10:39 AM EDT, 07/03/2024 (MT Newswires) -- First Foundation's ( FFWM ) capital raise will likely assist with its earnings recovery but comes at a significant dilutive cost, Wedbush said in a note Wednesday.

First Foundation ( FFWM ) said Tuesday affiliates of Fortress Investment, Canyon Partners, Strategic Value Bank Partners, North Reef Capital and other investors are investing up to $228 million in the company.

The deal comes at a meaningful 75% discount to tangible book value, the report said.

"We're surprised FFWM sought this transaction given there appeared to be a path to earnings recovery over the next 2-3 years without this raise," said Wedbush analysts including David Chiaverini.

The analysts said that the company was well capitalized and its credit quality remained strong with minimal losses. Also, management said that this deal wasn't driven by regulators.

"This leads us to conclude that the company's weak profitability in comparison to peers may have been expected to linger uncomfortably longer than we had originally assumed prior to this deal," they said.

"The company may have been extending a portion of its loans at below-market rates to enable borrowers to avoid credit issues, and thus could being weighing on, and projected to continue weighing on, earnings power for an extended period."

Wedbush cut its price target on the stock to $5 from $6 while keeping its neutral rating.

The stock was down about 25% in recent trading.

Price: 4.94, Change: -1.64, Percent Change: -24.89