Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-36461
FIRST FOUNDATION INC.
(Exact name of Registrant as specified in its charter)
Delaware
20-8639702
(State or other jurisdictionof incorporation or organization)
(I.R.S. EmployerIdentification Number)
200 Crescent Court, Suite 1400 Dallas, Texas
75201
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (469) 638-9636
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
FFWM
NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 3, 2022, the registrant had 56,514,168 shares of common stock, $0.001 par value per share, outstanding.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1.
Financial Statements
1
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
47
Item 4.
Controls and Procedures
48
Part II. Other Information
Item 1A
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6
Exhibits
49
SIGNATURES
S-1
(i)
PART I — FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 31,
December 31,
2022
2021
(unaudited)
ASSETS
Cash and cash equivalents
$
931,710
1,121,757
Securities available-for-sale ("AFS")
269,030
1,201,777
Securities held-to-maturity ("HTM")
920,408
—
Allowance for credit losses - investments
(10,743)
(10,399)
Net securities
1,178,695
1,191,378
Loans held for sale
501,424
501,436
Loans held for investment
7,397,464
6,906,728
Allowance for credit losses - loans
(32,822)
(33,776)
Net loans
7,364,642
6,872,952
Investment in FHLB stock
17,250
18,249
Deferred taxes
18,047
20,835
Premises and equipment, net
35,904
37,920
Real Estate Owned ("REO")
6,210
Goodwill and intangibles
223,239
222,125
Other assets
197,675
203,342
Total Assets
10,474,796
10,196,204
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits
8,957,518
8,811,960
Borrowings
325,969
210,127
Accounts payable and other liabilities
108,734
110,066
Total Liabilities
9,392,221
9,132,153
Shareholders’ Equity
57
56
Additional paid-in-capital
720,846
720,744
Retained earnings
365,604
340,976
Accumulated other comprehensive (loss) income
(3,932)
2,275
Total Shareholders’ Equity
1,082,575
1,064,051
Total Liabilities and Shareholders’ Equity
(See accompanying notes to the consolidated financial statements)
CONSOLIDATED INCOME STATEMENTS - UNAUDITED
Three Months Ended
Interest income:
Loans
72,027
53,531
Securities AFS
6,360
5,206
FHLB Stock, fed funds sold and interest-bearing deposits
757
401
Total interest income
79,144
59,138
Interest expense:
3,358
4,623
1,292
286
Total interest expense
4,650
4,909
Net interest income
74,494
54,229
Provision for credit losses
(792)
360
Net interest income after provision for credit losses
75,286
53,869
Noninterest income:
Asset management, consulting and other fees
10,197
8,349
Other income
5,230
3,559
Total noninterest income
15,427
11,908
Noninterest expense:
Compensation and benefits
29,821
21,526
Occupancy and depreciation
8,567
6,160
Professional services and marketing costs
3,417
2,122
Customer service costs
1,788
1,770
Other expenses
4,025
2,933
Total noninterest expense
47,618
34,511
Income before taxes on income
43,095
31,266
Taxes on income
12,259
8,911
Net income
30,836
22,355
Net income per share:
Basic
0.55
0.50
Diluted
Shares used in computation:
56,465,855
44,707,718
56,565,845
45,012,205
2
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY - UNAUDITED
(In thousands, except share amounts)
Additional
Accumulated Other
Number
Paid-in
Retained
Comprehensive
of Shares
Amount
Capital
Earnings
Income (Loss)
Total
Balance: December 31, 2020
44,667,650
45
433,941
247,638
14,087
695,711
Other comprehensive loss
(18)
Stock based compensation
995
Cash dividend
(4,023)
Issuance of common stock:
Exercise of options
47,000
354
Stock grants – vesting of restricted stock units
108,085
Stock repurchase
(40,580)
(944)
Balance: March 31, 2021
44,782,155
434,346
265,970
14,069
714,430
Balance: December 31, 2021
56,432,070
(6,207)
1,204
(6,208)
2,000
18
122,700
Repurchase of shares from restricted shares vesting
(42,602)
(1,120)
Balance: March 31, 2022
56,514,168
3
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME - UNAUDITED
(In thousands)
Three Months Ended March 31,
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities arising during the period
(7,731)
(25)
Other comprehensive income (loss) before tax
Income tax benefit (expense) related to items of other comprehensive income
1,524
7
Other comprehensive income (loss)
Total comprehensive income
24,629
22,337
4
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
For the Three Months Ended
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses - loans
(1,136)
(1,273)
Provision for credit losses - securities AFS
344
1,633
Stock–based compensation expense
Depreciation and amortization
974
823
Deferred tax benefit
3,431
1,669
Amortization of premium (discount) on securities
(351)
131
Amortization of core deposit intangible
509
432
Amortization of mortgage servicing rights - net
549
479
Valuation allowance on mortgage servicing rights - net
(201)
(37)
Increase in other assets
5,318
4,786
(Decrease) increase in accounts payable and other liabilities
(1,138)
626
Net cash provided by operating activities
40,339
32,619
Cash Flows from Investing Activities:
Net increase in loans
(490,869)
(321,271)
Purchase of premises and equipment
(1,222)
(628)
Disposals of premises and equipment
3,375
Recovery of allowance for credit losses
134
406
Purchases of securities AFS
(400)
Purchases of securities HTM
(83,008)
Maturities of securities AFS
7,965
53,418
Maturities of securities HTM
79,660
Proceeds from redemption of securities
3,000
Sale of FHLB and FRB stock, net
999
Net cash used in investing activities
(483,366)
(265,075)
Cash Flows from Financing Activities:
Increase in deposits
145,558
332,388
Net decrease in FHLB advances
(250,000)
Line of credit net change – borrowings, net
(18,500)
(7,000)
Net increase in subordinated debt
147,592
Net decrease in repurchase agreements
(13,250)
Gain on sale leaseback
(1,111)
Dividends paid
Proceeds from exercise of stock options
19
Repurchase of stock
Net cash provided by financing activities
252,980
70,775
Decrease in cash and cash equivalents
(190,047)
(161,681)
Cash and cash equivalents at beginning of year
629,707
Cash and cash equivalents at end of period
468,026
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes
5,209
Interest
3,893
6,221
Noncash transactions:
Transfer of loans to loans held for sale
8,195
Transfer of securities from available-for-sale to held-to-maturity
916,777
Chargeoffs against allowance for credit losses
145
214
Goodwill acquisition adjustment
1,623
5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2022 - UNAUDITED
NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements include First Foundation Inc. (“FFI”) and its wholly owned subsidiaries: First Foundation Advisors (“FFA”) and First Foundation Bank (“FFB” or the “Bank”) and the wholly owned subsidiaries of FFB, First Foundation Insurance Services (“FFIS”), Blue Moon Management, LLC, and First Foundation Public Finance (“FFPF”) (collectively referred to as the “Company”). FFI also has two inactive wholly owned subsidiaries, First Foundation Consulting and First Foundation Advisors, LLC. All intercompany balances and transactions have been eliminated in consolidation. The results of operations reflect any interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. The results for the 2022 interim periods are not necessarily indicative of the results expected for the full year.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.
The accompanying unaudited consolidated financial statements include all information and footnotes required for interim financial statement presentation. These financial statements assume that readers have read the most recent Annual Report on Form 10-K which contains the latest available audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2021.
Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 2022 presentation.
New Accounting Pronouncements
In March 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures”. ASU 2022-02 eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors and provides amendments to ASU 2016-13, Financial Instruments – Credit Losses on Financial Instruments by enhancing existing disclosure requirements and introduces new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU 2022-02 also requires that entities disclose current-period gross write-offs by year of origination for financing receivables within the scope of Subtopic 326-20. For entities that have adopted the amendments in Update 2016-13, the amendments in this ASU are effective for fiscal years beginning after December 15, 2022. The adoption of ASU 2022-02 is not expected to have a significant impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. ASU 2020-04 provides optional guidance for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU are effective as of March 12, 2020 through December 31, 2022. The adoption of ASU 2020-04 is not expected to have a significant impact on the Company’s consolidated financial statements.
6
NOTE 2: ACQUISITIONS
On December 17, 2021, the Company completed the acquisition of TGR Financial, Inc. (“TGRF”) and its wholly owned subsidiary, First Florida Integrity Bank, through a merger of TGRF with and into FFI followed immediately by the merger of First Florida Integrity Bank with and into FFB, in exchange for 11,352,232 shares of FFI common stock with a fair value of $24.93 per share.
