First Foundation (FFWM) - 2019 Q4 - Annual Report

FORWARD-LOOKING STATEMENTS This section outlines the inherent uncertainties and risks associated with forward-looking statements, emphasizing that actual results may differ materially Forward-Looking Statements Disclaimer This section contains forward-looking statements that predict future events or trends, which are subject to known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. The company disclaims any obligation to publicly release revisions or updates to these statements, except as required by law - Forward-looking statements predict or describe future events or trends and are subject to various known and currently unknown risks, uncertainties, and other factors that may cause actual results to differ materially[8] - The company expressly disclaims any obligation to publicly release revisions or updates to any forward-looking statements to reflect events or circumstances after the report date, except as required by applicable law[9] Item 1. Business This section provides an overview of the company's financial services, including banking, investment advisory, and wealth management, highlighting its integrated platform and competitive strategy Overview First Foundation Inc. (FFI) is a financial services company operating in California, Nevada, and Hawaii, providing banking, investment advisory, wealth management, and trust services through its consolidated subsidiaries. The company emphasizes an integrated platform and client-focused strategy, generating substantial fee-based recurring revenues - First Foundation Inc. (FFI) and its consolidated subsidiaries (First Foundation Advisors (FFA) and First Foundation Bank (FFB)) provide a comprehensive platform of financial services to individuals, businesses, and other organizations in California, Nevada, and Hawaii[11][12] Key Financial Metrics (as of December 31, 2019) | Metric | Amount ($B) | | :----------------------- | :---------- | | Total Assets | 6.3 | | Loans | 4.5 | | Loans Held for Sale | 0.5 | | Deposits | 4.9 | | Assets Under Management | 4.4 | - Non-interest income constituted 20% of total revenues in 2019, primarily from investment advisory, wealth management, and trust services, providing substantial, fee-based, recurring revenues[12] Overview of Our Banking Business First Foundation Bank (FFB) offers a broad range of loan, deposit, and trust services. Its primary revenues are driven by yields on interest-earning assets and interest rates on deposits. Trust services complement investment and wealth management, contributing to noninterest income - FFB offers a wide range of loan products, deposit products, business and personal banking services, and trust services[17] - Trust services, primarily asset management, complement FFA's investment and wealth management services and provide additional noninterest income[20] FFB Key Financial Metrics (as of December 31, 2019) | Metric | Amount ($B) | | :---------------------------- | :---------- | | Total Assets | 6.3 | | Loans | 4.5 | | Loans Held for Sale | 0.5 | | Deposits | 4.9 | | Trust Assets Under Management | 0.888 | Overview of Our Investment Advisory and Wealth Management Business First Foundation Advisors (FFA) is a fee-based investment advisor specializing in investment advisory and wealth management services for high net-worth individuals, families, and affiliated organizations - FFA is a fee-based investment advisor providing investment advisory and wealth management services primarily to high net-worth individuals, their families, family businesses, and other affiliated organizations[22] FFA Assets Under Management (as of December 31, 2019) | Metric | Amount ($B) | | :----------------------- | :---------- | | Assets Under Management | 4.4 | Banking Products and Services First Foundation Bank offers a comprehensive suite of loan and deposit products, delivered through a client-focused approach and specialized channels. The loan portfolio is heavily concentrated in real estate, while deposit services include treasury management and digital banking Loan Products FFB offers a diverse range of loan products, with a significant portion secured by real estate. Lending activities are structured into Commercial Real Estate (CRE), Commercial & Industrial (C&I), and Consumer channels, each with specific underwriting criteria - FFB's lending products are the primary drivers of revenues and earnings, designed to meet client credit needs while managing credit and interest rate risks[23] Loan Portfolio by Principal Amount (as of December 31) | Loan Type | 2019 Balance ($K) | % of Total (2019) | 2018 Balance ($K) | % of Total (2018) | | :-------------------------------------- | :---------------- | :---------------- | :---------------- | :---------------- | | Multifamily | 2,143,919 | 47.3% | 1,956,935 | 45.7% | | Single family | 871,181 | 19.2% | 904,828 | 21.1% | | Total secured by residential properties | 3,015,100 | 66.5% | 2,861,763 | 66.8% | | Commercial properties | 834,042 | 18.4% | 869,169 | 20.3% | | Land | 70,257 | 1.5% | 80,187 | 1.9% | | Total real estate loans | 3,919,399 | 86.4% | 3,811,119 | 89.0% | | Commercial and industrial loans | 600,213 | 13.2% | 449,805 | 10.5% | | Consumer loans | 16,273 | 0.4% | 22,699 | 0.5% | | Total loans | 4,535,885 | 100.0% | 4,283,623 | 100.0% | - The lending platform is focused on three primary channels: Commercial Real Estate (CRE), Commercial and Industrial (C&I), and Consumer loans[26] - Underwriting process is comprehensive, focusing on primary, secondary, and tertiary sources of repayment, including collateral cash flow and borrower's ability to repay[45] Deposit Products and Services FFB offers a wide array of deposit products, including checking, savings, money market, and certificates of deposit, with a pricing strategy aimed at client retention. Services include treasury management and digital banking, delivered through retail banking offices and a specialized team for complex commercial and fiduciary clients Deposit Products and Average Interest Rates (as of December 31) | Deposit Type | 2019 Amount ($K) | % of Total (2019) | 2019 Avg Rate | 2018 Amount ($K) | % of Total (2018) | 2018 Avg Rate | | :----------------------- | :--------------- | :---------------- | :------------ | :--------------- | :---------------- | :------------ | | Noninterest-bearing | 1,192,481 | 24.4% | — | 1,074,661 | 23.7% | — | | Interest-bearing | 386,276 | 7.9% | 0.635% | 317,380 | 7.0% | 0.798% | | Money market and savings | 1,334,736 | 27.3% | 1.355% | 1,190,717 | 26.3% | 1.115% | | Certificates of deposits | 1,977,651 | 40.4% | 1.971% | 1,950,210 | 43.0% | 2.142% | | Total | 4,891,144 | 100.0% | 1.217% | 4,532,968 | 100.0% | 1.270% | - The four largest bank depositors accounted for 18% of total deposits as of December 31, 2019[47] - Deposit services include Treasury Management (bill pay, wire transfers, remote deposit capture) and Digital Banking (online and mobile access)[48][49] - Deposit delivery channels include 20 retail banking offices and a specialty deposits team focused on large complex commercial customers and fiduciaries[51][52] Trust Services FFB provides trust services in California, Nevada, and Hawaii, primarily managing trust assets. These services complement FFA's wealth management offerings and create cross-selling opportunities Trust Assets Under Management (as of December 31, 2019) | Metric | Amount ($M) | | :---------------------------- | :---------- | | Trust Assets Under Management | 888 | Wealth Management Products and Services First Foundation Advisors (FFA) delivers personalized investment advisory and wealth management services, focusing on diversified portfolios and coordinating with external providers for comprehensive financial planning. FFA's Assets Under Management (AUM) have shown consistent growth - FFA provides personalized investment advisory and wealth management services, coordinating with outside service providers for risk management, estate, and tax planning[54] - FFA focuses on creating diversified investment portfolios tailored to client objectives, risk tolerance, and time horizon, using traditional investments[55] - AUM at FFA grew at a compound annual growth rate of 6% over the four-year period ending December 31, 2019[56] Competition The company operates in a highly competitive financial services market, competing with larger national and regional banks, as well as specialized wealth management firms. Its competitive advantage lies in offering an integrated platform of comprehensive financial services combined with personalized, responsive service, differentiating it from many competitors - The banking and investment advisory and wealth management businesses in California, Nevada, and Hawaii are highly competitive, dominated by major national and regional banks (e.g., Wells Fargo, JP Morgan Chase, US Bank)[59] - The company differentiates itself by providing personal and 'one-on-one' service through an integrated platform of comprehensive financial services, which is typically reserved for the wealthiest clients by larger institutions[60] - Competition is not primarily based on pricing, but the company attempts to maintain pricing in line with principal competitors to attract and grow its client base[61] Supervision and Regulation First Foundation Inc. and its subsidiaries are subject to extensive federal and state regulation, primarily aimed at protecting depositors and the financial system. This regulatory framework covers various aspects of operations, including capital requirements, permissible activities, acquisitions, consumer protection, and executive compensation - The banking industry is extensively regulated by federal and state laws, primarily for the protection of depositors, customers, and the FDIC's deposit insurance fund, not for the benefit of stockholders[62][194] - FFI is a registered bank holding company regulated by the Federal Reserve, and FFB is a California state-chartered bank regulated by the FDIC and the California Department of Business Oversight (DBO)[16][63][69] - First Foundation Advisors (FFA) is a fee-based registered investment advisor regulated by the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940[16][123] Bank Holding Company Regulation As a bank holding company, FFI is supervised by the Federal Reserve and must act as a source of financial and managerial strength to its subsidiary banks, maintaining adequate capital and engaging only in banking-related activities. It has not elected to be a financial holding company - FFI is regulated under the Bank Holding Company Act of 1956 and is subject to supervision and examination by the Federal Reserve[63] - A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and must maintain capital at or above prescribed levels[65] - FFI has not elected to qualify as a 'financial holding company,' which would allow for a broader range of financial activities[64] Capital Requirements Applicable to Banks and Bank Holding Companies FFI and FFB are subject to the Capital Rules (based on Basel III and Dodd-Frank Act), which revised risk-based capital requirements and introduced Common Equity Tier 1 (CET-1). These rules include a capital conservation buffer and specify deductions from capital - The Capital Rules, based on Basel III and Dodd-Frank Act, became effective for the Company and FFB on January 1, 2015, revising risk-based capital requirements and redefining capital components[71] Minimum Capital Ratios (including 2.5% capital conservation buffer) as of January 1, 2019 | Capital Ratio | Minimum Requirement | | :------------------------------------------------ | :------------------ | | CET-1 to risk-weighted assets | 7.000% | | Tier 1 capital to risk-weighted assets | 8.500% | | Total capital to risk-weighted assets | 10.500% | | Tier 1 capital-to-average consolidated assets (leverage ratio) | 4.000% | - The company elected to continue excluding Accumulated Other Comprehensive Income (AOCI) items from capital for regulatory capital ratio calculations[78] Prompt Corrective Action FDICIA established a framework for federal regulators to take 'prompt corrective action' based on a depository institution's capital adequacy, classifying institutions into five categories. Undercapitalized institutions face increasing restrictions and potential liability for their holding companies - FDICIA requires federal banking regulators to take 'prompt corrective action' if a depository institution does not meet certain capital adequacy standards[80] - Institutions are classified into five capital categories: 'well capitalized,' 'adequately capitalized,' 'undercapitalized,' 'significantly undercapitalized,' and 'critically