FIRST FOUNDATION INC. 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 months endedMarch 31, 2022 as compared to our results of operations in the three months endedMarch 31, 2021 ; and our financial condition atMarch 31, 2022 as compared to our financial condition atDecember 31, 2021 . This discussion and analysis is based on and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto contained elsewhere in this report and our audited consolidated financial statements for the year endedDecember 31, 2021 , and the notes thereto, which are set forth in Item 8 of our Annual Report on Form 10-K ("2021 10-K") which we filed with theSecurities and Exchange Commission ("SEC") onFebruary 28, 2022 .
Forward-Looking Statements
Statements contained in this report that are not historical facts or that discuss our expectations, beliefs or views regarding our future financial performance or future financial condition, or financial or other trends in our business or in the markets in which we operate, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," "forecast" or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." Such forward-looking statements are based on current information that is available to us, and on assumptions that we make, about future events or economic or financial conditions or trends over which we do not have control. In addition, our businesses and the markets in which we operate are subject to a number of risks and uncertainties. Those risks and uncertainties, and unexpected future events, could cause our financial condition or actual operating results in the future to differ, possibly significantly, from our expected financial condition and operating results that are set forth in the forward-looking statements contained in this report. The principal risks and uncertainties to which our businesses are subject are discussed in this Item 2 and under the heading "Risk Factors" in our 2021 10-K. Therefore, you are urged to read not only the information contained in this Item 2, but also the risk factors and other cautionary information contained under the heading "Risk Factors" in our 2021 10-K, which qualify the forward-looking statements contained in this report. The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and may continue to adversely affect, our business, operations, financial performance and prospects. Even after the COVID-19 pandemic subsides, it is possible that theU.S. and other major economies experience or continue to experience a prolonged recession, which could materially and adversely affect our business, operations, financial performance and prospects. Statements about the effects of the COVID-19 pandemic on our business, operations, financial performance and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us. Due to these risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements contained in this report and not to make predictions about our future financial performance based solely on our historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this report or in our 2021 10-K, except as may otherwise be required by applicable law or government regulations.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with generally
accepted accounting principles in
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circumstances or trends that could materially affect the value of those assets, such as economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets. Those estimates and assumptions are made based on current information available to us regarding those economic conditions or trends or other circumstances. If changes were to occur in the events, trends or other circumstances on which our estimates or assumptions were based, or other unanticipated events were to occur that might affect our operations, we may be required under GAAP to adjust our earlier estimates and to reduce the carrying values of the affected assets on our balance sheet, generally by means of charges against income, which could also affect our results of operations in the fiscal periods when those charges are recognized. Allowance for Credit Losses -Investment Securities - The ACL on investment securities is determined for both held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with ASC 326, and is evaluated on a quarterly basis. The ACL for held-to-maturity investment securities is determined on a collective basis, based on shared risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. Under ASC 326-20, for investment securities where the Company has reason to believe the credit loss exposure is remote, such as those guaranteed by theU.S. government or government sponsored entities, a zero loss expectation is applied and a company is not required to estimate and recognize an ACL. For securities AFS in an unrealized loss position, the Company first evaluates whether it intends to sell, or whether it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the security amortized cost basis is written down to fair value through income. If neither criteria is met, the Company is required to assess whether the decline in fair value has resulted from credit losses or noncredit-related factors. In determining whether a security's decline in fair value is credit related, the Company considers a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security, and (v) the ability of the issuer of the security to make scheduled principal and interest payments. If, after considering these factors, the present value of expected cash flows to be collected is less than the amortized cost basis, a credit loss exists, and an allowance for credit loss is recorded through income as a component of provision for credit loss expense. If the assessment indicates that a credit loss does not exist, the Company records the decline in fair value through other comprehensive income, net of related income tax effects. The Company has made the election to exclude accrued interest receivable on securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. See Note 4, Securities, for additional information related to the Company's allowance for credit losses on securities AFS. Allowance for Credit Losses - Loans. Our ACL for loans and investments is established through a provision for credit losses charged to expense and may be reduced by a recapture of previously established loss reserves, which are also reflected in the statement of income. Loans 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 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 30
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to generate during those future periods. If we conclude, on the basis of those estimates and the amount of the tax benefits available to us, that it is more likely than not that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the amount of the tax benefits available to us that it has become more likely than not that we will be unable to utilize those tax benefits in full prior to their expiration, then we would establish a valuation allowance to reduce the deferred tax asset on our balance sheet to the amount with respect to which we believe it is still more likely than not that we will be able to use to offset or reduce taxes in the future. The establishment of such a valuation allowance, or any increase in an existing valuation allowance, would be effectuated through a charge to the provision for income taxes or a reduction in any income tax credit for the period in which such valuation allowance is established or increased. We have two business segments, "Banking" and "Wealth Management." Banking includes the operations of FFB, FFIS, Blue Moon, and FFPF, while Wealth Management includes the operations of FFA. The financial position and operating results of the stand-alone holding company, FFI, are included under the caption "Other" in certain of the tables that follow, along with any consolidation elimination entries.