The acquisition was accounted for under the purchase method of accounting. The acquired assets, assumed liabilities and identifiable intangible assets are recorded at their respective acquisition date fair values. Goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining TGRF into FFI. None of the goodwill recognized is expected to be deductible for income tax purposes.
The following table represents the assets acquired and liabilities assumed of TGRF as of December 17, 2021 and the fair value adjustments and amounts recorded by the Company in 2021 under the acquisition method of accounting:
TGRF Book
Fair Value
(dollars in thousands)
Value
Adjustments
Assets Acquired:
1,145,335
1,145,340
147,739
109
147,848
Securities held-to-maturity
71,790
2,115
73,905
Loans, net of deferred fees
1,045,193
(5,387)
1,039,806
4,510
34,199
(4,180)
30,019
181
129,850
130,031
Bank owned life insurance
46,163
3,414
738
4,152
13,562
(298)
13,264
Total assets acquired
2,512,086
122,952
2,635,038
Liabilities Assumed:
2,170,676
313
2,170,989
177,114
1,929
179,043
7,386
182
7,568
Total liabilities assumed
2,355,176
2,424
2,357,600
Excess of assets acquired over liabilities assumed
156,910
120,528
277,438
Consideration:
Stock issued
283,011
Cash paid
10
Total consideration (1)
283,021
In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. The most significant category of assets for which this procedure was used was that of acquired loans. The excess of expected cash
flows above the fair value (Level 3 inputs) of the majority of loans will be accreted to interest income over the remaining lives of the loans in accordance with Accounting Standards Codification (“ASC”) 310-20. The fair values are estimates and are subject to adjustment for up to one year after the merger date.
Certain loans, for which specific credit-related deterioration since origination was identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on these purchased credit deteriorated (“PCD”) loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on nonaccrual status and have no accretable yield. All PCD loans were classified as accruing loans as of and subsequent to the acquisition date.
In accordance with generally accepted accounting principles there was no carryover of the allowance for credit losses that had been previously recorded by TGRF.
The Company recorded a deferred income tax asset of $4.2 million related to the acquisition of TGRF, including operating loss carry-forwards of $0.1 million that are subject to limitation under Section 382 of the Internal Revenue Code.
The fair value of savings and transaction deposit accounts acquired from TGRF were assumed to approximate their carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit accounts were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates (Level 2 inputs). The portfolio was segregated into pools based on remaining maturity. For each pool, the projected cash flows from maturing certificates were then calculated based on contractual rates and prevailing market rates. The valuation adjustment for each pool is equal to the present value of the difference of these two cash flows, discounted at the assumed market rate for a certificate with a corresponding maturity. This valuation adjustment will be accreted to reduce interest expense over the remaining maturities of the respective pools. The Company also recorded a core deposit intangible, which represents the value of the deposit relationships acquired from TGRF, of $3.3 million. The core deposit intangible will be amortized over a period of 10 years.
8
Pro Forma Information (unaudited)
The following table presents unaudited pro forma information for the three months ended March 31, 2021, as if the acquisition of TGRF had occurred on January 1, 2021, after giving effect to certain adjustments. The unaudited pro forma information for this period includes adjustments for interest income on loans acquired, amortization of intangibles arising from the transaction, adjustments for interest expense on deposits acquired, and the related income tax effects of all these items and the income tax costs or benefits derived from the income or loss before taxes of TGRF. The net effect of these pro forma adjustments was an increase of $0.5 million in net income for the three months ended March 31, 2021. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed dates.
Three Months
Ended March 31,
68,481
5,943
Noninterest income
13,012
Noninterest expenses
58,190
Income before taxes
17,360
4,645
12,715
0.23
NOTE 3: FAIR VALUE MEASUREMENTS
Assets Measured at Fair Value on a Recurring Basis
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
9
The following tables show the recorded amounts of assets and liabilities measured at fair value on a recurring basis as of:
Fair Value Measurement Level
Level 1
Level 2
Level 3
March 31, 2022:
Investment securities available for sale:
Collateralized mortgage obligations
11,184
Agency mortgage-backed securities
10,078
Municipal bonds
48,514
SBA securities
25,672
Beneficial interests in FHLMC securitization
10,222
Corporate bonds
151,763
U.S. Treasury
854
Investment in equity securities
8,569
Total assets at fair value on a recurring basis
266,856
247,211
18,791
December 31, 2021:
13,825
928,989
52,146
27,972
11,580
156,376
490
16,025
1,207,403
16,515
1,179,308
The decrease in Level 3 assets from December 31, 2021 was due to securitization paydowns and to $0.3 million in provisions for credit losses in the first three months of 2022.
Assets Measured at Fair Value on a Nonrecurring Basis
From time to time, we may be required to measure other assets at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
Loans. Loans measured at fair value on a nonrecurring basis include collateral dependent loans held for investment. The specific reserves for these loans are based on collateral value, net of estimated disposition costs and other identified quantitative inputs. Collateral value is determined based on independent third-party appraisals or internally-developed discounted cash flow analyses. Internal discounted cash flow analyses are also utilized to estimate the fair value of these loans, which considers internally-developed, unobservable inputs such as discount rates, default rates, and loss severity. When the fair value of the collateral is based on an observable market price or a current appraised value, we measure the impaired loan at nonrecurring Level 2. When an appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price or a discounted cash flow has been used to determine the fair value, we measure the impaired loan at nonrecurring Level 3. The total collateral dependent impaired Level 3 loans were $5.6 million and $2.8 million at March 31, 2022 and
December 31, 2021, respectively. There were no specific reserves related to these loans at March 31, 2022 and December 31, 2021.
Real Estate Owned. The fair value of real estate owned is based on external appraised values that include adjustments for estimated selling costs and assumptions of market conditions that are not directly observable, resulting in a Level 3 classification.
Mortgage Servicing Rights. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income, resulting in a Level 3 classification. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Significant assumptions in the valuation of these Level 3 mortgage servicing rights as of March 31, 2022 included prepayment rates ranging from 20% to 30% and a discount rate ranging from 1.43% to 10%.
Fair Value of Financial Instruments
FASB ASC 825-10, “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate such value. The methodologies for estimating the fair value of financial assets and financial liabilities measured at fair value on a recurring and non-recurring basis are discussed above. The estimated fair value amounts have been determined by management using available market information and appropriate valuation methodologies and are based on the exit price notion set forth by ASU 2016-01. In cases where quoted market prices are not available, fair values are based on estimates using present value or other market value techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The aggregate fair value amounts presented below do not represent the underlying value of the Company.
Fair value estimates are made at a discrete point in time based on relevant market information and other information about the financial instruments. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based in large part on judgments we make primarily regarding current economic conditions, risk characteristics of various financial instruments, prepayment rates, and future expected loss experience. These estimates are subjective in nature and invariably involve some inherent uncertainties. Additionally, unexpected changes in events or circumstances can occur that could require us to make changes to our assumptions and which, in turn, could significantly affect and require us to make changes to our previous estimates of fair value.
In addition, the fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of existing and anticipated future customer relationships and the value of assets and liabilities that are not considered financial instruments, such as premises and equipment and other real estate owned.
The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash and Cash Equivalents. The fair value of cash and cash equivalents approximates its carrying value.
Investment Securities. Investment securities are measured at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the securities are classified as Level 3
11
and reliance is placed upon internally developed models, and management judgment and evaluation for valuation. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include beneficial interests in FHLMC securitizations. Significant assumptions in the valuation of these Level 3 securities as of March 31, 2022 and December 31, 2021 included prepayment rates ranging from 30% to 35% and discount rates ranging from 7.11% to 12.20%.
Investment in Equity Securities. The fair value on investment in equity securities is the carrying amount and is evaluated for impairment on an annual basis.
Federal Home Loan Bank Stock. The Bank is a member of the Federal Home Loan Bank (the “FHLB”). As a member, we are required to own stock of the FHLB, the amount of which is based primarily on the level of our borrowings from this institution. The fair value of the stock is equal to the carrying amount, is classified as restricted securities and is periodically evaluated for impairment based on our assessment of the ultimate recoverability of our investments in that stock. Any cash or stock dividends paid to us on such stock are reported as income.
