Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-36461
FIRST FOUNDATION INC.
(Exact name of Registrant as specified in its charter)
Delaware
20-8639702
(State or other jurisdictionof incorporation or organization)
(I.R.S. EmployerIdentification Number)
200 Crescent Court, Suite 1400 Dallas, Texas
75201
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (469) 638-9636
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
FFWM
NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 3, 2021, the registrant had 44,782,155 shares of common stock, $0.001 par value per share, outstanding
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1.
Financial Statements
1
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
40
Item 4.
Controls and Procedures
Part II. Other Information
Item 1A
Risk Factors
41
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6
Exhibits
42
SIGNATURES
S-1
(i)
PART I — FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 31,
December 31,
2021
2020
(unaudited)
ASSETS
Cash and cash equivalents
$
468,026
629,707
Securities available-for-sale
758,097
814,671
Allowance for credit losses - investments
(8,878)
(7,245)
Net securities
749,219
807,426
Loans held for sale
513,054
505,404
Loans held for investment
5,117,206
4,803,799
Allowance for credit losses - loans
(23,180)
(24,200)
Net loans
5,094,026
4,779,599
Investment in FHLB stock
17,250
Deferred taxes
6,941
8,603
Premises and equipment, net
7,817
8,012
Goodwill and intangibles
94,864
95,296
Other assets
100,635
105,863
Total Assets
7,051,832
6,957,160
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits
6,245,821
5,913,433
Borrowings
12,000
269,000
Accounts payable and other liabilities
79,581
79,016
Total Liabilities
6,337,402
6,261,449
Shareholders’ Equity
45
Additional paid-in-capital
434,346
433,941
Retained earnings
265,970
247,638
Accumulated other comprehensive income (loss)
14,069
14,087
Total Shareholders’ Equity
714,430
695,711
Total Liabilities and Shareholders’ Equity
(See accompanying notes to the consolidated financial statements)
CONSOLIDATED INCOME STATEMENTS - UNAUDITED
Three Months Ended
Interest income:
Loans
53,531
54,884
Securities
5,206
6,997
FHLB stock, fed funds sold and interest-bearing deposits
401
457
Total interest income
59,138
62,338
Interest expense:
4,623
14,646
286
2,824
Total interest expense
4,909
17,470
Net interest income
54,229
44,868
Provision for credit losses
360
4,079
Net interest income after provision for credit losses
53,869
40,789
Noninterest income:
Asset management, consulting and other fees
8,349
7,762
Other income
3,559
2,913
Total noninterest income
11,908
10,675
Noninterest expense:
Compensation and benefits
21,526
19,857
Occupancy and depreciation
6,160
5,512
Professional services and marketing costs
2,122
1,754
Customer service costs
1,770
2,372
Other expenses
2,933
3,362
Total noninterest expense
34,511
32,857
Income before taxes on income
31,266
18,607
Taxes on income
8,911
5,396
Net income
22,355
13,211
Net income per share:
Basic
0.50
0.30
Diluted
0.29
Shares used in computation:
44,707,718
44,669,661
45,012,205
44,952,669
2
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY - UNAUDITED
(In thousands, except share amounts)
Additional
Accumulated Other
Number
Paid-in
Retained
Comprehensive
of Shares
Amount
Capital
Earnings
Income (Loss)
Total
Balance: December 31, 2019
44,670,743
433,775
175,773
4,276
613,869
—
Other comprehensive income
547
Stock based compensation
767
Cash dividend
(3,132)
Issuance of common stock:
Exercise of options
86,000
645
Stock grants – vesting of restricted stock units
83,057
Stock repurchase
(224,334)
(2,824)
Balance: March 31, 2020
44,615,466
432,363
185,852
4,823
623,083
Balance: December 31, 2020
44,667,650
(18)
995
(4,023)
47,000
354
108,085
Repurchase of shares from restricted shares vesting
(40,580)
(944)
Balance: March 31, 2021
44,782,155
3
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME - UNAUDITED
(In thousands)
Three Months Ended March 31,
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities arising during the period
(25)
772
Other comprehensive income (loss) before tax
Income tax expense (benefit) related to items of other comprehensive income
(7)
225
Other comprehensive income (loss)
Total comprehensive income
22,337
13,758
4
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
For the Three Months Ended
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses - loans
(1,273)
2,279
Provision for credit losses - securities AFS
1,633
1,800
Stock–based compensation expense
Depreciation and amortization
823
763
Deferred tax expense
1,669
1,722
Amortization of premium on securities
131
Amortization of core deposit intangible
432
519
Amortization of mortgage servicing rights - net
479
361
Amortization of premiums on purchased loans - net
(4,174)
Gain from hedging activities
(36)
Valuation allowance on mortgage servicing rights - net
(37)
Decrease (increase) in other assets
4,786
(7,355)
Increase (decrease) in accounts payable and other liabilities
626
(8,973)
Net cash provided by operating activities
32,619
884
Cash Flows from Investing Activities:
Net increase in loans
(321,271)
(263,552)
Purchase of premises and equipment
(628)
(977)
Recovery of allowance for credit losses
406
451
Purchases of AFS securities
(3,000)
Maturities of AFS securities
53,418
55,443
Proceeds from redemption of securities
3,000
Sale of FHLB stock, net
351
Net cash used in investing activities
(265,075)
(211,284)
Cash Flows from Financing Activities:
Increase in deposits
332,388
139,683
Net (decrease) increase in FHLB advances
(250,000)
51,000
Line of credit net change – borrowings (paydowns), net
(7,000)
Dividends paid
Proceeds from exercise of stock options
Repurchase of stock
Net cash provided by financing activities
70,775
185,372
Decrease in cash and cash equivalents
(161,681)
(25,028)
Cash and cash equivalents at beginning of year
65,387
Cash and cash equivalents at end of period
40,359
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes
5,209
Interest
6,221
19,804
Noncash transactions:
Transfer of loans to loans held for sale
8,195
10,163
Chargeoffs against allowance for credit losses
214
530
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2021 - UNAUDITED
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements include First Foundation Inc. (“FFI”) and its wholly owned subsidiaries: First Foundation Advisors (“FFA”) and First Foundation Bank (“FFB” or the “Bank”) and the wholly owned subsidiaries of FFB, First Foundation Insurance Services (“FFIS”), Blue Moon Management, LLC, and First Foundation Public Finance (“FFPF”) (collectively referred to as the “Company”). FFI also has two inactive wholly owned subsidiaries, First Foundation Consulting (“FFC”) and First Foundation Advisors, LLC (“FFA LLC”). All intercompany balances and transactions have been eliminated in consolidation. The results of operations reflect any interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. The results for the 2021 interim periods are not necessarily indicative of the results expected for the full year.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.
The accompanying unaudited consolidated financial statements include all information and footnotes required for interim financial statement presentation. These financial statements assume that readers have read the most recent Annual Report on Form 10-K which contains the latest available audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2020.
Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 2021 presentation.
Recent Accounting Pronouncements
In October 2020, the FASB issued Accounting Standards Update ASU 2020-10, “Codification Improvements”. ASU 2020-10 amends certain guidance that may have been applied in an inconsistent manner by certain entities. The effective date for the amendments in this ASU are effective for annual periods after December 15, 2020. The adoption of ASU 2020-10 is not expected to have a significant impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. ASU 2020-04 provides optional guidance for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU are effective as of March 12, 2020 through December 31, 2022. The adoption of ASU 2020-04 is not expected to have a significant impact on the Company’s consolidated financial statements.
