First Foundation (FFWM) - 2020 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Presents the unaudited consolidated financial information for First Foundation Inc., including financial statements, notes, and management's discussion and analysis ITEM 1. FINANCIAL STATEMENTS Presents unaudited consolidated financial statements for Q1 2020, including balance sheets, income statements, cash flows, and detailed notes Consolidated Balance Sheets Details the unaudited consolidated balance sheets for First Foundation Inc. as of March 31, 2020, and December 31, 2019 | ASSETS (In thousands) | March 31, 2020 (unaudited) | December 31, 2019 | | :-------------------- | :------------------------- | :---------------- | | Cash and cash equivalents | $40,359 | $65,387 | | Securities available-for-sale ("AFS") | 961,477 | 1,014,966 | | Loans held for sale | 520,721 | 503,036 | | Loans, net of deferred fees | 4,805,513 | 4,547,633 | | Allowance for credit losses ("ACL") | (23,000) | (20,800) | | Net loans | 4,782,513 | 4,526,833 | | Total Assets | $6,513,708 | $6,314,436 | | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Deposits | $5,030,827 | $4,891,144 | | Borrowings | 794,000 | 743,000 | | Total Liabilities | 5,890,625 | 5,700,567 | | Total Shareholders' Equity | 623,083 | 613,869 | | Total Liabilities and Shareholders' Equity | $6,513,708 | $6,314,436 | Consolidated Income Statements - Unaudited Presents unaudited consolidated income statements for the quarters ended March 31, 2020, and March 31, 2019 | (In thousands, except share and per share amounts) | For the Quarter Ended March 31, 2020 | For the Quarter Ended March 31, 2019 | | :------------------------------------------------- | :----------------------------------- | :----------------------------------- | | Total interest income | $62,338 | $60,544 | | Total interest expense | 17,470 | 19,497 | | Net interest income | 44,868 | 41,047 | | Provision for credit losses | 4,079 | 540 | | Net interest income after provision for credit losses | 40,789 | 40,507 | | Total noninterest income | 10,675 | 8,465 | | Total noninterest expense | 32,857 | 32,945 | | Income before taxes on income | 18,607 | 16,027 | | Taxes on income | 5,396 | 4,768 | | Net income | $13,211 | $11,259 | | Net income per share: | | | | Basic | $0.30 | $0.25 | | Diluted | $0.29 | $0.25 | Consolidated Statement of Changes in Shareholders' Equity - Unaudited Outlines the unaudited consolidated statement of changes in shareholders' equity for the quarter ended March 31, 2020 | (In thousands, except share amounts) | Balance: December 31, 2019 | Net income | Other comprehensive income | Stock based compensation | Cash dividend | Stock Repurchase | Balance: March 31, 2020 | | :----------------------------------- | :------------------------- | :--------- | :------------------------- | :----------------------- | :------------ | :--------------- | :---------------------- | | Total Shareholders' Equity | $613,869 | $13,211 | $547 | $767 | $(3,132) | $(2,824) | $623,083 | Consolidated Statements of Comprehensive Income - Unaudited Provides unaudited consolidated statements of comprehensive income for the quarters ended March 31, 2020, and March 31, 2019 | (In thousands) | For the Quarter Ended March 31, 2020 | For the Quarter Ended March 31, 2019 | | :------------- | :----------------------------------- | :----------------------------------- | | Net income | $13,211 | $11,259 | | Other comprehensive income (loss) | 547 | (759) | | Total comprehensive income | $13,758 | $10,500 | Consolidated Statements of Cash Flows - Unaudited Presents unaudited consolidated statements of cash flows for the three months ended March 31, 2020, and March 31, 2019 | (In thousands) | For the Three Months Ended March 31, 2020 | For the Three Months Ended March 31, 2019 | | :------------- | :---------------------------------------- | :---------------------------------------- | | Net cash provided by operating activities | $884 | $11,192 | | Net cash used in investing activities | (211,284) | (123,412) | | Net cash provided by financing activities | 185,372 | 125,601 | | Increase (decrease) in cash and cash equivalents | (25,028) | 13,381 | | Cash and cash