Loans Held For Sale. The fair value of loans held for sale is determined using secondary market pricing.
Loans Held for Investment. The fair value for loans with variable interest rates is the carrying amount. The fair value of fixed rate loans is derived by calculating the discounted value of future cash flows expected to be received by the various homogeneous categories of loans or by reference to secondary market pricing. All loans have been adjusted to reflect changes in credit risk.
Deposits. The fair value of demand deposits, savings deposits, and money market deposits is defined as the amounts payable on demand. The fair value of fixed maturity certificates of deposit is estimated based on the discounted value of the future cash flows expected to be paid on the deposits.
Borrowings. The fair value on repurchase agreements and subordinated debt are the carrying amounts. The fair value of borrowings is the carrying value of overnight FHLB advances that approximate fair value because of the short-term maturity of this instrument, resulting in a Level 2 classification. The fair value of term borrowings is derived by calculating the discounted value of future cash flows expected to be paid out by the Company.
12
The carrying amounts and estimated fair values of financial instruments are as follows as of:
Carrying
Assets:
Securities AFS, net
258,287
Securities HTM
880,751
515,965
Loans, net
7,578,756
8,317,757
639,761
152,680
173,289
515,978
7,072,878
8,143,473
668,487
165,930
44,197
13
NOTE 4: SECURITIES
The following table provides a summary of the Company’s securities AFS portfolio as of:
Amortized
Gross Unrealized
Allowance for
Estimated
Cost
Gains
Losses
Credit Losses
11,761
(577)
10,376
(306)
50,737
21
(2,244)
25,692
(21)
20,631
334
153,451
1,105
(2,793)
897
(43)
273,545
1,469
(5,984)
13,862
928,546
6,563
(6,120)
52,052
94
27,970
21,606
373
154,027
2,441
(92)
499
(9)
1,198,562
9,473
(6,258)
As of March 31, 2022, US Treasury securities of $0.9 million included in the table above are pledged as collateral to the State of California to meet regulatory requirements related to the Bank’s trust operations, $216.3 million of agency mortgage-backed securities are pledged as collateral as support for the Bank’s obligations under loan sales and securitizations agreements entered into from 2018 and 2021, and $163.9 million of SBA securities are pledged as collateral for repurchase agreements obtained from the TGRF acquisition.
The following table provides a summary of the Company’s securities HTM portfolio as of:
Gross Unrecognized
(39,657)
There were no securities HTM as of December 31, 2021.
The Company reassessed classification of certain securities AFS and effective January 1, 2022, the Company transferred $917 million in securities AFS to securities HTM. The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The related unrealized gain (or loss) of $0.6 million included in other comprehensive income remained in other comprehensive income to be amortized, with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. Subsequent to transfer, the ACL on these securities was evaluated under the accounting policy for securities HTM.
14
We monitor the credit quality of these securities by evaluating various quantitative attributes. The credit quality indicators the Company monitors include, but are not limited to, credit ratings of individual securities and the credit rating of government sponsored enterprises that guarantee the securities. Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is, those with ratings similar to BBB-/Baa3 or above, as defined by NRSROs, are generally considered by the rating agencies and market participants to be low credit risk. As of March 31, 2022, all of the Company’s securities were either investment grade or were issued by a U.S. government agency or a U.S. government sponsored enterprise with an investment grade rating.
The table below indicates, as of March 31, 2022 and December 31, 2021, the gross unrealized losses and fair values of our investments AFS, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
Securities with Unrealized Loss at March 31, 2022
Less than 12 months
12 months or more
Fair
Unrealized
Loss
11,182
8,577
47,446
23,038
93,155
Total temporarily impaired securities
184,252
Securities with Unrealized Loss at December 31, 2021
12,971
434,973
(5,051)
36,136
(1,069)
471,109
47,880
491
496,315
(5,189)
532,451
The table below indicates, as of March 31, 2022, the gross unrealized losses and fair values of our investments HTM, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
Securities with Unrecognized Loss at March 31, 2022
Unrecognized
844,511
(37,873)
36,240
(1,784)
Unrealized losses in agency mortgage backed securities, beneficial interests in FHLMC securitizations, and other securities have not been recognized into income because the issuer bonds are of high credit quality, management does not intend to sell, it is not more likely than not that management would be required to sell the securities prior to their anticipated
15
recovery, and the decline in fair value is largely due to changes in discount rates and assumptions regarding future interest rates. The fair value is expected to recover as the bonds approach maturity.
The following is a rollforward of the Bank’s allowance for credit losses related to investments for the following periods:
Three Months Ended March 31, 2022:
Beginning balance
10,399
10,743
Three Months Ended March 31, 2021:
7,245
8,878
Due to a change in expected cash flows of interest only strip securities, $0.3 million and $1.6 million in allowances were taken in the three months ended March 31, 2022 and 2021, respectively. The allowances were included as a charge in provision for credit losses on the consolidated income statement.
The ACL on investment securities is determined for both held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with ASC 326, and is evaluated on a quarterly basis. The ACL for held-to-maturity investment securities is determined on a collective basis, based on shared risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. Under ASC 326-20, for investment securities where the Company has reason to believe the credit loss exposure is remote, such as those guaranteed by the U.S. government or government sponsored entities, a zero loss expectation is applied and a company is not required to estimate and recognize an ACL.
For securities AFS in an unrealized loss position, the Company first evaluates whether it intends to sell, or whether it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the security amortized cost basis is written down to fair value through income. If neither criteria is met, the Company is required to assess whether the decline in fair value has resulted from credit losses or noncredit-related factors. In determining whether a security’s decline in fair value is credit related, the Company considers a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security, and (v) the ability of the issuer of the security to make scheduled principal and interest payments. If, after considering these factors, the present value of expected cash flows to be collected is less than the amortized cost basis, a credit loss exists, and an allowance for credit loss is recorded through income as a component of provision for credit loss expense. If the assessment indicates that a credit loss does not exist, the Company records the decline in fair value through other comprehensive income, net of related income tax effects. The Company has made the election to exclude accrued interest receivable on securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
16
The scheduled maturities of securities AFS and the related weighted average yields were as follows for the periods indicated:
Less than
1 Through
5 Through
After
1 Year
5 years
10 Years
March 31, 2022
Amortized Cost:
319
742
10,700
4,545
4,123
1,708
1,630
37,565
11,542
39
1,326
2,610
21,717
11,125
9,506
9,526
10,019
128,371
5,535
9,565
29,861
173,411
60,708
Weighted average yield
1.06
%
1.99
3.34
1.90
2.80
Estimated Fair Value:
703
10,162
4,431
3,984
1,663
1,645
36,217
10,652
1,323
2,607
21,703
9,840
20,965
9,519
9,748
127,257
5,239
9,558
29,445
170,768
59,259
17
December 31, 2021
710
802
12,350
4,990
24,568
898,988
1,625
38,853
11,574
70
1,613
2,952
23,335
11,902
9,704
9,534
10,519
128,438
5,536
9,604
31,858
195,613
961,487
(2.28)
2.06
3.03
1.63
1.84
799
12,316
5,082
25,056
898,851
1,704
38,865
11,577
2,953
23,336
10,077
21,979
9,529
10,499
130,754
5,594
9,599
32,000
198,427
961,751
The following is a summary of scheduled maturities of securities HTM and the related weighted average yields as of:
18,793
901,615
0.82
1.77
1.75
17,934
862,817
NOTE 5: LOANS
The following is a summary of our loans as of:
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily
3,284,003
2,886,055
Single family
911,438
933,445
Total real estate loans secured by residential properties
4,195,441
3,819,500
Commercial properties
1,264,221
1,309,200
Land and construction
159,533
156,028
Total real estate loans
5,619,195
5,284,728
Commercial and industrial loans
1,754,279
1,598,422
Consumer loans
9,760
10,834
Total loans
7,383,234
6,893,984
Premiums, discounts and deferred fees and expenses
14,230
12,744
The following table summarizes our delinquent and nonaccrual loans as of:
Past Due and Still Accruing
Total Past
90 Days
Due and
30–59 Days
60-89 Days
or More
Nonaccrual
Current
Real estate loans:
Residential properties
1,748
3,186
4,934
4,204,812
4,209,746
2,892
936
4,401
8,229
1,256,568
1,264,797
159,231
967
105
3,256
4,328
1,749,572
1,753,900
9,780
9,790
5,617
1,041
10,843
17,501
7,379,963
Percentage of total loans
0.08
0.01
0.15
0.24
1,519
310
3,281
5,110
3,827,385
3,832,495
2,934
1,529
4,463
1,305,112
1,309,575
155,926
303
260
3,520
4,083
1,593,782
1,597,865
10,867
4,756
570
8,330
13,656
6,893,072
0.07
0.12
0.20
The following table summarizes our nonaccrual loans as of:
with Allowance
with no Allowance
for Credit Losses
1,227
2,029
9,616
3,280
1,733
6,597
The following table presents the loans classified as troubled debt restructurings (“TDR”) by accrual and nonaccrual status as of:
Accrual
Residential loans
1,200
Commercial real estate loans
998
1,148
2,146
1,021
1,174
2,195
32
1,856
1,888
493
2,030
2,523
1,030
3,004
4,034
2,714
3,204
5,918
The following table provides information on loans that were modified as TDRs for the following periods:
Outstanding Recorded Investment
Number of loans
Pre-Modification
Post-Modification
Financial Impact
Year Ended December 31, 2021
346
There were no loans modified as TDRs for the first three months of 2022.