NOTE 2: FAIR VALUE MEASUREMENTS
Assets Measured at Fair Value on a Recurring Basis
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize
6
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Securities available for sale and investments in equity securities are measured at fair value on a recurring basis depending upon whether the inputs are Level 1, 2 or 3 as described above.
The following tables show the recorded amounts of assets and liabilities measured at fair value on a recurring basis as of:
Fair Value Measurement Level
(dollars in thousands)
Level 1
Level 2
Level 3
March 31, 2021:
Investment securities available for sale:
Agency mortgage-backed securities
673,164
Beneficial interest – FHLMC securitizations
17,893
Corporate bonds
56,554
Other
1,608
501
1,107
Investment in equity securities
434
Total assets at fair value on a recurring basis
749,653
935
730,825
December 31, 2020:
723,995
23,463
58,358
1,610
503
338
807,764
841
783,460
The decrease in Level 3 assets from December 31, 2020 was due to securitization paydowns and to $1.6 million in provisions for credit losses in the first three months of 2021.
Assets Measured at Fair Value on a Nonrecurring Basis
From time to time, we may be required to measure other assets at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
7
Loans. Loans measured at fair value on a nonrecurring basis include collateral dependent loans held for investment. The specific reserves for these loans are based on collateral value, net of estimated disposition costs and other identified quantitative inputs. Collateral value is determined based on independent third-party appraisals or internally-developed discounted cash flow analyses. Internal discounted cash flow analyses are also utilized to estimate the fair value of these loans, which considers internally-developed, unobservable inputs such as discount rates, default rates, and loss severity. When the fair value of the collateral is based on an observable market price or a current appraised value, we measure the impaired loan at nonrecurring Level 2. When an appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price or a discounted cash flow has been used to determine the fair value, we measure the impaired loan at nonrecurring Level 3. The total collateral dependent impaired Level 3 loans were $3.0 million and $3.1 million at March 31, 2021 and December 31, 2020, respectively. There were $1.0 million and $1.1 million in specific reserves related to these loans at March 31, 2021 and December 31, 2020, respectively.
Real Estate Owned. The fair value of real estate owned is based on external appraised values that include adjustments for estimated selling costs and assumptions of market conditions that are not directly observable, resulting in a Level 3 classification.
Mortgage Servicing Rights. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income, resulting in a Level 3 classification. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Significant assumptions in the valuation of these Level 3 mortgage servicing rights as of March 31, 2021 included prepayment rates ranging from 15% to 20% and a discount rate of 10%.
Fair Value of Financial Instruments
FASB ASC 825-10, “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate such value. The methodologies for estimating the fair value of financial assets and financial liabilities measured at fair value on a recurring and non-recurring basis are discussed above. The estimated fair value amounts have been determined by management using available market information and appropriate valuation methodologies and are based on the exit price notion set forth by ASU 2016-01. In cases where quoted market prices are not available, fair values are based on estimates using present value or other market value techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The aggregate fair value amounts presented below do not represent the underlying value of the Company.
Fair value estimates are made at a discrete point in time based on relevant market information and other information about the financial instruments. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based in large part on judgments we make primarily regarding current economic conditions, risk characteristics of various financial instruments, prepayment rates, and future expected loss experience. These estimates are subjective in nature and invariably involve some inherent uncertainties. Additionally, unexpected changes in events or circumstances can occur that could require us to make changes to our assumptions and which, in turn, could significantly affect and require us to make changes to our previous estimates of fair value.
In addition, the fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of existing and anticipated future customer relationships and the value of assets and liabilities that are not considered financial instruments, such as premises and equipment and other real estate owned.
8
The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and Cash Equivalents. The fair value of cash and cash equivalents approximates its carrying value.
Interest-Bearing Deposits with Financial Institutions. The fair values of interest-bearing deposits maturing within ninety days approximate their carrying values.
Investment Securities Available for Sale. Investment securities available-for-sale are measured at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the securities are classified as Level 3 and reliance is placed upon internally developed models, and management judgment and evaluation for valuation. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include beneficial interests in FHLMC securitizations. Significant assumptions in the valuation of these Level 3 securities as of March 31, 2021 and December 31, 2020 included prepayment rates ranging from 25% to 35% and discount rates ranging from 8.33% to 10%.
Federal Home Loan Bank Stock. The Bank is a member of the Federal Home Loan Bank (the “FHLB”). As a member, we are required to own stock of the FHLB, the amount of which is based primarily on the level of our borrowings from this institution. The fair value of the stock is equal to the carrying amount, is classified as restricted securities and is periodically evaluated for impairment based on our assessment of the ultimate recoverability of our investments in that stock. Any cash or stock dividends paid to us on such stock are reported as income.
Loans Held For Sale. The fair value of loans held for sale is determined using secondary market pricing.
Loans Held for Investment. The fair value for loans with variable interest rates is the carrying amount. The fair value of fixed rate loans is derived by calculating the discounted value of future cash flows expected to be received by the various homogeneous categories of loans or by reference to secondary market pricing. All loans have been adjusted to reflect changes in credit risk.
Deposits. The fair value of demand deposits, savings deposits, and money market deposits is defined as the amounts payable on demand. The fair value of fixed maturity certificates of deposit is estimated based on the discounted value of the future cash flows expected to be paid on the deposits.
Borrowings. The fair value of borrowings is the carrying value of overnight FHLB advances that approximate fair value because of the short-term maturity of this instrument, resulting in a Level 2 classification. The fair value of term borrowings is derived by calculating the discounted value of future cash flows expected to be paid out by the Company.
9
The carrying amounts and estimated fair values of financial instruments are as follows as of:
Carrying
Value
Assets:
Securities AFS, net
518,368
Loans, net
5,146,920
5,480,156
765,666
6,245,822
5,000
7,000
510,638
4,829,258
4,934,537
978,897
5,913,434
255,000
14,000
NOTE 3: SECURITIES
The following table provides a summary of the Company’s securities AFS portfolio as of:
Amortized
Gross Unrealized
Allowance for
Estimated
Cost
Gains
Losses
Credit Losses
Fair Value
656,055
18,016
(907)
Beneficial interests in FHLMC securitization
26,637
134
54,000
2,554
1,519
89
738,211
20,793
705,752
18,243
30,497
211
57,000
1,358
1,512
98
794,761
19,910
US Treasury securities of $0.5 million as of March 31, 2021 and December 31, 2020 that are included in the table above as Other are pledged as collateral to the State of California to meet regulatory requirements related to the Bank’s
10
trust operations. As of March 31, 2021, $191.8 million of agency mortgage-backed securities are pledged as collateral as support for the Bank’s obligations under loan sales and securitization agreements entered into from 2018 through 2020.
The table below indicates, as of March 31, 2021, the gross unrealized losses and fair values of our investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
Securities with Unrealized Loss at March 31, 2021
Less than 12 months
12 months or more
Fair
Unrealized
Loss
51,555
Total temporarily impaired securities
There were no unrealized losses on our investments as of December 31, 2020.
