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First Foundation Announces 2020 Second Quarter Financial Results

July 21, 2020 9:00 AM

IRVINE, Calif.--(BUSINESS WIRE)-- First Foundation Inc. (NASDAQ: FFWM), a financial services company with two wholly-owned operating subsidiaries, First Foundation Advisors (“FFA”) and First Foundation Bank (“FFB”), announced today its financial results for the three and six months ended June 30, 2020. As we present certain non-GAAP measures in this release, the reader should refer to the non-GAAP reconciliations set forth below under the section “Use of Non-GAAP Financial Measures.”

“Consistent with recent quarters, our second quarter results were very strong,” said Scott F. Kavanaugh, CEO. “I am so proud of our employees who have helped us safely keep all of our branch offices open and meet the needs of our clients through strong loan production and record deposit growth. Our wealth advisory and trust services also saw a return to near-peak levels of assets under management. While there are still some uncertainties regarding the overall economy, our solid business model positions us well to deliver the results we reported today. We are committed to promoting the safety of our employees and clients while remaining open to serve the financial needs of the community.”

Additionally, First Foundation announced today that its Board of Directors has approved the payment of a quarterly cash dividend of $0.07 per common share, payable on August 7, 2020 to common stockholders of record as of July 24, 2020.

Highlights

Financial Results:

Other Activity:

“Our credit quality remains strong, and even with the uncertainties in the economy, our non-performing assets continue to remain low at 22 bps,” said David DePillo, President. “The investments we have made in technology over the past few years are allowing us to serve our clients digitally while also enhancing employee productivity as evidenced by the improvement in our efficiency ratio to 53% for the quarter.”

Details

About First Foundation

First Foundation, (NASDAQ: FFWM), a financial institution founded in 1990, provides personal banking, business banking and private wealth management. The Company has offices in California, Nevada and Hawaii with headquarters in Irvine, California. For more information, please visit www.firstfoundationinc.com.

We have two business segments, “Banking” and “Investment Management and Wealth Planning” (“Wealth Management”). Banking includes the operations of FFB and First Foundation Insurance Services, 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.

Forward-Looking Statements

Statements in this news release, including statements in the Discussion of Changes in Results of Operations and Financial Position below, regarding our expectations and beliefs about our future financial performance and financial condition, dividends, as well as trends in our business and markets are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," "outlook," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." The forward-looking statements in this news release are based on current information and on assumptions that we make about future events and circumstances that are subject to a number of risks and uncertainties that are often difficult to predict and beyond our control. As a result of those risks and uncertainties, our actual financial results in the future could differ, possibly materially, from those expressed in or implied by the forward-looking statements contained in this news release and could cause us to make changes to our future plans. Those risks and uncertainties include, but are not limited to the risk of incurring loan losses, which is an inherent risk of the banking business; the negative impacts and disruptions resulting from the COVID-19 pandemic on our colleagues, clients, the communities we serve and the domestic and global economy, which may have an adverse effect on our business, financial position and results of operations; the risk that we will not be able to continue our internal growth rate; the risk that we will not be able to access the securitization market on favorable terms or at all; changes in general economic conditions, either nationally or locally in the areas in which we conduct or will conduct our business; risks associated with the Federal Reserve Board taking actions with respect to interest rates, which could adversely affect our interest income and interest rate margins and, therefore, our future operating results; the risk that the performance of our investment management business or of the equity and bond markets could lead clients to move their funds from or close their investment accounts with us, which would reduce our assets under management and adversely affect our operating results; the risk that we may be unable or that our board of directors may determine that it is inadvisable to pay future dividends; risks associated with changes in income tax laws and regulations; and risks associated with seeking new client relationships and maintaining existing client relationships. Additional information regarding these and other risks and uncertainties to which our business and future financial performance are subject is contained in our 2019 Annual Report on Form 10-K for the fiscal year ended December 31, 2019 that we filed with the SEC on March 2, 2020, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 that we filed with the SEC on May 8, 2020, and other documents we file with the SEC from time to time. We urge readers of this news release to review those reports and other documents we file with the SEC from time to time. Also, our actual financial results in the future may differ from those currently expected due to additional risks and uncertainties of which we are not currently aware or which we do not currently view as, but in the future may become, material to our business or operating results. Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this news release, which speak only as of today's date, or to make predictions based solely on historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this news release or in the above-referenced reports, whether as a result of new information, future events or otherwise, except as may be required by law or NASDAQ rules.