All of these loans were classified as a TDR as a result of a reduction in required principal payments and an extension of the maturity date of the loans. These loans have been paying in accordance with the terms of their restructure.
20
NOTE 6: ALLOWANCE FOR CREDIT LOSSES
The following is a rollforward of the Bank’s allowance for credit losses related to loans for the following periods:
Initial Allowance
Beginning
Provision for
on Acquired
Ending
Balance
PCD Loans
Charge-offs
Recoveries
2,637
561
3,198
17,049
(1,413)
15,636
1,995
(227)
1,768
11,992
149
(145)
12,130
103
(13)
90
33,776
(943)
32,822
5,115
918
6,033
8,711
(2,755)
5,956
892
3,070
3,962
9,249
(2,379)
(214)
7,062
233
(66)
167
24,200
(1,212)
23,180
Year Ended December 31, 2021:
(1,453)
93
(1,118)
774
7,564
1,051
52
614
1,836
(706)
(130)
856
9,545
(1,824)
The following table presents the balance in the allowance for credit losses and the recorded investment in loans by impairment method as of:
Allowance for Credit Losses
Loans Evaluated
Individually
Collectively
Allowance for credit losses:
110
3,088
7,662
7,974
69
1,699
1,615
10,515
9,456
23,366
Loans:
8,524
4,201,222
41,664
1,223,133
698
158,533
10,220
1,743,680
61,106
7,336,358
111
2,526
7,967
9,082
1,943
2,386
9,606
10,516
23,260
9,593
3,822,902
41,313
1,268,262
694
155,232
9,963
1,587,902
61,563
6,845,165
22
The following tables present risk categories of loans based on year of origination, as of:
Revolving
2020
2019
2018
Prior
Loans secured by Real Estate:
Residential
Pass
550,899
1,090,423
842,736
371,305
223,541
217,085
3,295,989
Special Mention
Substandard
Single Family
47,217
298,721
111,237
46,046
54,166
275,813
72,007
905,207
26
8,296
228
284,109
72,261
913,757
Commercial Real Estate
42,530
186,500
109,749
144,150
175,153
514,500
1,172,582
15,872
12,888
12,889
41,651
872
13,637
11,054
25,001
50,564
110,623
173,659
199,095
552,390
11,784
45,496
34,478
36,069
21,438
9,268
35,176
Commercial
190,819
450,214
206,463
99,132
46,572
53,223
686,999
1,733,422
941
466
4,854
6,261
2,734
1,677
1,048
2,766
5,988
14,217
190,823
210,138
101,275
47,620
55,989
697,841
Consumer
54
1,126
28
691
765
159
6,829
9,652
138
829
843,303
2,072,480
1,304,691
697,393
521,635
1,070,048
765,835
7,275,385
943
16,338
4,880
47,938
4,304
15,452
12,102
36,063
6,216
74,141
843,307
1,309,938
729,183
546,625
1,119,000
776,931
23
2017
1,092,903
868,483
418,346
265,872
141,433
108,529
2,895,566
1,177
419,523
2,896,743
278,337
122,530
52,995
60,559
57,174
280,216
74,934
926,745
1,873
6,830
278
8,981
59,047
287,046
75,238
935,752
114,678
39,135
59,426
94,930
115,614
804,295
1,228,078
23,495
30,389
53,884
2,217
22,462
27,613
85,855
117,831
857,146
14,738
17,692
31,952
2,529
88,321
89,015
471,431
191,405
88,050
20,709
5,531
167,201
636,507
1,580,834
883
1,101
833
1,370
2,790
6,977
1,535
1,765
982
192
2,688
10,054
472,314
194,041
90,648
21,691
5,723
171,259
642,189
2,617
7,022
1,972,141
1,221,553
636,509
475,196
322,281
1,451,179
718,463
6,797,322
25,505
32,453
2,816
62,758
4,699
4,282
31,980
3,170
46,648
1,973,024
1,224,189
666,713
476,178
326,563
1,515,612
724,449
24
The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses and the related allowance for credit losses (“ACL”) allocated to these loans:
Equipment/
ACL
Real Estate
Cash
Receivables
Allocation
2,488
2,918
Commercial loans
250
5,406
5,656
2,568
2,818
NOTE 7: LOAN SALES AND MORTGAGE SERVICING RIGHTS
In 2021, FFB sold $559 million of multifamily loans and recognized a gain of $21.5 million. For the sales of multifamily loans in 2021, FFB retained servicing rights for the majority of these loans and recognized mortgage servicing rights as part of the transactions. As of March 31, 2022 and December 31, 2021, mortgage servicing rights were $9.5 million and $6.8 million, respectively. The mortgage servicing rights as of March 31, 2022 and December 31, 2021 are net of $3.1 million and $1.9 million valuation allowances, respectively. The amount of loans serviced for others totaled $1.2 billion and $1.7 billion at March 31, 2022 and December 31, 2021, respectively. Servicing fees for the first three months of 2022 and 2021 were $0.5 million and $0.5 million, respectively.
NOTE 8: DEPOSITS
The following table summarizes the outstanding balance of deposits and average rates paid thereon as of:
Weighted
Average Rate
Demand deposits:
Noninterest-bearing
3,296,118
3,280,455
Interest-bearing
2,429,202
0.104
2,242,684
0.070
Money market and savings
2,592,437
0.271
2,620,336
0.275
Certificates of deposits
0.200
668,485
0.145
0.121
0.111
At March 31, 2022, of the $357 million of certificates of deposits of $250,000 or more, $352 million mature within one year and $5 million mature after one year. Of the $282 million of certificates of deposit of less than $250,000, $223 million mature within one year and $59 million mature after one year. At December 31, 2021, of the $367 million of certificates of deposits of $250,000 or more, $361 million mature within one year and $6 million mature after one year. Of the $301 million of certificates of deposit of less than $250,000, $229 million mature within one year and $72 million mature after one year.
25
NOTE 9: BORROWINGS
At March 31, 2022, our borrowings consisted of $173 million in subordinated notes and $153 million of repurchase agreements. At December 31, 2021, our borrowings consisted of $26 million in subordinated notes, $166 million of repurchase agreements, and $18.5 million of borrowings under a holding company line of credit. As of March 31, 2022, $150 million of the subordinated notes are fixed-to-floating rate notes that mature in February 2032. The notes will initially bear a rate of 3.50% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 2022 until February 1, 2027. From and including February 1, 2027 to, but excluding February 1, 2032, or the date of earlier redemption, the notes will bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be Three-Month Term Secured Overnight Financing Rate, or “SOFR”), each as defined in and subject to the provisions of the indenture under which the notes were issued, plus 204 basis points (2.04%), payable quarterly in arrears on February 1, May 1, August 1, and November 1 of each year, commencing on May 1, 2027. $23 million of the subordinated notes mature in June 2030 and bear a fixed interest rate of 6.0%, until June 30, 2025, at which time they will convert to a floating rate based on three month SOFR, plus 590 basis points (5.90%), until maturity.
