First Foundation Announces 2020 Second Quarter Financial Results

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 shares authorized; 44,625,324 and 44,496,007 shares issued and outstanding at June 30, 2020 and December 31, 2019 respectively			45			45
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, fed funds sold and deposits			259			612			716			1,156
Total interest income			61,932			63,308			124,270			123,852
Interest expense:
Deposits			10,914			16,296			25,560			31,744
Borrowings			2,571			5,125			5,395			9,174
Total interest expense			13,485			21,421			30,955			40,918
Net interest income			48,447			41,887			93,315			82,934
Provision for credit losses			1,367			1,231			5,431			1,771
Net interest income after provision for credit losses			47,080			40,656			87,884			81,163
Noninterest income:
Asset management, consulting and other fees			6,733			7,136			14,495			13,930
Other income			2,236			1,995			5,149			3,666
Total noninterest income			8,969			9,131			19,644			17,596
Noninterest expense:
Compensation and benefits			18,288			17,333			38,145			36,235
Occupancy and depreciation			5,855			5,167			11,367			10,035
Professional services and marketing costs			2,049			2,024			3,803			4,028
Customer service costs			1,622			4,283			3,994			7,672
Other expenses			3,123			3,475			6,500			7,257
Total noninterest expense			30,937			32,282			63,809			65,227
Income before taxes on income			25,112			17,505			43,719			33,532
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, consulting and other fees			6,733			7,136			14,495			13,930
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 - annualized			1.06	%		0.81	%		0.94	%		0.79	%
Return on average equity - annualized			11.3	%		8.6	%		9.9	%		8.3	%
Return on average tangible equity – annualized(1)			13.3	%		10.4	%		11.7	%		10.1	%
Net yield on interest-earning assets			2.96	%		2.84	%		2.94	%		2.86	%
Efficiency ratio(2)			53.0	%		63.5	%		56.0	%		65.1	%
Noninterest income as a % of total revenues			15.6	%		17.9	%		17.4	%		17.5	%
Other Information:
Loan originations		$	701,090		$	493,572		$	1,364,258		$	893,433
Charge-offs (recoveries) / average loans - annualized			0.03	%		0.02	%		0.02	%		0.02	%

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

(3)		Tangible common equity and tangible book value are non-GAAP financial 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 Ended							For the Six Months 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 income		$	25,723		$	18,425		$	44,972		$	35,354
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 income		$	227		$	415		$	550		$	628
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 income		$	(838)		$	(1,335)		$	(1,803)		$	(2,450)

FIRST FOUNDATION INC. ROLLING INCOME STATEMENTS - Unaudited (in thousands, except share and per share amounts)
		For the Quarter Ended
		June 30,			September 30,			December 31,			March 31,			June 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 sold and deposits			612			782			867			457			259
Total interest income			63,308			62,614			62,294			62,338			61,932
Interest expense:
Deposits			16,296			16,675			15,763			14,646			10,914
Borrowings			5,125			2,807			2,643			2,824			2,571
Total interest expense			21,421			19,482			18,406			17,470			13,485
Net interest income			41,887			43,132			43,888			44,868			48,447
Provision for credit losses			1,231			172			694			4,079			1,367
Net interest income after provision for credit losses			40,656			42,960			43,194			40,789			47,080
Noninterest income:
Asset management, consulting and other fees			7,136			7,304			7,424			7,762			6,733
Gain on sale of loans			—			4,218			—			—			—
Other income			1,995			2,460			2,774			2,913			2,236
Total noninterest income			9,131			13,982			10,198			10,675			8,969
Noninterest expense:
Compensation and benefits			17,333			17,167			16,531			19,857			18,288
Occupancy and depreciation			5,167			5,450			5,420			5,512			5,855
Professional services and marketing costs			2,024			1,745			1,644			1,754			2,049
Customer service costs			4,283			5,920			4,266			2,372			1,622
Other expenses			3,475			2,412			3,812			3,362			3,123
Total noninterest expense			32,282			32,694			31,673			32,857			30,937
Income before taxes on income			17,505			24,248			21,719			18,607			25,112
Taxes on income			5,095			6,892			6,505			5,396			7,258
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 used in 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 30,			December 31,			March 31,			June 30,
		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 losses			1,231			172			694			4,064			1,367
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 income		$	18,425		$	24,890		$	21,906		$	19,249		$	25,723
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 income		$	415		$	738		$	839		$	323		$	227
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 income		$	(1,335)		$	(1,380)		$	(1,026)		$	(965)		$	(838)

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
Total interest-earnings assets			6,550,312			5,892,960			6,347,055			5,790,660
Deposits: interest-bearing			3,791,997			3,500,824			3,748,952			3,502,995
Deposits: noninterest-bearing			1,442,333			1,175,707			1,354,331			1,150,155
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	%
Total interest-earnings assets			3.78	%		4.30	%		3.92	%		4.28	%
Deposits (interest-bearing only)			1.16	%		1.87	%		1.37	%		1.83	%
Deposits (noninterest and interest-bearing)			0.84	%		1.40	%		1.01	%		1.38	%
Borrowings			1.28	%		2.57	%		1.45	%		2.58	%
Total interest-bearing liabilities			1.18	%		2.00	%		1.38	%		1.95	%
Net Interest Rate Spread			2.61	%		2.30	%		2.53	%		2.33	%
Net Yield on Interest-earning Assets			2.96	%		2.84	%		2.94	%		2.86	%

		For the Quarter Ended
		June 30,			September 30,			December 31,			March 31,			June 30,
		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
Total interest-earnings assets			5,892,960			5,985,601			6,114,122			6,143,797			6,550,312
Deposits: interest-bearing			3,500,824			3,553,660			3,616,384			3,705,907			3,791,997
Deposits: noninterest-bearing			1,175,707			1,508,290			1,443,233			1,266,328			1,442,333
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	%
Total interest-earnings assets			4.30	%		4.18	%		4.07	%		4.06	%		3.78	%
Deposits (interest-bearing only)			1.87	%		1.86	%		1.73	%		1.59	%		1.16	%
Deposits (noninterest and interest-bearing)			1.40	%		1.31	%		1.24	%		1.18	%		0.84	%
Borrowings			2.57	%		2.29	%		1.80	%		1.66	%		1.28	%
Total interest-bearing liabilities			2.00	%		1.91	%		1.74	%		1.60	%		1.18	%
Net Interest Rate Spread			2.30	%		2.27	%		2.33	%		2.46	%		2.61	%
Net Yield on Interest-earning Assets			2.84	%		2.89	%		2.88	%		2.92	%		2.96	%

FIRST FOUNDATION INC. SELECTED INFORMATION: LOAN AND DEPOSIT BALANCES - Unaudited (in thousands)
		For the Quarter Ended
		June 30,			September 30,			December 31,			March 31,			June 30,
		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 loans			4,044,456			3,780,566			3,919,399			4,081,807			4,235,902
Commercial and industry loans			558,532			566,390			600,213			696,596			875,464
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 expenses			10,899			10,747			11,748			9,634			6,806
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 savings			1,166,734			1,316,899			1,334,736			1,380,903			1,643,871
Certificates of deposits			1,981,184			1,971,218			1,977,651			1,950,595			1,822,535
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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