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F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction | (I.R.S. Employer | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
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.
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).
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.
☒ | 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
As of August 3, 2022, the registrant had
FIRST FOUNDATION INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022
TABLE OF CONTENTS
| Page No. | ||||||
1 | |||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 | ||||||
51 | |||||||
51 | |||||||
52 | |||||||
52 | |||||||
53 | |||||||
S-1 | |||||||
(i)
PART I — FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
FIRST FOUNDATION INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 30, | December 31, | ||||||
2022 | 2021 | ||||||
(unaudited) | |||||||
ASSETS |
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| |||
Cash and cash equivalents | $ | | $ | | |||
Securities available-for-sale (AFS) |
| |
| | |||
Securities held-to-maturity (HTM) | | — | |||||
Allowance for credit losses - investments | ( | ( | |||||
Net securities | | | |||||
Loans held for sale |
| |
| | |||
Loans held for investment |
| |
| | |||
Allowance for credit losses - loans |
| ( |
| ( | |||
Net loans |
| |
| | |||
Investment in FHLB stock | |
| | ||||
Deferred taxes |
| |
| | |||
Premises and equipment, net |
| |
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Real estate owned (REO) | | | |||||
Goodwill and intangibles |
| |
| | |||
Other assets |
| |
| | |||
Total Assets | $ | | $ | | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
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| ||||
Liabilities: |
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| ||||
Deposits | $ | | $ | | |||
Borrowings |
| |
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Accounts payable and other liabilities |
| |
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Total Liabilities |
| |
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Shareholders’ Equity |
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Common Stock |
| |
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Additional paid-in-capital |
| |
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Retained earnings |
| |
| | |||
Accumulated other comprehensive (loss) income |
| ( |
| | |||
Total Shareholders’ Equity |
| |
| | |||
Total Liabilities and Shareholders’ Equity | $ | | $ | | |||
(See accompanying notes to the consolidated financial statements)
1
FIRST FOUNDATION INC.
CONSOLIDATED INCOME STATEMENTS - UNAUDITED
(In thousands, except share and per share amounts)
Quarter Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||
Interest income: |
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| ||||||
Loans | $ | | $ | | $ | | $ | | |||||
Securities |
| |
| |
| |
| | |||||
FHLB Stock, fed funds sold and interest-bearing deposits |
| |
| |
| |
| | |||||
Total interest income |
| |
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Interest expense: |
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Deposits |
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Borrowings |
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Total interest expense |
| | |
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Net interest income |
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Provision for credit losses | |
| |
| ( |
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Net interest income after provision for credit losses |
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Noninterest income: |
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Gain on sale of loans | — | | — | | |||||||||
Other income |
| |
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Total noninterest income |
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Noninterest expense: |
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Compensation and benefits |
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Occupancy and depreciation |
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Professional services and marketing costs |
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Customer service costs |
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Other expenses |
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Total noninterest expense |
| |
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Income before taxes on income |
| |
| |
| |
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Taxes on income |
| |
| |
| |
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Net income | $ | | $ | | $ | | $ | | |||||
Net income per share: |
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| |||||||
Basic | $ | | $ | | $ | | $ | | |||||
Diluted | $ | | $ | | $ | | $ | | |||||
Shares used in computation: |
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| |||||||
Basic |
| |
| |
| |
| | |||||
Diluted |
| |
| |
| |
| | |||||
(See accompanying notes to the consolidated financial statements)
2
FIRST FOUNDATION INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY - UNAUDITED
(In thousands, except share amounts)
| Common Stock |
| Additional |
|
| Accumulated Other |
| ||||||||||
Number | Paid-in | Retained | Comprehensive | ||||||||||||||
| of Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Total | ||||||
Balance: December 31, 2021 | | $ | | $ | | $ | | $ | | $ | | ||||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Stock based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Cash dividend | — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Issuance of common stock: |
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| |||||
Exercise of options |
| |
| — |
| |
| — |
| — |
| | |||||
Stock grants – vesting of restricted stock units |
| |
| — |
| — |
| — |
| — |
| — | |||||
Repurchase of shares from restricted shares vesting |
| ( |
| — |
| ( |
| — |
| — |
| ( | |||||
Stock repurchase | ( | — | ( | — | — | ( | |||||||||||
Balance: June 30, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
Balance: March 31, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Stock based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Cash dividend |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Issuance of common stock: |
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| |||||
Exercise of options |
| — |
| — |
| — |
| — |
| — |
| — | |||||
Stock grants – vesting of restricted stock units |
| |
| ( |
| — |
| — |
| — |
| ( | |||||
Repurchase of shares from restricted shares vesting |
| ( |
| — |
| — |
| — |
| — |
| — | |||||
Stock repurchase | ( | — | ( | — | — | ( | |||||||||||
Balance: June 30, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
Balance: December 31, 2020 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Stock based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Cash dividend |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Issuance of common stock: |
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| |||||
Exercise of options |
| |
| — |
| |
| — |
| — |
| | |||||
Stock grants – vesting of restricted stock units |
| |
| — |
| — |
| — |
| — |
| — | |||||
Repurchase of shares from restricted shares vesting |
| ( |
| — |
| ( |
| — |
| — |
| ( | |||||
Balance: June 30, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Balance: March 31, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
Net income |
| — |
| — |
| — |
| |
| — |
| | |||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Stock based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Cash dividend |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Issuance of common stock: |
|
|
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|
|
|
|
|
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|
|
| |||||
Exercise of options |
| |
| — |
| |
| — |
| — |
| | |||||
Stock grants – vesting of restricted stock units |
| |
| — |
| — |
| — |
| — |
| — | |||||
Repurchase of shares from restricted shares vesting |
| ( |
| — |
| ( |
| — |
| — |
| ( | |||||
Balance: June 30, 2021 |
| | $ | | $ | | $ | | $ | | $ | | |||||
(See accompanying notes to the consolidated financial statements)
3
FIRST FOUNDATION INC.
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME - UNAUDITED
(In thousands)
Quarter Ended June 30, | Six Months Ended June 30, | ||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||
Net income |
| $ | | $ | |
| $ | | $ | | |||
Other comprehensive income (loss): |
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|
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|
|
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| |||||
Unrealized holding gains (losses) on securities arising during the period |
| ( |
| ( |
| ( |
| ( | |||||
Other comprehensive income (loss) before tax |
| ( |
| ( |
| ( |
| ( | |||||
Income tax benefit (expense) related to items of other comprehensive income |
| |
| |
| |
| | |||||
Other comprehensive income (loss) |
| ( |
| ( |
| ( |
| ( | |||||
Total comprehensive income | $ | | $ | | $ | | $ | | |||||
(See accompanying notes to the consolidated financial statements)
4
FIRST FOUNDATION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
For the Six Months Ended | |||||||
June 30, | |||||||
2022 | 2021 | ||||||
Cash Flows from Operating Activities: |
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|
|
| |||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
| |||||
Provision for credit losses - loans |
| ( |
| ( | |||
Provision for credit losses - securities AFS | | | |||||
Stock–based compensation expense |
| |
| | |||
Depreciation and amortization |
| |
| | |||
Deferred tax expense |
| |
| | |||
Amortization of premium (discount) on securities | | | |||||
Amortization of core deposit intangible |
| |
| | |||
Amortization of mortgage servicing rights - net |
| |
| | |||
Gain on sale of loans |
| — |
| ( | |||
Amortization of OCI - securities transfer to HTM | ( | — | |||||
Valuation allowance on mortgage servicing rights - net | ( | | |||||
Increase in other assets |
| ( |
| ( | |||
Increase (decrease) in accounts payable and other liabilities |
| |
| ( | |||
Net cash provided by operating activities |
| |
| | |||
Cash Flows from Investing Activities: |
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| |||
Net increase in loans |
| ( |
| ( | |||
Proceeds from sale of loans |
| — |
| | |||
Purchase of premises and equipment |
| ( |
| ( | |||
Disposals of premises and equipment | | — | |||||
Recovery of allowance for credit losses |
| |
| | |||
Purchases of securities AFS |
| ( |
| ( | |||
Purchases of securities HTM | ( | — | |||||
Proceeds from sale of securities |
| — |
| | |||
Maturities of securities AFS |
| |
| | |||
Maturities of securities HTM | | — | |||||
Sale of FHLB and FRB stock, net |
| |
| — | |||
Net cash used in investing activities |
| ( |
| ( | |||
Cash Flows from Financing Activities: |
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|
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| |||
Increase in deposits |
| |
| | |||
Net increase (decrease) in FHLB advances |
| |
| ( | |||
Line of credit net change – borrowings, net |
| ( |
| | |||
Net increase in subordinated debt | | — | |||||
Net increase in repurchase agreements | | — | |||||
Gain on sale leaseback |
| ( |
| — | |||
Dividends paid |
| ( |
| ( | |||
Proceeds from exercise of stock options |
| |
| | |||
Repurchase of stock |
| ( |
| ( | |||
Net cash provided by financing activities |
| |
| | |||
Increase (decrease) in cash and cash equivalents |
| ( |
| | |||
Cash and cash equivalents at beginning of year |
| |
| | |||
Cash and cash equivalents at end of period | $ | | $ | | |||
Supplemental disclosures of cash flow information: |
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|
|
| |||
Cash paid during the period for: |
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|
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| |||
Income taxes | $ | | $ | | |||
Interest | | | |||||
Noncash transactions: |
|
|
| ||||
Transfer of loans to loans held for sale | $ | — | $ | | |||
Transfer of securities from available-for-sale to held-to-maturity | | — | |||||
Goodwill acquisition adjustment | | — | |||||
Operating lease liabilities recognized | | — | |||||
(See accompanying notes to the consolidated financial statements)
5
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - 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
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, 2021.
Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 2022 presentation.
New Accounting Pronouncements
In March 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures”. ASU 2022-02 eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors and provides amendments to ASU 2016-13, Financial Instruments – Credit Losses on Financial Instruments by enhancing existing disclosure requirements and introduces new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU 2022-02 also requires that entities disclose current-period gross write-offs by year of origination for financing receivables within the scope of Subtopic 326-20. For entities that have adopted the amendments in Update 2016-13, the amendments in this ASU are effective for fiscal years beginning after December 15, 2022. The adoption of ASU 2022-02 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.
6
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
NOTE 2: ACQUISITIONS
On December 17, 2021, the Company completed the acquisition of TGR Financial, Inc. (“TGRF”) and its wholly owned subsidiary, First Florida Integrity Bank, through a merger of TGRF with and into FFI followed immediately by the merger of First Florida Integrity Bank with and into FFB, in exchange for
The acquisition was accounted for under the purchase method of accounting. The acquired assets, assumed liabilities and identifiable intangible assets are recorded at their respective acquisition date fair values. Goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining TGRF into FFI.
The following table represents the assets acquired and liabilities assumed of TGRF as of December 17, 2021 and the fair value adjustments and amounts recorded by the Company in 2021 under the acquisition method of accounting:
| TGRF Book |
| Fair Value |
| |||||
(dollars in thousands) | Value | Adjustments | Fair Value | ||||||
Assets Acquired: |
|
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|
|
|
| |||
Cash and cash equivalents | $ | | $ | | $ | | |||
Securities AFS |
| |
| |
| | |||
Securities held-to-maturity | | | | ||||||
Loans, net of deferred fees |
| |
| ( |
| | |||
Investment in FHLB stock |
| |
| — |
| | |||
Premises and equipment, net |
| |
| ( |
| | |||
Goodwill and intangibles |
| |
| |
| | |||
Bank owned life insurance |
| |
| — |
| | |||
Deferred taxes |
| |
| |
| | |||
Other assets |
| |
| ( |
| | |||
Total assets acquired | $ | | $ | | $ | | |||
Liabilities Assumed: |
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|
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|
|
| |||
Deposits | $ | | $ | | $ | | |||
Borrowings |
| |
| |
| | |||
Accounts payable and other liabilities |
| |
| |
| | |||
Total liabilities assumed |
| |
| |
| | |||
Excess of assets acquired over liabilities assumed |
| |
| |
| | |||
Total | $ | | $ | | $ | | |||
Consideration: |
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| |||
Stock issued |
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|
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| $ | | |||
Cash paid | | ||||||||
Total consideration (1) | $ | | |||||||
In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. The most significant category of assets for which this procedure was used was that of acquired loans. The excess of expected cash
7
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
flows above the fair value (Level 3 inputs) of the majority of loans will be accreted to interest income over the remaining lives of the loans in accordance with Accounting Standards Codification (“ASC”) 310-20. The fair values are estimates and are subject to adjustment for up to one year after the merger date.
Certain loans, for which specific credit-related deterioration since origination was identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on these purchased credit deteriorated (“PCD”) loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on nonaccrual status and have no accretable yield. All PCD loans were classified as accruing loans as of and subsequent to the acquisition date.
In accordance with generally accepted accounting principles there was no carryover of the allowance for credit losses that had been previously recorded by TGRF.