Unrealized losses in agency mortgage backed securities, beneficial interests in FHLMC securitizations, and other securities have not been recognized into income because the issuer bonds are of high credit quality, management does not intend to sell, it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in discount rates and assumptions regarding future interest rates. The fair value is expected to recover as the bonds approach maturity.
Three Months Ended March 31, 2021:
7,245
8,878
Three Months Ended March 31, 2020:
Due to a change in expected cash flows of an interest only strip security, $1.6 million and $1.8 million in allowances were taken in the three months ended March 31, 2021 and 2020, respectively. The allowances were included as a charge in provision for credit losses on the consolidated income statement.
11
The scheduled maturities of securities AFS and the related weighted average yields were as follows for the periods indicated:
Less than
1 Through
5 Through
After
1 Year
5 years
10 Years
March 31, 2021
Amortized Cost:
500
1,019
55,519
Weighted average yield
1.85
%
2.99
5.33
5.26
Estimated Fair Value:
58,162
December 31, 2020
1,012
58,512
1.83
2.81
5.39
5.32
59,968
Agency mortgage-backed securities and beneficial interests in FHLMC securitizations are excluded from the above table because such securities are not due at a single maturity date. The weighted average yield of the agency mortgage-backed securities and beneficial interests as of March 31, 2021 and 2020 were 2.36% and 2.39%, respectively.
12
NOTE 4: LOANS
The following is a summary of our loans as of:
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily
2,425,182
2,247,542
Single family
844,532
806,014
Total real estate loans secured by residential properties
3,269,714
3,053,556
Commercial properties
701,920
747,807
Land and construction
57,227
55,832
Total real estate loans
4,028,861
3,857,195
Commercial and industrial loans
1,063,937
918,676
Consumer loans
14,243
18,888
Total loans
5,107,041
4,794,759
Premiums, discounts and deferred fees and expenses
10,165
9,040
The following table summarizes our delinquent and nonaccrual loans as of:
Past Due and Still Accruing
Total Past
90 Days
Due and
30–59 Days
60-89 Days
or More
Nonaccrual
Current
Real estate loans:
Residential properties
218
10,822
11,050
3,269,213
3,280,263
1,441
1,659
3,111
699,144
702,255
57,165
827
1,200
4,161
6,188
1,057,065
1,063,253
6,644
7,626
14,270
2,486
6,654
1,211
16,642
26,993
5,090,213
Percentage of total loans
0.05
0.13
0.02
0.33
0.53
35
10,947
10,982
3,042,574
951
240
4,544
5,735
742,072
1,013
411
152
5,137
6,713
911,963
1,999
651
20,628
23,430
4,771,329
0.04
0.01
0.00
0.43
0.49
13
The following table summarizes our nonaccrual loans as of:
with Allowance
with no Allowance
for Credit Losses
2,968
7,854
2,395
1,766
5,363
11,279
2,988
7,959
2,580
2,557
5,568
15,060
The following table presents the loans classified as troubled debt restructurings (“TDR”) by accrual and nonaccrual status as of:
Accrual
Residential loans
Commercial real estate loans
1,086
1,255
2,341
1,277
2,384
1,011
2,334
3,345
1,041
2,832
3,873
3,297
3,589
6,886
3,348
4,109
7,457
The following table provides information on loans that were modified as TDRs for the following periods:
Outstanding Recorded Investment
Number of loans
Pre-Modification
Post-Modification
Financial Impact
378
Year Ended December 31, 2020
507
All of these loans were classified as a TDR as a result of a reduction in required principal payments and an extension of the maturity date of the loans. These loans have been paying in accordance with the terms of their restructure.
14
NOTE 5: ALLOWANCE FOR CREDIT LOSSES
The following is a roll forward of the Bank’s allowance for credit losses related to loans for the following periods:
Beginning
Adoption of
Provision for
Ending
Balance
ASC 326
Charge-offs
Recoveries
5,115
918
6,033
8,711
(2,755)
5,956
892
3,070
3,962
9,249
(2,379)
(214)
7,062
233
(66)
167
24,200
(1,212)
23,180
8,423
363
(2,397)
6,389
4,166
3,760
(2,988)
4,938
573
92
679
1,344
7,448
2,756
(530)
10,125
190
204
20,800
4,215
(1,936)
23,000
Year Ended December 31, 2020:
(3,671)
785
227
2,642
(1,844)
1,003
43
26
15
The following table presents the balance in the allowance for credit losses and the recorded investment in loans by impairment method as of:
Allowance for Credit Losses
Loans Evaluated
Individually
Collectively
Allowance for credit losses:
1,032
5,001
482
5,474
856
6,206
2,370
20,810
Loans:
12,303
3,267,960
14,130
688,125
5,463
1,057,790
31,896
5,085,310
1,059
4,056
374
8,337
956
8,293
2,389
21,811
12,414
3,041,142
17,304
730,503
6,472
912,204
36,190
4,758,569
16
The following tables present risk categories of loans based on year of origination, as of:
Revolving
2019
2018
2017
Prior
Loans secured by Real Estate:
Residential
Pass
139,280
896,996
582,985
436,886
215,305
162,231
2,433,683
Special Mention
Substandard
Single Family
94,368
164,138
73,338
96,340
92,646
287,645
24,794
833,269
982
1,008
1,923
7,064
3,316
95,551
294,709
28,136
846,580
Commercial Real Estate
8,898
40,186
90,391
103,673
125,836
305,301
674,285
726
10,805
1,617
13,148
5,903
2,314
6,605
14,822
97,020
114,478
128,150
313,523
192
16,366
29,403
10,538
666
Commercial
187,761
308,847
123,816
36,671
14,039
28,234
344,781
1,044,149
1,293
2,037
3,154
1,419
585
217
3,167
11,872
1,171
236
1,173
250
2,691
1,711
7,232
189,054
312,055
127,206
39,263
14,874
31,142
349,659
Consumer
165
1,297
6,738
6,059
430,318
1,410,524
886,896
704,270
458,364
790,815
375,634
5,056,821
3,880
12,224
1,567
1,834
3,193
26,028
6,139
4,487
16,360
5,027
34,357
431,611
1,413,732
896,915
717,667
464,418
809,009
383,854
17
2016
774,701
638,237
469,866
218,470
82,941
63,328
2,247,543
173,563
83,311
110,560
95,888
107,568
196,692
25,014
792,596
986
1,946
7,134
3,351
12,431
98,820
203,826
28,365
806,013
46,260
100,432
120,230
129,120
119,719
194,533
710,294
743
16,278
2,333
157
19,511
5,929
2,336
2,515
7,222
18,002
107,104
136,508
131,456
124,567
201,912
257
15,923
27,792
10,532
706
622
377,500
146,279
54,910
15,868
13,180
16,823
270,604
895,164
2,058
3,922
1,868
579
297
448
6,107
15,279
1,226
316
1,188
259
2,459
281
2,504
8,233
380,784
150,517
57,966
16,706
15,936
17,552
279,215
1,321
6,784
100
8,123
1,374,838
984,182
784,679
469,881
330,898
472,098
303,741
4,720,317
4,665
18,146
1,565
2,630
605
35,776
6,245
4,541
4,974
14,637
5,855
38,666
1,378,122
995,092
804,013
475,987
338,502
487,340
315,703
18
The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses and the related ACL allocated to these loans:
Equipment/
ACL
Real Estate
Cash
Receivables
Allocation
10,032
1,022
Commercial loans
10,282
10,144
1,051
122
372
44
10,516
1,095
NOTE 6: LOAN SALES AND MORTGAGE SERVICING RIGHTS
In 2020, FFB sold $553 million of multifamily loans and recognized a gain of $15.1 million. For sales of multifamily loans, FFB retained servicing rights for the majority of these loans and recognized mortgage servicing rights as part of the transactions. As of March 31, 2021 and December 31, 2020, mortgage servicing rights were $7.4 million and $7.9 million, respectively, and the amount of loans serviced for others totaled $1.6 and $1.5 billion at March 31, 2021 and December 31, 2020, respectively. The mortgage servicing rights as of March 31, 2021 and December 31, 2020 are net of a $1.4 million valuation allowance. Servicing fees for the first three months of 2021 and 2020 were $0.5 million and $1.6 million, respectively.
