First Foundation Inc. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-36461

FIRST FOUNDATION INC.

(Exact name of Registrant as specified in its charter)


Delaware		20-8639702
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

18101 Von Karman Avenue, Suite 700 Irvine, CA 92612		92612
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (949) 202-4160

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 November 3, 2020, the registrant had 44,626,324 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 SEPTEMBER 30, 2020

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	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45

Part II. Other Information
Item 1A	Risk Factors	46
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6	Exhibits	49

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)


	September 30,		December 31,
	2020		2019
		(unaudited)
ASSETS
Cash and cash equivalents	$	282,983	$	65,387
Securities available-for-sale		890,981		1,014,966
Allowance for credit losses - investments		(8,049)		—
Net securities		882,932		1,014,966

Loans held for sale		512,598		503,036

Loans held for investment		4,615,323		4,547,633
Allowance for credit losses - loans		(24,183)		(20,800)
Net loans		4,591,140		4,526,833

Investment in FHLB stock		17,250		21,519
Deferred taxes		7,157		11,079
Premises and equipment, net		8,265		8,355
Goodwill and intangibles		95,735		97,191
Other assets		83,878		66,070
Total Assets	$	6,481,938	$	6,314,436

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	5,463,813	$	4,891,144
Borrowings		269,000		743,000
Accounts payable and other liabilities		71,189		66,423
Total Liabilities		5,804,002		5,700,567

Shareholders’ Equity
Common Stock		45		45
Additional paid-in-capital		433,263		433,775
Retained earnings		228,396		175,773
Accumulated other comprehensive income (loss)		16,232		4,276
Total Shareholders’ Equity		677,936		613,869
Total Liabilities and Shareholders’ Equity	$	6,481,938	$	6,314,436

(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				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Interest income:
Loans	$	55,231	$	56,483	$	165,249	$	166,828
Securities		6,107		5,349		19,643		17,700
FHLB stock, fed funds sold and interest-bearing deposits		353		782		1,069		1,938
Total interest income		61,691		62,614		185,961		186,466

Interest expense:
Deposits		7,988		16,675		33,548		48,419
Borrowings		2,086		2,807		7,481		11,981
Total interest expense		10,074		19,482		41,029		60,400

Net interest income		51,617		43,132		144,932		126,066

Provision for credit losses		1,548		172		6,979		1,943

Net interest income after provision for credit losses		50,069		42,960		137,953		124,123

Noninterest income:
Asset management, consulting and other fees		7,368		7,304		21,863		21,234
Gain on sale of loans		15,140		4,218		15,140		4,218
Other income		1,133		2,460		6,282		6,126
Total noninterest income		23,641		13,982		43,285		31,578

Noninterest expense:
Compensation and benefits		17,914		17,167		56,059		53,402
Occupancy and depreciation		6,052		5,450		17,419		15,485
Professional services and marketing costs		2,077		1,745		5,880		5,773
Customer service costs		1,723		5,920		5,717		13,592
Other expenses		2,829		2,412		9,329		9,669
Total noninterest expense		30,595		32,694		94,404		97,921

Income before taxes on income		43,115		24,248		86,834		57,780
Taxes on income		12,177		6,892		24,831		16,755
Net income	$	30,938	$	17,356	$	62,003	$	41,025

Net income per share:
Basic	$	0.69	$	0.39	$	1.39	$	0.92
Diluted	$	0.69	$	0.39	$	1.38	$	0.91
Shares used in computation:
Basic		44,625,668		44,639,481		44,638,634		44,602,368
Diluted		44,885,776		44,935,308		44,883,612		44,876,614

(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, 2018	44,496,007	$	44	$	431,832	$	128,461	$	(1,153)	$	559,184
Net income	—		—		—		41,025		—		41,025
Other comprehensive income	—		—		—		—		9,250		9,250
Stock based compensation	—		—		1,336		—		—		1,336
Cash dividend	—		—		—		(6,694)		—		(6,694)
Stock repurchase	(1,800)		—		(23)		—		—		(23)
Issuance of common stock:
Exercise of options	37,000		—		282		—		—		282
Stock grants – vesting of Restricted Stock Units	121,640		1		(1)		—		—		—
Balance: September 30, 2019	44,652,847	$	45	$	433,426	$	162,792	$	8,097	$	604,360

Balance: December 31, 2019	44,670,743	$	45	$	433,775	$	175,773	$	4,276	$	613,869
Net income	—		—		—		62,003		—		62,003
Other comprehensive income	—		—		—		—		11,956		11,956
Stock based compensation	—		—		1,660		—		—		1,660
Cash dividend	—		—		—		(9,380)		—		(9,380)
Issuance of common stock:
Exercise of options	87,000		—		652		—		—		652
Stock grants – vesting of Restricted Stock Units	92,915		—		—		—		—		—
Stock Repurchase	(224,334)		—		(2,824)		—		—		(2,824)
Balance: September 30, 2020	44,626,324	$	45	$	433,263	$	228,396	$	16,232	$	677,936

(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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	30,938	$	17,356	$	62,003	$	41,025
Other comprehensive income:
Unrealized holding gains on securities arising during the period		15,448		2,883		16,898		13,074
Other comprehensive income before tax		15,448		2,883		16,898		13,074
Income tax expense related to items of other comprehensive income		4,519		619		4,942		3,600
Other comprehensive income		10,929		2,264		11,956		9,474

Less: Reclassification adjustment for gains (loss) included in net earnings		—		(316)		—		(316)
Income tax (expense) benefit related to reclassification adjustment		—		90		—		92
Reclassification adjustment for gains included in net earnings, net of tax		—		(226)		—		(224)
Other comprehensive income (loss), net of tax		10,929		2,038		11,956		9,250
Total comprehensive income	$	41,867	$	19,394	$	73,959	$	50,275

(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 Nine Months Ended
	September 30,
	2020		2019
Cash Flows from Operating Activities:
Net income	$	62,003	$	41,025
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses - loans		3,990		1,943
Provision for credit losses - securities AFS		8,049		—
Stock–based compensation expense		1,660		1,336
Depreciation and amortization		2,367		2,256
Deferred tax expense		(1,020)		(107)
Amortization of core deposit intangible		1,456		1,765
Amortization of mortgage servicing rights - net		1,034		1,199
Amortization of premiums on purchased loans - net		(4,169)		(4,231)
Gain on sale of loans		(15,140)		(4,218)
Gain from hedging activities		—		(655)
Loss on sale of securities		—		316
Gain on sale of REO		—		(742)
Increase in other assets		(4,689)		(1,499)
Increase (decrease) in accounts payable and other liabilities		(5,149)		8,758
Net cash provided by operating activities		50,392		47,146
Cash Flows from Investing Activities:
Net increase in loans		(625,373)		(628,176)
Proceeds from sale of loans		577,875		573,897
Proceeds from sale of REO		—		1,557
Purchase of premises and equipment		(2,277)		(1,805)
Recovery of allowance for credit losses		786		1,770
Purchases of AFS securities		(60,988)		(576,539)
Proceeds from sale of securities		—		283,893
Maturities of AFS securities		197,271		73,054
Sale of FHLB stock, net		4,269		3,057
Net cash provided by (used in) investing activities		91,563		(269,292)
Cash Flows from Financing Activities:
Increase in deposits		572,669		637,598
Net increase in FHLB advances		(474,000)		(203,000)
Line of credit net change – borrowings (paydowns), net		—		15,000
Dividends paid		(9,380)		(6,694)
Settlement of swap		(11,476)		(19,883)
Proceeds from sale of stock, net		652		282
Repurchase of stock		(2,824)		(23)
Net cash provided by financing activities		75,641		423,280
Increase in cash and cash equivalents		217,596		201,134
Cash and cash equivalents at beginning of year		65,387		67,312
Cash and cash equivalents at end of period	$	282,983	$	268,446
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes	$	19,369	$	14,434
Interest		41,500		55,785
Noncash transactions:
Transfer of loans to loans held for sale	$	567,618	$	553,498
Mortgage servicing rights from loan sales		3,853		1,861
Chargeoffs against allowance for credit losses		1,393		2,213

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - 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”) and Blue Moon Management, LLC (collectively referred to as the “Company”). 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 2020 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, 2019.

Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 2020 presentation.

Recently Adopted Accounting Guidance

Measurement of Credit Losses on Financial Instruments: In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which introduces new guidance for the accounting for credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new model, referred to as the current expected credit losses (“CECL”) model, applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure.

The Company adopted the amendments within ASU 2016-13 on January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the periods beginning after that date are presented under Topic 326, while prior period amounts continue to be reported in accordance with previously applicable generally accepted accounting principles (“GAAP”). There was not any cumulative effect adjustment upon adoption. The instruments that were accounted for as purchased credit impaired (“PCI”) are transitioned under the new purchased credit deteriorated (“PCD”) model using the prospective transition approach. The Company applied the prospective transition approach for debt securities for which other than temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost basis remains the same before and after the effective date.

Allowance for credit losses on investment securities: On January 1, 2020, the Company adopted the amendments within ASU 2016-13, which replaces the legacy US GAAP Other Than Temporary Impairment (“OTTI”) model with a credit loss model. The credit loss model under Accounting Standards Codification (“ASC”) 326-30, applicable to debt securities available for sale (“Securities AFS”), requires recognition of credit losses through an allowance account, but

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED

retains the concept from the OTTI model that credit losses are recognized once securities become impaired. For Securities AFS, a decline in fair value due to credit loss results in recognition of an allowance for credit losses. Impairment may result from credit deterioration of the issuer or collateral underlying the security. The assessment of determining if a decline in fair value resulted from a credit loss is performed at the individual security level. Among other factors, the Company considers: 1) the extent to which the fair value is less than the amortized cost basis; 2) the financial condition and near term prospects of the issuer, including consideration of relevant financial metrics or ratios of the issuer; 3) any adverse conditions related to an industry or geographic area of an issuer; 4) any changes to the rating of the security by a rating agency; and 5) any past due principal or interest payments from the issuer. If an assessment of the above factors indicates that a credit loss exists, the Company records an allowance for credit losses for the excess of the amortized cost basis over the present value of cash flows expected to be collected, limited to the amount that the security’s fair value is less than its amortized cost basis. Subsequent changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized in earnings. Any interest received after the security has been placed on nonaccrual status is recognized on a cash basis. Accrued interest receivable on Securities AFS is excluded from the estimate of expected credit losses.

The provision for credit losses on the consolidated income statement includes the provisions for credit losses for loans and securities AFS. For the nine months ending September 30, 2020, the provision for credit losses was $7 million.

Recent Accounting Pronouncements

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.

In November 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes”. ASU 2019-12 provides amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of ASU 2019-12 is not expected to have a significant impact on the Company’s consolidated financial statements.

