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Table of Contents

F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to          

Commission File Number 001-36461

FIRST FOUNDATION INC.

(Exact name of Registrant as specified in its charter)

Delaware

20-8639702

(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer
Identification Number)

200 Crescent Court, Suite 1400 Dallas, Texas

75201

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (469) 638-9636

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

  

Trading Symbol(s)

  

Name of each exchange on which registered

Common Stock

FFWM

NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No   ☒

As of August 3, 2021, the registrant had 44,819,743 shares of common stock, $0.001 par value per share, outstanding

Table of Contents

FIRST FOUNDATION INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2021

TABLE OF CONTENTS

    

Page No.

Part I. Financial Information

Item 1.

Financial Statements

1

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

43

Part II. Other Information

Item 1A

Risk Factors

44

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 6

Exhibits

45

SIGNATURES

S-1

(i)

Table of Contents

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, 

2021

2020

(unaudited)

ASSETS

    

  

    

  

Cash and cash equivalents

$

969,646

$

629,707

Securities available-for-sale ("AFS")

 

745,850

 

814,671

Allowance for credit losses - investments

(9,116)

(7,245)

Net securities

736,734

807,426

Loans held for sale

 

498,319

 

505,404

Loans held for investment

 

5,512,888

 

4,803,799

Allowance for credit losses - loans

 

(22,272)

 

(24,200)

Net loans

 

5,490,616

 

4,779,599

Investment in FHLB stock

17,250

 

17,250

Deferred taxes

 

9,618

 

8,603

Premises and equipment, net

 

8,183

 

8,012

Goodwill and intangibles

 

94,454

 

95,296

Other assets

 

114,314

 

105,863

Total Assets

$

7,939,134

$

6,957,160

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

 

Liabilities:

 

  

 

Deposits

$

7,106,802

$

5,913,433

Borrowings

 

20,000

 

269,000

Accounts payable and other liabilities

 

78,314

 

79,016

Total Liabilities

 

7,205,116

 

6,261,449

Shareholders’ Equity

 

  

 

Common Stock

 

45

 

45

Additional paid-in-capital

 

435,201

 

433,941

Retained earnings

 

287,997

 

247,638

Accumulated other comprehensive income (loss)

 

10,775

 

14,087

Total Shareholders’ Equity

 

734,018

 

695,711

Total Liabilities and Shareholders’ Equity

$

7,939,134

$

6,957,160

(See accompanying notes to the consolidated financial statements)

1

Table of Contents

FIRST FOUNDATION INC.

CONSOLIDATED INCOME STATEMENTS - UNAUDITED

(In thousands, except share and per share amounts)

Quarter Ended

Six Months Ended

June 30, 

June 30, 

2021

2020

2021

2020

Interest income:

    

  

    

  

  

    

  

Loans

$

55,979

$

55,134

$

109,510

$

110,018

Securities AFS

 

4,927

 

6,539

 

10,133

 

13,536

FHLB stock, fed funds sold and interest-bearing deposits

 

497

 

259

 

898

 

716

Total interest income

 

61,403

 

61,932

 

120,541

 

124,270

Interest expense:

 

  

 

  

 

Deposits

 

3,387

 

10,914

 

8,010

 

25,560

Borrowings

 

106

 

2,571

 

392

 

5,395

Total interest expense

 

3,493

13,485

 

8,402

 

30,955

Net interest income

 

57,910

 

48,447

 

112,139

 

93,315

Provision for credit losses

44

 

1,367

 

404

 

5,431

Net interest income after provision for credit losses

 

57,866

 

47,080

 

111,735

 

87,884

Noninterest income:

 

Asset management, consulting and other fees

 

8,748

 

6,733

 

17,097

 

14,495

Gain on sale of loans

3,324

3,324

Other income

 

1,963

 

2,236

 

5,522

 

5,149

Total noninterest income

 

14,035

 

8,969

 

25,943

 

19,644

  

Noninterest expense:

 

 

  

 

  

 

Compensation and benefits

 

20,203

 

18,288

 

41,729

 

38,145

Occupancy and depreciation

 

5,710

 

5,855

 

11,870

 

11,367

Professional services and marketing costs

 

3,907

 

2,049

 

6,029

 

3,803

Customer service costs

 

2,353

 

1,622

 

4,123

 

3,994

Other expenses

 

3,444

 

3,123

 

6,377

 

6,500

Total noninterest expense

 

35,617

 

30,937

 

70,128

 

63,809

Income before taxes on income

 

36,284

 

25,112

 

67,550

 

43,719

Taxes on income

 

10,230

 

7,258

 

19,141

 

12,654

Net income

$

26,054

$

17,854

$

48,409

$

31,065

Net income per share:

 

  

 

  

 

 

Basic

$

0.58

$

0.40

$

1.08

$

0.70

Diluted

$

0.58

$

0.40

$

1.07

$

0.69

Shares used in computation:

 

  

 

  

 

  

 

  

Basic

 

44,792,358

 

44,620,716

 

44,750,272

 

44,645,189

Diluted

 

45,101,958

 

44,812,369

 

45,057,330

 

44,882,520

(See accompanying notes to the consolidated financial statements)

2

Table of Contents

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, 2020

 

44,667,650

$

45

$

433,941

$

247,638

$

14,087

$

695,711

Net income

 

 

 

 

48,409

 

 

48,409

Other comprehensive income (loss)

 

 

 

 

 

(3,312)

 

(3,312)

Stock based compensation

 

 

 

1,629

 

 

 

1,629

Cash dividend

 

 

 

 

(8,050)

 

 

(8,050)

Issuance of common stock:

 

  

 

  

 

  

 

  

 

  

 

  

Exercise of options

 

75,807

 

 

819

 

 

 

819

Stock grants – vesting of restricted stock units

 

117,223

 

 

 

 

 

Repurchase of shares from restricted shares vesting

 

(40,937)

 

 

(1,188)

 

 

 

(1,188)

Balance: June 30, 2021

 

44,819,743

$

45

$

435,201

$

287,997

$

10,775

$

734,018

Balance: March 31, 2021

 

44,782,155

$

45

$

434,346

$

265,970

$

14,069

$

714,430

Net income

 

 

 

 

26,054

 

 

26,054

Other comprehensive income (loss)

 

 

 

 

 

(3,294)

 

(3,294)

Stock based compensation

 

 

 

634

 

 

 

634

Cash dividend

 

 

 

 

(4,027)

 

 

(4,027)

Issuance of common stock:

 

  

 

  

 

  

 

  

 

  

 

  

Exercise of options

 

28,807

 

 

465

 

 

 

465

Stock grants – vesting of restricted stock units

 

9,138

 

 

 

 

 

Repurchase of shares from restricted shares vesting

 

(357)

 

 

(244)

 

 

 

(244)

Balance: June 30, 2021

 

44,819,743

$

45

$

435,201

$

287,997

$

10,775

$

734,018

Balance: December 31, 2019

 

44,670,743

$

45

$

433,775

$

175,773

$

4,276

$

613,869

Net income

 

 

 

 

31,065

 

 

31,065

Other comprehensive income (loss)

 

 

 

 

 

1,027

 

1,027

Stock based compensation

 

 

 

1,195

 

 

 

1,195

Cash dividend

 

 

 

 

(6,256)

 

 

(6,256)

Issuance of common stock:

 

  

 

  

 

  

 

  

 

  

 

  

Exercise of options

 

86,000

 

 

645

 

 

 

645

Stock grants – vesting of restricted stock units

 

92,915

 

 

 

 

 

Repurchase of shares from restricted shares vesting

 

(224,334)

 

 

(2,824)

 

 

 

(2,824)

Balance: June 30, 2020

 

44,625,324

$

45

$

432,791

$

200,582

$

5,303

$

638,721

Balance: March 31, 2020

 

44,615,466

$

45

$

432,363

$

185,852

$

4,823

$

623,083

Net income

 

 

 

 

17,854

 

 

17,854

Other comprehensive income (loss)

 

 

 

 

 

480

 

480

Stock based compensation

 

 

 

428

 

 

 

428

Cash dividend

 

 

 

 

(3,124)

 

 

(3,124)

Issuance of common stock:

 

  

 

  

 

  

 

  

 

  

 

  

Stock grants – vesting of restricted stock units

 

9,858

 

 

 

 

 

Balance: June 30, 2020

 

44,625,324

$

45

$

432,791

$

200,582

$

5,303

$

638,721

(See accompanying notes to the consolidated financial statements)

3

Table of Contents

FIRST FOUNDATION INC.

CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME - UNAUDITED

(In thousands)

Quarter Ended June 30, 

Six Months Ended June 30, 

2021

2020

2021

2020

Net income

    

$

26,054

$

17,854

    

$

48,409

$

31,065

Other comprehensive income (loss):

 

  

 

  

 

  

 

  

Unrealized holding gains (losses) on securities arising during the period

 

(4,657)

 

678

 

(4,682)

 

1,450

Other comprehensive income (loss) before tax

 

(4,657)

 

678

 

(4,682)

 

1,450

Income tax expense (benefit) related to items of other comprehensive income

 

(1,363)

 

198

 

(1,370)

 

423

Other comprehensive income (loss)

 

(3,294)

 

480

 

(3,312)

 

1,027

Total comprehensive income

$

22,760

$

18,334

$

45,097

$

32,092

(See accompanying notes to the consolidated financial statements)

4

Table of Contents

FIRST FOUNDATION INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(In thousands)

For the Six Months Ended

June 30, 

2021

2020

Cash Flows from Operating Activities:

    

  

    

  

Net income

$

48,409

$

31,065

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Provision for credit losses - loans

 

(1,467)

 

3,060

Provision for credit losses - securities AFS

1,871

2,371

Stock–based compensation expense

 

1,629

 

1,195

Depreciation and amortization

 

1,655

 

1,547

Deferred tax expense

 

355

 

1,462

Amortization of premium on securities

399

Amortization of core deposit intangible

 

842

 

1,010

Amortization of mortgage servicing rights - net

 

935

 

705

Amortization of premiums on purchased loans - net

 

 

(4,169)

Gain on sale of loans

 

(3,324)

 

Gain from hedging activities

 

 

(224)

Valuation allowance on mortgage servicing rights - net

1,309

Increase in other assets

 

(10,695)

 

(11,266)

Increase (decrease) in accounts payable and other liabilities

 

(1,264)

 

1,322

Net cash provided by operating activities

 

40,654

 

28,078

Cash Flows from Investing Activities:

 

  

 

  

Net increase in loans

 

(841,088)

 

(594,872)

Proceeds from sale of loans

 

142,000

 

Purchase of premises and equipment

 

(1,826)

 

(1,380)

Recovery of allowance for credit losses

 

509

 

564

Purchases of securities AFS

 

(83,372)

 

(6,757)

Proceeds from sale of securities

 

3,400

 

Maturities of securities AFS

 

143,712

 

155,376

Sale of FHLB stock, net

 

 

(2,079)

Net cash used in investing activities

 

(636,665)

 

(449,148)

Cash Flows from Financing Activities:

 

  

 

  

Increase in deposits

 

1,193,369

 

756,697

Net (decrease) increase in FHLB advances

 

(255,000)

 

21,600

Line of credit net change – borrowings (paydowns), net

 

6,000

 

Dividends paid

 

(8,050)

 

(6,256)

Proceeds from exercise of stock options

 

819

 

645

Repurchase of stock

 

(1,188)

 

(2,824)

Net cash provided by financing activities

 

935,950

 

769,862

Increase in cash and cash equivalents

 

339,939

 

348,792

Cash and cash equivalents at beginning of year

 

629,707

 

65,387

Cash and cash equivalents at end of period

$

969,646

$

414,179

Supplemental disclosures of cash flow information:

 

  

 

  

Cash paid during the period for:

 

  

 

  

Income taxes

$

17,424

$

185

Interest

10,019

30,289

Noncash transactions:

 

 

  

Transfer of loans to loans held for sale

$

132,521

$

14,666

Chargeoffs against allowance for credit losses

408

1,055

(See accompanying notes to the consolidated financial statements)

5

Table of Contents

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

NOTE 1: BASIS OF PRESENTATION

The consolidated financial statements include First Foundation Inc. (“FFI”) and its wholly owned subsidiaries: First Foundation Advisors (“FFA”) and First Foundation Bank (“FFB” or the “Bank”) and the wholly owned subsidiaries of FFB, First Foundation Insurance Services (“FFIS”), Blue Moon Management, LLC, and First Foundation Public Finance (“FFPF”) (collectively referred to as the “Company”). FFI also has two inactive wholly owned subsidiaries, First Foundation Consulting (“FFC”) and First Foundation Advisors, LLC (“FFA LLC”). All intercompany balances and transactions have been eliminated in consolidation. The results of operations reflect any interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. The results for the 2021 interim periods are not necessarily indicative of the results expected for the full year.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.

The accompanying unaudited consolidated financial statements include all information and footnotes required for interim financial statement presentation. These financial statements assume that readers have read the most recent Annual Report on Form 10-K which contains the latest available audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2020.

Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 2021 presentation.

