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 and nine months endedSeptember 30, 2020 as compared to our results of operations in the three and nine months endedSeptember 30, 2019 ; and our financial condition atSeptember 30, 2020 as compared to our financial condition atDecember 31, 2019 . 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, 2019 , and the notes thereto, which are set forth in Item 8 of our Annual Report on Form 10-K (our "2019 10-K") which we filed with theSecurities and Exchange Commission ("SEC") onMarch 2, 2020 . 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 2019 10-K and in this report. 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 2019 10-K and in this report, 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 2019 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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considered critical accounting policies, because they require us to make estimates and assumptions regarding circumstances or trends that could materially affect the value of those assets, such as economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets. Those estimates and assumptions are made based on current information available to us regarding those economic conditions or trends or other circumstances. If changes were to occur in the events, trends or other circumstances on which our estimates or assumptions were based, or other unanticipated events were to occur that might affect our operations, we may be required under GAAP to adjust our earlier estimates and to reduce the carrying values of the affected assets on our balance sheet, generally by means of charges against income, which could also affect our results of operations in the fiscal periods when those charges are recognized. Allowance for Credit Losses. We adopted CECL to compute our ACL onJanuary 1, 2020 . Our ACL 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 income statement. Loans are charged against the ACL when management believes that collectability of the principal is unlikely. The CECL model requires the ACL to cover estimated credit losses expected over the life of an exposure. This evaluation takes into consideration such factors as current economic projections, projected payment estimates, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and certain other 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 in our loan portfolio. Utilization and Valuation of Deferred Income Tax Benefits. We record as a "deferred tax asset" on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions (collectively "tax benefits") that we believe will be available to us to offset or reduce income taxes in future periods. Under applicable federal and state income tax laws and regulations, tax benefits related to tax loss carryforwards will expire if they cannot be used within specified periods of time. Accordingly, the ability to fully use our deferred tax asset related to tax loss carryforwards to reduce income taxes in the future depends on the amount of taxable income that we generate during those time periods. At least once each year, or more frequently, if warranted, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the amount of the tax benefits available to us, that it is more likely than not that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the amount of the tax benefits available to us that it has become more likely than not that we will be unable to utilize those tax benefits in full prior to their expiration, then we would establish a valuation allowance to reduce the deferred tax asset on our balance sheet to the amount with respect to which we believe it is still more likely than not that we will be able to use to offset or reduce taxes in the future. The establishment of such a valuation allowance, or any increase in an existing valuation allowance, would be effectuated through a charge to the provision for income taxes or a reduction in any income tax credit for the period in which such valuation allowance is established or increased.
We have two business segments, "Banking" and "Wealth Management." Banking includes the operations of FFB and FFIS and Wealth Management includes the operations of FFA. The financial position and operating results of the stand-alone holding company, FFI, are included under the caption "Other" in certain of the tables that follow, along with any consolidation elimination entries.
Overview and Recent Developments
The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government.Congress , the President, and theFederal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security ("CARES") Act was signed into law at the end ofMarch 2020 as a$2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition 27
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to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts could have a material impact on our operations and financial results. The following is a list of the impacts that are considered significant at this time. In response to the potential impact on liquidity resulting from the COVID-19 pandemic and to encourage banks to work with borrowers, FASB issued accounting guidelines that do not require forbearance or restructuring of loans completed as a result of the COVID-19 pandemic to be classified as troubled debt restructures. Upon theWorld Health Organization's pandemic declaration, we implemented our Pandemic Response Business Continuity Plan, under which we moved approximately 60% of our corporate employees to a remote working strategy and implemented protocols for the safety of our clients and employees. The transition to working remotely was achieved within a week and did not require any significant costs due to our existing technology platform in place. Additional costs associated with the safety protocols, such as additional cleaning and supplies has been offset by reduced costs for parking, meals, entertainment and travel. We have implemented alternative procedures, such as electronic signatures and approvals, to maintain effective internal controls over our financial reporting processes. Our financial position and results of operations through the first three quarters of 2020 have been impacted by increases in the allowance for credit losses as current economic projections, used in our CECL modeling, contemplate a significant adverse impact on the economy in the coming months resulting in higher estimates of credit losses. Due to the significant decrease in rates, our funding costs started to decline in March and are expected to decline over the course of the year if the current interest rate environment persists.
Potential impacts to our future financial position and results of operation include:
? Continuing adverse impacts of loan performance, including increased levels of
chargeoffs and the need for additional allowance for credit loss reserves.
Origination of loans under the Paycheck Protection Program ("the PPP")
administered by the
? 1%, are for a term of two years and we are paid a fee for originating these
loans, which we expect to average between 2.5% to 3%. While uncertain at this
time, we anticipate a significant portion of these loans will be repaid within
180 days from the time the SBA forgiveness process commences.
? Continuing low levels of funding costs due to the expected continuation of the
current low interest rate environment.
After funding of existing pipelines, expectations of significantly lower
? origination volumes due in part to the large credit spreads on certain lending
and investment security products.
The issuance of forbearance agreements to accommodate our borrowers. We have
received and granted requests for forbearance on certain commercial loans,
primarily to smaller businesses. However, we do require documentation of
financial difficulty before granting a request, and we do not expect a
? significant level of forbearance activity in our loans secured by multifamily
or single family real estate. The change in accounting guidelines that do not
require forbearance or restructuring of loans completed as a result of the
COVID 19 pandemic to be classified as troubled debt restructures will minimize
the financial impact of these accommodations.