equivalents at end of period | $40,359 | $80,693 | Notes to the Consolidated Financial Statements Provides detailed notes on accounting policies, fair value, securities, loans, credit losses, deposits, borrowings, and segment reporting NOTE 1: BASIS OF PRESENTATION Explains the basis of presentation, including consolidated entities, CECL adoption, and credit loss provisions - The consolidated financial statements include First Foundation Inc. (FFI) and its wholly-owned subsidiaries: First Foundation Advisors (FFA), First Foundation Bank (FFB), and FFB's subsidiaries First Foundation Insurance Services (FFIS) and Blue Moon Management, LLC[23] - The Company adopted ASU 2016-13, the Current Expected Credit Losses (CECL) model, on January 1, 2020, using the modified retrospective method for financial assets measured at amortized cost and off-balance sheet credit exposures, requiring credit loss estimation over an exposure's life upon initial recognition[26][27] - For the quarter ending March 31, 2020, the total provision for credit losses was $4.1 million, comprising $2.3 million for loans and $1.8 million for securities AFS[33] NOTE 2: FAIR VALUE MEASUREMENTS Describes fair value measurement categorization and provides a breakdown of assets and derivatives by fair value level - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (significant unobservable inputs)[37][38] | (dollars in thousands) | March 31, 2020 Total | Level 1 | Level 2 | Level 3 | | :--------------------- | :------------------- | :------ | :------ | :------ | | Investment securities available for sale: | | | | | | Agency mortgage-backed securities | $862,811 | $— | $862,811| $— | | Beneficial interest – FHLMC securitizations | 38,415 | — | — | 38,415 | | Corporate bonds | 58,786 | — | 58,786 | — | | Other | 1,465 | 409 | 1,056 | — | | Investment in equity securities | 293 | 293 | — | — | | Total assets at fair value on a recurring basis | $961,770 | $702 | $922,653| $38,415 | | Derivatives: | | | | | | Interest rate swaps | $8,333 | $— | $8,333 | $— | - The decrease in Level 3 assets from December 31, 2019, was primarily due to paydowns of Beneficial interest – FHLMC securitizations[42] - A $1.8 million reduction in the value of an interest-only strip security was required due to higher than expected prepayments on an underlying 2016 securitization, leading to impairment[43] NOTE 3: SECURITIES Details amortized cost and fair value of securities, explaining unrealized losses and impairment charges | (dollars in thousands) | Amortized Cost (March 31, 2020) | Estimated Fair Value (March 31, 2020) | Amortized Cost (December 31, 2019) | Estimated Fair Value (December 31, 2019) | | :--------------------- | :------------------------------ | :------------------------------------ | :--------------------------------- | :--------------------------------------- | | Agency mortgage-backed securities | $855,835 | $862,811 | $905,949 | $914,977 | | Beneficial interests in FHLMC securitization | 40,433 | 38,415 | 47,586 | 42,706 | | Corporate bonds | 57,000 | 58,786 | 54,000 | 55,834 | | Other | 1,392 | 1,465 | 1,386 | 1,449 | | Total | $954,660 | $961,477 | $1,008,921 | $1,014,966 | - Unrealized losses on agency mortgage-backed securities, beneficial interests in FHLMC securitizations, and other securities have not been recognized into income due to high credit quality, management's intent not to sell, and the expectation of fair value recovery as bonds approach maturity[68] - A $1.8 million impairment charge related to an interest-only strip security, due to higher than expected prepayments, was included in the provision for credit losses on the consolidated income statement[73] NOTE 4: LOANS Provides a breakdown of loan categories, past due and nonaccrual loans, and troubled debt restructurings | (dollars in thousands) | March 31, 2020 | December 31, 2019 | | :--------------------- | :------------- | :---------------- | | Loans secured by real estate: | | | | Multifamily | $2,369,081 | $2,143,919 | | Single family | 851,443 | 871,181 | | Commercial properties | 793,182 | 834,042 | | Land | 68,101 | 70,257 | | Commercial and industrial loans | 696,596 | 600,213 | | Consumer loans | 17,476 | 