As a matter of practice, the Bank provides substantially all of its qualifying loans as collateral to the FHLB or the Federal Reserve Bank. FHLB advances are collateralized primarily by loans secured by single family, multifamily, and commercial real estate properties with a carrying value of $4.4 billion as of March 31, 2022. The Bank’s total borrowing capacity from the FHLB at March 31, 2022 was $2.8 billion. The Bank had in place $278 million of letters of credit from the FHLB which are used to meet collateral requirements for borrowings from the State of California and local agencies.
During 2017, FFI entered into a loan agreement with an unaffiliated lender that provides for a revolving line of credit for up to $20 million. The loan agreement matures in February 2023, with an option to extend the maturity date subject to certain conditions, and bears interest at Prime rate, plus 50 basis points (0.50%). FFI’s obligations under the loan agreement are secured by, among other things, a pledge of all of its equity in FFB. We are required to meet certain financial covenants during the term of the loan, including minimum capital levels and limits on classified assets. As of March 31, 2022 and December 31, 2021, FFI was in compliance with the covenants on this loan agreement.
The Bank also has $245 million available borrowing capacity through unsecured fed funds lines, ranging in size from $20 million to $100 million, with five other financial institutions, and a $148 million secured line with the Federal Reserve Bank, secured by single family loans. None of these lines had outstanding borrowings at March 31, 2022 or December 31, 2021. Combined, the Bank’s unused lines of credit as of March 31, 2022 and December 31, 2021 were $3.2 billion and $3.1 billion, respectively.
NOTE 10: EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock that would then share in earnings. The following table sets forth the Company’s unaudited earnings per share calculations for the three months ended March 31:
March 31, 2021
(dollars in thousands, except per share amounts)
Basic common shares outstanding
Effect of options, restricted stock and contingent shares issuable
99,990
304,487
Diluted common shares outstanding
Earnings per share
Based on a weighted average basis, stock options and restricted stock units to purchase 99,990 and 102,708 shares of common stock were excluded for the three months ended March 31, 2022 and 2021, respectively, because their effect would have been anti-dilutive.
NOTE 11: SEGMENT REPORTING
For the three months ended March 31, 2022 and 2021, the Company had two reportable business segments: Banking (FFB, FFIS, Blue Moon, and FFPF) and Wealth Management (FFA). The results of FFI and any elimination entries are included in the column labeled Other. The following tables show key operating results for each of our business segments used to arrive at our consolidated totals for the following periods:
Wealth
Banking
Management
Other
Interest income
Interest expense
3,413
1,237
75,731
(1,237)
7,531
8,345
(449)
Noninterest expense
40,101
6,644
873
Income (loss) before taxes on income
43,953
1,701
(2,559)
4,848
61
54,290
(61)
5,309
6,923
(324)
28,579
5,731
201
30,660
1,192
(586)
27
NOTE 12: SUBSEQUENT EVENTS
Cash Dividend
On April 26, 2022, the Board of Directors of the Company declared a quarterly cash dividend of $0.11 per common share to be paid on May 16, 2022 to stockholders of record as of the close of business on May 6, 2022.
Stock Repurchase Program
On April 26, 2022, the Company announced that its Board of Directors authorized a stock repurchase program, pursuant to which the Company may repurchase up to $75 million of its common stock. This plan has no stated expiration date for the repurchases. This stock repurchase program replaces and supersedes the stock repurchase program approved by the Board of Directors on October 30, 2018, which had authorized the Company to repurchase up to 2,200,000 shares of its common stock, and which no additional shares were repurchased during the quarter ended March 31, 2022.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to facilitate the understanding and assessment of significant changes and trends in our businesses that accounted for the changes in our results of operations in the three months ended March 31, 2022 as compared to our results of operations in the three months ended March 31, 2021; and our financial condition at March 31, 2022 as compared to our financial condition at December 31, 2021. This discussion and analysis is based on and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto contained elsewhere in this report and our audited consolidated financial statements for the year ended December 31, 2021, and the notes thereto, which are set forth in Item 8 of our Annual Report on Form 10-K (“2021 10-K”) which we filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022.
Forward-Looking Statements
Statements contained in this report that are not historical facts or that discuss our expectations, beliefs or views regarding our future financial performance or future financial condition, or financial or other trends in our business or in the markets in which we operate, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” “forecast” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Such forward-looking statements are based on current information that is available to us, and on assumptions that we make, about future events or economic or financial conditions or trends over which we do not have control. In addition, our businesses and the markets in which we operate are subject to a number of risks and uncertainties. Those risks and uncertainties, and unexpected future events, could cause our financial condition or actual operating results in the future to differ, possibly significantly, from our expected financial condition and operating results that are set forth in the forward-looking statements contained in this report.
The principal risks and uncertainties to which our businesses are subject are discussed in this Item 2 and under the heading “Risk Factors” in our 2021 10-K. Therefore, you are urged to read not only the information contained in this Item 2, but also the risk factors and other cautionary information contained under the heading “Risk Factors” in our 2021 10-K, which qualify the forward-looking statements contained in this report.
The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and may continue to adversely affect, our business, operations, financial performance and prospects. Even after the COVID-19 pandemic subsides, it is possible that the U.S. and other major economies experience or continue to experience a prolonged recession, which could materially and adversely affect our business, operations, financial performance and prospects. Statements about the effects of the COVID-19 pandemic on our business, operations, financial performance and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us.
Due to these risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements contained in this report and not to make predictions about our future financial performance based solely on our historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this report or in our 2021 10-K, except as may otherwise be required by applicable law or government regulations.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and accounting practices in the banking industry. Certain of those accounting policies are 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 – Investment Securities – The ACL on investment securities is determined for both held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with ASC 326, and is evaluated on a quarterly basis. The ACL for held-to-maturity investment securities is determined on a collective basis, based on shared risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. Under ASC 326-20, for investment securities where the Company has reason to believe the credit loss exposure is remote, such as those guaranteed by the U.S. government or government sponsored entities, a zero loss expectation is applied and a company is not required to estimate and recognize an ACL.
For securities AFS in an unrealized loss position, the Company first evaluates whether it intends to sell, or whether it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the security amortized cost basis is written down to fair value through income. If neither criteria is met, the Company is required to assess whether the decline in fair value has resulted from credit losses or noncredit-related factors. In determining whether a security’s decline in fair value is credit related, the Company considers a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security, and (v) the ability of the issuer of the security to make scheduled principal and interest payments. If, after considering these factors, the present value of expected cash flows to be collected is less than the amortized cost basis, a credit loss exists, and an allowance for credit loss is recorded through income as a component of provision for credit loss expense. If the assessment indicates that a credit loss does not exist, the Company records the decline in fair value through other comprehensive income, net of related income tax effects. The Company has made the election to exclude accrued interest receivable on securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. See Note 4, Securities, for additional information related to the Company’s allowance for credit losses on securities AFS.
Allowance for Credit Losses - Loans. Our ACL for loans and investments is established through a provision for credit losses charged to expense and may be reduced by a recapture of previously established loss reserves, which are also reflected in the statement of income. Loans and investments are charged against the ACL when management believes that collectability of the principal is unlikely. The ACL for loans is an amount that management believes will be adequate to absorb estimated losses on existing loans that may become uncollectible based on an evaluation of the collectability of loans and prior loan loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions and certain other subjective factors that may affect the borrower’s ability to pay. While we use the best information available to make this evaluation, future adjustments to our ACL may be necessary if there are significant changes in economic or other conditions that can affect the collectability in full of loans and investments in our loan or investment portfolios.
Utilization and Valuation of Deferred Income Tax Benefits. We record as a “deferred tax asset” on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions (collectively “tax benefits”) that we believe will be available to us to offset or reduce income taxes in future periods. Under applicable federal and state income tax laws and regulations, tax benefits related to tax loss carryforwards will expire if they cannot be used within specified periods of time. Accordingly, the ability to fully use our deferred tax asset related to tax loss carryforwards to reduce income taxes in the future depends on the amount of taxable income that we generate during those time periods. At least once each year, or more frequently, if warranted, we make estimates of future taxable income that we believe we are likely
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to generate during those future periods. If we conclude, on the basis of those estimates and the amount of the tax benefits available to us, that it is more likely than not that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the amount of the tax benefits available to us that it has become more likely than not that we will be unable to utilize those tax benefits in full prior to their expiration, then we would establish a valuation allowance to reduce the deferred tax asset on our balance sheet to the amount with respect to which we believe it is still more likely than not that we will be able to use to offset or reduce taxes in the future. The establishment of such a valuation allowance, or any increase in an existing valuation allowance, would be effectuated through a charge to the provision for income taxes or a reduction in any income tax credit for the period in which such valuation allowance is established or increased.
