ffwm-10q_20160930.htm

 

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 September 30, 2016

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 jurisdiction
of incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

18101 Von Karman Avenue, Suite 700 Irvine, CA 92612

 

92612

(Address of principal executive offices)

 

(Zip Code)

(949) 202-4160

(Registrant’s telephone number, including area code)

 

 

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 and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

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 November 7th, 2016, there were 16,327,658 shares of registrant’s common stock outstanding

 

 

 

 


 

FIRST FOUNDATION INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

TABLE OF CONTENTS

 

 

  

 

 

Exhibit No.

 

 

 

Part I. Financial Information

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

1

 

 

 

 

 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

41

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

41

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

Item 1A

 

Risk Factors

 

41

 

 

 

 

 

Item 6

 

Exhibits

 

42

 

 

 

 

 

SIGNATURES

 

S-1

 

 

 

 

 

EXHIBITS

 

E-1

 

 

 

(i)


 

PART I — FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

FIRST FOUNDATION INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

 

September 30,
2016

 

 

December 31,
2015

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

496,813

 

 

$

215,748

 

Securities available-for-sale (“AFS”)

 

542,703

 

 

 

565,135

 

Loans held for sale

 

200,002

 

 

 

 

 

Loans, net of deferred fees

 

 

2,308,829

 

 

 

1,765,483

 

Allowance for loan and lease losses (“ALLL”)

 

(13,600

)

 

 

(10,600

)

Net loans

 

2,295,229

 

 

 

1,754,883

 

 

 

 

 

 

 

 

 

Investment in FHLB stock

 

25,677

 

 

 

21,492

 

Premises and equipment, net

 

5,342

 

 

 

2,653

 

Deferred taxes

 

10,156

 

 

 

15,392

 

Real estate owned (“REO”)

 

544

 

 

 

4,036

 

Goodwill and intangibles

 

2,232

 

 

 

2,416

 

Other assets

 

14,970

 

 

 

10,824

 

Total Assets

$

3,593,668

 

 

$

2,592,579

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits

$

2,338,737

 

 

$

1,522,176

 

Borrowings

 

951,000

 

 

 

796,000

 

Accounts payable and other liabilities

 

16,637

 

 

 

14,667

 

Total Liabilities

 

3,306,374

 

 

 

2,332,843

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common Stock, par value $0.001: 70,000,000 shares authorized;  16,300,833 and 15,980,526 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

16

 

 

 

16

 

Additional paid-in-capital

 

231,631

 

 

 

227,262

 

Retained earnings

 

50,548

 

 

 

33,762

 

Accumulated other comprehensive income (loss), net of tax

 

5,099

 

 

 

(1,304

)

Total Shareholders’ Equity

 

287,294

 

 

 

259,736

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

$

3,593,668

 

 

$

2,592,579

 

 

 

 

 

 

 

 

 

 

 

 

 

(See accompanying notes to the consolidated financial statements)

 

 

1


 

FIRST FOUNDATION INC.

CONSOLIDATED INCOME STATEMENTS - UNAUDITED

(In thousands, except share and per share amounts)

 

 

Quarter Ended

September  30,

 

 

Nine Months Ended

September  30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

$

22,231

 

 

$

15,634

 

 

$

61,362

 

 

$

41,097

 

Securities AFS

 

3,202

 

 

 

1,107

 

 

 

9,423

 

 

 

2,744

 

Fed funds sold, FHLB stock and deposits

 

571

 

 

 

367

 

 

 

1,490

 

 

 

1,418

 

Total interest income

 

26,004

 

 

 

17,108

 

 

 

72,275

 

 

 

45,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

2,426

 

 

 

1,328

 

 

 

6,194

 

 

 

3,366

 

Borrowings

 

415

 

 

 

319

 

 

 

1,636

 

 

 

1,137

 

Total interest expense

 

2,841

 

 

 

1,647

 

 

 

7,830

 

 

 

4,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

23,163

 

 

 

15,461

 

 

 

64,445

 

 

 

40,756

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

1,231

 

 

 

570

 

 

 

2,881

 

 

 

1,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

21,932

 

 

 

14,891

 

 

 

61,564

 

 

 

39,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management, consulting and other fees

 

6,141

 

 

 

5,870

 

 

 

18,127

 

 

 

17,642

 

Gain on sale of loans

 

7,238

 

 

 

205

 

 

 

7,238

 

 

 

205

 

Gain (loss) on capital markets activities

 

993

 

 

 

(2

)

 

 

(1,055

)

 

 

(28

)

Other income

 

707

 

 

 

795

 

 

 

2,664

 

 

 

1,673

 

Total noninterest income

 

15,079

 

 

 

6,868

 

 

 

26,974

 

 

 

19,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

12,059

 

 

 

10,870

 

 

 

36,707

 

 

 

29,440

 

Occupancy and depreciation

 

3,072

 

 

 

2,561

 

 

 

8,783

 

 

 

6,486

 

Professional services and marketing costs

 

3,525

 

 

 

1,481

 

 

 

7,808

 

 

 

4,051

 

Other expenses

 

2,880

 

 

 

2,044

 

 

 

7,505

 

 

 

4,311

 

Total noninterest expense

 

21,536

 

 

 

16,956

 

 

 

60,803

 

 

 

44,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes on income

 

15,475

 

 

 

4,803

 

 

 

27,735

 

 

 

14,487

 

Taxes on income

 

5,800

 

 

 

2,041

 

 

 

10,949

 

 

 

6,157

 

Net income

$

9,675

 

 

$

2,762

 

 

$

16,786

 

 

$

8,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.60

 

 

$

0.22

 

 

$

1.04

 

 

$

0.87

 

Diluted

$

0.58

 

 

$

0.21

 

 

$

1.01

 

 

$

0.84

 

Shares used to compute net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

16,257,008

 

 

 

12,623,924

 

 

 

16,132,112

 

 

 

9,534,056

 

Diluted

 

16,787,947

 

 

 

13,074,935

 

 

 

16,682,807

 

 

 

9,929,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See accompanying notes to the consolidated financial statements)

 

2


 

FIRST FOUNDATION INC.

CONSOLIDATED STATEMENT OF CHANGES

IN SHAREHOLDERS’ EQUITY - Unaudited

(In thousands, except share amounts)

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

Accumulated Other

 

 

 

 

 

 

Number

of Shares

 

Amount

 

Additional

Paid-in Capital

 

Retained Earnings

 

Comprehensive Income (Loss)

 

Total

Balance: December 31, 2015

 

15,980,526 

 

$

16

 

 

$

227,262

 

 

$

33,762

 

 

$

(1,304

)

 

$

259,736

 

Net income

 

 

 

 

 

 

 

 

 

16,786

 

 

 

 

 

 

16,786

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

6,403

 

 

 

6,403

 

Stock based compensation

 

 

 

 

 

 

712

 

 

 

 

 

 

 

 

 

712

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of options

 

293,471

 

 

 

 

 

3,657

 

 

 

 

 

 

 

 

 

3,657

 

Issuance of restricted stock

 

26,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance: September 30, 2016

 

16,300,833

 

$

16

 

 

$

231,631

 

 

$

50,548

 

 

$

5,099

 

 

$

287,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See accompanying notes to the consolidated financial statements)

3


 

FIRST FOUNDATION INC.

CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME - UNAUDITED

(In thousands)

 

 

 

Quarter Ended

September 30,

 

 

Nine Months Ended

September  30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

9,675

 

 

$

2,762

 

 

$

16,786

 

 

$

8,330

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (loss) on securities arising during the period

 

(1,033

)

 

 

2,690

 

 

 

9,805

 

 

 

 

1,477

 

Other comprehensive income (loss) before tax

 

(1,033

)

 

 

2,690

 

 

 

9,805

 

 

 

1,477

 

Income tax (expense) benefit related to items of other comprehensive income

 

425

 

 

 

(1,107

)

 

 

(4,035

)

 

 

 

(607

)

Other comprehensive income (loss)

 

(608

)

 

 

1,583

 

 

 

5,770

 

 

 

870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Reclassification adjustment for gains (loss) included in net

earnings

 

(993

)

 

 

(2

)

 

 

1,055

 

 

 

(28

)

Income tax (expense) benefit related to reclassification adjustment

 

397

 

 

 

1

 

 

 

(422

)

 

 

12

 

Reclassification adjustment for gains included in net earnings, net of tax

 

(596

)

 

 

(1

)

 

 

633

 

 

 

(16

)

Other comprehensive income (loss), net of tax

 

(1,204

)

 

 

1,582

 

 

 

6,403

 

 

 

854

 

Total comprehensive income

$

8,471

 

 

$

4,344

 

 

$

23,189

 

 

$

9,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(See accompanying notes to the consolidated financial statements)

 

4


 

FIRST FOUNDATION INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(In thousands)

 

 

For the Nine Months

Ended September 30,

 

 

2016

 

 

2015

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

$

16,786

 

 

$

8,330

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Provision for loan losses

 

2,881

 

 

 

1,473

 

Stock–based compensation expense

 

712

 

 

 

383

 

Depreciation and amortization

 

1,338

 

 

 

995

 

Deferred tax provision

 

758

 

 

 

(1,068

)

Accretion of discounts on purchased loans, net

 

(755

)

 

 

(523

)

Gain on sale of loans

 

(7,238

)

 

 

(205

)

Gain on sale of capital market activities

 

(1,307

)

 

 

 

Increase in other assets

 

(1,429

)

 

 

(2,076

)

Increase (decrease) in accounts payable and other liabilities

 

1,970

 

 

 

(14

)

Net cash provided by operating activities

 

13,716

 

 

 

7,295

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Net increase in loans

 

(1,008,136

)

 

 

(402,543

)

Proceeds from sale of REO

 

4,442

 

 

 

2,205

 

Proceeds from sale of loans

 

270,005

 

 

 

 

Purchases of premises and equipment

 

(4,027

)

 

 

(1,142

)

Purchases of securities AFS

 

(130,829

)

 

 

(225,396

)

Proceeds from sale of securities AFS

 

104,146

 

 

 

 

Maturities / payments – securities AFS

 

60,715

 

 

 

11,648

 

Cash acquired in acquisition

 

 

 

 

38,081

 

Purchases (net of redemptions) of FHLB stock

 

(4,185

)

 

 

(5,307

)

Net cash used in investing activities

 

(707,869

)

 

 

(582,454

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Increase in deposits

 

816,561

 

 

 

238,732

 

FHLB Advances – net increase

 

155,000

 

 

 

397,000

 

Proceeds – term note

 

 

 

 

10,114

 

Principal payments – term note

 

 

 

 

(30,000

)

Proceeds from sale of stock, net

 

3,657

 

 

 

135,959

 

Net cash provided by financing activities

 

975,218

 

 

 

751,805

 

 

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

281,065

 

 

 

176,646

 

Cash and cash equivalents at beginning of year

 

215,748

 

 

 

29,692

 

Cash and cash equivalents at end of period

$

496,813

 

 

$

206,338

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

$

7,334

 

 

$

4,444

 

Income taxes

$

10,050

 

 

$

7,650

 

Noncash transactions:

 

 

 

 

 

 

 

Recoveries (net of chargeoffs) added to allowance for loans losses

$

119

 

 

$

323

 

Transfer of loans to REO

$

950

 

 

$

 

Transfer of loans to loans held for sale

$

468,743

 

 

$

113,325

 

Mortgage servicing rights created from sale of loans

$

1,945

 

 

$

 

 

 

 

(See accompanying notes to the consolidated financial statements)

 

5


 

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 - UNAUDITED

 

NOTE 1: BASIS OF PRESENTATION

The consolidated financial statements include First Foundation Inc. (“FFI”) and its wholly owned subsidiaries: First Foundation Advisors (“FFA”), First Foundation Bank (“FFB” or the “Bank”) and First Foundation Insurance Services (“FFIS”), a wholly owned subsidiary of FFB (collectively referred to as the “Company”). All inter-company 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 2016 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. Those financial statements assume that readers of this Report 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, 2015.

Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 2016 presentation.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. The new standard contains several amendments that will simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital. The Company elected early adoption of ASU 2016-09 in the third quarter of 2016 which was applied using a modified retrospective approach. For the quarter and nine months ended September 30, 2016, we recognized all excess tax benefits and tax deficiencies that occurred in 2016 as income tax expense or benefit as a discrete event. An income tax benefit of approximately $0.8 million was recognized for the quarter and nine months ended September 30, 2016 as a result of the adoption of ASU 2016-09. There was no change to retained earnings with respect to excess tax benefits, as this is not applicable to the Company. In addition there was no cumulative effect on retained earnings as a result of the election by the Company to adopt an accounting policy to account for forfeitures as they occur. With the early adoption of 2016-09, we have elected to present the cash flow statement on a prospective transition method and no prior periods have been adjusted. ASU 2016-09 requires the recognition of any tax benefits or deficiencies to be recognized in the period in which they occur. As a result of the adoption of ASU 2016-09, our effective tax rate for the quarter and nine months ended September 30, 2016 was decreased by 4.5% and 2.5%, respectively.

In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” which provides guidance for eight specific cash flow issues. FASB issued the standard to clarify areas where GAAP has been either unclear or lacking in specific guidance. This update is effective for the Company for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company is currently evaluating the effects of ASU 2016-15 on its financial statements and disclosures.

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326):  Measurement of Credit Losses on Financial Instruments” which introduces new guidance for the accounting for credit losses on certain types of financial instruments.  It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.  The new model, referred to as the current expected credit losses (CECL) model, will apply to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures.  Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure.  This update is effective for the Company for annual periods beginning after December 15, 2019, and interim periods within those annual periods. The Company is currently evaluating the effects of ASU 2016-13 on its financial statements and disclosures.

On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases,

6


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

which is generally defined as a lease term of less than 12 months.  This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under current lease accounting guidance.  The amendments in this update are effective for interim and annual periods beginning after December 15, 2018.  The Company is currently evaluating the effects of ASU 2016-02 on its financial statements and disclosures.