The Company recorded a deferred income tax asset of $
The fair value of savings and transaction deposit accounts acquired from TGRF were assumed to approximate their carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit accounts were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates (Level 2 inputs). The portfolio was segregated into pools based on remaining maturity. For each pool, the projected cash flows from maturing certificates were then calculated based on contractual rates and prevailing market rates. The valuation adjustment for each pool is equal to the present value of the difference of these two cash flows, discounted at the assumed market rate for a certificate with a corresponding maturity. This valuation adjustment will be accreted to reduce interest expense over the remaining maturities of the respective pools. The Company also recorded a core deposit intangible, which represents the value of the deposit relationships acquired from TGRF, of $
8
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
Pro Forma Information (unaudited)
The following table presents unaudited pro forma information for the six months ended June 30, 2021, as if the acquisition of TGRF had occurred on January 1, 2021, after giving effect to certain adjustments. The unaudited pro forma information for this period includes adjustments for interest income on loans acquired, amortization of intangibles arising from the transaction, adjustments for interest expense on deposits acquired, and the related income tax effects of all these items and the income tax costs or benefits derived from the income or loss before taxes of TGRF. The net effect of these pro forma adjustments was an increase of $
Six Months Ended | |||
(dollars in thousands) |
| June 30, 2021 | |
Net interest income | $ | | |
Provision for credit losses |
| | |
Noninterest income |
| | |
Noninterest expenses |
| | |
Income before taxes |
| | |
Taxes on income |
| | |
Net income | $ | | |
Net income per share: |
|
| |
Basic | $ | | |
Diluted | $ | | |
NOTE 3: 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 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.
9
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
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) | Total | Level 1 | Level 2 | Level 3 | ||||||||
June 30, 2022: |
|
|
|
|
|
|
|
| ||||
Investment securities available for sale: |
|
|
|
|
|
|
|
| ||||
Collateralized mortgage obligations | $ | | $ | — | $ | | $ | — | ||||
Agency mortgage-backed securities |
| |
| — |
| |
| — | ||||
Municipal bonds |
| |
| — |
| |
| — | ||||
SBA securities | | — | | — | ||||||||
Beneficial interests in FHLMC securitization | | — | — | | ||||||||
Corporate bonds |
| |
| — |
| |
| — | ||||
U.S. Treasury | | | — | — | ||||||||
Investment in equity securities |
| |
| — |
| — |
| | ||||
Total assets at fair value on a recurring basis | $ | | $ | | $ | | $ | | ||||
December 31, 2021: | ||||||||||||
Investment securities available for sale: |
|
|
|
|
|
|
|
| ||||
Collateralized mortgage obligations | $ | | $ | — | $ | | $ | — | ||||
Agency mortgage-backed securities | | — | | — | ||||||||
Municipal bonds |
| |
| — |
| |
| — | ||||
SBA securities |
| |
| — |
| |
| — | ||||
Beneficial interests in FHLMC securitization |
| |
| — |
| — |
| | ||||
Corporate bonds | | — | | — | ||||||||
U.S. Treasury |
| |
| |
| — |
| — | ||||
Investment in equity securities |
| |
| |
| — |
| — | ||||
Total assets at fair value on a recurring basis | $ | | $ | | $ | | $ | | ||||
The increase in Level 3 assets from December 31, 2021, was due to securitization paydowns, a reclassification of investment in equity securities, and to $
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.
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
10
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
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 $
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 June 30, 2022 included prepayment rates ranging from
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.
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.
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
11
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
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 and investment in equity securities. Significant assumptions in the valuation of these Level 3 securities as of June 30, 2022, and December 31, 2021 included prepayment rates ranging from
Investment in Equity Securities. The fair value on investment in equity securities is the carrying amount and is evaluated for impairment on an annual basis.
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 on repurchase agreements is the carrying amount. The fair value of overnight FHLB advances is the carrying value that approximates fair value because of the short-term maturity of this instrument, resulting in a Level 2 classification. The fair value of term borrowings and subordinated debt are derived by calculating the discounted value of future cash flows expected to be paid out by the Company, resulting in a Level 3 classification.
12
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
The carrying amounts and estimated fair values of financial instruments are as follows as of:
Carrying | Fair Value Measurement Level | ||||||||||||||
(dollars in thousands) | Value | 1 | 2 | 3 | Total | ||||||||||
June 30, 2022: |
|
|
|
|
|
|
|
|
|
| |||||
Assets: |
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents | $ | | $ | | $ | — | $ | — | $ | | |||||
Securities AFS, net |
| |
| |
| |
| |
| | |||||
Securities HTM | | — | | — | | ||||||||||
Loans held for sale |
| |
| — |
| |
| — |
| | |||||
Loans, net |
| |
| — |
| — |
| |
| | |||||
Investment in FHLB stock |
| |
| — |
| |
| — |
| | |||||
Investment in equity securities |
| |
| — |
| — |
| |
| | |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
| |||||
Deposits | $ | | $ | | $ | | $ | — | $ | | |||||
Borrowings |
| |
| |
| — |
| |
| | |||||
December 31, 2021: | |||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents | $ | | $ | | $ | — | $ | — | $ | | |||||
Securities AFS, net |
| |
| |
| |
| |
| | |||||
Loans held for sale |
| |
| — |
| |
| — |
| | |||||
Loans, net |
| |
| — |
| — |
| |
| | |||||
Investment in FHLB stock |
| |
| — |
| |
| — |
| | |||||
Investment in equity securities |
| |
| |
| — |
| — |
| | |||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||||
Deposits | $ | | $ | | $ | | $ | — | $ | | |||||
Borrowings |
| |
| |
| — |
| |
| | |||||
13
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
NOTE 4: SECURITIES
The following table provides a summary of the Company’s securities AFS portfolio as of:
Amortized | Gross Unrealized | Allowance for | Estimated | ||||||||||||
(dollars in thousands) | Cost | Gains | Losses | Credit Losses | Fair Value | ||||||||||
June 30, 2022: | |||||||||||||||
Collateralized mortgage obligations | $ | | $ | — | $ | ( | $ | — | $ | | |||||
Agency mortgage-backed securities | | — | ( | — | | ||||||||||
Municipal bonds | | — | ( | — | | ||||||||||
SBA securities | | | ( | — | | ||||||||||
Beneficial interests in FHLMC securitization |
| |
| |
| — |
| ( |
| | |||||
Corporate bonds |
| |
| |
| ( |
| — |
| | |||||
U.S. Treasury |
| |
| — |
| ( |
| — |
| | |||||
Total | $ | | $ | | $ | ( | $ | ( | $ | | |||||
December 31, 2021: | |||||||||||||||
Collateralized mortgage obligations | $ | | $ | — | $ | ( | $ | — | $ | | |||||
Agency mortgage-backed securities | | | ( | — | | ||||||||||
Municipal bonds | | | — | — | | ||||||||||
SBA securities | | | — | — | | ||||||||||
Beneficial interests in FHLMC securitization |
| |
| |
| — |
| ( |
| | |||||
Corporate bonds |
| |
| |
| ( |
| — |
| | |||||
U.S. Treasury |
| |
| — |
| ( |
| — |
| | |||||
Total | $ | | $ | | $ | ( | $ | ( | $ | | |||||
As of June 30, 2022, US Treasury securities of $
The following table provides a summary of the Company’s securities HTM portfolio as of:
Amortized | Gross Unrecognized | Allowance for | Estimated | ||||||||||||
(dollars in thousands) | Cost | Gains | Losses | Credit Losses | Fair Value | ||||||||||
June 30, 2022: | |||||||||||||||
Agency mortgage-backed securities | $ | | $ | — | $ | ( | $ | — | $ | | |||||
Total | $ | | $ | — | $ | ( | $ | — | $ | | |||||
There were
The Company reassessed classification of certain securities AFS and effective January 1, 2022, the Company transferred $
14
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
We monitor the credit quality of these securities by evaluating various quantitative attributes. The credit quality indicators the Company monitors include, but are not limited to, credit ratings of individual securities and the credit rating of government sponsored enterprises that guarantee the securities. Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is, those with ratings similar to BBB-/Baa3 or above, as defined by NRSROs, are generally considered by the rating agencies and market participants to be low credit risk. As of June 30, 2022, all of the Company’s securities were either investment grade or were issued by a U.S. government agency or a U.S. government sponsored enterprise with an investment grade rating.
The tables below indicate, as of June 30, 2022 and December 31, 2021, the gross unrealized losses and fair values of our investments AFS, 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 June 30, 2022 | ||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||
(dollars in thousands) |
| Value |
| Loss |
| Value |
| Loss |
| Value |
| Loss | ||||||
Collateralized mortgage obligations | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
Agency mortgage-backed securities | | ( | — | — | | ( | ||||||||||||
Municipal bonds | | ( | — | — | | ( | ||||||||||||
SBA securities | | ( | — | — | | ( | ||||||||||||
Corporate bonds | | ( | — | — | | ( | ||||||||||||
U.S. Treasury | | ( | — | — | | ( | ||||||||||||
Total temporarily impaired securities | $ | | $ | ( | $ | — | $ | — | $ | | $ | ( | ||||||
Securities with Unrealized Loss at December 31, 2021 | ||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||
(dollars in thousands) |
| Value |
| Loss |
| Value |
| Loss |
| Value |
| Loss | ||||||
Collateralized mortgage obligations |
| $ | |
| $ | ( |
| $ | — |
| $ | — |
| $ | |
| $ | ( |
Agency mortgage-backed securities | | ( | | ( | | ( | ||||||||||||
Corporate bonds | | ( | — | — | | ( | ||||||||||||
U.S. Treasury |
| |
| ( |
| — |
| — |
| |
| ( | ||||||
Total temporarily impaired securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
The table below indicates, as of June 30, 2022, the gross unrealized losses and fair values of our investments HTM, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
Securities with Unrecognized Loss at June 30, 2022 | ||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||
Fair | Unrecognized | Fair | Unrecognized | Fair | Unrecognized | |||||||||||||
(dollars in thousands) |
| Value |
| Loss |
| Value |
| Loss |
| Value |
| Loss | ||||||
Agency mortgage-backed securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Total temporarily impaired securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
There were
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.
15
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
The following is a roll forward of our allowance for credit losses related to securities for the following periods:
(dollars in thousands) | Total | ||
Three Months Ended June 30, 2022: | |||
Beginning balance |
| $ | |
Provision for credit losses |
| | |
Balance: June 30, 2022 |
| $ | |
Six Months Ended June 30, 2022: | |||
Beginning balance |
| $ | |
Provision for credit losses |
| | |
Balance: June 30, 2022 |
| $ | |
Year Ended December 31, 2021: | |||
Beginning balance |
| $ | |
Provision for credit losses |
| | |
Balance: December 31, 2021 |
| $ | |
Due to a change in expected cash flows of interest only strip securities, $
The ACL on investment securities is determined for both held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with ASC 326, and is evaluated on a quarterly basis. The ACL for held-to-maturity investment securities is determined on a collective basis, based on shared risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. Under ASC 326-20, for investment securities where the Company has reason to believe the credit loss exposure is remote, such as those guaranteed by the U.S. government or government sponsored entities, a zero loss expectation is applied and a company is not required to estimate and recognize an ACL.
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 neither criteria is met, the Company is required to assess whether the decline in fair value has resulted from credit losses or noncredit-related factors. In determining whether a security’s decline in fair value is credit related, the Company considers a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security, and (v) the ability of the issuer of the security to make scheduled principal and interest payments. If, after considering these factors, 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.