Overview and Recent Developments
Our results of operations for the first three months of 2022 include:
Total loans, including loans held for sale, increased
? months ended
offset by payoffs or scheduled payments of
During the three months ended
? million and total revenues (net interest income and noninterest income)
increased by 36% when compared to the three months ended
During the second quarter of 2022, the Company authorized a stock repurchase program, where the Company may repurchase up to$75 million of its common stock from time to time in open market transactions or in privately negotiated transactions as permitted under applicable rules and regulations. The extent to which the Company repurchases its shares and the timing of such repurchases will depend on market conditions and other considerations as may be considered in the Company's sole discretion. The stock repurchase program, which has no stated expiration date, does not obligate the Company to repurchase any specific number of shares and may be modified, suspended or discontinued at any time without notice. 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 61% and 78%, respectively, of the total noninterest expense for Banking and Wealth Management in the three months endedMarch 31, 2022 . 31 Table of Contents
The following table shows key operating results for each of our business
segments for the quarter ended
Wealth
(dollars in thousands) Banking Management Other Total
2022:
Interest income $ 79,144 $ - $ - $ 79,144
Interest expense 3,413 - 1,237 4,650
Net interest income 75,731 - (1,237) 74,494
Provision for credit losses (792) - - (792)
Noninterest income 7,531 8,345 (449) 15,427
Noninterest expense 40,101 6,644 873 47,618
Income (loss) before taxes on income $ 43,953 $ 1,701 $ (2,559) $ 43,095
2021:
Interest income $ 59,138 $ - $ - $ 59,138
Interest expense 4,848 - 61 4,909
Net interest income 54,290 - (61) 54,229
Provision for credit losses 360 - - 360
Noninterest income 5,309 6,923 (324) 11,908
Noninterest expense 28,579 5,731
201 34,511
Income (loss) before taxes on income
General. Our net income and income before taxes in the three months endedMarch 31, 2022 were$30.8 million and$43.1 million , respectively, as compared to$22.4 million and$31.3 million , respectively, in the three months endedMarch 31, 2021 . The$11.8 million increase in income before taxes was the result of a$13.3 million increase in income before taxes for Banking and a$0.5 million increase in income before taxes for Wealth Management, offset partially by a$2.0 million increase in corporate expenses. The increase in Banking was due to higher net interest income, higher noninterest income and lower provision for credit losses. The increase in Wealth Management was due to higher noninterest income. The increase in corporate expenses was due to higher interest expense as a result of the subordinated notes assumed by the Company in connection with the TGRF acquisition in the fourth quarter of 2021, the$150 million of subordinated notes issued by the Company in the first quarter of 2022, and higher noninterest expenses. 32
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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 March 31:
2022 2021
Average Average Average Average
(dollars in thousands) Balances Interest Yield /Rate Balances Interest Yield /Rate
Interest-earning assets:
Loans $ 7,529,037 $ 72,027 3.84 % $ 5,383,745 $ 53,531 3.99 %
Securities AFS 1,197,859 6,360 2.12 % 772,204 5,206 2.70 %FHLB stock, fed funds, and deposits 1,212,777 757 0.25 % 714,379 401
0.23 %
Total interest-earning assets 9,939,673 79,144 3.19 % 6,870,328 59,138 3.45 %
Noninterest-earning assets:
Nonperforming assets 10,124 18,153
Other 449,275 189,640
Total assets $ 10,399,072 $ 7,078,121
Interest-bearing liabilities:
Demand deposits $ 2,359,334 $ 1,051 0.18 % $ 970,431 $ 874 0.37 %
Money market and savings 2,611,007 1,872 0.29 % 2,342,511 2,582 0.45 %
Certificates of deposit 654,279 435 0.27 % 861,048 1,167 0.55 %
Total interest-bearing deposits 5,624,620 3,358 0.24 % 4,173,990 4,623 0.45 %
Borrowings 301,236 1,292 1.74 % 206,085 286 0.56 %
Total interest-bearing liabilities 5,925,856 4,650 0.32 % 4,380,075 4,909
0.45 %
Noninterest-bearing liabilities:
Demand deposits 3,315,139 1,930,737
Other liabilities 94,484 66,854
Total liabilities 9,335,479 6,377,666
Shareholders' equity 1,063,593 700,455
Total liabilities and equity $ 10,399,072 $ 7,078,121
Net Interest Income $ 74,494 $ 54,229
Net Interest Rate Spread 2.87 % 3.00 %
Net Interest Margin 3.00 % 3.16 %
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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 months endedMarch 31, 2022 , as compared to the three months endedMarch 31, 2021 : Increase
(Decrease) due to Net Increase
(dollars in thousands) Volume Rate (Decrease)
Interest earned on:
Loans $ 20,546 $ (2,050) $ 18,496
Securities 2,437 (1,283) 1,154Cash, FHLB stock, fed funds and deposits 313 43 356 Total interest-earning assets 23,296 (3,290) 20,006 Interest paid on: Demand deposits 794 (617) 177 Money market and savings 283 (992) (709) Certificates of deposit (228) (505) (733) Borrowings 172 834 1,006 Total interest-bearing liabilities 1,021
(1,280) (259)
Net interest income $ 22,275 $ (2,010) $ 20,265
Net interest income increased 37% from $54.2 million in the three months ended
March 31, 2021 , to $74.5 million in the three months ended March 31, 2022 due to
a 45% increase in interest-earning assets and decrease in the cost of interest
bearing liabilities. The cost of interest-bearing liabilities decreased, from
0.45% in the three months ended March 31, 2021 , to 0.32% in the three months
ended March 31, 2022 . 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, which were partially offset by an increase in
borrowings. The average balance outstanding on borrowings increased from $206.1
million in the three months ended March 31, 2021 , to $301.2 million in the three
months ended March 31, 2022 . The increase in borrowings was due to the issuance
of $150 million in subordinated notes in the first quarter of 2022, and the
assumption of $165 million in repurchase agreements and $23 million in
subordinated notes as a result of the TGRF acquisition in the fourth quarter of
2021. The net interest margin decreased, from 3.16% in the three months ended
March 31, 2021 , to 3.00% in the three months ended March 31, 2022 . The decrease
in the interest margin was due to an increase in average excess liquidity during
the quarter brought on by the acquisition of TGRF, bringing our average fed
funds and cash deposit balances up by $498 million compared to the first three
months of 2021, earning an average rate of 0.25%. The yield on securities
decreased due a decrease in market rates. The average balance outstanding under
the holding company line of credit decreased from $6.6 million in the three
months ended March 31, 2021 to $0.4 million in the three months ended
March 31, 2022 .