FIRST FOUNDATION INC.

CONSOLIDATED BALANCE SHEETS - Unaudited

(in thousands, except share and per share amounts)

June 30,

December 31,

2020

2019

ASSETS

Cash and cash equivalents

$

414,179

$

65,387

Securities available-for-sale (“AFS”)

863,778

1,014,966

Loans held for sale

527,970

503,036

Loans, net of deferred fees

5,136,812

4,547,633

Allowance for credit losses (“ACL”)

(30,500)

(20,800)

Net loans

5,106,312

4,526,833

Investment in FHLB stock

23,598

21,519

Deferred taxes

9,194

11,079

Premises and equipment, net

8,188

8,355

Goodwill and intangibles

96,181

97,191

Other assets

88,943

66,070

Total Assets

$

7,138,343

$

6,314,436

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:

Deposits

$

5,647,841

$

4,891,144

Borrowings

764,600

743,000

Accounts payable and other liabilities

87,181

66,423

Total Liabilities

6,499,622

5,700,567

Shareholders’ Equity

Common Stock, par value $.001: 70,000,000 shares authorized; 44,625,324 and 44,496,007 shares issued and outstanding at June 30, 2020 and December 31, 2019 respectively

45

45

Additional paid-in-capital

432,791

433,775

Retained earnings

200,582

175,773

Accumulated other comprehensive income, net of tax

5,303

4,276

Total Shareholders’ Equity

638,721

613,869

Total Liabilities and Shareholders’ Equity

$

7,138,343

$

6,314,436

FIRST FOUNDATION INC.

CONSOLIDATED INCOME STATEMENTS - Unaudited

(in thousands, except share and per share amounts)

For the Quarter Ended

For the Six Months Ended

June 30,

June 30,

2020

2019

2020

2019

Interest income:

Loans

$

55,134

$

56,510

$

110,018

$

110,345

Securities

6,539

6,186

13,536

12,351

FHLB Stock, fed funds sold and deposits

259

612

716

1,156

Total interest income

61,932

63,308

124,270

123,852

Interest expense:

Deposits

10,914

16,296

25,560

31,744

Borrowings

2,571

5,125

5,395

9,174

Total interest expense

13,485

21,421

30,955

40,918

Net interest income

48,447

41,887

93,315

82,934

Provision for credit losses

1,367

1,231

5,431

1,771

Net interest income after provision for credit losses

47,080

40,656

87,884

81,163

Noninterest income:

Asset management, consulting and other fees

6,733

7,136

14,495

13,930

Other income

2,236

1,995

5,149

3,666

Total noninterest income

8,969

9,131

19,644

17,596

Noninterest expense:

Compensation and benefits

18,288

17,333

38,145

36,235

Occupancy and depreciation

5,855

5,167

11,367

10,035

Professional services and marketing costs

2,049

2,024

3,803

4,028

Customer service costs

1,622

4,283

3,994

7,672

Other expenses

3,123

3,475

6,500

7,257

Total noninterest expense

30,937

32,282

63,809

65,227

Income before taxes on income

25,112

17,505

43,719

33,532

Taxes on income

7,258

5,095

12,654

9,863

Net income

$

17,854

$

12,410

$

31,065

$

23,669

Net income per share:

Basic

$

0.40

$

0.28

$

0.70

$

0.53

Diluted

$

0.40

$

0.28

$

0.69

$

0.53

Shares used in computation:

Basic

44,620,716

44,625,673

44,645,189

44,583,503

Diluted

44,812,369

44,894,720

44,882,520

44,846,779

FIRST FOUNDATION INC.