16
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
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 |
|
| |||||||
(dollars in thousands) | 1 Year | 5 years | 10 Years | 10 Years | Total |
| ||||||||||
June 30, 2022 | ||||||||||||||||
Amortized Cost: |
|
|
|
|
|
|
|
|
|
| ||||||
Collateralized mortgage obligations | $ | — | $ | — | $ | | $ | | $ | | ||||||
Agency mortgage-backed securities | — | | | | | |||||||||||
Municipal bonds | | | | | | |||||||||||
SBA securities | | | | | | |||||||||||
Beneficial interests in FHLMC securitization | — | | — | | | |||||||||||
Corporate bonds | | | | | | |||||||||||
U.S. Treasury |
| — |
| |
| — |
| — |
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | ||||||
Weighted average yield |
| | % |
| | % |
| | % |
| | % |
| | % | |
Estimated Fair Value: |
|
|
|
|
|
|
|
|
|
| ||||||
Collateralized mortgage obligations | $ | — | $ | — | $ | | $ | | $ | | ||||||
Agency mortgage-backed securities | — | | | | | |||||||||||
Municipal bonds | | | | | | |||||||||||
SBA securities | | | | | | |||||||||||
Beneficial interests in FHLMC securitization | — | | — | | | |||||||||||
Corporate bonds | | | | | | |||||||||||
U.S. Treasury |
| — |
| |
| — |
| — |
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | ||||||
| Less than |
| 1 Through |
| 5 Through |
| After |
|
| |||||||
(dollars in thousands) | 1 Year | 5 years | 10 Years | 10 Years | Total |
| ||||||||||
December 31, 2021 | ||||||||||||||||
Amortized Cost: |
|
|
|
|
|
|
|
|
|
| ||||||
Collateralized mortgage obligations | $ | — | $ | | $ | | $ | | $ | | ||||||
Agency mortgage-backed securities | — | | | | | |||||||||||
Municipal bonds | — | | | | | |||||||||||
SBA securities | | | | | | |||||||||||
Beneficial interests in FHLMC securitization | — | | — | | | |||||||||||
Corporate bonds | | | | | | |||||||||||
U.S. Treasury |
| — |
| |
| — |
| — |
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | ||||||
Weighted average yield |
| ( | % |
| | % |
| | % |
| | % |
| | % | |
Estimated Fair Value: |
|
|
|
|
|
|
|
|
|
| ||||||
Collateralized mortgage obligations | $ | — | $ | | $ | | $ | | $ | | ||||||
Agency mortgage-backed securities | — | | | | | |||||||||||
Municipal bonds | — | | | | | |||||||||||
SBA securities | | | | | | |||||||||||
Beneficial interests in FHLMC securitization | — | | — | | | |||||||||||
Corporate bonds | | | | | | |||||||||||
U.S. Treasury |
| — |
| |
| — |
| — |
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | ||||||
17
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
The following is a summary of scheduled maturities of securities HTM and the related weighted average yields as of:
| Less than |
| 1 Through |
| 5 Through |
| After |
|
| |||||||
(dollars in thousands) | 1 Year | 5 years | 10 Years | 10 Years | Total |
| ||||||||||
June 30, 2022 | ||||||||||||||||
Amortized Cost: |
|
|
|
|
|
|
|
|
|
| ||||||
Agency mortgage-backed securities | $ | — | $ | | $ | | $ | | $ | | ||||||
Total | $ | — | $ | | $ | | $ | | $ | | ||||||
Weighted average yield |
| — | % |
| | % |
| | % |
| | % | | % | ||
Estimated Fair Value: |
|
|
|
|
|
|
|
|
|
| ||||||
Agency mortgage-backed securities | $ | — | $ | | $ | | $ | | $ | | ||||||
Total | $ | — | $ | | $ | | $ | | $ | | ||||||
There were
NOTE 5: LOANS
The following is a summary of our loans as of:
| June 30, | December 31, | ||||
(dollars in thousands) |
| 2022 |
| 2021 | ||
Outstanding principal balance: |
|
| ||||
Loans secured by real estate: |
|
|
|
| ||
Residential properties: |
|
|
|
| ||
Multifamily | $ | | $ | | ||
Single family |
| |
| | ||
Total real estate loans secured by residential properties |
| |
| | ||
Commercial properties |
| |
| | ||
Land and construction |
| |
| | ||
Total real estate loans |
| |
| | ||
Commercial and industrial loans |
| |
| | ||
Consumer loans |
| |
| | ||
Total loans |
| |
| | ||
Premiums, discounts and deferred fees and expenses |
| |
| | ||
Total | $ | | $ | | ||
18
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
The following table summarizes our delinquent and nonaccrual loans as of:
Past Due and Still Accruing | Total Past | ||||||||||||||||||||
90 Days | Due and | ||||||||||||||||||||
(dollars in thousands) |
| 30–59 Days |
| 60-89 Days |
| or More |
| Nonaccrual |
| Nonaccrual |
| Current |
| Total | |||||||
June 30, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Residential properties | $ | | $ | — | $ | — | $ | | $ | | $ | | $ | | |||||||
Commercial properties |
| |
| |
| |
| |
| |
| |
| | |||||||
Land and construction |
| — |
| — |
| — |
| — |
| — |
| |
| | |||||||
Commercial and industrial loans |
| |
| |
| — |
| |
| |
| |
| | |||||||
Consumer loans |
| |
| — |
| — |
| — |
| |
| |
| | |||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Percentage of total loans |
| | % |
| | % |
| | % |
| | % |
| | % |
|
|
|
| ||
December 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Residential properties | $ | | $ | | $ | — | $ | | $ | | $ | | $ | | |||||||
Commercial properties |
| |
| — |
| — |
| |
| |
| |
| | |||||||
Land and construction |
| — |
| — |
| — |
| — |
| — |
| |
| | |||||||
Commercial and industrial loans |
| |
| |
| — |
| |
| |
| |
| | |||||||
Consumer loans |
| — |
| — |
| — |
| — |
| — |
| |
| | |||||||
Total | $ | | $ | | $ | — | $ | | $ | | $ | | $ | | |||||||
Percentage of total loans |
| | % |
| | % |
| — | % |
| | % |
| | % |
|
|
|
| ||
The following table summarizes our nonaccrual loans as of:
Nonaccrual | Nonaccrual | |||||
with Allowance | with no Allowance | |||||
(dollars in thousands) |
| for Credit Losses |
| for Credit Losses | ||
June 30, 2022: |
|
|
| |||
Real estate loans: | ||||||
Residential properties | $ | — | $ | | ||
Commercial properties | — | | ||||
Commercial and industrial loans |
| |
| | ||
Total | $ | | $ | | ||
December 31, 2021: |
|
|
| |||
Real estate loans: | ||||||
Residential properties | $ | — | $ | | ||
Commercial properties | — | | ||||
Commercial and industrial loans |
| |
| | ||
Total | $ | | $ | | ||
19
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
The following table presents the loans classified as troubled debt restructurings (“TDR”) by accrual and nonaccrual status as of:
June 30, 2022 | December 31, 2021 | |||||||||||||||||
(dollars in thousands) | Accrual | Nonaccrual | Total | Accrual | Nonaccrual | Total | ||||||||||||
Residential loans |
| $ | — |
| $ | — |
| $ | — |
| $ | |
| $ | — |
| $ | |
Commercial real estate loans |
| |
| |
| |
| |
| |
| | ||||||
Commercial and industrial loans |
| |
| |
| |
| |
| |
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
The following table provides information on loans that were modified as TDRs for the following periods:
Outstanding Recorded Investment | |||||||||||
(dollars in thousands) | Number of loans | Pre-Modification | Post-Modification | Financial Impact | |||||||
Six Months Ended June 30, 2022: |
|
|
|
|
|
|
|
| |||
Commercial and industrial loans |
| | $ | | $ | | $ | — | |||
Total |
| | $ | | $ | | $ | — | |||
Outstanding Recorded Investment | |||||||||||
(dollars in thousands) | Number of loans | Pre-Modification | Post-Modification | Financial Impact | |||||||
Year Ended December 31, 2021 |
|
|
|
|
|
|
|
| |||
Commercial and industrial loans |
| | $ | | $ | | $ | — | |||
Total |
| | $ | | $ | | $ | — | |||
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.
20
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
NOTE 6: 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:
Initial Allowance | ||||||||||||||||||
| Beginning |
| Provision for |
| on Acquired |
|
|
| Ending | |||||||||
(dollars in thousands) | Balance | Credit Losses | PCD Loans | Charge-offs | Recoveries | Balance | ||||||||||||
Three Months Ended June 30, 2022: |
|
|
|
|
|
|
|
|
|
| ||||||||
Real estate loans: |
|
|
|
|
|
|
|
|
|
| ||||||||
Residential properties | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||
Commercial properties |
| |
| ( |
| — |
| — |
| — |
| | ||||||
Land and construction |
| |
| ( |
| — |
| — |
| — |
| | ||||||
Commercial and industrial loans |
| |
| |
| — |
| — |
| |
| | ||||||
Consumer loans |
| |
| ( |
| — |
| — |
| — |
| | ||||||
Total | $ | | $ | | $ | $ | — | $ | | $ | | |||||||
| ||||||||||||||||||
Six Months Ended June 30, 2022: |
|
|
|
|
|
|
|
|
|
|
| |||||||
Real estate loans: |
|
|
|
|
|
|
|
|
|
| ||||||||
Residential properties | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||
Commercial properties |
| |
| ( |
| — |
| — |
| — |
| | ||||||
Land and construction |
| |
| ( |
| — |
| — |
| — |
| | ||||||
Commercial and industrial loans |
| |
| |
| — |
| ( |
| |
| | ||||||
Consumer loans |
| |
| ( |
| — |
| — |
| — |
| | ||||||
Total | $ | | $ | ( | $ | — | $ | ( | $ | | $ | | ||||||
| ||||||||||||||||||
Year Ended December 31, 2021: |
|
|
|
|
|
|
|
|
|
| ||||||||
Real estate loans: |
|
|
|
|
|
|
|
|
|
| ||||||||
Residential properties | $ | | $ | ( | $ | | $ | ( | $ | — | $ | | ||||||
Commercial properties |
| |
| |
| |
| — |
| — |
| | ||||||
Land and construction |
| |
| |
| |
| — |
| — |
| | ||||||
Commercial and industrial loans |
| |
| |
| |
| ( |
| |
| | ||||||
Consumer loans |
| |
| ( |
| — |
| — |
| — |
| | ||||||
Total | $ | | $ | | $ | | $ | ( | $ | | $ | | ||||||
21
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
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 | ||||||||||
(dollars in thousands) |
| Individually |
| Collectively |
| Total |
| |||
June 30, 2022: | ||||||||||
Allowance for credit losses: |
|
|
|
|
|
|
| |||
Real estate loans: |
|
|
|
|
|
|
| |||
Residential properties | $ | | $ | | $ | | ||||
Commercial properties |
| |
| |
| | ||||
Land and construction |
| — |
| |
| | ||||
Commercial and industrial loans |
| |
| |
| | ||||
Consumer loans |
| — |
| |
| | ||||
Total | $ | | $ | | $ | | ||||
Loans: |
|
|
|
|
|
| ||||
Real estate loans: |
|
|
|
|
|
| ||||
Residential properties | $ | | $ | | $ | | ||||
Commercial properties |
| |
| |
| | ||||
Land and construction |
| — |
| |
| | ||||
Commercial and industrial loans |
| |
| |
| | ||||
Consumer loans |
| — |
| |
| | ||||
Total | $ | | $ | | $ | | ||||
December 31, 2021: | ||||||||||
Allowance for credit losses: |
|
|
|
|
|
| ||||
Real estate loans: |
|
|
|
|
|
| ||||
Residential properties | $ | | $ | | $ | | ||||
Commercial properties |
| |
| |
| | ||||
Land and construction |
| |
| |
| | ||||
Commercial and industrial loans |
| |
| |
| | ||||
Consumer loans |
| — |
| |
| | ||||
Total | $ | | $ | | $ | | ||||
Loans: |
|
|
|
|
|
| ||||
Real estate loans: |
|
|
|
|
|
| ||||
Residential properties | $ | | $ | | $ | | ||||
Commercial properties |
| |
| |
| | ||||
Land and construction |
| |
| |
| | ||||
Commercial and industrial loans |
| |
| |
| | ||||
Consumer loans |
| — |
| |
| | ||||
Total | $ | | $ | | $ | | ||||
22
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
The following tables present risk categories of loans based on year of origination, as of:
Revolving | ||||||||||||||||||||||||
(dollars in thousands) |
| 2022 |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| Prior |
| Loans |
| Total | ||||||||
June 30, 2022: | ||||||||||||||||||||||||
Loans secured by real estate: | ||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||
Multifamily | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | — |
| $ | | ||
Special mention | — | — | — | — | — | — | — | — | ||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||
Total |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | — |
| $ | | ||
Single family | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
Special mention | — | — | — | — | — | — | | | ||||||||||||||||
Substandard | — | — | — | — | — | | | | ||||||||||||||||
Total |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
Commercial real estate | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | — |
| $ | | ||
Special mention | — | | | | | | — | | ||||||||||||||||
Substandard | | | | | — | | — | | ||||||||||||||||
Total |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | — |
| $ | | ||
Land and construction | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | — |
| $ | | ||
Special mention | — | — | — | — | | — | — | | ||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||
Total |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | — |
| $ | | ||
Commercial | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
Special mention | — | — | | | — | — | | | ||||||||||||||||
Substandard | — | | | | | | | | ||||||||||||||||
Total |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
Consumer | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
Special mention | — | — | — | — | — | — | — | — | ||||||||||||||||
Substandard | — | — | — | | — | — | — | | ||||||||||||||||
Total |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
Total loans | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
Special mention | — | | | | | | | | ||||||||||||||||
Substandard | | | | | | | | | ||||||||||||||||
Total |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
23
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
Revolving | ||||||||||||||||||||||||
(dollars in thousands) |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Prior |
| Loans |
| Total | ||||||||
December 31, 2021: | ||||||||||||||||||||||||
Loans secured by real estate: | ||||||||||||||||||||||||
Residential | ||||||||||||||||||||||||
Multifamily | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | — |
| $ | | ||
Special mention | — | — | | — | — | — | — | | ||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||
Total |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | — |
| $ | | ||
Single family | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
Special mention | — | — | — | — | — | — | | | ||||||||||||||||
Substandard | — | — | — | — | | | | | ||||||||||||||||
Total |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
Commercial real estate | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | — |
| $ | | ||
Special mention | — | — | | — | — | | — | | ||||||||||||||||
Substandard | — | — | | — | | | — | | ||||||||||||||||
Total |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | — |
| $ | | ||
Land and construction | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | — | $ | |
| $ | |
| $ | | $ | |
| $ | — |
| $ | | ||
