Business Wire | Jul 21, 2020 09:00AM EDT

First Foundation Announces 2020 Second Quarter Financial Results

Jul. 21, 2020

IRVINE, Calif.--(BUSINESS WIRE)--Jul. 21, 2020--First Foundation Inc. (NASDAQ: FFWM), a financial services company with two wholly-owned operating subsidiaries, First Foundation Advisors ("FFA") and First Foundation Bank ("FFB"), announced today its financial results for the three and six months ended June 30, 2020. As we present certain non-GAAP measures in this release, the reader should refer to the non-GAAP reconciliations set forth below under the section "Use of Non-GAAP Financial Measures."

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

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

Highlights

Financial Results:

* 2020 second quarter compared to 2019 second quarter: Total revenues were $57.4 million, an increase of 13% Net interest income was $48.4 million, an increase of 16% Income before taxes was $25.1 million, an increase of 43% Earnings were $17.9 million, an increase of 44% Earnings per fully diluted share were $0.40, compared to $0.28

* 2020 year to date compared to 2019 year to date: Total revenues were $113.0 million, an increase of 12% Net interest income was $93.3 million, an increase of 13% Income before taxes was $43.7 million, an increase of 30% Earnings were $31.1 million, an increase of 31% Earnings per fully diluted share were $0.69, compared to $0.53

* 2020 Financial ratios: Return on average tangible equity of 13.3% for the quarter, 11.7% for year-to-date Return on average assets of 1.06% for the quarter, 0.94% for year-to-date Efficiency ratio of 53.0% at First Foundation Inc. and 47% at First Foundation Bank for the quarter Total tangible shareholders' equity of $543 million, tangible book value of $12.16 per share, and tangible common equity to tangible assets of 7.70%

Other Activity:

* We have not seen any significant need for forbearances in our multifamily and single-family portfolios, and total forbearances moved to 2.3% of total loan portfolio.

* Approximately 85% of our total loan portfolio is secured by stabilized real estate properties.

* Net interest margin ("NIM") was 2.96% for the second quarter.

* Hedge placed on loans held for sale. $11.7 million recorded as liability and increase to loans held for sale.

* Loan originations totaled $701 million for the quarter, including $171 million of PPP loans.

* Deposits increased by $757 million for the first six months of 2020.

* Declared and paid cash dividend of $0.07 per share in the quarter.

* Assets under management ("AUM") at FFA increased to $4.3 billion.

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

Details

* Total loans, including loans held for sale, increased $614 million in the first six months of 2020 as a result of $1.4 billion of originations, which were partially offset by payoffs or scheduled payments of $760 million.

* The $757 million growth in deposits during the first six months of 2020 included increases in specialty deposits of $467 million and branch deposits of $483 million, which were partially offset by a $193 million decrease in wholesale deposits.

* The $394 million increase in AUM during the second quarter of 2020 was the net result of $46 million of new accounts, $466 million of portfolio gains, and terminations and net withdrawals of $118 million.

About First Foundation

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

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

Forward-Looking Statements

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

FIRST FOUNDATION INC.

CONSOLIDATED BALANCE SHEETS - Unaudited

(in thousands, except share and per share amounts)



June 30, December 31,

2020 2019

ASSETS



Cash and cash equivalents $ 414,179 $ 65,387

Securities available-for-sale ("AFS") 863,778 1,014,966

Loans held for sale 527,970 503,036



Loans, net of deferred fees 5,136,812 4,547,633

Allowance for credit losses ("ACL") (30,500) (20,800)

Net loans 5,106,312 4,526,833



Investment in FHLB stock 23,598 21,519

Deferred taxes 9,194 11,079

Premises and equipment, net 8,188 8,355

Goodwill and intangibles 96,181 97,191

Other assets 88,943 66,070

Total Assets $ 7,138,343 $ 6,314,436



LIABILITIES AND SHAREHOLDERS' EQUITY



Liabilities:

Deposits $ 5,647,841 $ 4,891,144

Borrowings 764,600 743,000

Accounts payable and other liabilities 87,181 66,423

Total Liabilities 6,499,622 5,700,567



Shareholders' Equity

Common Stock, par value $.001: 70,000,000 sharesauthorized; 44,625,324 and 44,496,007 shares issued 45 45and outstanding at June 30, 2020 and December 31,2019 respectively

Additional paid-in-capital 432,791 433,775

Retained earnings 200,582 175,773

Accumulated other comprehensive income, net of tax 5,303 4,276

Total Shareholders' Equity 638,721 613,869



Total Liabilities and Shareholders' Equity $ 7,138,343 $ 6,314,436

FIRST FOUNDATION INC.