Provision for credit losses. The provision for credit losses represents our
estimate of the amount necessary to be charged against the current period's
earnings to maintain the ACL for loans and investments at a level that we
consider adequate in relation to the estimated losses inherent in the loan and
investment portfolios. The provision for credit losses for loans is impacted by
changes in loan balances as well as changes in estimated loss assumptions and
charge-offs and recoveries. The amount of the provision for loans also takes
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, current
economic conditions and certain other subjective factors that may affect the
ability of borrowers to meet their repayment obligations to us. The reversal of
provision for credit losses in the three months ended March 31, 2022 was $0.8
million , and the provision for credit losses in the three months ended
March 31, 2021 was $0.4 million . The decrease in provision for credit losses in
the three months ended March 31, 2022 was a result of improvement in the
economic scenario outlook.
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Noninterest income. Noninterest income for Banking includes fees charged to clients for trust services and deposit services, consulting fees, prepayment and late fees charged on loans, gain on sale of loans, and gains and losses from capital market activities and insurance commissions. The following table provides a breakdown of noninterest income for Banking for the three months endedMarch 31, 2022 and 2021:
(dollars in thousands) 2022 2021
Three Months EndedMarch 31 : Trust fees$ 2,108 $ 1,668 Loan related fees 2,562 2,944 Deposit charges 644 379 Gain on sale leaseback 1,123 - Consulting fees 95 101 Other 999 217 Total noninterest income$ 7,531 $ 5,309
Noninterest income in Banking in the three months endedMarch 31, 2022 was$2.2 million higher than the three months endedMarch 31, 2021 due primarily to a$1.1 million gain on a sale leaseback transaction, a$0.4 million increase in trust fees, and a$0.3 million increase in deposit charges. Noninterest income for Wealth Management includes fees charged to high net-worth clients for managing their assets and for providing financial planning consulting services. The following table provides the amounts of noninterest income for Wealth Management for the three months endedMarch 31, 2022 and
2021: (dollars in thousands) 2022 2021 Noninterest income$ 8,345 $ 6,923 Noninterest income for Wealth Management increased by$1.4 million in the three months endedMarch 31, 2022 when compared to the corresponding period in 2021 due primarily to higher levels of billable AUM in the quarter. The following table summarizes the activity in our AUM for the periods indicated: Existing account Beginning Additions/ New (dollars in thousands) Balance Withdrawals Accounts Terminations Performance Ending balance Three Months EndedMarch 31, 2022 : Equities$ 3,330,639 $ 35,136$ 46,186 $ (29,451) $ (285,233) $ 3,097,277 Fixed Income 1,303,760 22,003 44,040 (11,625) (82,779) 1,275,399 Cash and other 1,046,206 (13,143) 32,975 (15,538) 32,566 1,083,066 Total$ 5,680,605 $ 43,996$ 123,201 $ (56,614) $ (335,446) $ 5,455,742 Year EndedDecember 31, 2021 : Equities$ 2,451,056 $ 448,338$ 200,073 $ (156,809) $ 387,981 $ 3,330,639 Fixed Income 1,474,479 (195,117) 71,181 (45,818) (965) 1,303,760 Cash and other 1,001,256 (209,727) 146,701 (84,213) 192,189 1,046,206 Total$ 4,926,791 $ 43,494$ 417,955 $ (286,840) $ 579,205 $ 5,680,605 The$225 million decrease in AUM during the first quarter of 2022 was the net result of$123 million of new accounts,$335 million of portfolio losses, and terminations and net withdrawals of$13 million . 35
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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) 2022 2021 2022 2021
Three Months Ended March 31 :
Compensation and benefits $ 24,276 $ 16,823 $ 5,212 $ 4,447
Occupancy and depreciation 8,113 5,639 454 521Professional services and marketing 2,343 1,771 815
639
Customer service costs 1,788 1,770 - -
Other expenses 3,581 2,576 163 124
Total noninterest expense $ 40,101 $ 28,579 $ 6,644 $ 5,731
Noninterest expense in Banking increased from $28.6 million in the three months
ended March 31, 2021 to $40.1 million in the three months ended March 31, 2022
primarily due to higher compensation and benefits, occupancy and depreciation,
professional services and marketing, and other expenses. Compensation and
benefits in Banking were $7.5 million higher in the first quarter of 2022
primarily due to a 41.0% increase in average FTE largely associated with the
TGRF acquisition. Occupancy and depreciation costs were $2.5 million higher due
primarily to higher core processing costs related to higher volumes and services
and due to the TGRF acquisition. Noninterest expenses for Wealth Management
increased by $0.9 million in the three months ended March 31, 2022 due to higher
compensation and benefits, and professional services and marketing expenses.