Special mention | — | — | — | — | — | | — | | ||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||
Total |
| $ | |
| $ | — | $ | |
| $ | |
| $ | | $ | |
| $ | — |
| $ | | ||
Commercial | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
Special mention | | | | — | — | | | | ||||||||||||||||
Substandard | — | | | | | | | | ||||||||||||||||
Total |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
Consumer | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | — | $ | — |
| $ | |
| $ | — | $ | |
| $ | |
| $ | | ||
Special mention | — | — | — | — | — | — | — | — | ||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | ||||||||||||||||
Total |
| $ | |
| $ | — | $ | — |
| $ | |
| $ | — | $ | |
| $ | |
| $ | | ||
Total loans | ||||||||||||||||||||||||
Pass |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
Special mention | | | | — | — | | | | ||||||||||||||||
Substandard | — | | | | | | | | ||||||||||||||||
Total |
| $ | |
| $ | | $ | |
| $ | |
| $ | | $ | |
| $ | |
| $ | | ||
24
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses and the related allowance for credit losses (“ACL”) allocated to these loans:
Equipment/ | ACL | ||||||||||||||
(dollars in thousands) | Real Estate | Cash | Receivables | Total | Allocation | ||||||||||
June 30, 2022: | |||||||||||||||
Loans secured by real estate: |
|
|
|
|
|
|
| ||||||||
Residential properties | |||||||||||||||
Single family | $ | | $ | — | $ | — | $ | | $ | — | |||||
Commercial real estate loans |
| |
| — |
| — |
| |
| — | |||||
Commercial loans |
| — |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
December 31, 2021: | |||||||||||||||
Loans secured by real estate: |
|
|
|
|
|
|
| ||||||||
Residential properties | |||||||||||||||
Single family | $ | | $ | — | $ | — | $ | | $ | — | |||||
Commercial loans |
| — |
| |
| — |
| |
| — | |||||
Consumer loans |
| — |
| — |
| — |
| — |
| — | |||||
Total | $ | | $ | | $ | — | $ | | $ | — | |||||
NOTE 7: LOAN SALES AND MORTGAGE SERVICING RIGHTS
In 2021, FFB sold $
NOTE 8: DEPOSITS
The following table summarizes the outstanding balance of deposits and average rates paid thereon as of:
June 30, 2022 | December 31, 2021 | |||||||||||
| Weighted | Weighted | ||||||||||
(dollars in thousands) | Amount | Average Rate | Amount | Average Rate | ||||||||
Demand deposits: |
|
|
|
|
|
|
|
|
| |||
Noninterest-bearing | $ | |
| — | $ | |
| — | ||||
Interest-bearing |
| |
| | % |
| |
| | % | ||
Money market and savings |
| |
| | % |
| |
| | % | ||
Certificates of deposits |
| |
| | % |
| |
| | % | ||
Total | $ | |
| | % | $ | |
| | % | ||
At June 30, 2022, of the $
25
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
$
NOTE 9: BORROWINGS
At June 30, 2022, our borrowings consisted of $
As a matter of practice, the Bank provides substantially all of its qualifying loans as collateral to the FHLB or the Federal Reserve Bank. FHLB advances are collateralized primarily by loans secured by single family, multifamily, and commercial real estate properties with a carrying value of $
During 2017, FFI entered into a loan agreement with an unaffiliated lender that provides for a revolving line of credit for up to $
The Bank also has $
26
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
NOTE 10: 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 and six months ended June 30, 2022 and 2021:
| Three Months Ended | Three Months Ended | |||||||||||
| June 30, 2022 | June 30, 2021 | |||||||||||
(dollars in thousands, except per share amounts) | Basic | Diluted | Basic | Diluted | |||||||||
Net income |
| $ | |
| $ | |
| $ | |
| $ | | |
Basic common shares outstanding |
| |
| |
| |
| | |||||
Effect of options, restricted stock and contingent shares issuable | | | |||||||||||
Diluted common shares outstanding |
|
|
| |
|
|
| | |||||
Earnings per share | $ | | $ | | $ | | $ | | |||||
Based on a weighted average basis, restricted stock units to purchase
Six Months Ended | Six Months Ended | |||||||||||
| June 30, 2022 | June 30, 2021 | ||||||||||
(dollars in thousands, except share and per share amounts) | Basic | Diluted | Basic | Diluted | ||||||||
Net income |
| $ | |
| $ | |
| $ | |
| $ | |
Basic common shares outstanding |
| |
| |
| |
| | ||||
Effect of options, restricted stock and contingent shares issuable | | | ||||||||||
Diluted common shares outstanding |
|
|
| |
|
|
| | ||||
Earnings per share | $ | | $ | | $ | | $ | | ||||
Based on a weighted average basis, restricted stock units to purchase
27
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
NOTE 11: SEGMENT REPORTING
For the three and six months ended June 30, 2022 and 2021, the Company had
|
| Wealth |
|
| ||||||||
(dollars in thousands) | Banking | Management | Other | Total | ||||||||
Three Months Ended June 30, 2022: |
|
|
|
|
|
|
|
| ||||
Interest income | $ | | $ | — | $ | — | $ | | ||||
Interest expense |
| |
| — |
| |
| | ||||
Net interest income |
| |
| — |
| ( |
| | ||||
Provision for credit losses |
| |
| — |
| — |
| | ||||
Noninterest income |
| |
| |
| ( |
| | ||||
Noninterest expense |
| |
| |
| |
| | ||||
Income (loss) before taxes on income | $ | | $ | | $ | ( | $ | | ||||
Three Months Ended June 30, 2021: |
|
|
|
|
|
|
|
| ||||
Interest income | $ | | $ | — | $ | — | $ | | ||||
Interest expense |
| |
| — |
| |
| | ||||
Net interest income |
| |
| — |
| ( |
| | ||||
Provision for credit losses |
| |
| — |
| — |
| | ||||
Noninterest income |
| |
| |
| ( |
| | ||||
Noninterest expense |
| |
| |
| |
| | ||||
Income (loss) before taxes on income | $ | | $ | | $ | ( | $ | | ||||
|
| Wealth |
|
| ||||||||
(dollars in thousands) | Banking | Management | Other | Total | ||||||||
Six Months Ended June 30, 2022: |
|
|
|
|
|
|
|
| ||||
Interest income | $ | | $ | — | $ | — | $ | | ||||
Interest expense |
| |
| — |
| |
| | ||||
Net interest income |
| |
| — |
| ( |
| | ||||
Provision for credit losses |
| ( |
| — |
| — |
| ( | ||||
Noninterest income |
| |
| |
| ( |
| | ||||
Noninterest expense |
| |
| |
| |
| | ||||
Income (loss) before taxes on income | $ | | $ | | $ | ( | $ | | ||||
Six Months Ended June 30, 2021: |
|
|
|
|
|
|
|
| ||||
Interest income | $ | | $ | — | $ | — | $ | | ||||
Interest expense |
| |
| — |
| |
| | ||||
Net interest income |
| |
| — |
| ( |
| | ||||
Provision for credit losses |
| |
| — |
| — |
| | ||||
Noninterest income |
| |
| |
| ( |
| | ||||
Noninterest expense |
| |
| |
| |
| | ||||
Income (loss) before taxes on income | $ | | $ | | $ | ( | $ | | ||||
28
FIRST FOUNDATION INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2022 - UNAUDITED
NOTE 12: SUBSEQUENT EVENTS
Cash Dividend
On July 25, 2022, the Board of Directors of the Company declared a quarterly cash dividend of $
29
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 and six months ended June 30, 2022 as compared to our results of operations in the three and six months ended June 30, 2021; and our financial condition at June 30, 2022 as compared to our financial condition at December 31, 2021. 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, 2021, and the notes thereto, which are set forth in Item 8 of our Annual Report on Form 10-K (our “2021 10-K”) which we filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022.
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 2021 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 2021 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 2021 10-K, except as may otherwise be required by applicable law or government regulations.
30
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 – Investment Securities – The ACL on investment securities is determined for both held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with ASC 326, and is evaluated on a quarterly basis. The ACL for held-to-maturity investment securities is determined on a collective basis, based on shared risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. Under ASC 326-20, for investment securities where the Company has reason to believe the credit loss exposure is remote, such as those guaranteed by the U.S. government or government sponsored entities, a zero loss expectation is applied and a company is not required to estimate and recognize an ACL.
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 neither criteria is met, the Company is required to assess whether the decline in fair value has resulted from credit losses or noncredit-related factors. In determining whether a security’s decline in fair value is credit related, the Company considers a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security, and (v) the ability of the issuer of the security to make scheduled principal and interest payments. If, after considering these factors, 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 is 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 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
31
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.
We have two business segments, “Banking” and “Wealth Management.” Banking includes the operations of FFB, FFIS, Blue Moon, and FFPF, while 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 six months of 2022 include:
| ● | Total loans, including loans held for sale, increased $2 billion in the six months ended June 30, 2022 as a result of $3.4 billion of originations, which was partially offset by payoffs or scheduled payments of $1.4 billion. |
| ● | During the six months ended June 30, 2022, total deposits increased by $727 million and total revenues (net interest income and noninterest income) increased by 34% when compared to the six months ended June 30, 2021. |
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 57% and 78%, respectively, of the total noninterest expense for Banking and Wealth Management in the six months ended June 30, 2022.
32
The following table shows key operating results for each of our business segments for the three months ended June 30:
|
| Wealth |
|
| |||||||||
(dollars in thousands) |
| Banking |
| Management |
| Other |
| Total | |||||
2022: |
|
|
|
|
|
|
|
| |||||
Interest income | $ | 89,971 | $ | — | $ | — | $ | 89,971 | |||||
Interest expense |
| 6,476 |
| — |
| 1,690 |
| 8,166 | |||||
Net interest income |
| 83,495 |
| — |
| (1,690) |
| 81,805 | |||||
Provision for credit losses |
| 173 |
| — |
| — |
| 173 | |||||
Noninterest income |
| 5,857 |
| 7,980 |
| (437) |
| 13,400 | |||||
Noninterest expense |
| 42,032 |
| 6,189 |
| 584 |
| 48,805 | |||||
Income (loss) before taxes on income | $ | 47,147 | $ | 1,791 | $ | (2,711) | $ | 46,227 | |||||
2021: |
|
|
|
|
|
|
|
| |||||
Interest income | $ | 61,403 | $ | — | $ | — | $ | 61,403 | |||||
Interest expense |
| 3,387 |
| — |
| 106 |
| 3,493 | |||||
Net interest income |
| 58,016 |
| — |
| (106) |
| 57,910 | |||||
Provision for credit losses |
| 44 |
| — |
| — |
| 44 | |||||
Noninterest income |
| 7,199 |
| 7,240 |
| (404) |
| 14,035 | |||||
Noninterest expense |
| 28,868 |
| 5,372 |
| 1,377 |
| 35,617 | |||||
Income (loss) before taxes on income | $ | 36,303 | $ | 1,868 | $ | (1,887) | $ | 36,284 | |||||
General. Our net income and income before taxes in the three months ended June 30, 2022 were $33.3 million and $46.2 million, respectively, as compared to $26.1 million and $36.3 million, respectively, in the three months ended June 30, 2021. The $9.9 million increase in income before taxes was the result of a $10.8 million increase in income before taxes for Banking, which was partially offset by a $0.1 million decrease in Wealth Management and a $0.8 million increase in corporate expenses. The increase in Banking was due to higher net interest income, which was partially offset by an increase in noninterest expenses. The decrease in Wealth Management was due to higher noninterest expenses, which was partially offset by an increase in noninterest income. The increase in corporate expenses was due primarily to an increase in interest expense from subordinated debt acquired in the TGRF acquisition and the $150 million of subordinated notes issued by the Company in the first quarter of 2022.
33
The following table shows key operating results for each of our business segments for the six months ended June 30:
|
| Wealth |
|
| ||||||||
(dollars in thousands) |
| Banking |
| Management |
| Other |
| Total | ||||
2022: |
|
|
|
|
|
|
|
| ||||
Interest income | $ | 169,115 | $ | — | $ | — | $ | 169,115 | ||||
Interest expense |
| 9,889 |
| — |
| 2,927 |
| 12,816 | ||||
Net interest income |
| 159,226 |
| — |
| (2,927) |
| 156,299 | ||||
Provision for credit losses |
| (619) |
| — |
| — |
| (619) | ||||
Noninterest income |
| 13,388 |
| 16,325 |
| (886) |
| 28,827 | ||||
Noninterest expense |
| 82,133 |
| 12,833 |
| 1,457 |
| 96,423 | ||||
Income (loss) before taxes on income | $ | 91,100 | $ | 3,492 | $ | (5,270) | $ | 89,322 | ||||
2021: |
|
|
|
|
|
|
|
| ||||
Interest income | $ | 120,541 | $ | — | $ | — | $ | 120,541 | ||||
Interest expense |
| 8,235 |
| — |
| 167 |
| 8,402 | ||||
Net interest income |
| 112,306 |
| — |
| (167) |
| 112,139 | ||||
Provision for credit losses |
| 404 |
| — |
| — |
| 404 | ||||
Noninterest income |
| 12,508 |
| 14,163 |
| (728) |
| 25,943 | ||||
Noninterest expense |
| 57,447 |
| 11,103 |
| 1,578 |
| 70,128 | ||||
Income (loss) before taxes on income | $ | 66,963 | $ | 3,060 | $ | (2,473) | $ | 67,550 | ||||
General. Our net income and income before taxes in the six months ended June 30, 2022 were $64.2 million and $89.3 million, respectively, as compared to $48.4 million and $67.6 million, respectively, in the six months ended June 30, 2021. The $21.7 million increase in income before taxes was the result of a $24.1 million increase in income before taxes for Banking and a $0.4 million increase in income before taxes for Wealth Management, which was partially offset by a $2.8 million increase in corporate expenses. The increase in Banking was due to higher net interest income, higher noninterest income, and lower provision for credit losses. The increase in Wealth Management was due to higher noninterest income. The increase in corporate expenses was due primarily to an increase in interest expense from subordinated debt acquired in the TGRF acquisition and the $150 million of subordinated notes issued by the Company in the first quarter of 2022.
