First Foundation 10Q 2021 Q2 Quarterly report

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 June 30, 2021

☐	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)

200 Crescent Court, Suite 1400 Dallas, Texas		75201
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (469) 638-9636

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	FFWM	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 3, 2021, the registrant had 44,819,743 shares of common stock, $0.001 par value per share, outstanding

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FIRST FOUNDATION INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2021

TABLE OF CONTENTS


		Page No.
Part I. Financial Information
Item 1.	Financial Statements	1
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	43

Part II. Other Information
Item 1A	Risk Factors	44
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 6	Exhibits	45

SIGNATURES		S-1

(i)

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PART I — FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

FIRST FOUNDATION INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)


	June 30,		December 31,
	2021		2020
		(unaudited)
ASSETS
Cash and cash equivalents	$	969,646	$	629,707
Securities available-for-sale ("AFS")		745,850		814,671
Allowance for credit losses - investments		(9,116)		(7,245)
Net securities		736,734		807,426

Loans held for sale		498,319		505,404

Loans held for investment		5,512,888		4,803,799
Allowance for credit losses - loans		(22,272)		(24,200)
Net loans		5,490,616		4,779,599

Investment in FHLB stock		17,250		17,250
Deferred taxes		9,618		8,603
Premises and equipment, net		8,183		8,012
Goodwill and intangibles		94,454		95,296
Other assets		114,314		105,863
Total Assets	$	7,939,134	$	6,957,160

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	7,106,802	$	5,913,433
Borrowings		20,000		269,000
Accounts payable and other liabilities		78,314		79,016
Total Liabilities		7,205,116		6,261,449

Shareholders’ Equity
Common Stock		45		45
Additional paid-in-capital		435,201		433,941
Retained earnings		287,997		247,638
Accumulated other comprehensive income (loss)		10,775		14,087
Total Shareholders’ Equity		734,018		695,711
Total Liabilities and Shareholders’ Equity	$	7,939,134	$	6,957,160

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

CONSOLIDATED INCOME STATEMENTS - UNAUDITED

(In thousands, except share and per share amounts)


	Quarter Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Interest income:
Loans	$	55,979	$	55,134	$	109,510	$	110,018
Securities AFS		4,927		6,539		10,133		13,536
FHLB stock, fed funds sold and interest-bearing deposits		497		259		898		716
Total interest income		61,403		61,932		120,541		124,270

Interest expense:
Deposits		3,387		10,914		8,010		25,560
Borrowings		106		2,571		392		5,395
Total interest expense		3,493		13,485		8,402		30,955

Net interest income		57,910		48,447		112,139		93,315

Provision for credit losses		44		1,367		404		5,431

Net interest income after provision for credit losses		57,866		47,080		111,735		87,884

Noninterest income:
Asset management, consulting and other fees		8,748		6,733		17,097		14,495
Gain on sale of loans		3,324		—		3,324		—
Other income		1,963		2,236		5,522		5,149
Total noninterest income		14,035		8,969		25,943		19,644

Noninterest expense:
Compensation and benefits		20,203		18,288		41,729		38,145
Occupancy and depreciation		5,710		5,855		11,870		11,367
Professional services and marketing costs		3,907		2,049		6,029		3,803
Customer service costs		2,353		1,622		4,123		3,994
Other expenses		3,444		3,123		6,377		6,500
Total noninterest expense		35,617		30,937		70,128		63,809

Income before taxes on income		36,284		25,112		67,550		43,719
Taxes on income		10,230		7,258		19,141		12,654
Net income	$	26,054	$	17,854	$	48,409	$	31,065

Net income per share:
Basic	$	0.58	$	0.40	$	1.08	$	0.70
Diluted	$	0.58	$	0.40	$	1.07	$	0.69
Shares used in computation:
Basic		44,792,358		44,620,716		44,750,272		44,645,189
Diluted		45,101,958		44,812,369		45,057,330		44,882,520

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

CONSOLIDATED STATEMENT OF CHANGES

IN SHAREHOLDERS’ EQUITY - UNAUDITED

(In thousands, except share amounts)


	Common Stock			Additional				Accumulated Other
	Number			Paid-in		Retained		Comprehensive
	of Shares	Amount		Capital		Earnings		Income (Loss)		Total
Balance: December 31, 2020	44,667,650	$	45	$	433,941	$	247,638	$	14,087	$	695,711
Net income	—		—		—		48,409		—		48,409
Other comprehensive income (loss)	—		—		—		—		(3,312)		(3,312)
Stock based compensation	—		—		1,629		—		—		1,629
Cash dividend	—		—		—		(8,050)		—		(8,050)
Issuance of common stock:
Exercise of options	75,807		—		819		—		—		819
Stock grants – vesting of restricted stock units	117,223		—		—		—		—		—
Repurchase of shares from restricted shares vesting	(40,937)		—		(1,188)		—		—		(1,188)
Balance: June 30, 2021	44,819,743	$	45	$	435,201	$	287,997	$	10,775	$	734,018

Balance: March 31, 2021	44,782,155	$	45	$	434,346	$	265,970	$	14,069	$	714,430
Net income	—		—		—		26,054		—		26,054
Other comprehensive income (loss)	—		—		—		—		(3,294)		(3,294)
Stock based compensation	—		—		634		—		—		634
Cash dividend	—		—		—		(4,027)		—		(4,027)
Issuance of common stock:
Exercise of options	28,807		—		465		—		—		465
Stock grants – vesting of restricted stock units	9,138		—		—		—		—		—
Repurchase of shares from restricted shares vesting	(357)		—		(244)		—		—		(244)
Balance: June 30, 2021	44,819,743	$	45	$	435,201	$	287,997	$	10,775	$	734,018

Balance: December 31, 2019	44,670,743	$	45	$	433,775	$	175,773	$	4,276	$	613,869
Net income	—		—		—		31,065		—		31,065
Other comprehensive income (loss)	—		—		—		—		1,027		1,027
Stock based compensation	—		—		1,195		—		—		1,195
Cash dividend	—		—		—		(6,256)		—		(6,256)
Issuance of common stock:
Exercise of options	86,000		—		645		—		—		645
Stock grants – vesting of restricted stock units	92,915		—		—		—		—		—
Repurchase of shares from restricted shares vesting	(224,334)		—		(2,824)		—		—		(2,824)
Balance: June 30, 2020	44,625,324	$	45	$	432,791	$	200,582	$	5,303	$	638,721

Balance: March 31, 2020	44,615,466	$	45	$	432,363	$	185,852	$	4,823	$	623,083
Net income	—		—		—		17,854		—		17,854
Other comprehensive income (loss)	—		—		—		—		480		480
Stock based compensation	—		—		428		—		—		428
Cash dividend	—		—		—		(3,124)		—		(3,124)
Issuance of common stock:
Stock grants – vesting of restricted stock units	9,858		—		—		—		—		—
Balance: June 30, 2020	44,625,324	$	45	$	432,791	$	200,582	$	5,303	$	638,721

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME - UNAUDITED

(In thousands)


	Quarter Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Net income	$	26,054	$	17,854	$	48,409	$	31,065
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities arising during the period		(4,657)		678		(4,682)		1,450
Other comprehensive income (loss) before tax		(4,657)		678		(4,682)		1,450
Income tax expense (benefit) related to items of other comprehensive income		(1,363)		198		(1,370)		423
Other comprehensive income (loss)		(3,294)		480		(3,312)		1,027
Total comprehensive income	$	22,760	$	18,334	$	45,097	$	32,092

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(In thousands)


	For the Six Months Ended
	June 30,
	2021		2020
Cash Flows from Operating Activities:
Net income	$	48,409	$	31,065
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses - loans		(1,467)		3,060
Provision for credit losses - securities AFS		1,871		2,371
Stock–based compensation expense		1,629		1,195
Depreciation and amortization		1,655		1,547
Deferred tax expense		355		1,462
Amortization of premium on securities		399		—
Amortization of core deposit intangible		842		1,010
Amortization of mortgage servicing rights - net		935		705
Amortization of premiums on purchased loans - net		—		(4,169)
Gain on sale of loans		(3,324)		—
Gain from hedging activities		—		(224)
Valuation allowance on mortgage servicing rights - net		1,309		—
Increase in other assets		(10,695)		(11,266)
Increase (decrease) in accounts payable and other liabilities		(1,264)		1,322
Net cash provided by operating activities		40,654		28,078
Cash Flows from Investing Activities:
Net increase in loans		(841,088)		(594,872)
Proceeds from sale of loans		142,000		—
Purchase of premises and equipment		(1,826)		(1,380)
Recovery of allowance for credit losses		509		564
Purchases of securities AFS		(83,372)		(6,757)
Proceeds from sale of securities		3,400		—
Maturities of securities AFS		143,712		155,376
Sale of FHLB stock, net		—		(2,079)
Net cash used in investing activities		(636,665)		(449,148)
Cash Flows from Financing Activities:
Increase in deposits		1,193,369		756,697
Net (decrease) increase in FHLB advances		(255,000)		21,600
Line of credit net change – borrowings (paydowns), net		6,000		—
Dividends paid		(8,050)		(6,256)
Proceeds from exercise of stock options		819		645
Repurchase of stock		(1,188)		(2,824)
Net cash provided by financing activities		935,950		769,862
Increase in cash and cash equivalents		339,939		348,792
Cash and cash equivalents at beginning of year		629,707		65,387
Cash and cash equivalents at end of period	$	969,646	$	414,179
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes	$	17,424	$	185
Interest		10,019		30,289
Noncash transactions:
Transfer of loans to loans held for sale	$	132,521	$	14,666
Chargeoffs against allowance for credit losses		408		1,055

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

NOTE 1: BASIS OF PRESENTATION

The consolidated financial statements include First Foundation Inc. (“FFI”) and its wholly owned subsidiaries: First Foundation Advisors (“FFA”) and First Foundation Bank (“FFB” or the “Bank”) and the wholly owned subsidiaries of FFB, First Foundation Insurance Services (“FFIS”), Blue Moon Management, LLC, and First Foundation Public Finance (“FFPF”) (collectively referred to as the “Company”). FFI also has 2 inactive wholly owned subsidiaries, First Foundation Consulting (“FFC”) and First Foundation Advisors, LLC (“FFA LLC”). All intercompany balances and transactions have been eliminated in consolidation. The results of operations reflect any interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. The results for the 2021 interim periods are not necessarily indicative of the results expected for the full year.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.

The accompanying unaudited consolidated financial statements include all information and footnotes required for interim financial statement presentation. These financial statements assume that readers have read the most recent Annual Report on Form 10-K which contains the latest available audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2020.

Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 2021 presentation.

Recent Accounting Pronouncements

In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-10, “Codification Improvements”. ASU 2020-10 amends certain guidance that may have been applied in an inconsistent manner by certain entities. The effective date for the amendments in this ASU are effective for annual periods after December 15, 2020. The adoption of ASU 2020-10 is not expected to have a significant impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. ASU 2020-04 provides optional guidance for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU are effective as of March 12, 2020 through December 31, 2022. The adoption of ASU 2020-04 is not expected to have a significant impact on the Company’s consolidated financial statements.

NOTE 2: 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

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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
(dollars in thousands)	Total		Level 1		Level 2		Level 3
June 30, 2021:
Investment securities available for sale:
Agency mortgage-backed securities	$	620,886	$	—	$	620,886	$	—
Beneficial interest – FHLMC securitizations		15,496		—		—		15,496
Corporate bonds		96,619		—		96,619		—
Other		3,733		598		3,135		—
Investment in equity securities		458		458		—		—
Total assets at fair value on a recurring basis	$	737,192	$	1,056	$	720,640	$	15,496


December 31, 2020:
Investment securities available for sale:
Agency mortgage-backed securities	$	723,995	$	—	$	723,995	$	—
Beneficial interest – FHLMC securitizations		23,463		—		—		23,463
Corporate bonds		58,358		—		58,358		—
Other		1,610		503		1,107		—
Investment in equity securities		338		338		—		—
Total assets at fair value on a recurring basis	$	807,764	$	841	$	783,460	$	23,463

The decrease in Level 3 assets from December 31, 2020 was due to securitization paydowns and to $1.9 million in provisions for credit losses in the first six months of 2021.