SELECTED FINANCIAL INFORMATION - Unaudited

(in thousands, except share and per share amounts and percentages)

For the Quarter Ended

For the Six Months Ended

June 30,

June 30,

2020

2019

2020

2019

Selected Income Statement Data:

Net interest income

$

48,447

$

41,887

$

93,315

$

82,934

Provision for credit losses

1,367

1,231

5,431

1,771

Noninterest Income:

Asset management, consulting and other fees

6,733

7,136

14,495

13,930

Other

2,236

1,995

5,149

3,666

Noninterest expense

30,937

32,282

63,809

65,227

Income before taxes

25,112

17,505

43,719

33,532

Net income

17,854

12,410

31,065

23,669

Net income per share:

Basic

$

0.40

$

0.28

$

0.70

$

0.53

Diluted

0.40

0.28

0.69

0.53

Selected Performance Ratios:

Return on average assets - annualized

1.06

%

0.81

%

0.94

%

0.79

%

Return on average equity - annualized

11.3

%

8.6

%

9.9

%

8.3

%

Return on average tangible equity – annualized(1)

13.3

%

10.4

%

11.7

%

10.1

%

Net yield on interest-earning assets

2.96

%

2.84

%

2.94

%

2.86

%

Efficiency ratio(2)

53.0

%

63.5

%

56.0

%

65.1

%

Noninterest income as a % of total revenues

15.6

%

17.9

%

17.4

%

17.5

%

Other Information:

Loan originations

$

701,090

$

493,572

$

1,364,258

$

893,433

Charge-offs (recoveries) / average loans - annualized

0.03

%

0.02

%

0.02

%

0.02

%

(1)

Tangible equity is a non-GAAP financial measure. See disclosures regarding “Use of Non-GAAP Financial Measures” included as a separate section in this press release.

(2)

Efficiency Ratio is a non-GAAP financial measure: See disclosures regarding “Use of Non-GAAP Financial Measures” included as a separate section in this press release.

FIRST FOUNDATION INC.

SELECTED FINANCIAL INFORMATION - Unaudited

(in thousands, except share and per share amounts and percentages)

June 30,

December 31,

2020

2019

Selected Balance Sheet Data:

Cash and cash equivalents

$

414,179

$

65,387

Loans held for sale

527,970

503,036

Loans, net of deferred fees

5,136,812

4,547,633

Allowance for credit losses

30,500

20,800

Total assets

7,138,343

6,314,436

Noninterest-bearing deposits

1,770,382

1,192,481

Interest-bearing deposits

3,877,460

3,698,663

Borrowings

764,600

743,000

Shareholders’ equity

638,721

613,869

Selected Capital Data:

Tangible common equity to tangible assets(3)

7.70

%

8.31

%

Tangible book value per share(3)

$

12.16

$

11.57

Shares outstanding at end of period

44,625,324

44,670,743

Other Information:

Assets under management (end of period)

$

4,292,252

$

4,438,252

Number of employees

493

485

Loan to deposit ratio

100.3

%

103.0

%

Nonperforming assets to total assets

0.22

%

0.20

%

Ratio of ACL to loans(4)

0.55

%

0.49

%

(3)

Tangible common equity and tangible book value are non-GAAP financial measures. See disclosures regarding “Use of Non-GAAP Financial Measures” included as a separate section in this press release.

(4)

This ratio excludes allowance for credit losses on investments.

FIRST FOUNDATION INC.

SEGMENT REPORTING - Unaudited

(in thousands)

For the Quarter Ended

For the Six Months Ended

June 30,

June 30,

2020

2019

2020

2019

Banking:

Interest income

$

61,932

$

63,308

$

124,270

$

123,852

Interest expense

13,435

21,322

30,875

40,804

Net interest income

48,497

41,986

93,395

83,048

Provision for credit losses

1,367

1,231

5,431

1,771

Noninterest income

3,635

3,471

8,294

6,465

Noninterest expense

25,042

25,801

51,286

52,388

Income before taxes on income

$

25,723

$

18,425

$

44,972

$

35,354

Wealth Management:

Noninterest income

$

5,631

$

5,982

$

12,119

$

11,713

Noninterest expense

5,404

5,567

11,569

11,085

Income before taxes on income

$

227

$

415

$

550

$

628

Other and Eliminations:

Interest income

$

—

$

—

$

—

$

—

Interest expense

50

99

80

114

Net interest income

(50)

(99)

(80)

(114)

Noninterest income

(297)

(322)

(769)

(582)

Noninterest expense

491

914

954

1,754

Income before taxes on income

$

(838)

$

(1,335)

$

(1,803)

$

(2,450)

FIRST FOUNDATION INC.