Recent Accounting Pronouncements

In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-10, “Codification Improvements”.  ASU 2020-10 amends certain guidance that may have been applied in an inconsistent manner by certain entities. The effective date for the amendments in this ASU are effective for annual periods after December 15, 2020. The adoption of ASU 2020-10 is not expected to have a significant impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. ASU 2020-04 provides optional guidance for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU are effective as of March 12, 2020 through December 31, 2022. The adoption of ASU 2020-04 is not expected to have a significant impact on the Company’s consolidated financial statements.

NOTE 2: FAIR VALUE MEASUREMENTS

Assets Measured at Fair Value on a Recurring Basis

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize

6

Table of Contents

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

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.

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, 2021:

    

  

    

  

    

  

    

  

Investment securities available for sale:

 

  

 

  

 

  

 

  

Agency mortgage-backed securities

$

620,886

$

$

620,886

$

Beneficial interest – FHLMC securitizations

 

15,496

 

 

 

15,496

Corporate bonds

 

96,619

 

 

96,619

 

Other

 

3,733

 

598

 

3,135

 

Investment in equity securities

 

458

 

458

 

 

Total assets at fair value on a recurring basis

$

737,192

$

1,056

$

720,640

$

15,496

December 31, 2020:

Investment securities available for sale:

 

  

 

  

 

  

 

  

Agency mortgage-backed securities

$

723,995

$

$

723,995

$

Beneficial interest – FHLMC securitizations

 

23,463

 

 

 

23,463

Corporate bonds

 

58,358

 

 

58,358

 

Other

 

1,610

 

503

 

1,107

 

Investment in equity securities

 

338

 

338

 

 

Total assets at fair value on a recurring basis

$

807,764

$

841

$

783,460

$

23,463

The decrease in Level 3 assets from December 31, 2020 was due to securitization paydowns and to $1.9 million in provisions for credit losses in the first six months of 2021.

Assets Measured at Fair Value on a Nonrecurring Basis

From time to time, we may be required to measure other assets at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

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

7

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

of these loans, which considers internally-developed, unobservable inputs such as discount rates, default rates, and loss severity. When the fair value of the collateral is based on an observable market price or a current appraised value, we measure the impaired loan at nonrecurring Level 2. When an appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price or a discounted cash flow has been used to determine the fair value, we measure the impaired loan at nonrecurring Level 3. The total collateral dependent impaired Level 3 loans were $10.2 million and $3.1 million at June 30, 2021 and December 31, 2020, respectively. There were $1.2 million and $1.1 million in specific reserves related to these loans at June 30, 2021 and December 31, 2020.

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, 2021 included prepayment rates ranging from 20% to 25% and discount rates ranging from 0.14% to 10%.

Fair Value of Financial Instruments

FASB ASC 825-10, “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate such value. The methodologies for estimating the fair value of financial assets and financial liabilities measured at fair value on a recurring and non-recurring basis are discussed above. The estimated fair value amounts have been determined by management using available market information and appropriate valuation methodologies and are based on the exit price notion set forth by ASU 2016-01. In cases where quoted market prices are not available, fair values are based on estimates using present value or other market value techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The aggregate fair value amounts presented below do not represent the underlying value of the Company.

Fair value estimates are made at a discrete point in time based on relevant market information and other information about the financial instruments. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based in large part on judgments we make primarily regarding current economic conditions, risk characteristics of various financial instruments, prepayment rates, and future expected loss experience. These estimates are subjective in nature and invariably involve some inherent uncertainties. Additionally, unexpected changes in events or circumstances can occur that could require us to make changes to our assumptions and which, in turn, could significantly affect and require us to make changes to our previous estimates of fair value.

In addition, the fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of existing and anticipated future customer relationships and the value of assets and liabilities that are not considered financial instruments, such as premises and equipment and other real estate owned.

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.

8

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

Interest-Bearing Deposits with Financial Institutions. The fair values of interest-bearing deposits maturing within ninety days approximate their carrying values.

Investment Securities Available for Sale. Investment securities available-for-sale are measured at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the securities are classified as Level 3 and reliance is placed upon internally developed models, and management judgment and evaluation for valuation. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include beneficial interests in FHLMC securitizations. Significant assumptions in the valuation of these Level 3 securities as of June 30, 2021 and December 31, 2020 included prepayment rates ranging from 25% to 35% and discount rates ranging from 7.11% to 10%.

Federal Home Loan Bank Stock. The Bank is a member of the Federal Home Loan Bank (the “FHLB”). As a member, we are required to own stock of the FHLB, the amount of which is based primarily on the level of our borrowings from this institution. The fair value of the stock is equal to the carrying amount, is classified as restricted securities and is periodically evaluated for impairment based on our assessment of the ultimate recoverability of our investments in that stock. Any cash or stock dividends paid to us on such stock are reported as income.

Loans Held For Sale. The fair value of loans held for sale is determined using secondary market pricing.

Loans Held for Investment. The fair value for loans with variable interest rates is the carrying amount. The fair value of fixed rate loans is derived by calculating the discounted value of future cash flows expected to be received by the various homogeneous categories of loans or by reference to secondary market pricing. All loans have been adjusted to reflect changes in credit risk.

Deposits. The fair value of demand deposits, savings deposits, and money market deposits is defined as the amounts payable on demand. The fair value of fixed maturity certificates of deposit is estimated based on the discounted value of the future cash flows expected to be paid on the deposits.

Borrowings. The fair value of borrowings is the carrying value of overnight FHLB advances that approximate fair value because of the short-term maturity of this instrument, resulting in a Level 2 classification. The fair value of term borrowings is derived by calculating the discounted value of future cash flows expected to be paid out by the Company, resulting in a Level 3 classification.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - 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, 2021:

    

  

    

  

    

  

    

  

    

  

Assets:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

969,646

$

969,646

$

$

$

969,646

Securities AFS, net

 

736,734

 

598

 

720,640

 

15,496

 

736,734

Loans held for sale

 

498,319

 

 

503,428

 

 

503,428

Loans, net

 

5,490,616

 

 

 

5,547,016

 

5,547,016

Investment in FHLB stock

 

17,250

 

 

17,250

 

 

17,250

Investment in equity securities

 

458

 

458

 

 

 

458

Liabilities:

 

  

 

  

 

  

 

  

 

  

Deposits

$

7,106,802

$

6,430,077

$

683,504

$

$

7,113,581

Borrowings

 

20,000

 

 

 

20,000

 

20,000

December 31, 2020:

Assets:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

629,707

$

629,707

$

$

$

629,707

Securities AFS, net

 

807,426

 

503

 

783,460

 

23,463

 

807,426

Loans held for sale

 

505,404

 

 

510,638

 

 

510,638

Loans, net

 

4,779,599

 

 

 

4,829,258

 

4,829,258

Investment in FHLB stock

 

17,250

 

 

17,250

 

 

17,250

Investment in equity securities

 

338

 

338

 

 

 

338

Liabilities:

 

  

 

  

 

  

 

  

 

Deposits

$

5,913,433

$

4,934,537

$

978,897

$

$

5,913,434

Borrowings

 

269,000

 

 

255,000

 

14,000

 

269,000

NOTE 3: SECURITIES

The following table provides a summary of the Company’s securities AFS portfolio as of:

Amortized

Gross Unrealized

Allowance for

Estimated

(dollars in thousands)

Cost

Gains

Losses

Credit Losses

Fair Value

June 30, 2021:

Agency mortgage-backed securities

$

608,766

$

13,054

$

(934)

$

$

620,886

Beneficial interests in FHLMC securitization

 

24,199

 

413

 

 

(9,116)

 

15,496

Corporate bonds

 

94,000

 

2,619

 

 

 

96,619

Other

 

3,656

 

87

 

(10)

 

 

3,733

Total

$

730,621

$

16,173

$

(944)

$

(9,116)

$

736,734

December 31, 2020:

Agency mortgage-backed securities

$

705,752

$

18,243

$

$

$

723,995

Beneficial interests in FHLMC securitization

 

30,497

 

211

 

 

(7,245)

 

23,463

Corporate bonds

 

57,000

 

1,358

 

 

 

58,358

Other

 

1,512

 

98

 

 

 

1,610

Total

$

794,761

$

19,910

$

$

(7,245)

$

807,426

US Treasury securities of $0.6 million as of June 30, 2021 and December 31, 2020 that are included in the table above as Other are pledged as collateral to the State of California to meet regulatory requirements related to the Bank’s

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

trust operations. As of June 30, 2021, $186.8 million of agency mortgage-backed securities are pledged as collateral as support for the Bank’s obligations under loan sales and securitization agreements entered into from 2018 through 2020.

The table below indicates, as of June 30, 2021, the gross unrealized losses and fair values of our investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

Securities with Unrealized Loss at June 30, 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

Agency mortgage-backed securities

$

70,423

$

(933)

$

$

$

70,423

$

(933)

Other

2,520

(11)

2,520

(11)

Total temporarily impaired securities

$

72,943

$

(944)

$

$

$

72,943

$

(944)

There were no unrealized losses on our investments as of December 31, 2020.

Unrealized losses in agency mortgage backed securities, beneficial interests in FHLMC securitizations, and other securities have not been recognized into income because the issuer bonds are of high credit quality, management does not intend to sell, it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in discount rates and assumptions regarding future interest rates. The fair value is expected to recover as the bonds approach maturity.

The following is a roll forward of the Bank’s allowance for credit losses related to securities for the following periods:

(dollars in thousands)

Total

Three Months Ended June 30, 2021:

Beginning balance

    

$

8,878

Provision for credit losses

 

238

Balance: June 30, 2021

 

$

9,116

Six Months Ended June 30, 2021:

Beginning balance

    

$

7,245

Provision for credit losses

 

1,871

Balance: June 30, 2021

 

$

9,116

Year Ended December 31, 2020:

Beginning balance

    

$

Provision for credit losses

 

7,245

Balance: December 31, 2020

 

$

7,245

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - 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, 2021

Amortized Cost:

 

  

 

  

 

  

 

  

 

  

Corporate bonds

$

$

$

89,000

$

5,000

$

94,000

Other

 

100

 

1,526

 

2,030

 

 

3,656

Total

$

100

$

1,526

$

91,030

$

5,000

$

97,656

Weighted average yield

 

0.13

%  

 

2.02

%  

 

4.45

%  

 

3.38

%  

 

4.35

%

Estimated Fair Value:

 

  

 

  

 

  

 

  

 

  

Corporate bonds

$

$

$

91,550

$

5,069

$

96,619

Other

 

100

 

1,611

 

2,022

 

 

3,733

Total

$

100

$

1,611

$

93,572

$

5,069

$

100,352

    

Less than 

    

1 Through 

    

5 Through 

    

After

    

 

(dollars in thousands)

1 Year

5 years

10 Years

10 Years

Total

 

December 31, 2020

Amortized Cost:

 

  

 

  

 

  

 

  

 

  

Corporate bonds

$

$

$

57,000

$

$

57,000

Other

 

500

 

1,012

 

 

 

1,512

Total

$

500

$

1,012

$

57,000

$

$

58,512

Weighted average yield

 

1.83

%  

 

2.81

%  

 

5.39

%  

 

%  

 

5.32

%

Estimated Fair Value:

 

  

 

  

 

  

 

  

 

  

Corporate bonds

$

$

$

58,358

$

$

58,358

Other

 

503

 

1,107

 

 

 

1,610

Total

$

503

$

1,107

$

58,358

$

$

59,968

Agency mortgage-backed securities and beneficial interests in FHLMC securitizations are excluded from the above table because such securities are not due at a single maturity date. The weighted average yield of the agency mortgage-backed securities and beneficial interests as of June 30, 2021 and December 31, 2020 was 2.33% and 2.39%, respectively.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

NOTE 4: LOANS

The following is a summary of our loans as of:

    

June 30, 

December 31, 

(dollars in thousands)

    

2021

    

2020

Outstanding principal balance:

  

  

Loans secured by real estate:

 

  

 

  

Residential properties:

 

  

 

  

Multifamily

$

2,814,446

$

2,247,542

Single family

 

812,728

 

806,014

Total real estate loans secured by residential properties

 

3,627,174

 

3,053,556

Commercial properties

 

665,166

 

747,807

Land and construction

 

56,603

 

55,832

Total real estate loans

 

4,348,943

 

3,857,195

Commercial and industrial loans

 

1,142,766

 

918,676

Consumer loans

 

9,645

 

18,888

Total loans

 

5,501,354

 

4,794,759

Premiums, discounts and deferred fees and expenses

 

11,534

 

9,040

Total

$

5,512,888

$

4,803,799

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, 2021:

Real estate loans:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential properties

$

54

$

$

$

10,757

$

10,811

$

3,628,857

$

3,639,668

Commercial properties

 

776

 

 

 

1,613

 

2,389

 

663,155

 

665,544

Land and construction

 

 

 

 

 

 

56,565

 

56,565

Commercial and industrial loans

 

1,550

 

250

 

 

3,817

 

5,617

 

1,135,831

 

1,141,448

Consumer loans

 

 

 

 

 

 

9,663

 

9,663

Total

$

2,380

$

250

$

$

16,187

$

18,817

$

5,494,071

$

5,512,888

Percentage of total loans

 