On January 5, 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10).  Changes made to the current measurement model primarily affect the accounting for equity securities with readily determinable fair values, where changes in fair value will impact earnings instead of other comprehensive income.  The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged.  The update also changes the presentation and disclosure requirements for financial instruments including a requirement that public business entities use exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes.  This update is generally effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In September, 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.  The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.  For public companies, this update is effective for interim and annual periods beginning after December 15, 2015, including interim periods within those fiscal periods.  The adoption of ASU No. 2015-16 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

 

 

NOTE 2: ACQUISITIONS

On June 16, 2015, the Company completed the acquisition of Pacific Rim Bank (“PRB”), through a merger of PRB with and into the Bank, in exchange for 621,345 shares of its common stock with a fair value of $19.00 per share and $543,000 in cash, which was paid to dissenting shareholders. The primary reason for acquiring PRB was to expand our operations into Hawaii.

The acquisition is 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 of $1.3 million, which is not tax deductible, is included in intangible assets in the table below.  

7


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

The following table represents the assets acquired and liabilities assumed of PRB as of June 16, 2015 and the fair value adjustments and amounts recorded by the Bank in 2015 under the acquisition method of accounting:

 

 

PRB Book Value

 

Fair Value Adjustments

 

Fair Value

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets Acquired:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

38,624

 

 

$

 

 

$

38,624

 

Securities AFS

 

7,179

 

 

 

115

 

 

 

7,294

 

Loans, net of deferred fees

 

80,192

 

 

 

(2,419

)

 

 

77,773

 

Allowance for loan losses

 

(2,034

)

 

 

2,034

 

 

 

 

Premises and equipment, net

 

251

 

 

 

(188

)

 

 

63

 

Investment in FHLB stock

 

152

 

 

 

 

 

 

152

 

Deferred taxes

 

 

 

 

2,258

 

 

 

2,258

 

REO

 

4,374

 

 

 

(672

)

 

 

3,702

 

Goodwill

 

 

 

 

1,300

 

 

 

1,300

 

Core deposit intangible

 

 

 

 

1,099

 

 

 

1,099

 

Other assets

 

269

 

 

 

 

 

 

269

 

Total assets acquired

$

129,007

 

 

$

3,527

 

 

$

132,534

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities Assumed:

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

119,663

 

 

$

178

 

 

$

119,841

 

Accounts payable and other liabilities

 

442

 

 

 

(98

)

 

 

344

 

Total liabilities assumed

 

120,105

 

 

 

80

 

 

 

120,185

 

Excess of assets acquired over liabilities assumed

 

8,902

 

 

 

3,447

 

 

 

12,349

 

Total

$

129,007

 

 

$

3,527

 

 

$

132,534

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration:

 

 

 

 

 

 

 

 

 

 

 

Stock issued

 

 

 

 

 

 

 

 

$

11,806

 

Cash paid

 

 

 

 

 

 

 

 

 

543

 

Total

 

 

 

 

 

 

 

 

$

12,349

 

 

 

 

 

 

 

 

 

 

 

 

 

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 of the majority of loans will be accreted to interest income over the remaining lives of the loans in accordance with FASB Accounting Standards Codification (“ASC”) 310-20.

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 impaired” 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 purchased credit impaired 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 loan losses that had been previously recorded by PRB.

The Company recorded a deferred income tax asset of $2.3 million related to PRB’s operating loss carry-forward and other tax attributes of PRB, along with the effects of fair value adjustments resulting from applying the purchase method of accounting.

The fair value of savings and transaction deposit accounts acquired from PRB 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. 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

8


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

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 PRB, of $1.1 million. The core deposit intangible will be amortized over a period of 7 years.

Pro Forma Information (unaudited)

The following table presents unaudited pro forma information as if the acquisition of PRB had occurred on January 1, 2015, for the nine months period ending September 30, 2015, after giving effect to certain adjustments. The unaudited pro forma information for these periods 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 benefits derived from PRB’s loss before taxes. The net effect of these pro forma adjustments was an increase of $0.2 million in net income for the nine months ended September 30, 2015. 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.

 

 

 

 

Pro Forma

(dollars in thousands)

 

 

 

Net interest income

 

$

42,386

Provision for loan losses

 

 

1,473

Noninterest income

 

 

19,610

Noninterest expenses

 

 

47,050

Income before taxes

 

 

13,473

Taxes on income

 

 

5,728

Net income

 

$

7,745

 

 

 

 

Net income per share:

 

 

 

Basic

 

$

0.76

Diluted

 

$

0.73

 

 

 

 

The revenues (net interest income and noninterest income) and net income for the period from June 16, 2015 to September 30, 2015 related to the operations acquired from PRB and included in the results of operations for 2015 was approximately $1.6 million and $0.5 million, respectively.

9


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

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 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 requiring significant judgment or estimation about the assumptions that market participants would use in pricing an asset or liability.

 

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

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury securities

$

300

 

 

$

300

 

 

$

 

 

$

 

Agency mortgage-backed securities

 

498,886

 

 

 

 

 

 

498,886

 

 

 

 

Beneficial interest – FHLMC securitizations

 

43,517

 

 

 

 

 

 

 

 

 

43,517

 

Total assets at fair value on a recurring basis

$

542,703

 

 

$

300

 

 

$

498,886

 

 

$

43,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury securities

$

300

 

 

$

300

 

 

$

 

 

$

 

FNMA and FHLB Agency notes

 

16,013

 

 

 

 

 

 

16,013

 

 

 

 

Agency mortgage-backed securities

 

536,148

 

 

 

 

 

 

536,148

 

 

 

 

Beneficial interest – FHLMC securitizations

 

12,674

 

 

 

 

 

 

 

 

 

12,674

 

Total assets at fair value on a recurring basis

$

565,135

 

 

$

300

 

 

$

552,161

 

 

$

12,674

 

 

The increase in level 3 assets from December 31, 2015 was due to Beneficial interest – FHLMC securitization purchases.  The Company did not have any material assets measured at fair value on a nonrecurring basis as of September 30, 2016 and December 31, 2015.

 

Fair Value of Financial Instruments

We have elected to use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale are measured at fair value on a recurring basis. Additionally, from time to time, we may be required to measure at fair value other assets on a nonrecurring basis, such as loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

 

 

 

10


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

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 Company does not currently have any material assets measured at fair value on a nonrecurring basis.

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 Available for Sale. Investment securities available-for-sale 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 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 – FHLMC securitization.  Significant assumptions in the valuation of these Level 3 securities as of September 30, 2016 included a prepayment rate of 15% and discount rates ranging from 4.0% to 10%.

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 that 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. Mortgage loans originated or transferred and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors.  Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Loans. 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. All loans have been adjusted to reflect changes in credit risk.

Impaired Loans. ASC 820-10 applies to loans measured for impairment in accordance with ASC 310-10, “Accounting by Creditors for Impairment of a Loan”, including impaired loans measured at an observable market price (if available), and at the fair value of the loan’s collateral (if the loan is collateral dependent) less estimated selling cost. The fair value of an impaired loan is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. 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.

11


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

Mortgage Servicing Rights. Fair values are measured using independent pricing models or other model-based valuation techniques that would incorporate assumptions that market participants would use in estimating the fair value of servicing. These assumptions might include estimates of prepayment speeds, discount rate, costs to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations.  Mortgage servicing rights are considered a Level 3 measurement at September 30, 2016 and are included in other assets in the accompanying consolidated balance sheets

Deposits. The fair value of demand deposits, savings deposits, and money market deposits is defined as the amounts payable on demand at quarter-end. 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, using current market rates.

Borrowings. The fair value of $951 million in 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.  The carrying amounts and estimated fair values of financial instruments are as follows as of:

 

 

Carrying

 

 

Fair Value Measurement Level

 

(dollars in thousands)

Value

 

 

1

 

 

2

 

 

3

 

 

Total

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

496,813

 

 

$

496,813

 

 

$

 

 

$

 

 

$

496,813

 

Securities AFS

 

542,703

 

 

 

300

 

 

 

498,886

 

 

 

43,517

 

 

 

542,703

 

Loans

 

2,295,229

 

 

 

 

 

 

 

 

 

2,313,425

 

 

 

2,313,425

 

Loans held for sale

 

200,002

 

 

 

 

 

 

 

 

 

200,002

 

 

 

200,002

 

Investment in FHLB stock

 

25,677

 

 

 

 

 

 

25,677

 

 

 

 

 

 

25,677

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

2,338,737

 

 

 

1,787,742

 

 

 

551,051

 

 

 

 

 

 

2,338,737

 

Borrowings

 

951,000

 

 

 

 

 

 

951,000

 

 

 

 

 

 

951,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

215,748

 

 

$

215,748

 

 

$

 

 

$

 

 

$

215,748

 

Securities AFS

 

565,135

 

 

 

300

 

 

 

552,161

 

 

 

12,674

 

 

 

565,135

 

Loans

 

1,754,883

 

 

 

 

 

 

 

 

 

1,779,941

 

 

 

1,779,941

 

Investment in FHLB stock

 

21,492

 

 

 

 

 

 

21,492

 

 

 

 

 

 

21,492

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,522,176

 

 

 

1,051,976

 

 

 

470,128

 

 

 

 

 

 

1,522,104

 

Borrowings

 

796,000

 

 

 

 

 

 

796,000

 

 

 

 

 

 

796,000

 

 

 

12


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

NOTE 4: SECURITIES

The following table provides a summary of the Company’s securities AFS portfolio as of:

 

 

Amortized

 

 

Gross Unrealized

 

 

Estimated

 

(dollars in thousands)

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury securities

$

300

 

 

$

 

 

$

 

 

$

300

 

Agency mortgage-backed securities

 

489,233

 

 

 

9,749

 

 

 

(96

)

 

 

498,886

 

Beneficial interests in FHLMC securitization

 

44,505

 

 

 

121

 

 

 

(1,109

)

 

 

43,517

 

Total

$

534,038

 

 

$

9,870

 

 

$

(1,205

)

 

$

542,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury securities

$

300

 

 

$

 

 

$

 

 

$

300

 

FNMA and FHLB Agency notes

 

16,108

 

 

 

 

 

 

(95

)

 

 

16,013

 

Agency mortgage-backed securities

 

538,269

 

 

 

909

 

 

 

(3,030

)

 

 

536,148

 

Beneficial interests in FHLMC securitization

 

12,674

 

 

 

476

 

 

 

(476

)

 

 

12,674

 

Total

$

567,351

 

 

$

1,385

 

 

$

(3,601

)

 

$

565,135

 

The US Treasury securities are pledged as collateral to the State of California to meet regulatory requirements related to the Bank’s trust operations.

 

The tables below indicate, as of September 30, 2016 and December 31, 2015 the gross unrealized losses and fair values of our investments, 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 September 30, 2016

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

(dollars in thousands)

 

Fair Value

 

 

 

Unrealized Loss

 

 

Fair Value

 

 

 

Unrealized Loss

 

 

Fair Value

 

 

Unrealized Loss

 

Agency and FHLB Agency notes

 

$

46,649

 

 

$

(96

)

 

$

 

 

$

 

 

$

46,649

 

 

$

(96

)

Beneficial interests in FHLMC securitization

 

 

31,645

 

 

 

(1,109

)

 

 

 

 

 

 

 

 

31,645

 

 

 

(1,109

 

)

 

 

$

78,294

 

 

$

(1,205

)

 

$

 

 

$

 

 

$

78,294

 

 

$

(1,205

)

 

 

 

Securities with Unrealized Loss at December 31, 2015

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

(dollars in thousands)

 

Fair Value

 

 

 

Unrealized Loss

 

 

Fair Value

 

 

 

Unrealized Loss

 

 

Fair Value

 

 

Unrealized Loss

 

Agency notes

 

$

16,013

 

 

$

(95

)

 

$

 

 

$

 

 

$

16,013

 

 

$

(95

)

Agency mortgage backed securities

 

 

397,850

 

 

 

(3,030

)

 

 

 

 

 

 

 

 

397,850

 

 

 

(3,030

)

Beneficial interests in FHLMC securitization

 

 

12,674

 

 

 

(476

)

 

 

 

 

 

 

 

 

12,674

 

 

 

(476

 

)

 

 

$

426,537

 

 

$

(3,601

)

 

$

 

 

$

 

 

$

426,537

 

 

$

(3,601

)

 

Unrealized losses in agency and FHLB agency notes, agency mortgage backed securities, and beneficial interests in FHLMC securitizations 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 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.

13


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

The scheduled maturities of securities AFS and the related weighted average yields were as follows as of September 30, 2016:

 

(dollars in thousands)

Less than
1 Year

 

 

1 Through
5 years

 

 

5 Through
10 Years

 

 

After 10
Years

 

 

Total

 

Amortized Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury securities

$

 

 

$

300

 

 

$

 

 

$

 

 

$

300

 

Weighted average yield

 

%

 

 

0.90

%

 

 

%

 

 

%

 

 

0.90

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury Securities

$

 

 

$

300

 

 

$

 

 

$

 

 

$

300

 

Agency mortgage backed securities and beneficial interests in FHLMC securitizations are excluded from the above table because such securities are not due at a single maturity date. The weighted average yield of the agency mortgage backed securities and beneficial interests in FHLMC securitizations as of September 30, 2016 was 2.59%.

 

NOTE 5: LOANS

The following is a summary of our loans as of:

 

(dollars in thousands)

September 30,
2016

 

 

December 31,
2015

 

Outstanding principal balance:

 

 

 

 

 

 

 

Loans secured by real estate:

 

 

 

 

 

 

 

Residential properties:

 

 

 

 

 

 

 

Multifamily

$

986,921

 

 

$

627,311

 

Single family

 

576,886

 

 

 

533,257

 

Total real estate loans secured by residential properties

 

1,563,807

 

 

 

1,160,568

 

Commercial properties

 

459,703

 

 

 

358,791

 

Land and construction

 

20,034

 

 

 

12,320

 

Total real estate loans

 

2,043,544

 

 

 

1,531,679

 

Commercial and industrial loans

 

228,579

 

 

 

196,584

 

Consumer loans

 

34,248

 

 

 

37,206

 

Total loans

 

2,306,371

 

 

 

1,765,469

 

Premiums, discounts and deferred fees and expenses

 

2,458

 

 

 

14

 

Total

$

2,308,829

 

 

$

1,765,483

 

As of September 30, 2016 and December 31, 2015, the principal balances shown above are net of unaccreted discount related to loans acquired in an acquisition of $2.1 million and $2.8 million, respectively.

