First Foundation Inc. doubled revenue in the past two years, making it the fastest grower among midsize publicly traded companies in Orange County.
“We must be doing something right,” Chief Executive Scott Kavanaugh quipped in an interview.
Revenue at the Irvine-based company jumped to $158.5 million for the year ended June 30, compared with $79.3 million in the year ended June 30, 2015. The bank reported net income of $31.3 million for the most recent year.
First Foundation is one of seven banks on this year’s list of the 43 OC-based companies that reported revenue climbed more than 15% in the past two years. Other notable revenue increases include Irvine’s Pacific Premier Bancorp Inc., up 96% to $226.3 million, Irvine’s Opus Bank, up 54% to $342 million, and Santa Ana’s Banc of California Inc., up 35% to $577 million.
First Foundation reported third-quarter profit last week of 27 cents, topping the 24-cent average estimate of four analysts. It reported revenue of $38.3 million, flat from a year ago. The company’s shares have doubled since it went public in 2014.
Rick Keller Jr., now chairman of the board, began the firm as a wealth manager in 1990. When it decided to form a bank in 2007, it hired Kavanaugh as president, and Kavanaugh became CEO two years later.
Kavanaugh has a long history in banking, including as a founding stockholder of Commercial Capital Bancorp, where he served in a variety of roles. Opus Bank Chief Executive Stephen Gordon was founding chairman and chief executive of Commercial Capital. Opus is suing over what it calls a theft of employees by First Foundation, which has denied the charges.
The bank has established deep connections in Orange County. Keller helped steer the University of California-Irvine’s investment committee through the 2008 financial crisis. Doug Freeman, who worked at the bank until he retired last year, was chairman of the UCI trustees and has headed the school’s successful $1 billion fundraising capital campaign.
Nowadays, the private wealth management firm has $4.2 billion in assets under management, and the bank has $4 billion in assets.
Wealth vs. Banking
Its wealth management unit is a fee-based investment adviser that provides investment advisory and wealth management services primarily to high net-worth individuals, their families and family businesses, and other affiliated organizations.
Kavanaugh is often asked by other bankers about starting a wealth management unit. He said it’s an arduous process that would require at least $1 billion in assets and a lot of effort to find the expertise to make it work well.
“It takes years of losses to get to break-even status,” he said.
The bank unit provides more than three-fourths of the company’s revenue and profit, according to company presentations. It focuses on loans to individuals and small to moderate-size businesses and professional firms. About 51% of its loans are for multifamily dwellings, followed by 19% for single family homes and 15% for commercial real estate.
“We would love to increase (commercial & industrial) loans, but the reality is that is the most competitive industry around,” he said. “Every bank strives to increase C&I loans. It’s also the most difficult to monitor and put covenants. It’s very competitive.”
The company has reported a profit every year since 2012, and its operating margin has increased every year, from 18% in 2012 to 31% last year. Growth has been faster on the banking side, since its margins are higher than for wealth management, Kavanaugh said.
Increasing Revenue
First Foundation’s revenue has steadily increased every year since 2012, when it reported $44 million. Kavanaugh tracked the most recent growth to 2015, when the company laid out a business plan to grow and issued enough stock to raise $130.8 million.
“We’ve been able to deploy that capital in a positive way quicker than what we anticipated,” Kavanaugh said. “Our balance sheet is $1 billion more than we anticipated.”
This year, it announced it would pay $50.4 million in stock to acquire Community 1st Bancorp to increase its presence in the Sacramento region. The acquisition, which should close next month, will add about $18 million in annual revenue. First Foundation acquired Desert Commercial Bank in Palm Desert in 2012, Pacific Rim Bank in Honolulu in 2015 and a branch from Pacific Western Bank in both Seal Beach and Laguna Hills in December.
Kavanaugh estimated about 95% of revenue growth is organic.
“The secret was hiring very good people who are experienced,” he said. “When there is a lot of consolidation, there is an opportunity to hire some good people. Our average banker brings 20 years of experience.”
The company’s employee count in Orange County increased 16% to 249 from a year ago. Overall, it has 380 employees, a 22% jump. It currently has a moratorium on hiring as it plans to add employees who now work at Community 1st. It should resume hiring next year, Kavanaugh said.
“We will continue to hire people so that we can continue our growth.”