In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections. ASU 2019-07 amends certain Securities and Exchange Commission (“SEC”) sections or paragraphs within the ASC to reflect changes in SEC Final Rule Releases (“SEC Releases”) No. 33-10532, Disclosure Update and Simplification and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. The effective date and transition requirements for the amendments in this ASU are the same as the effective dates and transition requirements in SEC Releases 33-10532, 33-10231, and 33-10442, as amended by this ASU. The adoption of ASU 2019-07 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 Nine Months Ended September 30, 2020 - 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.

Securities available for sale and effective with the adoption of ASU 2016-01 on January 1, 2018, investments in equity securities are measured at fair value on a recurring basis depending upon whether the inputs are Level 1, 2 or 3 as described above.

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
September 30, 2020:
Investment securities available for sale:
Agency mortgage-backed securities	$	798,193	$	—	$	798,193	$	—
Beneficial interest – FHLMC securitizations		24,814		—		—		24,814
Corporate bonds		58,321		—		58,321		—
Other		1,604		505		1,099		—
Investment in equity securities		282		282		—		—
Total assets at fair value on a recurring basis	$	883,214	$	787	$	857,613	$	24,814


December 31, 2019:
Investment securities available for sale:
Agency mortgage-backed securities	$	914,977	$	—	$	914,977	$	—
Beneficial interest – FHLMC securitizations		42,706		—		—		42,706
Corporate bonds		55,834		—		55,834		—
Other		1,449		403		1,046		—
Investment in equity securities		434		434		—		—
Total assets at fair value on a recurring basis	$	1,015,400	$	837	$	971,857	$	42,706

The decrease in Level 3 assets from December 31, 2019 was due to Beneficial interest – FHLMC securitization paydowns, and due to a change in expected cash flows on an interest only strip security, an $8.0 million allowance was taken in the first nine months of 2020.

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.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED

Loans. Loans measured at fair value on a nonrecurring basis include collateral dependent loans held for investment. The specific reserves for these loans are based on collateral value, net of estimated disposition costs and other identified quantitative inputs. Collateral value is determined based on independent third-party appraisals or internally-developed discounted cash flow analyses. Internal discounted cash flow analyses are also utilized to estimate the fair value of these loans, which considers internally-developed, unobservable inputs such as discount rates, default rates, and loss severity. When the fair value of the collateral is based on an observable market price or a current appraised value, we measure the impaired loan at nonrecurring Level 2. When an appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price or a discounted cash flow has been used to determine the fair value, we measure the impaired loan at nonrecurring Level 3. The total collateral dependent impaired Level 3 loans were $13.3 million and $18.9 million at September 30, 2020 and December 31, 2019, respectively. There were $0.1 million in specific reserves related to these loans at September 30, 2020 and no specific reserves related to these loans at December 31, 2019.

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.

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.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED

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.

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 September 30, 2020 and December 31, 2019 included prepayment rates ranging from 20% to 30% and discount rates ranging from 7.35% 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.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - 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
September 30, 2020:
Assets:
Cash and cash equivalents	$	282,983	$	282,983	$	—	$	—	$	282,983
Securities AFS, net		882,932		505		857,613		24,814		882,932
Loans held for sale		512,598		—		517,922		—		517,922
Loans, net		4,591,140		—		—		4,639,003		4,639,003
Investment in FHLB stock		17,250		—		17,250		—		17,250
Investment in equity securities		282		282		—		—		282
Liabilities:
Deposits	$	5,463,813	$	4,209,230	$	1,259,324	$	—	$	5,468,554
Borrowings		269,000		—		260,000		9,000		269,000

December 31, 2019:
Assets:
Cash and cash equivalents	$	65,387	$	65,387	$	—	$	—	$	65,387
Securities AFS		1,014,966		403		971,857		42,706		1,014,966
Loans held for sale		503,036		—		506,750		—		506,750
Loans, net		4,526,833		—		—		4,573,516		4,573,516
Investment in FHLB stock		21,519		—		21,519		—		21,519
Investment in equity securities		434		434		—		—		434
Liabilities:
Deposits	$	4,891,144	$	2,913,493	$	1,977,652	$	—	$	4,891,145
Borrowings		743,000		—		733,000		10,000		743,000

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
September 30, 2020:
Agency mortgage-backed securities	$	776,956	$	21,237	$	—	$	—	$	798,193
Beneficial interests in FHLMC securitization		32,577		286		—		(8,049)		24,814
Corporate bonds		57,000		1,321		—		—		58,321
Other		1,505		99		—		—		1,604
Total	$	868,038	$	22,943	$	—	$	(8,049)	$	882,932
December 31, 2019:
Agency mortgage-backed securities	$	905,949	$	9,174	$	(146)	$	—	$	914,977
Beneficial interests in FHLMC securitization		47,586		1,801		(6,681)		—		42,706
Corporate bonds		54,000		1,834		—		—		55,834
Other		1,386		63		—		—		1,449
Total	$	1,008,921	$	12,872	$	(6,827)	$	—	$	1,014,966

US Treasury securities of $0.5 million as of September 30, 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 trust operations. As

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED

of September 30, 2020, $194.8 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 tables below indicate, as of September 30, 2020 and December 31, 2019, the gross unrealized losses and fair values of our investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

Securities with Unrealized Loss at September 30, 2020

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

—

Beneficial interests in FHLMC securitization

—

Total temporarily impaired securities

—


	Securities with Unrealized Loss at December 31, 2019
	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	$	5,488	$	(2)	$	13,880	$	(144)	$	19,368	$	(146)
Beneficial interests in FHLMC securitization		20,609		(2,856)		3,220		(3,825)		23,829		(6,681)
Total temporarily impaired securities	$	26,097	$	(2,858)	$	17,100	$	(3,969)	$	43,197	$	(6,827)

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 assessment of determining if a decline in fair value resulted from a credit loss is performed at the individual security level. Among other factors considered are: 1) the extent to which the fair value is less than the amortized cost basis; 2) the financial condition and near term prospects of the issuer, including consideration of relevant financial metrics or ratios of the issuer; 3) any adverse conditions related to an industry or geographic area of an issuer; 4) any changes to the rating of the security by a rating agency; and 5) any past due principal or interest payments from the issuer. If an assessment of the above factors indicates that a credit loss exists, the Company records an allowance for credit losses for the excess of the amortized cost basis over the present value of cash flows expected to be collected, limited to the amount that the security’s fair value is less than its amortized cost basis. Subsequent changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized in earnings. Any interest received after the security has been placed on nonaccrual status is recognized on a cash basis.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED


Allowance for credit losses - Investments
(dollars in thousands)
Quarter Ended September 30, 2020:
Balance: June 30, 2020	$	2,371
Provision for credit losses		5,678
Balance: September 30, 2020	$	8,049

Nine Months Ended September 30, 2020:
Balance: December 31, 2019	$	—
Provision for credit losses		8,049
Balance: September 30, 2020	$	8,049

Due to a change in expected cash flows of an interest only strip security, $5.6 million and $8 million in allowances were taken in the three and nine months ended September 30, 2020, respectively. The allowances were included as a charge in provision for credit losses on the consolidated income statement.

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
September 30, 2020
Amortized Cost:
Corporate bonds	$	—		$	—		$	57,000		$	—		$	57,000
Other		500			—			1,006			—			1,506
Total	$	500		$	—		$	58,006		$	—		$	58,506
Weighted average yield		1.76	%		—	%		5.35	%		—	%		5.32	%
Estimated Fair Value:
Corporate bonds	$	—		$	—		$	58,322		$	—		$	58,322
Other		505			—			1,100			—			1,605
Total	$	505		$	—		$	59,422		$	—		$	59,927


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
December 31, 2019
Amortized Cost:
Corporate bonds	$	—		$	—		$	54,000		$	—		$	54,000
Other		—			400			986			—			1,386
Total	$	—		$	400		$	54,986		$	—		$	55,386
Weighted average yield		—	%		2.25	%		5.29	%		—	%		5.27	%
Estimated Fair Value:
Corporate bonds	$	—		$	—		$	55,834		$	—		$	55,834
Other		—			403			1,046			—			1,449
Total	$	—		$	403		$	56,880		$	—		$	57,283

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 September 30, 2020 was 2.46%.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED

NOTE 4: LOANS

The following is a summary of our loans as of:


	September 30,		December 31,
(dollars in thousands)	2020		2019
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily	$	2,084,175	$	2,143,919
Single family		818,436		871,181
Total real estate loans secured by residential properties		2,902,611		3,015,100
Commercial properties		770,964		834,042
Land		57,722		70,257
Total real estate loans		3,731,297		3,919,399
Commercial and industrial loans		858,744		600,213
Consumer loans		18,399		16,273
Total loans		4,608,440		4,535,885
Premiums, discounts and deferred fees and expenses		6,883		11,748
Total	$	4,615,323	$	4,547,633

In 2017 and 2018 the Company purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. As of December 31, 2019, the principal balance shown above is net of unaccreted discount related to loans acquired in acquisitions of $8.4 million. The carrying amount of these PCD loans is as follows as of:


	September 30,		December 31,
(dollars in thousands)	2020		2019
Outstanding principal balance:
Loans secured by real estate:
Residential properties	$	288	$	366
Commercial properties		5,513		6,146
Land		—		1,058
Total real estate loans		5,801		7,570
Commercial and industrial loans		305		603
Total loans		6,106		8,173
Unaccreted discount on purchased credit deteriorated loans		—		(3,657)
Total	$	6,106	$	4,516

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED

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
September 30, 2020:
Real estate loans:
Residential properties	$	—		$	24		$	1,922		$	12,532		$	14,478		$	2,888,133	$	2,902,611
Commercial properties		722			215			—			1,738			2,675			768,289		770,964
Land		411			—			—			—			411			57,311		57,722
Commercial and industrial loans		442			1,038			481			6,306			8,267			850,477		858,744
Consumer loans		—			—			—			16			16			18,383		18,399
Total	$	1,575		$	1,277		$	2,403		$	20,592		$	25,847		$	4,582,593	$	4,608,440

Percentage of total loans		0.03	%		0.03	%		0.05	%		0.45	%		0.56	%

December 31, 2019:
Real estate loans:
Residential properties	$	89		$	13		$	—		$	1,743		$	1,845		$	3,013,255	$	3,015,100
Commercial properties		7,586			—			403			2,410			10,399			823,643		834,042
Land		—			—			—			—			—			70,257		70,257
Commercial and industrial loans		695			2,007			—			8,714			11,416			588,797		600,213
Consumer loans		22			3			—			—			25			16,248		16,273
Total	$	8,392		$	2,023		$	403		$	12,867		$	23,685		$	4,512,200	$	4,535,885

Percentage of total loans		0.19	%		0.04	%		0.01	%		0.28	%		0.52	%

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


	September 30, 2020						December 31, 2019
(dollars in thousands)	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total
Residential loans	$	1,200	$	—	$	1,200	$	1,200	$	—	$	1,200
Commercial real estate loans		1,127		1,303		2,430		1,188		2,166		3,354
Commercial and industrial loans		1,014		3,439		4,453		557		2,972		3,529
Total	$	3,341	$	4,742	$	8,083	$	2,945	$	5,138	$	8,083

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
Nine Months Ended September 30, 2020:
Commercial and industrial loans	1	$	514	$	514	$	—
Total	1	$	514	$	514	$	—

		Outstanding Recorded Investment
(dollars in thousands)	Number of loans	Pre-Modification		Post-Modification		Financial Impact
Year Ended December 31, 2019
Residential loans	1	$	1,200	$	1,200	$	—
Commercial real estate loans	1		2,872		2,872		—
Commercial and industrial loans	7		1,754		1,754		—
Total	9	$	5,826	$	5,826	$	—

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED

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.