In 2012 and 2015, the Company purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of these purchased credit impaired loans is as follows as of:

 

(dollars in thousands)

September 30, 2016

 

 

December 31,
2015

 

Outstanding principal balance:

 

 

 

 

 

 

 

Loans secured by real estate:

 

 

 

 

 

 

 

Commercial properties

$

298

 

 

$

533

 

Land

 

 

 

 

1,616

 

Total real estate loans

 

298

 

 

 

2,149

 

Commercial and industrial loans

 

6,192

 

 

 

6,787

 

Consumer loans

 

5

 

 

 

14

 

Total loans

 

6,495

 

 

 

8,950

 

Unaccreted discount on purchased credit impaired loans

 

(1,625

)

 

 

(2,291

)

Total

$

4,870

 

 

$

6,659

 

14


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

Accretable yield, or income expected to be collected on purchased credit impaired loans, and the related changes, is as follows for the periods indicated:

 

(dollars in thousands)

Nine Months Ended September 30, 2016

 

 

Year Ended December 31,

2015

 

 

 

 

 

 

 

 

 

Beginning balance

$

582

 

 

$

130

 

Accretion of income

 

(155

)

 

 

(529

)

Reclassifications from nonaccretable difference

 

 

 

 

176

 

Acquisition

 

 

 

 

805

 

Disposals

 

(108

)

 

 

 

Ending balance

$

319

 

 

$

582

 

The following table summarizes our delinquent and nonaccrual loans as of:

 

 

 

Past Due and Still Accruing

 

 

 

 

 

Total Past

 

 

 

 

 

 

 

(dollars in thousands)

 

30–59 Days

 

 

60-89 Days

 

 

90 Days 
or More

 

 

Nonaccrual

 

 

Due and
Nonaccrual

 

 

Current

 

 

Total

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

 

 

$

 

 

$

 

 

$

4,021

 

 

$

4,021

 

 

$

1,559,786

 

 

$

1,563,807

 

Commercial properties

 

 

1,363

 

 

 

 

 

 

780

 

 

 

1,187

 

 

 

3,330

 

 

 

456,373

 

 

 

459,703

 

Land and construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,034

 

 

 

20,034

 

Commercial and industrial loans

 

 

4,145

 

 

 

5

 

 

 

3,136

 

 

 

4,184

 

 

 

11,470

 

 

 

217,109

 

 

 

228,579

 

Consumer loans

 

 

18

 

 

 

 

 

 

 

 

 

14

 

 

 

32

 

 

 

34,216

 

 

 

34,248

 

Total

 

$

5,526

 

 

$

5

 

 

$

3,916

 

 

$

9,406

 

 

$

18,853

 

 

$

2,287,518

 

 

$

2,306,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of total loans

 

 

0.24

%

 

 

%

 

 

0.17

%

 

 

0.41

%

 

 

0.82

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

1,160,568

 

 

$

1,160,568

 

Commercial properties

 

 

1,232

 

 

 

 

 

 

793

 

 

 

1,552

 

 

 

3,577

 

 

 

355,214

 

 

 

358,791

 

Land and construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,320

 

 

 

12,320

 

Commercial and industrial loans

 

 

2,425

 

 

 

1,639

 

 

 

5,713

 

 

 

2,509

 

 

 

12,286

 

 

 

184,298

 

 

 

196,584

 

Consumer loans

 

 

1,010

 

 

 

 

 

 

1,991

 

 

 

75

 

 

 

3,076

 

 

 

34,130

 

 

 

37,206

 

Total

 

$

4,667

 

 

$

1,639

 

 

$

8,497

 

 

$

4,136

 

 

$

18,939

 

 

$

1,746,530

 

 

$

1,765,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of total loans

 

 

0.26

%

 

 

0.09

%

 

 

0.48

%

 

 

0.23

%

 

 

1.07

%

 

 

 

 

 

 

 

 

The level of delinquent loans and nonaccrual loans have been adversely impacted by the loans acquired from acquisitions. As of September 30, 2016, of the $13.3 million in loans over 90 days past due, including loans on nonaccrual, $4.5 million, or 34% were loans acquired from acquisitions.

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 ninety days or more with respect to principal or interest. The accrual of interest may be continued on a well-secured loan contractually past due ninety 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 Bank considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The determination of past due, nonaccrual or impairment status of loans acquired in an acquisition, other than loans deemed purchased impaired, is the same as loans we originate.

The troubled debt restructure (“TDR”) activity during the first nine months of 2016 consisted of 6 commercial and industrial loans, with a recorded investment of $3.9 million, whose payment terms were restructured. The TDR activity during the first nine months of 2015 consisted of two commercial and industrial loans, with a recorded investment of $0.5 million, whose payment terms were restructured.

15


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

     

 

NOTE 6: ALLOWANCE FOR LOAN LOSSES

The following is a roll forward of the Bank’s allowance for loan losses for the following periods:

 

(dollars in thousands)

 

Beginning
Balance

 

 

Provision for
Loan Losses

 

 

Charge-offs

 

 

Recoveries

 

 

Ending
Balance

 

Quarter Ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

5,353

 

 

$

951

 

 

$

 

 

$

 

 

$

6,304

 

Commercial properties

 

 

1,887

 

 

 

572

 

 

 

 

 

 

169

 

 

 

2,628

 

Land and construction

 

 

272

 

 

 

(70

)

 

 

 

 

 

 

 

 

 

 

202

 

Commercial and industrial loans

 

 

4,139

 

 

 

31

 

 

 

 

 

 

 

 

 

4,170

 

Consumer loans

 

 

549

 

 

 

(253

)

 

 

 

 

 

 

 

 

296

 

Total

 

$

12,200

 

 

$

1,231

 

 

$

 

 

$

169

 

 

$

13,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

6,799

 

 

$

(495

)

 

$

 

 

$

 

 

$

6,304

 

Commercial properties

 

 

1,813

 

 

 

696

 

 

 

(50

)

 

 

169

 

 

 

2,628

 

Land and construction

 

 

103

 

 

 

99

 

 

 

 

 

 

 

 

 

 

 

202

 

Commercial and industrial loans

 

 

1,649

 

 

 

2,521

 

 

 

 

 

 

 

 

 

4,170

 

Consumer loans

 

 

236

 

 

 

60

 

 

 

 

 

 

 

 

 

296

 

Total

 

$

10,600

 

 

$

2,881

 

 

$

(50

)

 

$

169

 

 

$

13,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

6,546

 

 

$

253

 

 

$

 

 

$

 

 

$

6,799

 

Commercial properties

 

 

1,499

 

 

 

624

 

 

 

(310

)

 

 

 

 

 

1,813

 

Land and construction

 

 

67

 

 

 

36

 

 

 

 

 

 

 

 

 

103

 

Commercial and industrial loans

 

 

1,897

 

 

 

1,665

 

 

 

(1,913

)

 

 

 

 

 

1,649

 

Consumer loans

 

 

141

 

 

 

95

 

 

 

 

 

 

 

 

 

236

 

Total

 

$

10,150

 

 

$

2,673

 

 

$

(2,223

)

 

$

 

 

$

10,600

 

16


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by impairment method as of:

 

(dollars in thousands)

 

Allowance for Loan Losses

 

Unaccreted
Credit

 

 

 

Evaluated for Impairment

 

 

Purchased

 

 

 

 

 

Component

 

 

 

Individually

 

Collectively

 

 

Impaired

 

 

Total

 

 

Other Loans

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

 

 

$

6,304

 

 

$

 

 

$

6,304

 

 

$

148

 

Commercial properties

 

 

 

 

 

2,628

 

 

 

 

 

 

2,628

 

 

 

149

 

Land and construction

 

 

 

 

 

202

 

 

 

 

 

 

202

 

 

 

3

 

Commercial and industrial loans

 

 

 

 

 

4,170

 

 

 

 

 

 

4,170

 

 

 

161

 

Consumer loans

 

 

 

 

 

296

 

 

 

 

 

 

296

 

 

 

20

 

Total

 

$

 

 

$

13,600

 

 

$

 

 

$

13,600

 

 

$

481

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

3,844

 

 

$

1,559,963

 

 

$

 

 

$

1,563,807

 

 

$

13,472

 

Commercial properties

 

 

1,187

 

 

 

458,334

 

 

 

182

 

 

 

459,703

 

 

 

24,982

 

Land and construction

 

 

 

 

 

20,034

 

 

 

 

 

 

20,034

 

 

 

436

 

Commercial and industrial loans

 

 

2,653

 

 

 

221,238

 

 

 

4,688

 

 

 

228,579

 

 

 

24,157

 

Consumer loans

 

 

14

 

 

 

34,234

 

 

 

 

 

 

34,248

 

 

 

1,477

 

Total

 

$

7,698

 

 

$

2,293,803

 

 

$

4,870

 

 

$

2,306,371

 

 

$

64,524

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

 

 

$

6,799

 

 

$

 

 

$

6,799

 

 

$

127

 

Commercial properties

 

 

30

 

 

 

1,783

 

 

 

 

 

 

1,813

 

 

 

363

 

Land and construction

 

 

 

 

 

103

 

 

 

 

 

 

103

 

 

 

42

 

Commercial and industrial loans

 

 

 

 

 

1,649

 

 

 

 

 

 

1,649

 

 

 

187

 

Consumer loans

 

 

 

 

 

236

 

 

 

 

 

 

236

 

 

 

13

 

Total

 

$

30

 

 

$

10,570

 

 

$

 

 

$

10,600

 

 

$

732

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

 

 

$

1,160,568

 

 

$

 

 

$

1,160,568

 

 

$

7,747

 

Commercial properties

 

 

6,275

 

 

 

352,162

 

 

 

354

 

 

 

358,791

 

 

 

43,287

 

Land and construction

 

 

 

 

 

11,180

 

 

 

1,140

 

 

 

12,320

 

 

 

4,267

 

Commercial and industrial loans

 

 

5,687

 

 

 

185,732

 

 

 

5,165

 

 

 

196,584

 

 

 

28,231

 

Consumer loans

 

 

76

 

 

 

37,130

 

 

 

 

 

 

37,206

 

 

 

1,761

 

Total

 

$

12,038

 

 

$

1,746,772

 

 

$

6,659

 

 

$

1,765,469

 

 

$

85,293

 

The column labeled “Unaccreted Credit Component Other Loans” represents the amount of unaccreted credit component discount for loans acquired in an acquisition that were not classified as purchased impaired or individually evaluated for impairment as of the dates indicated, and the stated principal balance of the related loans. The unaccreted credit component discount is equal to 0.75% and 0.86% of the stated principal balance of these loans as of September 30, 2016 and December 31, 2015, respectively. In addition to this unaccreted credit component discount, an additional $0.4 million and $0.3 million of the ALLL has been provided for these loans as of September 30, 2016 and December 31, 2015, respectively.

17


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as loans secured by multifamily or commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Bank uses the following definitions for risk ratings:

Pass: Loans classified as pass are strong credits with no existing or known potential weaknesses deserving of management’s close attention.

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Impaired: A loan is considered impaired, when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Purchased credit impaired loans are not considered impaired loans for these purposes.

Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions above and smaller, homogeneous loans not assessed on an individual basis.

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows as of:

 

(dollars in thousands)

 

Pass

 

 

Special
Mention

 

 

Substandard

 

 

Impaired

 

 

Total

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

1,556,117

 

 

$

3,846

 

 

$

 

 

$

3,844

 

 

$

1,563,807

 

Commercial properties

 

 

456,548

 

 

 

 

 

 

1,968

 

 

 

1,187

 

 

 

459,703

 

Land and construction

 

 

20,034

 

 

 

 

 

 

 

 

 

 

 

 

20,034

 

Commercial and industrial loans

 

 

207,574

 

 

 

1,913

 

 

 

16,439

 

 

 

2,653

 

 

 

228,579

 

Consumer loans

 

 

34,234

 

 

 

 

 

 

 

 

 

14

 

 

 

34,248

 

Total

 

$

2,274,507

 

 

$

5,759

 

 

$

18,407

 

 

$

7,698

 

 

$

2,306,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

1,159,029

 

 

$

1,539

 

 

$

 

 

$

 

 

$

1,160,568

 

Commercial properties

 

 

351,988

 

 

 

174

 

 

 

354

 

 

 

6,275

 

 

 

358,791

 

Land and construction

 

 

11,180

 

 

 

 

 

 

1,140

 

 

 

 

 

 

12,320

 

Commercial and industrial loans

 

 

180,755

 

 

 

4,977

 

 

 

5,165

 

 

 

5,687

 

 

 

196,584

 

Consumer loans

 

 

37,130

 

 

 

 

 

 

 

 

 

76

 

 

 

37,206

 

Total

 

$

1,740,082

 

 

$

6,690

 

 

$

6,659

 

 

$

12,038

 

 

$

1,765,469

 

18


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

Impaired loans evaluated individually and any related allowance are as follows as of:

 

 

 

With No Allowance Recorded

 

 

With an Allowance Recorded

 

(dollars in thousands)

 

Unpaid Principal Balance

 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Recorded Investment

 

 

Related Allowance

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

3,844

 

 

$

3,844

 

 

$

 

 

 

$

 

 

 

$

 

 

Commercial properties

 

 

1,187

 

 

 

1,187

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

2,653

 

 

 

2,653

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

14

 

 

 

14

 

 

 

 

 

 

 

 

 

 

Total

 

$

7,698

 

 

$

7,698

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial properties

 

$

5,925

 

 

$

5,925

 

$

 

590

 

 

$

350

 

 

$

30

 

Commercial and industrial loans

 

 

7,770

 

 

 

5,687

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

114

 

 

 

76

 

 

 

 

 

 

 

 

 

 

Total

 

$

13,809

 

 

$

11,688

 

 

$

590

 

 

$

350

 

 

$

30

 

The weighted average annualized average balance of the recorded investment for impaired loans, beginning from when the loan became impaired, and any interest income recorded on impaired loans after they became impaired is as follows for the:

 

 

 

Nine months Ended
September 30, 2016

 

 

Year Ended
December 31, 2015

 

(dollars in thousands)

 

Average Recorded Investment

 

 

Interest Income after Impairment

 

 

Average Recorded Investment

 

Interest Income after Impairment

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

 

 

$

 

 

$

27

 

 

$

2

 

Commercial properties

 

 

1,788

 

 

 

5

 

 

 

6,487

 

 

 

281

 

Commercial and industrial loans

 

 

1,600

 

 

 

19

 

 

 

7,850

 

 

 

394

 

Consumer loans

 

 

3

 

 

 

 

 

 

105

 

 

 

 

Total

 

$

3,391

 

 

$

24

 

 

$

14,469

 

 

$

677

 

There was no interest income recognized on a cash basis in either 2016 or 2015 on impaired loans.

