DALLAS — Scott Kavanaugh is a two-time bank founder.
He helped establish Commercial Capital Bank in Orange County, California, in 1998, watching it grow into a business with $6 billion in assets. But before it was sold in 2006, he was abruptly pushed out. He still got a generous payment from the sale, although he wouldn’t specify the amount, but it left him with an itch.
A few years later, Kavanaugh, 61, founded another financial institution, First Foundation Bank. Last year, he moved himself and the bank’s headquarters from California to Dallas.
“I had a lot of people say that I hadn’t created my own business,” said Kavanaugh, 61. “I really wanted to prove to myself and others that I could build a bank. It wasn’t so much for the money as to show myself I could run a franchise and business.”
First Foundation now manages $12.2 billion in assets and operates 31 locations across California, Florida, Hawaii, Nevada and Texas. For the past three months, the company reported revenue of about $100 million and net income of $29 million.
For Kavanaugh, planting First Foundation’s flag in Dallas felt like a homecoming. He had previously worked at Arthur Anderson in North Texas before leaving in 1986.
He recently sat down with The Dallas Morning News to talk about his journey from working in a grocery store for gas money to starting his own bank.
Early jobs
For his 16th birthday, Kavanaugh received a 1969 Cutlass with 190,000 miles on it and a birthday card with $5 in it. His parents said he’d need the money because the car had no gas and was only insured for a week.
“And so I was bagging groceries that afternoon,” he said. “I literally got straight in the car, and there was a grocery store a couple of miles away. They hired me on the spot.”
That job was at White Stores in Knoxville, Tennessee, where he grew up. His interest in numbers started in grade school because he had encouraging math teachers, he said.
“That piqued my interest, and I ended up graduating with an emphasis in information systems and accounting,” he said.
He attended the University of Tennessee, where he supported himself by working at a local shopping mall.
“It was largely commission-based, which was good practice because I spent 20 years in the institutional bond industry, which is 100% commission-based,” he said. “I had to be focused on growing things.”
Charting his path
After college, he received offers from each of the Big Eight accounting firms at the time. He chose Arthur Andersen in downtown Dallas but soon left because he wanted a more exciting work environment.
Kavanaugh found his stride trading stocks and bonds at Great Pacific Securities in Irvine, Calif. He was trading hundreds of millions of dollars a day and loved the fast-paced work.
“I usually had three phones handy at any given moment,” he said. “I had two phones, one to each ear, and one phone waiting.”
He worked as a trader for about 20 years before getting his first taste of banking when he helped form Commercial Capital Bank in California. He was there until about midway through 2003.
“I had an older gentleman say, ‘You need to take some time off.’ And I did,” Kavanaugh said. “And he also called me back up a few years later and said, ‘It’s probably time to get back to work.’”
In 2006, he started mapping out plans for his own bank, which ultimately took a year to get regulatory approval. He had to create a three-year business plan, as well as policies and procedures, to show regulators, he said.
His startup bank went on to raise a little over $32 million in six days to help it launch, he said.
Difficult times
First Foundation opened its doors on Oct. 1, 2007, just before banks like Washington Mutual and Countrywide Financial shut down in a financial crisis that threatened to devastate the U.S. economy. The bank was losing money. He had 28 employees and not enough loans and deposits on the books, he said.
“I was very scared,” he said. “But I felt like the only thing we could do was try to seize the opportunity and try to grow the bank when a lot of other banks were stagnant and couldn’t grow.”
First Foundation turned a profit in its first year, he said. Taking note of how the market welcomed the bank, Kavanaugh spent $1 million trying to take it public in 2014.
“I spent eight or nine days on the road trying to raise capital, and we failed,” he said. “And that was pretty brutal.”
Kavanaugh took three days off following the disappointing trip.
“When I came back, everyone was looking at me like, ‘What do we do?’ And I said, ‘Well, we’re going to tuck our hands and work hard.’”
The following year, he and his team put together a new business plan. This time, they opened the capital raise in the morning and had to close it in the afternoon because it was seven times oversubscribed, he said.
“So the market completely changed their tune after a year of us building out our business plan,” he said. “And that was a big milestone and really what launched us.”
Future concerns and growth
Kavanaugh may have built a bank during a financial crisis, but he said running a bank today is actually more challenging because of rising interest rates and inflation. As the Federal Reserve raises interest rates, deposit costs go up.
With the rise in interest rates, banks are having a harder time finding funding for loans, which come from deposits, he said.
“You could make an argument that the economy is already in a recession,” he said. “But definitely, I think the way the [Federal Reserve] is posturing right now, unfortunately, I think a lot of people are going to continue to lose jobs.”
The bank paid an average interest rate of 0.64% on all its deposits over the last three months. It reported $1.6 billion in originations for the period, twice as much as the same period last year.
Looking ahead, Kavanaugh would still like to make an acquisition in Texas. He said the bank was in negotiations with a couple of Texas banks after it moved to the state, but none of those panned out.
The bank will continue to focus on Texas growth, especially in Dallas-Fort Worth, he said. The bank’s first branch in Texas opened in Plano in May. He hopes the second Texas branch will be in Southlake.
“We want to be in vibrant economies, and one thing I think Texas and Florida provide is a very vibrant economy that’s very diverse with great opportunities for banking,” he said.
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