undercapitalized,' based on Tier 1 leverage, Tier 1 capital, and total capital ratios[81][82] - Undercapitalized banks face restrictions on dividends and management fees, and their parent holding companies may be required to guarantee capital restoration plans, incurring potential liability[88] Dividends and Stock Repurchases Dividend payments by bank holding companies are subject to Federal Reserve policy, requiring payments from available income and consistency with capital/liquidity needs. FFB's ability to pay dividends to FFI is further restricted by California law and FDIC regulations, which can prohibit payments deemed unsafe or unsound - Federal Reserve policy generally requires bank holding companies to pay common stock dividends only out of income available over the past year and consistent with future capital and liquidity needs[95] - FFB's ability to pay cash dividends to FFI is limited by California law (lesser of retained earnings or last three fiscal years' income less distributions) and FDIC regulations (prohibiting payments that would cause FFB to become undercapitalized or be deemed unsafe/unsound)[96] Deposit Insurance FFB's deposits are insured by the FDIC's Deposit Insurance Fund (DIF) up to $250,000 per depositor. The FDIC uses a risk-based assessment system, and deposit insurance can be terminated for unsafe practices - FFB's deposits are insured by the FDIC's Deposit Insurance Fund (DIF) up to $250,000 per depositor, a limit permanently increased by the Dodd-Frank Act[99] - The FDIC uses a risk-based assessment system, with rates calculated based on an institution's CAMELS supervisory rating and consolidated average assets less average tangible equity[100] Executive Compensation Restrictions Federal guidelines and the Dodd-Frank Act aim to prevent incentive compensation policies that encourage excessive risk-taking. The company has adopted a clawback policy for incentive compensation in cases of financial statement restatements due to material noncompliance - Federal guidelines prohibit incentive compensation that encourages risk-taking beyond the organization's ability to effectively identify and manage risks, or is inconsistent with effective internal controls[103] - The company has an incentive compensation clawback policy to recover excess incentive compensation paid in the previous three years if financial statements are restated due to material noncompliance[105] Restrictions on Transactions between FFB and the Company and its other Affiliates Sections 23A and 23B of the Federal Reserve Act impose quantitative and qualitative limits on transactions between FFB and its affiliates to prevent the transfer of benefits from the bank's access to insured deposits and the Federal Reserve System - Sections 23A and 23B of the Federal Reserve Act restrict extensions of credit, stock purchases, and asset purchases between FFB and its affiliates[107] - These transactions are limited, individually, to 10% of FFB's capital and surplus, and in the aggregate, to 20% of FFB's capital and surplus[107] Regulatory Guidelines for Commercial Real Estate Loan Concentrations Federal regulators have issued guidelines requiring heightened risk mitigation for banks with significant concentrations of commercial real estate (CRE) loans in their portfolios, including enhanced risk assessment, stringent underwriting, and stress testing - A bank is deemed to have a CRE loan concentration if construction/land loans are 100% or more of total capital, or if multifamily/non-farm residential + construction/land loans are 300% or more of total capital and the portfolio grew by 50%+ in 36 months[111] - If a concentration exists, the bank must implement heightened risk assessment, stringent underwriting, market analyses, and stress testing, potentially requiring increased allowance for loan losses and capital[111] Technology Risk Management and Consumer Privacy Banking regulators emphasize managing technology-related risks, and the Gramm-Leach-Bliley Act (GLBA) mandates safeguards for customer information security and privacy, including comprehensive security programs and privacy policy disclosures - Banking organizations are exposed to operational, compliance, security, privacy, and reputational risks from technology use, requiring prudent risk management[112] - GLBA requires safeguards for customer records and information, including a comprehensive written information security program and privacy policy notices with opt-out provisions for nonpublic personal information disclosure[113] Consumer Financial Protection Bureau The Dodd-Frank Act established the Consumer Financial Protection Bureau (CFPB) with broad powers to regulate and enforce federal consumer financial protection laws. While the FDIC retains primary examination authority for institutions of the company's size, the CFPB can participate in examinations and set mortgage origination standards - The CFPB has broad rulemaking, supervisory, and enforcement powers under various federal consumer financial protection laws[120] - For institutions of the company's size ($10 billion or less in assets), the FDIC retains primary examination authority for consumer compliance, but the CFPB may participate on a 'sampling basis'[120] Volcker Rule The Volcker Rule, implemented by federal bank regulatory agencies, restricts banking entities from proprietary trading and investing in certain 'covered funds.' Community banks with $10 billion or less in assets are excluded from this rule, and the company held no investments subject to it as of December 31, 2019 - The Volcker Rule restricts banking entities from proprietary trading and sponsoring or investing in certain 'covered funds'[122] - Community banks with $10 billion or less in assets and total trading assets and liabilities of five percent or less of total consolidated assets are excluded from the Volcker Rule[122] - The Company held no investment positions subject to the Volcker Rule as of December 31, 2019[122] Employees As of December 31, 2019, the company had approximately 485 full-time employees - As of December 31, 2019, the Company had approximately 485 full-time employees[125] Mergers and Acquisitions The company has completed five acquisitions since 2012, including PBB Bancorp in 2018 and Community 1st Bancorp in 2017, as part of its growth strategy - The Company has completed