NOTE 7: DEPOSITS
The following table summarizes the outstanding balance of deposits and average rates paid thereon as of:
Weighted
Average Rate
Demand deposits:
Noninterest-bearing
2,182,714
1,655,847
Interest-bearing
1,012,448
0.295
871,289
0.372
Money market and savings
2,284,994
0.393
2,407,401
0.549
Certificates of deposits
765,665
0.399
978,896
0.591
0.241
0.376
19
At March 31, 2021, of the $397 million of certificates of deposits of $250,000 or more, $392 million mature within one year and $5 million mature after one year. Of the $369 million of certificates of deposit of less than $250,000, $306 million mature within one year and $63 million mature after one year. At December 31, 2020, of the $416 million of certificates of deposits of $250,000 or more, $409 million mature within one year and $7 million mature after one year. Of the $563 million of certificates of deposit of less than $250,000, $520 million mature within one year and $43 million mature after one year.
NOTE 8: BORROWINGS
At March 31, 2021, our borrowings consisted of $5 million in FHLB zero interest advances, and $7 million of borrowings under a holding company line of credit. At December 31, 2020, our borrowings consisted of $255 million of overnight FHLB advances at the Bank and $14 million of borrowings under a holding company line of credit. The zero interest advance outstanding at March 31, 2021 matures in April 2021. At March 31, 2021, the interest rate on the holding company line of credit was 3.74%.
FHLB advances are collateralized primarily by loans secured by single family, multifamily, and commercial real estate properties with a carrying value of $3.6 billion as of March 31, 2021. As a matter of practice, the Bank provides substantially all of its qualifying loans as collateral to the FHLB or the Federal Reserve Bank. The Bank’s total borrowing capacity from the FHLB at March 31, 2021 was $2.3 billion. In addition to the $5 million borrowing at March 31, 2021, the Bank had in place $277 million of letters of credit from the FHLB which are used to meet collateral requirements for borrowings from the State of California and local agencies.
During 2017, FFI entered into a loan agreement with an unaffiliated lender that provides for a revolving line of credit for up to $40 million. The loan agreement matures in five years, with an option to extend the maturity date subject to certain conditions, and bears interest at 90 day LIBOR plus 350 basis points (3.50%). FFI’s obligations under the loan agreement are secured by, among other things, a pledge of all of its equity in FFB. We are required to meet certain financial covenants during the term of the loan, including minimum capital levels and limits on classified assets. As of March 31, 2021 and December 31, 2020, FFI was in compliance with the covenants on this loan agreement.
The Bank also has $195 million available borrowing capacity through unsecured fed funds lines, ranging in size from $20 million to $100 million, with five other financial institutions, and a $188 million secured line with the Federal Reserve Bank, secured by single family loans. None of these lines had outstanding borrowings as March 31, 2021. Combined, the Bank’s unused lines of credit as of March 31, 2021 and December 31, 2020 were $2.7 billion and $2.4 billion, respectively. The average balance of overnight borrowings during all of 2020 was $56 million.
20
NOTE 9: EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock that would then share in earnings. The following table sets forth the Company’s unaudited earnings per share calculations for the three months ended March 31:
Quarter Ended
March 31, 2020
(dollars in thousands, except per share amounts)
Basic common shares outstanding
Effect of options, restricted stock and contingent shares issuable
304,487
283,008
Diluted common shares outstanding
Earnings per share
Based on a weighted average basis, restricted stock units to purchase 102,708 and 118,750 shares of common stock were excluded for the three months ended March 31, 2021 and 2020, respectively, because their effect would have been anti-dilutive.
NOTE 10: SEGMENT REPORTING
For the three months ended March 31, 2021 and 2020, the Company had two reportable business segments: Banking (FFB and FFIS) and Wealth Management (FFA). The results of FFI and any elimination entries are included in the column labeled Other. The following tables show key operating results for each of our business segments used to arrive at our consolidated totals for the following periods:
Wealth
Banking
Management
Interest income
Interest expense
4,848
61
54,290
(61)
Noninterest income
5,309
6,923
(324)
Noninterest expense
28,579
5,731
201
Income (loss) before taxes on income
30,660
1,192
(586)
17,440
30
44,898
(30)
4,659
6,488
(472)
26,229
6,165
463
19,249
323
(965)
21
NOTE 11: SUBSEQUENT EVENTS
Cash Dividend
On April 27, 2021, the Board of Directors of the Company declared a quarterly cash dividend of $0.09 per common share to be paid on May 17, 2021 to stockholders of record as of the close of business on May 7, 2021.
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to facilitate the understanding and assessment of significant changes and trends in our businesses that accounted for the changes in our results of operations in the three months ended March 31, 2021 as compared to our results of operations in the three months ended March 31, 2020; and our financial condition at March 31, 2021 as compared to our financial condition at December 31, 2020. This discussion and analysis is based on and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto contained elsewhere in this report and our audited consolidated financial statements for the year ended December 31, 2020, and the notes thereto, which are set forth in Item 8 of our Annual Report on Form 10-K (as amended, our “2020 10-K”) which we filed with the Securities and Exchange Commission (“SEC”) on February 26, 2021.
Forward-Looking Statements
Statements contained in this report that are not historical facts or that discuss our expectations, beliefs or views regarding our future financial performance or future financial condition, or financial or other trends in our business or in the markets in which we operate, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” “forecast” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Such forward-looking statements are based on current information that is available to us, and on assumptions that we make, about future events or economic or financial conditions or trends over which we do not have control. In addition, our businesses and the markets in which we operate are subject to a number of risks and uncertainties. Those risks and uncertainties, and unexpected future events, could cause our financial condition or actual operating results in the future to differ, possibly significantly, from our expected financial condition and operating results that are set forth in the forward-looking statements contained in this report.
The principal risks and uncertainties to which our businesses are subject are discussed in this Item 2 and under the heading “Risk Factors” in our 2020 10-K. Therefore, you are urged to read not only the information contained in this Item 2, but also the risk factors and other cautionary information contained under the heading “Risk Factors” in our 2020 10-K, which qualify the forward-looking statements contained in this report.