ROLLING INCOME STATEMENTS - Unaudited

(in thousands, except share and per share amounts)

For the Quarter Ended

June 30,

September 30,

December 31,

March 31,

June 30,

2019

2019

2019

2020

2020

Interest income:

Loans

$

56,510

$

56,483

$

54,123

$

54,884

$

55,134

Securities

6,186

5,349

7,304

6,997

6,539

FHLB Stock, fed funds sold and deposits

612

782

867

457

259

Total interest income

63,308

62,614

62,294

62,338

61,932

Interest expense:

Deposits

16,296

16,675

15,763

14,646

10,914

Borrowings

5,125

2,807

2,643

2,824

2,571

Total interest expense

21,421

19,482

18,406

17,470

13,485

Net interest income

41,887

43,132

43,888

44,868

48,447

Provision for credit losses

1,231

172

694

4,079

1,367

Net interest income after provision for credit losses

40,656

42,960

43,194

40,789

47,080

Noninterest income:

Asset management, consulting and other fees

7,136

7,304

7,424

7,762

6,733

Gain on sale of loans

—

4,218

—

—

—

Other income

1,995

2,460

2,774

2,913

2,236

Total noninterest income

9,131

13,982

10,198

10,675

8,969

Noninterest expense:

Compensation and benefits

17,333

17,167

16,531

19,857

18,288

Occupancy and depreciation

5,167

5,450

5,420

5,512

5,855

Professional services and marketing costs

2,024

1,745

1,644

1,754

2,049

Customer service costs

4,283

5,920

4,266

2,372

1,622

Other expenses

3,475

2,412

3,812

3,362

3,123

Total noninterest expense

32,282

32,694

31,673

32,857

30,937

Income before taxes on income

17,505

24,248

21,719

18,607

25,112

Taxes on income

5,095

6,892

6,505

5,396

7,258

Net income

$

12,410

$

17,356

$

15,214

$

13,211

$

17,854

Net income per share:

Basic

$

0.28

$

0.39

$

0.34

$

0.30

$

0.40

Diluted

$

0.28

$

0.39

$

0.34

$

0.29

$

0.40

Shares used in computation:

Basic

44,625,673

44,639,481

44,661,852

44,669,661

44,620,716

Diluted

44,894,720

44,935,308

45,014,092

44,952,669

44,812,369

FIRST FOUNDATION INC.

ROLLING SEGMENT REPORTING - Unaudited

(in thousands)

For the Quarter Ended

June 30,

September 30,

December 31,

March 31,

June 30,

2019

2019

2019

2020

2020

Banking:

Interest income

$

63,308

$

62,614

$

62,294

$

62,338

$

61,932

Interest expense

21,322

19,328

18,318

17,440

13,435

Net interest income

41,986

43,286

43,976

44,898

48,497

Provision for credit losses

1,231

172

694

4,064

1,367

Noninterest income

3,471

8,173

4,206

4,659

3,635

Noninterest expense

25,801

26,397

25,582

26,244

25,042

Income before taxes on income

$

18,425

$

24,890

$

21,906

$

19,249

$

25,723

Wealth Management:

Noninterest income

$

5,982

$

6,161

$

6,262

$

6,488

$

5,631

Noninterest expense

5,567

5,423

5,423

6,165

5,404

Income before taxes on income

$

415

$

738

$

839

$

323

$

227

Other and Eliminations:

Interest income

$

—

$

—

$

—

$

—

$

—

Interest expense

99

154

88

30

50

Net interest income

(99)

(154)

(88)

(30)

(50)

Noninterest income

(322)

(352)

(270)

(472)

(297)

Noninterest expense

914

874

668

463

491

Loss before taxes on income

$

(1,335)

$

(1,380)

$

(1,026)

$

(965)

$

(838)

FIRST FOUNDATION INC.

SELECTED INFORMATION: INTEREST MARGIN - Unaudited

(in thousands, except percentages)

For the Quarter Ended

For the Six Months Ended

June 30,

June 30,

2020

2019

2020

2019

Average Balances:

Loans

$

5,475,796

$

5,064,903

$

5,278,974

$

4,951,044

Securities

919,788

779,903

959,707

791,141

Total interest-earnings assets

6,550,312

5,892,960

6,347,055

5,790,660

Deposits: interest-bearing

3,791,997

3,500,824

3,748,952

3,502,995

Deposits: noninterest-bearing

1,442,333

1,175,707

1,354,331

1,150,155

Borrowings

810,844

798,609

746,890

718,269

Average Yield / Rate:

Loans

4.03

%

4.46

%

4.17

%

4.46

%

Securities

2.84

%

3.17

%

2.82

%

3.12

%

Total interest-earnings assets

3.78

%

4.30

%

3.92

%

4.28

%

Deposits (interest-bearing only)

1.16

%

1.87

%

1.37

%

1.83

%

Deposits (noninterest and interest-bearing)

0.84

%

1.40

%

1.01

%

1.38

%

Borrowings

1.28

%

2.57

%

1.45

%

2.58

%

Total interest-bearing liabilities

1.18

%

2.00

%

1.38

%

1.95

%

Net Interest Rate Spread

2.61

%

2.30

%

2.53

%

2.33

%

Net Yield on Interest-earning Assets

2.96

%

2.84

%

2.94

%

2.86

%

For the Quarter Ended

June 30,

September 30,

December 31,

March 31,

June 30,

2019

2019

2019

2020

2020

Average Balances:

Loans

$

5,064,903

$

5,282,338

$

4,942,708

$

5,082,152

$

5,475,796

Securities

779,903

616,424

1,023,715

999,625

919,788

Total interest-earnings assets

5,892,960

5,985,601

6,114,122

6,143,797

6,550,312

Deposits: interest-bearing

3,500,824

3,553,660

3,616,384

3,705,907

3,791,997

Deposits: noninterest-bearing

1,175,707

1,508,290

1,443,233

1,266,328

1,442,333

Borrowings

798,609

486,807

583,458

682,936

810,844

Average Yield / Rate:

Loans

4.46

%

4.27

%

4.37

%

4.32

%

4.03

%

Securities

3.17

%

3.47

%

2.85

%

2.80

%

2.84

%

Total interest-earnings assets

4.30

%

4.18

%

4.07

%

4.06

%

3.78

%

Deposits (interest-bearing only)

1.87

%

1.86

%

1.73

%

1.59

%

1.16

%

Deposits (noninterest and interest-bearing)

1.40

%

1.31

%

1.24

%

1.18

%

0.84

%

Borrowings

2.57

%

2.29

%

1.80

%

1.66

%

1.28

%

Total interest-bearing liabilities

2.00

%

1.91

%

1.74

%

1.60

%

1.18

%

Net Interest Rate Spread

2.30

%

2.27

%

2.33

%

2.46

%

2.61

%

Net Yield on Interest-earning Assets

2.84

%

2.89

%

2.88

%

2.92

%

2.96

%

FIRST FOUNDATION INC.

SELECTED INFORMATION: LOAN AND DEPOSIT BALANCES - Unaudited

(in thousands)

For the Quarter Ended

June 30,

September 30,

December 31,

March 31,

June 30,

2019

2019

2019

2020

2020

Loans

Outstanding principal balance:

Loans secured by real estate:

Residential properties:

Multifamily

$

2,179,750

$

1,941,624

$

2,143,919

$

2,369,081

$

2,556,332

Single Family

904,413

896,607

871,181

851,443

839,537

Subtotal

3,084,163

2,838,231

3,015,100

3,220,524

3,395,869

Commercial properties

897,303

871,225

834,042

793,182

774,939

Land and construction

62,990

71,110

70,257

68,101

65,094

Total real estate loans

4,044,456

3,780,566

3,919,399

4,081,807

4,235,902

Commercial and industry loans

558,532

566,390

600,213

696,596

875,464

Consumer loans

17,477

16,505

16,273

17,476

18,640

Total loans

4,620,465

4,363,461

4,535,885

4,795,879

5,130,006

Deferred fees and expenses

10,899

10,747

11,748

9,634

6,806

Total

$

4,631,364

$

4,374,208

$

4,547,633

$

4,805,513

$

5,136,812

Loans held for sale

$

622,130

$

501,860

$

503,036

$

520,721

$

527,970

Deposits

Demand deposits:

Noninterest-bearing

$

1,279,218

$

1,532,105

$

1,192,481

$

1,315,114

$

1,770,382

Interest-bearing

316,806

350,344

386,276

384,215

411,053

Money market and savings

1,166,734

1,316,899

1,334,736

1,380,903

1,643,871

Certificates of deposits

1,981,184

1,971,218

1,977,651

1,950,595

1,822,535

Total

$

4,743,942

$

5,170,566

$

4,891,144

$

5,030,827

$

5,647,841

Use of Non-GAAP Financial Measures

To supplement our unaudited condensed consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures (including, but not limited to, non-GAAP net income and non-GAAP financial ratios) of financial performance. These supplemental performance measures may vary from, and may not be comparable to, similarly titled measures by other companies in our industry. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirement.