16,273 | | Total loans | $4,795,879 | $4,535,885 | | (dollars in thousands) | March 31, 2020 | December 31, 2019 | | :--------------------- | :------------- | :---------------- | | Total Past Due and Nonaccrual Loans | $11,407 | $23,685 | | Percentage of total loans | 0.24% | 0.52% | | (dollars in thousands) | March 31, 2020 Total TDR | December 31, 2019 Total TDR | | :--------------------- | :----------------------- | :-------------------------- | | Residential loans | $1,200 | $1,200 | | Commercial real estate loans | 2,573 | 3,354 | | Commercial and industrial loans | 4,149 | 3,529 | | Total | $7,922 | $8,083 | NOTE 5: ALLOWANCE FOR CREDIT LOSSES Presents changes in allowance for credit losses by loan category and details loan risk categorization | (dollars in thousands) | Beginning Balance (Dec 31, 2019) | Provision for Credit Losses | Charge-offs | Recoveries | Ending Balance (Mar 31, 2020) | | :--------------------- | :------------------------------- | :-------------------------- | :---------- | :--------- | :---------------------------- | | Real estate loans: | | | | | | | Residential properties | $8,423 | $(2,034) | $— | $— | $6,389 | | Commercial properties | 4,166 | 772 | — | — | 4,938 | | Land | 573 | 771 | — | — | 1,344 | | Commercial and industrial loans | 7,448 | 2,756 | (530) | 451 | 10,125 | | Consumer loans | 190 | 14 | — | — | 204 | | Total | $20,800 | $2,279 | $(530) | $451 | $23,000 | - The Bank categorizes loans into risk categories (Pass, Special Mention, Substandard) based on borrower ability to service debt, financial information, collateral adequacy, and economic trends[93][94][95] | (dollars in thousands) | March 31, 2020 Total Loans | December 31, 2019 Total Loans | | :--------------------- | :------------------------- | :-------------------------- | | Pass | $4,775,576 | $4,498,530 | | Special Mention | 8,873 | 8,881 | | Substandard Loans | 3,107 | 9,572 | | Individually Evaluated | 17,957 | 18,902 | | Total | $4,805,513 | $4,535,885 | NOTE 6: LOAN SALES AND MORTGAGE SERVICING RIGHTS Discusses gains from loan sales and provides metrics for mortgage servicing rights and loans serviced for others - FFB recognized $4.2 million in gains from selling $549 million of multifamily loans in 2019, retaining servicing rights for most[105] | Metric | March 31, 2020 | December 31, 2019 | | :----- | :------------- | :---------------- | | Mortgage servicing rights | $6.6 million | $7 million | | Loans serviced for others | $1.4 billion | $1.7 billion | | Servicing fees (3 months ended March 31) | $0.4 million | $1.7 million | NOTE 7: DEPOSITS Details deposit composition by type, including noninterest-bearing and interest-bearing accounts with weighted average rates | (dollars in thousands) | March 31, 2020 Amount | March 31, 2020 Weighted Average Rate | December 31, 2019 Amount | December 31, 2019 Weighted Average Rate | | :--------------------- | :-------------------- | :----------------------------------- | :----------------------- | :-------------------------------------- | | Noninterest-bearing demand deposits | $1,315,114 | — | $1,192,481 | — | | Interest-bearing demand deposits | 384,215 | 0.436% | 386,276 | 0.635% | | Money market and savings | 1,380,903 | 0.849% | 1,334,736 | 1.355% | | Certificates of deposits | 1,950,595 | 1.732% | 1,977,651 | 1.971% | | Total | $5,030,827 | 0.938% | $4,891,144 | 1.217% | NOTE 8: BORROWINGS Outlines types and amounts of borrowings, including FHLB advances and lines of credit, and their collateralization | (dollars in thousands) | March 31, 2020 | December 31, 2019 | | :--------------------- | :------------- | :---------------- | | Overnight FHLB advances | $34,000 | $233,000 | | FHLB term advances | 750,000 | 500,000 | | Holding company line of credit | 10,000 | 10,000 | | Total borrowings | $794,000 | $743,000 | - FHLB advances are primarily collateralized by multifamily and commercial real estate loans with a carrying value of $3.6 billion as of March 31, 2020, with the Bank's total borrowing capacity from the FHLB at $1.6 billion[108] - The Bank had $120 million available through unsecured fed funds lines and a $184 million secured line with the Federal Reserve Bank, with total unused