The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and may continue to adversely affect, our business, operations, financial performance and prospects. Even after the COVID-19 pandemic subsides, it is possible that the U.S. and other major economies experience or continue to experience a prolonged recession, which could materially and adversely affect our business, operations, financial performance and prospects. Statements about the effects of the COVID-19 pandemic on our business, operations, financial performance and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us.
Due to these risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements contained in this report and not to make predictions about our future financial performance based solely on our historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this report or in our 2020 10-K, except as may otherwise be required by applicable law or government regulations.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and accounting practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make estimates and assumptions regarding
circumstances or trends that could materially affect the value of those assets, such as economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets. Those estimates and assumptions are made based on current information available to us regarding those economic conditions or trends or other circumstances. If changes were to occur in the events, trends or other circumstances on which our estimates or assumptions were based, or other unanticipated events were to occur that might affect our operations, we may be required under GAAP to adjust our earlier estimates and to reduce the carrying values of the affected assets on our balance sheet, generally by means of charges against income, which could also affect our results of operations in the fiscal periods when those charges are recognized.
Allowance for Credit Losses - Securities Available-for-Sale (“AFS”) - For securities AFS in an unrealized loss position, the Company first evaluates whether it intends to sell, or whether it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the security amortized cost basis is written down to fair value through income. If the criteria is not met, the Company is required to assess whether the decline in fair value has resulted from credit losses or noncredit-related factors. If the present value of expected cash flows to be collected is less than the amortized cost basis, a credit loss exists, and an allowance for credit loss is recorded through income as a component of provision for credit loss expense. If the assessment indicates that a credit loss does not exist, the Company records the decline in fair value through other comprehensive income, net of related income tax effects. The Company has made the election to exclude accrued interest receivable on securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. See Note 4, Securities, for additional information related to the Company’s allowance for credit losses on securities AFS.
Allowance for Credit Losses - Loans. Our ACL for loans and investments are established through a provision for credit losses charged to expense and may be reduced by a recapture of previously established loss reserves, which are also reflected in the statement of income. Loans and investments are charged against the ACL when management believes that collectability of the principal is unlikely. The ACL for loans is an amount that management believes will be adequate to absorb estimated losses on existing loans that may become uncollectible based on an evaluation of the collectability of loans and prior loan loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions and certain other subjective factors that may affect the borrower’s ability to pay. While we use the best information available to make this evaluation, future adjustments to our ACL may be necessary if there are significant changes in economic or other conditions that can affect the collectability in full of loans and investments in our loan or investment portfolios.
Utilization and Valuation of Deferred Income Tax Benefits. We record as a “deferred tax asset” on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions (collectively “tax benefits”) that we believe will be available to us to offset or reduce income taxes in future periods. Under applicable federal and state income tax laws and regulations, tax benefits related to tax loss carryforwards will expire if they cannot be used within specified periods of time. Accordingly, the ability to fully use our deferred tax asset related to tax loss carryforwards to reduce income taxes in the future depends on the amount of taxable income that we generate during those time periods. At least once each year, or more frequently, if warranted, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the amount of the tax benefits available to us, that it is more likely than not that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the amount of the tax benefits available to us that it has become more likely than not that we will be unable to utilize those tax benefits in full prior to their expiration, then we would establish a valuation allowance to reduce the deferred tax asset on our balance sheet to the amount with respect to which we believe it is still more likely than not that we will be able to use to offset or reduce taxes in the future. The establishment of such a valuation allowance, or any increase in an existing valuation allowance, would be effectuated through a charge to the provision for income taxes or a reduction in any income tax credit for the period in which such valuation allowance is established or increased.
24
We have two business segments, “Banking” and “Wealth Management.” Banking includes the operations of FFB and FFIS and Wealth Management includes the operations of FFA. The financial position and operating results of the stand-alone holding company, FFI, are included under the caption “Other” in certain of the tables that follow, along with any consolidation elimination entries.
Overview and Recent Developments
Our results of operations for the first three months of 2021 include:
The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government. As the restrictive measures have been eased during 2020 and into 2021, the U.S. economy has begun to recover and with the availability and distribution of a COVID-19 vaccine, we anticipate continued improvements in commercial and consumer activity and the U.S. economy. Commercial activity has improved but has not returned to the levels existing prior to the outbreak of the pandemic, which may result in our customers’ inability to meet their loan obligations to us and reduce demand for loans and other services we offer.
During the past 12 months, Congress, the President, and the Federal Reserve have taken actions designed to cushion the economic fallout from the COVID-19 pandemic. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion economic stimulus package. In December 2020, Congress passed a $900 billion aid package, which extends certain relief provisions under the CARES Act, and in March 2021, Congress passed another $1.9 trillion aid package, which builds upon many of the measures in the CARES Act. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have and may continue to have a material impact on our operations and financial results.
In response to the potential impact on liquidity resulting from the COVID-19 pandemic and to encourage banks to work with borrowers, in accordance with the CARES Act, FASB issued accounting guidelines which provide that certain forbearances or restructurings of loans completed as a result of the COVID-19 pandemic need not be classified as troubled debt restructures.
25
Results of Operations
The primary sources of revenue for Banking are net interest income, fees from its deposits and trust services, gains on sales of loans, certain loan fees, and consulting fees. The primary sources of revenue for Wealth Management are asset management fees assessed on the balance of assets under management (“AUM”). Compensation and benefit costs, which represent the largest component of noninterest expense, accounted for 59% and 78%, respectively, of the total noninterest expense for Banking and Wealth Management in the three months ended March 31, 2021.
The following table shows key operating results for each of our business segments for the quarter ended March 31:
2021:
2020:
General. Our net income and income before taxes in the three months ended March 31, 2021 were $22.4 million and $31.3 million, respectively, as compared to $13.2 million and $18.6 million, respectively, in the three months ended March 31, 2020. The $12.7 million increase in income before taxes was the result of a $11.4 million increase in income before taxes for Banking, a $0.9 million increase in income before taxes for Wealth Management and a $ 0.3 million decrease in corporate noninterest expenses. The increase in Banking was due to higher net interest income, higher noninterest income and lower provision for credit losses and noninterest expenses. The increase in Wealth Management was due to higher noninterest income and lower noninterest expenses.