Assets Measured at Fair Value on a Nonrecurring Basis

From time to time, we may be required to measure other assets at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Loans. Loans measured at fair value on a nonrecurring basis include collateral dependent loans held for investment. The specific reserves for these loans are based on collateral value, net of estimated disposition costs and other identified quantitative inputs. Collateral value is determined based on independent third-party appraisals or internally-developed discounted cash flow analyses. Internal discounted cash flow analyses are also utilized to estimate the fair value

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

of these loans, which considers internally-developed, unobservable inputs such as discount rates, default rates, and loss severity. When the fair value of the collateral is based on an observable market price or a current appraised value, we measure the impaired loan at nonrecurring Level 2. When an appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price or a discounted cash flow has been used to determine the fair value, we measure the impaired loan at nonrecurring Level 3. The total collateral dependent impaired Level 3 loans were $10.2 million and $3.1 million at June 30, 2021 and December 31, 2020, respectively. There were $1.2 million and $1.1 million in specific reserves related to these loans at June 30, 2021 and December 31, 2020.

Real Estate Owned. The fair value of real estate owned is based on external appraised values that include adjustments for estimated selling costs and assumptions of market conditions that are not directly observable, resulting in a Level 3 classification.

Mortgage Servicing Rights. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income, resulting in a Level 3 classification. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Significant assumptions in the valuation of these Level 3 mortgage servicing rights as of June 30, 2021 included prepayment rates ranging from 20% to 25% and discount rates ranging from 0.14% to 10%.

Fair Value of Financial Instruments

FASB ASC 825-10, “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate such value. The methodologies for estimating the fair value of financial assets and financial liabilities measured at fair value on a recurring and non-recurring basis are discussed above. The estimated fair value amounts have been determined by management using available market information and appropriate valuation methodologies and are based on the exit price notion set forth by ASU 2016-01. In cases where quoted market prices are not available, fair values are based on estimates using present value or other market value techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The aggregate fair value amounts presented below do not represent the underlying value of the Company.

Fair value estimates are made at a discrete point in time based on relevant market information and other information about the financial instruments. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based in large part on judgments we make primarily regarding current economic conditions, risk characteristics of various financial instruments, prepayment rates, and future expected loss experience. These estimates are subjective in nature and invariably involve some inherent uncertainties. Additionally, unexpected changes in events or circumstances can occur that could require us to make changes to our assumptions and which, in turn, could significantly affect and require us to make changes to our previous estimates of fair value.

In addition, the fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of existing and anticipated future customer relationships and the value of assets and liabilities that are not considered financial instruments, such as premises and equipment and other real estate owned.

The following methods and assumptions were used to estimate the fair value of financial instruments:

Cash and Cash Equivalents. The fair value of cash and cash equivalents approximates its carrying value.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

Interest-Bearing Deposits with Financial Institutions. The fair values of interest-bearing deposits maturing within ninety days approximate their carrying values.

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 in FHLMC securitizations. Significant assumptions in the valuation of these Level 3 securities as of June 30, 2021 and December 31, 2020 included prepayment rates ranging from 25% to 35% and discount rates ranging from 7.11% 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 the stock is equal to the carrying amount, is classified as restricted securities and is periodically evaluated for impairment based on our assessment of the ultimate recoverability of our investments in that stock. Any cash or stock dividends paid to us on such stock are reported as income.

Loans Held For Sale. The fair value of loans held for sale is determined using secondary market pricing.

Loans Held for Investment. The fair value for loans with variable interest rates is the carrying amount. The fair value of fixed rate loans is derived by calculating the discounted value of future cash flows expected to be received by the various homogeneous categories of loans or by reference to secondary market pricing. All loans have been adjusted to reflect changes in credit risk.

Deposits. The fair value of demand deposits, savings deposits, and money market deposits is defined as the amounts payable on demand. The fair value of fixed maturity certificates of deposit is estimated based on the discounted value of the future cash flows expected to be paid on the deposits.

Borrowings. The fair value of borrowings is the carrying value of overnight FHLB advances that approximate fair value because of the short-term maturity of this instrument, resulting in a Level 2 classification. The fair value of term borrowings is derived by calculating the discounted value of future cash flows expected to be paid out by the Company, resulting in a Level 3 classification.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

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
June 30, 2021:
Assets:
Cash and cash equivalents	$	969,646	$	969,646	$	—	$	—	$	969,646
Securities AFS, net		736,734		598		720,640		15,496		736,734
Loans held for sale		498,319		—		503,428		—		503,428
Loans, net		5,490,616		—		—		5,547,016		5,547,016
Investment in FHLB stock		17,250		—		17,250		—		17,250
Investment in equity securities		458		458		—		—		458
Liabilities:
Deposits	$	7,106,802	$	6,430,077	$	683,504	$	—	$	7,113,581
Borrowings		20,000		—		—		20,000		20,000

December 31, 2020:
Assets:
Cash and cash equivalents	$	629,707	$	629,707	$	—	$	—	$	629,707
Securities AFS, net		807,426		503		783,460		23,463		807,426
Loans held for sale		505,404		—		510,638		—		510,638
Loans, net		4,779,599		—		—		4,829,258		4,829,258
Investment in FHLB stock		17,250		—		17,250		—		17,250
Investment in equity securities		338		338		—		—		338
Liabilities:
Deposits	$	5,913,433	$	4,934,537	$	978,897	$	—	$	5,913,434
Borrowings		269,000		—		255,000		14,000		269,000

NOTE 3: SECURITIES

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


	Amortized		Gross Unrealized				Allowance for		Estimated
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Fair Value
June 30, 2021:
Agency mortgage-backed securities	$	608,766	$	13,054	$	(934)	$	—	$	620,886
Beneficial interests in FHLMC securitization		24,199		413		—		(9,116)		15,496
Corporate bonds		94,000		2,619		—		—		96,619
Other		3,656		87		(10)		—		3,733
Total	$	730,621	$	16,173	$	(944)	$	(9,116)	$	736,734
December 31, 2020:
Agency mortgage-backed securities	$	705,752	$	18,243	$	—	$	—	$	723,995
Beneficial interests in FHLMC securitization		30,497		211		—		(7,245)		23,463
Corporate bonds		57,000		1,358		—		—		58,358
Other		1,512		98		—		—		1,610
Total	$	794,761	$	19,910	$	—	$	(7,245)	$	807,426

US Treasury securities of $0.6 million as of June 30, 2021 and December 31, 2020 that are included in the table above as Other are pledged as collateral to the State of California to meet regulatory requirements related to the Bank’s

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

trust operations. As of June 30, 2021, $186.8 million of agency mortgage-backed securities are pledged as collateral as support for the Bank’s obligations under loan sales and securitization agreements entered into from 2018 through 2020.

The table below indicates, as of June 30, 2021, 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 June 30, 2021
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Agency mortgage-backed securities	$	70,423	$	(933)	$	—	$	—	$	70,423	$	(933)
Other		2,520		(11)		—		—		2,520		(11)
Total temporarily impaired securities	$	72,943	$	(944)	$	—	$	—	$	72,943	$	(944)

There were 0 unrealized losses on our investments as of December 31, 2020.

Unrealized losses in agency mortgage backed securities, beneficial interests in FHLMC securitizations, and other securities have not been recognized into income because the issuer bonds are of high credit quality, management does not intend to sell, it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in discount rates and assumptions regarding future interest rates. The fair value is expected to recover as the bonds approach maturity.

The following is a roll forward of the Bank’s allowance for credit losses related to securities for the following periods:


(dollars in thousands)		Total

Three Months Ended June 30, 2021:
Beginning balance	$	8,878
Provision for credit losses		238
Balance: June 30, 2021	$	9,116

Six Months Ended June 30, 2021:
Beginning balance	$	7,245
Provision for credit losses		1,871
Balance: June 30, 2021	$	9,116

Year Ended December 31, 2020:
Beginning balance	$	—
Provision for credit losses		7,245
Balance: December 31, 2020	$	7,245

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

The scheduled maturities of securities AFS and the related weighted average yields were as follows for the periods indicated:


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
June 30, 2021
Amortized Cost:
Corporate bonds	$	—		$	—		$	89,000		$	5,000		$	94,000
Other		100			1,526			2,030			—			3,656
Total	$	100		$	1,526		$	91,030		$	5,000		$	97,656
Weighted average yield		0.13	%		2.02	%		4.45	%		3.38	%		4.35	%
Estimated Fair Value:
Corporate bonds	$	—		$	—		$	91,550		$	5,069		$	96,619
Other		100			1,611			2,022			—			3,733
Total	$	100		$	1,611		$	93,572		$	5,069		$	100,352


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
December 31, 2020
Amortized Cost:
Corporate bonds	$	—		$	—		$	57,000		$	—		$	57,000
Other		500			1,012			—			—			1,512
Total	$	500		$	1,012		$	57,000		$	—		$	58,512
Weighted average yield		1.83	%		2.81	%		5.39	%		—	%		5.32	%
Estimated Fair Value:
Corporate bonds	$	—		$	—		$	58,358		$	—		$	58,358
Other		503			1,107			—			—			1,610
Total	$	503		$	1,107		$	58,358		$	—		$	59,968

Agency mortgage-backed securities and beneficial interests in FHLMC securitizations are excluded from the above table because such securities are not due at a single maturity date. The weighted average yield of the agency mortgage-backed securities and beneficial interests as of June 30, 2021 and December 31, 2020 was 2.33% and 2.39%, respectively.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

NOTE 4: LOANS

The following is a summary of our loans as of:


	June 30,		December 31,
(dollars in thousands)	2021		2020
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily	$	2,814,446	$	2,247,542
Single family		812,728		806,014
Total real estate loans secured by residential properties		3,627,174		3,053,556
Commercial properties		665,166		747,807
Land and construction		56,603		55,832
Total real estate loans		4,348,943		3,857,195
Commercial and industrial loans		1,142,766		918,676
Consumer loans		9,645		18,888
Total loans		5,501,354		4,794,759
Premiums, discounts and deferred fees and expenses		11,534		9,040
Total	$	5,512,888	$	4,803,799

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


	Past Due and Still Accruing												Total Past
							90 Days						Due and
(dollars in thousands)	30–59 Days			60-89 Days			or More			Nonaccrual			Nonaccrual			Current		Total
June 30, 2021:
Real estate loans:
Residential properties	$	54		$	—		$	—		$	10,757		$	10,811		$	3,628,857	$	3,639,668
Commercial properties		776			—			—			1,613			2,389			663,155		665,544
Land and construction		—			—			—			—			—			56,565		56,565
Commercial and industrial loans		1,550			250			—			3,817			5,617			1,135,831		1,141,448
Consumer loans		—			—			—			—			—			9,663		9,663
Total	$	2,380		$	250		$	—		$	16,187		$	18,817		$	5,494,071	$	5,512,888

Percentage of total loans		0.04	%		0.00	%		—	%		0.29	%		0.34	%

December 31, 2020:
Real estate loans:
Residential properties	$	35		$	—		$	—		$	10,947		$	10,982		$	3,042,574	$	3,053,556
Commercial properties		951			240			—			4,544			5,735			742,072		747,807
Land and construction		—			—			—			—			—			55,832		55,832
Commercial and industrial loans		1,013			411			152			5,137			6,713			911,963		918,676
Consumer loans		—			—			—			—			—			18,888		18,888
Total	$	1,999		$	651		$	152		$	20,628		$	23,430		$	4,771,329	$	4,794,759