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
Quarter Ended September 30, 2020:
Real estate loans:
Residential properties	$	6,756	$	—	$	(3,791)	$	—	$	—	$	2,965
Commercial properties		9,311		—		336		—		—		9,647
Land		3,368		—		(2,211)		—		—		1,157
Commercial and industrial loans		8,488		—		1,831		(338)		222		10,203
Consumer loans		206		—		5		—		—		211
Total	$	28,129	$	—	$	(3,830)	$	(338)	$	222	$	24,183

Nine Months Ended September 30, 2020:
Real estate loans:
Residential properties	$	8,423	$	(363)	$	(5,095)	$	—	$	—	$	2,965
Commercial properties		4,166		(3,760)		9,241		—		—		9,647
Land		573		(92)		676		—		—		1,157
Commercial and industrial loans		7,448		—		3,362		(1,393)		786		10,203
Consumer loans		190		—		21		—		—		211
Total	$	20,800	$	(4,215)	$	8,205	$	(1,393)	$	786	$	24,183

Year Ended December 31, 2019:
Real estate loans:
Residential properties	$	9,216	$	—	$	(793)	$	—	$	—	$	8,423
Commercial properties		4,547		—		(381)		—		—		4,166
Land		391		—		182		—		—		573
Commercial and industrial loans		4,628		—		3,653		(2,687)		1,854		7,448
Consumer loans		218		—		(24)		(5)		1		190
Total	$	19,000	$	—	$	2,637	$	(2,692)	$	1,855	$	20,800

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - 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								Unaccreted
					Purchased				Credit
	Evaluated for Impairment				Credit				Component
(dollars in thousands)	Individually		Collectively		Deteriorated		Total		Other Loans
September 30, 2020:
Allowance for credit losses:
Real estate loans:
Residential properties	$	7	$	2,954	$	4	$	2,965	$
Commercial properties		98		9,268		281		9,647
Land		—		1,157		—		1,157
Commercial and industrial loans		1,095		9,102		6		10,203
Consumer loans		—		211		—		211
Total	$	1,200	$	22,692	$	291	$	24,183	$	—
Loans:
Real estate loans:
Residential properties	$	13,714	$	2,888,609	$	288	$	2,902,611	$
Commercial properties		11,873		753,578		5,513		770,964
Land		—		57,722		—		57,722
Commercial and industrial loans		7,320		851,119		305		858,744
Consumer loans		16		18,383		—		18,399
Total	$	32,923	$	4,569,411	$	6,106	$	4,608,440	$	—

December 31, 2019:
Allowance for credit losses:
Real estate loans:
Residential properties	$	—	$	8,423	$	—	$	8,423	$	1,013
Commercial properties		107		4,059		—		4,166		1,048
Land		—		573		—		573		6
Commercial and industrial loans		763		6,685		—		7,448		277
Consumer loans		—		190		—		190		1
Total	$	870	$	19,930	$	—	$	20,800	$	2,345
Loans:
Real estate loans:
Residential properties	$	2,897	$	3,012,203	$	—	$	3,015,100	$	189,339
Commercial properties		6,689		824,026		3,327		834,042		201,370
Land		—		69,476		781		70,257		28,660
Commercial and industrial loans		9,316		590,489		408		600,213		24,143
Consumer loans		—		16,273		—		16,273		253
Total	$	18,902	$	4,512,467	$	4,516	$	4,535,885	$	443,765

The column labeled “Unaccreted Credit Component Other Loans” represents the amount of unaccreted credit component discount for the other loans acquired in a business combination, and the stated principal balance of the related loans. The discount is equal to 0.53% of the stated principal balance of these loans as of December 31, 2019. In addition to this unaccreted credit component discount, an additional $0.3 million of ACL has been provided for these loans as of December 31, 2019.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED

Assets that were previously accounted for as PCI under ASC 310-30 are accounted for as PCD assets under the new impairment standard. When instruments that were accounted for as PCI are transitioned to the new PCD model, a “gross up” is recorded to the amortized cost basis of the asset and the allowance for credit losses of these instruments. If any noncredit discount still exists, it is accredited to interest income using the interest method.

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

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

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

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. PCD (PCI prior to January 1, 2020) loans are classified as substandard loans.

Loans individually evaluated: Substandard loans and other TDR loans are individually evaluated for credit losses and are broken out separately in the table below.

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

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED

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


							Loans Individually
(dollars in thousands)	Pass		Special Mention		Substandard Loans		Evaluated		Total

September 30, 2020:
Real estate loans:
Residential properties	$	2,887,890	$	990	$	17	$	13,714	$	2,902,611
Commercial properties		740,035		12,840		6,216		11,873		770,964
Land		57,311		411		—		—		57,722
Commercial and industrial loans		839,377		8,260		3,787		7,320		858,744
Consumer loans		18,383		—		—		16		18,399
Total	$	4,542,996	$	22,501	$	10,020	$	32,923	$	4,608,440

December 31, 2019:
Real estate loans:
Residential properties	$	3,012,203	$	—	$	—	$	2,897	$	3,015,100
Commercial properties		821,425		679		5,249		6,689		834,042
Land		69,476		—		781		—		70,257
Commercial and industrial loans		579,153		8,202		3,542		9,316		600,213
Consumer loans		16,273		—		—		—		16,273
Total	$	4,498,530	$	8,881	$	9,572	$	18,902	$	4,535,885

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED

The risk categories of loans based on year of origination, with classified loans defined as special mention loans, substandard loans and loans individually evaluated as of September 30, 2020, are as follows:


													Revolving
(dollars in thousands)	2020		2019		2018		2017		2016		Prior		Loans		Total
Loans secured by Real Estate:
Residential
Multifamily
Pass	$	414,824	$	671,855	$	556,493	$	283,805	$	90,563	$	66,635	$	—	$	2,084,175
Classified		—		—		—		—		—		—		—		—
Total	$	414,824	$	671,855	$	556,493	$	283,805	$	90,563	$	66,635	$	—	$	2,084,175

Single Family
Pass	$	121,026	$	98,636	$	123,467	$	102,171	$	122,259	$	211,628	$	24,528	$	803,715
Classified		—		—		—		2,949		—		8,693		3,079		14,721
Total	$	121,026	$	98,636	$	123,467	$	105,120	$	122,259	$	220,321	$	27,607	$	818,436

Commercial Real Estate
Pass	$	23,813	$	101,270	$	128,506	$	135,422	$	125,552	$	225,472	$	—	$	740,035
Classified		—		6,693		10,935		2,365		3,397		7,539		—		30,929
Total	$	23,813	$	107,963	$	139,441	$	137,787	$	128,949	$	233,011	$	—	$	770,964

Land
Pass	$	—	$	15,506	$	29,931	$	10,532	$	712	$	630	$	—	$	57,311
Classified		—		—		—		—		—		411		—		411
Total	$	—	$	15,506	$	29,931	$	10,532	$	712	$	1,041	$	—	$	57,722

Commercial
Pass	$	326,810	$	162,434	$	64,528	$	17,995	$	15,426	$	18,127	$	234,057	$	839,377
Classified		2,041		3,093		5,177		1,302		2,261		290		5,203		19,367
Total	$	328,851	$	165,527	$	69,705	$	19,297	$	17,687	$	18,417	$	239,260	$	858,744

Consumer
Pass	$	2,108	$	—	$	1,389	$	4	$	6,924	$	127	$	7,831	$	18,383
Classified		—		—		—		16		—		—		—		16
Total	$	2,108	$	—	$	1,389	$	20	$	6,924	$	127	$	7,831	$	18,399

Total loans
Pass	$	888,581	$	1,049,701	$	904,314	$	549,929	$	361,436	$	522,619	$	266,416	$	4,542,996
Classified		2,041		9,786		16,112		6,632		5,658		16,933		8,282		65,444
Total	$	890,622	$	1,059,487	$	920,426	$	556,561	$	367,094	$	539,552	$	274,698	$	4,608,440

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED

Loans evaluated individually and any related allowance are as follows as of:


	With No Allowance Recorded				With an Allowance Recorded
	Unpaid				Unpaid
	Principal		Recorded		Principal		Recorded		Related
(dollars in thousands)	Balance		Investment		Balance		Investment		Allowance

September 30, 2020:
Real estate loans:
Residential properties	$	12,934	$	12,887	$	882	$	827	$	7
Commercial properties		11,027		10,745		1,127		1,127		98
Land		—		—		—		—		—
Commercial and industrial loans		3,474		3,090		4,399		4,231		1,095
Consumer loans		16		16		—		—		—
Total	$	27,451	$	26,738	$	6,408	$	6,185	$	1,200

December 31, 2019:
Real estate loans:
Residential properties	$	2,970	$	2,897	$	—	$	—	$	—
Commercial properties		5,683		5,456		1,188		1,188		107
Land		—		—		—		—		—
Commercial and industrial loans		6,485		5,708		3,764		3,653		763
Total	$	15,138	$	14,061	$	4,952	$	4,841	$	870

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


	Nine Months Ended				Year Ended
	September 30, 2020				December 31, 2019
	Average				Average
	Recorded		Interest		Recorded		Interest
(dollars in thousands)	Investment		Income		Investment		Income
Real estate loans:
Residential properties	$	18,963	$	40	$	1,765	$	13
Commercial properties		20,138		173		8,889		341
Land		335		—		523		—
Commercial and industrial loans		19,275		905		10,608		11
Consumer loans		42		—		—		—
Total	$	58,753	$	1,118	$	21,785	$	365

There was no interest income recognized on a cash basis in either 2020 or 2019 on these loans.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - 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 ACL allocated to these loans:


					Equipment/					ACL
(dollars in thousands)	Real Estate		Cash		Receivables		Total			Allocation
September 30, 2020:
Loans secured by Real Estate:
Residential properties
Single family	$	11,734	$	—	$	—	$	11,734	$	—
Commercial real estate loans		—		—		—		—		—
Land		—		—		—		—		—
Commercial loans		1,039		250		252		1,541		113
Consumer loans		—		16		—		16		—
Total	$	12,773	$	266	$	252	$	13,291	$	113

NOTE 6: LOAN SALES AND MORTGAGE SERVICING RIGHTS

During the first nine months of 2020, FFB recognized $15.1 million of gains on the sale of $553 million of multifamily loans. In 2019, FFB recognized $4.2 million of gains on the sale of $549 million of multifamily loans. 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 September 30, 2020 and December 31, 2019, mortgage servicing rights were $9.8 million and $7 million, respectively, and the amount of loans serviced for others totaled $1.7 billion at September 30, 2020 and December 31, 2019. The $9.8 million in mortgage servicing rights as of September 30, 2020 is net of a $1.7 million valuation allowance, and as a result, servicing fees for the nine months ended September 30, 2020 decreased by $0.5 million. Servicing fees for 2019 were $1.7 million. There was no valuation allowance on the mortgage servicing rights as of December 31, 2019.