lines of credit at $1.8 billion as of March 31, 2020[110][112] NOTE 9: LEASES Explains accounting for operating leases under Topic 842 and provides key metrics for lease assets and liabilities - With the adoption of Topic 842, operating lease agreements are recognized on the consolidated balance sheet as a right-of-use (ROU) asset and a corresponding lease liability[113] | (dollars in thousands) | March 31, 2020 | | :--------------------- | :------------- | | Operating lease asset classified as other assets | $15,240 | | Operating lease liability classified as other liabilities | 16,648 | | Weighted average lease term, in years | 4.85 | | Weighted average discount rate | 3.62% | | Total future minimum lease payments | $21,168 | | Total lease liability | $16,648 | NOTE 10: EARNINGS PER SHARE Presents the calculation of basic and diluted earnings per share, including net income and common shares outstanding | (dollars in thousands, except per share amounts) | Basic 2020 | Diluted 2020 | Basic 2019 | Diluted 2019 | | :----------------------------------------------- | :--------- | :----------- | :--------- | :----------- | | Net income | $13,211 | $13,211 | $11,259 | $11,259 | | Basic common shares outstanding | 44,669,661 | 44,669,661 | 44,540,865 | 44,540,865 | | Diluted common shares outstanding | | 44,952,669 | | 44,798,306 | | Earnings per share | $0.30 | $0.29 | $0.25 | $0.25 | NOTE 11: SEGMENT REPORTING Provides financial information by reportable business segment, Banking and Wealth Management, for Q1 2020 - The Company operates two reportable business segments: Banking (FFB and FFIS) and Wealth Management (FFA)[122] | (dollars in thousands) Quarter ended March 31, 2020 | Banking | Wealth Management | Other | Total | | :-------------------------------------------------- | :------ | :---------------- | :---- | :---- | | Net interest income | $44,898 | $— | $(30) | $44,868 | | Provision for loan losses | 4,079 | — | — | 4,079 | | Noninterest income | 4,659 | 6,488 | (472) | 10,675 | | Noninterest expense | 26,229 | 6,165 | 463 | 32,857 | | Income (loss) before taxes on income | $19,249 | $323 | $(965)| $18,607 | NOTE 12: SUBSEQUENT EVENTS Discloses significant events after the balance sheet date, specifically a declared quarterly cash dividend - On April 28, 2020, the Board of Directors declared a quarterly cash dividend of $0.07 per common share, payable on June 15, 2020[123] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Analyzes financial condition and results for Q1 2020, addressing COVID-19 impact, accounting policies, and segment performance Overview and Recent Developments Discusses COVID-19 impact, operational adjustments, funding costs, AUM changes, and key financial movements - The COVID-19 pandemic and related government actions have caused significant economic uncertainty, adversely affecting the Company and its customers, employees, and third-party service providers[135][139][209][210] - The Company implemented its Pandemic Response Business Continuity Plan, transitioning approximately 85% of corporate employees to remote work without significant additional costs[138] - Funding costs are expected to decline due to the persistent low interest rate environment, however, assets under management decreased by 12% in Q1 2020, which will reduce future Wealth Management revenues[139][148] - Total loans, including loans held for sale, increased by $276 million in Q1 2020, driven by $664 million in originations and an $8 million positive mark-to-market valuation, partially offset by $396 million in payoffs[149] - Total deposits increased by $140 million, and total revenues (net interest income and noninterest income) increased by 12% compared to Q1 2019[150] Results of Operations Analyzes financial performance, including net income, net interest income, credit loss provision, and noninterest items | (dollars in thousands) | Q1 2020 | Q1 2019 | Change (QoQ) | | :--------------------- | :------ | :------ | :----------- | | Net income | $13,211 | $11,259 | +$1,952 | | Income before taxes | $18,607 | $16,027 | +$2,580 | | Net interest income | $44,868 | $41,047 | +$3,821 | | Provision for credit losses | $4,079 | $540 | +$3,539 | | Noninterest income | $10,675 | $8,465 | +$2,210 | | Noninterest expense | $32,857 | $32,945 | -$88 | - Net interest income for Banking increased by $3.8 million, driven by an 8% increase in interest-earning assets and an increase in net yield on interest-earning assets from 2.88% to 2.92%[156] - The provision for credit losses significantly increased to $4.1 million in Q1 2020 (from $0.5 million in Q1 2019) due to adverse economic conditions under CECL and a $1.8 million impairment charge on an interest-only strip security[157] - Noninterest income in Banking increased by $1.7 million, primarily due to higher loan fees ($1.4 million) and trust fees ($0.3 million), while Wealth Management noninterest income increased by $0.8 million due to higher investment management fees[159][160] - Noninterest expense in Banking decreased by $0.4 million, mainly from lower customer service costs and FDIC costs, partially offset by higher compensation and benefits and occupancy costs, while Wealth Management noninterest expenses increased by $0.6 million due to higher compensation and professional services[161] Financial Condition Examines the balance sheet, including total assets, loans, securities, deposits, borrowings, and allowance for credit losses | (dollars in thousands) | March 31, 2020 | December 31, 2019 | Change (QoQ) | | :--------------------- | :------------- | :---------------- | :----------- | | Total assets | $6,513,708 | $6,314,436 | +$199,272 | | Loans, net | 4,782,513 | 4,526,833 | +$255,680 | | Loans held for sale | 520,721 | 503,036 | +$17,685 | | Securities AFS | 961,477 | 1,014,966 | -$53,489 | | Deposits | 5,030,827 | 4,891,144 | +$139,683 | | Borrowings | 794,000 | 743,000 | +$51,000 | - Total assets increased by $199.3 million in Q1 2020, primarily due to a $276 million increase in loans (including held for sale), partially offset by a $53.5 million decrease in securities[164] - Deposit growth of $139.7 million was driven by increases in branch deposits ($171 million) and specialty deposits ($53 million), partially offset by an $84 million decrease in wholesale deposits[164] - The weighted average rate of interest-bearing deposits decreased from 1.61% at December 31, 2019, to 1.27% at March 31, 2020, reflecting decreased market rates[172] - Total past due and nonaccrual loans decreased from $23.7 million (0.52% of total loans) at December 31, 2019, to $11.4 million (0.24% of total loans) at March 31, 2020[176] - The Allowance for Credit Losses (ACL) increased from $20.8 million at December 31, 2019, to $23.0 million at March 31, 2020, with the provision for credit losses being $2.3 million for the quarter[178] Liquidity Assesses cash flow from operating, investing, and financing activities, and the loan-to-deposit ratio - Operating activities provided $884 thousand in net cash in Q1 2020, a decrease from $11.2 million in Q1 2019, primarily due to net income and provisions for credit losses, offset by changes in other assets and liabilities[187] - Investing activities used $211.3 million in net cash in Q1 2020, mainly for a $264 million net increase in loans and $3 million in securities purchases, partially offset by $55 million from securities maturities[188] - Financing activities provided $185.4 million in net cash in Q1 2020, driven by a $140 million increase in deposits and a $51 million increase in FHLB advances, partially offset by dividends paid and stock repurchases[189] - The loan-to-deposit ratio at FFB increased from 103% at December 31, 2019, to 106% at March 31, 2020[190] Off-Balance Sheet Arrangements Details off-balance sheet commitments, including loan funding commitments and standby letters of credit | (dollars in thousands) | March 31, 2020 | | :--------------------- | :------------- | | Commitments to fund new loans | $40,567 | | Commitments to fund under existing loans, lines of credit | 430,195 | | Commitments under standby letters of credit | 13,465 | - FFB was obligated on $281 million of letters of credit to the FHLB, used as collateral for public fund deposits, including $263 million from the State of California[192] Capital Resources and Dividend Policy Reviews capital ratios, available capital, and dividend