? Pricing volatility of our AFS securities portfolio.
? Potential servicing advances required under our loan servicing agreements if
borrowers are granted forbearances or do not pay their loans on a timely basis.
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As previously mentioned, our funding costs have and are expected to continue to
decrease. We do not expect any significant impact to our liquidity or contingent
liquidity sources at this time. Due to available funding sources, we do not
expect reduced cash flows caused by forbearances, loans issued under the PPP,
servicing advances or increases in delinquencies to have a material adverse
impact on our liquidity position.
Our results of operations for the first nine months of 2020 include:
? Completed securitization of
gain, inclusive of associated mortgage servicing rights of
Total loans, including loans held for sale, increased
? months ended
which were partially offset by payoffs or scheduled payments of
and loan sales of
During the nine months ended
?
increased by 19% when compared to the nine months ended
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 56% and 75%, respectively, of the total
noninterest expense for Banking and Wealth Management in the nine months ended
September 30, 2020 .
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
2020:
Interest income $ 61,691 $ - $ - $ 61,691
Interest expense 10,024 - 50 10,074
Net interest income 51,667 - (50) 51,617
Provision for credit losses 1,548 - - 1,548
Noninterest income 17,976 6,020 (355) 23,641
Noninterest expense 24,949 5,166 480 30,595
Income (loss) before taxes on income $ 43,146 $ 854 $ (885) $ 43,115
2019:
Interest income $ 62,614 $ - $ - $ 62,614
Interest expense 19,328 - 154 19,482
Net interest income 43,286 - (154) 43,132
Provision for credit losses 172 - - 172
Noninterest income 8,173 6,161 (352) 13,982
Noninterest expense 26,397 5,423
874 32,694
Income (loss) before taxes on income
General. Our net income and income before taxes in the three months endedSeptember 30, 2020 were$30.9 million and$43.1 million , respectively, as compared to$17.4 million and$24.2 million , respectively, in the three months endedSeptember 30, 2019 . The$18.9 million increase in income before taxes was the result of a$18.3 million increase in income before taxes for Banking, a$0.1 million increase in income before taxes for Wealth Management and a$ 0.4 million decrease in corporate noninterest expenses. The increase in Banking was due to higher net interest income, higher 29
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noninterest income and lower noninterest expenses. The increase in Wealth Management was due to lower noninterest expenses, offset partially by lower noninterest income.
The following table shows key operating results for each of our business
segments for the nine months ended
Wealth
(dollars in thousands) Banking Management Other Total
2020:
Interest income $ 185,961 $ - $ - $ 185,961
Interest expense 40,899 - 130 41,029
Net interest income 145,062 - (130) 144,932
Provision for credit losses 6,979 - - 6,979
Noninterest income 26,270 18,139 (1,124) 43,285
Noninterest expense 76,235 16,735 1,434 94,404
Income (loss) before taxes on income $ 88,118 $ 1,404 $ (2,688) $ 86,834
2019:
Interest income $ 186,466 $ - $ - $ 186,466
Interest expense 60,132 - 268 60,400
Net interest income 126,334 - (268) 126,066
Provision for credit losses 1,943 - - 1,943
Noninterest income 14,638 17,874 (934) 31,578
Noninterest expense 78,785 16,508
2,628 97,921
Income (loss) before taxes on income
General. Our net income and income before taxes in the nine months endedSeptember 30, 2020 were$62.0 million and$86.8 million , respectively, as compared to$41.0 million and$57.8 million , respectively, in the first nine months of 2019. The$29.1 million increase in income before taxes was the result of a$27.9 million increase in income before taxes for Banking, and a$1.2 million decrease in corporate noninterest expenses. The increase in Banking was due to higher net interest income, higher noninterest income and lower noninterest expenses, partially offset by a higher provision for credit losses. 30 Table of Contents
Net Interest Income. The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net interest margin:
Quarter Ended September 30:
2020 2019
Average Average Average Average
(dollars in thousands) Balances Interest Yield /Rate Balances Interest Yield /Rate
Interest-earning assets:
Loans $ 5,644,646 $ 55,231 3.91 % $ 5,282,338 $ 56,483 4.27 %
Securities 840,593 6,107 2.91 % 616,424 5,349 3.47 %FHLB stock, fed funds, and deposits 329,311 353 0.43 % 86,839 782
3.57 %
Total interest-earning assets 6,814,550 61,691 3.62 % 5,985,601 62,614 4.18 %
Noninterest-earning assets:
Nonperforming assets 16,506 18,001
Other 186,751 206,065
Total assets $ 7,017,807 $ 6,209,667
Interest-bearing liabilities:
Demand deposits $ 425,674 $ 369 0.35 % $ 370,681 $ 897 0.96 %
Money market and savings 1,805,284 3,071 0.68 % 1,194,714 3,946 1.31 %