We have two business segments, “Banking” and “Wealth Management.” Banking includes the operations of FFB, FFIS, Blue Moon, and FFPF, while Wealth Management includes the operations of FFA. The financial position and operating results of the stand-alone holding company, FFI, are included under the caption “Other” in certain of the tables that follow, along with any consolidation elimination entries.
Overview and Recent Developments
Our results of operations for the first three months of 2022 include:
During the second quarter of 2022, the Company authorized a stock repurchase program, where the Company may repurchase up to $75 million of its common stock from time to time in open market transactions or in privately negotiated transactions as permitted under applicable rules and regulations. The extent to which the Company repurchases its shares and the timing of such repurchases will depend on market conditions and other considerations as may be considered in the Company’s sole discretion. The stock repurchase program, which has no stated expiration date, does not obligate the Company to repurchase any specific number of shares and may be modified, suspended or discontinued at any time without notice.
Results of Operations
The primary sources of revenue for Banking are net interest income, fees from its deposits and trust services, gains on sales of loans, certain loan fees, and consulting fees. The primary sources of revenue for Wealth Management are asset management fees assessed on the balance of assets under management (“AUM”). Compensation and benefit costs, which represent the largest component of noninterest expense, accounted for 61% and 78%, respectively, of the total noninterest expense for Banking and Wealth Management in the three months ended March 31, 2022.
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The following table shows key operating results for each of our business segments for the quarter ended March 31:
2022:
2021:
General. Our net income and income before taxes in the three months ended March 31, 2022 were $30.8 million and $43.1 million, respectively, as compared to $22.4 million and $31.3 million, respectively, in the three months ended March 31, 2021. The $11.8 million increase in income before taxes was the result of a $13.3 million increase in income before taxes for Banking and a $0.5 million increase in income before taxes for Wealth Management, offset partially by a $2.0 million increase in corporate expenses. The increase in Banking was due to higher net interest income, higher noninterest income and lower provision for credit losses. The increase in Wealth Management was due to higher noninterest income. The increase in corporate expenses was due to higher interest expense as a result of the subordinated notes assumed by the Company in connection with the TGRF acquisition in the fourth quarter of 2021, the $150 million of subordinated notes issued by the Company in the first quarter of 2022, and higher noninterest expenses.
Net Interest Income. The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net interest margin:
Three Months Ended March 31:
Average
Balances
Yield /Rate
Interest-earning assets:
7,529,037
3.84
5,383,745
3.99
1,197,859
2.12
772,204
2.70
FHLB stock, fed funds, and deposits
1,212,777
0.25
714,379
Total interest-earning assets
9,939,673
3.19
6,870,328
3.45
Noninterest-earning assets:
Nonperforming assets
10,124
18,153
449,275
189,640
Total assets
10,399,072
7,078,121
Interest-bearing liabilities:
Demand deposits
2,359,334
0.18
970,431
874
0.37
2,611,007
1,872
0.29
2,342,511
2,582
0.45
Certificates of deposit
654,279
435
0.27
861,048
1,167
Total interest-bearing deposits
5,624,620
4,173,990
301,236
1.74
206,085
0.56
Total interest-bearing liabilities
5,925,856
0.32
4,380,075
Noninterest-bearing liabilities:
3,315,139
1,930,737
Other liabilities
94,484
66,854
Total liabilities
9,335,479
6,377,666
Shareholders’ equity
1,063,593
700,455
Total liabilities and equity
Net Interest Income
Net Interest Rate Spread
2.87
3.00
Net Interest Margin
3.16
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Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by prior volume) and mix of interest-earning assets and interest-bearing liabilities. Variances attributable to both rate and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the rate variance. The following table provides a breakdown of the changes in net interest income due to volume and rate changes for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021:
Increase (Decrease) due to
Net Increase
Volume
Rate
(Decrease)
Interest earned on:
20,546
(2,050)
18,496
Securities
2,437
(1,283)
1,154
Cash, FHLB stock, fed funds and deposits
43
356
23,296
(3,290)
20,006
Interest paid on:
794
(617)
177
283
(992)
(709)
(228)
(505)
(733)
172
834
1,006
(1,280)
(259)
22,275
(2,010)
20,265
Net interest income increased 37% from $54.2 million in the three months ended March 31, 2021, to $74.5 million in the three months ended March 31, 2022 due to a 45% increase in interest-earning assets and decrease in the cost of interest bearing liabilities. The cost of interest-bearing liabilities decreased, from 0.45% in the three months ended March 31, 2021, to 0.32% in the three months ended March 31, 2022. The decrease in the cost of interest-bearing liabilities was due to decreased costs of interest-bearing deposits, resulting from decreases in deposit market rates, which were partially offset by an increase in borrowings. The average balance outstanding on borrowings increased from $206.1 million in the three months ended March 31, 2021, to $301.2 million in the three months ended March 31, 2022. The increase in borrowings was due to the issuance of $150 million in subordinated notes in the first quarter of 2022, and the assumption of $165 million in repurchase agreements and $23 million in subordinated notes as a result of the TGRF acquisition in the fourth quarter of 2021. The net interest margin decreased, from 3.16% in the three months ended March 31, 2021, to 3.00% in the three months ended March 31, 2022. The decrease in the interest margin was due to an increase in average excess liquidity during the quarter brought on by the acquisition of TGRF, bringing our average fed funds and cash deposit balances up by $498 million compared to the first three months of 2021, earning an average rate of 0.25%. The yield on securities decreased due a decrease in market rates. The average balance outstanding under the holding company line of credit decreased from $6.6 million in the three months ended March 31, 2021 to $0.4 million in the three months ended March 31, 2022.
Provision for credit losses. The provision for credit losses represents our estimate of the amount necessary to be charged against the current period’s earnings to maintain the ACL for loans and investments at a level that we consider adequate in relation to the estimated losses inherent in the loan and investment portfolios. The provision for credit losses for loans is impacted by changes in loan balances as well as changes in estimated loss assumptions and charge-offs and recoveries. The amount of the provision for loans also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions and certain other subjective factors that may affect the ability of borrowers to meet their repayment obligations to us. The reversal of provision for credit losses in the three months ended March 31, 2022 was $0.8 million, and the provision for credit losses in the three months ended March 31, 2021 was $0.4 million. The decrease in provision for credit losses in the three months ended March 31, 2022 was a result of improvement in the economic scenario outlook.
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Noninterest income. Noninterest income for Banking includes fees charged to clients for trust services and deposit services, consulting fees, prepayment and late fees charged on loans, gain on sale of loans, and gains and losses from capital market activities and insurance commissions. The following table provides a breakdown of noninterest income for Banking for the three months ended March 31, 2022 and 2021:
Trust fees
2,108
1,668
Loan related fees
2,562
2,944
Deposit charges
644
379
1,123
Consulting fees
95
101
217
Noninterest income in Banking in the three months ended March 31, 2022 was $2.2 million higher than the three months ended March 31, 2021 due primarily to a $1.1 million gain on a sale leaseback transaction, a $0.4 million increase in trust fees, and a $0.3 million increase in deposit charges.
Noninterest income for Wealth Management includes fees charged to high net-worth clients for managing their assets and for providing financial planning consulting services. The following table provides the amounts of noninterest income for Wealth Management for the three months ended March 31, 2022 and 2021:
Noninterest income for Wealth Management increased by $1.4 million in the three months ended March 31, 2022 when compared to the corresponding period in 2021 due primarily to higher levels of billable AUM in the quarter.
The following table summarizes the activity in our AUM for the periods indicated:
Existing account
Additions/
New
Withdrawals
Accounts
Terminations
Performance
Ending balance
Equities
3,330,639
35,136
46,186
(29,451)
(285,233)
3,097,277
Fixed Income
1,303,760
22,003
44,040
(11,625)
(82,779)
1,275,399
Cash and other
1,046,206
(13,143)
32,975
(15,538)
32,566
1,083,066
5,680,605
43,996
123,201
(56,614)
(335,446)
5,455,742
2,451,056
448,338
200,073
(156,809)
387,981
1,474,479
(195,117)
71,181
(45,818)
(965)
1,001,256
(209,727)
146,701
(84,213)
192,189
4,926,791
43,494
417,955
(286,840)
579,205
The $225 million decrease in AUM during the first quarter of 2022 was the net result of $123 million of new accounts, $335 million of portfolio losses, and terminations and net withdrawals of $13 million.