Net Interest Income. The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net interest margin:
Quarter Ended March 31:
Average
Balances
Yield /Rate
Interest-earning assets:
5,383,745
3.99
5,082,152
4.32
772,204
2.70
999,625
2.80
FHLB stock, fed funds, and deposits
714,379
0.23
62,020
2.96
Total interest-earning assets
6,870,328
3.45
6,143,797
4.06
Noninterest-earning assets:
Nonperforming assets
18,153
11,924
189,640
173,929
Total assets
7,078,121
6,329,650
Interest-bearing liabilities:
Demand deposits
970,431
874
0.37
359,410
0.81
2,342,511
2,582
0.45
1,373,321
4,395
1.29
Certificates of deposit
861,048
1,167
0.55
1,973,176
9,525
1.94
Total interest-bearing deposits
4,173,990
3,705,907
1.59
206,085
0.56
682,936
1.66
Total interest-bearing liabilities
4,380,075
4,388,843
1.60
Noninterest-bearing liabilities:
1,930,737
1,266,328
Other liabilities
66,854
57,036
Total liabilities
6,377,666
5,712,207
Shareholders’ equity
700,455
617,443
Total liabilities and equity
Net Interest Income
Net Interest Rate Spread
3.00
2.46
Net Interest Margin
3.16
2.92
Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by prior volume) and mix of interest-earning assets and interest-bearing liabilities. Variances attributable to both rate and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the rate variance. The following table provides a breakdown of the changes in net interest income due to volume and rate changes for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020:
27
March 31, 2021 vs. 2020
Increase (Decrease) due to
Volume
Rate
Interest earned on:
3,068
(4,421)
(1,353)
(1,540)
(251)
(1,791)
FHLB stock, fed funds and deposits
728
(784)
(56)
2,256
(5,456)
(3,200)
Interest paid on:
715
(567)
148
2,049
(3,862)
(1,813)
(3,658)
(4,700)
(8,358)
(1,298)
(1,240)
(2,538)
(2,192)
(10,369)
(12,561)
4,448
4,913
9,361
Net interest income increased 21% from $44.9 million in the three months ended March 31, 2020, to $54.3 million in the three months ended March 31, 2021 due to a 12% increase in interest-earning assets and an increase in the net interest rate spread. The net interest rate spread increased from 2.46% in the three months ended March 31, 2020 to 3.00% in the three months ended March 31, 2021 due to a decrease in the cost of interest-bearing liabilities, from 1.60% in the three months ended March 31, 2020, to 0.45% in the three months ended March 31, 2021, which was partially offset by a decrease in yield on interest-earning assets, from 4.06% in the three months ended March 31, 2020, to 3.45% in the three months ended March 31, 2021. The decrease in the cost of interest-bearing liabilities was due to decreased costs of interest-bearing deposits, resulting from decreases in deposit market rates, and decreased costs of borrowings, as the average rate on FHLB advances and other borrowings decreased from 1.66% in the three months ended March 31, 2020, to 0.56% in the three months ended March 31, 2021. The net interest margin decreased due to decreases in yields on loans and securities and an increase in the proportion of deposits to total interest-earning assets. The yield on loans decreased due to accelerated payoffs of higher yielding loans during the last year and the decrease in market rates, which resulted in lower rates on loans added to the portfolio. The average balance outstanding under the holding company line of credit increased from $2.3 million in the three months ended March 31, 2020 to $6.6 million in the three months ended March 31, 2021.
Provision for credit losses. The provision for credit losses represents our estimate of the amount necessary to be charged against the current period’s earnings to maintain the ACL for loans and investments at a level that we consider adequate in relation to the estimated losses inherent in the loan and investment portfolios. The provision for credit losses for loans is impacted by changes in loan balances as well as changes in estimated loss assumptions and charge-offs and recoveries. The amount of the provision for loans also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions and certain other subjective factors that may affect the ability of borrowers to meet their repayment obligations to us. The provision for credit losses in the three months ended March 31, 2021 and 2020 was $0.4 million and $4.1 million, respectively. The decrease to $0.4 million provision for credit losses in the three months ended March 31, 2021 was a result of improvement in the economic scenario outlook. The $4.1 million provision for credit losses in the first quarter of 2020 was impacted by the adverse change in economic conditions required to be contemplated under CECL and a $1.8 million charge related to impairment in an interest only strip security.
Noninterest income. Noninterest income for Banking includes fees charged to clients for trust services and deposit services, consulting fees, prepayment and late fees charged on loans, gain on sale of loans, and gains and losses from capital market activities and insurance commissions. The following table provides a breakdown of noninterest income for Banking for the three months ended March 31, 2021 and 2020:
28
Three Months Ended March 31:
Trust fees
1,668
1,464
Consulting fees
101
86
Deposit charges
379
Loan related fees
2,944
2,573
213
Noninterest income in Banking in the three months ended March 31, 2021 was $0.7 million higher than the three months ended March 31, 2020 due primarily to a $0.4 million increase in loan fees and a $0.2 million increase in trust fees. The increase in loan fees was due primarily to higher prepayment fees and higher servicing fees.
Noninterest income for Wealth Management includes fees charged to high net-worth clients for managing their assets and for providing financial planning consulting services. The following table provides the amounts of noninterest income for Wealth Management for the three months ended March 31, 2021 and 2020:
Noninterest income for Wealth Management increased by $0.4 million in the three months ended March 31, 2021 when compared to the corresponding period in 2020 due primarily to higher levels of billable AUM in the quarter.
The following table summarizes the activity in our AUM for the periods indicated:
Existing account
Additions/
New
Withdrawals
Accounts
Terminations
Performance
Ending balance
Fixed Income
1,474,479
(88,287)
18,314
(9,212)
35,198
1,430,492
Equities
2,451,056
135,662
45,343
(40,582)
53,514
2,644,993
Cash and other
1,001,256
(85,645)
42,288
(37,392)
31,997
952,504
4,926,791
(38,270)
105,945
(87,186)
120,709
5,027,989
1,678,660
(334,302)
117,362
(42,907)
55,666
2,628,472
(645,341)
115,418
(83,292)
435,799
131,120
809,238
133,286
(50,799)
(21,589)
4,438,252
(170,405)
366,066
(176,998)
469,876
The $101 million increase in AUM during the first quarter of 2021 was the net result of $106 million of new accounts, $121 million of portfolio gains, and terminations and net withdrawals of $126 million.
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Noninterest Expense. The following table provides a breakdown of noninterest expense for Banking and Wealth Management for the periods indicated:
Wealth Management
14,833
4,447
4,582
5,639
4,867
521
609
Professional services and marketing
1,771
1,186
639
781
2,576
2,971
124
193
Noninterest expense in Banking increased from $26.2 million in the three months ended March 31, 2020 to $28.6 million in the three months ended March 31, 2021 primarily due to higher compensation and benefits, and occupancy and depreciation expenses, which were partially offset by lower customer service costs. Compensation and benefits were $2.0 million higher due to merit increases and annual bonus and commission payouts in the first quarter of 2021. Occupancy and depreciation costs were $0.8 million higher due primarily to higher core processing costs related to higher volumes and services. The $0.6 million decrease in customer service costs was due to decreases in the earnings credit rates paid on deposit balances, as interest rates have declined. Noninterest expenses for Wealth Management decreased by $0.4 million in the three months ended March 31, 2021, when compared to the three months ended March 31, 2020, due to lower compensation and benefits, and professional services and marketing expenses.
Financial Condition
The following table shows the financial position for each of our business segments, and of FFI and elimination entries used to arrive at our consolidated totals which are included in the column labeled Other and Eliminations, as of:
Other and
Eliminations
467,328
1,603
(905)
Premises and equipment
7,137
544
136
FHLB Stock
7,001
186
(246)
87,334
307
12,994
7,037,213
2,640
11,979
6,254,263
(8,442)
Intercompany balances
2,399
(2,736)
337
62,052
2,024
15,505
713,499
3,352
(2,421)
629,066
1,671
(1,030)
7,313
563
8,663
Goodwill and Intangibles
91,702
314
13,847
6,941,719
2,734
12,707
5,919,155
(5,722)
4,493
(3,519)
(974)
65,423
3,808
9,785
697,648
2,445
(4,382)
Our consolidated balance sheet is primarily affected by changes occurring in our Banking operations as our Wealth Management operations do not maintain significant levels of assets. Banking has experienced and is expected to continue to experience increases in its total assets as a result of our growth strategy.