Certificates of deposit 1,538,377 4,548 1.18 % 1,988,265 11,832 2.36 %
Total interest-bearing deposits 3,769,335 7,988 0.84 % 3,553,660 16,675
1.86 %
Borrowings 698,860 2,086 1.19 % 486,807 2,807 2.29 %
Total interest-bearing liabilities 4,468,195 10,074 0.90 % 4,040,467 19,482
1.91 %
Noninterest-bearing liabilities:
Demand deposits 1,832,709 1,508,290
Other liabilities 75,555 72,424
Total liabilities 6,376,459 5,621,181
Shareholders' equity 641,348 588,486
Total liabilities and equity $ 7,017,807 $ 6,209,667
Net Interest Income $ 51,617 $ 43,132
Net Interest Rate Spread 2.72 % 2.27 %
Net Interest Margin 3.03 % 2.89 %
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Nine Months Ended September 30:
2020 2019
Average Average Average Average
(dollars in thousands) Balances Interest Yield /Rate Balances Interest Yield /Rate
Interest-earning assets:
Loans $ 5,401,754 $ 165,249 4.08 % $ 5,062,689 $ 166,828 4.40 %
Securities 919,712 19,643 2.85 % 732,262 17,700 3.22 %
FHLB stock, fed funds and deposits 182,558 1,069 0.78 % 61,403 1,938
4.22 %
Total interest-earning assets 6,504,024 185,961 3.81 % 5,856,354 186,466 4.25 %
Noninterest-earning assets:
Nonperforming assets 13,095 15,123
Other 180,735 193,176
Total assets $ 6,697,854 $ 6,064,653
Interest-bearing liabilities:
Demand deposits $ 386,249 1,466 0.51 % $ 333,838 2,392 0.96 %
Money market and savings 1,554,295 10,595 0.91 % 1,181,657 10,972 1.24 %
Certificates of deposit 1,815,252 21,487 1.58 % 2,004,574 35,055 2.34 %
Total interest-bearing deposits 3,755,796 33,548 1.19 % 3,520,069 48,419
1.84 %
Borrowings 730,763 7,481 1.37 % 640,267 11,981 2.50 %
Total interest-bearing liabilities 4,486,559 41,029 1.22 % 4,160,336 60,400
1.94 %
Noninterest-bearing liabilities:
Demand deposits 1,514,954 1,270,845
Other liabilities 67,887 60,639
Total liabilities 6,069,400 5,491,820
Stockholders' equity 628,454 572,833
Total liabilities and equity $ 6,697,854 $ 6,064,653
Net Interest Income $ 144,932 $ 126,066
Net Interest Rate Spread 2.59 % 2.31 %
Net Interest Margin 2.97 % 2.87 %
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 quarter and nine months endedSeptember 30, 2020 , as compared to the quarter and nine months endedSeptember 30, 2019 : Quarter Ended Nine Months Ended September 30, 2020 vs. 2019 September 30, 2020 vs. 2019 Increase (Decrease) due to Increase (Decrease) due to (dollars in thousands) Volume Rate Total Volume Rate Total Interest earned on: Loans$ 3,699 $ (4,951) $ (1,252) $ 10,790 $ (12,369) $ (1,579) Securities 1,727 (969) 758 4,165 (2,222) 1,943 FHLB stock, fed funds and deposits 711 (1,140) (429) 1,622 (2,491) (869) Total interest-earning assets 6,137 (7,060) (923)
16,577 (17,082) (505)
Interest paid on:
Demand deposits 109 (637) (528) 335 (1,262) (927)
Money market and savings 1,488 (2,363) (875) 2,973 (3,350) (377)
Certificates of deposit (2,313) (4,971) (7,284) (3,040) (10,527) (13,567)
Borrowings 924 (1,645) (721) 1,523 (6,023) (4,500)Total interest-bearing liabilities 208 (9,616) (9,408)
1,791 (21,162) (19,371)
Net interest income $ 5,929 $ 2,556 $ 8,485 $ 14,786 $ 4,080 $ 18,866
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Net interest income increased 20% from $43.1 million in the third quarter of
2019, to $51.6 million in the third quarter of 2020 due to a 14% increase in
interest-earning assets and an increase in the net interest rate spread. The net
interest rate spread increased from 2.27% in the third quarter of 2019 to 2.72%
in the third quarter of 2020 due to a decrease in the cost of interest-bearing
liabilities, from 1.91% in the third quarter of 2019, to 0.90% in the third
quarter of 2020, which was partially offset by a decrease in yield on
interest-earning assets, from 4.18% in the third quarter of 2019, to 3.62% in
the third quarter of 2020. The decrease in the cost of interest-bearing
liabilities was due to decreased costs of interest-bearing deposits, resulting
from decreases in deposit market rates, and decreased costs of borrowings, as
the average rate on FHLB advances and other overnight borrowings decreased from
2.29% in the third quarter of 2019 to 1.19% in the third quarter of 2020. The
yield on interest-earning assets decreased due to decreases in yields on loans
and securities and an increase in the proportion of lower yielding securities
and deposits to total interest-earning assets. The yield on loans decreased due
to accelerated payoffs of higher yielding loans during the last year and the
decrease in market rates, which resulted in lower rates on loans added to the
portfolio. The yield on securities decreased due to the purchase of $576 million
of securities in the third quarter of 2019 at current market rates, which were
lower than the overall yield realized in 2019. The average balance outstanding
under the holding company line of credit decreased from $10.5 million in the
third quarter of 2019 to $5.3 million in the third quarter of 2020, resulting in
a $0.1 million decrease in corporate interest expense.