0.04

%  

 

0.00

%  

 

%  

 

0.29

%  

 

0.34

%  

 

  

 

  

December 31, 2020:

Real estate loans:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential properties

$

35

$

$

$

10,947

$

10,982

$

3,042,574

$

3,053,556

Commercial properties

 

951

 

240

 

 

4,544

 

5,735

 

742,072

 

747,807

Land and construction

 

 

 

 

 

 

55,832

 

55,832

Commercial and industrial loans

 

1,013

 

411

 

152

 

5,137

 

6,713

 

911,963

 

918,676

Consumer loans

 

 

 

 

 

 

18,888

 

18,888

Total

$

1,999

$

651

$

152

$

20,628

$

23,430

$

4,771,329

$

4,794,759

Percentage of total loans

 

0.04

%  

 

0.01

%  

 

0.00

%  

 

0.43

%  

 

0.49

%  

 

  

 

  

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

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, 2021:

 

 

  

Real estate loans:

Residential properties

$

2,958

$

7,799

Commercial properties

1,613

Land and construction

Commercial and industrial loans

 

1,881

 

1,936

Consumer loans

 

 

Total

$

4,839

$

11,348

December 31, 2020:

 

 

  

Real estate loans:

Residential properties

$

2,987

$

7,959

Commercial properties

4,544

Land and construction

Commercial and industrial loans

 

2,581

 

2,557

Consumer loans

 

 

Total

$

5,568

$

15,060

The following table presents the loans classified as troubled debt restructurings (“TDR”) by accrual and nonaccrual status as of:

June 30, 2021

December 31, 2020

(dollars in thousands)

Accrual

Nonaccrual

Total

Accrual

Nonaccrual

Total

Residential loans

    

$

1,200

    

$

    

$

1,200

    

$

1,200

    

$

    

$

1,200

Commercial real estate loans

 

1,064

 

1,228

 

2,292

 

1,107

 

1,277

 

2,384

Commercial and industrial loans

 

980

 

2,180

 

3,160

 

1,041

 

2,832

 

3,873

Total

$

3,244

$

3,408

$

6,652

$

3,348

$

4,109

$

7,457

The following table provides information on loans that were modified as TDRs for the following periods:

Outstanding Recorded Investment

(dollars in thousands)

Number of loans

Pre-Modification

Post-Modification

Financial Impact

Six Months Ended June 30, 2021:

    

  

    

  

    

  

    

  

Commercial and industrial loans

 

1

$

362

$

362

$

Total

 

1

$

362

$

362

$

Outstanding Recorded Investment

(dollars in thousands)

Number of loans

Pre-Modification

Post-Modification

Financial Impact

Year Ended December 31, 2020

 

  

 

  

 

  

 

  

Commercial and industrial loans

 

1

$

507

$

507

 

Total

 

1

$

507

$

507

$

All of these loans were classified as a TDR as a result of a reduction in required principal payments and an extension of the maturity date of the loans. These loans have been paying in accordance with the terms of their restructure.

14

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

NOTE 5: ALLOWANCE FOR CREDIT LOSSES

The following is a roll forward of the Bank’s allowance for credit losses related to loans for the following periods:

    

Beginning

Adoption of

    

Provision for

    

    

    

Ending

(dollars in thousands)

Balance

ASC 326

Credit Losses

Charge-offs

Recoveries

Balance

Three Months Ended June 30, 2021:

 

  

  

 

  

 

  

 

  

 

  

Real estate loans:

 

  

  

 

  

 

  

 

  

 

  

Residential properties

$

6,033

$

$

1,203

$

$

$

7,236

Commercial properties

 

5,956

 

 

(471)

 

 

 

5,485

Land and construction

 

3,962

 

 

(1,978)

 

 

 

1,984

Commercial and industrial loans

 

7,062

 

 

487

 

(194)

 

103

 

7,458

Consumer loans

 

167

 

 

(58)

 

 

 

109

Total

$

23,180

$

$

(817)

$

(194)

$

103

$

22,272

Six Months Ended June 30, 2021:

 

  

 

  

 

  

 

  

 

  

 

  

Real estate loans:

 

  

 

  

 

  

 

  

 

  

 

  

Residential properties

$

5,115

$

$

2,121

$

$

$

7,236

Commercial properties

 

8,711

 

 

(3,226)

 

 

 

5,485

Land and construction

 

892

 

 

1,092

 

 

 

1,984

Commercial and industrial loans

 

9,249

 

 

(1,892)

 

(408)

 

509

 

7,458

Consumer loans

 

233

 

 

(124)

 

 

 

109

Total

$

24,200

$

$

(2,029)

$

(408)

$

509

$

22,272

Year Ended December 31, 2020:

 

  

 

  

 

  

 

  

 

  

 

  

Real estate loans:

 

  

 

  

 

  

 

  

 

  

 

  

Residential properties

$

8,423

$

363

$

(3,671)

$

$

$

5,115

Commercial properties

 

4,166

 

3,760

 

785

 

 

 

8,711

Land and construction

 

573

 

92

 

227

 

 

 

892

Commercial and industrial loans

 

7,448

 

 

2,642

 

(1,844)

 

1,003

 

9,249

Consumer loans

 

190

 

 

43

 

 

 

233

Total

$

20,800

$

4,215

$

26

$

(1,844)

$

1,003

$

24,200

15

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - 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, 2021:

Allowance for credit losses:

 

  

 

  

 

  

 

Real estate loans:

 

  

 

  

 

  

 

Residential properties

$

1,218

$

6,152

$

7,370

Commercial properties

 

437

 

4,999

 

5,436

Land and construction

 

 

1,967

 

1,967

Commercial and industrial loans

 

710

 

6,681

 

7,391

Consumer loans

 

 

108

 

108

Total

$

2,365

$

19,907

$

22,272

Loans:

 

  

 

  

 

  

Real estate loans:

 

  

 

  

 

  

Residential properties

$

16,556

$

3,623,112

$

3,639,668

Commercial properties

 

14,025

 

651,519

 

665,544

Land and construction

 

 

56,565

 

56,565

Commercial and industrial loans

 

5,045

 

1,136,403

 

1,141,448

Consumer loans

 

 

9,663

 

9,663

Total

$

35,626

$

5,477,262

$

5,512,888

December 31, 2020:

Allowance for credit losses:

 

  

 

  

 

  

Real estate loans:

 

  

 

  

 

  

Residential properties

$

1,059

$

4,056

$

5,115

Commercial properties

 

374

 

8,337

 

8,711

Land and construction

 

 

892

 

892

Commercial and industrial loans

 

956

 

8,293

 

9,249

Consumer loans

 

 

233

 

233

Total

$

2,389

$

21,811

$

24,200

Loans:

 

  

 

  

 

  

Real estate loans:

 

  

 

  

 

  

Residential properties

$

12,414

$

3,041,142

$

3,053,556

Commercial properties

 

17,304

 

730,503

 

747,807

Land and construction

 

 

55,832

 

55,832

Commercial and industrial loans

 

6,472

 

912,204

 

918,676

Consumer loans

 

 

18,888

 

18,888

Total

$

36,190

$

4,758,569

$

4,794,759

16

Table of Contents

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

The following tables present risk categories of loans based on year of origination, as of:

Revolving

(dollars in thousands)

    

2021

    

2020

    

2019

    

2018

  

2017

  

Prior

  

Loans

  

Total

June 30, 2021:

Loans secured by Real Estate:

Residential

Multifamily

Pass

 

$

664,743

 

$

886,772

$

568,896

 

$

368,554

 

$

203,307

$

132,432

 

$

 

$

2,824,704

Special Mention

Substandard

Total

 

$

664,743

 

$

886,772

$

568,896

 

$

368,554

 

$

203,307

$

132,432

 

$

 

$

2,824,704

Single Family

Pass

 

$

157,457

 

$

139,254

$

64,441

 

$

81,469

 

$

72,746

$

259,317

 

$

23,699

 

$

798,383

Special Mention

26

26

Substandard

1,910

11,353

3,292

16,555

Total

 

$

157,457

 

$

139,254

$

64,441

 

$

81,469

 

$

74,656

$

270,670

 

$

27,017

 

$

814,964

Commercial Real Estate

Pass

 

$

18,446

 

$

39,848

$

76,796

 

$

100,255

 

$

124,522

$

268,611

 

$

 

$

628,478

Special Mention

10,678

10,740

937

22,355

Substandard

5,878

2,283

6,550

14,711

Total

 

$

18,446

 

$

39,848

$

93,352

 

$

110,995

 

$

126,805

$

276,098

 

$

 

$

665,544

Land and construction

Pass

 

$

 

$

214

$

16,623

 

$

28,592

 

$

10,538

$

598

 

$

 

$

56,565

Special Mention

Substandard

Total

 

$

 

$

214

$

16,623

 

$

28,592

 

$

10,538

$

598

 

$

 

$

56,565

Commercial

Pass

 

$

253,972

 

$

237,331

$

118,650

 

$

29,284

 

$

11,238

$

26,668

 

$

446,972

 

$

1,124,115

Special Mention

715

1,473

1,080

1,246

134

3,048

7,696

Substandard

1,114

1,927

1,063

230

2,615

2,688

9,637

Total

 

$

254,687

 

$

239,918

$

121,657

 

$

31,593

 

$

11,468

$

29,417

 

$

452,708

 

$

1,141,448

Consumer

Pass

 

$

77

 

$

1,145

$

 

$

1,273

 

$

$

92

 

$

7,076

 

$

9,663

Special Mention

Substandard

Total

 

$

77

 

$

1,145

$

 

$

1,273

 

$

$

92

 

$

7,076

 

$

9,663

Total loans

Pass

 

$

1,094,695

 

$

1,304,564

$

845,406

 

$

609,427

 

$

422,351

$

687,718

 

$

477,747

 

$

5,441,908

Special Mention

715

1,473

11,758

11,986

1,071

3,074

30,077

Substandard

1,114

7,805

1,063

4,423

20,518

5,980

40,903

Total

 

$

1,095,410

 

$

1,307,151

$

864,969

 

$

622,476

 

$

426,774

$

709,307

 

$

486,801

 

$

5,512,888

17

Table of Contents

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

Revolving

(dollars in thousands)

    

2020

    

2019

    

2018

    

2017

  

2016

  

Prior

  

Loans

  

Total

December 31, 2020:

Loans secured by Real Estate:

Residential

Multifamily

Pass

 

$

774,701

 

$

638,237

$

469,866

 

$

218,470

 

$

82,941

$

63,328

 

$

 

$

2,247,543

Special Mention

Substandard

Total

 

$

774,701

 

$

638,237

$

469,866

 

$

218,470

 

$

82,941

$

63,328

 

$

 

$

2,247,543

Single Family

Pass

 

$

173,563

 

$

83,311

$

110,560

 

$

95,888

 

$

107,568

$

196,692

 

$

25,014

 

$

792,596

Special Mention

986

986

Substandard

1,946

7,134

3,351

12,431

Total

 

$

173,563

 

$

83,311

$

110,560

 

$

98,820

 

$

107,568

$

203,826

 

$

28,365

 

$

806,013

Commercial Real Estate

Pass

 

$

46,260

 

$

100,432

$

120,230

 

$

129,120

 

$

119,719

$

194,533

 

$

 

$

710,294

Special Mention

743

16,278

2,333

157

19,511

Substandard

5,929

2,336

2,515

7,222

18,002

Total

 

$

46,260

 

$

107,104

$

136,508

 

$

131,456

 

$

124,567

$

201,912

 

$

 

$

747,807

Land and construction

Pass

 

$

257

 

$

15,923

$

27,792

 

$

10,532

 

$

706

$

622

 

$

 

$

55,832

Special Mention

Substandard

Total

 

$

257

 

$

15,923

$

27,792

 

$

10,532

 

$

706

$

622

 

$

 

$

55,832

Commercial

Pass

 

$

377,500

 

$

146,279

$

54,910

 

$

15,868

 

$

13,180

$

16,823

 

$

270,604

 

$

895,164

Special Mention

2,058

3,922

1,868

579

297

448

6,107

15,279

Substandard

1,226

316

1,188

259

2,459

281

2,504

8,233

Total

 

$

380,784

 

$

150,517

$

57,966

 

$

16,706

 

$

15,936

$

17,552

 

$

279,215

 

$

918,676

Consumer

Pass

 

$

2,557

 

$

$

1,321

 

$

3

 

$

6,784

$

100

 

$

8,123

 

$

18,888

Special Mention

Substandard

Total

 

$

2,557

 

$

$

1,321

 

$

3

 

$

6,784

$

100

 

$

8,123

 

$

18,888

Total loans

Pass

 

$

1,374,838

 

$

984,182

$

784,679

 

$

469,881

 

$

330,898

$

472,098

 

$

303,741

 

$

4,720,317

Special Mention

2,058

4,665

18,146

1,565

2,630

605

6,107

35,776

Substandard

1,226

6,245

1,188

4,541

4,974

14,637

5,855

38,666

Total

 

$

1,378,122

 

$

995,092

$

804,013

 

$

475,987

 

$

338,502

$

487,340

 

$

315,703

 

$

4,794,759

18

Table of Contents

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - 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, 2021:

Loans secured by Real Estate:

    

  

    

  

  

    

  

Residential properties

Single family

$

9,987

$

$

$

9,987

$

1,204

Commercial loans

 

 

250

 

 

250

 

Total

$

9,987

$

250

$

$

10,237

$

1,204

December 31, 2020:

Loans secured by Real Estate:

    

  

    

  

  

    

  

Residential properties

Single family

$

10,144

$

$

$

10,144

$

1,051

Commercial loans

 

 

250

 

122

 

372

 

44

Total

$

10,144

$

250

$

122

$

10,516

$

1,095

NOTE 6: LOAN SALES AND MORTGAGE SERVICING RIGHTS

In 2020, FFB sold $553 million of multifamily loans and recognized a gain of $15.1 million. For sales of multifamily loans, FFB retained servicing rights for the majority of these loans and recognized mortgage servicing rights as part of the transactions. As of June 30, 2021 and December 31, 2020, mortgage servicing rights were $5.6 million and $7.9 million, respectively. The amount of loans serviced for others totaled $1.4 billion and $1.5 billion as of June 30, 2021 and December 31, 2020. The mortgage servicing rights as of June 30, 2021 and December 31, 2020 are net of $2.7 million and $1.4 million valuation allowances, respectively.  Excluding $1.3 million in valuation provisions on mortgage servicing rights taken in the six months ended June 30, 2021, servicing fees for the first six months ended June 30, 2021 were $0.9 million, while servicing fees were $0.3 million for the six months ended June 30, 2020.