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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
March 31, 2022 :
Cash and cash equivalents $ 930,984 $ 11,908 $ (11,182) $ 931,710
Securities AFS, net 258,287 - - 258,287
Securities HTM 920,408 - - 920,408
Loans held for sale 501,424 - - 501,424
Loans, net 7,364,642 - - 7,364,642
Premises and equipment 35,402 366 136 35,904
Investment in FHLB Stock 17,250 - - 17,250
Deferred taxes 17,422 70 555 18,047
REO 6,210 - - 6,210
Goodwill and intangibles 223,239 - - 223,239
Other assets 173,610 386 23,679 197,675
Total assets $ 10,448,878 $ 12,730 $ 13,188 $ 10,474,796
Deposits $ 9,037,219 $ - $ (79,701) $ 8,957,518
Borrowings 152,680 - 173,289 325,969
Intercompany balances 3,037 565 (3,602) -
Other liabilities 84,297 2,965 21,472 108,734
Shareholders' equity 1,171,645 9,200 (98,270) 1,082,575
Total liabilities and equity $ 10,448,878 $ 12,730 December 31, 2021 : Cash and cash equivalents$ 1,121,089 $ 3,195 $ (2,527) $ 1,121,757 Securities AFS, net 1,191,378 - - 1,191,378 Loans held for sale 501,436 - - 501,436 Loans, net 6,872,952 - - 6,872,952 Premises and equipment 37,373 411 136 37,920 Investment in FHLB Stock 18,249 - - 18,249 Deferred taxes 20,745 138 (48) 20,835 REO 6,210 - - 6,210 Goodwill and intangibles 222,125 - - 222,125 Other assets 179,385 365 23,592 203,342 Total assets$ 10,170,942 $ 4,109 $ 21,153 $ 10,196,204 Deposits$ 8,836,250 $ -$ (24,290) $ 8,811,960 Borrowings 165,930 - 44,197 210,127 Intercompany balances 4,605 (8,204) 3,599 - Other liabilities 92,500 4,381 13,185 110,066 Shareholders' equity 1,071,657 7,932 (15,538) 1,064,051 Total liabilities and equity$ 10,170,942 $ 4,109
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 three months ended
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total securities decreased by $12 million primarily due to payoffs of
mortgage-backed securities. Loans and loans held for sale increased $491 million
in the three months ended March 31, 2022 , primarily as a result of $1.1 billion
of originations, which were partially offset by payoffs or scheduled payments of
$657 million . The $146 million growth in deposits during the first three months
of 2022 was due primarily to an increase in corporate deposits of $175 million ,
offset by a decrease in branch deposits of $31 million . Borrowings increased by
$116 million during the three months ended March 31, 2022 due to the addition of
$150 million in subordinated debt, offset partially by the $18.5 million paydown
on FFI's credit line, and $13 million decrease in repurchase agreements.
Cash and cash equivalents, certificates of deposit and securities. Cash and cash
equivalents, which primarily consist of funds held at the Federal Reserve Bank
or at correspondent banks, including fed funds, decreased by $190 million during
the three months ended March 31, 2022 . Changes in cash and cash equivalents are
primarily affected by the funding of loans, investments in securities, and
changes in our sources of funding: deposits, FHLB advances and FFI borrowings.
Securities available for sale. The following table provides a summary of the Company's AFS securities portfolio as of:
Amortized Gross Unrealized Allowance for Estimated
(dollars in thousands) Cost Gains Losses Credit Losses Fair Value
March 31, 2022 :
Collateralized mortgage obligations $ 11,761 $ - $ (577) $ - $ 11,184
Agency mortgage-backed securities 10,376 8 (306)
- 10,078
Municipal bonds 50,737 21 (2,244) - 48,514
SBA securities 25,692 1 (21) - 25,672
Beneficial interests in FHLMC
securitization 20,631 334 - (10,743) 10,222
Corporate bonds 153,451 1,105 (2,793) - 151,763
U.S. Treasury 897 - (43) - 854
Total $ 273,545 $ 1,469 $ (5,984) $ (10,743) $ 258,287
December 31, 2021:Collateralized mortgage obligations$ 13,862 $ -$ (37) $ -$ 13,825 Agency mortgage-backed securities 928,546 6,563 (6,120)
- 928,989
Municipal bonds 52,052 94 - - 52,146
SBA securities 27,970 2 - - 27,972
Beneficial interest - FHLMC
securitization 21,606 373 - (10,399) 11,580
Corporate bonds 154,027 2,441 (92) - 156,376
U.S. Treasury 499 - (9) - 490
Total $ 1,198,562 $ 9,473 $ (6,258) $ (10,399) $ 1,191,378
US Treasury securities that are included in the table above are pledged as
collateral to the State of California to meet regulatory requirements related to
FFB's trust operations. Agency mortgage-backed securities are pledged as
collateral as support for the Bank's obligations under loan sales and
securitization agreements entered into from 2018 through 2021. SBA securities
are pledged as collateral for repurchase agreements.