five acquisitions since 2012, including PBB Bancorp in June 2018 and Community 1st Bancorp in November 2017[126] Item 1A. Risk Factors This section details the significant risks impacting the company's business, regulatory environment, and common stock ownership, including credit, market, operational, and compliance risks Risks Related to Our Business The company faces numerous business-specific risks, including potential loan losses, the adequacy of its allowance for loan and lease losses (ALLL), adverse economic conditions, geographic concentration in its markets, and sensitivity to interest rate changes. Other risks involve its acquisition and growth strategies, ability to attract capital, competition, reliance on key personnel, and operational vulnerabilities such as technology, fraud, and natural disasters - Loan defaults and losses are inherent risks, exacerbated by economic downturns, and the Allowance for Loan and Lease Losses (ALLL) may not be adequate to cover actual losses[130][131] - The implementation of the Current Expected Credit Loss (CECL) model on January 1, 2020, is estimated to result in additional costs of up to $1 million and introduce volatility into reported earnings[132] - The company's operations are geographically concentrated in California, Nevada, and Hawaii, with approximately 96% of loans to borrowers in these states, leading to significant exposure to regional economic conditions[137] - Changes in interest rates could reduce net interest margins if rates on liabilities increase faster than assets, or increase operating expenses due to higher customer service costs[138][139] - Real estate loans constitute approximately 66% of outstanding loans as of December 31, 2019, making the company vulnerable to downturns in the real estate market[143] - The four largest deposit clients accounted for 18% of total deposits as of December 31, 2019, posing a liquidity risk if these deposits decrease materially[146] - Acquisition and growth strategies involve risks such as integration difficulties, diversion of management time, and potential dilution of existing stockholders' investments[148][153] - The company faces intense competition from larger banks and financial institutions, which have greater financial and marketing resources[161] - Reliance on key personnel and the inability to attract additional qualified staff could adversely affect client retention and business growth[163] - Fraudulent activity, information security breaches, and cybersecurity attacks pose significant risks, potentially leading to financial losses, reputational damage, and increased operating costs[173][174] Risks Related to Our Regulatory Environment The company operates in a highly regulated environment, facing risks from extensive federal and state banking laws, potential changes in regulations, and supervisory actions. Compliance with stringent capital requirements, consumer protection laws, anti-money laundering statutes, and privacy regulations is critical, with non-compliance potentially leading to significant sanctions and business restrictions - The banking industry is extensively regulated, and legislative or regulatory actions, including changes to existing laws or their interpretation, may significantly and adversely affect operations and increase compliance costs[194][195] - Federal and state banking agencies conduct periodic examinations, and failure to comply with supervisory actions can result in sanctions, business restrictions, civil money penalties, or damage to reputation[197] - The company is subject to stringent capital requirements, and failure to meet these standards could limit growth, dividend payments, and access to funding, potentially diluting existing stockholders[198][200] - Noncompliance with consumer protection laws (e.g., CRA, fair lending laws) and anti-money laundering statutes (Bank Secrecy Act, USA PATRIOT Act) could lead to sanctions, fines, and reputational damage[204][206] - Regulations related to privacy, information security, and data protection (e.g., Gramm-Leach-Bliley Act) could increase costs, limit data use, and adversely affect business opportunities[208][211] - First Foundation Advisors (FFA) is highly regulated by the SEC and other agencies, with potential for fines, suspensions, or revocation of registration for non-compliance[213] Risks Related to Ownership of Our Common Stock Ownership of the company's common stock carries risks including potential reductions or discontinuations of dividends due to regulatory restrictions, volatility in market prices influenced by various factors, and the possibility of dilution from future equity issuances. Additionally, significant ownership by officers and directors, along with corporate governance documents, could make a change of control more difficult - The company may reduce or discontinue dividend payments on common stock due to restrictions from Delaware and federal law, Federal Reserve policies, and subsidiary dividend limitations[214] - Market prices and trading volume of common stock may be volatile due to factors such as operating results, market conditions, regulatory changes, and performance of comparable companies[215][216] - Officer and director ownership (approximately 12% as of February 7, 2020) and corporate governance documents could make it more difficult for third parties to acquire the company or effectuate a change of control[218][219][220] - Future issuances of additional equity securities, including for acquisitions, could dilute the holdings and reduce the market price of existing common stockholders[224] - An investment in the company's common stock is not an insured deposit and is not guaranteed by the FDIC, meaning investors could lose some or all of their investment[229] Item 1B. Unresolved Staff Comments. This section confirms that there are no unresolved comments from the SEC staff regarding the company's filings Unresolved Staff Comments There are no unresolved staff comments to report - This item is not applicable, indicating no unresolved staff comments[232] Item 2. Properties. This section describes the company's corporate headquarters and branch network across California, Nevada, and Hawaii, detailing the ownership and lease arrangements of its facilities Company Properties The company's corporate headquarters is in Irvine, California. It operates 20 