 

NOTE 7: DEPOSITS

The following table summarizes the outstanding balance of deposits and average rates paid thereon as of:

 

 

 

September 30, 2016

 

 

December 31, 2015

 

(dollars in thousands)

 

Amount

 

 

Weighted
Average Rate

 

 

Amount

 

 

Weighted
Average Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

775,466

 

 

 

 

 

$

299,794

 

 

 

 

Interest-bearing

 

 

175,782

 

 

 

0.436

%

 

 

260,167

 

 

 

0.359

%

Money market and savings

 

 

836,494

 

 

 

0.697

%

 

 

492,015

 

 

 

0.531

%

Certificates of deposits

 

 

550,995

 

 

 

0.587

%

 

 

470,200

 

 

 

0.554

%

Total

 

$

2,338,737

 

 

 

0.420

%

 

$

1,522,176

 

 

 

0.404

%

At September 30, 2016, of the $179.5 million of certificates of deposits of $250,000 or more, $174.3  million mature within one year and $5.2 million mature after one year. Of the $371.4 million of certificates of deposit of less than $250,000, $360.4 million mature within one year and $11.0 million mature after one year. At December 31, 2015, of the $149.2 million of certificates of

19


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

deposits of $250,000 or more, $137.8 million mature within one year and $11.4 million mature after one year.  Of the $321 million of certificates of deposit of less than $250,000, $292.5 million mature within one year and $28.5 million mature after one year.  

 

 

NOTE 8: BORROWINGS

At September 30, 2016, our borrowings consisted of $951 million of overnight FHLB advances. At December 31, 2015, our borrowings consisted of $796.0 million of overnight FHLB advances. The FHLB advances were paid in full in the early part of October 2016 and January 2016, respectively, and bore interest rates of 0.38% and 0.27%, respectively. Because the Bank utilizes overnight borrowings, the balance of outstanding borrowings fluctuates on a daily basis. The average balance of overnight borrowings during the first nine months of 2016 was $499 million, as compared to $353 million during all of 2015.

 

 

NOTE 9: 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 periods indicated:

 

 

Quarter Ended

September 30, 2016

 

 

Quarter Ended

September 30, 2015

 

(dollars in thousands, except per share amounts)

Basic

 

 

Diluted

 

 

Basic

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

9,675

 

 

$

9,675

 

 

$

2,762

 

 

$

2,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic common shares outstanding

 

16,257,008

 

 

 

16,257,008

 

 

 

12,623,924

 

 

 

12,623,924

 

Effect of contingent shares issuable

 

 

 

 

 

796

 

 

 

 

 

 

 

796

 

Effect of options and restricted stock

 

 

 

 

 

530,143

 

 

 

 

 

 

 

450,215

 

Diluted common shares outstanding

 

 

 

 

 

16,787,947

 

 

 

 

 

 

 

13,074,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

$

0.60

 

 

$

0.58

 

 

$

0.22

 

 

$

0.21

 

 

Based on a weighted average basis, options to purchase 14,500 shares of common stock were excluded for the quarter ended September 30, 2015 because their effect would have been anti-dilutive.    

 

 

Nine Months Ended

September 30, 2016

 

 

Nine Months Ended

September 30, 2015

 

(dollars in thousands, except per share amounts)

Basic

 

 

Diluted

 

 

Basic

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

16,786

  

 

$

16,786

  

 

$

8,330

 

 

$

8,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic common shares outstanding

 

16,132,112

 

 

 

16,132,112

 

 

 

9,534,056

 

 

 

9,534,056

 

Effect of contingent shares issuable

 

 

 

 

 

796

 

 

 

 

 

 

 

796

 

Effect of options and restricted stock

 

 

 

 

 

549,899

 

 

 

 

 

 

 

394,593

 

Diluted common shares outstanding

 

 

 

 

 

16,682,807

 

 

 

 

 

 

 

9,929,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

$

1.04

 

 

$

1.01

 

 

$

0.87

 

 

$

0.84

 

 

Based on a weighted average basis, options to purchase 4,401 and 56,847 shares of common stock were excluded for the nine months ended September 30, 2016 and 2015, respectively, because their effect would have been anti-dilutive.    

 

 

20


FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2016 – UNAUDITED

 

NOTE 10: SEGMENT REPORTING

For the quarter and nine months ended September 30, 2016 and 2015, the Company had two reportable business segments: Banking (FFB and FFIS) 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:

 

(dollars in thousands)

 

Banking

 

 

Wealth Management

 

 

Other

 

 

Total

 

Quarter ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

26,004

 

 

$

 

 

$

 

 

$

26,004

 

Interest expense

 

 

2,841

 

 

 

 

 

 

 

 

 

2,841

 

Net interest income

 

 

23,163

 

 

 

 

 

 

 

 

 

23,163

 

Provision for loan losses

 

 

1,231

 

 

 

 

 

 

 

 

 

1,231

 

Noninterest income

 

 

9,923

 

 

 

5,319

 

 

 

(163

)

 

 

15,079

 

Noninterest expense

 

 

16,134

 

 

 

4,697

 

 

 

705

 

 

 

21,536

 

Income (loss) before taxes on income

 

$

15,721

 

 

$

622

 

 

$

(868

)

 

$

15,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

17,108

 

 

$

 

 

$

 

 

$

17,108

 

Interest expense

 

 

1,509

 

 

 

 

 

 

138

 

 

 

1,647

 

Net interest income

 

 

15,599

 

 

 

 

 

 

(138

)

 

 

15,461

 

Provision for loan losses

 

 

570

 

 

 

 

 

 

 

 

 

570

 

Noninterest income

 

 

1,839

 

 

 

5,171

 

 

 

(142

)

 

 

6,868

 

Noninterest expense

 

 

11,653

 

 

 

4,685

 

 

 

618

 

 

 

16,956

 

Income (loss) before taxes on income

 

$

5,215

 

 

$

486

 

 

$

(898

)

 

$

4,803

 

 

 

 

Banking

 

 

Wealth Management

 

 

Other

 

 

Total

 

Nine months ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

72,275

 

 

$

 

 

$

 

 

$

72,275

 

Interest expense

 

 

7,830

 

 

 

 

 

 

 

 

 

7,830

 

Net interest income

 

 

64,445

 

 

 

 

 

 

 

 

 

64,445

 

Provision for loan losses

 

 

2,881

 

 

 

 

 

 

 

 

 

2,881

 

Noninterest income

 

 

11,505

 

 

 

15,917

 

 

 

(448

)

 

 

26,974

 

Noninterest expense

 

 

43,746

 

 

 

14,536

 

 

 

2,521

 

 

 

60,803

 

Income (loss) before taxes on income

 

$

29,323

 

 

$

1,381

 

 

$

(2,969

)

 

$

27,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

45,259

 

 

$

 

 

$

 

 

$

45,259

 

Interest expense

 

 

3,829

 

 

 

 

 

 

674

 

 

 

4,503

 

Net interest income

 

 

41,430

 

 

 

 

 

 

(674

)

 

 

40,756

 

Provision for loan losses

 

 

1,473

 

 

 

 

 

 

 

 

 

1,473

 

Noninterest income

 

 

4,501

 

 

 

15,426

 

 

 

(435

)

 

 

19,492

 

Noninterest expense

 

 

28,138

 

 

 

13,950

 

 

 

2,200

 

 

 

44,288

 

Income (loss) before taxes on income

 

$

16,320

 

 

$

1,476

 

 

$

(3,309

)

 

$

14,487

 

 

 

         

 

 

21


 

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 quarter and nine months ended September 30, 2016 as compared to our results of operations in the quarter and nine months ended September 30, 2015; and our financial condition at September 30, 2016 as compared to our financial condition at December 31, 2015. 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, 2015, and the notes thereto, which are set forth in Item 8 of our Annual Report on Form 10-K (“our 2015 10-K”) which we filed with the Securities and Exchange Commission (“SEC”) on March 15, 2016.

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 Item 1A in our 2015 10-K and in this Item 2 below.  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 in Item 1A of our 2015 10-K, which qualify the forward-looking statements contained in this report.

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 2015 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. There have been no significant changes to our critical accounting policies as described in our 2015 10-K.

Utilization and Valuation of Deferred Income Tax Benefits. We record as a “deferred tax asset” on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions (collectively “tax benefits”) that we believe will be available to us to offset or reduce income taxes in future periods. Under applicable federal and state income tax laws and regulations, tax benefits related to tax loss carryforwards will expire if they cannot be used within specified periods of time. Accordingly, the ability to fully use our deferred tax asset related to tax loss carryforwards to reduce income taxes in the future depends on the amount of taxable income that we generate during those time periods. At least once each year, or more frequently, if warranted, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the amount of the tax benefits available to us, that it is more likely, than not, that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the amount of the tax benefits available to us that it has become more likely, than not, that

22


 

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.

 

Allowance for Loan and Lease Losses. Our ALLL is established through a provision for loan losses charged to expense and may be increased by a recapture of previously established chargeoffs. Loans are charged against the ALLL when management believes that collectability of the principal is unlikely. The ALLL 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 ALLL may be necessary if there are significant changes in economic or other conditions that can affect the collectability in full of loans in our loan portfolio.

Adoption of new or revised accounting standards. For some accounting standards, we may elect to take advantage of the extended transition period afforded by the Jumpstart our Business Startups Act of 2012 (or “JOBS Act”), for the implementation of new or revised accounting standards. As a result, we may not be required to comply with new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies or we cease to be an “emerging growth” company as defined in the JOBS Act. As a result of this election, our financial statements may not be comparable to the financials statements of companies that comply with public company effective dates.

We have two business segments, “Banking” and “Investment Management and Wealth Planning” (“Wealth Management”). Banking includes the operations of FFB and FFIS and Wealth Management includes the operations of FFA. The financial position and operating results of the stand-alone holding company, FFI, are included under the caption “Other” in certain of the tables that follow, along with any consolidation elimination entries.

Recent Developments and Overview

We experienced strong growth during the first nine months of 2016 with loan originations of $1.3 billion and deposit growth of $817 million. Our assets under management (“AUM”) in Wealth Management increased $126 million during the first nine months of 2016. Revenues and income before taxes continue to increase as our investments in staffing and systems are resulting in higher levels of interest earnings assets.    

A $7.2 million gain was realized on the sale of $265 million of loans secured by multifamily properties to Freddie Mac who securitized the loans as part of their small balance loan program. The agreement with Freddie Mac to sell these loans provided for changes in pricing based upon changes in rates on certain treasury swap indices. In an effort to reduce the interest rate risk associated with this agreement, we entered into a swap agreement. In conjunction with the finalization of pricing under the agreement, we closed out our swap position and paid $2.4 million, including fees, to counterparties under the swap agreement, and the pricing on the loan sale increased by $2.2 million.

As of September 30, 2016, we have $200 million of multifamily loans classified as loans held for sale as part of a future sale and securitization of these loans.

A $0.8 million reduction in taxes on income was realized in the third quarter as a result of the early adoption of ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting” (“ASU 2016-09”). Under this new standard, excess tax benefits and deficiencies resulting from the exercise of, or vesting of, stock awards are now recognized as income tax benefit or expense in the period in which they occur. For purposes of determining an annual effective tax rate, the excess tax benefits or deficiencies cannot be included but rather are required to be treated as discrete items in the period in which they occur. In addition, for diluted earnings per share calculations, excess tax benefits are no longer included in assumed proceeds when determining average diluted shares outstanding under the treasury stock method. As set forth in ASU 2016-09, we recognized the impact of these changes on a prospective basis and included any activity that occurred since January 1, 2016 in the results for the third quarter of 2016.

 

 

23


 

Results of Operations

Our net income for the quarter and nine months ending September 30, 2016 was $9.7 million and $16.8 million, respectively as compared to $2.8 million and $8.3 million for the corresponding periods in 2015. Income before taxes for the quarter and nine months ending September 30, 2016 was $15.5 million and $27.7 million, respectively, as compared to $4.8 million and $14.5 million for the corresponding periods in 2015. The effective tax rate, which was impacted by the adoption in the third quarter of 2016 of ASU 2016-09, was 39.5% and 42.5% for the nine month periods ending September 30, 2016 and 2015, respectively.

The primary sources of revenue for Banking are net interest income, fees from its deposits, trust and insurance services, fees charged for consulting and administrative services and certain loan fees. The primary source of revenue for Wealth Management is asset management fees assessed on the balance of AUM. Compensation and benefit costs, which represent the largest component of noninterest expense accounted for 57% and 76%, respectively, of the total noninterest expense for Banking and Wealth Management in the first nine months of 2016.

