When the leaders of the wealth management firm Keller Financial Group decided to charter a bank three years ago, they could not have known what gut-wrenching times lay just ahead.
"In 2007, when we opened our doors, there was this pause and we said, What did we get ourselves into?" said Scott F. Kavanaugh, the Irvine, Calif., bank's chief executive.
First Foundation Inc., which opened for business Oct. 1, 2007, came out of that crucible in good shape — thanks largely to its roots as an advisory firm, Kavanaugh said.
The holding company contains First Foundation Bank and the advisory business, now called First Foundation Advisors. Assets under management, which stood at $1.2 billion around the time of First Foundation's opening, plunged to roughly $900 million during 2008, in the teeth of the market crash, but have rebounded to $1.4 billion.
Total assets at the bank, meanwhile, have risen steadily quarter to quarter. From $36.6 million at the end of 2007, they had risen to $238 million by the end of 2009. The net loans and leases the bank reported to the Federal Deposit Insurance Corp. jumped to $197.9 million at the end of last year from $89.2 million 12 months earlier.
As of the end of March the bank had loans of $226 million and a similar amount of deposits, Kavanaugh said. "In all honesty, it's been better than we ever thought," he said.
What's more, the company has signed a lease in Pasadena for a second branch to open in August. It will allow First Foundation's expansion into the Los Angeles market, Kavanaugh said.
Investment advisory clients have clearly buoyed the bank: As much as 70% of the deposit base has come "as a result of referrals from the advisory side," the CEO said.
First Foundation is not technically a private bank. But its trust business and the fact that it was spawned by an advisory business that caters to high-net-worth clients might make it seem that way, Kavanaugh acknowledges. "Our model is what a U.S. Trust used to look like," he said. That company, which focuses on very wealthy clients, was sold in 2000 to Charles Schwab Corp. and in 2007 to Bank of America Corp.
The market and economic environment may have dealt First Foundation a bad opening hand, but they also created the opportunity to attract clients and talent from bigger organizations, according to Kavanaugh.
Its advisory business has hired executives from larger organizations. Overall, employment at First Foundation has risen above 70, and it will staff up more before the Pasadena office opens.
First Foundation made a splash when it was created. Although wealth management firms are often targeted for acquisition by banks, advisory firms seldom overturn the formula by opening banks.
Keller Financial's leaders had received inquiries from several large banks, but opted to control their company's destiny instead. The group had worked with Kavanaugh as a result of its investment in Commercial Capital Bancorp Inc., also of Irvine. Kavanaugh helped to found and run that bank, which was sold in 2006 to Washington Mutual Inc.
Kavanaugh has said he sees as an opportunity to gain investment clients who are dissatisfied with wire houses and other big firms and want more personal service. Since the beginning of 2008, First Foundation's client list has grown by more than 10%, to about 1,100, he said.
But Alois Pirker, a senior analyst at Aite Group LLC, said now that big institutions are stabilizing after mergers and reorganizations, it will likely be harder to win clients away from them. "There has been a window of opportunity, but it is closing as large firms move through their integration efforts and bring their ships to an even keel," he said.
It may still be realistic to recruit wire-house advisers, however, Pirker said. A recent Aite survey found that a mere 15% of advisers within wire houses are not contemplating leaving. "The messaging you hear from the large firms is that the attrition is over, but that may be a temporary state," Pirker said.