We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures (as applicable), provide meaningful supplemental information regarding our performance by providing additional information used by management that is not otherwise required by GAAP or other applicable requirements. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate a comparison of our performance to prior periods. We believe these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. However, these non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, net income or other financial measures prepared in accordance with GAAP. In the information below, we have provided a reconciliation of, where applicable, the most comparable GAAP financial measures to the non-GAAP financial measures used in this press release, or a reconciliation of the non-GAAP calculation of the financial measure.

In this press release, we use certain non-GAAP financial ratios and measures that are not required by GAAP or exclude certain financial items from calculations that are otherwise required under GAAP, including:

Discussion of Changes in Results of Operations and Financial Position

Quarter Ended June 30, 2020 as Compared to Quarter Ended June 30, 2019

Our net income and income before taxes in the second quarter of 2020 were $ 17.9 million and $ 25.1 million, respectively, as compared to $12.4 million and $17.5 million, respectively, in the second quarter of 2019. The $7.6 million increase in income before taxes was the result of a $7.3 million increase in income before taxes for Banking, a $0.1 million decrease 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 noninterest income and lower noninterest expenses. The decrease in Wealth Management was due to lower noninterest income, offset partially by lower noninterest expenses.

Our effective tax rate for the second quarter of 2020 was 28.9% as compared to 29.1% for the second quarter of 2019 and as compared to our statutory tax rate of 29.0%.

Net interest income for Banking increased 16% from $42.0 million in the second quarter of 2019, to $48.5 million in the second quarter of 2020 due to an 11% increase in interest-earning assets and an increase in the net interest rate spread. The net interest rate spread increased from 2.30% in the second quarter of 2019 to 2.61% in the second quarter of 2020 due to a decrease in the cost of interest-bearing liabilities from 2.00% in the second quarter of 2019 to 1.18% in the second quarter of 2020, which was partially offset by a decrease in yield on interest-earning assets from 4.30% in the second quarter of 2019 to 3.78% in the second 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 increased from 2.54% in the second quarter of 2019 to 1.26% in the second quarter of 2020. The yield on interest-earning assets decreased from 4.30% in the second quarter of 2019 to 3.78% in the second quarter of 2020 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 $6.5 million in the second quarter of 2019 to $3.4 million in the second quarter of 2020, resulting in a $0.1 million decrease in corporate interest expense.

The provision for credit losses in the second quarter of 2020 was $ 1.4 million as compared to $1.2 million in the second quarter of 2019. The $1.4 million provision for credit losses in the second quarter of 2020 was due to the growth in loan balances and $0.4 million of net chargeoffs. The $1.2 million provision for credit losses in the second quarter of 2019 was due to the growth in loan balances and $0.2 million of net chargeoffs.

Noninterest income in Banking in the second quarter of 2020 was $0.2 million higher than the second quarter of 2019 due to loan fees, including prepayment and servicing fees. Noninterest income for Wealth Management decreased by $0.3 million in the second quarter of 2020 when compared to the corresponding period in 2019 due primarily to lower levels of AUM.

Noninterest expense in Banking decreased from $25.8 million in the second quarter of 2019 to $25.0 million in the second 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 $2.6 million decrease in customer service costs were due to decreases in the earnings credit rates paid on deposit balances, as interest rates have declined. Compensation and benefits were $1.0 million higher due to raises effective in the first quarter of 2020 and commission costs related to higher production volume during 2020. Occupancy and depreciation costs were $0.7 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 $0.2 million in the second quarter of 2020, when compared to the second quarter of 2019, due to lower compensation and benefits and professional services and marketing expenses. The $0.4 million decrease in corporate expenses was due primarily to lower professional services and marketing expenses.