The following table shows key operating results for each of our business segments for the quarter ended September 30:

 

(dollars in thousands)

 

Banking

 

 

Wealth Management

 

 

Other

 

 

Total

 

2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

26,004

 

 

$

 

 

$

 

 

$

26,004

 

Interest expense

 

 

2,841

 

 

 

 

 

 

 

 

 

2,841

 

Net interest income

 

 

23,163

 

 

 

 

 

 

 

 

 

23,163

 

Provision for loan losses

 

 

1,231

 

 

 

 

 

 

 

 

 

1,231

 

Noninterest income

 

 

9,923

 

 

 

5,319

 

 

 

(163

)

 

 

15,079

 

Noninterest expense

 

 

16,134

 

 

 

4,697

 

 

 

705

 

 

 

21,536

 

Income (loss) before taxes on income

 

$

15,721

 

 

$

622

 

 

$

(868

)

 

$

15,475

 

2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

17,108

 

 

$

 

 

$

 

 

$

17,108

 

Interest expense

 

 

1,509

 

 

 

 

 

 

138

 

 

 

1,647

 

Net interest income

 

 

15,599

 

 

 

 

 

 

(138

)

 

 

15,461

 

Provision for loan losses

 

 

570

 

 

 

 

 

 

 

 

 

570

 

Noninterest income

 

 

1,839

 

 

 

5,171

 

 

 

(142

)

 

 

6,868

 

Noninterest expense

 

 

11,653

 

 

 

4,685

 

 

 

618

 

 

 

16,956

 

Income (loss) before taxes on income

 

$

5,215

 

 

$

486

 

 

$

(898

)

 

$

4,803

 

 

General. Consolidated income before taxes was $15.5 million for the third quarter of 2016 as compared to $4.8 million in the third quarter of 2015. The increase was the result of a $10.5 million increase in income before taxes for Banking and a $0.1 million increase in income before taxes for Wealth Management. The increase in Banking was due to higher net interest income and higher noninterest income which were partially offset by a higher provision for loan losses and higher noninterest expenses. The increase in Wealth Management for the third quarter of 2016 was higher than the third quarter of 2015 due to a $0.1 million increase in noninterest income. Corporate interest expense decreased by $0.1 million due to the payoff of a term note in 2015, while corporate noninterest expenses increased by $0.1 million.


24


 

The following table shows key operating results for each of our business segments for the nine months ended September 30:

 

(dollars in thousands)

 

Banking

 

 

Wealth Management

 

 

Other

 

 

Total

 

2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

72,275

 

 

$

 

 

$

 

 

$

72,275

 

Interest expense

 

 

7,830

 

 

 

 

 

 

 

 

 

7,830

 

Net interest income

 

 

64,445

 

 

 

 

 

 

 

 

 

64,445

 

Provision for loan losses

 

 

2,881

 

 

 

 

 

 

 

 

 

2,881

 

Noninterest income

 

 

11,505

 

 

 

15,917

 

 

 

(448

)

 

 

26,974

 

Noninterest expense

 

 

43,746

 

 

 

14,536

 

 

 

2,521

 

 

 

60,803

 

Income (loss) before taxes on income

 

$

29,323

 

 

$

1,381

 

 

$

(2,969

)

 

$

27,735

 

2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

45,259

 

 

$

 

 

$

 

 

$

45,259

 

Interest expense

 

 

3,829

 

 

 

 

 

 

674

 

 

 

4,503

 

Net interest income

 

 

41,430

 

 

 

 

 

 

(674

)

 

 

40,756

 

Provision for loan losses

 

 

1,473

 

 

 

 

 

 

 

 

 

1,473

 

Noninterest income

 

 

4,501

 

 

 

15,426

 

 

 

(435

)

 

 

19,492

 

Noninterest expense

 

 

28,138

 

 

 

13,950

 

 

 

2,200

 

 

 

44,288

 

Income (loss) before taxes on income

 

$

16,320

 

 

$

1,476

 

 

$

(3,309

)

 

$

14,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General. Consolidated income before taxes for the first nine months of 2016 was $27.7 million as compared to $14.5 million for the first nine months of 2015. The increase was the result of a $13.0 million increase in income before taxes for Banking and a $0.3 million decrease in corporate expenses, which were partially offset by a $0.1 million decrease in earnings before taxes for Wealth Management. The increase in Banking was due primarily to higher net interest income and higher noninterest income which were partially offset by a higher provision for loans losses and higher noninterest expenses. The decrease in Wealth Management was due to higher noninterest expenses which were partially offset by higher noninterest income. Corporate interest expense decreased $0.7 million due to the payoff of a term note in 2015, while corporate noninterest expenses increased by $0.3 million.

25


 

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 yield on interest-earning assets:

 

 

 

Quarter Ended September 30:

 

 

 

2016

 

 

2015

 

(dollars in thousands)

 

Average
Balances

 

 

Interest

 

 

Average
Yield / Rate

 

 

Average
Balances

 

 

Interest

 

 

Average
Yield / Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

2,357,956

 

 

$

22,231

 

 

 

3.77

%

 

$

1,562,960

 

 

$

15,634

 

 

 

4.00

%

Securities

 

 

508,193

 

 

 

3,202

 

 

 

2.52

%

 

 

190,107

 

 

 

1,107

 

 

 

2.33

%

Fed funds, FHLB stock, and deposits

 

 

77,731

 

 

 

571

 

 

 

2.92

%

 

 

49,917

 

 

 

367

 

 

 

2.91

%

Total interest-earning assets

 

 

2,943,880

 

 

 

26,004

 

 

 

3.53

%

 

 

1,802,984

 

 

 

17,108

 

 

 

3.79

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming assets

 

 

8,794

 

 

 

 

 

 

 

 

 

 

 

2,553

 

 

 

 

 

 

 

 

 

Other

 

 

38,379

 

 

 

 

 

 

 

 

 

 

 

31,529

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,991,053

 

 

 

 

 

 

 

 

 

 

$

1,837,066

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

191,133

 

 

 

213

 

 

 

0.44

%

 

$

315,933

 

 

 

379

 

 

 

0.48

%

Money market and savings

 

 

761,778

 

 

 

1,307

 

 

 

0.68

%

 

 

310,962

 

 

 

452

 

 

 

0.58

%

Certificates of deposit

 

 

568,068

 

 

 

906

 

 

 

0.63

%

 

 

370,959

 

 

 

497

 

 

 

0.53

%

Total interest-bearing deposits

 

 

1,520,979

 

 

 

2,426

 

 

 

0.63

%

 

 

997,854

 

 

 

1,328

 

 

 

0.53

%

Borrowings

 

 

362,576

 

 

 

415

 

 

 

0.46

%

 

 

334,022

 

 

 

319

 

 

 

0.38

%

Total interest-bearing liabilities

 

 

1,883,555

 

 

 

2,841

 

 

 

0.60

%

 

 

1,331,876

 

 

 

1,647

 

 

 

0.49

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

806,861

 

 

 

 

 

 

 

 

 

 

 

300,414

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

18,578

 

 

 

 

 

 

 

 

 

 

 

10,492

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

2,708,994

 

 

 

 

 

 

 

 

 

 

 

1,642,782

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

282,059

 

 

 

 

 

 

 

 

 

 

 

194,284

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

2,991,053

 

 

 

 

 

 

 

 

 

 

$

1,837,066

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

 

 

 

 

$

23,163

 

 

 

 

 

 

 

 

 

 

$

15,461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Rate Spread

 

 

 

 

 

 

 

 

 

 

2.93

%

 

 

 

 

 

 

 

 

 

 

3.30

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Yield on Interest-earning Assets

 

 

 

 

 

 

 

 

 

 

3.15

%

 

 

 

 

 

 

 

 

 

 

3.43

%

26


 

 

 

 

Nine Months Ended September 30:

 

 

 

2016

 

 

2015

 

(dollars in thousands)

 

Average
Balances

 

 

Interest

 

 

Average
Yield / Rate

 

 

Average
Balances

 

 

Interest

 

 

Average
Yield / Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

2,143,315

 

 

$

61,362

 

 

 

3.82

%

 

$

1,378,191

 

 

$

41,097

 

 

 

3.98

%

Securities

 

 

525,089

 

 

 

9,423

 

 

 

2.39

%

 

 

154,538

 

 

 

2,744

 

 

 

2.37

%

Fed funds, FHLB stock, and deposits

 

 

62,147

 

 

 

1,490

 

 

 

3.20

%

 

 

41,837

 

 

 

1,418

 

 

 

4.53

%

Total interest-earning assets

 

 

2,730,551

 

 

 

72,275

 

 

 

3.53

%

 

 

1,574,566

 

 

 

45,259

 

 

 

3.83

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming assets

 

 

6,682

 

 

 

 

 

 

 

 

 

 

 

1,724

 

 

 

 

 

 

 

 

 

Other

 

 

35,450

 

 

 

 

 

 

 

 

 

 

 

22,886

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,772,683

 

 

 

 

 

 

 

 

 

 

$

1,599,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

$

223,490

 

 

 

779

 

 

 

0.47

%

 

$

298,613

 

 

 

1,022

 

 

 

0.46

%

Money market and savings

 

 

636,612

 

 

 

3,087

 

 

 

0.65

%

 

 

236,699

 

 

 

1,030

 

 

 

0.58

%

Certificates of deposit

 

 

509,790

 

 

 

2,328

 

 

 

0.61

%

 

 

315,488

 

 

 

1,314

 

 

 

0.56

%

Total interest-bearing deposits

 

 

1,369,892

 

 

 

6,194

 

 

 

0.60

%

 

 

850,800

 

 

 

3,366

 

 

 

0.53

%

Borrowings

 

 

499,191

 

 

 

1,636

 

 

 

0.44

%

 

 

334,260

 

 

 

1,137

 

 

 

0.45

%

Total interest-bearing liabilities

 

 

1,869,083

 

 

 

7,830

 

 

 

0.56

%

 

 

1,185,060

 

 

 

4,503

 

 

 

0.51

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

615,049

 

 

 

 

 

 

 

 

 

 

 

269,930

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

15,573

 

 

 

 

 

 

 

 

 

 

 

10,075

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

2,499,705

 

 

 

 

 

 

 

 

 

 

 

1,465,065

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

272,978

 

 

 

 

 

 

 

 

 

 

 

134,111

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

2,772,683

 

 

 

 

 

 

 

 

 

 

$

1,599,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

 

 

 

 

$

64,445

 

 

 

 

 

 

 

 

 

 

$

40,756

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Rate Spread

 

 

 

 

 

 

 

 

 

 

2.97

%

 

 

 

 

 

 

 

 

 

 

3.33

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Yield on Interest-earning Assets

 

 

 

 

 

 

 

 

 

 

3.15

%

 

 

 

 

 

 

 

 

 

 

3.45

%

 

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. The following table provides a breakdown of the changes in net interest income due to volume and rate changes for the quarter and nine months ended September 30, 2016, as compared to corresponding periods in 2015:

 

 

Quarter Ended
September 30, 2016 vs. 2015

 

 

Nine Months Ended
September 30, 2016 vs. 2015

 

(dollars in thousands)

Increase (Decrease) due to:

 

 

 

Increase (Decrease) due to:

 

 

 

Volume

 

 

 

Rate

 

 

 

Total

 

 

 

Volume

 

 

 

Rate

 

 

 

Total

 

Interest earned on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

$

7,525

 

 

$

(928

)

 

$

6,597

 

 

$

21,953

 

 

$

(1,688

)

 

$

20,265

 

Securities

 

1,997

 

 

 

98

 

 

 

2,095

 

 

 

6,653

 

 

 

26

 

 

 

6,679

 

Fed funds, FHLB stock, and deposits

 

203

 

 

 

1

 

 

 

204

 

 

 

567

 

 

 

(495

)

 

 

72

 

Total interest-earning assets

 

9,725

 

 

 

(829

)

 

 

8,896

 

 

 

29,173

 

 

 

(2,157

)

 

 

27,016

 

Interest paid on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

(139

)

 

 

(27

)

 

 

(166

)

 

 

(269

)

 

 

26

 

 

 

(243

)

Money market and savings

 

760

 

 

 

95

 

 

 

855

 

 

 

1,922

 

 

 

135

 

 

 

2,057

 

Certificates of deposit

 

306

 

 

 

103

 

 

 

409

 

 

 

879

 

 

 

135

 

 

 

1,014

 

Borrowings

 

23

 

 

 

73

 

 

 

96

 

 

 

537

 

 

 

(38

)

 

 

499

 

Total interest-bearing liabilities

 

950

 

 

 

244

 

 

 

1,194

 

 

 

3,069

 

 

 

258

 

 

 

3,327

 

Net interest income

$

8,775

 

 

$

(1,073

)

 

$

7,702

 

 

$

26,104

 

 

$

(2,415

)

 

$

23,689

 

 


27


 

Net interest income increased 50% from $15.5 million in the third quarter of 2015, to $23.2 million in the third quarter of 2016 due primarily to a 63% increase in interest-earning assets, which was partially offset by a decrease in our net interest rate spread. The decrease in the net interest rate spread from 3.30% in the third quarter of 2015 to 2.93% in the third quarter of 2016 was due to a decrease in yield on total interest-earning assets and an increase in the cost of interest-bearing liabilities. The yield on interest-earning assets decreased from 3.79% to 3.53% due to an increase in the proportion of lower yielding securities to total interest-earning assets and a decrease in the yield on loans. The decrease in yield on loans was due to prepayments of higher yielding loans and the addition of loans at current market rates which are lower than the current yield on our loan portfolio. The increase in the cost of interest-bearing liabilities was due primarily to increased costs of borrowings related to higher rates on FHLB advances which were partially offset by the payoff of our higher cost term note in the third quarter of 2015. The average rate on FHLB advances increased from 0.22% in the third quarter of 2015 to 0.46% in the third quarter of 2016.  

 

Net interest income increased 58% from $40.8 million in the first nine months of 2015, to $64.4 million in the first nine months of 2016 due to a 73% increase in interest-earning assets, which was partially offset by a decrease in our net interest rate spread. The decrease in the net interest rate spread from 3.33% in the first nine months of 2015 to 2.97% in the first nine months of 2016 was primarily due to a decrease in yield on total interest-earning assets and an increase in the cost of interest-bearing liabilities. The yield on interest-earning assets decreased from 3.83% to 3.53% due to an increase in the proportion of lower yielding securities to total interest-earning assets and a decrease in the yield on loans. The decrease in yield on loans was due to prepayments of higher yielding loans and the addition of loans at current market rates which are lower than the current yield on our loan portfolio. The increase in the cost of interest-bearing liabilities was due primarily to increased costs of borrowings related to higher rates on FHLB advances which were partially offset by the payoff of our higher cost term note in the third quarter of 2015. The average rate on FHLB advances increased from 0.20% in the first nine months of 2015 to 0.44% in the first nine months of 2016.