Percentage of total loans		0.04	%		0.01	%		0.00	%		0.43	%		0.49	%

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

The following table summarizes our nonaccrual loans as of:


	Nonaccrual		Nonaccrual
	with Allowance		with no Allowance
(dollars in thousands)	for Credit Losses		for Credit Losses
June 30, 2021:
Real estate loans:
Residential properties	$	2,958	$	7,799
Commercial properties		—		1,613
Land and construction		—		—
Commercial and industrial loans		1,881		1,936
Consumer loans		—		—
Total	$	4,839	$	11,348

December 31, 2020:
Real estate loans:
Residential properties	$	2,987	$	7,959
Commercial properties		—		4,544
Land and construction		—		—
Commercial and industrial loans		2,581		2,557
Consumer loans		—		—
Total	$	5,568	$	15,060

The following table presents the loans classified as troubled debt restructurings (“TDR”) by accrual and nonaccrual status as of:


	June 30, 2021						December 31, 2020
(dollars in thousands)	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total
Residential loans	$	1,200	$	—	$	1,200	$	1,200	$	—	$	1,200
Commercial real estate loans		1,064		1,228		2,292		1,107		1,277		2,384
Commercial and industrial loans		980		2,180		3,160		1,041		2,832		3,873
Total	$	3,244	$	3,408	$	6,652	$	3,348	$	4,109	$	7,457

The following table provides information on loans that were modified as TDRs for the following periods:


		Outstanding Recorded Investment
(dollars in thousands)	Number of loans	Pre-Modification		Post-Modification		Financial Impact
Six Months Ended June 30, 2021:
Commercial and industrial loans	1	$	362	$	362	$	—
Total	1	$	362	$	362	$	—

		Outstanding Recorded Investment
(dollars in thousands)	Number of loans	Pre-Modification		Post-Modification		Financial Impact
Year Ended December 31, 2020
Commercial and industrial loans	1	$	507	$	507		—
Total	1	$	507	$	507	$	—

All of these loans were classified as a TDR as a result of a reduction in required principal payments and an extension of the maturity date of the loans. These loans have been paying in accordance with the terms of their restructure.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

NOTE 5: ALLOWANCE FOR CREDIT LOSSES

The following is a roll forward of the Bank’s allowance for credit losses related to loans for the following periods:


	Beginning		Adoption of		Provision for						Ending
(dollars in thousands)	Balance		ASC 326		Credit Losses		Charge-offs		Recoveries		Balance
Three Months Ended June 30, 2021:
Real estate loans:
Residential properties	$	6,033	$	—	$	1,203	$	—	$	—	$	7,236
Commercial properties		5,956		—		(471)		—		—		5,485
Land and construction		3,962		—		(1,978)		—		—		1,984
Commercial and industrial loans		7,062		—		487		(194)		103		7,458
Consumer loans		167		—		(58)		—		—		109
Total	$	23,180	$	—	$	(817)	$	(194)	$	103	$	22,272

Six Months Ended June 30, 2021:
Real estate loans:
Residential properties	$	5,115	$	—	$	2,121	$	—	$	—	$	7,236
Commercial properties		8,711		—		(3,226)		—		—		5,485
Land and construction		892		—		1,092		—		—		1,984
Commercial and industrial loans		9,249		—		(1,892)		(408)		509		7,458
Consumer loans		233		—		(124)		—		—		109
Total	$	24,200	$	—	$	(2,029)	$	(408)	$	509	$	22,272

Year Ended December 31, 2020:
Real estate loans:
Residential properties	$	8,423	$	363	$	(3,671)	$	—	$	—	$	5,115
Commercial properties		4,166		3,760		785		—		—		8,711
Land and construction		573		92		227		—		—		892
Commercial and industrial loans		7,448		—		2,642		(1,844)		1,003		9,249
Consumer loans		190		—		43		—		—		233
Total	$	20,800	$	4,215	$	26	$	(1,844)	$	1,003	$	24,200

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

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


	Allowance for Credit Losses
	Loans Evaluated
(dollars in thousands)	Individually		Collectively		Total
June 30, 2021:
Allowance for credit losses:
Real estate loans:
Residential properties	$	1,218	$	6,152	$	7,370
Commercial properties		437		4,999		5,436
Land and construction		—		1,967		1,967
Commercial and industrial loans		710		6,681		7,391
Consumer loans		—		108		108
Total	$	2,365	$	19,907	$	22,272
Loans:
Real estate loans:
Residential properties	$	16,556	$	3,623,112	$	3,639,668
Commercial properties		14,025		651,519		665,544
Land and construction		—		56,565		56,565
Commercial and industrial loans		5,045		1,136,403		1,141,448
Consumer loans		—		9,663		9,663
Total	$	35,626	$	5,477,262	$	5,512,888

December 31, 2020:
Allowance for credit losses:
Real estate loans:
Residential properties	$	1,059	$	4,056	$	5,115
Commercial properties		374		8,337		8,711
Land and construction		—		892		892
Commercial and industrial loans		956		8,293		9,249
Consumer loans		—		233		233
Total	$	2,389	$	21,811	$	24,200
Loans:
Real estate loans:
Residential properties	$	12,414	$	3,041,142	$	3,053,556
Commercial properties		17,304		730,503		747,807
Land and construction		—		55,832		55,832
Commercial and industrial loans		6,472		912,204		918,676
Consumer loans		—		18,888		18,888
Total	$	36,190	$	4,758,569	$	4,794,759

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

The following tables present risk categories of loans based on year of origination, as of:


													Revolving
(dollars in thousands)	2021		2020		2019		2018		2017		Prior		Loans		Total
June 30, 2021:
Loans secured by Real Estate:
Residential
Multifamily
Pass	$	664,743	$	886,772	$	568,896	$	368,554	$	203,307	$	132,432	$	—	$	2,824,704
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	664,743	$	886,772	$	568,896	$	368,554	$	203,307	$	132,432	$	—	$	2,824,704

Single Family
Pass	$	157,457	$	139,254	$	64,441	$	81,469	$	72,746	$	259,317	$	23,699	$	798,383
Special Mention		—		—		—		—		—		—		26		26
Substandard		—		—		—		—		1,910		11,353		3,292		16,555
Total	$	157,457	$	139,254	$	64,441	$	81,469	$	74,656	$	270,670	$	27,017	$	814,964

Commercial Real Estate
Pass	$	18,446	$	39,848	$	76,796	$	100,255	$	124,522	$	268,611	$	—	$	628,478
Special Mention		—		—		10,678		10,740		—		937		—		22,355
Substandard		—		—		5,878		—		2,283		6,550		—		14,711
Total	$	18,446	$	39,848	$	93,352	$	110,995	$	126,805	$	276,098	$	—	$	665,544

Land and construction
Pass	$	—	$	214	$	16,623	$	28,592	$	10,538	$	598	$	—	$	56,565
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	—	$	214	$	16,623	$	28,592	$	10,538	$	598	$	—	$	56,565

Commercial
Pass	$	253,972	$	237,331	$	118,650	$	29,284	$	11,238	$	26,668	$	446,972	$	1,124,115
Special Mention		715		1,473		1,080		1,246		—		134		3,048		7,696
Substandard		—		1,114		1,927		1,063		230		2,615		2,688		9,637
Total	$	254,687	$	239,918	$	121,657	$	31,593	$	11,468	$	29,417	$	452,708	$	1,141,448

Consumer
Pass	$	77	$	1,145	$	—	$	1,273	$	—	$	92	$	7,076	$	9,663
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	77	$	1,145	$	—	$	1,273	$	—	$	92	$	7,076	$	9,663

Total loans
Pass	$	1,094,695	$	1,304,564	$	845,406	$	609,427	$	422,351	$	687,718	$	477,747	$	5,441,908
Special Mention		715		1,473		11,758		11,986		—		1,071		3,074		30,077
Substandard		—		1,114		7,805		1,063		4,423		20,518		5,980		40,903
Total	$	1,095,410	$	1,307,151	$	864,969	$	622,476	$	426,774	$	709,307	$	486,801	$	5,512,888

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED


													Revolving
(dollars in thousands)	2020		2019		2018		2017		2016		Prior		Loans		Total
December 31, 2020:
Loans secured by Real Estate:
Residential
Multifamily
Pass	$	774,701	$	638,237	$	469,866	$	218,470	$	82,941	$	63,328	$	—	$	2,247,543
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	774,701	$	638,237	$	469,866	$	218,470	$	82,941	$	63,328	$	—	$	2,247,543

Single Family
Pass	$	173,563	$	83,311	$	110,560	$	95,888	$	107,568	$	196,692	$	25,014	$	792,596
Special Mention		—		—		—		986		—		—		—		986
Substandard		—		—		—		1,946		—		7,134		3,351		12,431
Total	$	173,563	$	83,311	$	110,560	$	98,820	$	107,568	$	203,826	$	28,365	$	806,013

Commercial Real Estate
Pass	$	46,260	$	100,432	$	120,230	$	129,120	$	119,719	$	194,533	$	—	$	710,294
Special Mention		—		743		16,278		—		2,333		157		—		19,511
Substandard		—		5,929		—		2,336		2,515		7,222		—		18,002
Total	$	46,260	$	107,104	$	136,508	$	131,456	$	124,567	$	201,912	$	—	$	747,807

Land and construction
Pass	$	257	$	15,923	$	27,792	$	10,532	$	706	$	622	$	—	$	55,832
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	257	$	15,923	$	27,792	$	10,532	$	706	$	622	$	—	$	55,832

Commercial
Pass	$	377,500	$	146,279	$	54,910	$	15,868	$	13,180	$	16,823	$	270,604	$	895,164
Special Mention		2,058		3,922		1,868		579		297		448		6,107		15,279
Substandard		1,226		316		1,188		259		2,459		281		2,504		8,233
Total	$	380,784	$	150,517	$	57,966	$	16,706	$	15,936	$	17,552	$	279,215	$	918,676

Consumer
Pass	$	2,557	$	—	$	1,321	$	3	$	6,784	$	100	$	8,123	$	18,888
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	2,557	$	—	$	1,321	$	3	$	6,784	$	100	$	8,123	$	18,888

Total loans
Pass	$	1,374,838	$	984,182	$	784,679	$	469,881	$	330,898	$	472,098	$	303,741	$	4,720,317
Special Mention		2,058		4,665		18,146		1,565		2,630		605		6,107		35,776
Substandard		1,226		6,245		1,188		4,541		4,974		14,637		5,855		38,666
Total	$	1,378,122	$	995,092	$	804,013	$	475,987	$	338,502	$	487,340	$	315,703	$	4,794,759

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses and the related allowance for credit losses (“ACL”) allocated to these loans:


					Equipment/					ACL
(dollars in thousands)	Real Estate		Cash		Receivables		Total			Allocation
June 30, 2021:
Loans secured by Real Estate:
Residential properties
Single family	$	9,987	$	—	$	—	$	9,987	$	1,204
Commercial loans		—		250		—		250		—
Total	$	9,987	$	250	$	—	$	10,237	$	1,204

December 31, 2020:
Loans secured by Real Estate:
Residential properties
Single family	$	10,144	$	—	$	—	$	10,144	$	1,051
Commercial loans		—		250		122		372		44
Total	$	10,144	$	250	$	122	$	10,516	$	1,095

NOTE 6: LOAN SALES AND MORTGAGE SERVICING RIGHTS

In 2020, FFB sold $553 million of multifamily loans and recognized a gain of $15.1 million. For sales of multifamily loans, FFB retained servicing rights for the majority of these loans and recognized mortgage servicing rights as part of the transactions. As of June 30, 2021 and December 31, 2020, mortgage servicing rights were $5.6 million and $7.9 million, respectively. The amount of loans serviced for others totaled $1.4 billion and $1.5 billion as of June 30, 2021 and December 31, 2020. The mortgage servicing rights as of June 30, 2021 and December 31, 2020 are net of $2.7 million and $1.4 million valuation allowances, respectively. Excluding $1.3 million in valuation provisions on mortgage servicing rights taken in the six months ended June 30, 2021, servicing fees for the first six months ended June 30, 2021 were $0.9 million, while servicing fees were $0.3 million for the six months ended June 30, 2020.