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Noninterest Expense. The following table provides a breakdown of noninterest expense for Banking and Wealth Management for the periods indicated:
Wealth Management
24,276
16,823
5,212
4,447
8,113
5,639
454
521
Professional services and marketing
2,343
1,771
815
639
3,581
2,576
163
124
Noninterest expense in Banking increased from $28.6 million in the three months ended March 31, 2021 to $40.1 million in the three months ended March 31, 2022 primarily due to higher compensation and benefits, occupancy and depreciation, professional services and marketing, and other expenses. Compensation and benefits in Banking were $7.5 million higher in the first quarter of 2022 primarily due to a 41.0% increase in average FTE largely associated with the TGRF acquisition. Occupancy and depreciation costs were $2.5 million higher due primarily to higher core processing costs related to higher volumes and services and due to the TGRF acquisition. Noninterest expenses for Wealth Management increased by $0.9 million in the three months ended March 31, 2022 due to higher compensation and benefits, and professional services and marketing expenses.
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Financial Condition
The following table shows the financial position for each of our business segments, and of FFI and elimination entries used to arrive at our consolidated totals which are included in the column labeled Other and Eliminations, as of:
Other and
Eliminations
930,984
(11,182)
Premises and equipment
35,402
366
136
Investment in FHLB Stock
17,422
555
REO
173,610
386
23,679
10,448,878
12,730
13,188
9,037,219
(79,701)
Intercompany balances
3,037
565
(3,602)
84,297
2,965
21,472
1,171,645
9,200
(98,270)
1,121,089
3,195
(2,527)
37,373
411
20,745
(48)
179,385
365
23,592
10,170,942
4,109
21,153
8,836,250
(24,290)
4,605
(8,204)
3,599
92,500
4,381
13,185
1,071,657
7,932
Our consolidated balance sheet is primarily affected by changes occurring in our Banking operations as our Wealth Management operations do not maintain significant levels of assets. Banking has experienced and is expected to continue to experience increases in its total assets as a result of our growth strategy.
During the three months ended March 31, 2022 total assets increased by $279 million primarily due to an increase in loans, which was partially offset by decreases in cash and securities. During the three months ended March 31, 2022,
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total securities decreased by $12 million primarily due to payoffs of mortgage-backed securities. Loans and loans held for sale increased $491 million in the three months ended March 31, 2022, primarily as a result of $1.1 billion of originations, which were partially offset by payoffs or scheduled payments of $657 million. The $146 million growth in deposits during the first three months of 2022 was due primarily to an increase in corporate deposits of $175 million, offset by a decrease in branch deposits of $31 million. Borrowings increased by $116 million during the three months ended March 31, 2022 due to the addition of $150 million in subordinated debt, offset partially by the $18.5 million paydown on FFI’s credit line, and $13 million decrease in repurchase agreements.
Cash and cash equivalents, certificates of deposit and securities. Cash and cash equivalents, which primarily consist of funds held at the Federal Reserve Bank or at correspondent banks, including fed funds, decreased by $190 million during the three months ended March 31, 2022. Changes in cash and cash equivalents are primarily affected by the funding of loans, investments in securities, and changes in our sources of funding: deposits, FHLB advances and FFI borrowings.
Securities available for sale. The following table provides a summary of the Company’s AFS securities portfolio as of:
Beneficial interest – FHLMC securitization
US Treasury securities that are included in the table above are pledged as collateral to the State of California to meet regulatory requirements related to FFB’s trust operations. Agency mortgage-backed securities are pledged as collateral as support for the Bank’s obligations under loan sales and securitization agreements entered into from 2018 through 2021. SBA securities are pledged as collateral for repurchase agreements.
Excluding allowance for credit losses, the decrease in AFS securities in the first three months of 2022 was due primarily to the $920 million transfer of agency mortgage-backed securities to held-to-maturity.
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Securities held to maturity. The following table provides a summary of the Company’s HTM securities portfolio as of:
Gross Uncognized
The scheduled maturities of securities AFS, as well as the related weighted average yield, are as follows, as of March 31, 2022:
The scheduled maturities of securities HTM, and the related weighted average yield is as follows, as of March 31, 2022:
Loans. The following table sets forth our loans, by loan category, as of:
Loans and loans held for sale increased $491 million during the three months ended March 31, 2022 primarily as a result of $1.1 billion in originations, which were partially offset by payoffs or scheduled payments of $657 million.
Deposits. The following table sets forth information with respect to our deposits and the average rates paid on deposits, as of:
During the first three months of 2022, our deposit rates have moved in a manner consistent with overall deposit market rates. The weighted average rate of our interest-bearing deposits increased from 0.18% at December 31, 2021, to 0.19% at March 31, 2022 due to increased costs of interest-bearing deposits, while the weighted average interest rates of both interest-bearing and noninterest-bearing deposits have decreased from 0.15% at December 31, 2021 to 0.12% at March 31, 2022. The financial impact of the increase in noninterest-bearing deposits is reflected in customer service costs, which are included in noninterest expenses.
The maturities of our certificates of deposit of $100,000 or more were as follows as of March 31, 2022:
3 months or less
302,445
Over 3 months through 6 months
65,581
Over 6 months through 12 months
111,750
Over 12 months
57,687
537,463
From time to time, the Bank will utilize brokered deposits as a source of funding. As of March 31, 2022, the Bank held $90 million of deposits which are classified as brokered deposits.
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Borrowings. At March 31, 2022, our borrowings consisted of $173 million in subordinated notes and $153 million of repurchase agreements. At December 31, 2021, our borrowings consisted of $26 million in subordinated notes, $166 million of repurchase agreements, and $18.5 million of borrowings under a holding company line of credit. As of March 31, 2022, $150 million of the subordinated notes are fixed-to-floating rate notes that mature in February 2032. The notes will initially bear a rate of 3.50% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 2022 until February 1, 2027. From and including February 1, 2027 to, but excluding February 1, 2032, or the date of earlier redemption, the notes will bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be Three-Month Term Secured Overnight Financing Rate, or “SOFR”), each as defined in and subject to the provisions of the indenture under which the notes were issued, plus 204 basis points (2.04%), payable quarterly in arrears on February 1, May 1, August 1, and November 1 of each year, commencing on May 1, 2027. $23 million of the subordinated notes mature in June 2030 and bear a fixed interest rate of 6.0%, until June 30, 2025, at which time they will convert to a floating rate based on three month SOFR, plus 590 basis points (5.90%), until maturity. The maximum amount of borrowings at the Bank outstanding at any month-end during the three months ended March 31, 2022, and during all of 2021, was $177 million and $255 million, respectively.
Delinquent Loans, Nonperforming Assets and Provision for Credit Losses
Loans are considered past due following the date when either interest or principal is contractually due and unpaid. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued when reasonable doubt exists as to the full, timely collection of interest or principal and, generally, when a loan becomes contractually past due for 90 days or more with respect to principal or interest. However, the accrual of interest may be continued on a well-secured loan contractually past due 90 days or more with respect to principal or interest if the loan is in the process of collection or collection of the principal and interest is deemed probable. The following tables provide a summary of past due and nonaccrual loans as of:
Total Past Due
and Nonaccrual
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6,598
The following table presents the composition of TDRs by accrual and nonaccrual status as of:
These loans were classified as a TDR as a result of a reduction in required principal payments, reductions in rates and/or an extension of the maturity date of the loans.
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Allowance for Credit Losses. The following table summarizes the activity in our ACL related to loans for the periods indicated:
Allowance
Three months ended March 31, 2022:
Three months ended March 31, 2021:
Year ended December 31, 2021:
Our ACL related to loans represented 0.44% and 0.49% of total loans outstanding as of March 31, 2022 and December 31, 2021, respectively.
