First Foundation Inc. - Quarter Report: 2022 March (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 March 31, 2022

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

For the transition period from to

Commission File Number 001-36461

FIRST FOUNDATION INC.

(Exact name of Registrant as specified in its charter)


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

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

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

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


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

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

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

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



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

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

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

As of May 3, 2022, the registrant had 56,514,168 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 MARCH 31, 2022

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	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	48

Part II. Other Information
Item 1A	Risk Factors	48
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)


	March 31,		December 31,
	2022		2021
		(unaudited)
ASSETS
Cash and cash equivalents	$	931,710	$	1,121,757
Securities available-for-sale ("AFS")		269,030		1,201,777
Securities held-to-maturity ("HTM")		920,408		—
Allowance for credit losses - investments		(10,743)		(10,399)
Net securities		1,178,695		1,191,378

Loans held for sale		501,424		501,436

Loans held for investment		7,397,464		6,906,728
Allowance for credit losses - loans		(32,822)		(33,776)
Net loans		7,364,642		6,872,952

Investment in FHLB stock		17,250		18,249
Deferred taxes		18,047		20,835
Premises and equipment, net		35,904		37,920
Real Estate Owned ("REO")		6,210		6,210
Goodwill and intangibles		223,239		222,125
Other assets		197,675		203,342
Total Assets	$	10,474,796	$	10,196,204

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	8,957,518	$	8,811,960
Borrowings		325,969		210,127
Accounts payable and other liabilities		108,734		110,066
Total Liabilities		9,392,221		9,132,153

Shareholders’ Equity
Common Stock		57		56
Additional paid-in-capital		720,846		720,744
Retained earnings		365,604		340,976
Accumulated other comprehensive (loss) income		(3,932)		2,275
Total Shareholders’ Equity		1,082,575		1,064,051
Total Liabilities and Shareholders’ Equity	$	10,474,796	$	10,196,204

(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)


	Three Months Ended
	March 31,
	2022		2021
Interest income:
Loans	$	72,027	$	53,531
Securities AFS		6,360		5,206
FHLB Stock, fed funds sold and interest-bearing deposits		757		401
Total interest income		79,144		59,138

Interest expense:
Deposits		3,358		4,623
Borrowings		1,292		286
Total interest expense		4,650		4,909

Net interest income		74,494		54,229

Provision for credit losses		(792)		360

Net interest income after provision for credit losses		75,286		53,869

Noninterest income:
Asset management, consulting and other fees		10,197		8,349
Other income		5,230		3,559
Total noninterest income		15,427		11,908

Noninterest expense:
Compensation and benefits		29,821		21,526
Occupancy and depreciation		8,567		6,160
Professional services and marketing costs		3,417		2,122
Customer service costs		1,788		1,770
Other expenses		4,025		2,933
Total noninterest expense		47,618		34,511

Income before taxes on income		43,095		31,266
Taxes on income		12,259		8,911
Net income	$	30,836	$	22,355

Net income per share:
Basic	$	0.55	$	0.50
Diluted	$	0.55	$	0.50
Shares used in computation:
Basic		56,465,855		44,707,718
Diluted		56,565,845		45,012,205

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

CONSOLIDATED STATEMENT OF CHANGES

IN SHAREHOLDERS’ EQUITY - UNAUDITED

(In thousands, except share amounts)


	Common Stock			Additional				Accumulated Other
	Number			Paid-in		Retained		Comprehensive
	of Shares	Amount		Capital		Earnings		Income (Loss)		Total
Balance: December 31, 2020	44,667,650	$	45	$	433,941	$	247,638	$	14,087	$	695,711
Net income	—		—		—		22,355		—		22,355
Other comprehensive loss	—		—		—		—		(18)		(18)
Stock based compensation	—		—		995		—		—		995
Cash dividend	—		—		—		(4,023)		—		(4,023)
Issuance of common stock:
Exercise of options	47,000		—		354		—		—		354
Stock grants – vesting of restricted stock units	108,085		—		—		—		—		—
Stock repurchase	(40,580)		—		(944)		—		—		(944)
Balance: March 31, 2021	44,782,155	$	45	$	434,346	$	265,970	$	14,069	$	714,430

Balance: December 31, 2021	56,432,070	$	56	$	720,744	$	340,976	$	2,275	$	1,064,051
Net income	—		—		—		30,836		—		30,836
Other comprehensive loss	—		—		—		—		(6,207)		(6,207)
Stock based compensation	—		—		1,204		—		—		1,204
Cash dividend	—		—		—		(6,208)		—		(6,208)
Issuance of common stock:
Exercise of options	2,000		—		18		—		—		18
Stock grants – vesting of restricted stock units	122,700		1		—		—		—		1
Repurchase of shares from restricted shares vesting	(42,602)		—		(1,120)		—		—		(1,120)
Balance: March 31, 2022	56,514,168	$	57	$	720,846	$	365,604	$	(3,932)	$	1,082,575

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME - UNAUDITED

(In thousands)