NOTE 7: DEPOSITS

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


	June 30, 2021				December 31, 2020
			Weighted				Weighted
(dollars in thousands)	Amount		Average Rate		Amount		Average Rate
Demand deposits:
Noninterest-bearing	$	3,276,901	—		$	1,655,847	—
Interest-bearing		896,224	0.201	%		871,289	0.372	%
Money market and savings		2,256,952	0.319	%		2,407,401	0.549	%
Certificates of deposits		676,725	0.274	%		978,896	0.591	%
Total	$	7,106,802	0.153	%	$	5,913,433	0.376	%

At June 30, 2021, of the $370 million of certificates of deposits of $250,000 or more, $367 million mature within one year and $3 million mature after one year. Of the $306 million of certificates of deposit of less than $250,000, $298 million mature within one year and $8 million mature after one year. At December 31, 2020, of the $416 million of certificates of deposits of $250,000 or more, $409 million mature within one year and $7 million mature after one year. Of the $563 million of certificates of deposit of less than $250,000, $520 million mature within one year and $43 million mature after one year.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED

NOTE 8: BORROWINGS

At June 30, 2021, our borrowings consisted of $20 million of borrowings under a holding company line of credit. At December 31, 2020, our borrowings consisted of $255 million of overnight FHLB advances at the Bank and $14 million of borrowings under a holding company line of credit. At June 30, 2021, the interest rate on the holding company line of credit was 3.70%.

FHLB advances are collateralized primarily by loans secured by single family, multifamily, and commercial real estate properties with a carrying value of $3.9 billion as of June 30, 2021. As a matter of practice, the Bank provides substantially all of its qualifying loans as collateral to the FHLB or the Federal Reserve Bank. The Bank’s total borrowing capacity from the FHLB at June 30, 2021 was $2.5 billion. The Bank had in place $277 million of letters of credit from the FHLB, as of June 30, 2021 which are used to meet collateral requirements for borrowings from the State of California and local agencies.

During 2017, FFI entered into a loan agreement with an unaffiliated lender that provides for a revolving line of credit for up to $40 million. The loan agreement matures in five years, with an option to extend the maturity date subject to certain conditions, and bears interest at 90 day LIBOR plus 350 basis points (3.50%). FFI’s obligations under the loan agreement are secured by, among other things, a pledge of all of its equity in FFB. We are required to meet certain financial covenants during the term of the loan, including minimum capital levels and limits on classified assets. As of June 30, 2021 and December 31, 2020, FFI was in compliance with the covenants on this loan agreement.

The Bank also has $195 million available borrowing capacity through unsecured fed funds lines, ranging in size from $20 million to $100 million, with 5 other financial institutions, and a $234 million secured line with the Federal Reserve Bank, secured by single family loans. NaN of these lines had outstanding borrowings as June 30, 2021. Combined, the Bank’s unused lines of credit as of June 30, 2021 and December 31, 2020 were $3.0 billion and $2.4 billion, respectively. The average balance of overnight borrowings during all of 2020 was $56 million.

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 three and six months ended June 30, 2021 and 2020:


	Three Months Ended				Three Months Ended
	June 30, 2021				June 30, 2020
(dollars in thousands, except per share amounts)	Basic		Diluted		Basic		Diluted
Net income	$	26,054	$	26,054	$	17,854	$	17,854
Basic common shares outstanding		44,792,358		44,792,358		44,620,716		44,620,716
Effect of options, restricted stock and contingent shares issuable				309,600				191,653
Diluted common shares outstanding				45,101,958				44,812,369
Earnings per share	$	0.58	$	0.58	$	0.40	$	0.40

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED


	Six Months Ended				Six Months Ended
	June 30, 2021				June 30, 2020
(dollars in thousands, except share and per share amounts)	Basic		Diluted		Basic		Diluted
Net income	$	48,409	$	48,409	$	31,065	$	31,065
Basic common shares outstanding		44,750,272		44,750,272		44,645,189		44,645,189
Effect of options and restricted stock				307,058				237,331
Diluted common shares outstanding				45,057,330				44,882,520
Earnings per share	$	1.08	$	1.07	$	0.70	$	0.69

Based on a weighted average basis, restricted stock units to purchase 62,267 and 59,375 shares of common stock were excluded for the six months ended June 30, 2021 and 2020, respectively, because their effect would have been anti-dilutive.

NOTE 10: SEGMENT REPORTING

For the three and six months ended June 30, 2021 and 2020, the Company had 2 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:


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
Three Months Ended June 30, 2021:
Interest income	$	61,403	$	—	$	—	$	61,403
Interest expense		3,387		—		106		3,493
Net interest income		58,016		—		(106)		57,910
Provision for credit losses		44		—		—		44
Noninterest income		7,199		7,240		(404)		14,035
Noninterest expense		28,868		5,372		1,377		35,617
Income (loss) before taxes on income	$	36,303	$	1,868	$	(1,887)	$	36,284

Three Months Ended June 30, 2020:
Interest income	$	61,932	$	—	$	—	$	61,932
Interest expense		13,435		—		50		13,485
Net interest income		48,497		—		(50)		48,447
Provision for credit losses		1,367		—		—		1,367
Noninterest income		3,635		5,631		(297)		8,969
Noninterest expense		25,042		5,404		491		30,937
Income (loss) before taxes on income	$	25,723	$	227	$	(838)	$	25,112

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended June 30, 2021 - UNAUDITED


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
Six Months Ended June 30, 2021:
Interest income	$	120,541	$	—	$	—	$	120,541
Interest expense		8,235		—		167		8,402
Net interest income		112,306		—		(167)		112,139
Provision for credit losses		404		—		—		404
Noninterest income		12,508		14,163		(728)		25,943
Noninterest expense		57,447		11,103		1,578		70,128
Income (loss) before taxes on income	$	66,963	$	3,060	$	(2,473)	$	67,550

Six Months Ended June 30, 2020:
Interest income	$	124,270	$	—	$	—	$	124,270
Interest expense		30,875		—		80		30,955
Net interest income		93,395		—		(80)		93,315
Provision for credit losses		5,431		—		—		5,431
Noninterest income		8,294		12,119		(769)		19,644
Noninterest expense		51,286		11,569		954		63,809
Income (loss) before taxes on income	$	44,972	$	550	$	(1,803)	$	43,719

NOTE 11: ACQUISITIONS

Acquisition of TGR Financial, Inc.

On June 2, 2021, FFI entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with TGR Financial, Inc. (“TGR Financial”), pursuant to which TGR Financial will merge with and into FFI (the “Merger”), with FFI as the surviving corporation. The Merger Agreement contemplates that immediately after the Merger, First Florida Integrity Bank, a Florida state-chartered bank and wholly-owned subsidiary of TGR Financial, will merge with and into FFB, with FFB as the surviving bank. Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each outstanding share of TGR Financial common stock will be converted into the right to receive 0.6068 (the “Exchange Ratio”) of a share of FFI common stock, and each outstanding share of TGR Financial preferred stock will be converted into the right to receive the number of shares of FFI common stock equal to the product of the number of shares of TGR Financial common stock into which such share of TGR Financial preferred stock is convertible in connection with, and as a result of, the Merger, multiplied by the Exchange Ratio. In addition, at the effective time of the Merger, FFI will cash out all outstanding stock option based on a formula using the average price of FFI’s common stock for a 20-day trading period prior to the closing of the Merger. Subject to regulatory and shareholder approvals, the transaction is expected to close during the fourth quarter of 2021.

NOTE 12: SUBSEQUENT EVENTS

Cash Dividend

On July 27, 2021, the Board of Directors of the Company declared a quarterly cash dividend of $0.09 per common share to be paid on August 20, 2021 to stockholders of record as of the close of business on August 9, 2021.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to facilitate the understanding and assessment of significant changes and trends in our businesses that accounted for the changes in our results of operations in the three and six months ended June 30, 2021 as compared to our results of operations in the three and six months ended June 30, 2020; and our financial condition at June 30, 2021 as compared to our financial condition at December 31, 2020. 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, 2020, and the notes thereto, which are set forth in Item 8 of our Annual Report on Form 10-K (as amended, our “2020 10-K”) which we filed with the Securities and Exchange Commission (“SEC”) on February 26, 2021.

Forward-Looking Statements

Statements contained in this report that are not historical facts or that discuss our expectations, beliefs or views regarding our future financial performance or future financial condition, or financial or other trends in our business or in the markets in which we operate, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” “forecast” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Such forward-looking statements are based on current information that is available to us, and on assumptions that we make, about future events or economic or financial conditions or trends over which we do not have control. In addition, our businesses and the markets in which we operate are subject to a number of risks and uncertainties. Those risks and uncertainties, and unexpected future events, could cause our financial condition or actual operating results in the future to differ, possibly significantly, from our expected financial condition and operating results that are set forth in the forward-looking statements contained in this report.

The principal risks and uncertainties to which our businesses are subject are discussed in this Item 2 and under the heading “Risk Factors” in our 2020 10-K. Therefore, you are urged to read not only the information contained in this Item 2, but also the risk factors and other cautionary information contained under the heading “Risk Factors” in our 2020 10-K, which qualify the forward-looking statements contained in this report.

The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and may continue to adversely affect, our business, operations, financial performance and prospects. Even after the COVID-19 pandemic subsides, it is possible that the U.S. and other major economies experience or continue to experience a prolonged recession, which could materially and adversely affect our business, operations, financial performance and prospects. Statements about the effects of the COVID-19 pandemic on our business, operations, financial performance and prospects may constitute forward-looking statements and are subject to the risk that the actual impacts may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us.

Further, statements about the potential effects of the proposed acquisition of TGR Financial on our business, financial results, and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in the forward-looking statements due to factors and future developments which are uncertain, unpredictable and in many cases beyond our control, including the possibility that the proposed merger does not close when expected or at all because required regulatory, shareholder or other approvals, financial tests or other conditions to closing are not received or satisfied on a timely basis or at all; changes in our or TGR Financial’s stock price before closing, including as a result of each company’s financial performance prior to closing or transaction-related uncertainty, or more generally due to broader stock market movements, and the performance of financial companies and peer group companies; the occurrence of any event, change or other circumstance that could give

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risk to the right of one or both of the parties to terminate the merger agreement; the risk that the benefits from the proposed merger may not be fully realized or may take longer to realize than expected or be more costly to achieve, including as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the geographic and business areas in which we and TGR Financial operate; our ability to promptly and effectively integrate the companies’ businesses; reputational risks and the reaction of the companies' customers, employees and counterparties to the proposed merger; diversion of management time on merger-related issues; lower than expected revenues, credit quality deterioration or a reduction in real estate values or a reduction in net earnings; and that the COVID-19 pandemic, including uncertainty and volatility in financial, commodities and other markets, and disruptions to banking and other financial activity, could harm our or TGR Financial's business, financial position and results of operations, and could adversely affect the timing and anticipated benefits of the proposed merger.

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 2020 10-K, except as may otherwise be required by applicable law or government regulations.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and accounting practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make estimates and assumptions regarding circumstances or trends that could materially affect the value of those assets, such as economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets. Those estimates and assumptions are made based on current information available to us regarding those economic conditions or trends or other circumstances. If changes were to occur in the events, trends or other circumstances on which our estimates or assumptions were based, or other unanticipated events were to occur that might affect our operations, we may be required under GAAP to adjust our earlier estimates and to reduce the carrying values of the affected assets on our balance sheet, generally by means of charges against income, which could also affect our results of operations in the fiscal periods when those charges are recognized.