Excluding allowance for credit losses, the decrease in AFS securities in the
first three months of 2022 was due primarily to the $920 million transfer of
agency mortgage-backed securities to held-to-maturity.
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Securities held to maturity. The following table provides a summary of the Company's HTM securities portfolio as of:
Amortized Gross Uncognized Allowance for Estimated
(dollars in thousands) Cost Gains Losses Credit Losses Fair Value
March 31, 2022 :
Agency mortgage-backed securities $ 920,408 $ - $ (39,657) $ - $ 880,751
Total $ 920,408 $ - $ (39,657) $ - $ 880,751 There were no securities HTM as of
The scheduled maturities of securities AFS, as well as the related weighted
average yield, are as follows, as of
Less than 1 Through 5 Through After
(dollars in thousands) 1 Year 5 years 10 Years 10 Years Total
Amortized Cost:
Collateralized mortgage obligations $ - $ 319 $ 742 $ 10,700 $ 11,761
Agency mortgage-backed securities - 4,545 4,123 1,708 10,376 Municipal bonds - 1,630 37,565 11,542 50,737 SBA securities 39 1,326 2,610 21,717 25,692 Beneficial interests in FHLMC securitization - 11,125 - 9,506 20,631 Corporate bonds 9,526 10,019 128,371 5,535 153,451 U.S. Treasury - 897 - - 897 Total$ 9,565 $ 29,861 $ 173,411 $ 60,708 $ 273,545 Weighted average yield 1.06 % 1.99 % 3.34 % 1.90 % 2.80 % Estimated Fair Value: Collateralized mortgage obligations $ -$ 319 $ 703 $ 10,162 $ 11,184 Agency mortgage-backed securities - 4,431
3,984 1,663 10,078 Municipal bonds - 1,645 36,217 10,652 48,514 SBA securities 39 1,323 2,607 21,703 25,672 Beneficial interests in FHLMC securitization - 11,125 - 9,840 20,965 Corporate bonds 9,519 9,748 127,257 5,239 151,763 U.S. Treasury - 854 - - 854 Total$ 9,558 $ 29,445 $ 170,768 $ 59,259 $ 269,030
The scheduled maturities of securities HTM, and the related weighted average
yield is as follows, as of
Less than 1 Through 5 Through After
(dollars in thousands) 1 Year 5 years 10 Years 10 Years Total
March 31, 2022
Amortized Cost:
Agency mortgage-backed securities $ - $ - $ 18,793 $ 901,615 $ 920,408
Total $ - $ - $ 18,793 $ 901,615 $ 920,408
Weighted average yield - % - % 0.82 % 1.77 % 1.75 %
Estimated Fair Value: Agency mortgage-backed securities $ - $ - $
17,934$ 862,817 $ 880,751 Total $ - $ -$ 17,934 $ 862,817 $ 880,751 39 Table of Contents
Loans. The following table sets forth our loans, by loan category, as of:
March 31 ,
(dollars in thousands) 2022 2021
Outstanding principal balance: Loans secured by real estate: Residential properties: Multifamily$ 3,284,003 $ 2,886,055 Single family 911,438 933,445
Total real estate loans secured by residential properties 4,195,441
3,819,500
Commercial properties 1,264,221 1,309,200
Land and construction 159,533 156,028
Total real estate loans 5,619,195 5,284,728Commercial and industrial loans 1,754,279
1,598,422
Consumer loans 9,760 10,834
Total loans 7,383,234 6,893,984Premiums, discounts and deferred fees and expenses 14,230
12,744
Total $ 7,397,464 $ 6,906,728 Loans and loans held for sale increased
Deposits. The following table sets forth information with respect to our deposits and the average rates paid on deposits, as of:
March 31, 2022 December 31, 2021
Weighted Weighted
(dollars in thousands) Amount Average Rate Amount Average Rate
Demand deposits:
Noninterest-bearing $ 3,296,118 - $ 3,280,455 -
Interest-bearing 2,429,202 0.104 % 2,242,684 0.070 %
Money market and savings 2,592,437 0.271 % 2,620,336 0.275 %
Certificates of deposits 639,761 0.200 % 668,485 0.145 %
Total $ 8,957,518 0.121 % $ 8,811,960 0.111 %
During the first three months of 2022, our deposit rates have moved in a manner
consistent with overall deposit market rates. The weighted average rate of our
interest-bearing deposits increased from 0.18% at December 31, 2021 , to 0.19% at
March 31, 2022 due to increased costs of interest-bearing deposits, while the
weighted average interest rates of both interest-bearing and noninterest-bearing
deposits have decreased from 0.15% at December 31, 2021 to 0.12% at
March 31, 2022 . The financial impact of the increase in noninterest-bearing
deposits is reflected in customer service costs, which are included in
noninterest expenses.