NOTE 7: DEPOSITS

The following table summarizes the outstanding balance of deposits and average rates paid thereon as of:

June 30, 2021

December 31, 2020

Weighted

Weighted

(dollars in thousands)

Amount

Average Rate

Amount

Average Rate

Demand deposits:

    

  

    

  

    

  

    

  

    

Noninterest-bearing

$

3,276,901

 

$

1,655,847

 

Interest-bearing

 

896,224

 

0.201

%  

 

871,289

 

0.372

%  

Money market and savings

 

2,256,952

 

0.319

%  

 

2,407,401

 

0.549

%  

Certificates of deposits

 

676,725

 

0.274

%  

 

978,896

 

0.591

%  

Total

$

7,106,802

 

0.153

%  

$

5,913,433

 

0.376

%  

At June 30, 2021, of the $370 million of certificates of deposits of $250,000 or more, $367 million mature within one year and $3 million mature after one year. Of the $306 million of certificates of deposit of less than $250,000, $298 million mature within one year and $8 million mature after one year. At December 31, 2020, of the $416 million of certificates of deposits of $250,000 or more, $409 million mature within one year and $7 million mature after one year. Of the $563 million of certificates of deposit of less than $250,000, $520 million mature within one year and $43 million mature after one year.

19

Table of Contents

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

NOTE 8: BORROWINGS

At June 30, 2021, our borrowings consisted of $20 million of borrowings under a holding company line of credit. At December 31, 2020, our borrowings consisted of $255 million of overnight FHLB advances at the Bank and $14 million of borrowings under a holding company line of credit. At June 30, 2021, the interest rate on the holding company line of credit was 3.70%.

FHLB advances are collateralized primarily by loans secured by single family, multifamily, and commercial real estate properties with a carrying value of $3.9 billion as of June 30, 2021. As a matter of practice, the Bank provides substantially all of its qualifying loans as collateral to the FHLB or the Federal Reserve Bank. The Bank’s total borrowing capacity from the FHLB at June 30, 2021 was $2.5 billion. The Bank had in place $277 million of letters of credit from the FHLB, as of June 30, 2021 which are used to meet collateral requirements for borrowings from the State of California and local agencies.

During 2017, FFI entered into a loan agreement with an unaffiliated lender that provides for a revolving line of credit for up to $40 million. The loan agreement matures in five years, with an option to extend the maturity date subject to certain conditions, and bears interest at 90 day LIBOR plus 350 basis points (3.50%). FFI’s obligations under the loan agreement are secured by, among other things, a pledge of all of its equity in FFB. We are required to meet certain financial covenants during the term of the loan, including minimum capital levels and limits on classified assets. As of June 30, 2021 and December 31, 2020, FFI was in compliance with the covenants on this loan agreement.

The Bank also has $195 million available borrowing capacity through unsecured fed funds lines, ranging in size from $20 million to $100 million, with five other financial institutions, and a $234 million secured line with the Federal Reserve Bank, secured by single family loans. None of these lines had outstanding borrowings as June 30, 2021. Combined, the Bank’s unused lines of credit as of June 30, 2021 and December 31, 2020 were $3.0 billion and $2.4 billion, respectively. The average balance of overnight borrowings during all of 2020 was $56 million.

NOTE 9: EARNINGS PER SHARE

Basic earnings per share excludes dilution and is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock that would then share in earnings. The following table sets forth the Company’s unaudited earnings per share calculations for the three and six months ended June 30, 2021 and 2020:

Three Months Ended

Three Months Ended

June 30, 2021

June 30, 2020

(dollars in thousands, except per share amounts)

Basic

Diluted

Basic

Diluted

Net income

    

$

26,054

    

$

26,054

    

$

17,854

    

$

17,854

Basic common shares outstanding

 

44,792,358

 

44,792,358

 

44,620,716

 

44,620,716

Effect of options, restricted stock and contingent shares issuable

309,600

191,653

Diluted common shares outstanding

 

  

 

45,101,958

 

  

 

44,812,369

Earnings per share

$

0.58

$

0.58

$

0.40

$

0.40

20

Table of Contents

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

Six Months Ended

Six Months Ended

June 30, 2021

June 30, 2020

(dollars in thousands, except share and per share amounts)

Basic

Diluted

Basic

Diluted

Net income

    

$

48,409

    

$

48,409

    

$

31,065

    

$

31,065

Basic common shares outstanding

 

44,750,272

 

44,750,272

 

44,645,189

 

44,645,189

Effect of options and restricted stock

307,058

237,331

Diluted common shares outstanding

 

  

 

45,057,330

 

  

 

44,882,520

Earnings per share

$

1.08

$

1.07

$

0.70

$

0.69

Based on a weighted average basis, restricted stock units to purchase 62,267 and 59,375 shares of common stock were excluded for the six months ended June 30, 2021 and 2020, respectively, because their effect would have been anti-dilutive.

NOTE 10: SEGMENT REPORTING

For the three and six months ended June 30, 2021 and 2020, the Company had two reportable business segments: Banking (FFB and FFIS) and Wealth Management (FFA). The results of FFI and any elimination entries are included in the column labeled Other. The following tables show key operating results for each of our business segments used to arrive at our consolidated totals for the following periods:

    

    

Wealth

    

    

(dollars in thousands)

Banking

Management

Other

Total

Three Months Ended June 30, 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

Three Months Ended June 30, 2020:

 

  

 

  

 

  

 

  

Interest income

$

61,932

$

$

$

61,932

Interest expense

 

13,435

 

 

50

 

13,485

Net interest income

 

48,497

 

 

(50)

 

48,447

Provision for credit losses

 

1,367

 

 

 

1,367

Noninterest income

 

3,635

 

5,631

 

(297)

 

8,969

Noninterest expense

 

25,042

 

5,404

 

491

 

30,937

Income (loss) before taxes on income

$

25,723

$

227

$

(838)

$

25,112

21

Table of Contents

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

    

    

Wealth

    

    

(dollars in thousands)

Banking

Management

Other

Total

Six Months Ended June 30, 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

Six Months Ended June 30, 2020:

 

  

 

  

 

  

 

  

Interest income

$

124,270

$

$

$

124,270

Interest expense

 

30,875

 

 

80

 

30,955

Net interest income

 

93,395

 

 

(80)

 

93,315

Provision for credit losses

 

5,431

 

 

 

5,431

Noninterest income

 

8,294

 

12,119

 

(769)

 

19,644

Noninterest expense

 

51,286

 

11,569

 

954

 

63,809

Income (loss) before taxes on income

$

44,972

$

550

$

(1,803)

$

43,719

NOTE 11: ACQUISITIONS

Acquisition of TGR Financial, Inc.

On June 2, 2021, FFI entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with TGR Financial, Inc. (“TGR Financial”), pursuant to which TGR Financial will merge with and into FFI (the “Merger”), with FFI as the surviving corporation.  The Merger Agreement contemplates that immediately after the Merger, First Florida Integrity Bank, a Florida state-chartered bank and wholly-owned subsidiary of TGR Financial, will merge with and into FFB, with FFB as the surviving bank. Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each outstanding share of TGR Financial common stock will be converted into the right to receive 0.6068 (the “Exchange Ratio”) of a share of FFI common stock, and each outstanding share of TGR Financial preferred stock will be converted into the right to receive the number of shares of FFI common stock equal to the product of the number of shares of TGR Financial common stock into which such share of TGR Financial preferred stock is convertible in connection with, and as a result of, the Merger, multiplied by the Exchange Ratio. In addition, at the effective time of the Merger, FFI will cash out all outstanding stock option based on a formula using the average price of FFI’s common stock for a 20-day trading period prior to the closing of the Merger. Subject to regulatory and shareholder approvals, the transaction is expected to close during the fourth quarter of 2021.

NOTE 12: SUBSEQUENT EVENTS

Cash Dividend

On July 27, 2021, the Board of Directors of the Company declared a quarterly cash dividend of $0.09 per common share to be paid on August 20, 2021 to stockholders of record as of the close of business on August 9, 2021.

22

Table of Contents

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, 2021 as compared to our results of operations in the three and six months ended June 30, 2020; and our financial condition at June 30, 2021 as compared to our financial condition at December 31, 2020. This discussion and analysis is based on and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto contained elsewhere in this report and our audited consolidated financial statements for the year ended December 31, 2020, and the notes thereto, which are set forth in Item 8 of our Annual Report on Form 10-K (as amended, our “2020 10-K”) which we filed with the Securities and Exchange Commission (“SEC”) on February 26, 2021.

Forward-Looking Statements

Statements contained in this report that are not historical facts or that discuss our expectations, beliefs or views regarding our future financial performance or future financial condition, or financial or other trends in our business or in the markets in which we operate, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” “forecast” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Such forward-looking statements are based on current information that is available to us, and on assumptions that we make, about future events or economic or financial conditions or trends over which we do not have control. In addition, our businesses and the markets in which we operate are subject to a number of risks and uncertainties. Those risks and uncertainties, and unexpected future events, could cause our financial condition or actual operating results in the future to differ, possibly significantly, from our expected financial condition and operating results that are set forth in the forward-looking statements contained in this report.

The principal risks and uncertainties to which our businesses are subject are discussed in this Item 2 and under the heading “Risk Factors” in our 2020 10-K. Therefore, you are urged to read not only the information contained in this Item 2, but also the risk factors and other cautionary information contained under the heading “Risk Factors” in our 2020 10-K, which qualify the forward-looking statements contained in this report.

The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and may continue to adversely affect, our business, operations, financial performance and prospects. Even after the COVID-19 pandemic subsides, it is possible that the U.S. and other major economies experience or continue to experience a prolonged recession, which could materially and adversely affect our business, operations, financial performance and prospects. Statements about the effects of the COVID-19 pandemic on our business, operations, financial performance and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us.

Further, statements about the potential effects of the proposed acquisition of TGR Financial on our business, financial results, and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in the forward-looking statements due to factors and future developments which are uncertain, unpredictable and in many cases beyond our control, including the possibility that the proposed merger does not close when expected or at all because required regulatory, shareholder or other approvals, financial tests or other conditions to closing are not received or satisfied on a timely basis or at all; changes in our or TGR Financial’s stock price before closing, including as a result of each company’s financial performance prior to closing or transaction-related uncertainty, or more generally due to broader stock market movements, and the performance of financial companies and peer group companies; the occurrence of any event, change or other circumstance that could give

23

Table of Contents

risk to the right of one or both of the parties to terminate the merger agreement; the risk that the benefits from the proposed merger may not be fully realized or may take longer to realize than expected or be more costly to achieve, including as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the geographic and business areas in which we and TGR Financial operate; our ability to promptly and effectively integrate the companies’ businesses; reputational risks and the reaction of the companies' customers, employees and counterparties to the proposed merger; diversion of management time on merger-related issues; lower than expected revenues, credit quality deterioration or a reduction in real estate values or a reduction in net earnings; and that the COVID-19 pandemic, including uncertainty and volatility in financial, commodities and other markets, and disruptions to banking and other financial activity, could harm our or TGR Financial's business, financial position and results of operations, and could adversely affect the timing and anticipated benefits of the proposed merger.

Due to these risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements contained in this report and not to make predictions about our future financial performance based solely on our historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this report or in our 2020 10-K, except as may otherwise be required by applicable law or government regulations.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and accounting practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make estimates and assumptions regarding circumstances or trends that could materially affect the value of those assets, such as economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets. Those estimates and assumptions are made based on current information available to us regarding those economic conditions or trends or other circumstances. If changes were to occur in the events, trends or other circumstances on which our estimates or assumptions were based, or other unanticipated events were to occur that might affect our operations, we may be required under GAAP to adjust our earlier estimates and to reduce the carrying values of the affected assets on our balance sheet, generally by means of charges against income, which could also affect our results of operations in the fiscal periods when those charges are recognized.