Allowance for Credit Losses - Securities Available-for-Sale (“AFS”) - For securities AFS in an unrealized loss position, the Company first evaluates whether it intends to sell, or whether it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the security amortized cost basis is written down to fair value through income. If the criteria is not met, the Company is required to assess whether the decline in fair value has resulted from credit losses or noncredit-related factors. If the present value of expected cash flows to be collected is less than the amortized cost basis, a credit loss exists, and an allowance for credit loss is recorded through income as a component of provision for credit loss expense. If the assessment indicates that a credit loss does not exist, the Company records the decline in fair value through other comprehensive income, net of related income tax effects. The Company has made the election to exclude accrued interest receivable on securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. See Note 3, Securities, for additional information related to the Company’s allowance for credit losses on securities AFS.

Allowance for Credit Losses - Loans. Our ACL for loans and investments are established through a provision for credit losses charged to expense and may be reduced by a recapture of previously established loss reserves, which are also reflected in the statement of income. Loans and investments are charged against the ACL when management believes that collectability of the principal is unlikely. The ACL for loans is an amount that management believes will be adequate to absorb estimated losses on existing loans that may become uncollectible based on an evaluation of the collectability of loans and prior loan loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions and certain other subjective factors that may affect the borrower’s ability to pay. While we use the best information

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available to make this evaluation, future adjustments to our ACL may be necessary if there are significant changes in economic or other conditions that can affect the collectability in full of loans and investments in our loan or investment portfolios.

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

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

Overview and Recent Developments

Our results of operations for the first six months of 2021 include:

●

Total loans, including loans held for sale, increased $702 million in the six months ended June 30, 2021 as a result of $1.9 billion of originations and $56 million of loan purchases, which was partially offset by payoffs or scheduled payments of $1.3 billion.

●

During the six months ended June 30, 2021, total deposits increased by $1.2 billion and total revenues (net interest income and noninterest income) increased by 22% when compared to the six months ended June 30, 2020.

Proposed Merger with TGR Financial, Inc. On June 2, 2021, FFI entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with TGR Financial, Inc. (“TGR Financial”), pursuant to which TGR Financial will merge with and into FFI (the “Merger”), with FFI as the surviving corporation. The Merger Agreement contemplates that immediately after the Merger, First Florida Integrity Bank, a Florida state-chartered bank and wholly-owned subsidiary of TGR Financial, will merge with and into FFB, with FFB as the surviving bank. Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each outstanding share of TGR Financial common stock will be converted into the right to receive 0.6068 (the “Exchange Ratio”) of a share of FFI common stock, and each outstanding share of TGR Financial preferred stock will be converted into the right to receive the number of shares of FFI common stock equal to the product of the number of shares of TGR Financial common stock into which such share of TGR Financial preferred stock is convertible in connection with, and as a result of, the Merger, multiplied by the Exchange Ratio. In addition, at the effective time of the Merger, FFI will cash out all outstanding stock option based on a formula using the average price of FFI’s common stock for a 20-day trading period prior to the closing of the Merger. Subject to regulatory and shareholder approvals, the transaction is expected to close during the fourth quarter of 2021.

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COVID-19 Update. Our business continues to be affected by the COVID-19 pandemic, which has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. As restrictive measures were eased during the first half of 2021, commercial activity has improved but has not returned to the levels existing prior to the outbreak of the pandemic, and many businesses continue to operate under restricted measures and the ongoing risk that they will face further restrictions imposed in response to the pandemic, all of which may result in our customers’ inability to meet their loan obligations to us and reduce demand for loans and other services we offer. In addition, we continue to operate under our Pandemic Response Business Continuity Plan, under which approximately 20% of our corporate employees continue to working remotely. We continue to follow protocols for the safety of our clients and employees. Additional costs associated with the safety protocols, such as additional cleaning and supplies has been offset by reduced costs for parking, meals, entertainment and travel. We have implemented alternative procedures, such as electronic signatures and approvals, to maintain effective internal controls over our financial reporting processes. We continued to face other risk and uncertainties as a result of the COVID-19 pandemic, including those described in “Item 1A – Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2020, which we filed with the SEC on February 26, 2021.

Results of Operations

The primary sources of revenue for Banking are net interest income, fees from its deposits and trust services, gains on sales of loans, certain loan fees, and consulting fees. The primary sources of revenue for Wealth Management are asset management fees assessed on the balance of assets under management (“AUM”). Compensation and benefit costs, which represent the largest component of noninterest expense, accounted for 57% and 77%, respectively, of the total noninterest expense for Banking and Wealth Management in the six months ended June 30, 2021.

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


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
2021:
Interest income	$	61,403	$	—	$	—	$	61,403
Interest expense		3,387		—		106		3,493
Net interest income		58,016		—		(106)		57,910
Provision for credit losses		44		—		—		44
Noninterest income		7,199		7,240		(404)		14,035
Noninterest expense		28,868		5,372		1,377		35,617
Income (loss) before taxes on income	$	36,303	$	1,868	$	(1,887)	$	36,284

2020:
Interest income	$	61,932	$	—	$	—	$	61,932
Interest expense		13,435		—		50		13,485
Net interest income		48,497		—		(50)		48,447
Provision for credit losses		1,367		—		—		1,367
Noninterest income		3,635		5,631		(297)		8,969
Noninterest expense		25,042		5,404		491		30,937
Income (loss) before taxes on income	$	25,723	$	227	$	(838)	$	25,112

General. Our net income and income before taxes in the three months ended June 30, 2021 were $26.1 million and $36.3 million, respectively, as compared to $17.9 million and $25.1 million, respectively, in the three months ended June 30, 2020. The $11.2 million increase in income before taxes was the result of a $10.6 million increase in income before taxes for Banking and a $1.6 million increase in income before taxes for Wealth Management, which was partially offset by a $0.9 million increase in corporate noninterest expenses. The increase in Banking was due to higher net interest income, higher noninterest income, and lower provision for credit losses. The increase in Wealth Management was due to higher noninterest income and lower noninterest expenses.

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


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
2021:
Interest income	$	120,541	$	—	$	—	$	120,541
Interest expense		8,235		—		167		8,402
Net interest income		112,306		—		(167)		112,139
Provision for credit losses		404		—		—		404
Noninterest income		12,508		14,163		(728)		25,943
Noninterest expense		57,447		11,103		1,578		70,128
Income (loss) before taxes on income	$	66,963	$	3,060	$	(2,473)	$	67,550

2020:
Interest income	$	124,270	$	—	$	—	$	124,270
Interest expense		30,875		—		80		30,955
Net interest income		93,395		—		(80)		93,315
Provision for credit losses		5,431		—		—		5,431
Noninterest income		8,294		12,119		(769)		19,644
Noninterest expense		51,286		11,569		954		63,809
Income (loss) before taxes on income	$	44,972	$	550	$	(1,803)	$	43,719

General. Our net income and income before taxes in the six months ended June 30, 2021 were $48.4 million and $67.6 million, respectively, as compared to $31.1 million and $43.7 million, respectively, in the six months ended June 30, 2020. The $23.9 million increase in income before taxes was the result of a $22.0 million increase in income before taxes for Banking and a $2.5 million increase in income before taxes for Wealth Management, which was partially offset by a $0.6 million increase in corporate noninterest expenses. The increase in Banking was due to higher net interest income, higher noninterest income, and lower provision for credit losses. The increase in Wealth Management was due to higher noninterest income and lower noninterest expenses.

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Net Interest Income. The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net interest margin:


	Three Months Ended June 30:
	2021						2020
	Average				Average		Average				Average
(dollars in thousands)	Balances		Interest		Yield /Rate		Balances		Interest		Yield /Rate
Interest-earning assets:
Loans	$	5,780,494	$	55,979	3.88	%	$	5,475,796	$	55,134	4.03	%
Securities AFS		741,967		4,927	2.66	%		919,788		6,539	2.84	%
FHLB stock, fed funds, and deposits		727,053		497	0.27	%		154,728		259	0.67	%
Total interest-earning assets		7,249,514		61,403	3.39	%		6,550,312		61,932	3.78	%
Noninterest-earning assets:
Nonperforming assets		16,500						10,817
Other		193,334						181,459
Total assets	$	7,459,348					$	6,742,588
Interest-bearing liabilities:
Demand deposits	$	940,133	$	556	0.24	%	$	373,231	$	370	0.40	%
Money market and savings		2,271,899		2,137	0.38	%		1,481,521		3,129	0.85	%
Certificates of deposit		720,326		694	0.39	%		1,937,245		7,415	1.54	%
Total interest-bearing deposits		3,932,358		3,387	0.35	%		3,791,997		10,914	1.16	%
Borrowings		12,980		106	3.26	%		810,844		2,571	1.28	%
Total interest-bearing liabilities		3,945,338		3,493	0.35	%		4,602,841		13,485	1.18	%
Noninterest-bearing liabilities:
Demand deposits		2,751,013						1,442,333
Other liabilities		42,761						70,984
Total liabilities		6,739,112						6,116,158
Shareholders’ equity		720,236						626,430
Total liabilities and equity	$	7,459,348					$	6,742,588
Net Interest Income			$	57,910					$	48,447
Net Interest Rate Spread					3.04	%					2.60	%
Net Interest Margin					3.20	%					2.96	%

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	Six Months Ended June 30:
	2021						2020
	Average				Average		Average				Average
(dollars in thousands)	Balances		Interest		Yield /Rate		Balances		Interest		Yield /Rate
Interest-earning assets:
Loans	$	5,583,216	$	109,510	3.93	%	$	5,278,974	$	110,018	4.17	%
Securities AFS		757,002		10,133	2.68	%		959,707		13,536	2.82	%
FHLB stock, fed funds and deposits		720,750		898	0.25	%		108,374		716	1.33	%
Total interest-earning assets		7,060,968		120,541	3.42	%		6,347,055		124,270	3.92	%
Noninterest-earning assets:
Nonperforming assets		17,322						11,371
Other		191,498						177,693
Total assets	$	7,269,788					$	6,536,119
Interest-bearing liabilities:
Demand deposits	$	955,198	$	1,430	0.30	%	$	366,321		1,096	0.60	%
Money market and savings		2,307,010		4,719	0.41	%		1,427,421		7,524	1.06	%
Certificates of deposit		790,298		1,861	0.47	%		1,955,210		16,940	1.74	%
Total interest-bearing deposits		4,052,506		8,010	0.40	%		3,748,952		25,560	1.37	%
Borrowings		108,999		392	0.73	%		746,890		5,395	1.45	%
Total interest-bearing liabilities		4,161,505		8,402	0.41	%		4,495,842		30,955	1.38	%
Noninterest-bearing liabilities:
Demand deposits		2,343,141						1,354,331
Other liabilities		54,742						64,009
Total liabilities		6,559,388						5,914,182
Stockholders’ equity		710,400						621,937
Total liabilities and equity	$	7,269,788					$	6,536,119
Net Interest Income			$	112,139					$	93,315
Net Interest Rate Spread					3.01	%					2.54	%
Net Interest Margin					3.18	%					2.94	%

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Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by prior volume) and mix of interest-earning assets and interest-bearing liabilities. Variances attributable to both rate and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the rate variance. The following table provides a breakdown of the changes in net interest income due to volume and rate changes for the three and six months ended June 30, 2021, as compared to the three and six months ended June 30, 2020:


	Quarter Ended							Six Months Ended
	June 30, 2021 vs. 2020						June 30, 2021 vs. 2020
	Increase (Decrease) due to						Increase (Decrease) due to
(dollars in thousands)	Volume		Rate		Total		Volume		Rate		Total
Interest earned on:
Loans	$	3,018	$	(2,173)	$	845	$	6,034	$	(6,542)	$	(508)
Securities		(1,202)		(410)		(1,612)		(2,747)		(656)		(3,403)
FHLB stock, fed funds and deposits		472		(234)		238		1,172		(990)		182
Total interest-earning assets		2,288		(2,817)		(529)		4,459		(8,188)		(3,729)
Interest paid on:
Demand deposits		385		(199)		186		1,085		(751)		334
Money market and savings		1,233		(2,225)		(992)		3,185		(5,990)		(2,805)
Certificates of deposit		(3,045)		(3,676)		(6,721)		(6,814)		(8,265)		(15,079)
Borrowings		(4,064)		1,599		(2,465)		(3,160)		(1,843)		(5,003)
Total interest-bearing liabilities		(5,491)		(4,501)		(9,992)		(5,704)		(16,849)		(22,553)
Net interest income	$	7,779	$	1,684	$	9,463	$	10,163	$	8,661	$	18,824

Net interest income increased 20%, from $48.4 million in the three months ended June 30, 2020, to $57.9 million in the three months ended June 30, 2021 due to an 11% increase in interest-earning assets and an increase in the net interest rate spread. On a consolidated basis our net interest margin increased from 2.96% in the three months ended June 30, 2020, to 3.20% in the three months ended June 30, 2021, due to a decrease in the cost of interest-bearing liabilities, from 1.18% in the three months ended June 30, 2020, to 0.35% in the three months ended June 30, 2021, which was partially offset by a decrease in yield on interest-earning assets, from 3.78% in the three months ended June 30, 2020, to 3.39% in the three months ended June 30, 2021. The decrease in the cost of interest-bearing liabilities was due to decreased costs of interest-bearing deposits, resulting from decreases in deposit market rates, and decreased average balance of borrowings, as the average balance on FHLB advances and other borrowings decreased from $810.8 million in the three months ended June 30, 2020, to $13.0 million in the three months ended June 30, 2021. The average balance outstanding under the holding company line of credit increased from $4.1 million in the three months ended June 30, 2020, to $11.4 million in the three months ended June 30, 2021.