Net interest income for Banking increased 15% from $126.3 million in the first
nine months of 2019, to $145.1 million in the first nine months of 2020 due
primarily to a 11% increase in interest-earning assets. On a consolidated basis
our net interest margin was 2.97% for the first nine months of 2020 as compared
to 2.87% in the first nine months of 2019. This increase was due to an increase
in the net interest rate spread, from 2.31% in the first nine months of 2019 to
2.59% in the first nine months of 2020. The increase in the net interest rate
spread was due to a decrease in the cost of interest-bearing liabilities, from
1.94% in the first nine months of 2019, to 1.22% in the first nine months of
2020, which was partially offset by a decrease in yield on total
interest-earning assets, from 4.25% in the first nine months of 2019, to 3.81%
in the first nine months of 2020. The decrease in the cost of interest-bearing
liabilities was due to decreased costs of interest-bearing deposits, resulting
from decreases in deposit market rates, and decreased costs of borrowings, as
the average rate on FHLB advances and other overnight borrowings decreased from
2.50% in the first nine months of 2019 to 1.37% in the first nine months of
2020. The yield on interest-earning assets decreased as new loans added to the
portfolio bear interest rates lower than the current portfolio rates, due to
decreases in market rates. The average balance outstanding under the holding
company line of credit decreased from $12.5 million in the first nine months of
2019 to $3.9 million in the first nine months of 2020.
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 at a level that we consider adequate in relation to
the estimated losses inherent in the loan portfolio. The provision for credit
losses 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
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. For
the three and nine months ended September 30, 2020 , we recorded provisions for
credit losses of $1.5 million and $7.0 million , respectively, as compared to
$0.2 million and $1.9 million , respectively, for the three and nine months ended
September 30, 2019 . Net chargeoffs against the ACL were $0.1 million and $0.6
million for the three and nine months ended September 30, 2020 , respectively, as
compared to net recoveries of $0.1 million and net chargeoffs of $0.4 for the
three and nine months ended September 30, 2019 . The $7.0 million provision for
credit losses in the first nine months of 2020 was due to an $8.0 million
increase in the allowance for credit losses for investments. With the current
interest rate environment and the increase we have experienced in prepayment
speeds in our interest-only strip securities, this allowance represents the
change in expected cash flows on these securities. These increases were
partially offset by a decrease in the allowance for credit losses for loans,
which was a result of a decrease in loans held for investment, as $513 million
of loan balances were transferred to the held for sale category in preparation
for a securitization next year, as well as a change in the economic factor we
utilize for the CECL calculation.
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
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capital market activities and insurance commissions. The following table
provides a breakdown of noninterest income for Banking for the three and nine
months ended
(dollars in thousands) 2020 2019
Quarter Ended September 30 :
Trust fees $ 1,504 $ 1,305
Loan related fees 713 1,857
Deposit charges 326 309
Gain on sale of loans 15,140 4,218
Consulting fees 99 95
Other 194 389
Total noninterest income $ 17,976 $ 8,173
Nine Months Ended September 30 :
Trust fees $ 4,200 $ 3,790
Loan related fees 5,104 4,454
Deposit charges 917 727
Gain on sale of loans 15,140 4,218
Consulting fees 299 300
Other 610 1,149
Total noninterest income $ 26,270 $ 14,638 Noninterest income for Banking in the three and nine months endedSeptember 30, 2020 were$9.8 million and$11.6 million higher than the three and nine months endedSeptember 30, 2019 , respectively, due to$15.1 million in gains on sales of loans in the third quarter of 2020, as compared to$4.2 million in the third quarter of 2019. Other loan fees decreased by$1.4 million in three months endedSeptember 30, 2020 when compared to the corresponding period in 2019, due to a$1.3 million valuation allowance on mortgage servicing rights, which was due to an increase in prepayment speeds. Noninterest income for Wealth Management includes fees charged to high net-worth clients for managing their assets and for providing financial planning consulting services. The following table provides the amounts of noninterest income for Wealth Management for the three and nine months endedSeptember 30, 2020 and 2019: (dollars in thousands) 2020 2019 Quarter EndedSeptember 30 : Noninterest income$ 6,020 $ 6,161 Nine Months EndedSeptember 30 : Noninterest income$ 18,139 $ 17,874 Noninterest income for Wealth Management decreased by$0.1 million in the third quarter of 2020 when compared to the corresponding period in 2019 due primarily to lower levels of billable AUM in the quarter. Noninterest income for Wealth Management increased by$0.3 million in the first nine months of 2020 when compared to the first nine months of 2019 due primarily to higher investment management fees in the first quarter of 2020. 34 Table of Contents
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) 2020 2019 2020 2019
Quarter Ended September 30 :
Compensation and benefits $ 13,696 $ 12,613 $ 3,897 $ 4,185
Occupancy and depreciation 5,414 4,814 620 578Professional services and marketing 1,595 1,173 544
474
Customer service costs 1,723 5,920 - -
Other expenses 2,521 1,877 105 186
Total noninterest expense $ 24,949 $ 26,397 $ 5,166 $ 5,423
Nine Months Ended September 30 :
Compensation and benefits $ 42,376 $ 39,774 $ 12,567 $ 12,549
Occupancy and depreciation 15,529 13,630 1,796 1,716
Professional services and marketing 4,287 3,519 1,961
1,702 Customer Service Costs 5,717 13,592 - - Other expenses 8,326 8,270 411 541 Total noninterest expense$ 76,235 $ 78,785 $ 16,735 $ 16,508 Noninterest expense in Banking decreased from$26.4 million in the third quarter of 2019 to$25.0 million in the third quarter of 2020 primarily due to lower customer service costs, which were partially offset by higher compensation and benefits, and occupancy and depreciation expenses. The$4.2 million decrease in customer service costs was due to decreases in the earnings credit rates paid on deposit balances, as interest rates have declined. Compensation and benefits were$1.1 million higher due to higher compensation costs and commission costs related to higher production volume during 2020. Occupancy and depreciation costs were$0.6 million higher due primarily to higher core processing costs related to higher volumes and services added during 2020. Noninterest expenses for Wealth Management decreased by$0.3 million in the third quarter of 2020, when compared to the third quarter of 2019, due to lower compensation and benefits expenses. Noninterest expense in Banking decreased from$78.8 million in the first nine months of 2019 to$76.2 million in the first nine months of 2020, due to a decrease in customer service costs, which were partially offset by increases in compensation and benefits, occupancy and depreciation, and professional services and marketing. Customer service costs for Banking decreased from$13.6 million in the first nine months of 2019 to$5.7 million in the first nine months of 2020 due to decreases in the earnings credit rates paid on the related deposit balances, as interest rates declined during the first nine months of 2020. Compensation and benefits for Banking increased$2.6 million during the first nine months of 2020 as compared to the first nine months of 2019, due to salary increases and an increase in the FTE in Banking, which increased to 431.1 in the first nine months of 2020, from 422.7 in the first nine months of 2019, as a result of the increased staffing related to additional personnel added to support the growth in loans and deposits. The$1.9 million increase in occupancy and depreciation for Banking in the first nine months of 2020 as compared to the first nine months of 2019 were due to higher core processing costs related to higher volumes and services added during 2019. Noninterest expenses for Wealth Management increased by$0.2 million in the first nine months of 2020, when compared to the first nine months of 2019, due to higher professional services and marketing expenses. Professional services and marketing expenses were$0.3 million higher due to costs incurred on a legal matter in the first quarter
of
2020.