policy, confirming well-capitalized status - Both FFI (consolidated) and FFB (stand-alone) exceeded all minimum required capital ratios and qualified as a well-capitalized depository institution as of March 31, 2020[197] | (dollars in thousands) FFI Capital Ratios | March 31, 2020 Actual Ratio | December 31, 2019 Actual Ratio | | :---------------------------------------- | :-------------------------- | :----------------------------- | | CET1 capital ratio | 10.47% | 10.65% | | Tier 1 leverage ratio | 8.36% | 8.25% | | Tier 1 risk-based capital ratio | 10.47% | 10.65% | | Total risk-based capital ratio | 10.99% | 11.15% | | (dollars in thousands) FFB Capital Ratios | March 31, 2020 Actual Ratio | December 31, 2019 Actual Ratio | | :---------------------------------------- | :-------------------------- | :----------------------------- | | CET1 capital ratio | 10.56% | 10.62% | | Tier 1 leverage ratio | 8.43% | 8.22% | | Tier 1 risk-based capital ratio | 10.56% | 10.62% | | Total risk-based capital ratio | 11.08% | 11.12% | - FFI had $11.7 million of available capital as of March 31, 2020, providing the ability to contribute additional capital to FFB if needed[198] - The Company paid a quarterly cash dividend of $0.07 per common share in Q1 2020 and intends to continue quarterly dividends, subject to Board approval and regulatory restrictions[200] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Refers to the 2019 Annual Report for market risk disclosures, noting no material changes since then - No material changes to quantitative and qualitative disclosures about market risk have occurred since December 31, 2019[204] ITEM 4. CONTROLS AND PROCEDURES Confirms effectiveness of disclosure controls and procedures and reports no material changes to internal control - The Company's disclosure controls and procedures were effective as of March 31, 2020, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[206] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2020[207] PART II — OTHER INFORMATION Presents other required information, including risk factors, equity sales, and exhibits ITEM 1A. RISK FACTORS Supplements risk factors from the 10-K, addressing adverse impacts and uncertainties of the COVID-19 pandemic - The COVID-19 pandemic and related government actions have created significant economic uncertainty, adversely affecting the Company and its customers, employees, and third-party service providers[209][210] - Potential adverse effects include increased delinquencies, defaults, foreclosures, reduced loan demand, lower collateral values, and impacts on interest and noninterest income[211] - The ultimate extent of the pandemic's impact is highly uncertain and difficult to predict, potentially leading to materially adverse effects on the Company's business and financial results[214][215] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Details stock repurchase activities during Q1 2020 under the existing stock repurchase plan - The Company has a stock repurchase plan adopted on October 30, 2018, authorizing the repurchase of up to 2.2 million shares of common stock[217] | Purchase Dates | Total Number of Shares Purchased | Average Price Paid Per Share | Maximum Number of Shares That May Yet Be Purchased Under the Program | | :---------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------- | | January 1 to January 31, 2020 | — | — | 2,162,900 | | February 1 to February 29, 2020 | — | — | 2,162,900 | | March 1 to March 31, 2020 | 224,300 | 12.59 | 1,938,600 | ITEM 6. EXHIBITS Lists all exhibits filed with the Form 10-Q, including organizational documents, agreements, and certifications - The exhibits include the Certificate of Incorporation, Bylaws, Fifth Amendments to Employment Agreements for key executives (Scott F. Kavanaugh, Ulrich E. Keller, Jr.), Second Amendments to Employment Agreements (David DePillo, Lindsay Lawrence), and certifications under the Sarbanes-Oxley Act[219] SIGNATURES Confirms the official signing of the report by the Executive Vice President and Chief Financial Officer - The report was signed on May 8, 2020, by John M. Michel, Executive Vice President and Chief Financial Officer of First Foundation Inc[224]