Allowance for Credit Losses - Securities Available-for-Sale (“AFS”) - For securities AFS in an unrealized loss position, the Company first evaluates whether it intends to sell, or whether it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the security amortized cost basis is written down to fair value through income. If the criteria is not met, the Company is required to assess whether the decline in fair value has resulted from credit losses or noncredit-related factors. If the present value of expected cash flows to be collected is less than the amortized cost basis, a credit loss exists, and an allowance for credit loss is recorded through income as a component of provision for credit loss expense. If the assessment indicates that a credit loss does not exist, the Company records the decline in fair value through other comprehensive income, net of related income tax effects. The Company has made the election to exclude accrued interest receivable on securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. See Note 3, Securities, for additional information related to the Company’s allowance for credit losses on securities AFS.

Allowance for Credit Losses - Loans. Our ACL for loans and investments are established through a provision for credit losses charged to expense and may be reduced by a recapture of previously established loss reserves, which are also reflected in the statement of income. Loans and investments are charged against the ACL when management believes that collectability of the principal is unlikely. The ACL for loans is an amount that management believes will be adequate to absorb estimated losses on existing loans that may become uncollectible based on an evaluation of the collectability of loans and prior loan loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions and certain other subjective factors that may affect the borrower’s ability to pay. While we use the best information

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available to make this evaluation, future adjustments to our ACL may be necessary if there are significant changes in economic or other conditions that can affect the collectability in full of loans and investments in our loan or investment portfolios.

Utilization and Valuation of Deferred Income Tax Benefits. We record as a “deferred tax asset” on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions (collectively “tax benefits”) that we believe will be available to us to offset or reduce income taxes in future periods. Under applicable federal and state income tax laws and regulations, tax benefits related to tax loss carryforwards will expire if they cannot be used within specified periods of time. Accordingly, the ability to fully use our deferred tax asset related to tax loss carryforwards to reduce income taxes in the future depends on the amount of taxable income that we generate during those time periods. At least once each year, or more frequently, if warranted, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the amount of the tax benefits available to us, that it is more likely than not that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the amount of the tax benefits available to us that it has become more likely than not that we will be unable to utilize those tax benefits in full prior to their expiration, then we would establish a valuation allowance to reduce the deferred tax asset on our balance sheet to the amount with respect to which we believe it is still more likely than not that we will be able to use to offset or reduce taxes in the future. The establishment of such a valuation allowance, or any increase in an existing valuation allowance, would be effectuated through a charge to the provision for income taxes or a reduction in any income tax credit for the period in which such valuation allowance is established or increased.

We have two business segments, “Banking” and “Wealth Management.” Banking includes the operations of FFB and FFIS and Wealth Management includes the operations of FFA. The financial position and operating results of the stand-alone holding company, FFI, are included under the caption “Other” in certain of the tables that follow, along with any consolidation elimination entries.

Overview and Recent Developments

Our results of operations for the first six months of 2021 include:

Total loans, including loans held for sale, increased $702 million in the six months ended June 30, 2021 as a result of $1.9 billion of originations and $56 million of loan purchases, which was partially offset by payoffs or scheduled payments of $1.3 billion.
During the six months ended June 30, 2021, total deposits increased by $1.2 billion and total revenues (net interest income and noninterest income) increased by 22% when compared to the six months ended June 30, 2020.

Proposed Merger with TGR Financial, Inc.  On June 2, 2021, FFI entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with TGR Financial, Inc. (“TGR Financial”), pursuant to which TGR Financial will merge with and into FFI (the “Merger”), with FFI as the surviving corporation.  The Merger Agreement contemplates that immediately after the Merger, First Florida Integrity Bank, a Florida state-chartered bank and wholly-owned subsidiary of TGR Financial, will merge with and into FFB, with FFB as the surviving bank. Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each outstanding share of TGR Financial common stock will be converted into the right to receive 0.6068 (the “Exchange Ratio”) of a share of FFI common stock, and each outstanding share of TGR Financial preferred stock will be converted into the right to receive the number of shares of FFI common stock equal to the product of the number of shares of TGR Financial common stock into which such share of TGR Financial preferred stock is convertible in connection with, and as a result of, the Merger, multiplied by the Exchange Ratio. In addition, at the effective time of the Merger, FFI will cash out all outstanding stock option based on a formula using the average price of FFI’s common stock for a 20-day trading period prior to the closing of the Merger. Subject to regulatory and shareholder approvals, the transaction is expected to close during the fourth quarter of 2021.

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COVID-19 Update.  Our business continues to be affected by the COVID-19 pandemic, which has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree.  As restrictive measures were eased during the first half of 2021, commercial activity has improved but has not returned to the levels existing prior to the outbreak of the pandemic, and many businesses continue to operate under restricted measures and the ongoing risk that they will face further restrictions imposed in response to the pandemic, all of which may result in our customers’ inability to meet their loan obligations to us and reduce demand for loans and other services we offer.  In addition, we continue to operate under our Pandemic Response Business Continuity Plan, under which approximately 20% of our corporate employees continue to working remotely.  We continue to follow protocols for the safety of our clients and employees. Additional costs associated with the safety protocols, such as additional cleaning and supplies has been offset by reduced costs for parking, meals, entertainment and travel. We have implemented alternative procedures, such as electronic signatures and approvals, to maintain effective internal controls over our financial reporting processes.  We continued to face other risk and uncertainties as a result of the COVID-19 pandemic, including those described in “Item 1A – Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020, which we filed with the SEC on February 26, 2021.

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 77%, respectively, of the total noninterest expense for Banking and Wealth Management in the six months ended June 30, 2021.

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

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

2020:

 

  

 

  

 

  

 

  

Interest income

$

61,932

$

$

$

61,932

Interest expense

 

13,435

 

 

50

 

13,485

Net interest income

 

48,497

 

 

(50)

 

48,447

Provision for credit losses

 

1,367

 

 

 

1,367

Noninterest income

 

3,635

 

5,631

 

(297)

 

8,969

Noninterest expense

 

25,042

 

5,404

 

491

 

30,937

Income (loss) before taxes on income

$

25,723

$

227

$

(838)

$

25,112

General. Our net income and income before taxes in the three months ended June 30, 2021 were $26.1 million and $36.3 million, respectively, as compared to $17.9 million and $25.1 million, respectively, in the three months ended June 30, 2020. The $11.2 million increase in income before taxes was the result of a $10.6 million increase in income before taxes for Banking and a $1.6 million increase in income before taxes for Wealth Management, which was partially offset by a $0.9 million increase in corporate noninterest 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 and lower noninterest expenses.

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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

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

2020:

 

  

 

  

 

  

 

  

Interest income

$

124,270

$

$

$

124,270

Interest expense

 

30,875

 

 

80

 

30,955

Net interest income

 

93,395

 

 

(80)

 

93,315

Provision for credit losses

 

5,431

 

 

 

5,431

Noninterest income

 

8,294

 

12,119

 

(769)

 

19,644

Noninterest expense

 

51,286

 

11,569

 

954

 

63,809

Income (loss) before taxes on income

$

44,972

$

550

$

(1,803)

$

43,719

General. Our net income and income before taxes in the six months ended June 30, 2021 were $48.4 million and $67.6 million, respectively, as compared to $31.1 million and $43.7 million, respectively, in the six months ended June 30, 2020. The $23.9 million increase in income before taxes was the result of a $22.0 million increase in income before taxes for Banking and a $2.5 million increase in income before taxes for Wealth Management, which was partially offset by a $0.6 million increase in corporate noninterest 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 and lower noninterest expenses.

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Table of Contents

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:

 

    

2021

    

2020

 

Average

Average

Average

Average

(dollars in thousands)

    

Balances

    

Interest

    

Yield /Rate

    

Balances

    

Interest

    

Yield /Rate

    

Interest-earning assets:

  

  

  

  

  

  

 

Loans

$

5,780,494

$

55,979

 

3.88

%  

$

5,475,796

$

55,134

 

4.03

%

Securities AFS

 

741,967

 

4,927

 

2.66

%  

 

919,788

 

6,539

 

2.84

%

FHLB stock, fed funds, and deposits

 

727,053

 

497

 

0.27

%  

 

154,728

 

259

 

0.67

%

Total interest-earning assets

 

7,249,514

 

61,403

 

3.39

%  

 

6,550,312

 

61,932

 

3.78

%

Noninterest-earning assets:

 

 

  

 

  

 

  

 

  

 

  

Nonperforming assets

 

16,500

 

  

 

10,817

 

  

 

  

Other

 

193,334

 

  

 

181,459

 

  

 

  

Total assets

$

7,459,348

 

  

$

6,742,588

 

  

 

  

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

Demand deposits

$

940,133

$

556

 

0.24

%  

$

373,231

$

370

 

0.40

%

Money market and savings

 

2,271,899

 

2,137

 

0.38

%  

 

1,481,521

 

3,129

 

0.85

%

Certificates of deposit

 

720,326

 

694

 

0.39

%  

 

1,937,245

 

7,415

 

1.54

%

Total interest-bearing deposits

 

3,932,358

 

3,387

 

0.35

%  

 

3,791,997

 

10,914

 

1.16

%

Borrowings

 

12,980

 

106

 

3.26

%  

 

810,844

 

2,571

 

1.28

%

Total interest-bearing liabilities

 

3,945,338

 

3,493

 

0.35

%  

 

4,602,841

 

13,485

 

1.18

%

Noninterest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Demand deposits

 

2,751,013

 

  

 

1,442,333

 

  

 

  

Other liabilities

 

42,761

 

  

 

70,984

 

  

 

  

Total liabilities

 

6,739,112

 

  

 

6,116,158

 

  

 

  

Shareholders’ equity

 

720,236

 

  

 

626,430

 

  

 

  

Total liabilities and equity

$

7,459,348

 

  

$

6,742,588

 

  

 

  

Net Interest Income

$

57,910

 

 

  

$

48,447

 

  

Net Interest Rate Spread

 

 

3.04

%  

 

  

 

  

 

2.60

%  

Net Interest Margin

 

 

3.20

%  

 

  

 

  

 

2.96

%  

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Six Months Ended June 30:

 

    

2021

    

2020

 

Average

Average

Average

Average

(dollars in thousands)

    

Balances

    

Interest

    

Yield /Rate

    

Balances

    

Interest

    

Yield /Rate

    

Interest-earning assets:

  

  

  

  

  

  

 

Loans

$

5,583,216

$

109,510

 

3.93

%  

$

5,278,974

$

110,018

 

4.17

%

Securities AFS

 

757,002

 

10,133

 

2.68

%  

 

959,707

 

13,536

 

2.82

%

FHLB stock, fed funds and deposits

 

720,750

 

898

 

0.25

%  

 

108,374

 

716

 

1.33

%

Total interest-earning assets

 

7,060,968

 

120,541

 

3.42

%  

 

6,347,055

 

124,270

 

3.92

%

Noninterest-earning assets:

 

 

  

 

  

 

  

 

  

 

  

Nonperforming assets

 

17,322

 

  

 

11,371

 

  

 

  

Other

 

191,498

 

  

 

177,693

 

  

 

  

Total assets

$

7,269,788

 

  

$

6,536,119

 

  

 

  

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Demand deposits

$

955,198

$

1,430

 

0.30

%  

$

366,321

 

1,096

 

0.60

%

Money market and savings

 

2,307,010

 

4,719

 

0.41

%  

 

1,427,421

 

7,524

 

1.06

%

Certificates of deposit

 

790,298

 

1,861

 

0.47

%  

 

1,955,210

 

16,940

 

1.74

%

Total interest-bearing deposits

 

4,052,506

 

8,010

 

0.40

%  

 

3,748,952

 

25,560

 

1.37

%

Borrowings

 

108,999

 

392

 

0.73

%  

 

746,890

 

5,395

 

1.45

%

Total interest-bearing liabilities

 

4,161,505

 

8,402

 

0.41

%  

 

4,495,842

 

30,955

 

1.38

%

Noninterest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Demand deposits

 

2,343,141

 

  

 

1,354,331

 

  

 

  

Other liabilities

 

54,742

 

  

 

64,009

 

  

 

  

Total liabilities

 

6,559,388

 

  

 

5,914,182

 

  

 

  

Stockholders’ equity

 

710,400

 

  

 

621,937

 

  

 

  

Total liabilities and equity

$

7,269,788

 

  

$

6,536,119

 

  

 

  

Net Interest Income

$

112,139

 

 

  

$

93,315

 

  

Net Interest Rate Spread

 

 

3.01

%  

 

  

 

  

 

2.54

%  

Net Interest Margin

 

 

3.18

%  

 

  

 

  

 

2.94

%  

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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, 2021, as compared to the three and six months ended June 30, 2020:

    

Quarter Ended

Six Months Ended

June 30, 2021 vs. 2020

June 30, 2021 vs. 2020

    