Six Months Ended June 30, 2020 as Compared to Six Months Ended June 30, 2019

Our net income and income before taxes in the first six months of 2020 were $31.1 million and $43.7 million, respectively, as compared to $23.7 million and $33.5 million, respectively, in the first six months of 2019. The $10.2 million increase in income before taxes was the result of a $9.6 million increase in income before taxes for Banking, a $0.1 million decrease in income before taxes for Wealth Management, and a $0.8 million decrease in corporate noninterest expenses. The increase in Banking was due to higher net interest income, a lower provision for credit losses and higher noninterest income, which were partially offset by higher noninterest expenses. The decrease in Wealth Management was due to lower noninterest income.

Our effective tax rate for the six months of 2020 was 28.9% as compared to 29.4% for the first six months of 2019 and as compared to our statutory tax rate of 29.0%.

Net interest income for Banking increased 12% from $83.0 million in the first six months of 2019, to $93.4 million in the first six months of 2020 due primarily to a 10% increase in interest-earning assets. On a consolidated basis our net yield on interest earning assets was 2.94% for the first six months of 2020 as compared to 2.86% in the first six months of 2019. This increase was due to an increase in the net interest rate spread, from 2.33% in the first six months of 2019 to 2.53% in the first six months of 2020. The increase in the net interest rate spread was due to a decrease in the cost of interest-bearing liabilities, from 1.95% in the first six months of 2019, to 1.38% in the first six months of 2020, which was partially offset by a decrease in yield on total interest-earning assets, from 4.28% in the first six months of 2019, to 3.92% in the first six 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 2.56% in the first six months of 2019 to 1.44% in the first six 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 $3.8 million in the first six months of 2019 to $3.2 million in the first six months of 2020.

The $5.4 million provision for credit losses in the first six months of 2020 includes $2 million resulting from the computation of the provision for credit losses related to loans under CECL, as compared to what the computation would have been if CECL was not adopted, and a $1.8 million allowance taken in the first quarter of 2020 due to a change in expected cash flows of an interest only strip security. The $1.8 million provision for credit losses in the first six months of 2019 was due to growth in loan balances and $0.6 million of net chargeoffs.

Noninterest income in Banking in the first six months of 2020 was $1.8 million higher than the corresponding period in 2019 due a $1.8 increase in loan fees. Noninterest income for Wealth Management increased by $0.4 million in the first six months of 2020 when compared to the first six months of 2019 due primarily to higher investment management fees as a result of a corresponding increase in AUM.

Noninterest expense in Banking decreased from $52.4 million in the first six months of 2019 to $51.3 million in the first six months of 2020, due to a decrease in customer service costs, which were partially offset by increases in compensation and benefits and occupancy and depreciation. Customer service costs for Banking decreased from $7.7 million in the first six months of 2019 to $4.0 million in the first six months of 2020 due to decreases in the earnings credit rates paid on the related deposit balances, as interest rates declined during the first six months of 2020. Compensation and benefits for Banking increased $1.5 million during the first six months of 2020 as compared to the first six months of 2019 due to salary increases and an increase in the FTE in Banking, which increased to 431.1 in the first six months of 2020 from 422.8 in the first six months of 2019, as a result of the increased staffing related to additional personnel added to support the growth in loans and deposits. The $1.3 million increase in occupancy and depreciation for Banking in the first six months of 2020 as compared to the first six 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 $0.5 million in the first six months of 2020, when compared to the first six months of 2019, due to higher compensation and benefits and professional services and marketing expenses. Compensation and benefits were $0.3 million higher due to raises effective in the first quarter of 2020 and compensation paid on the higher levels of income. Professional services and marketing expenses were $0.2 million higher due to costs incurred on a legal matter. The $0.8 million decrease in corporate expenses was due primarily to lower legal expenses resulting from the recovery of legal costs on the settlement of a matter.

Quarter Ended June 30, 2020 as Compared to Quarter Ended March 31, 2020

Our net income and income before taxes in the second quarter of 2020 were $17.9 million and $25.1 million, respectively, as compared to $13.2 million and $18.6 million, respectively, in the first quarter of 2020. The $6.5 million increase in income before taxes was the result of a $6.5 million increase in income before taxes for Banking, a $0.1 million decrease in income before taxes for Wealth Management and a $0.1 million decrease in corporate expenses. The increase in Banking was due to higher net interest income and a lower provision for credit losses, which were partially offset by lower noninterest income.