NOTE 7: DEPOSITS

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


	September 30, 2020				December 31, 2019
			Weighted				Weighted
(dollars in thousands)	Amount		Average Rate		Amount		Average Rate
Demand deposits:
Noninterest-bearing	$	1,890,028	—		$	1,192,481	—
Interest-bearing		396,938	0.255	%		386,276	0.635	%
Money market and savings		1,922,264	0.634	%		1,334,736	1.355	%
Certificates of deposits		1,254,583	0.902	%		1,977,651	1.971	%
Total	$	5,463,813	0.449	%	$	4,891,144	1.217	%

At September 30, 2020, of the $457 million of certificates of deposits of $250,000 or more, $450 million mature within one year and $7 million mature after one year. Of the $798 million of certificates of deposit of less than $250,000, $781 million mature within one year and $17 million mature after one year. At December 31, 2019, of the $472 million of certificates of deposits of $250,000 or more, $471 million mature within one year and $0.8 million mature after one year. Of the $1.5 billion of certificates of deposit of less than $250,000, $1.5 billion mature within one year and $13 million mature after one year.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED

NOTE 8: BORROWINGS

At September 30, 2020, our borrowings consisted of $250 million in FHLB term advances at the Bank, $10 million in FHLB zero interest advances, and $9 million of borrowings under a holding company line of credit. At December 31, 2019, our borrowings consisted of $233 million of overnight FHLB advances at the Bank, a $500 million FHLB term advance at the Bank, and $10 million of borrowings under a holding company line of credit. The $250 million FHLB term advance outstanding at September 30, 2020 matures in March 2021, and bears an interest rate of 0.47%. The two $5 million zero interest advances outstanding at September 30, 2020 mature in October 2020 and April 2021. At September 30, 2020, the interest rate on the holding company line of credit was 3.80%.

FHLB advances are collateralized primarily by loans secured by single family, multifamily, and commercial real estate properties with a carrying value of $3.4 billion as of September 30, 2020. 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 September 30, 2020 was $1.8 billion. In addition to the $269 million borrowing at September 30, 2020, the Bank had in place $283 million of letters of credit from the FHLB which are used to meet collateral requirements for borrowings from the State of California and local agencies.

During 2017, FFI entered into a loan agreement with an unaffiliated lender that provides for a revolving line of credit for up to $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 December 31, 2019 and September 30, 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 five other financial institutions, and a $210 million secured line with the Federal Reserve Bank, secured by single family loans. None of these lines had outstanding borrowings as September 30, 2020. Combined, the Bank’s unused lines of credit as of September 30, 2020 and December 31, 2019 were $2.2 billion and $1.4 billion, respectively. The average balance of overnight borrowings during the first nine months of 2020 was $74 million, as compared to $413 million during all of 2019.

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 quarters and nine months ended September 30:


	Quarter Ended				Quarter Ended
	September 30, 2020				September 30, 2019
(dollars in thousands, except per share amounts)	Basic		Diluted		Basic		Diluted
Net income	$	30,938	$	30,938	$	17,356	$	17,356
Basic common shares outstanding		44,625,668		44,625,668		44,639,481		44,639,481
Effect of contingent shares issuable				—				1,592
Effect of options and restricted stock				260,108				294,235
Diluted common shares outstanding				44,885,776				44,935,308
Earnings per share	$	0.69	$	0.69	$	0.39	$	0.39

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED


	Nine Months Ended				Nine Months Ended
	September 30, 2020				September 30, 2019
(dollars in thousands, except share and per share amounts)	Basic		Diluted		Basic		Diluted
Net income	$	62,003	$	62,003	$	41,025	$	41,025
Basic common shares outstanding		44,638,634		44,638,634		44,602,368		44,602,368
Effect of contingent shares issuable				—				1,592
Effect of options and restricted stock				244,978				272,654
Diluted common shares outstanding				44,883,612				44,876,614
Earnings per share	$	1.39	$	1.38	$	0.92	$	0.91

Based on a weighted average basis, restricted stock units to purchase 39,439 shares of common stock were excluded for the nine months ended September 30, 2020 because their effect would have been anti-dilutive.

NOTE 10: SEGMENT REPORTING

For the three and nine months ended September 30, 2020 and 2019, the Company had two reportable business segments: Banking (FFB and FFIS) and Wealth Management (FFA). The results of FFI and any elimination entries are included in the column labeled Other. The following tables show key operating results for each of our business segments used to arrive at our consolidated totals for the following periods:


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
Quarter ended September 30, 2020:
Interest income	$	61,691	$	—	$	—	$	61,691
Interest expense		10,024		—		50		10,074
Net interest income		51,667		—		(50)		51,617
Provision for credit losses		1,548		—		—		1,548
Noninterest income		17,976		6,020		(355)		23,641
Noninterest expense		24,949		5,166		480		30,595
Income (loss) before taxes on income	$	43,146	$	854	$	(885)	$	43,115

Quarter ended September 30, 2019:
Interest income	$	62,614	$	—	$	—	$	62,614
Interest expense		19,328		—		154		19,482
Net interest income		43,286		—		(154)		43,132
Provision for credit losses		172		—		—		172
Noninterest income		8,173		6,161		(352)		13,982
Noninterest expense		26,397		5,423		874		32,694
Income (loss) before taxes on income	$	24,890	$	738	$	(1,380)	$	24,248

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2020 - UNAUDITED


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
Nine Months Ended September 30, 2020:
Interest income	$	185,961	$	—	$	—	$	185,961
Interest expense		40,899		—		130		41,029
Net interest income		145,062		—		(130)		144,932
Provision for credit losses		6,979		—		—		6,979
Noninterest income		26,270		18,139		(1,124)		43,285
Noninterest expense		76,235		16,735		1,434		94,404
Income (loss) before taxes on income	$	88,118	$	1,404	$	(2,688)	$	86,834

Nine Months Ended September 30, 2019:
Interest income	$	186,466	$	—	$	—	$	186,466
Interest expense		60,132		—		268		60,400
Net interest income		126,334		—		(268)		126,066
Provision for credit losses		1,943		—		—		1,943
Noninterest income		14,638		17,874		(934)		31,578
Noninterest expense		78,785		16,508		2,628		97,921
Income (loss) before taxes on income	$	60,244	$	1,366	$	(3,830)	$	57,780

NOTE 11: SUBSEQUENT EVENTS

Cash Dividend

On October 27, 2020, the Board of Directors of the Company declared a quarterly cash dividend of $0.07 per common share to be paid on November 17, 2020 to stockholders of record as of the close of business on November 9, 2020.

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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 nine months ended September 30, 2020 as compared to our results of operations in the three and nine months ended September 30, 2019; and our financial condition at September 30, 2020 as compared to our financial condition at December 31, 2019. This discussion and analysis is based on and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto contained elsewhere in this report and our audited consolidated financial statements for the year ended December 31, 2019, and the notes thereto, which are set forth in Item 8 of our Annual Report on Form 10-K (our “2019 10-K”) which we filed with the Securities and Exchange Commission (“SEC”) on March 2, 2020.

Forward-Looking Statements

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

The principal risks and uncertainties to which our businesses are subject are discussed in this Item 2 and under the heading “Risk Factors” in our 2019 10-K and in this report. Therefore, you are urged to read not only the information contained in this Item 2, but also the risk factors and other cautionary information contained under the heading “Risk Factors” in our 2019 10-K and in this report, which qualify the forward-looking statements contained in this report.

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

Due to these risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements contained in this report and not to make predictions about our future financial performance based solely on our historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this report or in our 2019 10-K, except as may otherwise be required by applicable law or government regulations.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and accounting practices in the banking industry. Certain of those accounting policies are

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

Allowance for Credit Losses. We adopted CECL to compute our ACL on January 1, 2020. Our ACL is established through a provision for credit losses charged to expense and may be reduced by a recapture of previously established loss reserves, which are also reflected in the income statement. Loans are charged against the ACL when management believes that collectability of the principal is unlikely. The CECL model requires the ACL to cover estimated credit losses expected over the life of an exposure. This evaluation takes into consideration such factors as current economic projections, projected payment estimates, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and certain other factors that may affect the borrower’s ability to pay. While we use the best information available to make this evaluation, future adjustments to our ACL may be necessary if there are significant changes in economic or other conditions that can affect the collectability in full of loans in our loan portfolio.

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

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

Overview and Recent Developments

The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition

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to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts could have a material impact on our operations and financial results. The following is a list of the impacts that are considered significant at this time.

In response to the potential impact on liquidity resulting from the COVID-19 pandemic and to encourage banks to work with borrowers, FASB issued accounting guidelines that do not require forbearance or restructuring of loans completed as a result of the COVID-19 pandemic to be classified as troubled debt restructures.

Upon the World Health Organization’s pandemic declaration, we implemented our Pandemic Response Business Continuity Plan, under which we moved approximately 60% of our corporate employees to a remote working strategy and implemented protocols for the safety of our clients and employees. The transition to working remotely was achieved within a week and did not require any significant costs due to our existing technology platform in place. Additional costs associated with the safety protocols, such as additional cleaning and supplies has been offset by reduced costs for parking, meals, entertainment and travel. We have implemented alternative procedures, such as electronic signatures and approvals, to maintain effective internal controls over our financial reporting processes.

Our financial position and results of operations through the first three quarters of 2020 have been impacted by increases in the allowance for credit losses as current economic projections, used in our CECL modeling, contemplate a significant adverse impact on the economy in the coming months resulting in higher estimates of credit losses. Due to the significant decrease in rates, our funding costs started to decline in March and are expected to decline over the course of the year if the current interest rate environment persists.

Potential impacts to our future financial position and results of operation include:

●

Continuing adverse impacts of loan performance, including increased levels of chargeoffs and the need for additional allowance for credit loss reserves.

