Lower taxes, more M&A: Behind a California bank’s move to Texas

First Foundation in Irvine, Calif., is ready for its next act — in North Texas.

Lured by opportunities to beef up lending, add wealth management clients and pursue acquisitions of community banks — and the promise of lower taxes over time — the parent of First Foundation Bank is relocating its corporate headquarters from California to Dallas this spring. Executives are scouting locations near Plano for a potential branch that could open within the next six months and are gearing up to hire as many as 35 new employees by the end of this year.

The relocation — announced in late January during the company’s quarterly earnings call — is part of a plan to boost assets from $7 billion to $10 billion by 2023.

“When we started figuring out how to get to the growth numbers [we seek], we decided that we need other markets to help us get there,” CEO Scott Kavanaugh said this week. “And the Dallas metroplex is such a strong marketplace that we felt very compelled to try to build out there.”

First Foundation is the latest in a string of companies fleeing California for Texas, joining Charles Schwab, Toyota Motor North America and Jamba Juice and others that have moved to the Dallas-Fort Worth market.

Seven hundred sixty-five companies left California in 2018 and 2019, on top of an estimated 13,000 companies that left the state between 2009 and 2016, according to a California economics newsletter published by the Hoover Institution, a think tank at Stanford University.

Kavanaugh said companies view Texas as being more business-friendly than California, where taxes are high, regulations can be tough and growth opportunities are limited.

First Foundation’s taxes will decrease over several years as the company ramps up loan production and starts earning more profits outside of California, Kavanaugh said. A more immediate benefit of the relocation, however, is a healthy multifamily lending space in Dallas, where the percentage of vacancies is low and monthly rental fees are rising thanks to the region’s robust population growth.

At the end of December, the number of residents in the Dallas-Fort Worth area topped 7.8 million, a new high, according to a Cushman & Wakefield report.

As it settles into Texas, First Foundation will focus on multifamily lending, at least in the near term, Kavanaugh said. Right now, multifamily lending is the largest segment of the company’s loan portfolio, accounting for 42% of the mix as of late December, though the company is doing more commercial and industrial lending, which accounts for 26% of the portfolio.

In the multifamily space, JPMorgan Chase is First Foundation’s largest competitor in California, but in Dallas, the market is “a little bit more fragmented,” Kavanaugh said.

“Real estate lending is usually easier to build” in a new market, First Foundation Bank President David DePillo told investors last month. But as time passes, the company will “start layering in C&I and consumer” loans, along with wealth management products, he said.

The company will seek Texas trust powers after it opens its first branch, Kavanaugh said. It is also planning to host its annual shareholders meeting in Dallas this year, he added.

There are no plans to change the headquarters of the bank or the wealth management business, which will remain in Irvine for now, Kavanaugh said.

The shift to Texas won’t have “an overnight effect” on the company, but focusing on multifamily is a solid starting point, according to Gary Tenner, an analyst at D.A. Davidson who follows the company.

“Multifamily, if you bring on the right people, is clearly a space where you could grow pretty quickly if you source the right people, so I have no doubt they can do that,” he said. “In terms of more traditional C&I, that’s a longer sales process … and more commodified. It’s the same with wealth management. You have to source the right people to bring over the assets and I think all of that takes time.”

The company considered Denver, Florida and other markets, but ultimately decided that Dallas would provide the best chance for expansion, including by way of M&A, Kavanaugh said. There were more than 400 community banks in Texas as of Sept. 30, according to Federal Deposit Insurance Corp. data.

“In the Dallas metroplex area, there are more than you can shake a stick at in terms of community banks,” Kavanaugh said. “Now, whether they’re willing to consider M&A, that’s a different topic, but I do believe there’s great opportunity for consolidation in the Texas marketplace.”

There have been discussions with potential sellers, but nothing has been worked out yet, he said.

First Foundation is not the first out-of-state bank to relocate to Texas seeking more growth and acquisition opportunities. In 2007, Comerica moved its headquarters from Detroit to Dallas and about three years later struck a deal to acquire Sterling Bancshares in Houston.

For Kavanaugh, a University of North Texas graduate, the move is a homecoming of sorts. He moved to California from Dallas in 1986 and helped launch First Foundation Bank in 2007.

He is building a home in the area, which he expects will be finished in April.

The relocation will mark First Foundation’s third expansion outside California, where it launched the first of its two subsidiaries, First Foundation Advisors, in 1990. In 2012, it opened one branch location and an adviser office in Las Vegas and two years later did the same thing in Honolulu, Hawaii.

Today the company operates 20 branches, all but two in California, and employs about 500 people, of which about 75% are based in Irvine. Over time, certain operations and other back-office jobs in Irvine will shift to Dallas, but there is no set timeline on how quickly that will happen, Kavanaugh said.

“I’ve had quite a few CEOs call me and ask” about the relocation, he said. “A lot of people are saying, ‘We think it’s a smart move.’”


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