The amount of the ACL for loans is adjusted periodically by charges to operations (referred to in our income statement as the “provision for credit losses”) (i) to replenish the ACL after it has been reduced due to loan write-downs or charge-offs, (ii) to reflect increases in the volume of outstanding loans, and (iii) to take account of changes in the risk of potential loan losses due to a deterioration in the condition of borrowers, or in the value of property securing non–performing loans, or adverse changes in economic conditions. The amounts of the provisions we make for loan losses are based on our estimate of losses in our loan portfolio. In estimating such losses, we use economic and loss migration models that are based on bank regulatory guidelines and industry standards, and our historical charge-off experience and loan delinquency rates, local and national economic conditions, a borrower’s ability to repay its borrowings, and the value of any property collateralizing the loan, as well as a number of subjective factors. However, these determinations involve judgments about changes and trends in current economic conditions and other events that can affect the ability of borrowers to meet their loan obligations to us, and a weighting among the quantitative and qualitative factors we consider in determining the sufficiency of the ACL. Moreover, the duration and anticipated effects of prevailing economic conditions or trends can be uncertain and can be affected by a number of risks and circumstances that are outside of our control. If changes in economic or market conditions or unexpected subsequent events were to occur, or if changes were made to bank regulatory guidelines or industry standards that are used to assess the sufficiency of the ACL, it could become
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, the Federal Deposit Insurance Corporation (“FDIC”) and the California 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:
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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 the Federal Reserve Bank of San Francisco or other financial institutions.
We monitor our liquidity in accordance with guidelines established by our Board of Directors and applicable regulatory requirements. Our need for liquidity is affected by our loan activity, net changes in deposit levels and the maturities of our borrowings. The principal sources of our liquidity consist of deposits, loan interest and principal payments and prepayments, investment management and consulting fees, FHLB advances and proceeds from borrowings and sales of FFI common stock. The remaining balances of the Company’s lines of credit available to draw down totaled $3.2 billion at March 31, 2022.
Cash Flows Provided by Operating Activities. During the quarter ended March 31, 2022, operating activities provided net cash of $40 million, primarily due to net income of $31 million and a net increase of $5 million in other assets. During the quarter ended March 31, 2021, operating activities provided net cash of $33 million, primarily due to net income of $22 million and a net decrease of $5 million in other assets.
Cash Flows Used in Investing Activities. During the quarter ended March 31, 2022, investing activities used net cash of $483 million, primarily due to a $491 million net increase in loans and $83 million in purchases of securities AFS, offset partially by $88 million in cash received in principal collection and maturities of securities. During the quarter ended March 31, 2021, investing activities used net cash of $265 million, primarily due to a $321 million net increase in loans, offset partially by $53 million in cash received in principal collection and maturities of securities, and $3 million in proceeds from a redemption of securities.
Cash Flows Provided by Financing Activities. During the quarter ended March 31, 2022, financing activities provided net cash of $253 million, consisting primarily of a net increase of $146 million in deposits and $148 million net increase in subordinated debt, offset partially by $19 million net paydowns in our line of credit, $6 million in dividends paid, and a $13 million net decrease in repurchase agreements. During the quarter ended March 31, 2021, financing activities provided net cash of $71 million, consisting primarily of a net increase of $332 million in deposits, offset partially by a $250 million decrease in FHLB advances, $7 million net paydowns in our line of credit, and $4 million in dividends paid.
Ratio of Loans to Deposits. The relationship between gross loans and total deposits can provide a useful measure of a bank’s liquidity. Since repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan-to-deposit ratio the less liquid are our assets. On the other hand, since we realize greater yields on loans than we do on other interest-earning assets, a lower loan-to-deposit ratio can adversely affect interest income and earnings. As a result, our goal is to achieve a loan-to-deposit ratio that appropriately balances the requirements of liquidity and the need to generate a fair return on our assets. At March 31, 2022 and December 31, 2021, the loan-to-deposit ratios at FFB were 88% and 84%, respectively.
Off-Balance Sheet Arrangements
The following table provides the off-balance sheet arrangements of the Company as of March 31, 2022:
Commitments to fund new loans
77,012
Commitments to fund under existing loans, lines of credit
1,223,173
Commitments under standby letters of credit
24,745
Some of the commitments to fund existing loans, lines of credit and letters of credit are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. As of
March 31, 2022, FFB was obligated on $278 million of letters of credit to the FHLB which were being used as collateral for public fund deposits, including $263 million of deposits from the State of California.
Capital Resources and Dividend Policy
The capital rules applicable to United States based bank holding companies and federally insured depository institutions (“Capital Rules”) require the Company (on a consolidated basis) and FFB (on a stand-alone basis) to meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt corrective action regulations place a federally insured depository institution, such as FFB, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution’s primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.
The following table sets forth the capital and capital ratios of FFI (on a consolidated basis) and FFB as of the respective dates indicated below, as compared to the respective regulatory requirements applicable to them:
To Be Well Capitalized
For Capital
Under Prompt Corrective
Actual
Adequacy Purposes
Action Provisions
Ratio
FFI
CET1 capital ratio
862,092
10.98
356,437
4.50
Tier 1 leverage ratio
8.52
408,396
4.00
Tier 1 risk-based capital ratio
475,249
6.00
Total risk-based capital ratio
902,747
13.68
633,665
8.00
846,515
11.34
335,801
8.43
401,645
447,735
887,821
11.90
596,980
FFB
958,976
12.16
354,965
512,727
6.50
9.14
419,807
524,759
5.00
473,286
631,048
999,631
12.67
788,810
10.00
854,075
11.49
334,608
483,323
8.53
400,616
500,770
446,144
594,859
895,381
12.04
743,574
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.
46
As of March 31, 2022, FFI had $84.0 million of available liquidity as well as a revolving line of credit and, therefore, has the ability and financial resources to contribute additional capital to FFB, if needed.
As of March 31, 2022, the amount of capital at FFB in excess of amounts required to be well capitalized for purposes of the prompt corrective action regulations was $446 million for the CET1 capital ratio, $434 million for the Tier 1 Leverage Ratio, $328 million for the Tier 1 risk-based capital ratio and $211 million for the Total risk-based capital ratio.
The Company paid a quarterly cash dividend of $0.11 per common share in the first quarter of 2022. It is our current intention to continue to pay quarterly dividends. The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain regulatory restrictions which are discussed in Item 1 “Business—Supervision and Regulation—Dividends and Stock Repurchases” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2021. Additionally, under the terms of the holding company line of credit agreement, FFI may only declare and pay a dividend if the total amount of dividends and stock repurchases during the current twelve months does not exceed 50% of FFI’s net income for the same twelve month period. We paid $16.1 million in dividends ($0.36 per share) in 2021.
We had no material commitments for capital expenditures as of March 31, 2022. However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain financial risks, which are discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the section titled Asset and Liability Management: Interest Rate Risk in our Annual Report on Form 10-K which we filed with the Securities and Exchange Commission on February 28, 2022. There have been no material changes to our quantitative and qualitative disclosures about market risk since December 31, 2021.
ITEM 4.CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness, as of March 31, 2022, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2022, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There was no change in our internal control over financial reporting that occurred during the three months ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1A.RISK FACTORS
There have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2021, which we filed with the SEC on February 28, 2022.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 26, 2022, the Company announced that its Board of Directors authorized a stock repurchase program, pursuant to which the Company may repurchase up to $75 million of its common stock. This plan has no stated expiration date. This stock repurchase program replaces and supersedes the stock repurchase program approved by the Board of Directors on October 30, 2018, which had authorized the Company to repurchase up to 2,200,000 shares of its common stock, and which no additional shares were repurchased during the quarter ended March 31, 2022.
ITEM 6.EXHIBITS
Exhibit No.
Description of Exhibit
3.1
Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on October 29, 2015).
3.2
Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on October 29, 2015).
4.1
Indenture, dated January 24, 2022, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on January 24, 2022).
4.2
First Supplemental Indenture, dated January 24, 2022, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed on January 24, 2022).
4.3
Form of 3.50% Fixed-to-Floating Rate Subordinated Notes due 2032 (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed on January 24, 2022).
10.1
Fifth Amendment to Loan Agreement, dated as of March 22, 2022, by and between the Company and NexBank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on March 24, 2022).
31.1(1)
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2(1)
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1(1)
Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
32.2(1)
Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 9, 2022
By:
/s/ KEVIN L. THOMPSON
Kevin L. Thompson
Executive Vice President andChief Financial Officer