Provision for loan losses. The provision for loan losses represents our estimate of the amount necessary to be charged against the current period’s earnings to maintain the ALLL at a level that we consider adequate in relation to the estimated losses inherent in the loan portfolio. The provision for loan losses is impacted by changes in loan balances as well as changes in estimated loss assumptions and charge-offs and recoveries. The amount of the provision also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions and certain other subjective factors that may affect the ability of borrowers to meet their repayment obligations to us. For the quarter and nine months ended September 30, 2016, we recorded provisions for loan losses of $1.2 million and $2.9 million, respectively, as compared to $0.6 million and $1.5 million, respectively, for the quarter and nine months ended September 30, 2015. The increases in the provision for loan losses for the quarter and nine months ended September 30, 2016 as compared to the corresponding periods in 2015 reflects the increase in loan balances during the 2016 periods when compared to the 2015 periods.

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 and insurance commissions. The following table provides a breakdown of noninterest income for Banking for the quarter and nine months ended September 30:

 

(dollars in thousands)

2016

 

 

2015

 

Quarter Ended September 30:

 

 

 

 

 

 

 

Trust fees

$

799

 

 

$

555

 

Consulting fees

 

145

 

 

 

243

 

Deposit charges

 

105

 

 

 

125

 

Gain on sale of loans

 

7,238

 

 

 

205

 

Gain on capital markets activities

 

997

 

 

 

 

Prepayment fees

 

210

 

 

 

503

 

Other

 

429

 

 

 

208

 

Total noninterest income

$

9,923

 

 

$

1,839

 

Nine Months Ended September 30:

 

 

 

 

 

 

 

Trust fees

$

2,001

 

 

$

1,755

 

Consulting fees

 

536

 

 

 

736

 

Deposit charges

 

348

 

 

 

315

 

Gain on sale of loans

 

7,238

 

 

 

205

 

Loss on capital markets activities

 

(1,043

)

 

 

 

Prepayment fees

 

898

 

 

 

998

 

Other

 

1,527

 

 

 

492

 

Total noninterest income

$

11,505

 

 

$

4,501

 

 

Noninterest income for Banking increased from $1.8 million in the third quarter of 2015 to $9.9 million in the third quarter of 2016 due to a $7.2 million gain on the sale of loans and a $1.0 million gain on the sale of securities realized during the third quarter of 2016. The gain on sale of loans was realized on the sale of $265 million of loans secured by multifamily properties to Freddie Mac who securitized the loans as part of their small balance loan program. $2.2 million of this gain was related to a clause included in the

28


 

agreement with Freddie Mac which provided for changes in pricing based upon changes in rates on certain treasury swap indices. During the third quarter of 2016, we decided to sell $64 million of mortgage backed securities that carried higher risks of prepayments, resulting in the gain on sale of securities.

Noninterest income for Banking increased from $4.5 million in the first nine months of 2015 to $11.5 million in the first nine months of 2016. This $7.0 million increase was due to the recognition of the following during the first nine months of 2016:  a $7.2 million gain on the sale of loans; $1.3 million gain on the sale of securities, $2.4 million of costs incurred to close out a swap and a $0.8 million increase in revenues related to our insurance agency operations. The gain on sale of loans was realized on the sale of $265 million of loans secured by multifamily properties to Freddie Mac who securitized the loans as part of their small balance loan program. The agreement with Freddie Mac to sell these loans provided for changes in pricing based upon changes in rates on certain treasury swap indices. In an effort to reduce the interest rate risk associated with this agreement, we entered into a swap agreement. In conjunction with the finalization of pricing under the agreement, we closed out our swap position and paid $2.4 million, including fees, to counterparties under the swap agreement, and the pricing on the loan sale increased by $2.2 million. During the first nine months of 2016, during favorable market conditions, we sold securities with less desirable features and higher prepayment risk to better position our securities portfolio. The increase in insurance agency revenues was due to a premium earned on a large life insurance policy and increasing revenues from our property and casualty activities which began operations in 2015.  

Noninterest income for Wealth Management includes fees charged to high net-worth clients for managing their assets and for providing financial consulting services. The following table provides a breakdown of noninterest income for Wealth Management for the quarter and nine months ended September 30:

 

(dollars in thousands)

2016

 

 

2015

 

Quarter Ended September 30:

 

 

 

 

 

 

 

Asset management fees

$

5,301

 

 

$

5,146

 

Financial consulting fees

 

22

 

 

 

27

 

Other

 

(4

)

 

 

(2

)

Total noninterest income

$

5,319

 

 

$

5,171

 

 

Nine Months Ended September 30:

 

 

 

 

 

 

 

Asset management fees

$

15,856

 

 

$

15,360

 

Financial consulting fees

 

73

 

 

 

94

 

Other

 

(12

)

 

 

(28

)

Total noninterest income

$

15,917

 

 

$

15,426

 

 

Noninterest revenue for Wealth Management increased by $0.1 million in the third quarter of 2016 and $0.5 million during the first nine months of 2016 when compared to the corresponding periods in 2015 due to higher levels of AUM balances on which the asset management fees are calculated. AUM, which totaled $3.6 billion at September 30, 2016, increased by $126 million during the first nine months of 2016 as new account growth of $224 million and portfolio gains of $224 million were partially offset by net withdrawals and account terminations of $322 million.

Noninterest Expense. The following table provides a breakdown of noninterest expense for Banking and Wealth Management for the quarter and nine months ended September 30:

 

 

 

Banking

 

 

Wealth Management

 

(dollars in thousands)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Quarter Ended September 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

8,252

 

 

$

7,084

 

 

$

3,576

 

 

$

3,508

 

Occupancy and depreciation

 

 

2,506

 

 

 

2,003

 

 

 

547

 

 

 

508

 

Professional services and marketing

 

 

2,797

 

 

 

900

 

 

 

421

 

 

 

388

 

Other expenses

 

 

2,579

 

 

 

1,666

 

 

 

153

 

 

 

281

 

Total noninterest expense

 

$

16,134

 

 

$

11,653

 

 

$

4,697

 

 

$

4,685

 

 

 

 

 

 

 

 

Nine Months Ended September 30:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

$

24,887

 

 

$

17,819

 

 

$

11,068

 

 

$

10,753

 

Occupancy and depreciation

 

 

7,072

 

 

 

4,910

 

 

 

1,619

 

 

 

1,445

 

Professional services and marketing

 

 

5,511

 

 

 

2,222

 

 

 

1,397

 

 

 

1,153

 

Other expenses

 

 

6,276

 

 

 

3,187

 

 

 

452

 

 

 

599

 

Total noninterest expense

 

$

43,746

 

 

$

28,138

 

 

$

14,536

 

 

$

13,950

 

The $4.5 million and $15.6 million increases in noninterest expense in Banking in the third quarter and first nine months of 2016, respectively, as compared to the corresponding periods in 2015 were due primarily to increases in staffing and costs associated with the Bank’s expansion, the growth of its balances of loans and deposits and costs associated with our property and casualty

29


 

insurance agency operations which started during 2015. Compensation and benefits for Banking increased $1.2 million or 16% during the third quarter of 2016 as compared to the third quarter of 2015 as the number of full time equivalent employees (“FTE”) in Banking increased to 266.3 from 207.5 as a result of the increased staffing to support the growth in loans and deposits, a portion of which was offset by increased deferred costs relating to the higher loan originations. Compensation and benefits for Banking increased $7.1 million or 40% during the first nine months of 2016 as compared to the first nine months of 2015 as the number of FTE in Banking increased to 256.2 from 180.1 as a result of the acquisition of PRB, increased staffing to support the growth in loans and deposits and increased staffing for our property and casualty insurance agency operations. The increases in occupancy and depreciation, professional services and marketing and other expenses of $3.3 million and $8.5 million for the third quarter and nine months ended of 2016 were related to higher legal costs related to ongoing litigation matters, costs associated with our expansion into additional corporate space and opening of new offices, and costs related to the higher levels of loans and deposits, including FDIC insurance and customer service costs.

Noninterest expense in Wealth Management was relatively unchanged in the third quarter of 2016 as compared to the third quarter of 2015.  The $0.5 million increase for the first nine months of 2016 as compared to corresponding period in 2015 was primarily due to increased compensation costs related to an increase in FTE from 55.3 for the first nine months of 2015 to 59.1 for the first nine months of 2016.

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:

 

(dollars in thousands)

 

Banking

 

 

Wealth Management

 

 

Other and Eliminations

 

 

Total

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

496,725

 

 

$

1,624

 

 

$

(1,536

)

 

$

496,813

 

Securities AFS

 

 

542,703

 

 

 

 

 

 

 

 

 

542,703

 

Loans Held For Sale

 

 

200,002

 

 

 

 

 

 

 

 

 

200,002

 

Loans, net

 

 

2,295,229

 

 

 

 

 

 

 

 

 

2,295,229

 

FHLB Stock

 

 

25,677

 

 

 

 

 

 

 

 

 

25,677

 

Premises and equipment

 

 

4,546

 

 

 

671

 

 

 

125

 

 

 

5,342

 

Deferred taxes

 

 

9,495

 

 

 

481

 

 

 

180

 

 

 

10,156

 

REO

 

 

544

 

 

 

 

 

 

 

 

 

544

 

Goodwill and intangibles

 

 

2,232

 

 

 

 

 

 

 

 

 

2,232

 

Other assets

 

 

12,340

 

 

 

189

 

 

 

2,441

 

 

 

14,970

 

Total assets

 

$

3,589,493

 

 

$

2,965

 

 

$

1,210

 

 

$

3,593,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,365,210

 

 

$

 

 

$

(26,473

)

 

$

2,338,737

 

Borrowings

 

 

951,000

 

 

 

 

 

 

 

 

 

951,000

 

Intercompany balances

 

 

2,309

 

 

 

162

 

 

 

(2,471

)

 

 

 

Other liabilities

 

 

10,761

 

 

 

2,356

 

 

 

3,520

 

 

 

16,637

 

Shareholders’ equity

 

 

260,213

 

 

 

447

 

 

 

26,634

 

 

 

287,294

 

Total liabilities and equity

 

$

3,589,493

 

 

$

2,965

 

 

$

1,210

 

 

$

3,593,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December  31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

215,671

 

 

$

5,682

 

 

$

(5,605

)

 

$

215,748

 

Securities AFS

 

 

565,135

 

 

 

 

 

 

 

 

 

565,135

 

Loans, net

 

 

1,754,883

 

 

 

 

 

 

 

 

 

1,754,883

 

FHLB Stock

 

 

21,492

 

 

 

 

 

 

 

 

 

21,492

 

Premises and equipment

 

 

1,996

 

 

 

545

 

 

 

112

 

 

 

2,653

 

Deferred taxes

 

 

14,466

 

 

 

630

 

 

 

296

 

 

 

15,392

 

REO

 

 

4,036

 

 

 

 

 

 

 

 

 

4,036

 

Goodwill and Intangibles

 

 

2,416

 

 

 

 

 

 

 

 

 

2,416

 

Other assets

 

 

8,645

 

 

 

314

 

 

 

1,865

 

 

 

10,824

 

Total assets

 

$

2,588,740

 

 

$

7,171

 

 

$

(3,332

)

 

$

2,592,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,569,932

 

 

$

 

 

$

(47,756

)

 

$

1,522,176

 

Borrowings

 

 

796,000

 

 

 

 

 

 

 

 

 

796,000

 

Intercompany balances

 

 

2,748

 

 

 

121

 

 

 

(2,869

)

 

 

 

Other liabilities

 

 

9,309

 

 

 

2,634

 

 

 

2,724

 

 

 

14,667

 

Shareholders’ equity

 

 

210,751

 

 

 

4,416

 

 

 

44,569

 

 

 

259,736

 

Total liabilities and equity

 

$

2,588,740

 

 

$

7,171

 

 

$

(3,332

)

 

$

2,592,579

 

30


 

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.


31


 

During the first nine months of 2016, total assets for the Company and FFB increased by $1.0 billion. For FFB, during the first nine months of 2016, loans, including loans held for sale, and deposits increased $743 million and $795 million, respectively, cash and cash equivalents increased by $281 million, securities AFS decreased by $22 million and FHLB advances increased by $155 million.

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, increased $281 million during the first nine months of 2016. Changes in cash equivalents are primarily affected by the funding of loans, investments in securities, and changes in our sources of funding: deposits, FHLB advances and FFI borrowings.  

Securities available for sale. The following table provides a summary of the Company’s AFS securities portfolio as of:

 

 

 

Amortized

 

 

Gross Unrealized

 

 

Estimated

 

(dollars in thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury security

 

$

300

 

 

$

 

 

$

 

 

$

300

 

Agency mortgage-backed securities

 

 

489,233

 

 

 

9,749

 

 

 

(96

)

 

 

498,886

 

Beneficial interest – FHLMC securitization

 

 

44,505

 

 

 

121

 

 

 

(1,109

)

 

 

43,517

 

Total

 

$

534,038

 

 

$

9,870

 

 

$

(1,205

)

 

$

542,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury security

 

$

300

 

 

$

 

 

$

 

 

$

300

 

FNMA and FHLB Agency notes

 

 

16,108

 

 

 

 

 

 

(95

)

 

 

16,013

 

Agency mortgage-backed securities

 

 

538,269

 

 

 

909

 

 

 

(3,030

)

 

 

536,148

 

Beneficial interest – FHLMC securitization

 

 

12,674

 

 

 

476

 

 

 

(476

)

 

 

12,674

 

Total

 

$

567,351

 

 

$

1,385

 

 

$

(3,601

)

 

$

565,135

 

The US Treasury securities are pledged as collateral to the State of California to meet regulatory requirements related to FFB’s trust operations.