During the three months ended March 31, 2021 total assets increased by $95 million primarily due to an increase in loans, which was partially offset by decreases in cash and securities. During the three months ended March 31, 2021, securities decreased by $57 million primarily due to payoffs of mortgage backed securities. Loans and loans held for sale increased $321 million in the three months ended March 31, 2021, primarily as a result of $765 million of originations, which were partially offset by payoffs or scheduled payments of $500 million. The $332 million growth in deposits during
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the first three months of 2021 included increases in commercial deposits of $419 million and branch deposits of $45 million, which were partially offset by a $179 million decrease in wholesale deposits and a $35 million decrease in digital channel deposits. Borrowings decreased by $257 million during the three months ended March 31, 2021 as cash provided by the increase in deposits, which exceeded the growth in our assets, was used to pay down our borrowings at the Bank. At March 31, 2021 and December 31, 2020, the outstanding balance on the holding company line of credit was $7 million.
Cash and cash equivalents, certificates of deposit and securities. Cash and cash equivalents, which primarily consist of funds held at the Federal Reserve Bank or at correspondent banks, including fed funds, decreased by $162 million during the three months ended March 31, 2021. Changes in cash and cash equivalents are primarily affected by the funding of loans, investments in securities, and changes in our sources of funding: deposits, FHLB advances and FFI borrowings.
Securities available for sale. The following table provides a summary of the Company’s AFS securities portfolio as of:
Beneficial interest – FHLMC securitization
US Treasury Securities that are included in the table above are pledged as collateral to the State of California to meet regulatory requirements related to FFB’s trust operations. Agency mortgage-backed securities are pledged as collateral as support for the Bank’s obligations under loan sales and securitization agreements entered into from 2018 through 2020.
The scheduled maturities of securities AFS, other than agency mortgage backed securities, and the related weighted average yield is as follows, as of March 31, 2021:
Agency mortgage-backed securities and beneficial interests in FHLMC securitizations are excluded from the above table because such securities are not due at a single maturity date. The weighted average yield of the agency mortgage-backed securities and beneficial interests as of March 31, 2021 was 2.36%.
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Loans. The following table sets forth our loans, by loan category, as of:
Loans and loans held for sale increased $321 million during the three months ended March 31, 2021 primarily as a result of $765 million in originations, and $56 million in loan purchases, which were partially offset by payoffs or scheduled payments of $500 million.
Deposits. The following table sets forth information with respect to our deposits and the average rates paid on deposits, as of:
During the first three months of 2021, our deposit rates have moved in a manner consistent with overall deposit market rates. The weighted average rate of our interest-bearing deposits decreased from 0.52% at December 31, 2020, to 0.37% at March 31, 2021 due to decreased costs of interest-bearing deposits, while the weighted average interest rates of both interest-bearing and noninterest-bearing deposits have decreased from 0.38% at December 31, 2020 to 0.24% at March 31, 2021. The financial impact of the increase in noninterest-bearing deposits is reflected in customer service costs, which are included in noninterest expenses.
The maturities of our certificates of deposit of $100,000 or more were as follows as of March 31, 2021:
3 months or less
206,377
Over 3 months through 6 months
235,452
Over 6 months through 12 months
98,354
Over 12 months
9,788
549,971
From time to time, the Bank will utilize brokered deposits as a source of funding. As of March 31, 2021, the Bank held $147 million of deposits which are classified as brokered deposits.
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Borrowings. At March 31, 2021, our borrowings consisted of $5 million in FHLB zero interest advances and $7 million of borrowings under a holding company line of credit. At December 31, 2020, our borrowings consisted of $255 million in FHLB term advances at the Bank, and $14 million of borrowings under a company line of credit. Because FFB generally utilizes overnight borrowings, the balance of outstanding borrowings may fluctuate on a daily basis. The average balance of FHLB advances outstanding during the three months ended March 31, 2021 was $199 million, as compared to $681 million for the three months ended March 31, 2020. The weighted average interest rate on these borrowings was 0.46% for the three months ended March 31, 2021, as compared to 1.65% for the three months ended March 31, 2020. The maximum amount of borrowings at the Bank outstanding at any month-end during the three months ended March 31, 2021, and during all of 2020, was $255 million and $860 million, respectively.
Delinquent Loans, Nonperforming Assets and Provision for Credit Losses
Loans are considered past due following the date when either interest or principal is contractually due and unpaid. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued when reasonable doubt exists as to the full, timely collection of interest or principal and, generally, when a loan becomes contractually past due for 90 days or more with respect to principal or interest. However, the accrual of interest may be continued on a well-secured loan contractually past due 90 days or more with respect to principal or interest if the loan is in the process of collection or collection of the principal and interest is deemed probable. The following tables provide a summary of past due and nonaccrual loans as of:
Total Past Due
and Nonaccrual
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The following table presents the composition of TDRs by accrual and nonaccrual status as of:
Residential real estate loans
These loans were classified as a TDR as a result of a reduction in required principal payments, reductions in rates and/or an extension of the maturity date of the loans.
Allowance for Credit Losses. The following table summarizes the activity in our ACL related to loans for the periods indicated:
Three months ended March 31, 2021:
Three months ended March 31, 2020:
Land
Year ended December 31, 2020:
Our ACL related to loans represented 0.45% and 0.50% of total loans outstanding as of March 31, 2021 and December 31, 2020, respectively.
The amount of the ACL for loans is adjusted periodically by charges to operations (referred to in our income statement as the “provision for credit losses”) (i) to replenish the ACL after it has been reduced due to loan write-downs or charge-offs, (ii) to reflect increases in the volume of outstanding loans, and (iii) to take account of changes in the risk of potential loan losses due to a deterioration in the condition of borrowers, or in the value of property securing non–performing loans, or adverse changes in economic conditions. The amounts of the provisions we make for loan losses are based on our estimate of losses in our loan portfolio. In estimating such losses, we use economic and loss migration models that are based on bank regulatory guidelines and industry standards, and our historical charge-off experience and loan delinquency rates, local and national economic conditions, a borrower’s ability to repay its borrowings, and the value of any property collateralizing the loan, as well as a number of subjective factors. However, these determinations involve judgments about changes and trends in current economic conditions and other events that can affect the ability of borrowers to meet their loan obligations to us, and a weighting among the quantitative and qualitative factors we consider in determining the sufficiency of the ACL. Moreover, the duration and anticipated effects of prevailing economic conditions or trends can be uncertain and can be affected by a number of risks and circumstances that are outside of our control. If changes in economic or market conditions or unexpected subsequent events were to occur, or if changes were made to bank regulatory guidelines or industry standards that are used to assess the sufficiency of the ACL, it could become necessary for us to incur additional, and possibly significant, charges to increase the ACL, which would have the effect of reducing our income.
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In addition, the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Financial Protection and Innovation, as an integral part of their examination processes, periodically review the adequacy of our ACL. These agencies may require us to make additional provisions for credit losses, over and above the provisions that we have already made, the effect of which would be to reduce our income.
