model, and Henchy and I have known and respected Scott Kavanaugh for some time. This investment provides First Foundation with the financial strength and flexibility to improve its net interest margin and strengthen its balance sheet while refocusing on opportunities to profitably build the Companys deposit base, loan portfolio and high-performing wealth management business. With the appointment of Simone Lagomarsino as President further bolstering a strong management team, and the addition of exceptionally talented individuals to the companys Board of Directors, we believe First Foundation is well-positioned to capitalize on opportunities for growth and value creation in the years ahead.'
• Jesse Wiener, Managing Director at Canyon Partners stated, 'We are excited to invest in an institution that we know and respect in the California market and appreciate the constructive engagement with First Foundation management over the last few months as weve conducted our due diligence. The enhanced board of directors combined with the addition of Simone as President provides the opportunity for First Foundation to optimize its balance sheet for future growth.'
• Ben Mackovak, Co-Founder and Managing Member of Strategic Value Bank Partners stated, 'I look forward to working with the Board and management team to productively deploy this new capital to make First Foundation a stronger institution that will create value for customers, employees, communities, and shareholders. As an existing shareholder, we are pleased to see such respected institutions taking a stake in First Foundation to support its future success.'

Industry Context

This announcement comes at a time when the banking industry is facing increased scrutiny and challenges, making this equity investment a significant move for First Foundation to strengthen its position and capitalize on growth opportunities.

Comparison to Industry Standards

• The equity raise of $228 million is a significant amount for a bank of First Foundation's size, indicating a strong commitment from investors.
• The involvement of Fortress Investment Group, Canyon Partners, and Strategic Value Bank Partners, all well-known institutional investors, suggests a high level of confidence in First Foundation's future prospects.
• The addition of Simone Lagomarsino, a former CEO of Luther Burbank, as President of the Bank, is a strategic move to bring in experienced leadership.
• The pro forma capital ratios after the equity raise are expected to be significantly improved, with CET1 at 12.6%, Tier 1 at 12.6%, and Total Risk Based Capital Ratio at 14.9%, which are above industry averages.
• The focus on reducing multi-family concentrations and growing C&I platforms aligns with industry trends towards diversification and higher-yielding assets.

Management Changes

Corporate Governance

Stakeholder Impact

• Shareholders will benefit from the improved capital ratios and financial flexibility of the company.
• Employees will benefit from the enhanced leadership and strategic direction of the company.
• Customers will benefit from the company's ability to provide a broader range of financial products and services.
• The communities in which the company operates will benefit from the company's increased financial strength and stability.
• Creditors will benefit from the company's improved capital ratios and reduced risk profile.

Next Steps

• The company will file a proxy statement with the SEC to seek stockholder approval for the Authorized Share Amendment and the Share Issuance.
• The company will work to close the transaction on or around July 8, 2024.
• The company will reconstitute its board of directors and the board of directors of First Foundation Bank.
• The company will implement its strategic plan to refocus its balance sheet, reduce multi-family concentrations, and grow C&I platforms.

Key Dates

Keywords

equity investment, capital raise, preferred stock, warrants, board of directors, bank recapitalization, financial services, Fortress Investment Group, Canyon Partners, Strategic Value Bank Partners, Simone Lagomarsino, Henchy Enden, Sam Edelson, Ben Mackovak