Our effective tax rate for the second quarter of 2020 was 28.9% as compared to 29.0% for the first quarter of 2020 and as compared to our statutory tax rate of 29.0%.

Net interest income for Banking increased 8% from $44.9 million in the first quarter of 2020 to $48.5 million in the second quarter of 2020 due to a 23% decrease in interest earning liabilities. On a consolidated basis, the net yield on interest earning assets increased from 2.92% in the first quarter of 2020 to 2.96% in the second quarter of 2020 due to an increase in the net interest rate spread. The net interest rate spread increased from 2.46% in the first quarter of 2020 to 2.61% in the second quarter of 2020 due to a decrease in the cost of our interest-bearing liabilities. 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 decreases in our borrowing costs due to declines in the Fed Funds rates, which strongly influence our borrowing rates. The average balance outstanding under the holding company line of credit increased from $2.5 million in the first quarter of 2020 to $4.1 million in the second quarter of 2020.

The provision for credit losses in the second quarter of 2020 was $1.4 million as compared to $4.1 million in the first quarter of 2020. The $4.1 million provision for credit losses in the first quarter of 2020 includes $2 million resulting from the computation of the provision for credit losses under CECL as compared to what the computation would have been if CECL was not adopted, and a $1.8 million allowance taken in the first quarter of 2020 due to a change in expected cash flows of an interest only strip security. The $1.4 million provision for credit losses in the second quarter of 2020 was due to the growth in loan balances, $0.4 million of net chargeoffs, and $0.5 million of changes in expected cash flows of securities.

Noninterest income in Banking decreased from $4.7 million in the first quarter of 2020 to $3.6 million in the second quarter of 2020 due to due to lower trust fees and loan fees, including prepayment and servicing fees. Noninterest income for Wealth Management decreased by $0.9 million in the second quarter of 2020 when compared to the first quarter of 2020 due primarily to lower levels of fees earned on AUM.

Noninterest expense in Banking decreased from $26.2 million in the first quarter of 2020 to $25.0 million in the second quarter of 2020 due to lower compensation and benefits and customer service costs, which were partially offset by higher occupancy and depreciation costs. Compensation and benefits were $1.0 million lower in the second quarter of 2020 due to seasonal increases in costs associated with raises, employer taxes and employer contributions to retirement plans, and commission costs related to higher loan production volume in the first quarter of 2020. Customer service costs decreased by $0.8 million in the second quarter of 2020 when compared to the first quarter of 2020 due primarily to lower rates and lower balances of related deposits. Occupancy and depreciation expenses increased by $0.4 million in the second quarter of 2020 when compared to the first quarter of 2020 due primarily to higher core processing costs related to higher volumes and services. Noninterest expenses for wealth management decreased from $6.2 million in the first quarter of 2020 to $5.4 million in the second quarter of 2020 due to lower compensation and benefits costs. Compensation and benefits were $0.5 million lower in the second quarter of 2020 due to seasonal increases in costs associated with raises, employer taxes and employer contributions to retirement plans in the first quarter of 2020.

Changes in Financial Position

During the first six months of 2020, total assets increased by $824 million primarily due to an increase in loans, including loans held for sale which was partially offset by a decrease in securities. During the first six months of 2020, securities decreased by $151 million primarily due to payoffs of mortgage backed securities. Loans and loans held for sale increased $614 million in the first six months of 2020 as a result of $1.4 billion of originations, which were partially offset by payoffs or scheduled payments of $760 million. The $757 million growth in deposits during the first six months of 2020 included increases in branch deposits of $483 million and specialty deposits of $467 million, offset partially by a $193 million decrease in wholesale deposits. Borrowings increased by $22 million during the first six months of 2020 primarily to support the growth in our total assets. At June 30, 2020 and December 31, 2019, the outstanding balance on the holding company line of credit was $4.6 million and $10 million, respectively.

Our credit quality remains strong, as our ratio of nonperforming assets to total assets is at 0.22% at June 30, 2020. We recorded $0.4 million and $0.6 million of net loan chargeoffs in the first six months of 2020 and 2019, respectively. At June 30, 2020 and December 31, 2019, the ratio of the allowance for credit losses to loans, was 0.55% and 0.49%, respectively.

Kevin Thompson

Chief Financial Officer

First Foundation Inc.

949-202-4164

[email protected]

Source: First Foundation Inc.

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