The following table presents the balance in the ACL and the recorded investment in loans by impairment method as of:
Evaluated for Impairment
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Liquidity
Liquidity management focuses on our ability to generate, on a timely and cost-effective basis, cash sufficient to meet the funding needs of current loan demand, deposit withdrawals, principal and interest payments with respect to outstanding borrowings and to pay operating expenses. Our liquidity management is both a daily and long-term function of funds management. Liquid assets are generally invested in marketable securities or held as cash at the Federal Reserve Bank of San Francisco or other financial institutions.
We monitor our liquidity in accordance with guidelines established by our Board of Directors and applicable regulatory requirements. Our need for liquidity is affected by our loan activity, net changes in deposit levels and the maturities of our borrowings. The principal sources of our liquidity consist of deposits, loan interest and principal payments and prepayments, investment management and consulting fees, FHLB advances and proceeds from borrowings and sales of FFI common stock. The remaining balances of the Company’s lines of credit available to draw down totaled $2.7 billion at March 31, 2021.
Cash Flows Provided by Operating Activities. During the quarter ended March 31, 2021, operating activities provided net cash of $33 million, primarily due to net income of $22 million and a net decrease of $5 million in other assets. During the quarter ended March 31, 2020, operating activities provided net cash of $1 million, primarily due to net income of $13 million and $4 million in provisions for credit losses, offset partially by a net increase of $7 million in other assets and $9 million decrease in other liabilities.
Cash Flows Used in Investing Activities. During the quarter ended March 31, 2021, investing activities used net cash of $265 million, primarily due to a $321 million net increase in loans, offset partially by $53 million in cash received in principal collection and maturities of securities, and $3 million in proceeds from a redemption of securities. During the quarter ended March 31, 2020, investing activities used net cash of $209 million, primarily to fund a $264 million net increase in loans and $3 million in securities purchases, offset partially by $55 million in cash received in principal collection and maturities of securities.
Cash Flows Provided by Financing Activities. During the three months ended March 31, 2021, financing activities provided net cash of $71 million, consisting primarily of a net increase of $332 million in deposits, offset partially by a $250 million decrease in FHLB advances, $7 million net paydowns in our line of credit, and $4 million in dividends paid. During the quarter ended March 31, 2020, financing activities provided net cash of $185 million, consisting primarily of a net increase of $140 million in deposits and a $51 million increase in FHLB advances, offset partially by $3 million in dividends paid and $3 million in stock repurchases.
Ratio of Loans to Deposits. The relationship between gross loans and total deposits can provide a useful measure of a bank’s liquidity. Since repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan-to-deposit ratio the less liquid are our assets. On the other hand, since we realize greater yields on loans than we do on other interest-earning assets, a lower loan-to-deposit ratio can adversely affect interest income and earnings. As a result, our goal is to achieve a loan-to-deposit ratio that appropriately balances the requirements of liquidity and the need to generate a fair return on our assets. At March 31, 2021 and December 31, 2020, the loan-to-deposit ratios at FFB were 90.1% and 89.8%, respectively.
Off-Balance Sheet Arrangements
The following table provides the off-balance sheet arrangements of the Company as of March 31, 2021:
Commitments to fund new loans
59,805
Commitments to fund under existing loans, lines of credit
690,573
Commitments under standby letters of credit
14,113
Some of the commitments to fund existing loans, lines of credit and letters of credit are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. As of
38
March 31, 2021, FFB was obligated on $277 million of letters of credit to the FHLB which were being used as collateral for public fund deposits, including $263 million of deposits from the State of California.
Capital Resources and Dividend Policy
The capital rules applicable to United States based bank holding companies and federally insured depository institutions (“Capital Rules”) require the Company (on a consolidated basis) and FFB (on a stand-alone basis) to meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt correct action regulations place a federally insured depository institution, such as FFB, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution’s primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.
The following table sets forth the capital and capital ratios of FFI (on a consolidated basis) and FFB as of the respective dates indicated below, as compared to the respective regulatory requirements applicable to them:
To Be Well Capitalized
For Capital
Under Prompt Corrective
Actual
Adequacy Purposes
Action Provisions
Ratio
FFI
CET1 capital ratio
608,536
11.13
245,984
4.50
Tier 1 leverage ratio
8.57
283,985
4.00
Tier 1 risk-based capital ratio
327,979
6.00
Total risk-based capital ratio
640,359
11.71
437,305
8.00
589,276
11.55
229,490
8.93
263,986
305,987
620,700
12.17
407,982
FFB
607,566
11.14
245,355
354,402
6.50
8.58
283,379
354,223
5.00
327,140
436,186
639,389
11.73
545,233
10.00
591,171
11.63
228,703
330,349
8.98
263,330
329,162
304,938
406,583
622,595
12.25
508,229
As of each of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and FFB’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the prompt corrective action regulations. The required ratios for capital adequacy set forth in the above table do not include the Capital Rules’ additional capital conservation buffer, though each of the Company and FFB maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated.
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As of March 31, 2021, FFI had $11.5 million of available liquidity as well as a revolving line of credit and, therefore, has the ability and financial resources to contribute additional capital to FFB, if needed.
As of March 31, 2021, the amount of capital at FFB in excess of amounts required to be well capitalized for purposes of the prompt corrective action regulations was $253 million for the CET1 capital ratio, $253 million for the Tier 1 Leverage Ratio, $171 million for the Tier 1 risk-based capital ratio and $94 million for the Total risk-based capital ratio.
The Company paid a quarterly cash dividend of $0.09 per common share in the first quarter of 2021. It is our current intention to continue to pay quarterly dividends. The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain regulatory restrictions which are discussed in Item 1 “Business—Supervision and Regulation—Dividends and Stock Repurchases” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020. Additionally, under the terms of the holding company line of credit agreement, FFI may only declare and pay a dividend if the total amount of dividends and stock repurchases during the current twelve months does not exceed 50% of FFI’s net income for the same twelve month period. We paid $12.5 million in dividends ($0.28 per share) in 2020.
We had no material commitments for capital expenditures as of March 31, 2021. However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain financial risks, which are discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the section titled Asset and Liability Management: Interest Rate Risk in our Annual Report on Form 10-K which we filed with the Securities and Exchange Commission on February 26, 2021. There have been no material changes to our quantitative and qualitative disclosures about market risk since December 31, 2020.
ITEM 4.CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness, as of March 31, 2021, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2021, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There was no change in our internal control over financial reporting that occurred during the three months ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1A.RISK FACTORS
There have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020, which we filed with the SEC on February 26, 2021.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company adopted a stock repurchase plan on October 30, 2018 for the repurchase of up to 2,200,000 shares of its common stock from time to time as market conditions allow. This plan has no stated expiration date for the repurchases. The Company did not repurchase any shares during the three months ended March 31, 2021. As of March 31, 2021, the maximum number of shares that may be purchased under the program was 1,938,600.
ITEM 6.EXHIBITS
Exhibit No.
Description of Exhibit
3.1
Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on October 29, 2015).
3.2
Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on October 29, 2015).
31.1(1)
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2(1)
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1(1)
Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
32.2(1)
Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
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Inline XBRL Taxonomy Extension Definition Linkbase
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Cover Page Interactive Data File (embedded within the Inline XBRL document)
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 7, 2021
By:
/s/ KEVIN L. THOMPSON
Kevin L. Thompson
Executive Vice President andChief Financial Officer