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Financial Condition
The following table shows the financial position for each of our business segments, and of FFI and elimination entries used to arrive at our consolidated totals which are included in the column labeled Other and Eliminations, as of:
Wealth Other and
(dollars in thousands) Banking Management Eliminations Total
September 30, 2020 :
Cash and cash equivalents $ 282,502 $ 2,117 $ (1,636) $ 282,983 Securities AFS, net 882,932 - - 882,932 Loans held for sale 512,598 - - 512,598 Loans, net 4,591,140 - - 4,591,140 Premises and equipment 7,510 619 136 8,265 FHLB Stock 17,250 - - 17,250 Deferred taxes 7,208 186 (237) 7,157
Goodwill and intangibles 95,735 -
- 95,735
Other assets 68,481 332 15,065 83,878
Total assets $ 6,465,356 $ 3,254 $ 13,328 $ 6,481,938
Deposits $ 5,469,019 $ - $ (5,206) $ 5,463,813
Borrowings 260,000 - 9,000 269,000
Intercompany balances 10,426 (1,397) (9,029) -
Other liabilities 48,687 3,186 19,316 71,189
Shareholders' equity 677,224 1,465 (753) 677,936
Total liabilities and equity $ 6,465,356 $ 3,254 December 31, 2019 : Cash and cash equivalents$ 65,083 $ 5,054 $ (4,750) $ 65,387 Securities AFS, net 1,014,966 - - 1,014,966 Loans held for sale 503,036 - - 503,036 Loans, net 4,526,833 - - 4,526,833 Premises and equipment 7,561 658 136 8,355 FHLB Stock 21,519 - - 21,519 Deferred taxes 10,778 133 168 11,079
Goodwill and Intangibles 97,191 -
- 97,191
Other assets 51,229 445 14,396 66,070
Total assets $ 6,298,196 $ 6,290 $ 9,950 $ 6,314,436
Deposits $ 4,902,958 $ - $ (11,814) $ 4,891,144
Borrowings 733,000 - 10,000 743,000
Intercompany balances 3,111 469 (3,580) -
Other liabilities 48,159 3,400 14,864 66,423
Shareholders' equity 610,968 2,421 480 613,869
Total liabilities and equity $ 6,298,196 $ 6,290 $ 9,950 $ 6,314,436 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 nine months endedSeptember 30, 2020 , total assets increased by$168 million primarily due to an increase in cash and cash equivalents and loans, which was partially offset by a decrease in securities. During the nine months endedSeptember 30, 2020 , securities decreased by$124 million primarily due to payoffs of mortgage backed securities. Loans and loans held for sale increased$77 million in the nine months endedSeptember 30, 2020 as a result of$1.8 billion of originations, which were partially offset by payoffs or scheduled payments of$1.1 billion and loan sales of 36
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$553 million . The$573 million growth in deposits during the nine months of 2020 included increases in specialty deposits of$564 million , branch deposits of$353 million , and digital channel deposits of$329 million , which were partially offset by a$674 million decrease in wholesale deposits. Borrowings decreased by$474 million during the nine months endedSeptember 30, 2020 as cash provided by the increase in deposits, which exceeded the growth in our assets, was used to pay down our borrowings at the Bank. AtSeptember 30, 2020 andDecember 31, 2019 , the outstanding balance on the holding company line of credit was$9 million and$10 million , respectively. Cash and cash equivalents, certificates of deposit and securities. Cash and cash equivalents, which primarily consist of funds held at theFederal Reserve Bank or at correspondent banks, including fed funds, increased by$218 million during the nine months endedSeptember 30, 2020 . 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
September 30, 2020 :
Agency mortgage-backed securities $ 776,956 $ 21,237 $ - $ - $ 798,193
Beneficial interest - FHLMC
securitization 32,577 286 - (8,049) 24,814
Corporate bonds 57,000 1,321 - - 58,321
Other 1,505 99 - - 1,604
Total $ 868,038 $ 22,943 $ - $ (8,049) $ 882,932
December 31, 2019:
Agency mortgage-backed securities $ 905,949 $ 9,174 $ (146) $ - $ 914,977
Beneficial interest - FHLMC
securitization 47,586 1,801 (6,681) - 42,706
Corporate bonds 54,000 1,834 - - 55,834
Other 1,386 63 - - 1,449
Total $ 1,008,921 $ 12,872 $ (6,827) $ - $ 1,014,966
The scheduled maturities of securities
Less than 1 Through 5 Through After(dollars in thousands) 1 Year 5 years 10 Years 10
Years Total Amortized Cost: Corporate bonds $ - $ -$ 57,000 $ -$ 57,000 Other 500 - 1,006 - 1,506 Total$ 500 $ -$ 58,006 $ -$ 58,506
Weighted average yield 1.76 % - % 5.35 % - % 5.32 % Estimated Fair Value: Corporate bonds $ - $ -$ 58,322 $ -$ 58,322 Other 505 - 1,100 - 1,605 Total$ 505 $ -$ 59,422 $ -$ 59,927 Agency mortgage-backed securities and beneficial interests in FHLMC securitizations are excluded from the above table because such securities are not due at a single maturity date. The weighted average yield of the agency mortgage-backed securities and beneficial interests as ofSeptember 30, 2020 was 2.46%. 37 Table of Contents
Loans. The following table sets forth our loans, by loan category, as of:
September 30, December 31,
(dollars in thousands) 2020 2019
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily $ 2,084,175 $ 2,143,919
Single family 818,436 871,181