34
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:
| Three Months Ended June 30: |
| ||||||||||||||||
| 2022 |
| 2021 |
| ||||||||||||||
Average | Average | Average | Average | |||||||||||||||
(dollars in thousands) |
| Balances |
| Interest |
| Yield /Rate |
| Balances |
| Interest |
| Yield /Rate |
| |||||
Interest-earning assets: |
|
|
|
|
|
|
| |||||||||||
Loans | $ | 8,497,504 | $ | 82,032 |
| 3.86 | % | $ | 5,780,494 | $ | 55,979 |
| 3.88 | % | ||||
Securities AFS |
| 267,634 |
| 2,006 |
| 3.00 | % |
| 741,967 |
| 4,927 |
| 2.66 | % | ||||
Securities HTM | 949,893 | 4,615 | 1.94 | % | — | — | — | % | ||||||||||
FHLB stock, fed funds, and deposits |
| 569,002 |
| 1,318 |
| 0.93 | % |
| 727,053 |
| 497 |
| 0.27 | % | ||||
Total interest-earning assets |
| 10,284,033 |
| 89,971 |
| 3.50 | % |
| 7,249,514 |
| 61,403 |
| 3.39 | % | ||||
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
| |||||||
Nonperforming assets |
| 10,459 |
|
|
| 16,500 |
|
|
|
| ||||||||
Other |
| 437,320 |
|
|
| 193,334 |
|
|
|
| ||||||||
Total assets | $ | 10,731,812 |
|
| $ | 7,459,348 |
|
|
|
| ||||||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Demand deposits | $ | 2,461,369 | $ | 2,870 |
| 0.47 | % | $ | 940,133 | $ | 556 |
| 0.24 | % | ||||
Money market and savings |
| 2,643,388 |
| 2,700 |
| 0.41 | % |
| 2,271,899 |
| 2,137 |
| 0.38 | % | ||||
Certificates of deposit |
| 646,527 |
| 770 |
| 0.48 | % |
| 720,326 |
| 694 |
| 0.39 | % | ||||
Total interest-bearing deposits |
| 5,751,284 |
| 6,340 |
| 0.44 | % |
| 3,932,358 |
| 3,387 |
| 0.35 | % | ||||
Borrowings |
| 327,212 |
| 1,826 |
| 2.27 | % |
| 12,980 |
| 106 |
| 3.26 | % | ||||
Total interest-bearing liabilities |
| 6,078,496 |
| 8,166 |
| 0.54 | % |
| 3,945,338 |
| 3,493 |
| 0.35 | % | ||||
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Demand deposits |
| 3,479,847 |
|
|
| 2,751,013 |
|
|
|
| ||||||||
Other liabilities |
| 85,649 |
|
|
| 42,761 |
|
|
|
| ||||||||
Total liabilities |
| 9,643,992 |
|
|
| 6,739,112 |
|
|
|
| ||||||||
Shareholders’ equity |
| 1,087,820 |
|
|
| 720,236 |
|
|
|
| ||||||||
Total liabilities and equity | $ | 10,731,812 |
|
| $ | 7,459,348 |
|
|
|
| ||||||||
Net Interest Income | $ | 81,805 |
|
|
| $ | 57,910 |
|
| |||||||||
Net Interest Rate Spread |
|
| 2.96 | % |
|
|
|
|
| 3.04 | % | |||||||
Net Interest Margin |
|
| 3.18 | % |
|
|
|
|
| 3.20 | % | |||||||
35
| Six Months Ended June 30: |
| |||||||||||||||
| 2022 |
| 2021 |
| |||||||||||||
Average | Average | Average | Average | ||||||||||||||
(dollars in thousands) |
| Balances |
| Interest |
| Yield /Rate |
| Balances |
| Interest |
| Yield /Rate |
| ||||
Interest-earning assets: |
|
|
|
|
|
|
| ||||||||||
Loans | $ | 8,015,946 | $ | 154,059 |
| 3.85 | % | $ | 5,583,216 | $ | 109,510 |
| 3.93 | % | |||
Securities AFS |
| 572,754 |
| 6,949 |
| 2.43 | % |
| 757,002 |
| 10,133 |
| 2.68 | % | |||
Securities HTM | 634,994 | 6,032 | 1.90 | % | — | — | — | % | |||||||||
FHLB stock, fed funds and deposits |
| 889,110 |
| 2,075 |
| 0.47 | % |
| 720,750 |
| 898 |
| 0.25 | % | |||
Total interest-earning assets |
| 10,112,804 |
| 169,115 |
| 3.35 | % |
| 7,060,968 |
| 120,541 |
| 3.42 | % | |||
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
| ||||||
Nonperforming assets |
| 10,292 |
|
|
| 17,322 |
|
|
|
| |||||||
Other |
| 443,265 |
|
|
| 191,498 |
|
|
|
| |||||||
Total assets | $ | 10,566,361 |
|
| $ | 7,269,788 |
|
|
|
| |||||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Demand deposits | $ | 2,410,633 | $ | 3,921 |
| 0.33 | % | $ | 955,198 | $ | 1,430 |
| 0.30 | % | |||
Money market and savings |
| 2,627,287 |
| 4,572 |
| 0.35 | % |
| 2,307,010 |
| 4,719 |
| 0.41 | % | |||
Certificates of deposit |
| 650,382 |
| 1,205 |
| 0.37 | % |
| 790,298 |
| 1,861 |
| 0.47 | % | |||
Total interest-bearing deposits |
| 5,688,302 |
| 9,698 |
| 0.34 | % |
| 4,052,506 |
| 8,010 |
| 0.40 | % | |||
Borrowings |
| 314,296 |
| 3,118 |
| 2.02 | % |
| 108,999 |
| 392 |
| 0.73 | % | |||
Total interest-bearing liabilities |
| 6,002,598 |
| 12,816 |
| 0.43 | % |
| 4,161,505 |
| 8,402 |
| 0.41 | % | |||
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Demand deposits |
| 3,397,948 |
|
|
| 2,343,141 |
|
|
|
| |||||||
Other liabilities |
| 90,042 |
|
|
| 54,742 |
|
|
|
| |||||||
Total liabilities |
| 9,490,588 |
|
|
| 6,559,388 |
|
|
|
| |||||||
Stockholders’ equity |
| 1,075,773 |
|
|
| 710,400 |
|
|
|
| |||||||
Total liabilities and equity | $ | 10,566,361 |
|
| $ | 7,269,788 |
|
|
|
| |||||||
Net Interest Income | $ | 156,299 |
|
|
| $ | 112,139 |
|
| ||||||||
Net Interest Rate Spread |
|
| 2.92 | % |
|
|
|
|
| 3.01 | % | ||||||
Net Interest Margin |
|
| 3.10 | % |
|
|
|
|
| 3.18 | % | ||||||
36
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 and six months ended June 30, 2022, as compared to the three and six months ended June 30, 2021:
| Quarter Ended | Six Months Ended | |||||||||||||||||
June 30, 2022 vs. 2021 | June 30, 2022 vs. 2021 | ||||||||||||||||||
| Increase (Decrease) due to | Increase (Decrease) due to | |||||||||||||||||
(dollars in thousands) |
| Volume |
| Rate |
| Total |
| Volume |
| Rate |
| Total | |||||||
Interest earned on: |
|
|
|
|
|
|
|
|
|
|
| ||||||||
Loans | $ | 26,217 | $ | (164) | $ | 26,053 | $ | 46,711 | $ | (2,162) | $ | 44,549 | |||||||
Securities AFS |
| (3,484) |
| 563 |
| (2,921) |
| (2,306) |
| (878) |
| (3,184) | |||||||
Securities HTM | 2,307 | 2,308 | 4,615 | 3,041 | 2,991 | 6,032 | |||||||||||||
Cash, FHLB stock, fed funds and deposits |
| (135) |
| 956 |
| 821 |
| 246 |
| 931 |
| 1,177 | |||||||
Total interest-earning assets |
| 24,905 |
| 3,663 |
| 28,568 |
| 47,692 |
| 882 |
| 48,574 | |||||||
Interest paid on: |
|
|
|
|
|
|
|
|
|
|
| ||||||||
Demand deposits |
| 1,439 |
| 875 |
| 2,314 |
| 2,357 |
| 134 |
| 2,491 | |||||||
Money market and savings |
| 370 |
| 193 |
| 563 |
| 607 |
| (754) |
| (147) | |||||||
Certificates of deposit |
| (77) |
| 153 |
| 76 |
| (298) |
| (358) |
| (656) | |||||||
Borrowings |
| 1,762 |
| (42) |
| 1,720 |
| 1,389 |
| 1,337 |
| 2,726 | |||||||
Total interest-bearing liabilities |
| 3,494 |
| 1,179 |
| 4,673 |
| 4,055 |
| 359 |
| 4,414 | |||||||
Net interest income | $ | 21,411 | $ | 2,484 | $ | 23,895 | $ | 43,637 | $ | 523 | $ | 44,160 | |||||||
Net interest income increased 41%, from $57.9 million in the three months ended June 30, 2021, to $81.8 million in the three months ended June 30, 2022, due to a 42% increase in interest-earning assets. On a consolidated basis our net interest margin decreased from 3.20% in the three months ended June 30, 2021, to 3.18% in the three months ended June 30, 2022, due to an increase in the cost of interest-bearing liabilities, from 0.35% in the three months ended June 30, 2021, to 0.54% in the three months ended June 30, 2022, which was partially offset by an increase in yield on interest-earning assets, from 3.39% in the three months ended June 30, 2021, to 3.50% in the three months ended June 30, 2022. The increase in interest-earning assets was due to a 47% increase in average loans, from $5.8 billion in the three months ended June 30, 2021, to $8.5 billion in the three months ended June 30, 2022. The increase in the cost of interest-bearing liabilities was due to increased costs of interest-bearing deposits, resulting from increases in deposit market rates, and an increase in borrowings. The average rate on interest-bearing deposits increased from 0.35% in the three months ended June 30, 2021, to 0.44% in the three months ended June 30, 2022, and the average balance increased from $3.9 billion in the three months ended June 30, 2021, to $5.8 billion in the three months ended June 30, 2022. The average balance outstanding on borrowings increased from $13 million in the three months ended June 30, 2021, to $327.2 million in the three months ended June 30, 2022. The increase in borrowings was due to the issuance of $150 million in subordinated notes in the first quarter of 2022, and the assumption of $165 million in repurchase agreements and $23 million in subordinated notes acquired from the TGRF acquisition in the fourth quarter of 2021. The average balance outstanding under the holding company subordinated debt was $173.3 million in the three months ended June 30, 2022.
Net interest income increased 39%, from $112.1 million in the six months ended June 30, 2021, to $156.3 million in the six months ended June 30, 2022, due primarily to a 43% increase in interest-earning assets. On a consolidated basis our net interest margin was 3.10% for the six months ended June 30, 2022, as compared to 3.18% in the six months ended June 30, 2021. This decrease was due to a decrease in the net interest rate spread, from 3.01% in the six months ended June 30, 2021, to 2.92% in the six months ended June 30, 2022. The decrease in the net interest rate spread was due to an increase in the cost of interest-bearing liabilities, from 0.41% in the six months ended June 30, 2021, to 0.43% in the six months ended June 30, 2022, and a decrease in yield on total interest-earning assets, from 3.42% in the six months ended June 30, 2021, to 3.35% in the six months ended June 30, 2022, which was offset partially by a 43.6% increase in average loans, from $5.6 billion in the six months ended June 30, 2021, to $8.0 billion in the six months ended June 30, 2022. The increase in the cost of interest-bearing liabilities was due to increased costs of interest-bearing deposits, resulting from increases in deposit market rates, and an increase in borrowings. The average balance outstanding on borrowings increased
37
from $109 million in the six months ended June 30, 2021, to $314.3 million in the six months ended June 30, 2022. The average balance outstanding under the holding company subordinated debt was $154.5 million in the six months ended June 30, 2022. The average balance outstanding under the holding company line of credit decreased from $9.1 million in the six months ended June 30, 2021, to $0.2 million in the six months ended June 30, 2022.
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 for the three months ended June 30, 2022 was $0.2 million and net chargeoffs of $0.6 million for the six months ended June 30, 2022, compared to provisions of $44,000 and $0.4 million, for the three and six months ended June 30, 2021, respectively. Net recoveries were $0.2 million for the three and six months ended June 30, 2022, as compared to net chargeoffs of $0.1 million and net recoveries of $0.1 million for the three and six months ended June 30, 2021, respectively. The decrease in the provision for credit losses for the six months ended June 30, 2022 was a result of the release of specific reserves related to purchase credit deteriorated (“PCD”) loans from prior acquisitions.
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 and six months ended June 30, 2022 and 2021:
(dollars in thousands) |
| 2022 |
| 2021 | ||
Three Months Ended June 30: | ||||||
Trust fees | $ | 2,149 | $ | 1,763 | ||
Loan related fees |
| 2,071 |
| 1,324 | ||
Deposit charges |
| 665 |
| 397 | ||
Gain on sale of loans | — | 3,324 | ||||
Consulting fees |
| 100 |
| 100 | ||
Other |
| 872 |
| 291 | ||
Total noninterest income | $ | 5,857 | $ | 7,199 | ||
Six Months Ended June 30: | ||||||
Trust fees | $ | 4,257 | $ | 3,431 | ||
Loan related fees |
| 4,633 |
| 4,268 | ||
Deposit charges |
| 1,309 |
| 776 | ||
Gain on sale leaseback | 1,123 | — | ||||
Gain on sale of loans |
| — |
| 3,324 | ||
Consulting fees | 195 | 201 | ||||
Other |
| 1,871 |
| 508 | ||
Total noninterest income | $ | 13,388 | $ | 12,508 | ||
Noninterest income for Banking decreased in the three months ended June 30, 2022, by $1.3 million due to a $3.3 million gain on sale of loans in the three months ended June 30, 2021, offset partially by increases in trust and loan related fees. Noninterest income for Banking increased by $0.9 million in the six months ended June 30, 2022, due to a $1.1 million gain on a sale leaseback transaction, a $0.4 million increase in loan related fees, $0.8 million increase in trust fees, and a $0.5 million increase in deposit charges, offset partially by the gain on sale of loans in the six months ended June 30, 3021. The increase in trust fees was due primarily to higher levels of billable assets under advisement (“AUA”). The increase in loan fees was primarily due to higher prepayment fees and higher servicing fees. The increase in deposit charges was due to higher levels of deposits.