CONSOLIDATED INCOME STATEMENTS - Unaudited

(in thousands, except share and per share amounts)



For the Quarter Ended For the Six Months Ended

June 30, June 30,

2020 2019 2020 2019



Interest income:

Loans $ 55,134 $ 56,510 $ 110,018 $ 110,345

Securities 6,539 6,186 13,536 12,351

FHLB Stock, fedfunds sold and 259 612 716 1,156deposits

Total interest 61,932 63,308 124,270 123,852income



Interest expense:

Deposits 10,914 16,296 25,560 31,744

Borrowings 2,571 5,125 5,395 9,174

Total interest 13,485 21,421 30,955 40,918expense



Net interest income 48,447 41,887 93,315 82,934



Provision for 1,367 1,231 5,431 1,771credit losses



Net interest incomeafter provision for 47,080 40,656 87,884 81,163credit losses



Noninterest income:

Asset management,consulting and 6,733 7,136 14,495 13,930other fees

Other income 2,236 1,995 5,149 3,666

Total noninterest 8,969 9,131 19,644 17,596income



Noninterest expense:

Compensation and 18,288 17,333 38,145 36,235benefits

Occupancy and 5,855 5,167 11,367 10,035depreciation

Professionalservices and 2,049 2,024 3,803 4,028marketing costs

Customer service 1,622 4,283 3,994 7,672costs

Other expenses 3,123 3,475 6,500 7,257

Total noninterest 30,937 32,282 63,809 65,227expense



Income before taxes 25,112 17,505 43,719 33,532on income

Taxes on income 7,258 5,095 12,654 9,863

Net income $ 17,854 $ 12,410 $ 31,065 $ 23,669



Net income per share:

Basic $ 0.40 $ 0.28 $ 0.70 $ 0.53

Diluted $ 0.40 $ 0.28 $ 0.69 $ 0.53

Shares used in computation:

Basic 44,620,716 44,625,673 44,645,189 44,583,503

Diluted 44,812,369 44,894,720 44,882,520 44,846,779

FIRST FOUNDATION INC.

SELECTED FINANCIAL INFORMATION - Unaudited

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



For the Quarter Ended For the Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Selected Income Statement Data:

Net interest income $ 48,447 $ 41,887 $ 93,315 $ 82,934

Provision for credit losses 1,367 1,231 5,431 1,771

Noninterest Income:

Asset management, 6,733 7,136 14,495 13,930 consulting and other fees

Other 2,236 1,995 5,149 3,666

Noninterest expense 30,937 32,282 63,809 65,227

Income before taxes 25,112 17,505 43,719 33,532

Net income 17,854 12,410 31,065 23,669

Net income per share:

Basic $ 0.40 $ 0.28 $ 0.70 $ 0.53

Diluted 0.40 0.28 0.69 0.53



Selected Performance Ratios:

Return on average assets - 1.06 % 0.81 % 0.94 % 0.79 %annualized

Return on average equity - 11.3 % 8.6 % 9.9 % 8.3 %annualized

Return on average tangible 13.3 % 10.4 % 11.7 % 10.1 %equity - annualized^(1)

Net yield on 2.96 % 2.84 % 2.94 % 2.86 %interest-earning assets

Efficiency ratio^(2) 53.0 % 63.5 % 56.0 % 65.1 %

Noninterest income as a % 15.6 % 17.9 % 17.4 % 17.5 %of total revenues



Other Information:

Loan originations $ 701,090 $ 493,572 $ 1,364,258 $ 893,433

Charge-offs (recoveries) / 0.03 % 0.02 % 0.02 % 0.02 %average loans - annualized



Tangible equity is a non-GAAP financial measure. See disclosures(1) regarding "Use of Non-GAAP Financial Measures" included as a separate section in this press release.