The maturities of our certificates of deposit of
(dollars in thousands)
3 months or less $ 302,445
Over 3 months through 6 months 65,581
Over 6 months through 12 months 111,750
Over 12 months 57,687
Total $ 537,463 From time to time, the Bank will utilize brokered deposits as a source of
funding. As of
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Borrowings. AtMarch 31, 2022 , our borrowings consisted of$173 million in subordinated notes and$153 million of repurchase agreements. AtDecember 31, 2021 , our borrowings consisted of$26 million in subordinated notes,$166 million of repurchase agreements, and$18.5 million of borrowings under a holding company line of credit. As ofMarch 31, 2022 ,$150 million of the subordinated notes are fixed-to-floating rate notes that mature inFebruary 2032 . The notes will initially bear a rate of 3.50% per annum, payable semi-annually in arrears onFebruary 1 andAugust 1 of each year, commencing onAugust 1, 2022 untilFebruary 1, 2027 . From and includingFebruary 1, 2027 to, but excludingFebruary 1, 2032 , or the date of earlier redemption, the notes will bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be Three-Month Term Secured Overnight Financing Rate, or "SOFR"), each as defined in and subject to the provisions of the indenture under which the notes were issued, plus 204 basis points (2.04%), payable quarterly in arrears onFebruary 1 ,May 1 ,August 1 , andNovember 1 of each year, commencing onMay 1, 2027 .$23 million of the subordinated notes mature inJune 2030 and bear a fixed interest rate of 6.0%, untilJune 30, 2025 , at which time they will convert to a floating rate based on three month SOFR, plus 590 basis points (5.90%), until maturity. The maximum amount of borrowings at the Bank outstanding at any month-end during the three months endedMarch 31, 2022 , and during all of 2021, was$177 million and$255 million , respectively.
Delinquent Loans, Nonperforming Assets and Provision for Credit Losses
Loans are considered past due following the date when either interest or
principal is contractually due and unpaid. Loans on which the accrual of
interest has been discontinued are designated as nonaccrual loans. Accrual of
interest on loans is discontinued when reasonable doubt exists as to the full,
timely collection of interest or principal and, generally, when a loan becomes
contractually past due for 90 days or more with respect to principal or
interest. However, the accrual of interest may be continued on a well-secured
loan contractually past due 90 days or more with respect to principal or
interest if the loan is in the process of collection or collection of the
principal and interest is deemed probable. The following tables provide a
summary of past due and nonaccrual loans as of:
90 Days Total Past Due
(dollars in thousands) 30-59 Days 60-89 Days or More
Nonaccrual and Nonaccrual Current Total
March 31, 2022 :
Real estate loans:
Residential properties $ 1,748 $ - $ - $ 3,186 $ 4,934 $ 4,204,812 $ 4,209,746
Commercial properties 2,892 936 - 4,401 8,229 1,256,568 1,264,797
Land and construction - - - - - 159,231 159,231Commercial and industrial loans 967 105
- 3,256 4,328 1,749,572 1,753,900 Consumer loans 10 - - - 10 9,780 9,790 Total$ 5,617 $ 1,041 $ -$ 10,843 $ 17,501$ 7,379,963 $ 7,397,464 Percentage of total loans 0.08 % 0.01 % - % 0.15 % 0.24 % December 31, 2021: Real estate loans: Residential properties$ 1,519 $ 310 $ -$ 3,281 $ 5,110$ 3,827,385 $ 3,832,495 Commercial properties 2,934 - - 1,529 4,463 1,305,112 1,309,575 Land and construction - - - - - 155,926 155,926
Commercial and industrial loans 303 260
- 3,520 4,083 1,593,782 1,597,865 Consumer loans - - - - - 10,867 10,867 Total$ 4,756 $ 570 $ -$ 8,330 $ 13,656$ 6,893,072 $ 6,906,728 Percentage of total loans 0.07 % 0.01 % - % 0.12 % 0.20 % 41 Table of Contents
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
March 31, 2022
Real estate loans:
Residential properties $ - $ 3,186
Commercial properties - 4,401
Commercial and industrial loans 1,227 2,029
Total $ 1,227 $ 9,616
December 31, 2021
Real estate loans:
Residential properties $ - $ 3,281
Commercial properties - 1,529
Commercial and industrial loans 1,733 1,788
Total $ 1,733 $ 6,598
The following table presents the composition of TDRs by accrual and nonaccrual
status as of:
March 31, 2022 December 31, 2021(dollars in thousands) Accrual Nonaccrual Total Accrual Nonaccrual Total Residential loans
$ - $ - $ - $ 1,200 $ - $ 1,200
Commercial real estate loans 998 1,148 2,146 1,021 1,174 2,195
Commercial and industrial loans 32 1,856 1,888
493 2,030 2,523
Total $ 1,030 $ 3,004 $ 4,034 $ 2,714 $ 3,204 $ 5,918 These loans were classified as a TDR as a result of a reduction in required principal payments, reductions in rates and/or an extension of the maturity date of the loans.