Net interest income increased 20% from $93.3 million in the six months ended June 30, 2020, to $112.1 million in the six months ended June 30, 2021 due primarily to an 11% increase in interest-earning assets. On a consolidated basis our net interest margin was 3.18% for the six months ended June 30, 2021 as compared to 2.94% in the six months ended June 30, 2020. This increase was due to an increase in the net interest rate spread, from 2.54% in the six months ended June 30, 2020 to 3.01% in the six months ended June 30, 2021. The increase in the net interest rate spread was due to a decrease in the cost of interest-bearing liabilities, from 1.38% in the six months ended June 30, 2020, to 0.41% in the six months ended June 30, 2021, which was partially offset by a decrease in yield on total interest-earning assets, from 3.92% in the six months ended June 30, 2020, to 3.42% in the six months ended June 30, 2021. The decrease in the cost of interest-bearing liabilities was due to decreased costs of interest-bearing deposits, resulting from decreases in deposit market rates, and decreased costs of borrowings, as the average rate on FHLB advances and other overnight borrowings decreased from 1.44% in the six months ended June 30, 2020 to 0.73% in the six months ended June 30, 2021. The average balance outstanding under the holding company line of credit increased from $3.2 million in the six months ended June 30, 2020 to $9.1 million in the six months ended June 30, 2021.

Provision for credit losses. The provision for credit losses represents our estimate of the amount necessary to be charged against the current period’s earnings to maintain the ACL for loans and investments at a level that we consider adequate in relation to the estimated losses inherent in the loan and investment portfolios. The provision for credit losses

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for loans is impacted by changes in loan balances as well as changes in estimated loss assumptions and charge-offs and recoveries. The amount of the provision for loans also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions and certain other subjective factors that may affect the ability of borrowers to meet their repayment obligations to us. The provision for credit losses for the three and six months ended June 30, 2021 was $44 thousand and $0.4 million, respectively, compared to $1.4 million and $5.4 million, respectively, for the three and six months ended June 30, 2020. Net chargeoffs against the ACL were $0.1 million for the three months ended June 30, 2021, and there were net recoveries of $0.1 million for the six months ended June 30, 2021, as compared to net chargeoffs of $0.4 million and $0.5 million for the three and six months ended June 30, 2020. The decrease in the provision for credit losses for the three and six months ended June 30, 2021 was a result of improvement in the economic scenario outlook.

Noninterest income. Noninterest income for Banking includes fees charged to clients for trust services and deposit services, consulting fees, prepayment and late fees charged on loans, gain on sale of loans, and gains and losses from capital market activities and insurance commissions. The following table provides a breakdown of noninterest income for Banking for the periods indicated:


(dollars in thousands)	2021		2020
Three Months Ended June 30:
Trust fees	$	1,763	$	1,232
Loan related fees		1,324		1,818
Deposit charges		397		268
Gain on sale of loans		3,324		—
Consulting fees		100		114
Other		291		203
Total noninterest income	$	7,199	$	3,635

Six Months Ended June 30:
Trust fees	$	3,431	$	2,696
Loan related fees		4,268		4,391
Deposit charges		776		591
Consulting fees		201		200
Gain on sale of loans		3,324		—
Other		508		416
Total noninterest income	$	12,508	$	8,294

Noninterest income for Banking in the three and six months ended June 30, 2021 were $3.6 million and $4.2 million higher than the three and six months ended June 30, 2020, respectively, due to an increase in trust fees and $3.3 million in gains on sales of loans, offset partially by a decrease in loan related fees. The increase in trust fees was due primarily to higher levels of billable assets under advisement (“AUA”). Loan related fees decreased due to a $1.3 million valuation allowance on mortgage servicing rights in the three and six months ended June 30, 2021 when compared to the corresponding period in 2020, which was due to an increase in prepayment speeds.

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Noninterest income for Wealth Management includes fees charged to high net-worth clients for managing their assets and for providing financial planning consulting services. The following table provides the amounts of noninterest income for Wealth Management for the periods indicated:


(dollars in thousands)	2021		2020
Three Months Ended June 30:
Noninterest income	$	7,240	$	5,631

Six Months Ended June 30:
Noninterest income	$	14,163	$	12,119

Noninterest income for Wealth Management increased by $1.6 million and $2.0 million in the three and six months ended June 30, 2021, respectively, when compared to the corresponding period in 2020, due primarily to higher levels of billable AUM in the quarter.

The following table summarizes the activity in our AUM for the periods indicated:


			Existing account
	Beginning		Additions/		New
(dollars in thousands)	Balance		Withdrawals		Accounts		Terminations		Performance		Ending balance
Three Months Ended June 30, 2021:
Fixed Income	$	1,430,492	$	(31,707)	$	21,149	$	(16,800)	$	6,259	$	1,409,393
Equities		2,644,993		46,658		86,551		(42,202)		224,111		2,960,111
Cash and other		952,504		(75,231)		53,048		(24,320)		44,357		950,358
Total	$	5,027,989	$	(60,280)	$	160,748	$	(83,322)	$	274,727	$	5,319,862

Six Months Ended June 30, 2021:
Fixed Income	$	1,474,479	$	(119,994)	$	39,463	$	(26,012)	$	41,457	$	1,409,393
Equities		2,451,056		182,320		131,894		(82,784)		277,625		2,960,111
Cash and other		1,001,256		(160,876)		95,336		(61,712)		76,354		950,358
Total	$	4,926,791	$	(98,550)	$	266,693	$	(170,508)	$	395,436	$	5,319,862

Year Ended December 31, 2020:
Fixed Income	$	1,678,660	$	(334,302)	$	117,362	$	(42,907)	$	55,666	$	1,474,479
Equities		2,628,472		(645,341)		115,418		(83,292)		435,799		2,451,056
Cash and other		131,120		809,238		133,286		(50,799)		(21,589)		1,001,256
Total	$	4,438,252	$	(170,405)	$	366,066	$	(176,998)	$	469,876	$	4,926,791

The $393 million increase in AUM during the six months ended June 30, 2021 was the net result of $267 million of new accounts, $387 million of portfolio gains, and terminations and net withdrawals of $261 million.

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Noninterest Expense. The following table provides a breakdown of noninterest expense for Banking and Wealth Management for the periods indicated:


	Banking				Wealth Management
(dollars in thousands)	2021		2020		2021		2020
Three Months Ended June 30, 2021:
Compensation and benefits	$	15,835	$	13,847	$	4,130	$	4,088
Occupancy and depreciation		5,268		5,248		442		567
Professional services and marketing		2,296		1,506		677		636
Customer service costs		2,353		1,622		—		—
Other expenses		3,116		2,819		123		113
Total noninterest expense	$	28,868	$	25,042	$	5,372	$	5,404

Six Months Ended June 30, 2021:
Compensation and benefits	$	32,658	$	28,680	$	8,577	$	8,670
Occupancy and depreciation		10,907		10,115		963		1,176
Professional services and marketing		4,067		2,692		1,316		1,417
Customer service costs		4,123		3,994		—		—
Other expenses		5,692		5,805		247		306
Total noninterest expense	$	57,447	$	51,286	$	11,103	$	11,569

Noninterest expense in Banking increased from $25 million in the three months ended June 30, 2020, to $28.9 million in the three months ended June 30, 2021, primarily due to higher compensation and benefits, professional services and marketing expenses, and customer service costs. Compensation and benefits were $2.0 million higher in the three months ended June 30, 2021 due to increases in FTE. The FTE in Banking increased to 459.5 in the three months ended June 30, 2021, from 437.4 in the three months ended June 30, 2020, due to increased staffing related to additional personnel added to support the growth in loans and deposits. Professional services and marketing were higher due primarily to $1.2 million of one-time merger expenses during the second quarter of 2021 related to the TGR Financial acquisition. The $0.7 million increase in customer service costs was due to higher earnings credits paid on increases in deposit balances. Noninterest expenses for Wealth Management were $5.4 million for the three months ended June 30, 2021 and three months ended June 30, 2020.

Noninterest expense in Banking increased from $51.3 million in the six months ended June 30, 2020, to $57.4 million in the six months ended June 30, 2021, primarily due to increases in compensation and benefits and professional services and marketing. Compensation and benefits for Banking increased, from $28.7 million in the six months ended June 30, 2020, to $32.7 million in the six months ended June 30, 2021, due to increases in FTE, and due to merit increases and annual bonus and commission payouts in the first quarter of 2021. The FTE in Banking increased to 450.8 in the six months ended June 30, 2021, from 434.3 in the six months ended June 30, 2020, due to increased staffing related to additional personnel added to support the growth in loans and deposits. The $1.4 million increase in professional services and marketing for Banking in the six months ended June 30, 2021, as compared to the six months ended June 30, 2020 was due to primarily to $1.2 million of one-time merger expenses during the second quarter of 2021 related to the TGR Financial acquisition. Noninterest expenses for Wealth Management decreased by $0.5 million in the six months ended June 30, 2021, when compared to the six months ended June 30, 2020, primarily due to lower compensation and benefits, occupancy and depreciation, and professional services and marketing expenses. Professional services and marketing expenses for Wealth Management were $0.2 million lower due to costs incurred on a legal matter in the six months ended June 30, 2020.