	Three Months Ended March 31,
	2022		2021
Net income	$	30,836	$	22,355
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities arising during the period		(7,731)		(25)
Other comprehensive income (loss) before tax		(7,731)		(25)
Income tax benefit (expense) related to items of other comprehensive income		1,524		7
Other comprehensive income (loss)		(6,207)		(18)
Total comprehensive income	$	24,629	$	22,337

(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 Three Months Ended
	March 31,
	2022		2021
Cash Flows from Operating Activities:
Net income	$	30,836	$	22,355
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses - loans		(1,136)		(1,273)
Provision for credit losses - securities AFS		344		1,633
Stock–based compensation expense		1,204		995
Depreciation and amortization		974		823
Deferred tax benefit		3,431		1,669
Amortization of premium (discount) on securities		(351)		131
Amortization of core deposit intangible		509		432
Amortization of mortgage servicing rights - net		549		479
Valuation allowance on mortgage servicing rights - net		(201)		(37)
Increase in other assets		5,318		4,786
(Decrease) increase in accounts payable and other liabilities		(1,138)		626
Net cash provided by operating activities		40,339		32,619
Cash Flows from Investing Activities:
Net increase in loans		(490,869)		(321,271)
Purchase of premises and equipment		(1,222)		(628)
Disposals of premises and equipment		3,375		—
Recovery of allowance for credit losses		134		406
Purchases of securities AFS		(400)		—
Purchases of securities HTM		(83,008)		—
Maturities of securities AFS		7,965		53,418
Maturities of securities HTM		79,660		—
Proceeds from redemption of securities		—		3,000
Sale of FHLB and FRB stock, net		999		—
Net cash used in investing activities		(483,366)		(265,075)
Cash Flows from Financing Activities:
Increase in deposits		145,558		332,388
Net decrease in FHLB advances		—		(250,000)
Line of credit net change – borrowings, net		(18,500)		(7,000)
Net increase in subordinated debt		147,592		—
Net decrease in repurchase agreements		(13,250)		—
Gain on sale leaseback		(1,111)		—
Dividends paid		(6,208)		(4,023)
Proceeds from exercise of stock options		19		354
Repurchase of stock		(1,120)		(944)
Net cash provided by financing activities		252,980		70,775
Decrease in cash and cash equivalents		(190,047)		(161,681)
Cash and cash equivalents at beginning of year		1,121,757		629,707
Cash and cash equivalents at end of period	$	931,710	$	468,026
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes	$	—	$	5,209
Interest		3,893		6,221
Noncash transactions:
Transfer of loans to loans held for sale	$	—	$	8,195
Transfer of securities from available-for-sale to held-to-maturity		916,777		—
Chargeoffs against allowance for credit losses		145		214
Goodwill acquisition adjustment		1,623		—

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

NOTE 1: BASIS OF PRESENTATION

The consolidated financial statements include First Foundation Inc. (“FFI”) and its wholly owned subsidiaries: First Foundation Advisors (“FFA”) and First Foundation Bank (“FFB” or the “Bank”) and the wholly owned subsidiaries of FFB, First Foundation Insurance Services (“FFIS”), Blue Moon Management, LLC, and First Foundation Public Finance (“FFPF”) (collectively referred to as the “Company”). FFI also has two inactive wholly owned subsidiaries, First Foundation Consulting and First Foundation Advisors, LLC. All intercompany balances and transactions have been eliminated in consolidation. The results of operations reflect any interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. The results for the 2022 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, 2021.

Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 2022 presentation.

New Accounting Pronouncements

In March 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures”. ASU 2022-02 eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors and provides amendments to ASU 2016-13, Financial Instruments – Credit Losses on Financial Instruments by enhancing existing disclosure requirements and introduces new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU 2022-02 also requires that entities disclose current-period gross write-offs by year of origination for financing receivables within the scope of Subtopic 326-20. For entities that have adopted the amendments in Update 2016-13, the amendments in this ASU are effective for fiscal years beginning after December 15, 2022. The adoption of ASU 2022-02 is not expected to have a significant impact on the Company’s consolidated financial statements.

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

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

NOTE 2: ACQUISITIONS

On December 17, 2021, the Company completed the acquisition of TGR Financial, Inc. (“TGRF”) and its wholly owned subsidiary, First Florida Integrity Bank, through a merger of TGRF with and into FFI followed immediately by the merger of First Florida Integrity Bank with and into FFB, in exchange for 11,352,232 shares of FFI common stock with a fair value of $24.93 per share.

The acquisition was accounted for under the purchase method of accounting. The acquired assets, assumed liabilities and identifiable intangible assets are recorded at their respective acquisition date fair values. Goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining TGRF into FFI. None of the goodwill recognized is expected to be deductible for income tax purposes.