Total real estate loans secured by residential properties 2,902,611 3,015,100
Commercial properties 770,964 834,042
Land 57,722 70,257
Total real estate loans 3,731,297 3,919,399
Commercial and industrial loans 858,744 600,213
Consumer loans 18,399 16,273
Total loans 4,608,440 4,535,885
Premiums, discounts and deferred fees and expenses 6,883 11,748
Total $ 4,615,323 $ 4,547,633 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:
September 30, 2020 December 31, 2019
Weighted Weighted
(dollars in thousands) Amount Average Rate Amount Average Rate
Demand deposits:
Noninterest-bearing $ 1,890,028 - $ 1,192,481 -
Interest-bearing 396,938 0.255 % 386,276 0.635 %
Money market and savings 1,922,264 0.634 % 1,334,736 1.355 %
Certificates of deposits 1,254,583 0.902 % 1,977,651 1.971 %
Total $ 5,463,813 0.449 % $ 4,891,144 1.217 %
During the first nine months of 2020, our deposit rates have moved in a manner
consistent with overall deposit market rates. The weighted average rate of our
interest-bearing deposits decreased from 1.61% at December 31, 2019 to 0.69% at
September 30, 2020 due to decreased costs of interest-bearing deposits, while
the weighted average interest rates of both interest-bearing and
noninterest-bearing deposits have decreased from 1.22% at December 31, 2019 to
0.45% at September 30, 2020 . 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 $ 249,794
Over 3 months through 6 months 216,798
Over 6 months through 12 months 163,605
Over 12 months 17,626
Total $ 647,823 From time to time, the Bank will utilize brokered deposits as a source of
funding. As of
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Borrowings. AtSeptember 30, 2020 , our borrowings consisted of$250 million in FHLB term advances at the Bank,$10 million in FHLB zero interest advances, and$9 million of borrowings under a holding company line of credit. AtDecember 31, 2019 , our borrowings consisted of$233 million of overnight FHLB advances at the Bank, a$500 million FHLB term advance at the Bank, and$10 million of borrowings under a holding company line of credit. The$250 million FHLB term advance outstanding atSeptember 30, 2020 matures inMarch 2021 and bears an interest rate of 0.47%. Because FFB generally utilizes overnight borrowings, the balance of outstanding borrowings may fluctuate on a daily basis. The average balance of FHLB advances outstanding during the nine months endedSeptember 30, 2020 was$727 million , as compared to$640 million for the nine months endedSeptember 30, 2019 . The weighted average interest rate on these borrowings was 1.35% for the nine months endedSeptember 30, 2020 as compared to 2.50% for the nine months endedSeptember 30, 2019 . The maximum amount of borrowings at the Bank outstanding at any month-end during the nine months endedSeptember 30, 2020 and during all of 2019 was$865 million and$956 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 TotalSeptember 30, 2020 : Real estate loans: Residential properties $ - $ 24$ 1,922 $ 12,532 $ 14,478$ 2,888,133 $ 2,902,611 Commercial properties 722 215 - 1,738 2,675 768,289 770,964 Land 411 - - - 411 57,311 57,722
Commercial and industrial loans 442 1,038 481
6,306 8,267 850,477 858,744
Consumer loans - - - 16 16 18,383 18,399
Total $ 1,575 $ 1,277 $ 2,403 $ 20,592 $ 25,847 $ 4,582,593 $ 4,608,440
Percentage of total loans 0.03 % 0.03 % 0.05 % 0.45 % 0.56 %
December 31, 2019:
Real estate loans:
Residential properties $ 89 $ 13 $ - $ 1,743 $ 1,845 $ 3,013,255 $ 3,015,100
Commercial properties 7,586 - 403 2,410 10,399 823,643 834,042
Land - - - - - 70,257 70,257Commercial and industrial loans 695 2,007 -
8,714 11,416 588,797 600,213
Consumer loans 22 3 - - 25 16,248 16,273
Total $ 8,392 $ 2,023 $ 403 $ 12,867 $ 23,685 $ 4,512,200 $ 4,535,885
Percentage of total loans 0.19 % 0.04 % 0.01 % 0.28 % 0.52 %
The following table presents the composition of TDRs by accrual and nonaccrual
status as of:
September 30, 2020 December 31, 2019
(dollars in thousands) Accrual Nonaccrual Total Accrual Nonaccrual Total
Residential real estate loans $ 1,200 $ - $ 1,200 $ 1,200 $ - $ 1,200
Commercial real estate loans 1,127 1,303 2,430 1,188 2,166 3,354
Commercial and industrial loans 1,014 3,439 4,453
557 2,972 3,529
Total $ 3,341 $ 4,742 $ 8,083 $ 2,945 $ 5,138 $ 8,083 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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The following is a breakdown of our loan portfolio by the risk category of loans
as of:
Loans Individually
(dollars in thousands) Pass Special Mention Substandard Evaluated Total
September 30, 2020:
Real estate loans:
Residential properties $ 2,887,890 $ 990 $ 17 $ 13,714 $ 2,902,611
Commercial properties 740,035 12,840 6,216 11,873 770,964
Land 57,311 411 - - 57,722Commercial and industrial loans 839,377 8,260
3,787 7,320 858,744
Consumer loans 18,383 - - 16 18,399
Total $ 4,542,996 $ 22,501 $ 10,020 $ 32,923 $ 4,608,440
December 31, 2019:
Real estate loans:
