First Foundation (US:FFWM)2023-05-09 18:15Part I Item 1. Financial Statements For the first quarter of 2023, First Foundation Inc. reported a significant decrease in net income to $8.5 million from $30.8 million year-over-year, driven by substantial net interest margin compression as interest expenses surged Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2023 (In thousands) | December 31, 2022 (In thousands) | | :--- | :--- | :--- | | Total Assets | $13,616,184 | $13,014,179 | | Cash and cash equivalents | $1,317,129 | $656,494 | | Net loans | $10,638,708 | $10,692,462 | | Total Liabilities | $12,482,446 | $11,879,801 | | Deposits | $10,051,706 | $10,362,612 | | Borrowings | $2,294,600 | $1,369,936 | | Total Shareholders' Equity | $1,133,738 | $1,134,378 | Consolidated Income Statement Highlights (Unaudited) | Account | Three Months Ended March 31, 2023 (In thousands) | Three Months Ended March 31, 2022 (In thousands) | | :--- | :--- | :--- | | Net interest income | $58,755 | $74,494 | | Provision for credit losses | $417 | $(792) | | Noninterest income | $11,698 | $15,427 | | Noninterest expense | $59,340 | $47,618 | | Net income | $8,496 | $30,836 | | Diluted EPS | $0.15 | $0.55 | Note 3: Securities As of March 31, 2023, the company held $223.6 million in available-for-sale (AFS) securities and $847.0 million in held-to-maturity (HTM) securities, with significant unrealized losses and pledges as collateral Securities Portfolio Summary (March 31, 2023) | Portfolio | Amortized Cost (in thousands) | Estimated Fair Value (in thousands) | Gross Unrealized/Unrecognized Losses (in thousands) | | :--- | :--- | :--- | :--- | | Available-for-Sale (AFS) | $243,635 | $211,324 | $(20,139) | | Held-to-Maturity (HTM) | $847,036 | $766,907 | $(80,129) | - The allowance for credit losses on investments increased to $12.3 million at the end of Q1 2023 from $11.4 million at year-end 2022, with a provision of $0.8 million recorded during the quarter56 - As of March 31, 2023, a total of $841.6 million in securities and loans are pledged as collateral to the Federal Reserve's discount window, and $184.2 million in securities are pledged for repurchase agreements47 Note 4: Loans The total loan portfolio was $10.7 billion as of March 31, 2023, slightly decreasing from year-end 2022, with multifamily loans comprising the largest segment and an increase in delinquent loans Loan Portfolio Composition (in thousands) | Loan Category | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Multifamily | $5,332,815 | $5,341,596 | | Single family | $1,008,657 | $1,016,498 | | Commercial properties | $1,155,624 | $1,203,292 | | Commercial and industrial | $2,985,984 | $2,984,748 | | Total Loans | $10,653,108 | $10,709,180 | - Total past due and nonaccrual loans were $48.3 million (0.45% of total loans) at March 31, 2023, an increase from $31.1 million (0.29% of total loans) at December 31, 202263 Note 5: Allowance for Credit Losses The Allowance for Credit Losses (ACL) on loans decreased to $31.1 million as of March 31, 2023, resulting in a net reduction of provision for credit losses despite net charge-offs ACL Rollforward for Loans (Q1 2023, in thousands) | Description | Amount | | :--- | :--- | | Beginning Balance (Dec 31, 2022) | $33,731 | | Provision for (Reduction of) Credit Losses | $(939) | | Charge-offs | $(2,003) | | Recoveries | $306 | | Ending Balance (Mar 31, 2023) | $31,095 | - The ACL for loans as a percentage of total loans was 0.29% at March 31, 2023, compared to 0.31% at December 31, 2022149 Note 8: Deposits Total deposits decreased by $311 million during the first quarter to $10.1 billion, primarily due to a decline in noninterest-bearing demand deposits, while the weighted average rate on total deposits increased Deposit Composition (in thousands) | Deposit Type | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Noninterest-bearing | $2,263,412 | $2,736,691 | | Interest-bearing Demand | $2,364,213 | $2,568,850 | | Money market and savings | $2,997,666 | $3,178,230 | | Certificates of deposit | $2,426,415 | $1,878,841 | | Total Deposits | $10,051,706 | $10,362,612 | - The weighted average rate paid on total deposits rose to 2.726% at March 31, 2023, from 2.177% at December 31, 202283 Note 9: Borrowings Total