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Financial Condition

The following table shows the financial position for each of our business segments, and of FFI and elimination entries used to arrive at our consolidated totals which are included in the column labeled Other and Eliminations, as of:


			Wealth		Other and
(dollars in thousands)	Banking		Management		Eliminations		Total
June 30, 2021:
Cash and cash equivalents	$	969,081	$	940	$	(375)	$	969,646
Securities AFS, net		736,734		—		—		736,734
Loans held for sale		498,319		—		—		498,319
Loans, net		5,490,616		—		—		5,490,616
Premises and equipment		7,546		501		136		8,183
FHLB Stock		17,250		—		—		17,250
Deferred taxes		9,390		162		66		9,618
Goodwill and intangibles		94,454		—		—		94,454
Other assets		93,278		314		20,722		114,314
Total assets	$	7,916,668	$	1,917	$	20,549	$	7,939,134

Deposits	$	7,114,402	$	—	$	(7,600)	$	7,106,802
Borrowings		—		—		20,000		20,000
Intercompany balances		6,244		(5,291)		(953)		—
Other liabilities		65,199		2,479		10,636		78,314
Shareholders’ equity		730,823		4,729		(1,534)		734,018
Total liabilities and equity	$	7,916,668	$	1,917	$	20,549	$	7,939,134

December 31, 2020:
Cash and cash equivalents	$	629,066	$	1,671	$	(1,030)	$	629,707
Securities AFS, net		807,426		—		—		807,426
Loans held for sale		505,404		—		—		505,404
Loans, net		4,779,599		—		—		4,779,599
Premises and equipment		7,313		563		136		8,012
FHLB Stock		17,250		—		—		17,250
Deferred taxes		8,663		186		(246)		8,603
Goodwill and intangibles		95,296		—		—		95,296
Other assets		91,702		314		13,847		105,863
Total assets	$	6,941,719	$	2,734	$	12,707	$	6,957,160

Deposits	$	5,919,155	$	—	$	(5,722)	$	5,913,433
Borrowings		255,000		—		14,000		269,000
Intercompany balances		4,493		(3,519)		(974)		—
Other liabilities		65,423		3,808		9,785		79,016
Shareholders’ equity		697,648		2,445		(4,382)		695,711
Total liabilities and equity	$	6,941,719	$	2,734	$	12,707	$	6,957,160

Our consolidated balance sheet is primarily affected by changes occurring in our Banking operations as our Wealth Management operations do not maintain significant levels of assets. Banking has experienced and is expected to continue to experience increases in its total assets as a result of our growth strategy.

During the six months ended June 30, 2021 total assets increased by $982 million, primarily due to an increase in loans and in cash. During the six months ended June 30, 2021, securities decreased by $71 million primarily due to payoffs of mortgage backed securities. Loans and loans held for sale increased $702 million in the six months ended June 30, 2021, primarily as a result of $1.9 billion of originations, which were partially offset by payoffs or scheduled payments of $1.2 billion. The $1.2 billion growth in deposits during the six months ended June 30, 2021 included increases

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in commercial deposits of $1.3 billion and branch deposits of $119 million, which were partially offset by a $209 million decrease in wholesale deposits and a $78 million decrease in digital channel deposits. Borrowings decreased by $249 million during the six months ended June 30, 2021 as cash provided by the increase in deposits, which exceeded the growth in our assets, was used to pay down our borrowings at the Bank. At June 30, 2021 and December 31, 2020, the outstanding balance on the holding company line of credit was $20 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 by $340 million during the six months ended June 30, 2021. Changes in cash and cash equivalents are primarily affected by the funding of loans, investments in securities, and changes in our sources of funding: deposits, FHLB advances and FFI borrowings.

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


	Amortized		Gross Unrealized				Allowance for		Estimated
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Fair Value
June 30, 2021:
Agency mortgage-backed securities	$	608,766	$	13,054	$	(934)	$	—	$	620,886
Beneficial interest – FHLMC securitization		24,199		413		—		(9,116)		15,496
Corporate bonds		94,000		2,619		—		—		96,619
Other		3,656		87		(10)		—		3,733
Total	$	730,621	$	16,173	$	(944)	$	(9,116)	$	736,734

December 31, 2020:
Agency mortgage-backed securities	$	705,752	$	18,243	$	—	$	—	$	723,995
Beneficial interest – FHLMC securitization		30,497		211		—		(7,245)		23,463
Corporate bonds		57,000		1,358		—		—		58,358
Other		1,512		98		—		—		1,610
Total	$	794,761	$	19,910	$	—	$	(7,245)	$	807,426

US Treasury Securities that are included in the table above are pledged as collateral to the State of California to meet regulatory requirements related to FFB’s trust operations. Agency mortgage-backed securities are pledged as collateral as support for the Bank’s obligations under loan sales and securitization agreements entered into from 2018 through 2020.

The scheduled maturities of securities AFS, other than agency mortgage backed securities, and the related weighted average yield is as follows, as of June 30, 2021:


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
Amortized Cost:
Corporate bonds	$	—		$	—		$	89,000		$	5,000		$	94,000
Other		100			1,526			2,030			—			3,656
Total	$	100		$	1,526		$	91,030		$	5,000		$	97,656
Weighted average yield		0.13	%		2.02	%		4.45	%		3.38	%		4.35	%
Estimated Fair Value:
Corporate bonds	$	—		$	—		$	91,550		$	5,069		$	96,619
Other		100			1,611			2,022			—			3,733
Total	$	100		$	1,611		$	93,572		$	5,069		$	100,352

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


	June 30,		December 31,
(dollars in thousands)	2021		2020
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily	$	2,814,446	$	2,247,542
Single family		812,728		806,014
Total real estate loans secured by residential properties		3,627,174		3,053,556
Commercial properties		665,166		747,807
Land and construction		56,603		55,832
Total real estate loans		4,348,943		3,857,195
Commercial and industrial loans		1,142,766		918,676
Consumer loans		9,645		18,888
Total loans		5,501,354		4,794,759
Premiums, discounts and deferred fees and expenses		11,534		9,040
Total	$	5,512,888	$	4,803,799

Loans and loans held for sale increased $702 million during six months ended June 30, primarily as a result of $1.9 billion in originations, and $56 million in loan purchases, which were partially offset by payoffs or scheduled payments of $1.2 billion.

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


	June 30, 2021				December 31, 2020
			Weighted				Weighted
(dollars in thousands)	Amount		Average Rate		Amount		Average Rate
Demand deposits:
Noninterest-bearing	$	3,276,901	—		$	1,655,847	—
Interest-bearing		896,224	0.201	%		871,289	0.372	%
Money market and savings		2,256,952	0.319	%		2,407,401	0.549	%
Certificates of deposits		676,725	0.274	%		978,896	0.591	%
Total	$	7,106,802	0.153	%	$	5,913,433	0.376	%

During the six months ended June 30, 2021, our deposit rates have moved in a manner consistent with overall deposit market rates. The weighted average rate of our interest-bearing deposits decreased from 0.52% at December 31, 2020, to 0.28% at June 30, 2021 due to decreased costs of interest-bearing deposits, while the weighted average interest rates of both interest-bearing and noninterest-bearing deposits have decreased from 0.38% at December 31, 2020 to 0.15% at June 30, 2021. The financial impact of the increase in noninterest-bearing deposits is reflected in customer service costs, which are included in noninterest expenses.

The maturities of our certificates of deposit of $100,000 or more were as follows as of June 30, 2021:


(dollars in thousands)
3 months or less	$	236,994
Over 3 months through 6 months		180,141
Over 6 months through 12 months		73,155
Over 12 months		7,606
Total	$	497,896

From time to time, the Bank will utilize brokered deposits as a source of funding. As of June 30, 2021, the Bank held $117 million of deposits, which are classified as brokered deposits.

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Borrowings. At June 30, 2021, our borrowings consisted of $20 million of borrowings under a holding company line of credit. At December 31, 2020, our borrowings consisted of $255 million in FHLB term advances at the Bank, and $14 million of borrowings under a company line of credit. Because FFB generally utilizes overnight borrowings, the balance of outstanding borrowings may fluctuate on a daily basis. The average balance of FHLB advances outstanding during the six months ended June 30, 2021 was $100 million, as compared to $744 million for the six months ended June 30, 2020. The weighted average interest rate on these borrowings was 0.45% for the six months ended June 30, 2021, as compared to 1.44% for the six months ended June 30, 2020. The maximum amount of borrowings at the Bank outstanding at any month-end during the six months ended June 30, 2021, and during all of 2020, was $255 million and $860 million, respectively.

Delinquent Loans, Nonperforming Assets and Provision for Credit Losses

Loans are considered past due following the date when either interest or principal is contractually due and unpaid. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued when reasonable doubt exists as to the full, timely collection of interest or principal and, generally, when a loan becomes contractually past due for 90 days or more with respect to principal or interest. However, the accrual of interest may be continued on a well-secured loan contractually past due 90 days or more with respect to principal or interest if the loan is in the process of collection or collection of the principal and interest is deemed probable. The following tables provide a summary of past due and nonaccrual loans as of:


							90 Days						Total Past Due
(dollars in thousands)	30–59 Days			60-89 Days			or More			Nonaccrual			and Nonaccrual			Current		Total
June 30, 2021:
Real estate loans:
Residential properties	$	54		$	—		$	—		$	10,757		$	10,811		$	3,628,857	$	3,639,668
Commercial properties		776			—			—			1,613			2,389			663,155		665,544
Land and construction		—			—			—			—			—			56,565		56,565
Commercial and industrial loans		1,550			250			—			3,817			5,617			1,135,831		1,141,448
Consumer loans		—			—			—			—			—			9,663		9,663
Total	$	2,380		$	250		$	—		$	16,187		$	18,817		$	5,494,071	$	5,512,888
Percentage of total loans		0.04	%		0.00	%		—	%		0.29	%		0.34	%

December 31, 2020:			��
Real estate loans:
Residential properties	$	35		$	—		$	—		$	10,947		$	10,982		$	3,042,574	$	3,053,556
Commercial properties		951			240			—			4,544			5,735			742,072		747,807
Land and construction		—			—			—			—			—			55,832		55,832
Commercial and industrial loans		1,013			411			152			5,137			6,713			911,963		918,676
Consumer loans		—			—			—			—			—			18,888		18,888
Total	$	1,999		$	651		$	152		$	20,628		$	23,430		$	4,771,329	$	4,794,759
Percentage of total loans		0.04	%		0.01	%		0.00	%		0.43	%		0.49	%

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The following table summarizes our nonaccrual loans as of:


	Nonaccrual		Nonaccrual
	with Allowance		with no Allowance
(dollars in thousands)	for Credit Losses		for Credit Losses
June 30, 2021
Real estate loans:
Residential properties	$	2,958	$	7,799
Commercial properties		—		1,613
Land and construction		—		—
Commercial and industrial loans		1,881		1,936
Consumer loans		—		—
Total	$	4,839	$	11,348

December 31, 2020
Real estate loans:
Residential properties	$	2,987	$	7,959
Commercial properties		—		4,544
Land and construction		—		—
Commercial and industrial loans		2,581		2,557
Consumer loans		—		—
Total	$	5,568	$	15,060

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


	June 30, 2021						December 31, 2020
(dollars in thousands)	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total
Residential real estate loans	$	1,200	$	—	$	1,200	$	1,200	$	—	$	1,200
Commercial real estate loans		1,064		1,228		2,292		1,107		1,277		2,384
Commercial and industrial loans		980		2,180		3,160		1,041		2,832		3,873
Total	$	3,244	$	3,408	$	6,652	$	3,348	$	4,109	$	7,457

These loans were classified as a TDR as a result of a reduction in required principal payments, reductions in rates and/or an extension of the maturity date of the loans.

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Allowance for Credit Losses. The following table summarizes the activity in our ACL related to loans for the periods indicated:

							��
	Beginning		Adoption of		Provision for							Ending
(dollars in thousands)	Balance		ASC 326		Credit Losses			Charge-offs		Recoveries		Balance
Three months ended June 30, 2021:
Real estate loans:
Residential properties	$	6,033	$	—	$	1,203		$	—	$	—	$	7,236
Commercial properties		5,956		—		(471)			—		—		5,485
Land and construction		3,962		—		(1,978)			—		—		1,984
Commercial and industrial loans		7,062		—		487			(194)		103		7,458
Consumer loans		167		—		(58)			—		—		109
Total	$	23,180	$	—	$	(817)		$	(194)	$	103	$	22,272

Six months ended June 30, 2021:
Real estate loans:
Residential properties	$	5,115	$	—	$	2,121		$	—	$	—	$	7,236
Commercial properties		8,711		—		(3,226)			—		—		5,485
Land		892		—		1,092			—		—		1,984
Commercial and industrial loans		9,249		—		(1,892)			(408)		509		7,458
Consumer loans		233		—		(124)			—		—		109
Total	$	24,200	$	—	$	(2,029)		$	(408)	$	509	$	22,272

Year ended December 31, 2020:
Real estate loans:
Residential properties	$	8,423	$	363	$	(3,671)		$	—	$	—	$	5,115
Commercial properties		4,166		3,760		785			—		—		8,711
Land and construction		573		92		227			—		—		892
Commercial and industrial loans		7,448		—		2,642			(1,844)		1,003		9,249
Consumer loans		190		—		43			—		—		233
Total	$	20,800	$	4,215	$	26		$	(1,844)	$	1,003	$	24,200

Our ACL related to loans represented 0.40% and 0.50% of total loans outstanding as of June 30, 2021 and December 31, 2020, respectively.