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 - 70,257Commercial 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 Credit Losses. The following table summarizes the activity in our ACL related to loans for the periods indicated:
Beginning Adoption of Provision for Ending
(dollars in thousands) Balance ASC 326 Credit Losses Charge-offs Recoveries Balance
Quarter ended September 30, 2020 :
Real estate loans:
Residential properties $ 6,756 $ - $ (3,791) $ - $ - $ 2,965
Commercial properties 9,311 - 336 - - 9,647
Land 3,368 - (2,211) - - 1,157Commercial and industrial loans 8,488 -
1,831 (338) 222 10,203
Consumer loans 206 - 5 - - 211
Total $ 28,129 $ - $ (3,830) $ (338) $ 222 $ 24,183
Nine months ended September 30, 2020 :
Real estate loans:
Residential properties $ 8,423 $ (363) $ (5,095) $ - $ - $ 2,965
Commercial properties 4,166 (3,760) 9,241 - - 9,647
Land 573 (92) 676 - - 1,157Commercial and industrial loans 7,448 -
3,362 (1,393) 786 10,203
Consumer loans 190 - 21 - - 211
Total $ 20,800 $ (4,215) $ 8,205 $ (1,393) $ 786 $ 24,183
Year ended December 31, 2019 :
Real estate loans:
Residential properties $ 9,216 $ - $ (793) $ - $ - $ 8,423
Commercial properties 4,547 - (381) - - 4,166
Land 391 - 182 - - 573Commercial and industrial loans 4,628 -
3,653 (2,687) 1,854 7,448
Consumer loans 218 - (24) (5) 1 190
Total $ 19,000 $ - $ 2,637 $ (2,692) $ 1,855 $ 20,800
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Including PCD loans, our ACL related to loans represented 0.52% and 0.49% of
total loans outstanding as of
The amount of the ACL 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 credit 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 credit losses are based on our estimate of losses in our loan portfolio. In estimating such losses, we use economic and loss migration models that are based on bank regulatory guidelines and industry standards, and our historical charge-off experience and loan delinquency rates, local and national economic conditions, a borrower's ability to repay its borrowings, and the value of any property collateralizing the loan, as well as a number of subjective factors. However, these determinations involve judgments about changes and trends in current economic conditions and other events that can affect the ability of borrowers to meet their loan obligations to us and a weighting among the quantitative and qualitative factors we consider in determining the sufficiency of the ACL. Moreover, the duration and anticipated effects of prevailing economic conditions or trends can be uncertain and can be affected by a number of risks and circumstances that are outside of our control. If changes in economic or market conditions or unexpected subsequent events were to occur, or if changes were made to bank regulatory guidelines or industry standards that are used to assess the sufficiency of the ACL, it could become necessary for us to incur additional, and possibly significant, charges to increase the ACL, which would have the effect of reducing our income. 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:
Purchased Unaccreted Credit
Evaluated for Impairment Credit Component
(dollars in thousands) Individually Collectively Deteriorated Total Other Loans
September 30, 2020:
Allowance for credit losses:
Real estate loans:
Residential properties $ 7 $ 2,954 $ 4 $ 2,965 $
Commercial properties 98 9,268 281 9,647
Land - 1,157 - 1,157Commercial and industrial loans 1,095 9,102
6 10,203
Consumer loans - 211 - 211
Total $ 1,200 $ 22,692 $ 291 $ 24,183 $
Loans:
Real estate loans:
Residential properties $ 13,714 $ 2,888,609 $ 288 $ 2,902,611 $
Commercial properties 11,873 753,578 5,513 770,964
Land - 57,722 - 57,722
Commercial and industrial loans 7,320 851,119 305 858,744
Consumer loans 16 18,383 - 18,399
Total $ 32,923 $ 4,569,411 $ 6,106 $ 4,608,440 $
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Allowance for Credit Losses Unaccreted Credit
Evaluated for Impairment Component
(dollars in thousands) Individually Collectively PCI Total Other Loans
December 31, 2019:
Allowance for credit losses:
Real estate loans:
Residential properties $ - $ 8,423 $ - $ 8,423 $ 1,013
Commercial properties 107 4,059 - 4,166 1,048
Land - 573 - 573 6Commercial and industrial loans 763 6,685
- 7,448 277
Consumer loans - 190 - 190 1
Total $ 870 $ 19,930 $ - $ 20,800 $ 2,345
Loans:
Real estate loans:
Residential properties $ 2,897 $ 3,012,203 $ - $ 3,015,100 $ 189,339
Commercial properties 6,689 824,026 3,327 834,042 201,370
Land - 69,476 781 70,257 28,660Commercial and industrial loans 9,316 590,489
408 600,213 24,143
Consumer loans - 16,273 - 16,273 253
Total $ 18,902 $ 4,512,467 $ 4,516 $ 4,535,885 $ 443,765
The column labeled "Unaccreted Credit Component Other Loans" represents the amount of unaccreted credit component discount for the other loans acquired in acquisitions, and the stated principal balance of the related loans. The discount is equal to 0.53% of the stated principal balance on these loans as ofDecember 31, 2019 . In addition to this unaccreted credit component discount, an additional$0.3 million of the ACL was provided for these loans as ofDecember 31, 2019 .