Increase (Decrease) due to

Increase (Decrease) due to

(dollars in thousands)

    

Volume

    

Rate

    

Total

    

Volume

    

Rate

    

Total

Interest earned on:

 

  

 

  

 

  

  

 

  

 

  

Loans

$

3,018

$

(2,173)

$

845

$

6,034

$

(6,542)

$

(508)

Securities

 

(1,202)

 

(410)

 

(1,612)

 

(2,747)

 

(656)

 

(3,403)

FHLB stock, fed funds and deposits

 

472

 

(234)

 

238

 

1,172

 

(990)

 

182

Total interest-earning assets

 

2,288

 

(2,817)

 

(529)

 

4,459

 

(8,188)

 

(3,729)

Interest paid on:

 

  

 

  

 

  

 

  

 

 

  

Demand deposits

 

385

 

(199)

 

186

 

1,085

 

(751)

 

334

Money market and savings

 

1,233

 

(2,225)

 

(992)

 

3,185

 

(5,990)

 

(2,805)

Certificates of deposit

 

(3,045)

 

(3,676)

 

(6,721)

 

(6,814)

 

(8,265)

 

(15,079)

Borrowings

 

(4,064)

 

1,599

 

(2,465)

 

(3,160)

 

(1,843)

 

(5,003)

Total interest-bearing liabilities

 

(5,491)

 

(4,501)

 

(9,992)

 

(5,704)

 

(16,849)

 

(22,553)

Net interest income

$

7,779

$

1,684

$

9,463

$

10,163

$

8,661

$

18,824

Net interest income increased 20%, from $48.4 million in the three months ended June 30, 2020, to $57.9 million in the three months ended June 30, 2021 due to an 11% increase in interest-earning assets and an increase in the net interest rate spread. On a consolidated basis our net interest margin increased from 2.96% in the three months ended June 30, 2020, to 3.20% in the three months ended June 30, 2021, due to a decrease in the cost of interest-bearing liabilities, from 1.18% in the three months ended June 30, 2020, to 0.35% in the three months ended June 30, 2021, which was partially offset by a decrease in yield on interest-earning assets, from 3.78% in the three months ended June 30, 2020, to 3.39% in the three months ended June 30, 2021. The decrease in the cost of interest-bearing liabilities was due to decreased costs of interest-bearing deposits, resulting from decreases in deposit market rates, and decreased average balance of borrowings, as the average balance on FHLB advances and other borrowings decreased from $810.8 million in the three months ended June 30, 2020, to $13.0 million in the three months ended June 30, 2021. The average balance outstanding under the holding company line of credit increased from $4.1 million in the three months ended June 30, 2020, to $11.4 million in the three months ended June 30, 2021.

Net interest income increased 20% from $93.3 million in the six months ended June 30, 2020, to $112.1 million in the six months ended June 30, 2021 due primarily to an 11% increase in interest-earning assets. On a consolidated basis our net interest margin was 3.18% for the six months ended June 30, 2021 as compared to 2.94% in the six months ended June 30, 2020. This increase was due to an increase in the net interest rate spread, from 2.54% in the six months ended June 30, 2020 to 3.01% in the six months ended June 30, 2021. The increase in the net interest rate spread was due to a decrease in the cost of interest-bearing liabilities, from 1.38% in the six months ended June 30, 2020, to 0.41% in the six months ended June 30, 2021, which was partially offset by a decrease in yield on total interest-earning assets, from 3.92% in the six months ended June 30, 2020, to 3.42% in the six months ended June 30, 2021. The decrease in the cost of interest-bearing liabilities was due to decreased costs of interest-bearing deposits, resulting from decreases in deposit market rates, and decreased costs of borrowings, as the average rate on FHLB advances and other overnight borrowings decreased from 1.44% in the six months ended June 30, 2020 to 0.73% in the six months ended June 30, 2021. The average balance outstanding under the holding company line of credit increased from $3.2 million in the six months ended June 30, 2020 to $9.1 million in the six months ended June 30, 2021.

Provision for credit losses. The provision for credit losses represents our estimate of the amount necessary to be charged against the current period’s earnings to maintain the ACL for loans and investments at a level that we consider adequate in relation to the estimated losses inherent in the loan and investment portfolios. The provision for credit losses

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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 and six months ended June 30, 2021 was $44 thousand and $0.4 million, respectively, compared to $1.4 million and $5.4 million, respectively, for the three and six months ended June 30, 2020. Net chargeoffs against the ACL were $0.1 million for the three months ended June 30, 2021, and there were net recoveries of $0.1 million for the six months ended June 30, 2021, as compared to net chargeoffs of $0.4 million and $0.5 million for the three and six months ended June 30, 2020. The decrease in the provision for credit losses for the three and six months ended June 30, 2021 was a result of improvement in the economic scenario outlook.

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 periods indicated:

(dollars in thousands)

    

2021

    

2020

Three Months Ended June 30:

Trust fees

$

1,763

$

1,232

Loan related fees

 

1,324

 

1,818

Deposit charges

 

397

 

268

Gain on sale of loans

3,324

Consulting fees

 

100

 

114

Other

 

291

 

203

Total noninterest income

$

7,199

$

3,635

Six Months Ended June 30:

Trust fees

$

3,431

$

2,696

Loan related fees

 

4,268

 

4,391

Deposit charges

 

776

 

591

Consulting fees

 

201

 

200

Gain on sale of loans

3,324

Other

 

508

 

416

Total noninterest income

$

12,508

$

8,294

Noninterest income for Banking in the three and six months ended June 30, 2021 were $3.6 million and $4.2 million higher than the three and six months ended June 30, 2020, respectively, due to an increase in trust fees and $3.3 million in gains on sales of loans, offset partially by a decrease in loan related fees. The increase in trust fees was due primarily to higher levels of billable assets under advisement (“AUA”). Loan related fees decreased due to a $1.3 million valuation allowance on mortgage servicing rights in the three and six months ended June 30, 2021 when compared to the corresponding period in 2020, which was due to an increase in prepayment speeds.

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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 periods indicated:

(dollars in thousands)

    

2021

    

2020

Three Months Ended June 30:

Noninterest income

$

7,240

$

5,631

Six Months Ended June 30:

Noninterest income

$

14,163

$

12,119

Noninterest income for Wealth Management increased by $1.6 million and $2.0 million in the three and six months ended June 30, 2021, respectively, when compared to the corresponding period in 2020, due primarily to higher levels of billable AUM in the quarter.

The following table summarizes the activity in our AUM for the periods indicated:

Existing account

Beginning

Additions/

New

(dollars in thousands)

    

Balance

   

Withdrawals

   

Accounts

   

Terminations

   

Performance

   

Ending balance

Three Months Ended June 30, 2021:

 

 

  

 

  

 

  

 

  

 

  

Fixed Income

$

1,430,492

$

(31,707)

$

21,149

$

(16,800)

$

6,259

$

1,409,393

Equities

 

2,644,993

 

46,658

 

86,551

 

(42,202)

 

224,111

 

2,960,111

Cash and other

 

952,504

 

(75,231)

 

53,048

 

(24,320)

 

44,357

 

950,358

Total

$

5,027,989

$

(60,280)

$

160,748

$

(83,322)

$

274,727

$

5,319,862

Six Months Ended June 30, 2021:

 

 

  

 

  

 

  

 

  

 

  

Fixed Income

$

1,474,479

$

(119,994)

$

39,463

$

(26,012)

$

41,457

$

1,409,393

Equities

 

2,451,056

 

182,320

 

131,894

 

(82,784)

 

277,625

 

2,960,111

Cash and other

 

1,001,256

 

(160,876)

 

95,336

 

(61,712)

 

76,354

 

950,358

Total

$

4,926,791

$

(98,550)

$

266,693

$

(170,508)

$

395,436

$

5,319,862

Year Ended December 31, 2020:

 

 

  

 

  

 

  

 

  

 

  

Fixed Income

$

1,678,660

$

(334,302)

$

117,362

$

(42,907)

$

55,666

$

1,474,479

Equities

 

2,628,472

 

(645,341)

115,418

(83,292)

435,799

 

2,451,056

Cash and other

 

131,120

 

809,238

133,286

(50,799)

(21,589)

 

1,001,256

Total

$

4,438,252

$

(170,405)

$

366,066

$

(176,998)

$

469,876

$

4,926,791

The $393 million increase in AUM during the six months ended June 30, 2021 was the net result of $267 million of new accounts, $387 million of portfolio gains, and terminations and net withdrawals of $261 million.

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Noninterest Expense. The following table provides a breakdown of noninterest expense for Banking and Wealth Management for the periods indicated:

Banking

Wealth Management

(dollars in thousands)

2021

2020

2021

2020

Three Months Ended June 30, 2021:

Compensation and benefits

    

$

15,835

    

$

13,847

    

$

4,130

    

$

4,088

Occupancy and depreciation

 

5,268

 

5,248

 

442

 

567

Professional services and marketing

 

2,296

 

1,506

 

677

 

636

Customer service costs

 

2,353

 

1,622

 

 

Other expenses

 

3,116

 

2,819

 

123

 

113

Total noninterest expense

$

28,868

$

25,042

$

5,372

$

5,404

Six Months Ended June 30, 2021:

Compensation and benefits

    

$

32,658

    

$

28,680

    

$

8,577

    

$

8,670

Occupancy and depreciation

 

10,907

 

10,115

 

963

 

1,176

Professional services and marketing

 

4,067

 

2,692

 

1,316

 

1,417

Customer service costs

 

4,123

 

3,994

 

 

Other expenses

 

5,692

 

5,805

 

247

 

306

Total noninterest expense

$

57,447

$

51,286

$

11,103

$

11,569

Noninterest expense in Banking increased from $25 million in the three months ended June 30, 2020, to $28.9 million in the three months ended June 30, 2021, primarily due to higher compensation and benefits, professional services and marketing expenses, and customer service costs. Compensation and benefits were $2.0 million higher in the three months ended June 30, 2021 due to increases in FTE. The FTE in Banking increased to 459.5 in the three months ended June 30, 2021, from 437.4 in the three months ended June 30, 2020, due to increased staffing related to additional personnel added to support the growth in loans and deposits. Professional services and marketing were higher due primarily to $1.2 million of one-time merger expenses during the second quarter of 2021 related to the TGR Financial acquisition. The $0.7 million increase in customer service costs was due to higher earnings credits paid on increases in deposit balances. Noninterest expenses for Wealth Management were $5.4 million for the three months ended June 30, 2021 and three months ended June 30, 2020.

Noninterest expense in Banking increased from $51.3 million in the six months ended June 30, 2020, to $57.4 million in the six months ended June 30, 2021, primarily due to increases in compensation and benefits and professional services and marketing. Compensation and benefits for Banking increased, from $28.7 million in the six months ended June 30, 2020, to $32.7 million in the six months ended June 30, 2021, due to increases in FTE, and due to merit increases and annual bonus and commission payouts in the first quarter of 2021. The FTE in Banking increased to 450.8 in the six months ended June 30, 2021, from 434.3 in the six months ended June 30, 2020, due to increased staffing related to additional personnel added to support the growth in loans and deposits. The $1.4 million increase in professional services and marketing for Banking in the six months ended June 30, 2021, as compared to the six months ended June 30, 2020 was due to primarily to $1.2 million of one-time merger expenses during the second quarter of 2021 related to the TGR Financial acquisition. Noninterest expenses for Wealth Management decreased by $0.5 million in the six months ended June 30, 2021, when compared to the six months ended June 30, 2020, primarily due to lower compensation and benefits, occupancy and depreciation, and professional services and marketing expenses. Professional services and marketing expenses for Wealth Management were $0.2 million lower due to costs incurred on a legal matter in the six months ended June 30, 2020.