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Allowance for Credit Losses. The following table summarizes the activity in our ACL related to loans for the periods indicated:
Allowance
Beginning Provision for on Acquired Ending
(dollars in thousands) Balance Credit Losses PCD Loans Charge-offs Recoveries BalanceThree months endedMarch 31, 2022 : Real estate loans: Residential properties$ 2,637 $ 561 $ - $ - $ -$ 3,198 Commercial properties 17,049 (1,413) - - - 15,636 Land and construction 1,995 (227) - - - 1,768 Commercial and industrial loans 11,992 149 - (145) 134 12,130 Consumer loans 103 (13) - - - 90 Total$ 33,776 $ (943) $ -$ (145) $ 134 $ 32,822 Three months ended March 31, 2021: Real estate loans: Residential properties$ 5,115 $ 918 $ - $ - $ -$ 6,033 Commercial properties 8,711 (2,755) - - - 5,956 Land and construction 892 3,070 - - - 3,962 Commercial and industrial loans 9,249 (2,379) - (214) 406 7,062 Consumer loans 233 (66) - - - 167 Total$ 24,200 $ (1,212) $ -$ (214) $ 406 $ 23,180 Year ended December 31, 2021: Real estate loans: Residential properties$ 5,115 $ (1,453) $ 93$ (1,118) $ -$ 2,637 Commercial properties 8,711 774 7,564 - - 17,049 Land and construction 892 1,051 52 - - 1,995 Commercial and industrial loans 9,249 614 1,836 (706) 999 11,992 Consumer loans 233 (130) - - - 103 Total$ 24,200 $ 856$ 9,545 $ (1,824) $ 999 $ 33,776
Our ACL related to loans represented 0.44% and 0.49% of total loans outstanding
as of
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
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necessary for us to incur additional, and possibly significant, charges to increase the ACL, which would have the effect of reducing our income.
In addition, theFederal Deposit Insurance Corporation ("FDIC") and theCalifornia 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
March 31, 2022:
Allowance for credit losses:
Real estate loans:
Residential properties $ 110 $ 3,088 $ 3,198
Commercial properties 7,662 7,974 15,636
Land and construction 69 1,699 1,768Commercial and industrial loans 1,615 10,515
12,130 Consumer loans - 90 90 Total$ 9,456 $ 23,366 $ 32,822 Loans: Real estate loans: Residential properties$ 8,524 $ 4,201,222 $ 4,209,746 Commercial properties 41,664 1,223,133 1,264,797 Land and construction 698 158,533 159,231 Commercial and industrial loans 10,220 1,743,680 1,753,900 Consumer loans - 9,790 9,790 Total$ 61,106 $ 7,336,358 $ 7,397,464 Allowance for Credit Losses Loans Evaluated (dollars in thousands) Individually Collectively Total December 31, 2021: Allowance for credit losses: Real estate loans: Residential properties $ 111$ 2,526 $ 2,637 Commercial properties 7,967 9,082 17,049 Land and construction 52 1,943 1,995
Commercial and industrial loans 2,386 9,606
11,992 Consumer loans - 103 103 Total$ 10,516 $ 23,260 $ 33,776 Loans: Real estate loans: Residential properties$ 9,593 $ 3,822,902 $ 3,832,495 Commercial properties 41,313 1,268,262 1,309,575 Land and construction 694 155,232 155,926 Commercial and industrial loans 9,963 1,587,902 1,597,865 Consumer loans - 10,867 10,867 Total$ 61,563 $ 6,845,165 $ 6,906,728 44 Table of Contents 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 theFederal Reserve Bank of San Francisco or other financial institutions. We monitor our liquidity in accordance with guidelines established by our Board of Directors and applicable regulatory requirements. Our need for liquidity is affected by our loan activity, net changes in deposit levels and the maturities of our borrowings. The principal sources of our liquidity consist of deposits, loan interest and principal payments and prepayments, investment management and consulting fees, FHLB advances and proceeds from borrowings and sales of FFI common stock. The remaining balances of the Company's lines of credit available to draw down totaled$3.2 billion atMarch 31, 2022 . Cash Flows Provided by Operating Activities. During the quarter endedMarch 31, 2022 , operating activities provided net cash of$40 million , primarily due to net income of$31 million and a net increase of$5 million in other assets. During the quarter endedMarch 31, 2021 , operating activities provided net cash of$33 million , primarily due to net income of$22 million and a net decrease of$5 million in other assets. Cash Flows Used in Investing Activities. During the quarter endedMarch 31, 2022 , investing activities used net cash of$483 million , primarily due to a$491 million net increase in loans and$83 million in purchases of securities AFS, offset partially by$88 million in cash received in principal collection and maturities of securities. During the quarter endedMarch 31, 2021 , investing activities used net cash of$265 million , primarily due to a$321 million net increase in loans, offset partially by$53 million in cash received in principal collection and maturities of securities, and$3 million in proceeds from a redemption of securities. Cash Flows Provided by Financing Activities. During the quarter endedMarch 31, 2022 , financing activities provided net cash of$253 million , consisting primarily of a net increase of$146 million in deposits and$148 million net increase in subordinated debt, offset partially by$19 million net paydowns in our line of credit,$6 million in dividends paid, and a$13 million net decrease in repurchase agreements. During the quarter endedMarch 31, 2021 , financing activities provided net cash of$71 million , consisting primarily of a net increase of$332 million in deposits, offset partially by a$250 million decrease in FHLB advances,$7 million net paydowns in our line of credit, and$4 million in dividends paid. Ratio of Loans to Deposits. The relationship between gross loans and total deposits can provide a useful measure of a bank's liquidity. Since repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan-to-deposit ratio the less liquid are our assets. On the other hand, since we realize greater yields on loans than we do on other interest-earning assets, a lower loan-to-deposit ratio can adversely affect interest income and earnings. As a result, our goal is to achieve a loan-to-deposit ratio that appropriately balances the requirements of liquidity and the need to generate a fair return on our assets. AtMarch 31, 2022 andDecember 31, 2021 , the loan-to-deposit ratios at FFB were 88% and 84%, respectively.