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$2.2 billion atSeptember 30, 2020 . Cash Flows Provided by Operating Activities. During the nine months endedSeptember 30, 2020 , operating activities provided net cash of$50 million , primarily due to net income of$62 million ,$7 million in provisions for credit losses, and a net decrease of$5 million in other liabilities, partially offset by a net increase of$5 million in other assets and$4 million in amortization of premiums on purchased loans. During the nine months endedSeptember 30, 2019 , operating activities provided net cash of$47 million , comprised primarily of our net income of$41 million . Cash Flows Used in Investing Activities. During the nine months endedSeptember 30, 2020 , investing activities provided net cash of$92 million , primarily from proceeds from sales of loans of$578 million and$197 million in cash received in principal collection and maturities of securities, offset partially by a$625 million net increase in loans and$61 million in securities purchases. During the nine months endedSeptember 30, 2019 , investing activities used net cash of$269 million , primarily to fund a$628 million net increase in loans and$577 million in securities purchases, offset partially 42
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by
Cash Flow Provided by Financing Activities. During the nine months endedSeptember 30, 2020 , financing activities provided net cash of$76 million , consisting primarily of a net increase of$573 million in deposits, offset partially by a$474 million decrease in FHLB advances,$9 million in dividends paid, and$11 million in the settlement of a swap transaction. During the nine months endedSeptember 30, 2019 , financing activities provided net cash of$423 million , consisting primarily of a net increase of$638 million in deposits, offset partially by a$203 million decrease in FHLB advances, and$20 million cash paid in the settlement of a swap transaction. 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. AtSeptember 30, 2020 andDecember 31, 2019 , the loan-to-deposit ratios at FFB were 94%, and 103%, 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 $ 37,739 Commitments to fund under existing loans, lines of credit 515,536 Commitments under standby letters of credit
16,305
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
September 30, 2020 , FFB was obligated on $283 million of letters of credit to
the FHLB which were being used as collateral for public fund deposits, including
$263 million of deposits from the State of California .
Capital Resources and Dividend Policy
The capital rules applicable 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 correct action regulations place a federally insured depository institution, such as FFB, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution's primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency. 43
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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
September 30, 2020 :
CET1 capital ratio $ 569,234 10.96 % $ 233,748 4.50 %
Tier 1 leverage ratio 569,234 8.21 % 277,495 4.00 %Tier 1 risk-based capital ratio 569,234 10.96 % 311,664 6.00 % Total risk-based capital ratio 592,879 11.41 % 415,553
8.00 %December 31, 2019 : CET1 capital ratio$ 513,083 10.65 %$ 216,782 4.50 % Tier 1 leverage ratio 513,083 8.25 % 248,798 4.00 %
Tier 1 risk-based capital ratio 513,083 10.65 % 289,043 6.00 % Total risk-based capital ratio 537,048 11.15 % 385,390
8.00 %
FFB
September 30, 2020 :
CET1 capital ratio $ 568,476 10.98 % $ 233,023 4.50 % $ 336,588 6.50 %
Tier 1 leverage ratio 568,476 8.21 % 276,824 4.00 % 346,030 5.00 %Tier 1 risk-based capital ratio 568,476 10.98 % 310,697 6.00 % 414,263 8.00 % Total risk-based capital ratio 592,121 11.43 % 414,263
8.00 % 517,828 10.00 % December 31, 2019: CET1 capital ratio$ 510,142 10.62 %$ 216,063 4.50 %$ 312,091 6.50 % Tier 1 leverage ratio 510,142 8.22 % 248,119 4.00 % 310,148 5.00 %
Tier 1 risk-based capital ratio 510,142 10.62 % 288,084 6.00 % 384,112 8.00 % Total risk-based capital ratio 534,107 11.12 % 384,112
8.00 % 480,140 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.
As of
As ofSeptember 30, 2020 , the amount of capital at FFB in excess of amounts required to be well capitalized for purposes of the prompt corrective action regulations was$232 million for the CET1 capital ratio,$222 million for the Tier 1 Leverage Ratio,$154 million for the Tier 1 risk-based capital ratio and$74 million for the Total risk-based capital ratio. The Company paid a quarterly cash dividend of$0.07 per common share in each of the first three quarters of 2020. 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, 2019 . 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$8.9 million in dividends ($0.20 per share) in
2019.
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We had no material commitments for capital expenditures as of
September 30, 2020 . 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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