●

Origination of loans under the Paycheck Protection Program (“the PPP”) administered by the Small Business Administration. These loans bear interest at 1%, are for a term of two years and we are paid a fee for originating these loans, which we expect to average between 2.5% to 3%. While uncertain at this time, we anticipate a significant portion of these loans will be repaid within 180 days from the time the SBA forgiveness process commences.

●

Continuing low levels of funding costs due to the expected continuation of the current low interest rate environment.

●

After funding of existing pipelines, expectations of significantly lower origination volumes due in part to the large credit spreads on certain lending and investment security products.

●

The issuance of forbearance agreements to accommodate our borrowers. We have received and granted requests for forbearance on certain commercial loans, primarily to smaller businesses. However, we do require documentation of financial difficulty before granting a request, and we do not expect a significant level of forbearance activity in our loans secured by multifamily or single family real estate. The change in accounting guidelines that do not require forbearance or restructuring of loans completed as a result of the COVID 19 pandemic to be classified as troubled debt restructures will minimize the financial impact of these accommodations.

●

Pricing volatility of our AFS securities portfolio.

●

Potential servicing advances required under our loan servicing agreements if borrowers are granted forbearances or do not pay their loans on a timely basis.

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As previously mentioned, our funding costs have and are expected to continue to decrease. We do not expect any significant impact to our liquidity or contingent liquidity sources at this time. Due to available funding sources, we do not expect reduced cash flows caused by forbearances, loans issued under the PPP, servicing advances or increases in delinquencies to have a material adverse impact on our liquidity position.

Our results of operations for the first nine months of 2020 include:

●

Completed securitization of $553 million of loans, recognizing a $15.1 million gain, inclusive of associated mortgage servicing rights of $3.9 million.

●

Total loans, including loans held for sale, increased $77 million in the nine months ended September 30, 2020 as a result of $1.8 billion of originations, which were partially offset by payoffs or scheduled payments of $1.1 billion and loan sales of $553 million.

●

During the nine months ended September 30, 2020, total deposits increased by $573 million and total revenues (net interest income and noninterest income) increased by 19% when compared to the nine months ended September 30, 2019.

Results of Operations

The primary sources of revenue for Banking are net interest income, fees from its deposits and trust services, gains on sales of loans, certain loan fees, and consulting fees. The primary sources of revenue for Wealth Management are asset management fees assessed on the balance of assets under management (“AUM”). Compensation and benefit costs, which represent the largest component of noninterest expense, accounted for 56% and 75%, respectively, of the total noninterest expense for Banking and Wealth Management in the nine months ended September 30, 2020.

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


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
2020:
Interest income	$	61,691	$	—	$	—	$	61,691
Interest expense		10,024		—		50		10,074
Net interest income		51,667		—		(50)		51,617
Provision for credit losses		1,548		—		—		1,548
Noninterest income		17,976		6,020		(355)		23,641
Noninterest expense		24,949		5,166		480		30,595
Income (loss) before taxes on income	$	43,146	$	854	$	(885)	$	43,115

2019:
Interest income	$	62,614	$	—	$	—	$	62,614
Interest expense		19,328		—		154		19,482
Net interest income		43,286		—		(154)		43,132
Provision for credit losses		172		—		—		172
Noninterest income		8,173		6,161		(352)		13,982
Noninterest expense		26,397		5,423		874		32,694
Income (loss) before taxes on income	$	24,890	$	738	$	(1,380)	$	24,248

General. Our net income and income before taxes in the three months ended September 30, 2020 were $30.9 million and $43.1 million, respectively, as compared to $17.4 million and $24.2 million, respectively, in the three months ended September 30, 2019. The $18.9 million increase in income before taxes was the result of a $18.3 million increase in income before taxes for Banking, a $0.1 million increase in income before taxes for Wealth Management and a $ 0.4 million decrease in corporate noninterest expenses. The increase in Banking was due to higher net interest income, higher

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noninterest income and lower noninterest expenses. The increase in Wealth Management was due to lower noninterest expenses, offset partially by lower noninterest income.

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


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
2020:
Interest income	$	185,961	$	—	$	—	$	185,961
Interest expense		40,899		—		130		41,029
Net interest income		145,062		—		(130)		144,932
Provision for credit losses		6,979		—		—		6,979
Noninterest income		26,270		18,139		(1,124)		43,285
Noninterest expense		76,235		16,735		1,434		94,404
Income (loss) before taxes on income	$	88,118	$	1,404	$	(2,688)	$	86,834

2019:
Interest income	$	186,466	$	—	$	—	$	186,466
Interest expense		60,132		—		268		60,400
Net interest income		126,334		—		(268)		126,066
Provision for credit losses		1,943		—		—		1,943
Noninterest income		14,638		17,874		(934)		31,578
Noninterest expense		78,785		16,508		2,628		97,921
Income (loss) before taxes on income	$	60,244	$	1,366	$	(3,830)	$	57,780

General. Our net income and income before taxes in the nine months ended September 30, 2020 were $62.0 million and $86.8 million, respectively, as compared to $41.0 million and $57.8 million, respectively, in the first nine months of 2019. The $29.1 million increase in income before taxes was the result of a $27.9 million increase in income before taxes for Banking, and a $1.2 million decrease in corporate noninterest expenses. The increase in Banking was due to higher net interest income, higher noninterest income and lower noninterest expenses, partially offset by a higher provision for credit losses.

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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:


	Quarter Ended September 30:
	2020						2019
	Average				Average		Average				Average
(dollars in thousands)	Balances		Interest		Yield /Rate		Balances		Interest		Yield /Rate
Interest-earning assets:
Loans	$	5,644,646	$	55,231	3.91	%	$	5,282,338	$	56,483	4.27	%
Securities		840,593		6,107	2.91	%		616,424		5,349	3.47	%
FHLB stock, fed funds, and deposits		329,311		353	0.43	%		86,839		782	3.57	%
Total interest-earning assets		6,814,550		61,691	3.62	%		5,985,601		62,614	4.18	%
Noninterest-earning assets:
Nonperforming assets		16,506						18,001
Other		186,751						206,065
Total assets	$	7,017,807					$	6,209,667
Interest-bearing liabilities:
Demand deposits	$	425,674	$	369	0.35	%	$	370,681	$	897	0.96	%
Money market and savings		1,805,284		3,071	0.68	%		1,194,714		3,946	1.31	%
Certificates of deposit		1,538,377		4,548	1.18	%		1,988,265		11,832	2.36	%
Total interest-bearing deposits		3,769,335		7,988	0.84	%		3,553,660		16,675	1.86	%
Borrowings		698,860		2,086	1.19	%		486,807		2,807	2.29	%
Total interest-bearing liabilities		4,468,195		10,074	0.90	%		4,040,467		19,482	1.91	%
Noninterest-bearing liabilities:
Demand deposits		1,832,709						1,508,290
Other liabilities		75,555						72,424
Total liabilities		6,376,459						5,621,181
Shareholders’ equity		641,348						588,486
Total liabilities and equity	$	7,017,807					$	6,209,667
Net Interest Income			$	51,617					$	43,132
Net Interest Rate Spread					2.72	%					2.27	%
Net Interest Margin					3.03	%					2.89	%

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	Nine Months Ended September 30:
	2020						2019
	Average				Average		Average				Average
(dollars in thousands)	Balances		Interest		Yield /Rate		Balances		Interest		Yield /Rate
Interest-earning assets:
Loans	$	5,401,754	$	165,249	4.08	%	$	5,062,689	$	166,828	4.40	%
Securities		919,712		19,643	2.85	%		732,262		17,700	3.22	%
FHLB stock, fed funds and deposits		182,558		1,069	0.78	%		61,403		1,938	4.22	%
Total interest-earning assets		6,504,024		185,961	3.81	%		5,856,354		186,466	4.25	%
Noninterest-earning assets:
Nonperforming assets		13,095						15,123
Other		180,735						193,176
Total assets	$	6,697,854					$	6,064,653
Interest-bearing liabilities:
Demand deposits	$	386,249		1,466	0.51	%	$	333,838		2,392	0.96	%
Money market and savings		1,554,295		10,595	0.91	%		1,181,657		10,972	1.24	%
Certificates of deposit		1,815,252		21,487	1.58	%		2,004,574		35,055	2.34	%
Total interest-bearing deposits		3,755,796		33,548	1.19	%		3,520,069		48,419	1.84	%
Borrowings		730,763		7,481	1.37	%		640,267		11,981	2.50	%
Total interest-bearing liabilities		4,486,559		41,029	1.22	%		4,160,336		60,400	1.94	%
Noninterest-bearing liabilities:
Demand deposits		1,514,954						1,270,845
Other liabilities		67,887						60,639
Total liabilities		6,069,400						5,491,820
Stockholders’ equity		628,454						572,833
Total liabilities and equity	$	6,697,854					$	6,064,653
Net Interest Income			$	144,932					$	126,066
Net Interest Rate Spread					2.59	%					2.31	%
Net Interest Margin					2.97	%					2.87	%

Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by prior volume) and mix of interest-earning assets and interest-bearing liabilities. Variances attributable to both rate and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the rate variance. The following table provides a breakdown of the changes in net interest income due to volume and rate changes for the quarter and nine months ended September 30, 2020, as compared to the quarter and nine months ended September 30, 2019:


	Quarter Ended							Nine Months Ended
	September 30, 2020 vs. 2019						September 30, 2020 vs. 2019
	Increase (Decrease) due to						Increase (Decrease) due to
(dollars in thousands)	Volume		Rate		Total		Volume		Rate		Total
Interest earned on:
Loans	$	3,699	$	(4,951)	$	(1,252)	$	10,790	$	(12,369)	$	(1,579)
Securities		1,727		(969)		758		4,165		(2,222)		1,943
FHLB stock, fed funds and deposits		711		(1,140)		(429)		1,622		(2,491)		(869)
Total interest-earning assets		6,137		(7,060)		(923)		16,577		(17,082)		(505)
Interest paid on:
Demand deposits		109		(637)		(528)		335		(1,262)		(927)
Money market and savings		1,488		(2,363)		(875)		2,973		(3,350)		(377)
Certificates of deposit		(2,313)		(4,971)		(7,284)		(3,040)		(10,527)		(13,567)
Borrowings		924		(1,645)		(721)		1,523		(6,023)		(4,500)
Total interest-bearing liabilities		208		(9,616)		(9,408)		1,791		(21,162)		(19,371)
Net interest income	$	5,929	$	2,556	$	8,485	$	14,786	$	4,080	$	18,866

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Net interest income increased 20% from $43.1 million in the third quarter of 2019, to $51.6 million in the third quarter of 2020 due to a 14% increase in interest-earning assets and an increase in the net interest rate spread. The net interest rate spread increased from 2.27% in the third quarter of 2019 to 2.72% in the third quarter of 2020 due to a decrease in the cost of interest-bearing liabilities, from 1.91% in the third quarter of 2019, to 0.90% in the third quarter of 2020, which was partially offset by a decrease in yield on interest-earning assets, from 4.18% in the third quarter of 2019, to 3.62% in the third quarter of 2020. The decrease in the cost of interest-bearing liabilities was due to decreased costs of interest-bearing deposits, resulting from decreases in deposit market rates, and decreased costs of borrowings, as the average rate on FHLB advances and other overnight borrowings decreased from 2.29% in the third quarter of 2019 to 1.19% in the third quarter of 2020. The yield on interest-earning assets decreased due to decreases in yields on loans and securities and an increase in the proportion of lower yielding securities and deposits to total interest-earning assets. The yield on loans decreased due to accelerated payoffs of higher yielding loans during the last year and the decrease in market rates, which resulted in lower rates on loans added to the portfolio. The yield on securities decreased due to the purchase of $576 million of securities in the third quarter of 2019 at current market rates, which were lower than the overall yield realized in 2019. The average balance outstanding under the holding company line of credit decreased from $10.5 million in the third quarter of 2019 to $5.3 million in the third quarter of 2020, resulting in a $0.1 million decrease in corporate interest expense.