banking offices and 2 loan production offices across California, Nevada, and Hawaii. Most of these offices are leased under non-cancelable operating leases expiring between 2020 and 2026, while a few buildings and land are owned - The corporate headquarters for FFI and its subsidiaries is located in Irvine, California[233] - The Company has offices in California (Irvine, Indian Wells, Pasadena, El Centro, West Los Angeles, El Segundo, Laguna Hills, Seal Beach, Auburn, Oakland, Sacramento, Roseville, Burlingame, Big Bear, Running Springs, Palos Verdes, Rolling Hills, Lucerne, San Diego), Las Vegas, Nevada, and Honolulu, Hawaii[233] - Most offices are leased under non-cancelable operating leases expiring between 2020 and 2026, with some buildings and land being owned[233][235] Item 3. Legal Proceedings. This section addresses the company's involvement in routine legal claims and litigation, stating that no current proceedings are expected to have a material adverse effect Legal Proceedings Overview The company is subject to routine legal claims and litigation arising from its financial services business. Management does not anticipate any threatened or pending litigation to have a material adverse effect on its operations, financial condition, or results - The company is subject to claims, counter claims, suits, and other litigation typical of financial services businesses in the ordinary course[236] - Management is not aware of any threatened or pending litigation expected to have a material adverse effect on business operations, financial condition, or results of operations[236] Item 4. Mine Safety Disclosures. This section confirms that the company has no operations subject to mine safety disclosure requirements Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[237] PART II This part covers market information for common equity, related stockholder matters, issuer purchases of equity securities, selected financial data, and management's discussion and analysis Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. This section details the company's common stock market, dividend policy, stock repurchase program, and historical stock performance Market Information The company's common stock has been listed and traded on the NASDAQ Global Stock Market under the symbol "FFWM" since November 3, 2014. As of February 27, 2020, there were 44,759,800 shares outstanding held by approximately 3,600 shareholders - The company's common stock (FFWM) has been listed and trading on the NASDAQ Global Stock Market since November 3, 2014[241] Common Stock Outstanding (as of February 27, 2020) | Metric | Amount | | :--------------------- | :----------- | | Shares Outstanding | 44,759,800 | | Shareholders of Record | ~3,600 | Dividend Policy and Restrictions on the Payment of Dividends The company intends to continue paying quarterly dividends, having done so since the first quarter of 2019. However, its ability to pay dividends is subject to restrictions under Delaware and federal law, Federal Reserve regulations, California law for its subsidiaries (FFB and FFA), and covenants from its holding company line of credit agreement - The company has paid quarterly dividends since the first quarter of 2019 and intends to continue doing so[242] - Dividend payments are restricted by Delaware General Corporation Law (DGCL) and the regulatory authority of the Federal Reserve[243] - Cash dividends from FFB and FFA are the principal source of funds for FFI's dividends, and are subject to California General Corporation Law (CGCL) and stricter California state banking laws for FFB[244][245] - Under the holding company line of credit agreement, FFI can only declare and pay a dividend if total dividends and stock repurchases during the current twelve months do not exceed 50% of FFI's net income for the same period[246] Repurchases of Common Stock The company adopted a stock repurchase plan on October 30, 2018, authorizing the repurchase of up to 2,200,000 shares of common stock. As of December 31, 2019, 2,162,900 shares remained available under the program, with no repurchases made during the fourth quarter of 2019 - A stock repurchase plan was adopted on October 30, 2018, authorizing the repurchase of up to 2,200,000 shares of common stock[247] - As of December 31, 2019, the maximum number of shares that could be purchased under the program was 2,162,900[247] - The company did not repurchase any shares during the quarter ended December 31, 2019[247] Stock Performance Graph This section presents a comparison of the cumulative total return of the company's common stock against the Russell 2000 Index, Russell 3000 Index, and the SNL Western Bank Index for the period from December 31, 2015, through December 31, 2019, assuming a $100 initial investment with reinvested dividends Cumulative Total Return (December 31, 2015 = $100) | | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | | :----------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | | First Foundation Inc. (FFWM) | 100.00 | 120.81 | 157.19 | 109.03 | 147.52 | | Russell 2000 Index | 100.00 | 119.48 | 135.18 | 118.72 | 146.89 | | Russell 3000 Index | 100.00 | 110.42 | 131.23 | 122.06 | 156.89 | | SNL Western Bank Index | 100.00 | 107.62 | 117.66 | 90.84 | 107.77 | - The graph assumes a $100 investment on December 31, 2015, with all dividends reinvested[250] Item 6. Selected Financial Data This section presents a five-year summary of key consolidated financial and operating data, including income statement, balance sheet, performance, and capital ratios Selected Consolidated Financial Information This section provides a five-year summary of selected consolidated financial and operating data, including key income statement figures, balance sheet items, performance ratios, and capital ratios, derived from the company's audited financial statements Selected Income Statement Data (in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :-------------------------- | :-------- | :-------- | :-------- | :------- | :------- | | Net interest income | $169,954 | $155,610 | $113,618 | $89,449 | $64,471 | | Provision for loan losses | 2,637 | 4,220 | 2,762 | 4,681 | 2,673 | | Noninterest Income | 41,776 | 35,771 | 38,719 | 34,560 | 28,773 | | Noninterest expense | 129,594 | 127,075 | 98,976 | 80,994 | 61,458 | | Income before taxes | 79,499 | 60,086 | 50,599 | 38,334 | 22,832 | | Net income | 56,239 | 42,958 | 27,582 | 23,303 | 13,378 | | Basic EPS | $1.26 | $1.02 | $0.80 | $0.72 | $0.60 | | Diluted EPS | $1.25 | $1.01 | $0.78 | $0.70 | $0.58 | Selected Balance Sheet Data (in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :-------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Cash and cash equivalents | $65,387 | $67,312 | $120,394 | $597,946 | $215,748 | | Loans, net of deferred fees | 5,029,869 | 4,782,312 | 3,799,707 | 2,791,251 | 1,754,883 | | ALLL | 20,800 | 19,000 | 18,400 | 15,400 | 10,600 | | Total assets | 6,314,436 | 5,840,412 | 4,541,185 | 3,975,403 | 2,592,579 | | Noninterest-bearing deposits| 1,192,481 | 1,074,661 | 1,097,196 | 661,781 | 299,794 | | Interest-bearing deposits | 3,698,663 | 3,458,307 | 2,346,331 | 1,765,014 | 1,222,382 | | Borrowings | 743,000 | 708,000 | 678,000 | 1,250,000 | 796,000 | | Shareholders' equity | 613,869 | 559,184 | 394,951 | 284,264 | 259,736 | Selected Performance and Capital Ratios | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :-------------------------------------- | :------ | :------ | :------ | :------ | :------ | | Return on average assets | 0.91% | 0.81% | 0.70% | 0.80% | 0.76% | | Return on average equity | 9.6% | 9.1% | 8.5% | 8.4% | 8.1% | | Return on average tangible equity | 11.5% | 10.6% | 8.6% | 8.5% | 8.1% | | Net yield on interest-earning assets | 2.87% | 2.99% | 2.93% | 3.13% | 3.39% | | Efficiency ratio | 61.9% | 64.4% | 63.3% | 65.3% | 70.7% | | Noninterest income as a % of total revenues | 19.7% | 18.7% | 25.4% | 27.9% | 33.1% | | Tangible common equity to tangible assets | 8.31% | 8.01% | 8.02% | 7.10% | 9.93% | | Tier 1 leverage ratio | 8.25% | 8.39% | 8.44% | 8.76% | 11.81% | | Tier 1 risk-based capital ratio | 10.65% | 10.67% | 11.99% | 12.80% | 17.44% | | Total risk-based capital ratio | 11.15% | 11.16% | 12.61% | 13.52% | 18.19% | Other Information | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :-------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Assets under management (end of period) | $4,438,252 | $3,934,700 | $4,296,077 | $3,586,672 | $3,471,237 | | NPAs to total assets | 0.20% | 0.21% | 0.31% | 0.25% | 0.32% | | Charge-offs to average loans | 0.02% | 0.08% | 0.00% | 0.00% | 0.15% | | Ratio of ALLL to loans | 0.49% | 0.51% | 0.54% | 0.60% | 0.61% | | Number of banking offices | 20 | 20 | 14 | 11 | 9 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, critical accounting policies, and key financial trends Critical Accounting Policies The company's critical accounting policies, including the Allowance for Loan and Lease Losses (ALLL) and the Utilization and Valuation of Deferred Income Tax Benefits, require significant management estimates and assumptions. These estimates are based on current economic conditions and trends, and changes could materially affect financial statements - The Allowance for Loan and Lease Losses (ALLL) is a critical accounting policy, established through a provision for loan losses, based on management's evaluation of estimated losses, prior experience, and current economic conditions[263] - The Utilization and Valuation of Deferred Income Tax Benefits is another critical policy, requiring annual estimates of future taxable income to determine the likelihood of fully utilizing tax benefits before expiration[264] Overview and Recent Developments The company experienced strong growth in 2019, with significant increases in loan originations, deposits, and total revenues. This growth positively impacted the Banking segment's income before taxes. A quarterly cash dividend of $0.07 per common share was declared for Q1 2020 - The company achieved strong growth in 2019 with $1.9 billion in loan originations and $358 million in deposit growth[266] - Total revenues (net interest income and noninterest income) increased by 11% in 2019[266] - Income before taxes for the Banking segment increased by $18.5 million, from $63.7 million in 2018 to $82.2 million in 2019[268] - A quarterly cash dividend of $0.07 per common share was declared on January 28, 2020, to be paid on March 16, 2020[268] Results of Operations The company's results of operations for 2019 and 2018 show increased net income and income before taxes, primarily driven by the Banking segment's performance. Key drivers include changes in net interest income, provision for loan losses, and noninterest income and expense, with varying impacts across the Banking and Wealth Management segments Years Ended December 31, 2019 and 2018 Consolidated income before taxes increased by $19.4 million in 2019, primarily due to an $18.5 million increase in Banking's income before taxes, driven by higher net interest income, lower loan loss provision, and increased noninterest income. Wealth Management's income before taxes decreased by $1.4 million Consolidated Income Before Taxes and Net Income (2019 vs. 2018) | Metric | 2019 ($M) | 2018 ($M) | Change ($M) | | :-------------------- | :-------- | :-------- | :---------- | | Income before taxes | 79.5 | 60.1 | +19.4 | | Net income | 56.2 | 43.0 | +13.2 | - The increase in consolidated income before taxes was primarily due to an $18.5 million increase in Banking's income before taxes, offset by a $1.4 million decrease in Wealth Management's income before taxes and a $2.4 million decrease in corporate expenses[271] Net Interest Income and Yields (2019 vs. 2018) | Metric | 2019 | 2018 | Change | | :----------------------------------- | :------ | :------ | :----- | | Net Interest Income ($K) | 169,954 | 155,610 | +14,344 | | Net Yield on Interest-earning Assets | 2.87% | 2.99% | -0.12% | | Net Interest Rate Spread | 2.31% | 2.51% | -0.20% | - Provision for loan losses decreased from $4.2 million in 2018 to $2.6 million in 2019[278] - Noninterest income in Banking increased by $7.5 million in 2019, driven by higher gains on loan sales, loan fees, and trust fees[279] - Noninterest income for Wealth Management decreased by $1.1 million in 2019 due to lower average billable AUM[280] - Noninterest expense in Banking increased by $3.6 million, primarily due to staffing and expansion costs (PBB acquisition) and customer service costs, partially offset by a $3.4 million decrease in merger-related costs[282][283] Years Ended December 31, 2018 and 2017 Consolidated income before taxes increased by $9.5 million in 