38
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 and six months ended June 30, 2022 and 2021:
(dollars in thousands) |
| 2022 |
| 2021 | ||
Three Months Ended June 30: | ||||||
Noninterest income | $ | 7,980 | $ | 7,240 | ||
Six Months Ended June 30: | ||||||
Noninterest income | $ | 16,325 | $ | 14,163 | ||
Noninterest income for Wealth Management increased by $0.7 million and $2.2 million in the three and six months ended June 30, 2022 when compared to the corresponding periods in 2021, due primarily to higher levels of billable AUM in the quarter and six months ended June 30, 2022.
The following table summarizes the activity in our AUM for the periods indicated:
Existing account | ||||||||||||||||||
Beginning | Additions/ | New | ||||||||||||||||
(dollars in thousands) |
| Balance |
| Withdrawals |
| Accounts |
| Terminations |
| Performance |
| Ending balance | ||||||
Three Months Ended June 30, 2022: |
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed income | $ | 1,275,399 | $ | 13,546 | $ | 47,149 | $ | (6,503) | $ | (73,712) | $ | 1,255,879 | ||||||
Equities |
| 3,097,277 |
| (76,582) |
| 32,949 |
| (23,635) |
| (555,498) |
| 2,474,511 | ||||||
Cash and other |
| 1,083,066 |
| 33,496 |
| 19,543 |
| (19,101) |
| (25,615) |
| 1,091,389 | ||||||
Total | $ | 5,455,742 | $ | (29,540) | $ | 99,641 | $ | (49,239) | $ | (654,825) | $ | 4,821,779 | ||||||
Six Months Ended June 30, 2022: |
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed income | $ | 1,303,760 | $ | 35,549 | $ | 91,189 | $ | (18,128) | $ | (156,491) | $ | 1,255,879 | ||||||
Equities | 3,330,639 | (41,446) | 79,135 | (53,086) | (840,731) | 2,474,511 | ||||||||||||
Cash and other |
| 1,046,206 |
| 20,353 |
| 52,518 |
| (34,639) |
| 6,951 |
| 1,091,389 | ||||||
Total | $ | 5,680,605 | $ | 14,456 | $ | 222,842 | $ | (105,853) | $ | (990,271) | $ | 4,821,779 | ||||||
Year Ended December 31, 2021: |
|
|
|
|
|
|
|
|
|
|
| |||||||
Fixed income | $ | 1,474,479 | $ | (195,117) | $ | 71,181 | $ | (45,818) | $ | (965) | $ | 1,303,760 | ||||||
Equities | 2,451,056 | 448,338 | 200,073 | (156,809) | 387,981 | 3,330,639 | ||||||||||||
Cash and other |
| 1,001,256 |
| (209,727) | 146,701 | (84,213) | 192,189 |
| 1,046,206 | |||||||||
Total | $ | 4,926,791 | $ | 43,494 | $ | 417,955 | $ | (286,840) | $ | 579,205 | $ | 5,680,605 | ||||||
The $859 million decrease in AUM during the six months ended June 30, 2022, was the net result of $223 million of new accounts, $990 million of portfolio losses, and terminations and net withdrawals of $91 million.
39
Noninterest Expense. The following table provides a breakdown of noninterest expense for Banking and Wealth Management for the periods indicated:
Banking | Wealth Management | |||||||||||
(dollars in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||
Three Months Ended June 30: | ||||||||||||
Compensation and benefits |
| $ | 22,567 |
| $ | 15,835 |
| $ | 4,801 |
| $ | 4,130 |
Occupancy and depreciation |
| 8,356 |
| 5,268 |
| 458 |
| 442 | ||||
Professional services and marketing |
| 2,237 |
| 2,296 |
| 730 |
| 677 | ||||
Customer service costs |
| 4,611 |
| 2,353 |
| — |
| — | ||||
Other expenses |
| 4,261 |
| 3,116 |
| 200 |
| 123 | ||||
Total noninterest expense | $ | 42,032 | $ | 28,868 | $ | 6,189 | $ | 5,372 | ||||
Six Months Ended June 30: | ||||||||||||
Compensation and benefits |
| $ | 46,843 |
| $ | 32,658 |
| $ | 10,013 |
| $ | 8,577 |
Occupancy and depreciation |
| 16,469 |
| 10,907 |
| 912 |
| 963 | ||||
Professional services and marketing |
| 4,580 |
| 4,067 |
| 1,545 |
| 1,316 | ||||
Customer service costs |
| 6,399 |
| 4,123 |
| — |
| — | ||||
Other expenses |
| 7,842 |
| 5,692 |
| 363 |
| 247 | ||||
Total noninterest expense | $ | 82,133 | $ | 57,447 | $ | 12,833 | $ | 11,103 | ||||
Noninterest expense for Banking increased from $28.9 million in the three months ended June 30, 2021, to $42.0 million in the three months ended June 30, 2022, primarily due to higher compensation and benefits, occupancy and depreciation, customer service costs, and other expenses. Compensation and benefits were $6.7 million higher in the three months ended June 30, 2022, due to increases in FTE. The FTE for Banking increased to 661.2 in the three months ended June 30, 2022, from 458.3 in the three months ended June 30, 2021, due to increased staffing related to additional personnel from the TGRF acquisition, and to support the growth in loans and deposits. The $3.1 million increase in occupancy and depreciation expenses for Banking in the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, was due to the TGRF acquisition and increases in higher core processing costs related to higher volumes and services. The $2.3 million increase in customer service costs for Banking in the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, was due to higher earnings credits paid on increases in deposit balances. The $1.1 million increase in other expenses for Banking in the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, were due to additional activities related to the acquisitions, primarily amortization of core deposit intangibles and FDIC insurance. Noninterest expenses for Wealth Management increased by $0.8 million in the second quarter of 2022 when compared to the second quarter of 2021 due to higher compensation and benefits expenses.
Noninterest expense for Banking increased from $57.4 million in the six months ended June 30, 2021, to $82.1 million in the six months ended June 30, 2022, primarily due to higher compensation and benefits, occupancy and depreciation, and customer service costs. Compensation and benefits for Banking increased from $32.7 million in the six months ended June 30, 2021, to $46.8 million in the six months ended June 30, 2022, due to increases in FTE. The FTE for Banking increased to 642.4 in the six months ended June 30, 2022, from 450.2 in the six months ended June 30, 2021, due to increased staffing related to additional personnel from the TGRF acquisition, and to support the growth in loans and deposits. The $5.6 million increase in occupancy and depreciation expenses for Banking in the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, was due to the TGRF acquisition and increases in higher core processing costs related to higher volumes and services. The $2.3 million increase in customer service costs for Banking in the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, was due to higher earnings credits paid on increases in deposit balances. The $2.2 million increase in other expenses for Banking in the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, were due to additional activities related to the acquisitions, primarily amortization of core deposit intangibles and FDIC insurance. Noninterest expenses for Wealth Management increased by $1.7 million in the six months ended June 30, 2022, when compared to the six months ended June 30, 2021, primarily due to an increase in compensation and benefits expenses.
40
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:
|
| Wealth |
| Other and |
| |||||||
(dollars in thousands) | Banking | Management | Eliminations | Total | ||||||||
June 30, 2022: |
|
|
|
| ||||||||
Cash and cash equivalents | $ | 173,026 | $ | 14,089 | $ | (13,591) | $ | 173,524 | ||||
Securities AFS, net |
| 240,270 |
| — |
| — |
| 240,270 | ||||
Securities HTM | 930,562 | — | — | 930,562 | ||||||||
Loans held for sale |
| 485,296 |
| — |
| — |
| 485,296 | ||||
Loans, net |
| 8,905,676 |
| — |
| — |
| 8,905,676 | ||||
Premises and equipment |
| 36,724 |
| 300 |
| 136 |
| 37,160 | ||||
Investment in FHLB stock |
| 17,250 |
| — |
| — |
| 17,250 | ||||
Deferred taxes |
| 19,410 |
| 87 |
| 1,974 |
| 21,471 | ||||
REO | 6,210 | — | — | 6,210 | ||||||||
Goodwill and intangibles |
| 222,749 |
| — |
| — |
| 222,749 | ||||
Other assets |
| 186,585 |
| 432 |
| 22,055 |
| 209,072 | ||||
Total assets | $ | 11,223,758 | $ | 14,908 | $ | 10,574 | $ | 11,249,240 | ||||
Deposits | $ | 9,597,680 | $ | — | $ | (58,936) | $ | 9,538,744 | ||||
Borrowings |
| 320,423 |
| — |
| 173,305 |
| 493,728 | ||||
Intercompany balances |
| 5,472 |
| 647 |
| (6,119) |
| — | ||||
Other liabilities |
| 98,690 |
| 3,749 |
| 11,420 |
| 113,859 | ||||
Shareholders’ equity |
| 1,201,493 |
| 10,512 |
| (109,096) |
| 1,102,909 | ||||
Total liabilities and equity | $ | 11,223,758 | $ | 14,908 | $ | 10,574 | $ | 11,249,240 | ||||
December 31, 2021: |
|
|
|
| ||||||||
Cash and cash equivalents | $ | 1,121,089 | $ | 3,195 | $ | (2,527) | $ | 1,121,757 | ||||
Securities AFS, net |
| 1,191,378 |
| — |
| — |
| 1,191,378 | ||||
Loans held for sale |
| 501,436 |
| — |
| — |
| 501,436 | ||||
Loans, net |
| 6,872,952 |
| — |
| — |
| 6,872,952 | ||||
Premises and equipment |
| 37,373 |
| 411 |
| 136 |
| 37,920 | ||||
Investment in FHLB stock |
| 18,249 |
| — |
| — |
| 18,249 | ||||
Deferred taxes |
| 20,745 |
| 138 |
| (48) |
| 20,835 | ||||
REO |
| 6,210 | — | — |
| 6,210 | ||||||
Goodwill and intangibles |
| 222,125 |
| — |
| — |
| 222,125 | ||||
Other assets |
| 179,385 |
| 365 |
| 23,592 |
| 203,342 | ||||
Total assets | $ | 10,170,942 | $ | 4,109 | $ | 21,153 | $ | 10,196,204 | ||||
Deposits | $ | 8,836,250 | $ | — | $ | (24,290) | $ | 8,811,960 | ||||
Borrowings |
| 165,930 |
| — |
| 44,197 |
| 210,127 | ||||
Intercompany balances |
| 4,605 |
| (8,204) |
| 3,599 |
| — | ||||
Other liabilities |
| 92,500 |
| 4,381 |
| 13,185 |
| 110,066 | ||||
Shareholders’ equity |
| 1,071,657 |
| 7,932 |
| (15,538) |
| 1,064,051 | ||||
Total liabilities and equity | $ | 10,170,942 | $ | 4,109 | $ | 21,153 | $ | 10,196,204 | ||||
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 six months ended June 30, 2022, total assets increased by $1.1 billion, primarily due to an increase in loans. During the six months ended June 30, 2022, securities decreased by $20 million primarily due to paydowns of
41
mortgage backed securities and corporate bonds. Loans and loans held for sale increased $2.0 billion in the six months ended June 30, 2022, primarily as a result of $3.4 billion of originations, which was partially offset by payoffs or scheduled payments of $1.4 billion. The $727 million growth in deposits during the six months ended June 30, 2022, included increases in commercial deposits of $787 million, $297 million in corporate deposits, and $94 million in digital channel deposits, offset by a decrease in branch deposits of $451 million. Borrowings increased by $284 million during the six months ended June 30, 2022, primarily due an increase of $148 million in subordinated debt, $149 million increase in overnight borrowings due to increased loan volume, and an increase of $6 million in repurchase agreements, offset partially by the $18.5 million paydown on FFI’s credit line.
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 $948 million during the six months ended June 30, 2022. 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:
| Amortized |
| Gross Unrealized |
| Allowance for |
| Estimated | ||||||||
(dollars in thousands) |
| Cost |
| Gains |
| Losses |
| Credit Losses |
| Fair Value | |||||
June 30, 2022: |
|
|
|
| |||||||||||
Collateralized mortgage obligations | $ | 10,941 | $ | — | $ | (936) | $ | — | $ | 10,005 | |||||
Agency mortgage-backed securities | 9,530 | — | (530) | — | 9,000 | ||||||||||
Municipal bonds | 50,567 | — | (3,733) | — | 46,834 | ||||||||||
SBA securities | 23,039 | 69 | (3) | — | 23,105 | ||||||||||
Beneficial interests in FHLMC securitization |
| 20,015 |
| 201 |
| — |
| (11,226) |
| 8,990 | |||||
Corporate bonds |
| 147,635 |
| 191 |
| (6,327) |
| — |
| 141,499 | |||||
U.S. Treasury |
| 897 |
| — |
| (60) |
| — |
| 837 | |||||
Total | $ | 262,624 | $ | 461 | $ | (11,589) | $ | (11,226) | $ | 240,270 | |||||
December 31, 2021: |
|
|
|
|
|
|
|
| |||||||
Collateralized mortgage obligations | $ | 13,862 | $ | — | $ | (37) | $ | — | $ | 13,825 | |||||
Agency mortgage-backed securities | 928,546 | 6,563 | (6,120) | — | 928,989 | ||||||||||
Municipal bonds | 52,052 |
| 94 |
| — |
| — |
| 52,146 | ||||||
SBA securities | 27,970 | 2 | — | — | 27,972 | ||||||||||
Beneficial interest in FHLMC securitization |
| 21,606 |
| 373 |
| — |
| (10,399) |
| 11,580 | |||||
Corporate bonds |
| 154,027 |
| 2,441 |
| (92) |
| — |
| 156,376 | |||||
U.S. Treasury |
| 499 |
| — |
| (9) |
| — |
| 490 | |||||
Total | $ | 1,198,562 | $ | 9,473 | $ | (6,258) | $ | (10,399) | $ | 1,191,378 | |||||
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 2021. SBA securities are pledged as collateral for repurchase agreements.