Net interest income for Banking increased 15% from $126.3 million in the first nine months of 2019, to $145.1 million in the first nine months of 2020 due primarily to a 11% increase in interest-earning assets. On a consolidated basis our net interest margin was 2.97% for the first nine months of 2020 as compared to 2.87% in the first nine months of 2019. This increase was due to an increase in the net interest rate spread, from 2.31% in the first nine months of 2019 to 2.59% in the first nine months of 2020. The increase in the net interest rate spread was due to a decrease in the cost of interest-bearing liabilities, from 1.94% in the first nine months of 2019, to 1.22% in the first nine months of 2020, which was partially offset by a decrease in yield on total interest-earning assets, from 4.25% in the first nine months of 2019, to 3.81% in the first nine months of 2020. The decrease in the cost of interest-bearing liabilities was due to decreased costs of interest-bearing deposits, resulting from decreases in deposit market rates, and decreased costs of borrowings, as the average rate on FHLB advances and other overnight borrowings decreased from 2.50% in the first nine months of 2019 to 1.37% in the first nine months of 2020. The yield on interest-earning assets decreased as new loans added to the portfolio bear interest rates lower than the current portfolio rates, due to decreases in market rates. The average balance outstanding under the holding company line of credit decreased from $12.5 million in the first nine months of 2019 to $3.9 million in the first nine months of 2020.

Provision for credit losses. The provision for credit losses represents our estimate of the amount necessary to be charged against the current period’s earnings to maintain the ACL at a level that we consider adequate in relation to the estimated losses inherent in the loan portfolio. The provision for credit losses is impacted by changes in loan balances as well as changes in estimated loss assumptions and charge-offs and recoveries. The amount of the provision also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions and certain other subjective factors that may affect the ability of borrowers to meet their repayment obligations to us. For the three and nine months ended September 30, 2020, we recorded provisions for credit losses of $1.5 million and $7.0 million, respectively, as compared to $0.2 million and $1.9 million, respectively, for the three and nine months ended September 30, 2019. Net chargeoffs against the ACL were $0.1 million and $0.6 million for the three and nine months ended September 30, 2020, respectively, as compared to net recoveries of $0.1 million and net chargeoffs of $0.4 for the three and nine months ended September 30, 2019. The $7.0 million provision for credit losses in the first nine months of 2020 was due to an $8.0 million increase in the allowance for credit losses for investments. With the current interest rate environment and the increase we have experienced in prepayment speeds in our interest-only strip securities, this allowance represents the change in expected cash flows on these securities. These increases were partially offset by a decrease in the allowance for credit losses for loans, which was a result of a decrease in loans held for investment, as $513 million of loan balances were transferred to the held for sale category in preparation for a securitization next year, as well as a change in the economic factor we utilize for the CECL calculation.

Noninterest income. Noninterest income for Banking includes fees charged to clients for trust services and deposit services, consulting fees, prepayment and late fees charged on loans, gain on sale of loans, and gains and losses from

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capital market activities and insurance commissions. The following table provides a breakdown of noninterest income for Banking for the three and nine months ended September 30, 2020 and 2019.


(dollars in thousands)	2020		2019
Quarter Ended September 30:
Trust fees	$	1,504	$	1,305
Loan related fees		713		1,857
Deposit charges		326		309
Gain on sale of loans		15,140		4,218
Consulting fees		99		95
Other		194		389
Total noninterest income	$	17,976	$	8,173

Nine Months Ended September 30:
Trust fees	$	4,200	$	3,790
Loan related fees		5,104		4,454
Deposit charges		917		727
Gain on sale of loans		15,140		4,218
Consulting fees		299		300
Other		610		1,149
Total noninterest income	$	26,270	$	14,638

Noninterest income for Banking in the three and nine months ended September 30, 2020 were $9.8 million and $11.6 million higher than the three and nine months ended September 30, 2019, respectively, due to $15.1 million in gains on sales of loans in the third quarter of 2020, as compared to $4.2 million in the third quarter of 2019. Other loan fees decreased by $1.4 million in three months ended September 30, 2020 when compared to the corresponding period in 2019, due to a $1.3 million valuation allowance on mortgage servicing rights, which was due to an increase in prepayment speeds.

Noninterest income for Wealth Management includes fees charged to high net-worth clients for managing their assets and for providing financial planning consulting services. The following table provides the amounts of noninterest income for Wealth Management for the three and nine months ended September 30, 2020 and 2019:


(dollars in thousands)	2020		2019
Quarter Ended September 30:
Noninterest income	$	6,020	$	6,161

Nine Months Ended September 30:
Noninterest income	$	18,139	$	17,874

Noninterest income for Wealth Management decreased by $0.1 million in the third quarter of 2020 when compared to the corresponding period in 2019 due primarily to lower levels of billable AUM in the quarter. Noninterest income for Wealth Management increased by $0.3 million in the first nine months of 2020 when compared to the first nine months of 2019 due primarily to higher investment management fees in the first quarter of 2020.

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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)	2020		2019		2020		2019
Quarter Ended September 30:
Compensation and benefits	$	13,696	$	12,613	$	3,897	$	4,185
Occupancy and depreciation		5,414		4,814		620		578
Professional services and marketing		1,595		1,173		544		474
Customer service costs		1,723		5,920		—		—
Other expenses		2,521		1,877		105		186
Total noninterest expense	$	24,949	$	26,397	$	5,166	$	5,423

Nine Months Ended September 30:
Compensation and benefits	$	42,376	$	39,774	$	12,567	$	12,549
Occupancy and depreciation		15,529		13,630		1,796		1,716
Professional services and marketing		4,287		3,519		1,961		1,702
Customer Service Costs		5,717		13,592		—		—
Other expenses		8,326		8,270		411		541
Total noninterest expense	$	76,235	$	78,785	$	16,735	$	16,508

Noninterest expense in Banking decreased from $26.4 million in the third quarter of 2019 to $25.0 million in the third quarter of 2020 primarily due to lower customer service costs, which were partially offset by higher compensation and benefits, and occupancy and depreciation expenses. The $4.2 million decrease in customer service costs was due to decreases in the earnings credit rates paid on deposit balances, as interest rates have declined. Compensation and benefits were $1.1 million higher due to higher compensation costs and commission costs related to higher production volume during 2020. Occupancy and depreciation costs were $0.6 million higher due primarily to higher core processing costs related to higher volumes and services added during 2020. Noninterest expenses for Wealth Management decreased by $0.3 million in the third quarter of 2020, when compared to the third quarter of 2019, due to lower compensation and benefits expenses.

Noninterest expense in Banking decreased from $78.8 million in the first nine months of 2019 to $76.2 million in the first nine months of 2020, due to a decrease in customer service costs, which were partially offset by increases in compensation and benefits, occupancy and depreciation, and professional services and marketing. Customer service costs for Banking decreased from $13.6 million in the first nine months of 2019 to $5.7 million in the first nine months of 2020 due to decreases in the earnings credit rates paid on the related deposit balances, as interest rates declined during the first nine months of 2020. Compensation and benefits for Banking increased $2.6 million during the first nine months of 2020 as compared to the first nine months of 2019, due to salary increases and an increase in the FTE in Banking, which increased to 431.1 in the first nine months of 2020, from 422.7 in the first nine months of 2019, as a result of the increased staffing related to additional personnel added to support the growth in loans and deposits. The $1.9 million increase in occupancy and depreciation for Banking in the first nine months of 2020 as compared to the first nine months of 2019 were due to higher core processing costs related to higher volumes and services added during 2019. Noninterest expenses for Wealth Management increased by $0.2 million in the first nine months of 2020, when compared to the first nine months of 2019, due to higher professional services and marketing expenses. Professional services and marketing expenses were $0.3 million higher due to costs incurred on a legal matter in the first quarter of 2020.

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Financial Condition

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


			Wealth		Other and
(dollars in thousands)	Banking		Management		Eliminations		Total
September 30, 2020:
Cash and cash equivalents	$	282,502	$	2,117	$	(1,636)	$	282,983
Securities AFS, net		882,932		—		—		882,932
Loans held for sale		512,598		—		—		512,598
Loans, net		4,591,140		—		—		4,591,140
Premises and equipment		7,510		619		136		8,265
FHLB Stock		17,250		—		—		17,250
Deferred taxes		7,208		186		(237)		7,157
Goodwill and intangibles		95,735		—		—		95,735
Other assets		68,481		332		15,065		83,878
Total assets	$	6,465,356	$	3,254	$	13,328	$	6,481,938

Deposits	$	5,469,019	$	—	$	(5,206)	$	5,463,813
Borrowings		260,000		—		9,000		269,000
Intercompany balances		10,426		(1,397)		(9,029)		—
Other liabilities		48,687		3,186		19,316		71,189
Shareholders’ equity		677,224		1,465		(753)		677,936
Total liabilities and equity	$	6,465,356	$	3,254	$	13,328	$	6,481,938

December 31, 2019:
Cash and cash equivalents	$	65,083	$	5,054	$	(4,750)	$	65,387
Securities AFS, net		1,014,966		—		—		1,014,966
Loans held for sale		503,036		—		—		503,036
Loans, net		4,526,833		—		—		4,526,833
Premises and equipment		7,561		658		136		8,355
FHLB Stock		21,519		—		—		21,519
Deferred taxes		10,778		133		168		11,079
Goodwill and Intangibles		97,191		—		—		97,191
Other assets		51,229		445		14,396		66,070
Total assets	$	6,298,196	$	6,290	$	9,950	$	6,314,436

Deposits	$	4,902,958	$	—	$	(11,814)	$	4,891,144
Borrowings		733,000		—		10,000		743,000
Intercompany balances		3,111		469		(3,580)		—
Other liabilities		48,159		3,400		14,864		66,423
Shareholders’ equity		610,968		2,421		480		613,869
Total liabilities and equity	$	6,298,196	$	6,290	$	9,950	$	6,314,436

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

During the nine months ended September 30, 2020, total assets increased by $168 million primarily due to an increase in cash and cash equivalents and loans, which was partially offset by a decrease in securities. During the nine months ended September 30, 2020, securities decreased by $124 million primarily due to payoffs of mortgage backed securities. Loans and loans held for sale increased $77 million in the nine months ended September 30, 2020 as a result of $1.8 billion of originations, which were partially offset by payoffs or scheduled payments of $1.1 billion and loan sales of

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$553 million. The $573 million growth in deposits during the nine months of 2020 included increases in specialty deposits of $564 million, branch deposits of $353 million, and digital channel deposits of $329 million, which were partially offset by a $674 million decrease in wholesale deposits. Borrowings decreased by $474 million during the nine months ended September 30, 2020 as cash provided by the increase in deposits, which exceeded the growth in our assets, was used to pay down our borrowings at the Bank. At September 30, 2020 and December 31, 2019, the outstanding balance on the holding company line of credit was $9 million and $10 million, respectively.