2018, mainly from a $10.2 million increase in Banking's income before taxes. This was driven by higher net interest income, despite increased loan loss provisions and noninterest expenses. Wealth Management also saw increased noninterest income Consolidated Income Before Taxes and Net Income (2018 vs. 2017) | Metric | 2018 ($M) | 2017 ($M) | Change ($M) | | :-------------------- | :-------- | :-------- | :---------- | | Income before taxes | 60.1 | 50.6 | +9.5 | | Net income | 43.0 | 27.6 | +15.4 | - The effective tax rate decreased from 45.5% in 2017 to 28.5% in 2018, primarily due to reduced federal tax rates under the Tax Cuts and Job Act[288] - Net interest income for Banking increased 38% from $114.3 million in 2017 to $157.4 million in 2018, driven by a 34% increase in interest-earning assets and an increase in net yield[292] - Provision for loan losses increased from $2.8 million in 2017 to $4.2 million in 2018, reflecting growth in loan balances and higher net charge-offs[294] - Noninterest income in Banking decreased by $4.7 million in 2018, primarily due to lower gains on loan sales, partially offset by higher loan, deposit, and trust fees[295] - Noninterest income for Wealth Management increased by $1.7 million in 2018 due to higher Assets Under Management (AUM)[296] - Noninterest expense in Banking increased from $74.0 million in 2017 to $100.8 million in 2018, driven by staffing and costs associated with the C1B and PBB acquisitions and growth in loans and deposits[298] Financial Condition The company's consolidated balance sheet primarily reflects changes in its Banking operations, which experienced significant asset growth in 2019. This growth was driven by increases in securities and loans, funded by a rise in deposits and borrowings - Total assets increased by $474 million in 2019, primarily due to increases in securities and loans[304] - Securities available for sale (AFS) increased by $205 million in 2019, driven by $576 million in purchases from loan securitization, partially offset by $284 million in sales of lower-yielding securities[304][307] - Loans and loans held for sale increased by $249 million in 2019, resulting from $1.9 billion in originations, partially offset by $551 million in loan sales and $1.1 billion in payoffs/scheduled payments[304][313] - Deposits grew by $358 million in 2019, with increases in branch deposits ($138 million) and specialty deposits ($222 million)[304][315] Deposits and Weighted Average Rates (as of December 31) | Deposit Type | 2019 Amount ($K) | 2019 Wtd Avg Rate | 2018 Amount ($K) | 2018 Wtd Avg Rate | | :----------------------- | :--------------- | :---------------- | :--------------- | :---------------- | | Noninterest-bearing | 1,192,481 | — | 1,074,661 | — | | Interest-bearing | 386,276 | 0.635% | 317,380 | 0.798% | | Money market and savings | 1,334,736 | 1.355% | 1,190,717 | 1.115% | | Certificates of deposits | 1,977,651 | 1.971% | 1,950,210 | 2.142% | | Total | 4,891,144 | 1.217% | 4,532,968 | 1.270% | - Borrowings increased by $35 million in 2019, primarily to support asset growth, consisting of $233 million in overnight FHLB advances, a $500 million FHLB term advance, and $10 million under a company line of credit[304][318] - The Bank held $1.4 billion of brokered deposits as of December 31, 2019[317] Delinquent Loans, Nonperforming Assets and Provision for Credit Losses The company's loan portfolio quality is assessed through monitoring past due and nonaccrual loans, troubled debt restructurings (TDRs), and risk categories. The Allowance for Loan and Lease Losses (ALLL) is adjusted periodically based on estimated losses, loan volume changes, and economic conditions Past Due and Nonaccrual Loans (as of December 31, 2019, in thousands) | Category | 30–59 Days Past Due | 60-89 Days Past Due | 90+ Days Still Accruing | Nonaccrual | Total Past Due and Nonaccrual | | :---------------------------- | :------------------ | :------------------ | :---------------------- | :--------- | :---------------------------- | | Real estate loans: | | | | | | | Residential properties | $89 | $13 | $— | $1,743 | $1,845 | | Commercial properties | 7,586 | — | 403 | 2,410 | 10,399 | | Land | — | — | — | — | — | | Commercial and industrial loans | 695 | 2,007 | — | 8,714 | 11,416 | | Consumer loans | 22 | 3 | — | — | 25 | | Total | $8,392 | $2,023 | $403 | $12,867 | $23,685 | | Percentage of total loans | 0.19% | 0.04% | 0.01% | 0.28% | 0.52% | Troubled Debt Restructurings (TDRs) by Accrual Status (as of December 31, 2019, in thousands) | Loan Type | Accrual | Nonaccrual | Total | | :---------------------------- | :------ | :--------- | :---- | | Residential real estate loans | $1,200 | $— | $1,200 | | Commercial real estate loans | 1,188 | 2,166 | 3,354 | | Commercial and industrial loans | 557 | 2,972 | 3,529 | | Total | $2,945 | $5,138 | $8,083 | Loan Portfolio by Risk Category (as of December 31, 2019, in thousands) | Loan Type | Pass | Special Mention | Substandard | Impaired | Total | | :---------------------------- | :---------- | :-------------- | :---------- | :---------- | :---------- | | Residential properties | $3,012,203 | $— | $— | $2,897 | $3,015,100 | | Commercial properties | 821,425 | 679 | 5,249 | 6,689 | 834,042 | | Land | 69,476 | — | 781 | — | 70,257 | | Commercial and industrial loans | 579,153 | 8,202 | 3,542 | 9,316 | 600,213 | | Consumer loans | 16,273 | — | — | — | 16,273 | | Total | $4,498,530 | $8,881 | $9,572 | $18,902 | $4,535,885 | Allowance for Loan and Lease Losses (ALLL) Activity (Year Ended December 31, 2019, in thousands) | Metric | Amount ($K) | | :---------------- | :---------- | | Beginning Balance | 19,000 | | Provision for Losses | 2,637 | | Charge-offs | (2,692) | | Recoveries | 1,855 | | Ending Balance | 20,800 | - Excluding acquired loans, the ALLL as a percentage of total loans was 0.49% as of December 31, 2019, a slight decrease from 0.51% in 2018[325] Liquidity Liquidity management focuses on generating sufficient cash to meet funding needs. The company's primary liquidity sources include deposits, loan payments, investment management fees, FHLB advances, and proceeds from borrowings/stock sales. Cash flows from operating activities provided $60 million in 2019, while investing activities used $427 million, and financing activities provided $365 million - The company's principal