Excluding allowance for credit losses, the decrease in AFS securities in the first six months of 2022 was due primarily to the $917 million transfer of agency mortgage-backed securities to held-to-maturity.
42
Securities held to maturity. The following table provides a summary of the Company’s HTM securities portfolio as of:
| Amortized |
| Gross Unrecognized |
| Allowance for |
| Estimated | ||||||||
(dollars in thousands) |
| Cost |
| Gains |
| Losses |
| Credit Losses |
| Fair Value | |||||
June 30, 2022: |
|
|
|
| |||||||||||
Agency mortgage-backed securities | $ | 930,562 | $ | — | $ | (70,926) | $ | — | $ | 859,636 | |||||
Total | $ | 930,562 | $ | — | $ | (70,926) | $ | — | $ | 859,636 | |||||
There were no securities HTM as of December 31, 2021.
The scheduled maturities of securities AFS, other than agency mortgage-backed securities, and the related weighted average yield is as follows, as of June 30, 2022:
| Less than |
| 1 Through |
| 5 Through |
| After |
|
| |||||||
(dollars in thousands) | 1 Year | 5 years | 10 Years | 10 Years | Total |
| ||||||||||
Amortized Cost: |
|
|
|
|
|
| ||||||||||
Collateralized mortgage obligations | $ | — | $ | — | $ | 740 | $ | 10,201 | $ | 10,941 | ||||||
Agency mortgage-backed securities | — | 4,120 | 3,714 | 1,696 | 9,530 | |||||||||||
Municipal bonds | 304 | 5,176 | 35,374 | 9,713 | 50,567 | |||||||||||
SBA securities | 55 | 1,836 | 1,507 | 19,641 | 23,039 | |||||||||||
Beneficial interests in FHLMC securitization | — | 10,546 | — | 9,469 | 20,015 | |||||||||||
Corporate bonds | 6,018 | 10,412 | 125,671 | 5,534 | 147,635 | |||||||||||
U.S. Treasury |
| — |
| 897 |
| — |
| — |
| 897 | ||||||
Total | $ | 6,377 | $ | 32,987 | $ | 167,006 | $ | 56,254 | $ | 262,624 | ||||||
Weighted average yield |
| 1.97 | % |
| 1.98 | % |
| 3.48 | % |
| 2.00 | % |
| 2.94 | % | |
Estimated Fair Value: |
|
|
|
|
|
|
|
|
|
| ||||||
Collateralized mortgage obligations | $ | — | $ | — | $ | 687 | $ | 9,318 | $ | 10,005 | ||||||
Agency mortgage-backed securities | — | 3,969 | 3,460 | 1,571 | 9,000 | |||||||||||
Municipal bonds | 301 | 4,839 | 33,370 | 8,324 | 46,834 | |||||||||||
SBA securities | 55 | 1,833 | 1,510 | 19,707 | 23,105 | |||||||||||
Beneficial interests in FHLMC securitization | — | 10,546 | — | 9,670 | 20,216 | |||||||||||
Corporate bonds | 5,985 | 9,877 | 120,654 | 4,983 | 141,499 | |||||||||||
U.S. Treasury |
| — |
| 837 |
| — |
| — |
| 837 | ||||||
Total | $ | 6,341 | $ | 31,901 | $ | 159,681 | $ | 53,573 | $ | 251,496 | ||||||
The scheduled maturities of securities HTM, and the related weighted average yield is as follows, as of June 30, 2022:
| Less than |
| 1 Through |
| 5 Through |
| After |
|
| |||||||
(dollars in thousands) | 1 Year | 5 years | 10 Years | 10 Years | Total |
| ||||||||||
June 30, 2022 | ||||||||||||||||
Amortized Cost: |
|
|
|
|
|
|
|
|
|
| ||||||
Agency mortgage-backed securities | $ | — | $ | 131 | $ | 19,227 | $ | 911,204 | $ | 930,562 | ||||||
Total | $ | — | $ | 131 | $ | 19,227 | $ | 911,204 | $ | 930,562 | ||||||
Weighted average yield |
| — | % |
| 0.28 | % |
| 1.05 | % |
| 1.72 | % | 1.70 | % | ||
Estimated Fair Value: |
|
|
|
|
|
|
|
|
|
| ||||||
Agency mortgage-backed securities | $ | — | $ | 123 | $ | 17,937 | $ | 841,576 | $ | 859,636 | ||||||
Total | $ | — | $ | 123 | $ | 17,937 | $ | 841,576 | $ | 859,636 | ||||||
43
Loans. The following table sets forth our loans, by loan category, as of:
| June 30, |
| December 31, | ||||
(dollars in thousands) |
| 2022 |
| 2021 | |||
Outstanding principal balance: |
|
|
|
| |||
Loans secured by real estate: |
|
|
|
| |||
Residential properties: |
|
|
|
| |||
Multifamily | $ | 3,953,717 | $ | 2,886,055 | |||
Single family |
| 958,348 |
| 933,445 | |||
Total real estate loans secured by residential properties |
| 4,912,065 |
| 3,819,500 | |||
Commercial properties |
| 1,237,664 |
| 1,309,200 | |||
Land and construction |
| 170,887 |
| 156,028 | |||
Total real estate loans |
| 6,320,616 |
| 5,284,728 | |||
Commercial and industrial loans |
| 2,593,948 |
| 1,598,422 | |||
Consumer loans |
| 10,845 |
| 10,834 | |||
Total loans |
| 8,925,409 |
| 6,893,984 | |||
Premiums, discounts and deferred fees and expenses |
| 13,432 |
| 12,744 | |||
Total | $ | 8,938,841 | $ | 6,906,728 | |||
Loans and loans held for sale increased by $2.0 billion during six months ended June 30, 2022 primarily as a result of $3.4 billion of originations, which was partially offset by payoffs or scheduled payments of $1.4 billion.
Deposits. The following table sets forth information with respect to our deposits and the average rates paid on deposits, as of:
| June 30, 2022 |
| December 31, 2021 |
| ||||||||
Weighted | Weighted | |||||||||||
(dollars in thousands) |
| Amount |
| Average Rate |
| Amount |
| Average Rate |
| |||
Demand deposits: |
|
|
|
| ||||||||
Noninterest-bearing | $ | 3,587,375 |
| — | $ | 3,280,455 |
| — | ||||
Interest-bearing |
| 2,425,847 |
| 0.930 | % |
| 2,242,684 |
| 0.070 | % | ||
Money market and savings |
| 2,869,719 |
| 0.643 | % |
| 2,620,336 |
| 0.275 | % | ||
Certificates of deposits |
| 655,803 |
| 0.581 | % |
| 668,485 |
| 0.145 | % | ||
Total | $ | 9,538,744 |
| 0.470 | % | $ | 8,811,960 |
| 0.111 | % | ||
During the six months ended June 30, 2022, our deposit rates moved in a manner consistent with overall deposit market rates. The weighted average rate of our interest-bearing deposits increased from 0.18% at December 31, 2021, to 0.75% at June 30, 2022 due to increased costs of interest-bearing deposits, while the weighted average interest rates of both interest-bearing and noninterest-bearing deposits increased from 0.15% at December 31, 2021 to 0.47% at June 30, 2022. 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 June 30, 2022:
(dollars in thousands) | |||
3 months or less |
| $ | 379,579 |
Over 3 months through 6 months |
| 72,863 | |
Over 6 months through 12 months |
| 80,279 | |
Over 12 months |
| 55,509 | |
Total | $ | 588,230 |
From time to time, the Bank will utilize brokered deposits as a source of funding. As of June 30, 2022, the Bank held $90 million of deposits, which are classified as brokered deposits.
44
Borrowings. As of June 30, 2022, our borrowings consisted of $149 million in an overnight FHLB advance at the Bank, $174 million in subordinated notes at the holding company, and $171 million of repurchase agreements at the Bank. As of December 31, 2021, our borrowings consisted of $26 million in subordinated notes at the holding company, $166 million of repurchase agreements at the Bank, and $18.5 million of borrowings under a holding company line of credit. The FHLB overnight advance outstanding as of June 30, 2022, was paid in full in the early part of July 2022 and bore an interest rate of 1.66%. As of June 30, 2022, $150 million of the subordinated notes are fixed-to-floating rate notes that mature in February 2032. The notes will initially bear a rate of 3.50% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 2022 until February 1, 2027. From and including February 1, 2027 to, but excluding February 1, 2032, or the date of earlier redemption, the notes will bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be Three-Month Term Secured Overnight Financing Rate, or “SOFR”), each as defined in and subject to the provisions of the indenture under which the notes were issued, plus 204 basis points (2.04%), payable quarterly in arrears on February 1, May 1, August 1, and November 1 of each year, commencing on May 1, 2027. $24 million of the subordinated notes mature in June 2030 and bear a fixed interest rate of 6.0%, until June 30, 2025, at which time they will convert to a floating rate based on three month SOFR, plus 590 basis points (5.90%), until maturity. The maximum amount of borrowings at the Bank outstanding at any month-end during the six months ended June 30, 2022, and during all of 2021, were $320 million and $255 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:
90 Days | Total Past Due | ||||||||||||||||||||
(dollars in thousands) |
| 30–59 Days |
| 60-89 Days |
| or More |
| Nonaccrual |
| and Nonaccrual |
| Current |
| Total | |||||||
June 30, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Residential properties | $ | 480 | $ | — | $ | — | $ | 3,154 | $ | 3,634 | $ | 4,924,740 | $ | 4,928,374 | |||||||
Commercial properties |
| 1,932 |
| 343 |
| 2,877 |
| 4,246 |
| 9,398 |
| 1,226,767 |
| 1,236,165 | |||||||
Land and construction |
| — |
| — |
| — |
| — |
| — |
| 169,722 |
| 169,722 | |||||||
Commercial and industrial loans |
| 823 |
| 2,064 |
| — |
| 3,684 |
| 6,571 |
| 2,587,155 |
| 2,593,726 | |||||||
Consumer loans |
| 170 |
| — |
| — |
| — |
| 170 |
| 10,684 |
| 10,854 | |||||||
Total | $ | 3,405 | $ | 2,407 | $ | 2,877 | $ | 11,084 | $ | 19,773 | $ | 8,919,068 | $ | 8,938,841 | |||||||
Percentage of total loans |
| 0.04 | % |
| 0.03 | % |
| 0.03 | % |
| 0.12 | % |
| 0.22 | % |
|
|
|
| ||
December 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Residential properties | $ | 1,519 | $ | 310 | $ | — | $ | 3,281 | $ | 5,110 | $ | 3,827,385 | $ | 3,832,495 | |||||||
Commercial properties |
| 2,934 |
| — |
| — |
| 1,529 |
| 4,463 |
| 1,305,112 |
| 1,309,575 | |||||||
Land and construction |
| — |
| — |
| — |
| — |
| — |
| 155,926 |
| 155,926 | |||||||
Commercial and industrial loans |
| 303 |
| 260 |
| — |
| 3,520 |
| 4,083 |
| 1,593,782 |
| 1,597,865 | |||||||
Consumer loans |
| — |
| — |
| — |
| — |
| — |
| 10,867 |
| 10,867 | |||||||
Total | $ | 4,756 | $ | 570 | $ | — | $ | 8,330 | $ | 13,656 | $ | 6,893,072 | $ | 6,906,728 | |||||||
Percentage of total loans |
| 0.07 | % |
| 0.01 | % |
| — | % |
| 0.12 | % |
| 0.20 | % |
|
|
|
| ||
45
The following table summarizes our nonaccrual loans as of:
Nonaccrual | Nonaccrual | |||||
with Allowance | with no Allowance | |||||
(dollars in thousands) |
| for Credit Losses |
| for Credit Losses | ||
June 30, 2022 |
|
|
| |||
Real estate loans: | ||||||
Residential properties | $ | — | $ | 3,154 | ||
Commercial properties | — | 4,246 | ||||
Commercial and industrial loans |
| 1,835 |
| 1,849 | ||
Total | $ | 1,835 | $ | 9,249 | ||
December 31, 2021 |
|
|
| |||
Real estate loans: | ||||||
Residential properties | $ | — | $ | 3,281 | ||
Commercial properties | — | 1,529 | ||||
Commercial and industrial loans |
| 1,733 |
| 1,787 | ||
Total | $ | 1,733 | $ | 6,597 | ||
The following table presents the composition of TDRs by accrual and nonaccrual status as of:
| June 30, 2022 |
| December 31, 2021 | |||||||||||||||
(dollars in thousands) |
| Accrual |
| Nonaccrual |
| Total |
| Accrual |
| Nonaccrual |
| Total | ||||||
Residential loans | $ | — | $ | — | $ | — | $ | 1,200 | $ | — | $ | 1,200 | ||||||
Commercial real estate loans |
| 976 |
| 1,121 |
| 2,097 |
| 1,021 |
| 1,174 |
| 2,195 | ||||||
Commercial and industrial loans |
| 102 |
| 1,630 |
| 1,732 |
| 493 |
| 2,030 |
| 2,523 | ||||||
Total | $ | 1,078 | $ | 2,751 | $ | 3,829 | $ | 2,714 | $ | 3,204 | $ | 5,918 | ||||||
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.
