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Decrease Taxes, Extra Mergers and Acquisitions: Behind a California Financial institution Transfer to Texas

The First Foundation in Irvine, California is ready for its next act – in North Texas.

The parent company of First Foundation Bank is relocating its corporate headquarters from California to Dallas this spring as it has the opportunity to improve lending, asset management clients, and community bank acquisitions – and promise lower taxes over time . Executives are looking for a potential office near Plano that could open within the next six months and are preparing to hire up to 35 new employees by the end of this year.

The move, announced in late January as part of the company's quarterly earnings call, is part of a plan to increase its assets from $ 7 billion to $ 10 billion by 2023.

When the First Foundation "figured out how to get the growth numbers" they were looking for, we decided we needed other markets to get there, "CEO Scott Kavanaugh said this week." And the Dallas Metroplex is such a strong market that we felt very compelled to build there. "

The First Foundation is the latest in a string of companies fleeing California to Texas to join Charles Schwab, Toyota Motor North America, and Jamba Juice, as well as other companies that have moved into the Dallas-Fort Worth market.

Seven hundred and sixty-five companies left California in 2018 and 2019, in addition to an estimated 13,000 companies that left the state between 2009 and 2016. This emerges from a California business newsletter published by the Hoover Institution, a think tank at Stanford University.

Kavanaugh says businesses are more business-friendly in Texas than in California, where taxes are high, regulations can be tough, and opportunities for growth are limited.

First Foundation taxes will come down over the course of several years as the company ramps up loan production and makes more profits outside of California, Kavanaugh said. An immediate perk of the move, however, is a healthy multi-family loan facility in Dallas, where vacancy rates are 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 was above 7.8 million, a new high, according to a report by Cushman & Wakefield.

When settling in Texas, the First Foundation will focus on multi-family loans, at least in the short term, Kavanaugh said. Currently, multi-family lending is the largest segment of the company's loan portfolio, making up 42% of the mix at the end of December, although the company has more commercial and industrial loans that make up 26% of the portfolio.

In the multi-family sector, JPMorgan Chase is the First Foundation's largest competitor in California, but the Dallas market is "a little more fragmented," Kavanaugh said.

"Real estate loans tend to be easier to build," David DePillo, president of First Foundation Bank, told investors last month. But over time, the company will "start layering C&I and consumer credit along with wealth management products," he said.

The company will look for trust opportunities in Texas after opening its first office, Kavanaugh said. It also plans to host the annual general meeting this year in Dallas, he added.

There are no plans to change the bank's headquarters or asset management business, which will remain in Irvine for the time being, Kavanaugh said.

The Texas move isn't having an "overnight" impact on the company, but focusing on apartment buildings is a solid place to start, said Gary Tenner, analyst at D.A. Davidson.

"Multi-families, if you hire the right people, are clearly a place where you can grow pretty quickly if you find the right people. I have no doubt they can," Tenner said. "In terms of more traditional C&I, this is a longer sales process … and more merchandise. Similarly with asset management. You have to find the right people to bring in the assets and I think it all takes time. "

The company considered Denver, Florida and other markets, but ultimately decided that Dallas would offer the best opportunities for expansion, including through mergers and acquisitions, Kavanaugh said. According to the Federal Deposit Insurance Corp. There were more than 400 community banks in Texas as of September 30th.

"There's more to the metroplex area of ​​Dallas than can be said about community banking," said Kavanaugh. "Well, whether they are ready to consider M&A is a different issue, but I believe there is a great opportunity for consolidation in the Texan market."

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

HoldCo Asset Management announced last month that the First Foundation had attempted merger talks with Boston Private Financial Holdings, which are worth $ 9.7 billion. HoldCo, a private Boston investor, is upset that the company has agreed to sell it to SVB Financial of Santa Clara, California.

HoldCo, in a letter to Anthony DeChellis, CEO of Boston Private, shared the contents of an email from Kavanaugh stating that he had "persistently" called DeChellis "to have a dialogue about a merger." The First Foundation was told in late November that Boston Private's board of directors had directed DeChellis to focus internally and that the company was "not interested in a sale."

First Foundation isn't the first nongovernmental bank to move to Texas to find more growth and acquisition opportunities. In 2007, Comerica moved its headquarters from Detroit to Dallas and about three years later signed a deal to acquire Sterling Bancshares in Houston.

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

Kavanaugh is building a house in the area that he expects to be ready in April.

The move marks the First Foundation's third expansion outside of California, where the first of its two entities, First Foundation Advisors, was established in 1990. In 2012 she opened a branch and advisory office in Las Vegas and two years later did the same thing in Honolulu.

Today the company has 20 offices, all but two in California, and employs approximately 500 people, approximately 75% of whom are based in Irvine. Over time, certain operations and other back-office jobs in Irvine will be relocated to Dallas, but how quickly that will happen is yet to be determined, Kavanaugh said.

"I got calls from some CEOs asking about the move," he said. “A lot of people say, 'We think it's a smart move. "

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