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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, 2021:

  

  

  

  

Cash and cash equivalents

$

969,081

$

940

$

(375)

$

969,646

Securities AFS, net

 

736,734

 

 

 

736,734

Loans held for sale

 

498,319

 

 

 

498,319

Loans, net

 

5,490,616

 

 

 

5,490,616

Premises and equipment

 

7,546

 

501

 

136

 

8,183

FHLB Stock

 

17,250

 

 

 

17,250

Deferred taxes

 

9,390

 

162

 

66

 

9,618

Goodwill and intangibles

 

94,454

 

 

 

94,454

Other assets

 

93,278

 

314

 

20,722

 

114,314

Total assets

$

7,916,668

$

1,917

$

20,549

$

7,939,134

Deposits

$

7,114,402

$

$

(7,600)

$

7,106,802

Borrowings

 

 

 

20,000

 

20,000

Intercompany balances

 

6,244

 

(5,291)

 

(953)

 

Other liabilities

 

65,199

 

2,479

 

10,636

 

78,314

Shareholders’ equity

 

730,823

 

4,729

 

(1,534)

 

734,018

Total liabilities and equity

$

7,916,668

$

1,917

$

20,549

$

7,939,134

December 31, 2020:

 

 

 

 

Cash and cash equivalents

$

629,066

$

1,671

$

(1,030)

$

629,707

Securities AFS, net

 

807,426

 

 

 

807,426

Loans held for sale

 

505,404

 

 

 

505,404

Loans, net

 

4,779,599

 

 

 

4,779,599

Premises and equipment

 

7,313

 

563

 

136

 

8,012

FHLB Stock

 

17,250

 

 

 

17,250

Deferred taxes

 

8,663

 

186

 

(246)

 

8,603

Goodwill and intangibles

 

95,296

 

 

 

95,296

Other assets

 

91,702

 

314

 

13,847

 

105,863

Total assets

$

6,941,719

$

2,734

$

12,707

$

6,957,160

Deposits

$

5,919,155

$

$

(5,722)

$

5,913,433

Borrowings

 

255,000

 

 

14,000

 

269,000

Intercompany balances

 

4,493

 

(3,519)

 

(974)

 

Other liabilities

 

65,423

 

3,808

 

9,785

 

79,016

Shareholders’ equity

 

697,648

 

2,445

 

(4,382)

 

695,711

Total liabilities and equity

$

6,941,719

$

2,734

$

12,707

$

6,957,160

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, 2021 total assets increased by $982 million, primarily due to an increase in loans and in cash. During the six months ended June 30, 2021, securities decreased by $71 million primarily due to payoffs of mortgage backed securities. Loans and loans held for sale increased $702 million in the six months ended June 30, 2021, primarily as a result of $1.9 billion of originations, which were partially offset by payoffs or scheduled payments of $1.2 billion. The $1.2 billion growth in deposits during the six months ended June 30, 2021 included increases

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in commercial deposits of $1.3 billion and branch deposits of $119 million, which were partially offset by a $209 million decrease in wholesale deposits and a $78 million decrease in digital channel deposits. Borrowings decreased by $249 million during the six months ended June 30, 2021 as cash provided by the increase in deposits, which exceeded the growth in our assets, was used to pay down our borrowings at the Bank. At June 30, 2021 and December 31, 2020, the outstanding balance on the holding company line of credit was $20 million.

Cash and cash equivalents, certificates of deposit and securities. Cash and cash equivalents, which primarily consist of funds held at the Federal Reserve Bank or at correspondent banks, including fed funds, increased by $340 million during the six months ended June 30, 2021. Changes in cash and cash equivalents are primarily affected by the funding of loans, investments in securities, and changes in our sources of funding: deposits, FHLB advances and FFI borrowings.

Securities available for sale. The following table provides a summary of the Company’s AFS securities portfolio as of:

    

Amortized

    

Gross Unrealized

    

Allowance for

    

Estimated

(dollars in thousands)

    

Cost

    

Gains

    

Losses

    

Credit Losses

    

Fair Value

June 30, 2021:

  

  

  

  

Agency mortgage-backed securities

$

608,766

$

13,054

$

(934)

$

$

620,886

Beneficial interest – FHLMC securitization

 

24,199

 

413

 

 

(9,116)

 

15,496

Corporate bonds

 

94,000

 

2,619

 

 

 

96,619

Other

 

3,656

 

87

 

(10)

 

 

3,733

Total

$

730,621

$

16,173

$

(944)

$

(9,116)

$

736,734

December 31, 2020:

 

  

 

  

 

 

 

  

Agency mortgage-backed securities

$

705,752

$

18,243

$

$

$

723,995

Beneficial interest – FHLMC securitization

 

30,497

 

211

 

 

(7,245)

 

23,463

Corporate bonds

 

57,000

 

1,358

 

 

 

58,358

Other

 

1,512

 

98

 

 

 

1,610

Total

$

794,761

$

19,910

$

$

(7,245)

$

807,426

US Treasury Securities that are included in the table above are pledged as collateral to the State of California to meet regulatory requirements related to FFB’s trust operations. Agency mortgage-backed securities are pledged as collateral as support for the Bank’s obligations under loan sales and securitization agreements entered into from 2018 through 2020.

The scheduled maturities of securities AFS, other than agency mortgage backed securities, and the related weighted average yield is as follows, as of June 30, 2021:

    

Less than 

    

1 Through 

    

5 Through 

    

After

    

 

(dollars in thousands)

1 Year

5 years

10 Years

10 Years

Total

 

Amortized Cost:

  

  

  

  

  

 

Corporate bonds

$

$

$

89,000

$

5,000

$

94,000

Other

 

100

 

1,526

 

2,030

 

 

3,656

Total

$

100

$

1,526

$

91,030

$

5,000

$

97,656

Weighted average yield

 

0.13

%  

 

2.02

%  

 

4.45

%  

 

3.38

%  

 

4.35

%

Estimated Fair Value:

 

  

 

  

 

  

 

  

 

  

Corporate bonds

$

$

$

91,550

$

5,069

$

96,619

Other

 

100

 

1,611

 

2,022

 

 

3,733

Total

$

100

$

1,611

$

93,572

$

5,069

$

100,352

Agency mortgage-backed securities and beneficial interests in FHLMC securitizations are excluded from the above table because such securities are not due at a single maturity date. The weighted average yield of the agency mortgage-backed securities and beneficial interests as of June 30, 2021 was 2.33%.

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Loans. The following table sets forth our loans, by loan category, as of:

    

June 30, 

    

December 31, 

(dollars in thousands)

    

2021

    

2020

Outstanding principal balance:

 

  

 

  

Loans secured by real estate:

 

  

 

  

Residential properties:

 

  

 

  

Multifamily

$

2,814,446

$

2,247,542

Single family

 

812,728

 

806,014

Total real estate loans secured by residential properties

 

3,627,174

 

3,053,556

Commercial properties

 

665,166

 

747,807

Land and construction

 

56,603

 

55,832

Total real estate loans

 

4,348,943

 

3,857,195

Commercial and industrial loans

 

1,142,766

 

918,676

Consumer loans

 

9,645

 

18,888

Total loans

 

5,501,354

 

4,794,759

Premiums, discounts and deferred fees and expenses

 

11,534

 

9,040

Total

$

5,512,888

$

4,803,799

Loans and loans held for sale increased $702 million during six months ended June 30, primarily as a result of $1.9 billion in originations, and $56 million in loan purchases, which were partially offset by payoffs or scheduled payments of $1.2 billion.

Deposits. The following table sets forth information with respect to our deposits and the average rates paid on deposits, as of:

    

June 30, 2021

    

December 31, 2020

    

Weighted

Weighted

(dollars in thousands)

    

Amount

    

Average Rate

    

Amount

    

Average Rate

    

Demand deposits:

  

  

  

  

Noninterest-bearing

$

3,276,901

 

$

1,655,847

 

Interest-bearing

 

896,224

 

0.201

%  

 

871,289

 

0.372

%  

Money market and savings

 

2,256,952

 

0.319

%  

 

2,407,401

 

0.549

%  

Certificates of deposits

 

676,725

 

0.274

%  

 

978,896

 

0.591

%  

Total

$

7,106,802

 

0.153

%  

$

5,913,433

 

0.376

%  

During the six months ended June 30, 2021, our deposit rates have moved in a manner consistent with overall deposit market rates. The weighted average rate of our interest-bearing deposits decreased from 0.52% at December 31, 2020, to 0.28% at June 30, 2021 due to decreased costs of interest-bearing deposits, while the weighted average interest rates of both interest-bearing and noninterest-bearing deposits have decreased from 0.38% at December 31, 2020 to 0.15% at June 30, 2021. The financial impact of the increase in noninterest-bearing deposits is reflected in customer service costs, which are included in noninterest expenses.

The maturities of our certificates of deposit of $100,000 or more were as follows as of June 30, 2021:

(dollars in thousands)

3 months or less

    

$

236,994

Over 3 months through 6 months

 

180,141

Over 6 months through 12 months

 

73,155

Over 12 months

 

7,606

Total

$

497,896

From time to time, the Bank will utilize brokered deposits as a source of funding. As of June 30, 2021, the Bank held $117 million of deposits, which are classified as brokered deposits.

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Borrowings. At June 30, 2021, our borrowings consisted of $20 million of borrowings under a holding company line of credit. At December 31, 2020, our borrowings consisted of $255 million in FHLB term advances at the Bank, and $14 million of borrowings under a company line of credit. Because FFB generally utilizes overnight borrowings, the balance of outstanding borrowings may fluctuate on a daily basis. The average balance of FHLB advances outstanding during the six months ended June 30, 2021 was $100 million, as compared to $744 million for the six months ended June 30, 2020. The weighted average interest rate on these borrowings was 0.45% for the six months ended June 30, 2021, as compared to 1.44% for the six months ended June 30, 2020. The maximum amount of borrowings at the Bank outstanding at any month-end during the six months ended June 30, 2021, and during all of 2020, was $255 million and $860 million, respectively.

Delinquent Loans, Nonperforming Assets and Provision for Credit Losses

Loans are considered past due following the date when either interest or principal is contractually due and unpaid. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued when reasonable doubt exists as to the full, timely collection of interest or principal and, generally, when a loan becomes contractually past due for 90 days or more with respect to principal or interest. However, the accrual of interest may be continued on a well-secured loan contractually past due 90 days or more with respect to principal or interest if the loan is in the process of collection or collection of the principal and interest is deemed probable. The following tables provide a summary of past due and nonaccrual loans as of:

90 Days

Total Past Due 

(dollars in thousands)

    

30–59 Days

    

60-89 Days

    

or More

    

Nonaccrual

    

and Nonaccrual

    

Current

    

Total

June 30, 2021:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Real estate loans:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential properties

$

54

$

$

$

10,757

$

10,811

$

3,628,857

$

3,639,668

Commercial properties

 

776

 

 

 

1,613

 

2,389

 

663,155

 

665,544

Land and construction

 

 

 

 

 

 

56,565

 

56,565

Commercial and industrial loans

 

1,550

 

250

 

 

3,817

 

5,617

 

1,135,831

 

1,141,448

Consumer loans

 

 

 

 

 

 

9,663

 

9,663

Total

$

2,380

$

250

$

$

16,187

$

18,817

$

5,494,071

$

5,512,888

Percentage of total loans

 

0.04

%  

 

0.00

%  

 

%  

 

0.29

%  

 

0.34

%  

 

  

 

  

December 31, 2020:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Real estate loans:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential properties

$

35

$

$

$

10,947

$

10,982

$

3,042,574

$

3,053,556

Commercial properties

 

951

 

240

 

 

4,544

 

5,735

 

742,072

 

747,807

Land and construction

 

 

 

 

 

 

55,832

 

55,832

Commercial and industrial loans

 

1,013

 

411

 

152

 

5,137

 

6,713

 

911,963

 

918,676

Consumer loans

 

 

 

 

 

 

18,888

 

18,888

Total

$

1,999

$

651

$

152

$

20,628

$

23,430

$

4,771,329

$

4,794,759

Percentage of total loans

 

0.04

%  

 

0.01

%  

 

0.00

%  

 

0.43

%  

 

0.49

%  

 

  

 

  

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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, 2021

 

 

  

Real estate loans:

Residential properties

$

2,958

$

7,799

Commercial properties

1,613

Land and construction

Commercial and industrial loans

 

1,881

 

1,936

Consumer loans

 

 

Total

$

4,839

$

11,348

December 31, 2020

 

 

  

Real estate loans:

Residential properties

$

2,987

$

7,959

Commercial properties

4,544

Land and construction

Commercial and industrial loans

 

2,581

 

2,557

Consumer loans

 

 

Total

$

5,568

$

15,060

The following table presents the composition of TDRs by accrual and nonaccrual status as of:

    

June 30, 2021

    

December 31, 2020

(dollars in thousands)

    

Accrual

    

Nonaccrual

    

Total

    

Accrual

    

Nonaccrual

    

Total

Residential real estate loans

$

1,200

$

$

1,200

$

1,200

$

$

1,200

Commercial real estate loans

 

1,064

 

1,228

 

2,292

 

1,107

 

1,277

 

2,384

Commercial and industrial loans

 

980

 

2,180

 

3,160

 

1,041

 

2,832

 

3,873

Total

$

3,244

$

3,408

$

6,652

$

3,348

$

4,109

$

7,457

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.