46
Allowance for Credit Losses. The following table summarizes the activity in our ACL related to loans for the periods indicated:
Allowance | ||||||||||||||||||
Beginning | Provision for | on Acquired | Ending | |||||||||||||||
(dollars in thousands) |
| Balance | Credit Losses | PCD Loans |
| Charge-offs |
| Recoveries |
| Balance | ||||||||
Three months ended June 30, 2022: | ||||||||||||||||||
Real estate loans: |
|
|
|
|
|
|
|
|
| |||||||||
Residential properties | $ | 3,198 | $ | 1,248 | $ | — | $ | — | $ | — | $ | 4,446 | ||||||
Commercial properties |
| 15,636 |
| (2,922) |
| — |
| — |
| — |
| 12,714 | ||||||
Land and construction |
| 1,768 |
| (308) |
| — |
| — |
| — |
| 1,460 | ||||||
Commercial and industrial loans |
| 12,130 |
| 2,187 |
| — |
| — |
| 164 |
| 14,481 | ||||||
Consumer loans |
| 90 |
| (26) |
| — |
| — |
| — |
| 64 | ||||||
Total | $ | 32,822 | $ | 179 | $ | — | $ | — | $ | 164 | $ | 33,165 | ||||||
Six months ended June 30, 2022: | ||||||||||||||||||
Real estate loans: |
|
|
|
|
|
|
|
|
|
| ||||||||
Residential properties | $ | 2,637 | $ | 1,809 | $ | — | $ | — | $ | — | $ | 4,446 | ||||||
Commercial properties |
| 17,049 |
| (4,335) |
| — |
| — |
| — |
| 12,714 | ||||||
Land and construction |
| 1,995 |
| (535) |
| — |
| — |
| — |
| 1,460 | ||||||
Commercial and industrial loans |
| 11,992 |
| 2,336 |
| — |
| (145) |
| 298 |
| 14,481 | ||||||
Consumer loans |
| 103 |
| (39) |
| — |
| — |
| — |
| 64 | ||||||
Total | $ | 33,776 | $ | (764) | $ | — | $ | (145) | $ | 298 | $ | 33,165 | ||||||
Year ended December 31, 2021: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Residential properties | $ | 5,115 | $ | (1,453) | $ | 93 | $ | (1,118) | $ | — | $ | 2,637 | ||||||
Commercial properties |
| 8,711 |
| 774 |
| 7,564 |
| — |
| — |
| 17,049 | ||||||
Land and construction |
| 892 |
| 1,051 |
| 52 |
| — |
| — |
| 1,995 | ||||||
Commercial and industrial loans |
| 9,249 |
| 614 |
| 1,836 |
| (706) |
| 999 |
| 11,992 | ||||||
Consumer loans |
| 233 |
| (130) |
| — |
| — |
| — |
| 103 | ||||||
Total | $ | 24,200 | $ | 856 | $ | 9,545 | $ | (1,824) | $ | 999 | $ | 33,776 | ||||||
Our ACL related to loans represented 0.37% and 0.49% of total loans outstanding as of June 30, 2022, and December 31, 2021, respectively. The decrease in the ACL is primarily due to adjustments in impairment assumptions.
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.
47
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:
Allowance for Credit Losses | ||||||||||
Loans Evaluated | ||||||||||
(dollars in thousands) |
| Individually |
| Collectively |
| Total |
| |||
June 30, 2022: | ||||||||||
Allowance for credit losses: |
|
|
|
|
|
|
| |||
Real estate loans: |
|
|
|
|
|
|
| |||
Residential properties | $ | 79 | $ | 4,367 | $ | 4,446 | ||||
Commercial properties |
| 5,170 |
| 7,544 |
| 12,714 | ||||
Land and construction |
| — |
| 1,460 |
| 1,460 | ||||
Commercial and industrial loans |
| 2,225 |
| 12,256 |
| 14,481 | ||||
Consumer loans |
| — |
| 64 |
| 64 | ||||
Total | $ | 7,474 | $ | 25,691 | $ | 33,165 | ||||
Loans: |
|
|
|
|
|
| ||||
Real estate loans: |
|
|
|
|
|
| ||||
Residential properties | $ | 8,376 | $ | 4,919,998 | $ | 4,928,374 | ||||
Commercial properties |
| 40,646 |
| 1,195,519 |
| 1,236,165 | ||||
Land and construction |
| — |
| 169,722 |
| 169,722 | ||||
Commercial and industrial loans |
| 8,108 |
| 2,585,618 |
| 2,593,726 | ||||
Consumer loans |
| — |
| 10,854 |
| 10,854 | ||||
Total | $ | 57,130 | $ | 8,881,711 | $ | 8,938,841 | ||||
| Allowance for Credit Losses |
| ||||||||
Loans Evaluated | ||||||||||
(dollars in thousands) |
| Individually |
| Collectively |
| Total |
| |||
December 31, 2021: |
|
|
|
|
|
| ||||
Allowance for credit losses: |
|
|
|
|
|
| ||||
Real estate loans: |
|
|
|
|
|
| ||||
Residential properties | $ | 111 | $ | 2,526 | $ | 2,637 | ||||
Commercial properties |
| 7,967 |
| 9,082 |
| 17,049 | ||||
Land and construction |
| 52 |
| 1,943 |
| 1,995 | ||||
Commercial and industrial loans |
| 2,386 |
| 9,606 |
| 11,992 | ||||
Consumer loans |
| — |
| 103 |
| 103 | ||||
Total | $ | 10,516 | $ | 23,260 | $ | 33,776 | ||||
Loans: |
|
|
|
|
|
| ||||
Real estate loans: |
|
|
|
|
|
| ||||
Residential properties | $ | 9,593 | $ | 3,822,902 | $ | 3,832,495 | ||||
Commercial properties |
| 41,313 |
| 1,268,262 |
| 1,309,575 | ||||
Land and construction |
| 694 |
| 155,232 |
| 155,926 | ||||
Commercial and industrial loans |
| 9,963 |
| 1,587,902 |
| 1,597,865 | ||||
Consumer loans |
| — |
| 10,867 |
| 10,867 | ||||
Total | $ | 61,563 | $ | 6,845,165 | $ | 6,906,728 | ||||
48
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 $3.2 billion at June 30, 2022.
Cash Flows Provided by Operating Activities. During the six months ended June 30, 2022, operating activities provided net cash of $70 million, primarily due to net income of $64 million and a $5 million increase in accounts payable and other liabilities. During the six months ended June 30, 2021, operating activities provided net cash of $41 million, primarily due to net income of $48 million, offset partially by $3 million in gains on sales of loans.
Cash Flows Used in Investing Activities. During the six months ended June 30, 2022, investing activities used net cash of $2 billion, primarily due to a $2 billion net increase in loans and $172 million of securities purchases, offset partially by $175 million in cash received in principal collection and maturities of securities. During the six months ended June 30, 2021, investing activities used net cash of $637 million, primarily due to an $841 million net increase in loans and $83 million of securities purchases, offset partially by $144 million in cash received in principal collection and maturities of securities, and $142 million in proceeds from sales of loans.
Cash Flows Provided by Financing Activities. During the six months ended June 30, 2022, financing activities provided net cash of $993 million, consisting primarily of a net increase of $727 million in deposits, a $149 million increase in FHLB advances, and a $148 million increase in subordinated debt, offset partially by $12 million in dividends paid and a $19 million decrease in other borrowings. During the six months ended June 30, 2021, financing activities provided net cash of $936 million, consisting primarily of a net increase of $1.19 billion in deposits and $6 million in proceeds from a holding company line of credit, offset partially by a $255 million decrease in FHLB advances and $8 million in dividends paid.
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 June 30, 2022 and December 31, 2021, the loan-to-deposit ratios at FFB were 99% and 84%, respectively.
Off-Balance Sheet Arrangements
The following table provides the off-balance sheet arrangements of the Company as of June 30, 2022:
(dollars in thousands) |
| ||
Commitments to fund new loans | $ | 144,273 | |
Commitments to fund under existing loans, lines of credit |
| 1,281,157 | |
Commitments under standby letters of credit |
| 24,780 |
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
49
June 30, 2022, FFB was obligated on $315 million of letters of credit to the FHLB which were being used as collateral for public fund deposits, including $300 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 corrective 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 | ||||||||||||||
(dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
FFI |
|
|
|
|
|
|
| |||||||||
June 30, 2022: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
CET1 capital ratio | $ | 896,004 |
| 9.92 | % | $ | 406,358 |
| 4.50 | % |
|
|
| |||
Tier 1 leverage ratio |
| 896,004 |
| 8.50 | % |
| 421,597 |
| 4.00 | % |
|
|
| |||
Tier 1 risk-based capital ratio |
| 896,004 |
| 9.92 | % |
| 541,811 |
| 6.00 | % |
|
|
| |||
Total risk-based capital ratio |
| 1,110,094 |
| 12.29 | % |
| 722,414 |
| 8.00 | % |
|
|
| |||
December 31, 2021: |
|
|
|
|
|
|
|
| ||||||||
CET1 capital ratio | $ | 846,515 |
| 11.34 | % | $ | 335,801 |
| 4.50 | % |
|
|
| |||
Tier 1 leverage ratio |
| 846,515 |
| 8.43 | % |
| 401,645 |
| 4.00 | % |
|
|
| |||
Tier 1 risk-based capital ratio |
| 846,515 |
| 11.34 | % |
| 447,735 |
| 6.00 | % |
|
|
| |||
Total risk-based capital ratio |
| 887,821 |
| 11.90 | % |
| 596,980 |
| 8.00 | % |
|
|
| |||
FFB |
|
|
|
|
|
|
|
| ||||||||
June 30, 2022: |
|
|
|
|
|
|
|
| ||||||||
CET1 capital ratio | $ | 994,563 |
| 11.05 | % | $ | 405,065 |
| 4.50 | % | $ | 585,093 |
| 6.50 | % | |
Tier 1 leverage ratio |
| 994,563 |
| 8.81 | % |
| 451,478 |
| 4.00 | % |
| 564,348 |
| 5.00 | % | |
Tier 1 risk-based capital ratio |
| 994,563 |
| 11.05 | % |
| 540,086 |
| 6.00 | % |
| 720,115 |
| 8.00 | % | |
Total risk-based capital ratio |
| 1,035,348 |
| 11.50 | % |
| 720,115 |
| 8.00 | % |
| 900,144 |
| 10.00 | % | |
December 31, 2021: |
|
|
|
|
|
| ||||||||||
CET1 capital ratio | $ | 854,075 |
| 11.49 | % | $ | 334,608 |
| 4.50 | % | $ | 483,323 |
| 6.50 | % | |
Tier 1 leverage ratio |
| 854,075 |
| 8.53 | % |
| 400,616 |
| 4.00 | % |
| 500,770 |
| 5.00 | % | |
Tier 1 risk-based capital ratio |
| 854,075 |
| 11.49 | % |
| 446,144 |
| 6.00 | % |
| 594,859 |
| 8.00 | % | |
Total risk-based capital ratio |
| 895,381 |
| 12.04 | % |
| 594,859 |
| 8.00 | % |
| 743,574 |
| 10.00 | % | |
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.
50
As of June 30, 2022, FFI had $65.6 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 June 30, 2022, the amount of capital at FFB in excess of amounts required to be well capitalized for purposes of the prompt corrective action regulations was $409 million for the CET1 capital ratio, $430 million for the Tier 1 Leverage Ratio, $274 million for the Tier 1 risk-based capital ratio and $135 million for the Total risk-based capital ratio.
The Company paid $12.4 million in cash dividends ($0.11 per common share) and purchased $2.5 million of our common stock in the first six months of 2022. It is our current intention to continue to pay quarterly dividends. The amount and declaration of future cash dividends and stock repurchases 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, 2021. 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 $16.1 million in dividends ($0.36 per share) in 2021.
We had no material commitments for capital expenditures as of June 30, 2022. 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 28, 2022. There have been no material changes to our quantitative and qualitative disclosures about market risk since December 31, 2021.
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 June 30, 2022, 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 June 30, 2022, 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.
51
There was no change in our internal control over financial reporting that occurred during the three months ended June 30, 2022 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, 2021, which we filed with the SEC on February 28, 2022.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company adopted a stock repurchase program on April 26, 2022, pursuant to which the Company may repurchase up to $75 million of its common stock. This stock repurchase program, which has no stated expiration date, replaced and superseded the stock repurchase program approved by the Board of Directors on October 30, 2018, which had authorized the Company to repurchase up to 2,200,000 shares of its common stock. The following table provides information relating to the Company’s purchases of shares of its common stock during the second quarter of 2022:
Total Number of | Approximate Dollar | |||||||||||
Total Number | Average | Shares Purchased | Value of Shares That | |||||||||
of Shares | Price Paid Per | as Part of Publicly | May Yet Be Purchased | |||||||||
Purchase Dates |
| Purchased |
| Share |
| Announced Program |
| Under the Program | ||||
April 1 to April 30, 2022 | - |
| $ | - |
| - | $ | 75,000,000 | ||||
May 1 to May 31, 2022 | 54,742 |
| 21.19 |
| 54,742 | 73,839,900 | ||||||
June 1 to June 30, 2022 | 62,256 |
| 20.83 |
| 62,256 | 72,542,900 | ||||||
Total | 116,998 | 116,998 | ||||||||||
52
ITEM 6.EXHIBITS
Exhibit No. |
| Description of Exhibit |
3.1 | ||
3.2 | ||
3.3 | ||
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 | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH | Inline XBRL Taxonomy Extension Schema | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| (1) | Filed herewith. |
53
SIGNATURES
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.
FIRST FOUNDATION INC. | ||
Dated: August 8, 2022 | By: | /s/ KEVIN L. THOMPSON |
Kevin L. Thompson | ||
Executive Vice President and | ||
S-1