During the first nine months of 2016, the $33 million decrease in amortized cost of AFS securities was primarily the result of the sale of $104 million of AFS securities and the collection of $61 million in principal payments which were partially offset by the purchase of $131 million of AFS securities.

The scheduled maturities of securities AFS, other than agency mortgage-backed securities, and the related weighted average yield is as follows as of September 30, 2016:

 

(dollars in thousands)

Less than
1 Year

 

 

1 Through
5 years

 

 

5 Through 10 Years

 

 

After 10 Years

 

 

Total

 

Amortized Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury securities

$

 

 

$

300

 

 

$

 

 

$

 

 

$

300

 

Weighted average yield

 

%

 

 

0.90

%

 

 

%

 

 

%

 

 

0.90

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury securities

$

 

 

$

300

 

 

$

 

 

$

 

 

$

300

 

Agency mortgage backed securities and beneficial interests in FHLMC securitizations are excluded from the above table because such securities are not due at a single maturity date. The weighted average yield of the agency mortgage backed securities and beneficial interests in FHLMC securitizations as of September 30, 2016 was 2.59%.

32


 

Loans. The following table sets forth our loans, by loan category, as of:

 

(dollars in thousands)

September 30,
2016

 

 

December 31,
2015

 

Outstanding principal balance:

 

 

 

 

 

 

 

Loans secured by real estate:

 

 

 

 

 

 

 

Residential properties:

 

 

 

 

 

 

 

Multifamily

$

986,921

 

 

$

627,311

 

Single family

 

576,886

 

 

 

533,257

 

Total real estate loans secured by residential properties

 

1,563,807

 

 

 

1,160,568

 

Commercial properties

 

459,703

 

 

 

358,791

 

Land and construction

 

20,034

 

 

 

12,320

 

Total real estate loans

 

2,043,544

 

 

 

1,531,679

 

Commercial and industrial loans

 

228,579

 

 

 

196,584

 

Consumer loans

 

34,248

 

 

 

37,206

 

Total loans

 

2,306,371

 

 

 

1,765,469

 

Premiums, discounts and deferred fees and expenses

 

2,458

 

 

 

14

 

Total

$

2,308,829

 

 

$

1,765,483

 

The $543 million increase in loans, including loans classified as held for sale, during the first nine months of 2016 was the result of loan originations and funding of existing credit commitments of $1.3 billion, offset by $311 million of payoffs and the transfer of $469 million of loans held for sale. Loans held for sale, which totaled $200 million as of September 30, 2016, are not included in the above table.  

Deposits. The following table sets forth information with respect to our deposits and the average rates paid on deposits, as of:

 

 

 

September 30, 2016

 

 

December 31, 2015

 

(dollars in thousands)

 

Amount

 

 

Weighted Average Rate

 

 

Amount

 

 

Weighted Average Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

775,466

 

 

 

 

 

$

299,794

 

 

 

 

Interest-bearing

 

 

175,782

 

 

 

0.436

%

 

 

260,167

 

 

 

0.359

%

Money market and savings

 

 

836,494

 

 

 

0.697

%

 

 

492,015

 

 

 

0.531

%

Certificates of deposits

 

 

550,995

 

 

 

0.587

%

 

 

470,200

 

 

 

0.554

%

Total

 

$

2,338,737

 

 

 

0.420

%

 

$

1,522,176

 

 

 

0.404

%

During the first nine months of 2016 the weighted average rate of our interest-bearing deposits increased from 0.50% at December 31, 2015 to 0.63% at September 30, 2016, while the weighted average interest rates of both interest-bearing and noninterest-bearing deposits increased from 0.40% at December 31, 2015 to 0.42% at September 30, 2016, as the increase in the proportion of noninterest-bearing deposits, which increased from $300 million at December 31, 2015 to $775 million at September 30, 2016, partially offset the impacts of the increase in rates on interest-bearing deposits. The increase in the weighted average rate of our interest-bearing deposits was the result of increases in market rates, the use of higher than market promotional rates to attract new clients and our success in attracting higher balance accounts which generally bear higher interest rates.

The growth in deposits was due primarily to the organic growth in deposits from our specialty deposit group and our branch offices.

The maturities of our Certificates of deposit of $100,000 or more were as follows as of September 30, 2016:

 

(dollars in thousands)

 

 

 

 

3 months or less

$

149,731

 

Over 3 months through 6 months

 

45,895

 

Over 6 months through 12 months

 

70,579

 

Over 12 months

 

13,984

 

Total

$

280,189

 

FFB utilizes third party programs called CDARs and ICS which allows FFB to transfer funds of its clients in excess of the FDIC insurance limit (currently $250,000) to other institutions in exchange for an equal amount of funds from clients of these other institutions. This has allowed FFB to provide FDIC insurance coverage to its clients. Under certain regulatory guidelines, these deposits are considered brokered deposits. From time to time, the Bank will utilize brokered deposits as a source of funding. As of September 30, 2016 the Bank held $370.1 million of deposits which are classified as brokered deposits, including $109.7 million of CDARs and ICS reciprocal deposits.

33


 

Borrowings. At September 30, 2016 and December 31, 2015, our borrowings consisted of $951 million and $796 million, respectively, in overnight FHLB advances. The FHLB advances were paid in full in the early parts of October, 2016 and January, 2016, respectively. Because FFB utilizes overnight borrowings, the balance of outstanding borrowings fluctuates on a daily basis. The average balance of overnight borrowings during the first nine months of 2016 was $499 million, as compared to $312 million during the first nine months of 2015. The weighted average interest rate on these overnight borrowings was 0.44% for the first nine months of 2016, as compared to 0.20% during 2015. The maximum amount of overnight borrowings outstanding at any month-end during the first nine months of 2016 and 2015 was $951 million and $660 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:

 

 

 

Past Due and Still Accruing

 

 

 

 

 

 

Total Past

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

30–59 Days

 

 

60-89 Days

 

 

90 Days
or More

 

 

Nonaccrual

 

 

Due and Nonaccrual

 

 

Current

 

 

Total

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

 

 

$

 

 

$

 

 

$

4,021

 

 

$

4,021

 

 

$

1,559,786

 

 

$

1,563,807

 

Commercial properties

 

 

1,363

 

 

 

 

 

 

780

 

 

 

1,187

 

 

 

3,330

 

 

 

456,373

 

 

 

459,703

 

Land and construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,034

 

 

 

20,034

 

Commercial and industrial loans

 

 

4,145

 

 

 

5

 

 

 

3,136

 

 

 

4,184

 

 

 

11,470

 

 

 

217,109

 

 

 

228,579

 

Consumer loans

 

 

18

 

 

 

 

 

 

 

 

 

14

 

 

 

32

 

 

 

34,216

 

 

 

34,248

 

Total

 

$

5,526

 

 

$

5

 

 

$

3,916

 

 

$

9,406

 

 

$

18,853

 

 

$

2,287,518

 

 

$

2,306,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of total loans

 

 

0.24

%

 

 

%

 

 

0.17

%

 

 

0.41

%

 

 

0.82

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

1,160,568

 

 

$

1,160,568

 

Commercial properties

 

 

1,232

 

 

 

 

 

 

793

 

 

 

1,552

 

 

 

3,577

 

 

 

355,214

 

 

 

358,791

 

Land and construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,320

 

 

 

12,320

 

Commercial and industrial loans

 

 

2,425

 

 

 

1,639

 

 

 

5,713

 

 

 

2,509

 

 

 

12,286

 

 

 

184,298

 

 

 

196,584

 

Consumer loans

 

 

1,010

 

 

 

 

 

 

1,991

 

 

 

75

 

 

 

3,076

 

 

 

34,130

 

 

 

37,206

 

Total

 

$

4,667

 

 

$

1,639

 

 

$

8,497

 

 

$

4,136

 

 

$

18,939

 

 

$

1,746,530

 

 

$

1,765,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of total loans

 

 

0.26

%

 

 

0.09

%

 

 

0.48

%

 

 

0.23

%

 

 

1.07

%

 

 

 

 

 

 

 

 

The following table presents the composition of TDRs by accrual and nonaccrual status as of:

 

 

 

September 30, 2016

 

 

 

December 31, 2015

 

(dollars in thousands)

 

Accrual

 

 

 

Nonaccrual

 

 

Total

 

 

 

Accrual

 

 

Nonaccrual

 

 

Total

 

Commercial and industrial

 

$

403

 

 

$

3,936

 

 

$

4,339

 

 

$

 

 

$

344

 

 

$

344

 

The following is a breakdown of our loan portfolio by the risk category of loans as of:

34


 

 

(dollars in thousands)

 

Pass

 

 

Special 
Mention

 

 

Substandard

 

 

Impaired

 

 

Total

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

1,556,117

 

 

$

3,846

 

 

$

 

 

$

3,844

 

 

$

1,563,807

 

Commercial properties

 

 

456,548

 

 

 

 

 

 

1,968

 

 

 

1,187

 

 

 

459,703

 

Land and construction

 

 

20,034

 

 

 

 

 

 

 

 

 

 

 

 

20,034

 

Commercial and industrial loans

 

 

207,574

 

 

 

1,913

 

 

 

16,439

 

 

 

2,653

 

 

 

228,579

 

Consumer loans

 

 

34,234

 

 

 

 

 

 

 

 

 

14

 

 

 

34,248

 

Total

 

$

2,274,507

 

 

$

5,759

 

 

$

18,407

 

 

$

7,698

 

 

$

2,306,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

1,159,029

 

 

$

1,539

 

 

$

 

 

$

 

 

$

1,160,568

 

Commercial properties

 

 

351,988

 

 

 

174

 

 

 

354

 

 

 

6,275

 

 

 

358,791

 

Land and construction

 

 

11,180

 

 

 

 

 

 

1,140

 

 

 

 

 

 

12,320

 

Commercial and industrial loans

 

 

180,755

 

 

 

4,977

 

 

 

5,165

 

 

 

5,687

 

 

 

196,584

 

Consumer loans

 

 

37,130

 

 

 

 

 

 

 

 

 

76

 

 

 

37,206

 

Total

 

$

1,740,082

 

 

$

6,690

 

 

$

6,659

 

 

$

12,038

 

 

$

1,765,469

 

We consider a loan to be impaired when, based upon current information and events, we believe that it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. We measure impairment using either the present value of the expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the properties collateralizing the loan. Impairment losses are included in the ALLL through a charge to provision for loan losses. Adjustments to impairment losses due to changes in the fair value of the property collateralizing an impaired loan are considered in computing the provision for loan losses. Loans collectively reviewed for impairment include all loans except for loans which are individually reviewed based on specific criteria, such as delinquency, debt coverage, adequacy of collateral and condition of property collateralizing the loans. Impaired loans include nonaccrual loans (excluding those collectively reviewed for impairment), certain restructured loans and certain performing loans less than 90 days delinquent (“other impaired loans”) which we believe are not likely to be collected in accordance with the contractual terms of the loans.

In 2012 and in 2015, we purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of these purchased credit impaired loans is as follows as of:

 

(dollars in thousands)

September 30,
2016

 

 

December 31,
2015

 

Outstanding principal balance:

 

 

 

 

 

 

 

Loans secured by real estate:

 

 

 

 

 

 

 

Commercial properties

$

298

 

 

$

533

 

Land

 

 

 

 

1,616

 

Total real estate loans

 

298

 

 

 

2,149

 

Commercial and industrial loans

 

6,191

 

 

 

6,787

 

Consumer loans

 

5

 

 

 

14

 

Total loans

 

6,494

 

 

 

8,950

 

Unaccreted discount on purchased credit impaired loans

 

(1,625

)

 

 

(2,291

)

Total

$

4,869

 

 

$

6,659

 

35


 

 Allowance for Loan Losses. The following table summarizes the activity in our ALLL for the periods indicated:

 

(dollars in thousands)

Beginning Balance

 

 

Provision for Loan Losses

 

 

Charge-offs

 

 

Recoveries

 

 

Ending Balance

 

Quarter ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

$

5,353

 

 

$

951

 

 

$

 

 

$

 

 

$

6,304

 

Commercial properties

 

1,887

 

 

 

572

 

 

 

 

 

 

169

 

 

 

2,628

 

Land and construction

 

272

 

 

 

(70

)

 

 

 

 

 

 

 

 

202

 

Commercial and industrial loans

 

4,139

 

 

 

31

 

 

 

 

 

 

 

 

 

4,170

 

Consumer loans

 

549

 

 

 

(253

)

 

 

 

 

 

 

 

 

296

 

Total

$

12,200

 

 

$

1,231

 

 

$

 

 

$

169

 

 

$

13,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

$

6,799

 

 

$

(495

)

 

$

 

 

$

 

 

$

6,304

 

Commercial properties

 

1,813

 

 

 

696

 

 

 

(50

)

 

 

169

 

 

 

2,628

 

Land and construction

 

103

 

 

 

99

 

 

 

 

 

 

 

 

 

202

 

Commercial and industrial loans

 

1,649

 

 

 

2,521

 

 

 

 

 

 

 

 

 

4,170

 

Consumer loans

 

236

 

 

 

60

 

 

 

 

 

 

 

 

 

296

 

Total

$

10,600

 

 

$

2,881

 

 

$

(50

)

 

$

169

 

 

$

13,600

 

 

Year ended December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

$

6,546

 

 

$

253

 

 

$

 

 

$

 

 

$

6,799

 

Commercial properties

 

1,499

 

 

 

624

 

 

 

(310

)

 

 

 

 

 

1,813

 

Land and construction

 

67

 

 

 

36

 

 

 

 

 

 

 

 

 

103

 

Commercial and industrial loans

 

1,897

 

 

 

1,665

 

 

 

(1,913

)

 

 

 

 

 

1,649

 

Consumer loans

 

141

 

 

 

95

 

 

 

 

 

 

 

 

 

236

 

Total

$

10,150

 

 

$

2,673

 

 

$

(2,223

)

 

$

 

 

$

10,600

 

Excluding the loans acquired in acquisitions, our ALLL represented 0.59%, and 0.61% of total loans outstanding as of September 30, 2016 and December 31, 2015, respectively.