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Allowance for Credit Losses. The following table summarizes the activity in our ACL related to loans for the periods indicated:

Beginning 

Adoption of

Provision for

Ending

(dollars in thousands)

    

Balance

ASC 326

    

Credit Losses

    

Charge-offs

    

Recoveries

    

Balance

Three months ended June 30, 2021:

Real estate loans:

 

  

  

 

  

 

  

 

  

 

  

Residential properties

$

6,033

$

$

1,203

$

$

$

7,236

Commercial properties

 

5,956

 

 

(471)

 

 

 

5,485

Land and construction

 

3,962

 

 

(1,978)

 

 

 

1,984

Commercial and industrial loans

 

7,062

 

 

487

 

(194)

 

103

 

7,458

Consumer loans

 

167

 

 

(58)

 

 

 

109

Total

$

23,180

$

$

(817)

$

(194)

$

103

$

22,272

Six months ended June 30, 2021:

Real estate loans:

 

  

  

 

  

 

  

 

  

 

  

Residential properties

$

5,115

$

$

2,121

$

$

$

7,236

Commercial properties

 

8,711

 

 

(3,226)

 

 

 

5,485

Land

 

892

 

 

1,092

 

 

 

1,984

Commercial and industrial loans

 

9,249

 

 

(1,892)

 

(408)

 

509

 

7,458

Consumer loans

 

233

 

 

(124)

 

 

 

109

Total

$

24,200

$

$

(2,029)

$

(408)

$

509

$

22,272

Year ended December 31, 2020:

 

  

 

  

 

  

 

  

 

  

 

  

Real estate loans:

 

  

 

  

 

  

 

  

 

  

 

  

Residential properties

$

8,423

$

363

$

(3,671)

$

$

$

5,115

Commercial properties

 

4,166

 

3,760

 

785

 

 

 

8,711

Land and construction

 

573

 

92

 

227

 

 

 

892

Commercial and industrial loans

 

7,448

 

 

2,642

 

(1,844)

 

1,003

 

9,249

Consumer loans

 

190

 

 

43

 

 

 

233

Total

$

20,800

$

4,215

$

26

$

(1,844)

$

1,003

$

24,200

Our ACL related to loans represented 0.40% and 0.50% of total loans outstanding as of June 30, 2021 and December 31, 2020, respectively.

The amount of the ACL for loans is adjusted periodically by charges to operations (referred to in our income statement as the “provision for credit losses”) (i) to replenish the ACL after it has been reduced due to loan write-downs or charge-offs, (ii) to reflect increases in the volume of outstanding loans, and (iii) to take account of changes in the risk of potential loan losses due to a deterioration in the condition of borrowers, or in the value of property securing non–performing loans, or adverse changes in economic conditions. The amounts of the provisions we make for loan losses are based on our estimate of losses in our loan portfolio. In estimating such losses, we use economic and loss migration models that are based on bank regulatory guidelines and industry standards, and our historical charge-off experience and loan delinquency rates, local and national economic conditions, a borrower’s ability to repay its borrowings, and the value of any property collateralizing the loan, as well as a number of subjective factors. However, these determinations involve judgments about changes and trends in current economic conditions and other events that can affect the ability of borrowers to meet their loan obligations to us, and a weighting among the quantitative and qualitative factors we consider in determining the sufficiency of the ACL. Moreover, the duration and anticipated effects of prevailing economic conditions or trends can be uncertain and can be affected by a number of risks and circumstances that are outside of our control. If changes in economic or market conditions or unexpected subsequent events were to occur, or if changes were made to bank regulatory guidelines or industry standards that are used to assess the sufficiency of the ACL, it could become necessary for us to incur additional, and possibly significant, charges to increase the ACL, which would have the effect of reducing our income.

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In addition, the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Financial Protection and Innovation, as an integral part of their examination processes, periodically review the adequacy of our ACL. These agencies may require us to make additional provisions for credit losses, over and above the provisions that we have already made, the effect of which would be to reduce our income.

The following table presents the balance in the ACL and the recorded investment in loans by impairment method as of:

Allowance for Credit Losses

Loans Evaluated

(dollars in thousands)

    

Individually

    

Collectively

    

Total

    

June 30, 2021:

Allowance for credit losses:

 

  

 

  

 

  

 

Real estate loans:

 

  

 

  

 

  

 

Residential properties

$

1,218

$

6,152

$

7,370

Commercial properties

 

437

 

4,999

 

5,436

Land and construction

 

 

1,967

 

1,967

Commercial and industrial loans

 

710

 

6,681

 

7,391

Consumer loans

 

 

108

 

108

Total

$

2,365

$

19,907

$

22,272

Loans:

 

  

 

  

 

  

Real estate loans:

 

  

 

  

 

  

Residential properties

$

16,556

$

3,623,112

$

3,639,668

Commercial properties

 

14,025

 

651,519

 

665,544

Land and construction

 

 

56,565

 

56,565

Commercial and industrial loans

 

5,045

 

1,136,403

 

1,141,448

Consumer loans

 

 

9,663

 

9,663

Total

$

35,626

$

5,477,262

$

5,512,888

    

Allowance for Credit Losses

    

Loans Evaluated

(dollars in thousands)

    

Individually

    

Collectively

    

Total

    

December 31, 2020:

 

  

 

  

 

  

Allowance for credit losses:

 

  

 

  

 

  

Real estate loans:

 

  

 

  

 

  

Residential properties

$

1,059

$

4,056

$

5,115

Commercial properties

 

374

 

8,337

 

8,711

Land and construction

 

 

892

 

892

Commercial and industrial loans

 

956

 

8,293

 

9,249

Consumer loans

 

 

233

 

233

Total

$

2,389

$

21,811

$

24,200

Loans:

 

  

 

  

 

  

Real estate loans:

 

  

 

  

 

  

Residential properties

$

12,414

$

3,041,142

$

3,053,556

Commercial properties

 

17,304

 

730,503

 

747,807

Land and construction

 

 

55,832

 

55,832

Commercial and industrial loans

 

6,472

 

912,204

 

918,676

Consumer loans

 

 

18,888

 

18,888

Total

$

36,190

$

4,758,569

$

4,794,759

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Liquidity

Liquidity management focuses on our ability to generate, on a timely and cost-effective basis, cash sufficient to meet the funding needs of current loan demand, deposit withdrawals, principal and interest payments with respect to outstanding borrowings and to pay operating expenses. Our liquidity management is both a daily and long-term function of funds management. Liquid assets are generally invested in marketable securities or held as cash at the Federal Reserve Bank of San Francisco or other financial institutions.

We monitor our liquidity in accordance with guidelines established by our Board of Directors and applicable regulatory requirements. Our need for liquidity is affected by our loan activity, net changes in deposit levels and the maturities of our borrowings. The principal sources of our liquidity consist of deposits, loan interest and principal payments and prepayments, investment management and consulting fees, FHLB advances and proceeds from borrowings and sales of FFI common stock. The remaining balances of the Company’s lines of credit available to draw down totaled $3.0 billion at June 30, 2021.

Cash Flows Provided by Operating Activities. 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. During the six months ended June 30, 2020, operating activities provided net cash of $28 million, primarily due to net income of $31 million and $5 million in provisions for credit losses, partially offset by a net increase of $11 million in other assets.

Cash Flows Used in Investing Activities. 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. During the six months ended June 30, 2020, investing activities used net cash of $449 million, primarily to fund a $595 million net increase in loans and $7 million in securities purchases, offset partially by $155 million in cash received in principal collection and maturities of securities.

Cash Flows Provided by Financing Activities. 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. During the six months ended June 30, 2020, financing activities provided net cash of $770 million, consisting primarily of a net increase of $757 million in deposits and a $22 million increase in FHLB advances, offset partially by $6 million in dividends paid and $3 million in stock repurchases.

Ratio of Loans to Deposits. The relationship between gross loans and total deposits can provide a useful measure of a bank’s liquidity. Since repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan-to-deposit ratio the less liquid are our assets. On the other hand, since we realize greater yields on loans than we do on other interest-earning assets, a lower loan-to-deposit ratio can adversely affect interest income and earnings. As a result, our goal is to achieve a loan-to-deposit ratio that appropriately balances the requirements of liquidity and the need to generate a fair return on our assets. At June 30, 2021 and December 31, 2020, the loan-to-deposit ratios at FFB were 84.6% and 89.8%, respectively.

Off-Balance Sheet Arrangements

The following table provides the off-balance sheet arrangements of the Company as of June 30, 2021:

(dollars in thousands)

    

Commitments to fund new loans

$

80,661

Commitments to fund under existing loans, lines of credit

 

685,350

Commitments under standby letters of credit

 

14,850

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

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June 30, 2021, FFB was obligated on $277 million of letters of credit to the FHLB which were being used as collateral for public fund deposits, including $263 million of deposits from the State of California.

Capital Resources and Dividend Policy

The capital rules applicable to United States based bank holding companies and federally insured depository institutions (“Capital Rules”) require the Company (on a consolidated basis) and FFB (on a stand-alone basis) to meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt correct action regulations place a federally insured depository institution, such as FFB, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution’s primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.

The following table sets forth the capital and capital ratios of FFI (on a consolidated basis) and FFB as of the respective dates indicated below, as compared to the respective regulatory requirements applicable to them:

    

    

    

To Be Well Capitalized

 

For Capital 

Under Prompt Corrective

Actual

Adequacy Purposes

Action Provisions

(dollars in thousands)

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

FFI

  

  

  

  

  

  

 

June 30, 2021:

 

  

 

  

 

  

 

  

 

  

 

  

CET1 capital ratio

$

631,257

 

11.59

%  

$

245,147

 

4.50

%  

  

 

  

Tier 1 leverage ratio

 

631,257

 

8.33

%  

 

303,031

 

4.00

%  

  

 

  

Tier 1 risk-based capital ratio

 

631,257

 

11.59

%  

 

326,863

 

6.00

%  

  

 

  

Total risk-based capital ratio

 

663,201

 

12.17

%  

 

435,818

 

8.00

%  

  

 

  

December 31, 2020:

 

 

 

 

 

  

 

  

CET1 capital ratio

$

589,276

 

11.55

%  

$

229,490

 

4.50

%  

  

 

  

Tier 1 leverage ratio

 

589,276

 

8.93

%  

 

263,986

 

4.00

%  

  

 

  

Tier 1 risk-based capital ratio

 

589,276

 

11.55

%  

 

305,987

 

6.00

%  

  

 

  

Total risk-based capital ratio

 

620,700

 

12.17

%  

 

407,982

 

8.00

%  

  

 

  

FFB

 

 

 

 

 

  

 

  

June 30, 2021:

 

 

 

 

 

  

 

  

CET1 capital ratio

$

628,357

 

11.58

%  

$

244,079

 

4.50

%  

$

352,558

 

6.50

%

Tier 1 leverage ratio

 

628,357

 

8.32

%  

 

302,178

 

4.00

%  

 

377,722

 

5.00

%

Tier 1 risk-based capital ratio

 

628,357

 

11.58

%  

 

325,438

 

6.00

%  

 

433,918

 

8.00

%

Total risk-based capital ratio

 

660,301

 

12.17

%  

 

433,918

 

8.00

%  

 

542,397

 

10.00

%

December 31, 2020:

 

 

 

 

 

 

CET1 capital ratio

$

591,171

 

11.63

%  

$

228,703

 

4.50

%  

$

330,349

 

6.50

%

Tier 1 leverage ratio

 

591,171

 

8.98

%  

 

263,330

 

4.00

%  

 

329,162

 

5.00

%

Tier 1 risk-based capital ratio

 

591,171

 

11.63

%  

 

304,938

 

6.00

%  

 

406,583

 

8.00

%

Total risk-based capital ratio

 

622,595

 

12.25

%  

 

406,583

 

8.00

%  

 

508,229

 

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.

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As of June 30, 2021, FFI had $14.4 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, 2021, the amount of capital at FFB in excess of amounts required to be well capitalized for purposes of the prompt corrective action regulations was $276 million for the CET1 capital ratio, $251 million for the Tier 1 Leverage Ratio, $194 million for the Tier 1 risk-based capital ratio and $118 million for the Total risk-based capital ratio.

The Company paid a quarterly cash dividend of $0.09 per common share in the first and second quarters of 2021. It is our current intention to continue to pay quarterly dividends. The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain regulatory restrictions which are discussed in Item 1 “Business—Supervision and Regulation—Dividends and Stock Repurchases” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020. Additionally, under the terms of the holding company line of credit agreement, FFI may only declare and pay a dividend if the total amount of dividends and stock repurchases during the current twelve months does not exceed 50% of FFI’s net income for the same twelve month period. We paid $12.5 million in dividends ($0.28 per share) in 2020.

We had no material commitments for capital expenditures as of June 30, 2021, other than our proposed acquisition of TGR Financial. However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain financial risks, which are discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the section titled Asset and Liability Management: Interest Rate Risk in our Annual Report on Form 10-K which we filed with the Securities and Exchange Commission on February 26, 2021. There have been no material changes to our quantitative and qualitative disclosures about market risk since December 31, 2020.

ITEM 4.CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness, as of June 30, 2021, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2021, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

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There was no change in our internal control over financial reporting that occurred during the three months ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1A.RISK FACTORS

There have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020, which we filed with the SEC on February 26, 2021.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company adopted a stock repurchase plan on October 30, 2018 for the repurchase of up to 2,200,000 shares of its common stock from time to time as market conditions allow. This plan has no stated expiration date for the repurchases. The Company did not repurchase any shares during the three months ended June 30, 2021. As of June 30, 2021, the maximum number of shares that may be purchased under the program was 1,938,600.

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ITEM 6.EXHIBITS

Exhibit No.

    

Description of Exhibit

2.1(1)

Agreement and Plan of Merger and Reorganization dated as of June 2, 2021, by and between the Company and TGR Financial, Inc.

3.1

Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on October 29, 2015).

3.2

Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on October 29, 2015).

31.1(1)

Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

31.2(1)

Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

32.1(1)

Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002

32.2(1)

Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

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.

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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 6, 2021

By:

/s/    KEVIN L. THOMPSON

Kevin L. Thompson

Executive Vice President and
Chief Financial Officer

S-1