The amount of the ACL for loans is adjusted periodically by charges to operations (referred to in our income statement as the “provision for credit losses”) (i) to replenish the ACL after it has been reduced due to loan write-downs or charge-offs, (ii) to reflect increases in the volume of outstanding loans, and (iii) to take account of changes in the risk of potential loan losses due to a deterioration in the condition of borrowers, or in the value of property securing non–performing loans, or adverse changes in economic conditions. The amounts of the provisions we make for loan losses are based on our estimate of losses in our loan portfolio. In estimating such losses, we use economic and loss migration models that are based on bank regulatory guidelines and industry standards, and our historical charge-off experience and loan delinquency rates, local and national economic conditions, a borrower’s ability to repay its borrowings, and the value of any property collateralizing the loan, as well as a number of subjective factors. However, these determinations involve judgments about changes and trends in current economic conditions and other events that can affect the ability of borrowers to meet their loan obligations to us, and a weighting among the quantitative and qualitative factors we consider in determining the sufficiency of the ACL. Moreover, the duration and anticipated effects of prevailing economic conditions or trends can be uncertain and can be affected by a number of risks and circumstances that are outside of our control. If changes in economic or market conditions or unexpected subsequent events were to occur, or if changes were made to bank regulatory guidelines or industry standards that are used to assess the sufficiency of the ACL, it could become necessary for us to incur additional, and possibly significant, charges to increase the ACL, which would have the effect of reducing our income.

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In addition, the Federal Deposit Insurance Corporation (“FDIC”) and the California Department of Financial Protection and Innovation, as an integral part of their examination processes, periodically review the adequacy of our ACL. These agencies may require us to make additional provisions for credit losses, over and above the provisions that we have already made, the effect of which would be to reduce our income.

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


	Allowance for Credit Losses
	Loans Evaluated
(dollars in thousands)	Individually		Collectively		Total

June 30, 2021:
Allowance for credit losses:
Real estate loans:
Residential properties	$	1,218	$	6,152	$	7,370
Commercial properties		437		4,999		5,436
Land and construction		—		1,967		1,967
Commercial and industrial loans		710		6,681		7,391
Consumer loans		—		108		108
Total	$	2,365	$	19,907	$	22,272
Loans:
Real estate loans:
Residential properties	$	16,556	$	3,623,112	$	3,639,668
Commercial properties		14,025		651,519		665,544
Land and construction		—		56,565		56,565
Commercial and industrial loans		5,045		1,136,403		1,141,448
Consumer loans		—		9,663		9,663
Total	$	35,626	$	5,477,262	$	5,512,888


	Allowance for Credit Losses
	Loans Evaluated
(dollars in thousands)	Individually		Collectively		Total
December 31, 2020:
Allowance for credit losses:
Real estate loans:
Residential properties	$	1,059	$	4,056	$	5,115
Commercial properties		374		8,337		8,711
Land and construction		—		892		892
Commercial and industrial loans		956		8,293		9,249
Consumer loans		—		233		233
Total	$	2,389	$	21,811	$	24,200
Loans:
Real estate loans:
Residential properties	$	12,414	$	3,041,142	$	3,053,556
Commercial properties		17,304		730,503		747,807
Land and construction		—		55,832		55,832
Commercial and industrial loans		6,472		912,204		918,676
Consumer loans		—		18,888		18,888
Total	$	36,190	$	4,758,569	$	4,794,759

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Liquidity

Liquidity management focuses on our ability to generate, on a timely and cost-effective basis, cash sufficient to meet the funding needs of current loan demand, deposit withdrawals, principal and interest payments with respect to outstanding borrowings and to pay operating expenses. Our liquidity management is both a daily and long-term function of funds management. Liquid assets are generally invested in marketable securities or held as cash at the Federal Reserve Bank of San Francisco or other financial institutions.

We monitor our liquidity in accordance with guidelines established by our Board of Directors and applicable regulatory requirements. Our need for liquidity is affected by our loan activity, net changes in deposit levels and the maturities of our borrowings. The principal sources of our liquidity consist of deposits, loan interest and principal payments and prepayments, investment management and consulting fees, FHLB advances and proceeds from borrowings and sales of FFI common stock. The remaining balances of the Company’s lines of credit available to draw down totaled $3.0 billion at June 30, 2021.

Cash Flows Provided by Operating Activities. During the six months ended June 30, 2021, operating activities provided net cash of $41 million, primarily due to net income of $48 million, offset partially by $3 million in gains on sales of loans. During the six months ended June 30, 2020, operating activities provided net cash of $28 million, primarily due to net income of $31 million and $5 million in provisions for credit losses, partially offset by a net increase of $11 million in other assets.

Cash Flows Used in Investing Activities. During the six months ended June 30, 2021, investing activities used net cash of $637 million, primarily due to an $841 million net increase in loans and $83 million of securities purchases, offset partially by $144 million in cash received in principal collection and maturities of securities, and $142 million in proceeds from sales of loans. During the six months ended June 30, 2020, investing activities used net cash of $449 million, primarily to fund a $595 million net increase in loans and $7 million in securities purchases, offset partially by $155 million in cash received in principal collection and maturities of securities.

Cash Flows Provided by Financing Activities. During the six months ended June 30, 2021, financing activities provided net cash of $936 million, consisting primarily of a net increase of $1.19 billion in deposits and $6 million in proceeds from a holding company line of credit, offset partially by a $255 million decrease in FHLB advances and $8 million in dividends paid. During the six months ended June 30, 2020, financing activities provided net cash of $770 million, consisting primarily of a net increase of $757 million in deposits and a $22 million increase in FHLB advances, offset partially by $6 million in dividends paid and $3 million in stock repurchases.

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 June 30, 2021 and December 31, 2020, the loan-to-deposit ratios at FFB were 84.6% and 89.8%, respectively.

Off-Balance Sheet Arrangements

The following table provides the off-balance sheet arrangements of the Company as of June 30, 2021:


(dollars in thousands)
Commitments to fund new loans	$	80,661
Commitments to fund under existing loans, lines of credit		685,350
Commitments under standby letters of credit		14,850

Some of the commitments to fund existing loans, lines of credit and letters of credit are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. As of

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June 30, 2021, FFB was obligated on $277 million of letters of credit to the FHLB which were being used as collateral for public fund deposits, including $263 million of deposits from the State of California.

Capital Resources and Dividend Policy

The capital rules applicable to United States based bank holding companies and federally insured depository institutions (“Capital Rules”) require the Company (on a consolidated basis) and FFB (on a stand-alone basis) to meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt correct action regulations place a federally insured depository institution, such as FFB, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution’s primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.

The following table sets forth the capital and capital ratios of FFI (on a consolidated basis) and FFB as of the respective dates indicated below, as compared to the respective regulatory requirements applicable to them:


									To Be Well Capitalized
					For Capital				Under Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
FFI
June 30, 2021:
CET1 capital ratio	$	631,257	11.59	%	$	245,147	4.50	%
Tier 1 leverage ratio		631,257	8.33	%		303,031	4.00	%
Tier 1 risk-based capital ratio		631,257	11.59	%		326,863	6.00	%
Total risk-based capital ratio		663,201	12.17	%		435,818	8.00	%

December 31, 2020:
CET1 capital ratio	$	589,276	11.55	%	$	229,490	4.50	%
Tier 1 leverage ratio		589,276	8.93	%		263,986	4.00	%
Tier 1 risk-based capital ratio		589,276	11.55	%		305,987	6.00	%
Total risk-based capital ratio		620,700	12.17	%		407,982	8.00	%

FFB
June 30, 2021:
CET1 capital ratio	$	628,357	11.58	%	$	244,079	4.50	%	$	352,558	6.50	%
Tier 1 leverage ratio		628,357	8.32	%		302,178	4.00	%		377,722	5.00	%
Tier 1 risk-based capital ratio		628,357	11.58	%		325,438	6.00	%		433,918	8.00	%
Total risk-based capital ratio		660,301	12.17	%		433,918	8.00	%		542,397	10.00	%

December 31, 2020:
CET1 capital ratio	$	591,171	11.63	%	$	228,703	4.50	%	$	330,349	6.50	%
Tier 1 leverage ratio		591,171	8.98	%		263,330	4.00	%		329,162	5.00	%
Tier 1 risk-based capital ratio		591,171	11.63	%		304,938	6.00	%		406,583	8.00	%
Total risk-based capital ratio		622,595	12.25	%		406,583	8.00	%		508,229	10.00	%

As of each of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and FFB’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the prompt corrective action regulations. The required ratios for capital adequacy set forth in the above table do not include the Capital Rules’ additional capital conservation buffer, though each of the Company and FFB maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated.

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As of June 30, 2021, FFI had $14.4 million of available liquidity as well as a revolving line of credit and, therefore, has the ability and financial resources to contribute additional capital to FFB, if needed.

As of June 30, 2021, the amount of capital at FFB in excess of amounts required to be well capitalized for purposes of the prompt corrective action regulations was $276 million for the CET1 capital ratio, $251 million for the Tier 1 Leverage Ratio, $194 million for the Tier 1 risk-based capital ratio and $118 million for the Total risk-based capital ratio.

The Company paid a quarterly cash dividend of $0.09 per common share in the first and second quarters of 2021. It is our current intention to continue to pay quarterly dividends. The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain regulatory restrictions which are discussed in Item 1 “Business—Supervision and Regulation—Dividends and Stock Repurchases” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2020. Additionally, under the terms of the holding company line of credit agreement, FFI may only declare and pay a dividend if the total amount of dividends and stock repurchases during the current twelve months does not exceed 50% of FFI’s net income for the same twelve month period. We paid $12.5 million in dividends ($0.28 per share) in 2020.

We had no material commitments for capital expenditures as of June 30, 2021, other than our proposed acquisition of TGR Financial. However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain financial risks, which are discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the section titled Asset and Liability Management: Interest Rate Risk in our Annual Report on Form 10-K which we filed with the Securities and Exchange Commission on February 26, 2021. There have been no material changes to our quantitative and qualitative disclosures about market risk since December 31, 2020.

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 June 30, 2021, 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 June 30, 2021, 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.

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There was no change in our internal control over financial reporting that occurred during the three months ended June 30, 2021 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, 2020, which we filed with the SEC on February 26, 2021.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company adopted a stock repurchase plan on October 30, 2018 for the repurchase of up to 2,200,000 shares of its common stock from time to time as market conditions allow. This plan has no stated expiration date for the repurchases. The Company did not repurchase any shares during the three months ended June 30, 2021. As of June 30, 2021, the maximum number of shares that may be purchased under the program was 1,938,600.

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ITEM 6.EXHIBITS


Exhibit No.		Description of Exhibit

2.1(1)		Agreement and Plan of Merger and Reorganization dated as of June 2, 2021, by and between the Company and TGR Financial, Inc.

3.1		Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on October 29, 2015).

3.2		Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on October 29, 2015).

31.1(1)		Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

31.2(1)		Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

32.1(1)		Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002

32.2(1)		Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

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(1)	Filed herewith.

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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: August 6, 2021	By:	/s/ KEVIN L. THOMPSON
		Kevin L. Thompson
		Executive Vice President and Chief Financial Officer

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