Off-Balance Sheet Arrangements
The following table provides the off-balance sheet arrangements of the Company
as of
(dollars in thousands)
Commitments to fund new loans $ 77,012 Commitments to fund under existing loans, lines of credit 1,223,173 Commitments under standby letters of credit
24,745
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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March 31, 2022 , FFB was obligated on$278 million of letters of credit to the FHLB which were being used as collateral for public fund deposits, including$263 million of deposits from theState of California .
Capital Resources and Dividend Policy
The capital rules applicable toUnited States based bank holding companies and federally insured depository institutions ("Capital Rules") require the Company (on a consolidated basis) and FFB (on a stand-alone basis) to meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt corrective action regulations place a federally insured depository institution, such as FFB, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution's primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.
The following table sets forth the capital and capital ratios of FFI (on a consolidated basis) and FFB as of the respective dates indicated below, as compared to the respective regulatory requirements applicable to them:
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
FFI
March 31, 2022 :
CET1 capital ratio $ 862,092 10.98 % $ 356,437 4.50 %
Tier 1 leverage ratio 862,092 8.52 % 408,396 4.00 %Tier 1 risk-based capital ratio 862,092 10.98 % 475,249 6.00 % Total risk-based capital ratio 902,747 13.68 % 633,665
8.00 %December 31, 2021 : CET1 capital ratio$ 846,515 11.34 %$ 335,801 4.50 % Tier 1 leverage ratio 846,515 8.43 % 401,645 4.00 %
Tier 1 risk-based capital ratio 846,515 11.34 % 447,735 6.00 % Total risk-based capital ratio 887,821 11.90 % 596,980
8.00 %
FFB
March 31, 2022 :
CET1 capital ratio $ 958,976 12.16 % $ 354,965 4.50 % $ 512,727 6.50 %
Tier 1 leverage ratio 958,976 9.14 % 419,807 4.00 % 524,759 5.00 %Tier 1 risk-based capital ratio 958,976 12.16 % 473,286 6.00 % 631,048 8.00 % Total risk-based capital ratio 999,631 12.67 % 631,048
8.00 % 788,810 10.00 % December 31, 2021: CET1 capital ratio$ 854,075 11.49 %$ 334,608 4.50 %$ 483,323 6.50 % Tier 1 leverage ratio 854,075 8.53 % 400,616 4.00 % 500,770 5.00 %
Tier 1 risk-based capital ratio 854,075 11.49 % 446,144 6.00 % 594,859 8.00 %
Total risk-based capital ratio 895,381 12.04 % 594,859 8.00 % 743,574 10.00 %
As of each of the dates set forth in the above table, the Company exceeded the
minimum required capital ratios applicable to it and FFB's capital ratios
exceeded the minimums necessary to qualify as a well-capitalized depository
institution under the prompt corrective action regulations. The required ratios
for capital adequacy set forth in the above table do not include the Capital
Rules' additional capital conservation buffer, though each of the Company and
FFB maintained capital ratios necessary to satisfy the capital conservation
buffer requirements as of the dates indicated.
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As ofMarch 31, 2022 , FFI had$84.0 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 ofMarch 31, 2022 , the amount of capital at FFB in excess of amounts required to be well capitalized for purposes of the prompt corrective action regulations was$446 million for the CET1 capital ratio,$434 million for the Tier 1 Leverage Ratio,$328 million for the Tier 1 risk-based capital ratio and$211 million for the Total risk-based capital ratio. The Company paid a quarterly cash dividend of$0.11 per common share in the first quarter of 2022. 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 endedDecember 31, 2021 . Additionally, under the terms of the holding company line of credit agreement, FFI may only declare and pay a dividend if the total amount of dividends and stock repurchases during the current twelve months does not exceed 50% of FFI's net income for the same twelve month period. We paid$16.1 million in dividends ($0.36 per share) in 2021. We had no material commitments for capital expenditures as ofMarch 31, 2022 . However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations.
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