borrowings significantly increased to $2.3 billion at March 31, 2023, from $1.4 billion at year-end 2022, primarily driven by an increase in FHLB advances to bolster liquidity Borrowings Composition (in thousands) | Borrowing Type | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | FHLB advances | $2,000,000 | $805,000 | | Subordinated notes | $174,000 | $174,000 | | Repurchase agreements | $101,000 | $171,000 | | Holding company line of credit | $20,000 | $20,000 | | Federal funds purchased | $0 | $200,000 | | Total Borrowings | $2,295,000 | $1,370,000 | Note 11: Segment Reporting In Q1 2023, the Banking segment's income before taxes fell sharply to $13.3 million from $44.0 million year-over-year, while the Wealth Management segment's income also decreased to $1.2 million from $1.7 million Segment Income Before Taxes (in thousands) | Segment | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Banking | $13,290 | $43,953 | | Wealth Management | $1,226 | $1,701 | Note 12: Subsequent Events Subsequent to the quarter's end, on April 27, 2023, the Board of Directors declared a quarterly cash dividend of $0.02 per common share, a significant reduction from the previous dividend of $0.11 per share - On April 27, 2023, the Board of Directors declared a quarterly cash dividend of $0.02 per common share, payable on May 19, 202393 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant decline in profitability to severe net interest margin (NIM) compression, which fell to 1.83% from 3.00% a year prior, as funding costs rose faster than asset yields - Management directly links the $0.3 billion decrease in deposits and the corresponding increase in borrowings to deposit outflows following the closures of Silicon Valley Bank and Signature Bank in mid-March 2023110 - Net interest margin (NIM) contracted to 1.83% for Q1 2023, compared to 3.00% for Q1 2022, as the average rate on interest-bearing liabilities increased by 3.09% while the average yield on interest-earning assets increased by only 1.13%122 - The loan-to-deposit ratio was 106.1% at quarter-end, which management notes was elevated due to end-of-period deposit outflows, stating the average ratio for the quarter was a more normalized 100.3%160 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes to its quantitative and qualitative disclosures about market risk since the end of the previous fiscal year, December 31, 2022 - There have been no material changes to the company's market risk disclosures since December 31, 2022171 Item 4. Controls and Procedures Based on an evaluation as of March 31, 2023, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of March 31, 2023, the company's disclosure controls and procedures were effective at a reasonable assurance level174 - No changes in internal control over financial reporting occurred during the first quarter of 2023 that materially affected, or are reasonably likely to materially affect, internal controls175 Part II Item 1A. Risk Factors The company updated its risk factors to address recent banking industry turmoil, including the potential for eroded customer confidence leading to further deposit outflows and the risk of realizing significant losses on its securities portfolio if forced to sell to meet liquidity needs - A new risk factor highlights that adverse developments, such as the recent failures of other banks, have eroded customer confidence and could materially impact liquidity, funding costs, and operations178 - The company explicitly notes the risk that if it were required to sell securities from its portfolio to meet liquidity needs, it could incur significant losses due to the large unrealized loss position caused by rising interest rates179180 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has a stock repurchase program authorized by the Board of Directors on April 26, 2022, allowing for the repurchase of up to $75 million of its common stock, with no shares repurchased under the prior plan during the first quarter of 2023 - A stock repurchase program authorizing up to $75 million in common stock repurchases was approved in April 2022 and remains active182 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents and certifications by the CEO and CFO as required by the Sarbanes-Oxley Act