Cash and cash equivalents, certificates of deposit and securities. Cash and cash equivalents, which primarily consist of funds held at the Federal Reserve Bank or at correspondent banks, including fed funds, increased by $218 million during the nine months ended September 30, 2020. Changes in cash and cash equivalents are primarily affected by the funding of loans, investments in securities, and changes in our sources of funding: deposits, FHLB advances and FFI borrowings.

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


	Amortized		Gross Unrealized				Allowance for		Estimated
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Fair Value
September 30, 2020:
Agency mortgage-backed securities	$	776,956	$	21,237	$	—	$	—	$	798,193
Beneficial interest – FHLMC securitization		32,577		286		—		(8,049)		24,814
Corporate bonds		57,000		1,321		—		—		58,321
Other		1,505		99		—		—		1,604
Total	$	868,038	$	22,943	$	—	$	(8,049)	$	882,932

December 31, 2019:
Agency mortgage-backed securities	$	905,949	$	9,174	$	(146)	$	—	$	914,977
Beneficial interest – FHLMC securitization		47,586		1,801		(6,681)		—		42,706
Corporate bonds		54,000		1,834		—		—		55,834
Other		1,386		63		—		—		1,449
Total	$	1,008,921	$	12,872	$	(6,827)	$	—	$	1,014,966

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 September 30, 2020:


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
Amortized Cost:
Corporate bonds	$	—		$	—		$	57,000		$	—		$	57,000
Other		500			—			1,006			—			1,506
Total	$	500		$	—		$	58,006		$	—		$	58,506
Weighted average yield		1.76	%		—	%		5.35	%		—	%		5.32	%
Estimated Fair Value:
Corporate bonds	$	—		$	—		$	58,322		$	—		$	58,322
Other		505			—			1,100			—			1,605
Total	$	505		$	—		$	59,422		$	—		$	59,927

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


	September 30,		December 31,
(dollars in thousands)	2020		2019
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily	$	2,084,175	$	2,143,919
Single family		818,436		871,181
Total real estate loans secured by residential properties		2,902,611		3,015,100
Commercial properties		770,964		834,042
Land		57,722		70,257
Total real estate loans		3,731,297		3,919,399
Commercial and industrial loans		858,744		600,213
Consumer loans		18,399		16,273
Total loans		4,608,440		4,535,885
Premiums, discounts and deferred fees and expenses		6,883		11,748
Total	$	4,615,323	$	4,547,633

Loans and loans held for sale increased $77 million during the nine months ended September 30, 2020 as a result of $1.8 billion of originations, which were partially offset by payoffs or scheduled payments of $1.1 billion, and $553 million of loan sales.

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


	September 30, 2020				December 31, 2019
			Weighted				Weighted
(dollars in thousands)	Amount		Average Rate		Amount		Average Rate
Demand deposits:
Noninterest-bearing	$	1,890,028	—		$	1,192,481	—
Interest-bearing		396,938	0.255	%		386,276	0.635	%
Money market and savings		1,922,264	0.634	%		1,334,736	1.355	%
Certificates of deposits		1,254,583	0.902	%		1,977,651	1.971	%
Total	$	5,463,813	0.449	%	$	4,891,144	1.217	%

During the first nine months of 2020, our deposit rates have moved in a manner consistent with overall deposit market rates. The weighted average rate of our interest-bearing deposits decreased from 1.61% at December 31, 2019 to 0.69% at September 30, 2020 due to decreased costs of interest-bearing deposits, while the weighted average interest rates of both interest-bearing and noninterest-bearing deposits have decreased from 1.22% at December 31, 2019 to 0.45% at September 30, 2020. The financial impact of the increase in noninterest-bearing deposits is reflected in customer service costs, which are included in noninterest expenses.

The maturities of our certificates of deposit of $100,000 or more were as follows as of September 30, 2020:


(dollars in thousands)
3 months or less	$	249,794
Over 3 months through 6 months		216,798
Over 6 months through 12 months		163,605
Over 12 months		17,626
Total	$	647,823

From time to time, the Bank will utilize brokered deposits as a source of funding. As of September 30, 2020, the Bank held $534 million of deposits which are classified as brokered deposits.

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Borrowings. At September 30, 2020, our borrowings consisted of $250 million in FHLB term advances at the Bank, $10 million in FHLB zero interest advances, and $9 million of borrowings under a holding company line of credit. At December 31, 2019, our borrowings consisted of $233 million of overnight FHLB advances at the Bank, a $500 million FHLB term advance at the Bank, and $10 million of borrowings under a holding company line of credit. The $250 million FHLB term advance outstanding at September 30, 2020 matures in March 2021 and bears an interest rate of 0.47%. Because FFB generally utilizes overnight borrowings, the balance of outstanding borrowings may fluctuate on a daily basis. The average balance of FHLB advances outstanding during the nine months ended September 30, 2020 was $727 million, as compared to $640 million for the nine months ended September 30, 2019. The weighted average interest rate on these borrowings was 1.35% for the nine months ended September 30, 2020 as compared to 2.50% for the nine months ended September 30, 2019. The maximum amount of borrowings at the Bank outstanding at any month-end during the nine months ended September 30, 2020 and during all of 2019 was $865 million and $956 million, respectively.

Delinquent Loans, Nonperforming Assets and Provision for Credit Losses

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


							90 Days						Total Past Due
(dollars in thousands)	30–59 Days			60-89 Days			or More			Nonaccrual			and Nonaccrual			Current		Total
September 30, 2020:
Real estate loans:
Residential properties	$	—		$	24		$	1,922		$	12,532		$	14,478		$	2,888,133	$	2,902,611
Commercial properties		722			215			—			1,738			2,675			768,289		770,964
Land		411			—			—			—			411			57,311		57,722
Commercial and industrial loans		442			1,038			481			6,306			8,267			850,477		858,744
Consumer loans		—			—			—			16			16			18,383		18,399
Total	$	1,575		$	1,277		$	2,403		$	20,592		$	25,847		$	4,582,593	$	4,608,440

Percentage of total loans		0.03	%		0.03	%		0.05	%		0.45	%		0.56	%
December 31, 2019:
Real estate loans:
Residential properties	$	89		$	13		$	—		$	1,743		$	1,845		$	3,013,255	$	3,015,100
Commercial properties		7,586			—			403			2,410			10,399			823,643		834,042
Land		—			—			—			—			—			70,257		70,257
Commercial and industrial loans		695			2,007			—			8,714			11,416			588,797		600,213
Consumer loans		22			3			—			—			25			16,248		16,273
Total	$	8,392		$	2,023		$	403		$	12,867		$	23,685		$	4,512,200	$	4,535,885

Percentage of total loans		0.19	%		0.04	%		0.01	%		0.28	%		0.52	%

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


	September 30, 2020						December 31, 2019
(dollars in thousands)	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total
Residential real estate loans	$	1,200	$	—	$	1,200	$	1,200	$	—	$	1,200
Commercial real estate loans		1,127		1,303		2,430		1,188		2,166		3,354
Commercial and industrial loans		1,014		3,439		4,453		557		2,972		3,529
Total	$	3,341	$	4,742	$	8,083	$	2,945	$	5,138	$	8,083

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

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


								Loans Individually
(dollars in thousands)	Pass		Special Mention		Substandard		Evaluated		Total
September 30, 2020:
Real estate loans:
Residential properties	$	2,887,890	$	990	$	17	$	13,714	$	2,902,611
Commercial properties		740,035		12,840		6,216		11,873		770,964
Land		57,311		411		—		—		57,722
Commercial and industrial loans		839,377		8,260		3,787		7,320		858,744
Consumer loans		18,383		—		—		16		18,399
Total	$	4,542,996	$	22,501	$	10,020	$	32,923	$	4,608,440

December 31, 2019:
Real estate loans:
Residential properties	$	3,012,203	$	—	$	—	$	2,897	$	3,015,100
Commercial properties		821,425		679		5,249		6,689		834,042
Land		69,476		—		781		—		70,257
Commercial and industrial loans		579,153		8,202		3,542		9,316		600,213
Consumer loans		16,273		—		—		—		16,273
Total	$	4,498,530	$	8,881	$	9,572	$	18,902	$	4,535,885

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


	Beginning		Adoption of		Provision for						Ending
(dollars in thousands)	Balance		ASC 326		Credit Losses		Charge-offs		Recoveries		Balance
Quarter ended September 30, 2020:
Real estate loans:
Residential properties	$	6,756	$	—	$	(3,791)	$	—	$	—	$	2,965
Commercial properties		9,311		—		336		—		—		9,647
Land		3,368		—		(2,211)		—		—		1,157
Commercial and industrial loans		8,488		—		1,831		(338)		222		10,203
Consumer loans		206		—		5		—		—		211
Total	$	28,129	$	—	$	(3,830)	$	(338)	$	222	$	24,183

Nine months ended September 30, 2020:
Real estate loans:
Residential properties	$	8,423	$	(363)	$	(5,095)	$	—	$	—	$	2,965
Commercial properties		4,166		(3,760)		9,241		—		—		9,647
Land		573		(92)		676		—		—		1,157
Commercial and industrial loans		7,448		—		3,362		(1,393)		786		10,203
Consumer loans		190		—		21		—		—		211
Total	$	20,800	$	(4,215)	$	8,205	$	(1,393)	$	786	$	24,183

Year ended December 31, 2019:
Real estate loans:
Residential properties	$	9,216	$	—	$	(793)	$	—	$	—	$	8,423
Commercial properties		4,547		—		(381)		—		—		4,166
Land		391		—		182		—		—		573
Commercial and industrial loans		4,628		—		3,653		(2,687)		1,854		7,448
Consumer loans		218		—		(24)		(5)		1		190
Total	$	19,000	$	—	$	2,637	$	(2,692)	$	1,855	$	20,800

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Including PCD loans, our ACL related to loans represented 0.52% and 0.49% of total loans outstanding as of September 30, 2020 and December 31, 2019, respectively.