sources of liquidity include earnings, deposits, FHLB borrowings, sales of loans or investment securities, loan repayments, and proceeds from equity sales or borrowings[334] - The remaining balances of the company's lines of credit available to draw down totaled $1.4 billion at December 31, 2019[334] Cash Flow Summary (in thousands) | Cash Flow Activity | 2019 | 2018 | | :-------------------------------- | :-------- | :-------- | | Net cash provided by operating activities | $60,437 | $50,981 | | Net cash used in investing activities | (427,039) | (679,550) | | Net cash provided by financing activities | 364,677 | 575,487 | - The loan-to-deposit ratio at FFB was 103% at December 31, 2019, down from 106% in 2018, balancing liquidity and return generation[338] Contractual Obligations As of December 31, 2019, the company's contractual obligations primarily consisted of FHLB advances, a holding company line of credit loan, and operating lease obligations, with the majority due within one year Contractual Obligations (as of December 31, 2019, in thousands) | Obligation | Total | Less Than 1 Year | 1 – 3 Years | 3 – 5 Years | More Than 5 Years | | :---------------------- | :-------- | :--------------- | :---------- | :---------- | :---------------- | | FHLB Advances | $733,000 | $733,000 | $— | $— | $— | | FFI line of credit loan | 10,000 | — | 10,000 | — | — | | Operating lease obligations | 20,052 | 6,054 | 11,854 | 2,062 | 82 | | Total | $763,052 | $739,054 | $21,854 | $2,062 | $82 | Off-Balance Sheet Arrangements The company's off-balance sheet arrangements as of December 31, 2019, included commitments to fund new loans, existing loans/lines of credit, and standby letters of credit. A significant portion of these commitments may expire without being drawn upon Off-Balance Sheet Arrangements (as of December 31, 2019, in thousands) | Arrangement | Amount ($K) | | :-------------------------------------------- | :---------- | | Commitments to fund new loans | $54,687 | | Commitments to fund under existing loans, lines of credit | 473,646 | | Commitments under standby letters of credit | 10,769 | - FFB was obligated on $231 million of letters of credit from the FHLB, used as collateral for public fund deposits, including $213 million from the State of California[342] Asset and Liability Management: Interest Rate Risk The company manages interest rate risk through gap analysis, net interest income (NII) simulations, and economic value of equity (EVE) calculations. As of December 31, 2019, analyses indicated potential adverse impacts from short-term interest rate increases on net interest income and economic value of equity, while declining rates could be beneficial for NII but also adverse for EVE due to loan interest rate floors - Interest rate risk is managed using gap analysis, net interest income (NII) simulations, and economic value of equity (EVE) calculations[343] - As of December 31, 2019, the company had a $1.3 billion net negative position for the repricing period of less than one year, indicating an adverse impact from a short-term increase in interest rates[346] Estimated Increase (Decrease) in Net Interest Income from Instantaneous Rate Changes (as of December 31, 2019) | Assumed Instantaneous Change in Interest Rates | Estimated Increase (Decrease) in Net Interest Income | | :--------------------------------------------- | :--------------------------------------------------- | | +100 basis points | (5.7)% | | +200 basis points | (11.4)% | | +300 basis points | (17.4)% | | +400 basis points | (23.6)% | | -100 basis points | 6.1% | | -200 basis points | 11.1% | Estimated Increase (Decrease) in Economic Value of Equity from Simultaneous Rate Changes (as of December 31, 2019) | Assumed Simultaneous Change in Interest Rates | Estimated Increase (Decrease) in Economic Value of Equity | | :-------------------------------------------- | :-------------------------------------------------------- | | +100 basis points | (3.7)% | | +200 basis points | (7.1)% | | +300 basis points | (10.9)% | | +400 basis points | (15.1)% | | -100 basis points | 3.9% | | -200 basis points | 3.4% | - EVE results indicate adverse impact from both short-term increases and decreases in interest rates, with assumed interest rate floors for loans eliminating the normal benefit in a declining rate environment[352] Capital Resources and Dividends Both FFI and FFB consistently exceeded minimum regulatory capital requirements and qualified as 'well-capitalized' as of December 31, 2019. FFI made a $10 million capital contribution to FFB in 2019 and paid $8.9 million in dividends. The company plans to pursue future growth opportunities, potentially requiring additional capital - As of December 31, 2019, both FFI (consolidated) and FFB (stand-alone) exceeded all minimum required capital ratios and qualified as 'well-capitalized' under prompt corrective action regulations[357][358][619][620] FFB Capital in Excess of Well Capitalized Amounts (as of December 31, 2019, in millions) | Capital Ratio | Excess Amount ($M) | | :------------------------------ | :----------------- | | CET1 capital ratio | 198 | | Tier 1 leverage ratio | 200 | | Tier 1 risk-based capital ratio | 126 | | Total risk-based capital ratio | 54 | - FFI made a capital contribution of $10 million to FFB during 2019 and had $15.2 million of available capital as of December 31, 2019[359] - The company paid $8.9 million in dividends ($0.20 per share) in 2019, but no dividends were paid in 2018 or 2017[362] - The company intends to pursue future growth opportunities, including additional offices or acquisitions, which may require obtaining additional borrowings or selling common stock[363] At-the-Market Offering The company has an 'at-the-market' (ATM) equity offering program, established in February 2017, to sell up to $80 million in common stock. It sold shares in 2017 and 2018, realizing net proceeds of $22.8 million and $11.3 million, respectively. As of December 31, 2019, $45.2 million remained available under the program, but sales are suspended during stock repurchase periods - The company established an 'at-the-market' (ATM) equity offering program in February 2017 to sell up to $80 million in common stock[364] ATM Program Sales and Proceeds | Year | Shares Sold | Net Proceeds ($M) | | :--- | :---------- | :---------------- | | 201