Efficiency Ratio is a non-GAAP financial measure: See disclosures(2) regarding "Use of Non-GAAP Financial Measures" included as a separate section in this press release.

FIRST FOUNDATION INC.

SELECTED FINANCIAL INFORMATION - Unaudited

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



June 30, December 31,

2020 2019

Selected Balance Sheet Data:

Cash and cash equivalents $ 414,179 $ 65,387

Loans held for sale 527,970 503,036

Loans, net of deferred fees 5,136,812 4,547,633

Allowance for credit losses 30,500 20,800

Total assets 7,138,343 6,314,436

Noninterest-bearing deposits 1,770,382 1,192,481

Interest-bearing deposits 3,877,460 3,698,663

Borrowings 764,600 743,000

Shareholders' equity 638,721 613,869



Selected Capital Data:

Tangible common equity to tangible assets^(3) 7.70 % 8.31 %

Tangible book value per share^(3) $ 12.16 $ 11.57

Shares outstanding at end of period 44,625,324 44,670,743



Other Information:

Assets under management (end of period) $ 4,292,252 $ 4,438,252

Number of employees 493 485

Loan to deposit ratio 100.3 % 103.0 %

Nonperforming assets to total assets 0.22 % 0.20 %

Ratio of ACL to loans^(4) 0.55 % 0.49 %

Tangible common equity and tangible book value are non-GAAP financial(3) measures. See disclosures regarding "Use of Non-GAAP Financial Measures" included as a separate section in this press release.

(4) This ratio excludes allowance for credit losses on investments.

FIRST FOUNDATION INC.

SEGMENT REPORTING - Unaudited

(in thousands)



For the Quarter For the Six Months Ended Ended

June 30, June 30,

2020 2019 2020 2019

Banking:

Interest income $ 61,932 $ 63,308 $ 124,270 $ 123,852

Interest expense 13,435 21,322 30,875 40,804

Net interest income 48,497 41,986 93,395 83,048

Provision for credit losses 1,367 1,231 5,431 1,771

Noninterest income 3,635 3,471 8,294 6,465

Noninterest expense 25,042 25,801 51,286 52,388

Income before taxes on $ 25,723 $ 18,425 $ 44,972 $ 35,354income



Wealth Management:

Noninterest income $ 5,631 $ 5,982 $ 12,119 $ 11,713

Noninterest expense 5,404 5,567 11,569 11,085

Income before taxes on $ 227 $ 415 $ 550 $ 628income



Other and Eliminations:

Interest income $ - $ - $ - $ -

Interest expense 50 99 80 114

Net interest income (50) (99) (80) (114)

Noninterest income (297) (322) (769) (582)

Noninterest expense 491 914 954 1,754

Income before taxes on $ (838) $ (1,335) $ (1,803) $ (2,450)income

FIRST FOUNDATION INC.

ROLLING INCOME STATEMENTS - Unaudited

(in thousands, except share and per share amounts)



For the Quarter Ended

June 30, September December 31, March 31, June 30, 30,

2019 2019 2019 2020 2020



Interest income:

Loans $ 56,510 $ 56,483 $ 54,123 $ 54,884 $ 55,134

Securities 6,186 5,349 7,304 6,997 6,539

FHLB Stock,fed funds 612 782 867 457 259sold anddeposits

Totalinterest 63,308 62,614 62,294 62,338 61,932income



Interest expense:

Deposits 16,296 16,675 15,763 14,646 10,914

Borrowings 5,125 2,807 2,643 2,824 2,571

Totalinterest 21,421 19,482 18,406 17,470 13,485expense



Net interest 41,887 43,132 43,888 44,868 48,447income



Provisionfor credit 1,231 172 694 4,079 1,367losses



Net interestincome afterprovision 40,656 42,960 43,194 40,789 47,080for creditlosses



Noninterest income:

Assetmanagement,consulting 7,136 7,304 7,424 7,762 6,733and otherfees

Gain on sale - 4,218 - - -of loans

Other income 1,995 2,460 2,774 2,913 2,236

Totalnoninterest 9,131 13,982 10,198 10,675 8,969income



Noninterest expense:

Compensation 17,333 17,167 16,531 19,857 18,288and benefits

Occupancyand 5,167 5,450 5,420 5,512 5,855depreciation

Professionalservices and 2,024 1,745 1,644 1,754 2,049marketingcosts

Customerservice 4,283 5,920 4,266 2,372 1,622costs

Other 3,475 2,412 3,812 3,362 3,123expenses

Totalnoninterest 32,282 32,694 31,673 32,857 30,937expense



Incomebefore taxes 17,505 24,248 21,719 18,607 25,112on income

Taxes on 5,095 6,892 6,505 5,396 7,258income

Net income $ 12,410 $ 17,356 $ 15,214 $ 13,211 $ 17,854



Net income per share:

Basic $ 0.28 $ 0.39 $ 0.34 $ 0.30 $ 0.40

Diluted $ 0.28 $ 0.39 $ 0.34 $ 0.29 $ 0.40

Shares usedin computation:

Basic 44,625,673 44,639,481 44,661,852 44,669,661 44,620,716

Diluted 44,894,720 44,935,308 45,014,092 44,952,669 44,812,369

FIRST FOUNDATION INC.

ROLLING SEGMENT REPORTING - Unaudited

(in thousands)



For the Quarter Ended

June 30, September December March June 30, 30, 31, 31,

2019 2019 2019 2020 2020

Banking:

Interest income $ 63,308 $ 62,614 $ 62,294 $ 62,338 $ 61,932

Interest expense 21,322 19,328 18,318 17,440 13,435

Net interest income 41,986 43,286 43,976 44,898 48,497

Provision for credit 1,231 172 694 4,064 1,367losses

Noninterest income 3,471 8,173 4,206 4,659 3,635

Noninterest expense 25,801 26,397 25,582 26,244 25,042

Income before taxes on $ 18,425 $ 24,890 $ 21,906 $ 19,249 $ 25,723income



Wealth Management:

Noninterest income $ 5,982 $ 6,161 $ 6,262 $ 6,488 $ 5,631

Noninterest expense 5,567 5,423 5,423 6,165 5,404

Income before taxes on $ 415 $ 738 $ 839 $ 323 $ 227income



Other and Eliminations:

Interest income $ - $ - $ - $ - $ -

Interest expense 99 154 88 30 50

Net interest income (99) (154) (88) (30) (50)

Noninterest income (322) (352) (270) (472) (297)

Noninterest expense 914 874 668 463 491

Loss before taxes on $ (1,335) $ (1,380) $ (1,026) $ (965) $ (838)income

FIRST FOUNDATION INC.

SELECTED INFORMATION: INTEREST MARGIN - Unaudited

(in thousands, except percentages)



For the Quarter Ended For the Six Months Ended

June 30, June 30,

2020 2019 2020 2019

Average Balances:

Loans $ 5,475,796 $ 5,064,903 $ 5,278,974 $ 4,951,044

Securities 919,788 779,903 959,707 791,141

Totalinterest-earnings 6,550,312 5,892,960 6,347,055 5,790,660 assets

Deposits: 3,791,997 3,500,824 3,748,952 3,502,995 interest-bearing

Deposits: 1,442,333 1,175,707 1,354,331 1,150,155 noninterest-bearing

Borrowings 810,844 798,609 746,890 718,269



Average Yield / Rate:

Loans 4.03 % 4.46 % 4.17 % 4.46 %

Securities 2.84 % 3.17 % 2.82 % 3.12 %

Totalinterest-earnings 3.78 % 4.30 % 3.92 % 4.28 %assets

Deposits(interest-bearing 1.16 % 1.87 % 1.37 % 1.83 %only)

Deposits (noninterest 0.84 % 1.40 % 1.01 % 1.38 %and interest-bearing)

Borrowings 1.28 % 2.57 % 1.45 % 2.58 %

Totalinterest-bearing 1.18 % 2.00 % 1.38 % 1.95 %liabilities



Net Interest Rate 2.61 % 2.30 % 2.53 % 2.33 %Spread



Net Yield onInterest-earning 2.96 % 2.84 % 2.94 % 2.86 %Assets



For the Quarter Ended

June 30, September December March 31, June 30, 30, 31,

2019 2019 2019 2020 2020



Average Balances:

Loans $ 5,064,903 $ 5,282,338 $ 4,942,708 $ 5,082,152 $ 5,475,796

Securities 779,903 616,424 1,023,715 999,625 919,788

Totalinterest-earnings 5,892,960 5,985,601 6,114,122 6,143,797 6,550,312 assets

Deposits: 3,500,824 3,553,660 3,616,384 3,705,907 3,791,997 interest-bearing

Deposits: 1,175,707 1,508,290 1,443,233 1,266,328 1,442,333 noninterest-bearing

Borrowings 798,609 486,807 583,458 682,936 810,844



Average Yield / Rate:

Loans 4.46 % 4.27 % 4.37 % 4.32 % 4.03 %

Securities 3.17 % 3.47 % 2.85 % 2.80 % 2.84 %

Totalinterest-earnings 4.30 % 4.18 % 4.07 % 4.06 % 3.78 %assets

Deposits(interest-bearing 1.87 % 1.86 % 1.73 % 1.59 % 1.16 %only)

Deposits(noninterest and 1.40 % 1.31 % 1.24 % 1.18 % 0.84 %interest-bearing)

Borrowings 2.57 % 2.29 % 1.80 % 1.66 % 1.28 %

Totalinterest-bearing 2.00 % 1.91 % 1.74 % 1.60 % 1.18 %liabilities



Net Interest Rate 2.30 % 2.27 % 2.33 % 2.46 % 2.61 %Spread



Net Yield onInterest-earning 2.84 % 2.89 % 2.88 % 2.92 % 2.96 %Assets

FIRST FOUNDATION INC.

SELECTED INFORMATION: LOAN AND DEPOSIT BALANCES - Unaudited

(in thousands)



For the Quarter Ended

June 30, September December March 31, June 30, 30, 31,

2019 2019 2019 2020 2020

Loans

Outstanding principal balance:

Loans secured by real estate:

Residential properties:

Multifamily $ 2,179,750 $ 1,941,624 $ 2,143,919 $ 2,369,081 $ 2,556,332

Single Family 904,413 896,607 871,181 851,443 839,537

Subtotal 3,084,163 2,838,231 3,015,100 3,220,524 3,395,869

Commercial properties 897,303 871,225 834,042 793,182 774,939

Land and construction 62,990 71,110 70,257 68,101 65,094

Total real estate 4,044,456 3,780,566 3,919,399 4,081,807 4,235,902loans

Commercial and 558,532 566,390 600,213 696,596 875,464industry loans

Consumer loans 17,477 16,505 16,273 17,476 18,640

Total loans 4,620,465 4,363,461 4,535,885 4,795,879 5,130,006

Deferred fees and 10,899 10,747 11,748 9,634 6,806expenses

Total $ 4,631,364 $ 4,374,208 $ 4,547,633 $ 4,805,513 $ 5,136,812



Loans held for sale $ 622,130 $ 501,860 $ 503,036 $ 520,721 $ 527,970







Deposits

Demand deposits:

Noninterest-bearing $ 1,279,218 $ 1,532,105 $ 1,192,481 $ 1,315,114 $ 1,770,382

Interest-bearing 316,806 350,344 386,276 384,215 411,053

Money market and 1,166,734 1,316,899 1,334,736 1,380,903 1,643,871savings

Certificates of 1,981,184 1,971,218 1,977,651 1,950,595 1,822,535deposits

Total $ 4,743,942 $ 5,170,566 $ 4,891,144 $ 5,030,827 $ 5,647,841

Use of Non-GAAP Financial Measures

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

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

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

* The efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income and may exclude one-time and non-operating items of income or expense. Core deposit intangible amortization for the three and six months ended June 30, 2020 of $0.5 million and $1.0 million, respectively, was excluded from noninterest expenses. For the six months ended June 30, 2019, a $0.1 million of gain on sale of REO was excluded from noninterest income.

* Tangible common equity (also referred to as tangible book value or tangible equity) and tangible assets, are equal to common equity and assets, respectively, less $96.2 million and $97.2 million of goodwill and intangible assets as of June 30, 2020 and December 31, 2019, respectively. We believe that this information is consistent with the treatment by bank regulatory agencies, which exclude intangible assets from the calculation of capital ratios.