The amount of the ALLL is adjusted periodically by charges to operations (referred to in our income statement as the “provision for loan losses”) (i) to replenish the ALLL 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 ALLL. 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 ALLL, it could become necessary for us to incur additional, and possibly significant, charges to increase the ALLL, which would have the effect of reducing our income.

In addition, the FDIC and the California Department of Business Oversight, as an integral part of their examination processes, periodically review the adequacy of our ALLL. These agencies may require us to make additional provisions for loan losses, over and above the provisions that we have already made, the effect of which would be to reduce our income.

36


 

The following table presents the balance in the ALLL and the recorded investment in loans by impairment method as of:

(dollars in thousands)

 

Allowance for Loan Losses

 

Unaccreted Credit

 

 

 

Evaluated for Impairment

 

 

Purchased

 

 

 

 

 

 

Component

 

 

 

Individually

 

 

Collectively

 

 

Impaired

 

 

Total

 

 

Other Loans

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

 

 

$

6,304

 

 

$

 

 

$

6,304

 

 

$

148

 

Commercial properties

 

 

 

 

 

2,628

 

 

 

 

 

 

2,628

 

 

 

149

 

Land and construction

 

 

 

 

 

202

 

 

 

 

 

 

202

 

 

 

3

 

Commercial and industrial loans

 

 

 

 

 

4,170

 

 

 

 

 

 

4,170

 

 

 

161

 

Consumer loans

 

 

 

 

 

296

 

 

 

 

 

 

296

 

 

 

20

 

Total

 

$

 

 

$

13,600

 

 

$

 

 

$

13,600

 

 

$

481

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

3,844

 

 

$

1,559,963

 

 

$

 

 

$

1,563,807

 

 

$

13,472

 

Commercial properties

 

 

1,187

 

 

 

458,334

 

 

 

182

 

 

 

459,703

 

 

 

24,982

 

Land and construction

 

 

 

 

 

20,034

 

 

 

 

 

 

20,034

 

 

 

436

 

Commercial and industrial loans

 

 

2,653

 

 

 

221,238

 

 

 

4,688

 

 

 

228,579

 

 

 

24,157

 

Consumer loans

 

 

14

 

 

 

34,234

 

 

 

 

 

 

34,248

 

 

 

1,477

 

Total

 

$

7,698

 

 

$

2,293,803

 

 

$

4,870

 

 

$

2,306,371

 

 

$

64,524

 

 

(dollars in thousands)

 

Allowance for Loan Losses

 

 

Unaccreted Credit

 

 

 

Evaluated for Impairment

 

 

Purchased

 

 

 

 

 

 

Component

 

 

 

Individually

 

 

Collectively

 

 

Impaired

 

 

Total

 

 

Other Loans  

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

 

 

$

6,799

 

 

$

 

 

$

6,799

 

 

$

127

 

Commercial properties

 

 

30

 

 

 

1,783

 

 

 

 

 

 

1,813

 

 

 

363

 

Land and construction

 

 

 

 

 

103

 

 

 

 

 

 

103

 

 

 

42

 

Commercial and industrial loans

 

 

 

 

 

1,649

 

 

 

 

 

 

1,649

 

 

 

187

 

Consumer loans

 

 

 

 

 

236

 

 

 

 

 

 

236

 

 

 

13

 

Total

 

$

30

 

 

$

10,570

 

 

$

 

 

$

10,600

 

 

$

732

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential properties

 

$

 

 

$

1,160,568

 

 

$

 

 

$

1,160,568

 

 

$

7,747

 

Commercial properties

 

 

6,275

 

 

 

352,162

 

 

 

354

 

 

 

358,791

 

 

 

43,287

 

Land and construction

 

 

 

 

 

11,180

 

 

 

1,140

 

 

 

12,320

 

 

 

4,267

 

Commercial and industrial loans

 

 

5,687

 

 

 

185,732

 

 

 

5,165

 

 

 

196,584

 

 

 

28,231

 

Consumer loans

 

 

76

 

 

 

37,130

 

 

 

 

 

 

37,206

 

 

 

1,761

 

Total

 

$

12,038

 

 

$

1,746,772

 

 

$

6,659

 

 

$

1,765,469

 

 

$

85,293

 

The column labeled “Unaccreted Credit Component Other Loans” represents the amount of unaccreted credit component discount for loans acquired in an acquisition  that were not classified as purchased credit impaired or individually evaluated for impairment as of the dates indicated, and the stated principal balances of the related loans. The unaccreted credit component discount is equal to 0.75% and 0.86% of the stated principal balances of these loans as of September 30, 2016 and December 31, 2015, respectively. In addition to this unaccreted credit component discount, an additional $0.4 million and $0.3 million of the ALLL were provided for these loans as of September 30, 2016 and December 31, 2015, respectively.

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, 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 shares by FFI. The remaining balances of our lines of credit available to draw down totaled $431 million at September 30, 2016.

37


 

Cash Flows Provided by Operating Activities. During the nine months ended September 30, 2016, operating activities provided net cash of $13.7 million, comprised primarily of our net income of $16.8 million, and $5.7 million of non-cash charges, including provisions for loan losses, stock based compensation expense, depreciation and amortization and deferred income tax provision, offset partially by $8.5 gains on sales of loans and securities and a $1.4 million increase in other assets. During the nine months ended September 30, 2015, operating activities provided net cash of $7.3 million, comprised primarily of our net income of $8.3 million, and $2.9 million of non-cash charges, including provisions for loan losses, stock based compensation expense, bonus and other accruals, and depreciation and amortization, offset partially by a $2.1 million increase in other assets.

Cash Flows Used in Investing Activities. During the nine months ended September 30, 2016, investing activities used net cash of $708 million, primarily to fund a $1 billion net increase in loans and $131 million of securities purchases, offset partially by $270 million in cash received from the sale of loans and $165 million in cash received in proceeds from the sale, principal collection, and maturities of securities. During the nine months ended September 30, 2015, investing activities used net cash of $583 million, primarily to fund a $403 million net increase in loans and $225 million of securities purchases, offset partially by $38 million in cash received as a result of our acquisition of PRB.

Cash Flow Provided by Financing Activities. During the nine months ended September 30, 2016, financing activities provided net cash of $975 million, consisting primarily of a net increase of $817 million in deposits, and a $155 million increase in FHLB advances. During the nine months ended September 30, 2015, financing activities provided net cash of $752 million, consisting primarily of a net increase of $239 million in deposits, proceeds of $136 million from the sale of stock, and a $397 million increase in FHLB advances.

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 September 30, 2016 and December 31, 2015, our consolidated loan-to-deposit ratios were 107% and 116%, respectively.

Off-Balance Sheet Arrangements

The following table provides the off-balance sheet arrangements of the Company as of September 30, 2016:

 

(dollars in thousands)

 

 

 

Commitments to fund new loans

$

60,807

 

Commitments to fund under existing loans, lines of credit

 

198,443

 

Commitments under standby letters of credit

 

6,187

 

Some of the commitments to fund existing loans, lines of credit and letters of credit are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. As of September 30, 2016, the Bank was obligated on $129.0 million of letters of credit to the FHLB which were being used as collateral for public fund deposits, including $111.0 million of deposits from the State of California.

Capital Resources and Dividend Policy

Under federal banking regulations that apply to all United States based bank holding companies and federally insured banks, the Company (on a consolidated basis) and FFB (on a stand-alone basis) must 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. Under those regulations each bank holding company must meet a minimum capital ratio and each federally insured bank is determined by its primary federal bank regulatory agency to come within one of the following capital adequacy categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized.

Certain qualitative assessments also are made by a banking institution’s primary federal regulatory agency that could lead the agency to determine that the banking institution should be assigned to a lower capital category than the one indicated by the quantitative measures used to assess the institution’s capital adequacy. At each successive lower capital category, a banking institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.

38


 

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:

 

 

 

Actual

 

 

For Capital
Adequacy Purposes

 

 

To Be Well Capitalized Under Prompt Corrective Action Provisions

 

(dollars in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

FFI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 capital ratio

 

$

277,456

 

 

 

13.52

%

 

$

92,318

 

 

 

4.50

%

 

 

 

 

 

 

 

 

Tier 1 leverage ratio

 

 

277,456

 

 

 

9.28

%

 

 

119,589

 

 

 

4.00

%

 

 

 

 

 

 

 

 

Tier 1 risk-based capital ratio

 

 

277,456

 

 

 

13.52

%

 

 

123,091

 

 

 

6.00

%

 

 

 

 

 

 

 

 

Total risk-based capital ratio

 

 

291,566

 

 

 

14.21

%

 

 

164,121

 

 

 

8.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 capital ratio

 

$

256,007

 

 

 

17.44

%

 

 

66,072

 

 

 

4.50

%

 

 

 

 

 

 

 

 

Tier 1 leverage ratio

 

 

256,007

 

 

 

11.81

%

 

$

86,736

 

 

 

4.00

%

 

 

 

 

 

 

 

 

Tier 1 risk-based capital ratio

 

 

256,007

 

 

 

17.44

%

 

 

88,096

 

 

 

6.00

%

 

 

 

 

 

 

 

 

Total risk-based capital ratio

 

 

267,027

 

 

 

18.19

%

 

 

117,461

 

 

 

8.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFB

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 capital ratio

 

$

249,751

 

 

 

12.20

%

 

$

92,106

 

 

 

4.50

%

 

$

133,042

 

 

 

6.50

%

Tier 1 leverage ratio

 

 

249,751

 

 

 

8.37

%

 

 

119,385

 

 

 

4.00

%

 

 

149,232

 

 

 

5.00

%

Tier 1 risk-based capital ratio

 

 

249,751

 

 

 

12.20

%

 

 

122,808

 

 

 

6.00

%

 

 

163,744

 

 

 

8.00

%

Total risk-based capital ratio

 

 

263,861

 

 

 

12.89

%

 

 

163,744

 

 

 

8.00

%

 

 

204,680

 

 

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CET1 capital ratio

 

$

206,341

 

 

 

14.10

%

 

$

65,872

 

 

 

4.50

%

 

$

95,148

 

 

 

6.50

%

Tier 1 leverage ratio

 

 

206,341

 

 

 

9.54

%

 

 

86,543

 

 

 

4.00

%

 

 

108,179

 

 

 

5.00

%

Tier 1 risk-based capital ratio

 

 

206,341

 

 

 

14.10

%

 

 

87,829

 

 

 

6.00

%

 

 

117,106

 

 

 

8.00

%

Total risk-based capital ratio

 

 

217,361

 

 

 

14.85

%

 

 

117,106

 

 

 

8.00

%

 

 

146,382

 

 

 

10.00

%

As of each of the dates set forth in the above table, the Company (on a consolidated basis) exceeded the minimum required capital ratios applicable to it and FFB (on a stand-alone basis) qualified as a well-capitalized depository institution under the capital adequacy guidelines described above.

As of September 30, 2016, the amount of capital at FFB in excess of amounts required to be Well Capitalized was $117 million for the CET-1 capital ratio, $101 million for the Tier 1 leverage ratio, $86 million for the Tier 1 risk-based capital ratio and $59 million for the Total risk-based capital ratio. No conditions or events have occurred since September 30, 2016 which we believe have changed FFI’s or FFB’s capital adequacy classifications from those set forth in the above table.

The “Basel III” rules adopted by the Federal Reserve Board and the FDIC (the “New Capital Rules”) introduced a capital conservation buffer which is an increment added to the minimum capital ratios.  If a banking organization does not hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements, it will face constraints on dividends, equity repurchases and executive compensation based on the amount of the shortfall. The capital buffer is measured against risk weighted assets and is therefore not applicable to the tier 1 leverage ratio. The implementation of the capital conservation buffer began on January 1, 2016 at 0.625%, and will increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. The following table sets forth the minimum capital ratios plus the applicable increment of the capital conservation buffer as of the current year and when it is fully implemented in 2019:

 

 

2016

 

2019

CET-1 to risk-weighted assets

 

5.125

%

 

7.000

%

Tier 1 capital (i.e., CET-1 plus Additional Tier 1) to risk-weighted assets

 

6.625

%

 

8.500

%

Total capital (i.e., Tier 1 plus Tier 2) to risk-weighted assets

 

8.625

%

 

10.500

%

39


 

During the nine months of 2016, and during the entirety of 2015, FFI made cash capital contributions to FFB of $25.0 million and $76.5 million, respectively. As of September 30, 2016, FFI had $26.9 million of available capital and, therefore, has the ability and financial resources to contribute additional capital to FFB, if needed.

We did not pay dividends in 2016 or 2015 and we have no plans to pay dividends at least for the foreseeable future. Instead, it is our intention to retain internally generated cash flow to support our growth. Moreover, the payment of dividends is subject to certain regulatory restrictions.

We had no material commitments for capital expenditures as of September 30, 2016.

 

 

40


 

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 March 15, 2016.  There have been no material changes to our quantitative and qualitative disclosures about market risk since December 31, 2015.

 

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 September 30 2016, 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 September 30, 2016, 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 quarter ended September 30, 2016 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, 2015, which we filed with the SEC on March 15, 2016.

 

 

41


 

ITEM 6.

EXHIBITS

 

Exhibit No.

 

Description of Exhibit

 

 

 

31.1

 

Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1*

 

Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2*

 

Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

XBRL (eXtensive Business Reporting Language). The following financial materials from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2016, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

 

*

Furnished and not filed.

 

 

 

42


 

SIGNATURES

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.

 

 

 

FIRST FOUNDATION INC.

 

 

 

 

Dated: November 8, 2016

 

By:

/s/    JOHN M. MICHEL

 

 

 

John M. Michel

 

 

 

Executive Vice President and
Chief Financial Officer

 

 

 

S-1


 

INDEX TO EXHIBITS

 

Exhibit No.

   

Description of Exhibits

 

 

 

31.1

 

Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1*

 

Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2*

 

Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101

 

XBRL (eXtensive Business Reporting Language). The following financial materials from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2016, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

 

*

Furnished and not filed.

 

 

E-1