First Foundation in Irvine, Calif., makes no secret that its business model is built around catering to a wealthy clientele.
The $3.5 billion-asset company — founded in 1990 as a fee-only investment manager — states on its website that its target customer base consists of "mid-to-high net worth individuals." A consulting unit advises on estate planning and philanthropy. Another business helps clients buy and manage art collections.
So First Foundation's recently disclosed plan to make 7(a) loans backed by the Small Business Administration may seem odd since that program was originally created to help people unable to qualify for conventional loans. After all, individuals with more than $1 million in capital — First Foundation's definition of high-net-worth — are unlikely to need such assistance.
For the company, however, the move makes complete sense.
"When the bank had $200 million of assets, a very narrow focus was OK," said David DePillo, president of First Foundation's bank subsidiary. "Now that we're bigger, we want to deepen our support of our communities."
Regulators may have also played a not-so-subtle role. While First Foundation received a "satisfactory" Community Reinvestment Act rating earlier this year, the company was flagged for having "poor penetration among businesses of different revenue sizes."
Enter SBA lending.
First Foundation views 7(a) loans, which are made by lenders but largely guaranteed by the SBA, as a way to connect with businesses with less than $1 million in annual revenue. That's something the company has struggled to do with conventional commercial-and-industrial lending.
"This is a segment we're committed to serving," DePillo said. To oversee SBA lending, First Foundation hired veteran banker Dena Tapia, who had been a commercial underwriting manager at Umpqua Bank.
First Foundation joins a growing list of banks that have formed or expanded 7(a) programs in the last year, including the $800 million-asset Radius Bank in Boston; the $3.6 billion-asset State Bank Financial in Atlanta; the $8 billion-asset Berkshire Hills Bancorp in Pittsfield, Mass.; and the $18 billion-asset Fulton Financial in Lancaster, Pa.
Those companies' SBA initiatives represent straightforward, conventional plays to generate loan volume and fee income. While those metrics certainly matter to First Foundation, the key driver behind its effort is a desire to connect with startups, low- and moderate-income entrepreneurs and businesses in underserved markets.
"We want to be successful, but we haven't set any internal targets," DePillo said. "Serving our communities will be the primary goal. The volume we produce will be a byproduct."
Overall, the SBA's 7(a) program is on track to achieve record production in fiscal 2016, which ends Sept. 30. Through Sept. 9, the agency reported $22 billion in loans. The program guaranteed $23.6 billion of loans in the last fiscal year.
First Foundation's SBA plans represent a departure from the norm, said Kenneth Thomas, president of Community Development Fund Advisors in Miami and a longtime CRA consultant. Banks that focus on high-net-worth clients usually seek to meet Community Reinvestment Act obligations by making investments or forming a targeted strategic plan, he said.
"I like what [First Foundation] is doing," Thomas said. "I love to see banks that go the extra mile and think outside of the box. It's something that really should be encouraged."
Bob Coleman, publisher of the Coleman Report and a recognized authority on small-business lending, said he was unaware of any other boutique bank similar to First Foundation being active in the 7(a) program.
"I applaud them," Coleman said. "They're staying within their markets and getting involved in a program that will provide good returns and allow them to serve the needs of the local business community."
SBA lending also fits into First Foundation's efforts to focus more on commercial lending. The effort has been gaining traction; commercial loans, including multifamily, rose nearly 60% in the second quarter from a year earlier, to $1.4 billion.
The company has originated more than $900 million in loans so far in 2016, eclipsing its total originations from last year, DePillo said.
"It's been a very good year," he said. "Asset origination hasn't been an issue."
The long-term goal is to have some of First Foundation's new small-business clients eventually end up as part of the bank's high-net-worth portfolio.
"We want to serve them throughout their life cycle," DePillo said. "Getting in on the ground floor is something you always try to do."