* Average tangible equity is equal to average common equity less $96.4 million and $98.5 million of average goodwill and intangible assets for the quarters ended June 30, 2020 and 2019, respectively, and less $96.7 million and $98.9 million of average goodwill and intangible assets for the six months ended June 30, 2020 and 2019, respectively. We believe that this information is consistent with the treatment by bank regulatory agencies, which exclude intangible assets from the calculation of capital ratios.

Discussion of Changes in Results of Operations and Financial Position

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

Our net income and income before taxes in the second quarter of 2020 were $ 17.9 million and $ 25.1 million, respectively, as compared to $12.4 million and $17.5 million, respectively, in the second quarter of 2019. The $7.6 million increase in income before taxes was the result of a $7.3 million increase in income before taxes for Banking, a $0.1 million decrease in income before taxes for Wealth Management and a $ 0.4 million decrease in corporate noninterest expenses. The increase in Banking was due to higher net interest income, higher noninterest income and lower noninterest expenses. The decrease in Wealth Management was due to lower noninterest income, offset partially by lower noninterest expenses.

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

Net interest income for Banking increased 16% from $42.0 million in the second quarter of 2019, to $48.5 million in the second quarter of 2020 due to an 11% increase in interest-earning assets and an increase in the net interest rate spread. The net interest rate spread increased from 2.30% in the second quarter of 2019 to 2.61% in the second quarter of 2020 due to a decrease in the cost of interest-bearing liabilities from 2.00% in the second quarter of 2019 to 1.18% in the second quarter of 2020, which was partially offset by a decrease in yield on interest-earning assets from 4.30% in the second quarter of 2019 to 3.78% in the second quarter of 2020. The decrease in the cost of interest-bearing liabilities was due to decreased costs of interest-bearing deposits, resulting from decreases in deposit market rates, and decreased costs of borrowings as the average rate on FHLB advances and other overnight borrowings increased from 2.54% in the second quarter of 2019 to 1.26% in the second quarter of 2020. The yield on interest-earning assets decreased from 4.30% in the second quarter of 2019 to 3.78% in the second quarter of 2020 due to decreases in yields on loans and securities and an increase in the proportion of lower yielding securities and deposits to total interest-earning assets. The yield on loans decreased due to accelerated payoffs of higher yielding loans during the last year and the decrease in market rates, which resulted in lower rates on loans added to the portfolio. The yield on securities decreased due to the purchase of $576 million of securities in the third quarter of 2019 at current market rates, which were lower than the overall yield realized in 2019. The average balance outstanding under the holding company line of credit decreased from $6.5 million in the second quarter of 2019 to $3.4 million in the second quarter of 2020, resulting in a $0.1 million decrease in corporate interest expense.

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

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

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

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

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

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

Net interest income for Banking increased 12% from $83.0 million in the first six months of 2019, to $93.4 million in the first six months of 2020 due primarily to a 10% increase in interest-earning assets. On a consolidated basis our net yield on interest earning assets was 2.94% for the first six months of 2020 as compared to 2.86% in the first six months of 2019. This increase was due to an increase in the net interest rate spread, from 2.33% in the first six months of 2019 to 2.53% in the first six months of 2020. The increase in the net interest rate spread was due to a decrease in the cost of interest-bearing liabilities, from 1.95% in the first six months of 2019, to 1.38% in the first six months of 2020, which was partially offset by a decrease in yield on total interest-earning assets, from 4.28% in the first six months of 2019, to 3.92% in the first six months of 2020. The decrease in the cost of interest-bearing liabilities was due to decreased costs of interest-bearing deposits, resulting from decreases in deposit market rates, and decreased costs of borrowings, as the average rate on FHLB advances and other overnight borrowings decreased from 2.56% in the first six months of 2019 to 1.44% in the first six months of 2020. The yield on interest-earning assets decreased as new loans added to the portfolio bear interest rates lower than the current portfolio rates, due to decreases in market rates. The average balance outstanding under the holding company line of credit decreased from $3.8 million in the first six months of 2019 to $3.2 million in the first six months of 2020.

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

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

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

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

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

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

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

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

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

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

Changes in Financial Position

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

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

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CONTACT: Kevin Thompson Chief Financial Officer First Foundation Inc. 949-202-4164 kthompson@ff-inc.com