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

In addition, 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:


					Purchased				Unaccreted Credit
	Evaluated for Impairment				Credit				Component
(dollars in thousands)	Individually		Collectively		Deteriorated		Total		Other Loans

September 30, 2020:
Allowance for credit losses:
Real estate loans:
Residential properties	$	7	$	2,954	$	4	$	2,965	$
Commercial properties		98		9,268		281		9,647
Land		—		1,157		—		1,157
Commercial and industrial loans		1,095		9,102		6		10,203
Consumer loans		—		211		—		211
Total	$	1,200	$	22,692	$	291	$	24,183	$
Loans:
Real estate loans:
Residential properties	$	13,714	$	2,888,609	$	288	$	2,902,611	$
Commercial properties		11,873		753,578		5,513		770,964
Land		—		57,722		—		57,722
Commercial and industrial loans		7,320		851,119		305		858,744
Consumer loans		16		18,383		—		18,399
Total	$	32,923	$	4,569,411	$	6,106	$	4,608,440	$

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	Allowance for Credit Losses								Unaccreted Credit
	Evaluated for Impairment								Component
(dollars in thousands)	Individually		Collectively		PCI		Total		Other Loans
December 31, 2019:
Allowance for credit losses:
Real estate loans:
Residential properties	$	—	$	8,423	$	—	$	8,423	$	1,013
Commercial properties		107		4,059		—		4,166		1,048
Land		—		573		—		573		6
Commercial and industrial loans		763		6,685		—		7,448		277
Consumer loans		—		190		—		190		1
Total	$	870	$	19,930	$	—	$	20,800	$	2,345
Loans:
Real estate loans:
Residential properties	$	2,897	$	3,012,203	$	—	$	3,015,100	$	189,339
Commercial properties		6,689		824,026		3,327		834,042		201,370
Land		—		69,476		781		70,257		28,660
Commercial and industrial loans		9,316		590,489		408		600,213		24,143
Consumer loans		—		16,273		—		16,273		253
Total	$	18,902	$	4,512,467	$	4,516	$	4,535,885	$	443,765

The column labeled “Unaccreted Credit Component Other Loans” represents the amount of unaccreted credit component discount for the other loans acquired in acquisitions, and the stated principal balance of the related loans. The discount is equal to 0.53% of the stated principal balance on these loans as of December 31, 2019. In addition to this unaccreted credit component discount, an additional $0.3 million of the ACL was provided for these loans as of December 31, 2019.

Liquidity

Liquidity management focuses on our ability to generate, on a timely and cost-effective basis, cash sufficient to meet the funding needs of current loan demand, deposit withdrawals, principal and interest payments with respect to outstanding borrowings and to pay operating expenses. Our liquidity management is both a daily and long-term function of funds management. Liquid assets are generally invested in marketable securities or held as cash at 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 $2.2 billion at September 30, 2020.

Cash Flows Provided by Operating Activities. During the nine months ended September 30, 2020, operating activities provided net cash of $50 million, primarily due to net income of $62 million, $7 million in provisions for credit losses, and a net decrease of $5 million in other liabilities, partially offset by a net increase of $5 million in other assets and $4 million in amortization of premiums on purchased loans. During the nine months ended September 30, 2019, operating activities provided net cash of $47 million, comprised primarily of our net income of $41 million.

Cash Flows Used in Investing Activities. During the nine months ended September 30, 2020, investing activities provided net cash of $92 million, primarily from proceeds from sales of loans of $578 million and $197 million in cash received in principal collection and maturities of securities, offset partially by a $625 million net increase in loans and $61 million in securities purchases. During the nine months ended September 30, 2019, investing activities used net cash of $269 million, primarily to fund a $628 million net increase in loans and $577 million in securities purchases, offset partially

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by $357 million in cash received in proceeds from the sale, principal collection, and maturities of securities and $574 million in proceeds from the sale of securities.

Cash Flow Provided by Financing Activities. During the nine months ended September 30, 2020, financing activities provided net cash of $76 million, consisting primarily of a net increase of $573 million in deposits, offset partially by a $474 million decrease in FHLB advances, $9 million in dividends paid, and $11 million in the settlement of a swap transaction. During the nine months ended September 30, 2019, financing activities provided net cash of $423 million, consisting primarily of a net increase of $638 million in deposits, offset partially by a $203 million decrease in FHLB advances, and $20 million cash paid in the settlement of a swap transaction.

Ratio of Loans to Deposits. The relationship between gross loans and total deposits can provide a useful measure of a bank’s liquidity. Since repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan-to-deposit ratio the less liquid are our assets. On the other hand, since we realize greater yields on loans than we do on other interest-earning assets, a lower loan-to-deposit ratio can adversely affect interest income and earnings. As a result, our goal is to achieve a loan-to-deposit ratio that appropriately balances the requirements of liquidity and the need to generate a fair return on our assets. At September 30, 2020 and December 31, 2019, the loan-to-deposit ratios at FFB were 94%, and 103%, respectively.

Off-Balance Sheet Arrangements

The following table provides the off-balance sheet arrangements of the Company as of September 30, 2020:


(dollars in thousands)
Commitments to fund new loans	$	37,739
Commitments to fund under existing loans, lines of credit		515,536
Commitments under standby letters of credit		16,305

Some of the commitments to fund existing loans, lines of credit and letters of credit are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. As of September 30, 2020, FFB was obligated on $283 million of letters of credit to the FHLB which were being used as collateral for public fund deposits, including $263 million of deposits from the State of California.

Capital Resources and Dividend Policy

The capital rules applicable 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.

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


									To Be Well Capitalized
					For Capital				Under Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
FFI
September 30, 2020:
CET1 capital ratio	$	569,234	10.96	%	$	233,748	4.50	%
Tier 1 leverage ratio		569,234	8.21	%		277,495	4.00	%
Tier 1 risk-based capital ratio		569,234	10.96	%		311,664	6.00	%
Total risk-based capital ratio		592,879	11.41	%		415,553	8.00	%

December 31, 2019:
CET1 capital ratio	$	513,083	10.65	%	$	216,782	4.50	%
Tier 1 leverage ratio		513,083	8.25	%		248,798	4.00	%
Tier 1 risk-based capital ratio		513,083	10.65	%		289,043	6.00	%
Total risk-based capital ratio		537,048	11.15	%		385,390	8.00	%

FFB
September 30, 2020:
CET1 capital ratio	$	568,476	10.98	%	$	233,023	4.50	%	$	336,588	6.50	%
Tier 1 leverage ratio		568,476	8.21	%		276,824	4.00	%		346,030	5.00	%
Tier 1 risk-based capital ratio		568,476	10.98	%		310,697	6.00	%		414,263	8.00	%
Total risk-based capital ratio		592,121	11.43	%		414,263	8.00	%		517,828	10.00	%

December 31, 2019:
CET1 capital ratio	$	510,142	10.62	%	$	216,063	4.50	%	$	312,091	6.50	%
Tier 1 leverage ratio		510,142	8.22	%		248,119	4.00	%		310,148	5.00	%
Tier 1 risk-based capital ratio		510,142	10.62	%		288,084	6.00	%		384,112	8.00	%
Total risk-based capital ratio		534,107	11.12	%		384,112	8.00	%		480,140	10.00	%

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

As of September 30, 2020, FFI had $16.1 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 September 30, 2020, the amount of capital at FFB in excess of amounts required to be well capitalized for purposes of the prompt corrective action regulations was $232 million for the CET1 capital ratio, $222 million for the Tier 1 Leverage Ratio, $154 million for the Tier 1 risk-based capital ratio and $74 million for the Total risk-based capital ratio.

The Company paid a quarterly cash dividend of $0.07 per common share in each of the first three quarters of 2020. It is our current intention to continue to pay quarterly dividends. The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain regulatory restrictions which are discussed in Item 1 “Business—Supervision and Regulation—Dividends and Stock Repurchases” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019. Additionally, under the terms of the holding company line of credit agreement, FFI may only declare and pay a dividend if the total amount of dividends and stock repurchases during the current twelve months does not exceed 50% of FFI’s net income for the same twelve month period. We paid $8.9 million in dividends ($0.20 per share) in 2019.

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We had no material commitments for capital expenditures as of September 30, 2020. However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain financial risks, which are discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the section titled Asset and Liability Management: Interest Rate Risk in our Annual Report on Form 10-K which we filed with the Securities and Exchange Commission on March 2, 2020. There have been no material changes to our quantitative and qualitative disclosures about market risk since December 31, 2019.

ITEM 4.CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness, as of September 30, 2020, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2020, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting that occurred during the three months ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1A.RISK FACTORS

The following risk factors supplement, and should be read in conjunction with, the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The COVID-19 pandemic and measures intended to prevent its spread are adversely affecting us and our customers, employees and third-party service providers, and the ultimate extent of the impacts on our business, financial condition, results of operations, liquidity and prospects is uncertain.

Global health concerns relating to the COVID-19 pandemic and related government actions taken to reduce the spread of the virus have created significant economic uncertainty and reduced economic activity, including within our market areas. Governmental authorities have implemented numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, “stay at home” orders and business limitations and shutdowns. These measures have caused significant unemployment and have negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in a timely fashion. Continued deterioration in general business and economic conditions caused by the COVID-19 pandemic, including further increases in unemployment rates, or turbulence in domestic or global financial markets, could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility, which could result in impairment to our goodwill in future periods. In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance.

Our business is dependent upon the willingness and ability of our customers and employees to conduct banking and other financial transactions. Disruptions to our customers caused by the COVID-19 pandemic could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, as well as reductions in loan demand, the liquidity of loan guarantors, loan collateral values (particularly in real estate), loan originations, interest and noninterest income and deposit availability. These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 pandemic has subsided. We also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of the COVID-19 pandemic in our market areas. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. In addition, we rely upon our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers.

The extent to which the COVID-19 pandemic impacts our business, financial condition, results of operations, liquidity and prospects will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s economic impact and any recession that has occurred or may occur in the future.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, we do not yet know the full extent of the impacts on our business, our operations or the economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

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Our participation in the PPP exposes us to risks related to noncompliance with the PPP, as well as litigation risk related to our administration of the PPP loan program, which could have a material adverse impact on our business, financial condition and results of operations.

We are a participating lender in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their processes and procedures used in processing applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations. In addition, we may be exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

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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 September 30, 2020. As of September 30, 2020, 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

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: November 6, 2020	By:	/s/ KEVIN L. THOMPSON
		Kevin L. Thompson
		Executive Vice President and Chief Financial Officer

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