The following table represents the assets acquired and liabilities assumed of TGRF as of December 17, 2021 and the fair value adjustments and amounts recorded by the Company in 2021 under the acquisition method of accounting:


	TGRF Book		Fair Value
(dollars in thousands)	Value		Adjustments		Fair Value
Assets Acquired:
Cash and cash equivalents	$	1,145,335	$	5	$	1,145,340
Securities AFS		147,739		109		147,848
Securities held-to-maturity		71,790		2,115		73,905
Loans, net of deferred fees		1,045,193		(5,387)		1,039,806
Investment in FHLB stock		4,510		—		4,510
Premises and equipment, net		34,199		(4,180)		30,019
Goodwill and intangibles		181		129,850		130,031
Bank owned life insurance		46,163		—		46,163
Deferred taxes		3,414		738		4,152
Other assets		13,562		(298)		13,264
Total assets acquired	$	2,512,086	$	122,952	$	2,635,038

Liabilities Assumed:
Deposits	$	2,170,676	$	313	$	2,170,989
Borrowings		177,114		1,929		179,043
Accounts payable and other liabilities		7,386		182		7,568
Total liabilities assumed		2,355,176		2,424		2,357,600
Excess of assets acquired over liabilities assumed		156,910		120,528		277,438
Total	$	2,512,086	$	122,952	$	2,635,038

Consideration:
Stock issued					$	283,011
Cash paid						10
Total consideration ⁽¹⁾					$	283,021

(1)	The difference between total consideration and the excess of assets acquired over liabilities assumed relates to the recognition of a credit loss reserve for non-PCD loans of $5.6 million, which is recognized as an expense in the consolidated income statement on the acquisition date.

In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. The most significant category of assets for which this procedure was used was that of acquired loans. The excess of expected cash

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

flows above the fair value (Level 3 inputs) of the majority of loans will be accreted to interest income over the remaining lives of the loans in accordance with Accounting Standards Codification (“ASC”) 310-20. The fair values are estimates and are subject to adjustment for up to one year after the merger date.

Certain loans, for which specific credit-related deterioration since origination was identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on these purchased credit deteriorated (“PCD”) loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on nonaccrual status and have no accretable yield. All PCD loans were classified as accruing loans as of and subsequent to the acquisition date.

In accordance with generally accepted accounting principles there was no carryover of the allowance for credit losses that had been previously recorded by TGRF.

The Company recorded a deferred income tax asset of $4.2 million related to the acquisition of TGRF, including operating loss carry-forwards of $0.1 million that are subject to limitation under Section 382 of the Internal Revenue Code.

The fair value of savings and transaction deposit accounts acquired from TGRF were assumed to approximate their carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit accounts were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates (Level 2 inputs). The portfolio was segregated into pools based on remaining maturity. For each pool, the projected cash flows from maturing certificates were then calculated based on contractual rates and prevailing market rates. The valuation adjustment for each pool is equal to the present value of the difference of these two cash flows, discounted at the assumed market rate for a certificate with a corresponding maturity. This valuation adjustment will be accreted to reduce interest expense over the remaining maturities of the respective pools. The Company also recorded a core deposit intangible, which represents the value of the deposit relationships acquired from TGRF, of $3.3 million. The core deposit intangible will be amortized over a period of 10 years.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

Pro Forma Information (unaudited)

The following table presents unaudited pro forma information for the three months ended March 31, 2021, as if the acquisition of TGRF had occurred on January 1, 2021, after giving effect to certain adjustments. The unaudited pro forma information for this period includes adjustments for interest income on loans acquired, amortization of intangibles arising from the transaction, adjustments for interest expense on deposits acquired, and the related income tax effects of all these items and the income tax costs or benefits derived from the income or loss before taxes of TGRF. The net effect of these pro forma adjustments was an increase of $0.5 million in net income for the three months ended March 31, 2021. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed dates.


	Three Months
	Ended March 31,
(dollars in thousands)	2021
Net interest income	$	68,481
Provision for credit losses		5,943
Noninterest income		13,012
Noninterest expenses		58,190
Income before taxes		17,360
Taxes on income		4,645
Net income	$	12,715

Net income per share:
Basic	$	0.23
Diluted	$	0.23

NOTE 3: FAIR VALUE MEASUREMENTS

Assets Measured at Fair Value on a Recurring Basis

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair values:

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

Level 2: Significant 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.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

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
March 31, 2022:
Investment securities available for sale:
Collateralized mortgage obligations	$	11,184	$	—	$	11,184	$	—
Agency mortgage-backed securities		10,078		—		10,078		—
Municipal bonds		48,514		—		48,514		—
SBA securities		25,672		—		25,672		—
Beneficial interests in FHLMC securitization		10,222		—		—		10,222
Corporate bonds		151,763		—		151,763		—
U.S. Treasury		854		854		—		—
Investment in equity securities		8,569		—		—		8,569
Total assets at fair value on a recurring basis	$	266,856	$	854	$	247,211	$	18,791


December 31, 2021:
Investment securities available for sale:
Collateralized mortgage obligations	$	13,825	$	—	$	13,825	$	—
Agency mortgage-backed securities		928,989		—		928,989		—
Municipal bonds		52,146		—		52,146		—
SBA securities		27,972		—		27,972		—
Beneficial interests in FHLMC securitization		11,580		—		—		11,580
Corporate bonds		156,376		—		156,376		—
U.S. Treasury		490		490		—		—
Investment in equity securities		16,025		16,025		—		—
Total assets at fair value on a recurring basis	$	1,207,403	$	16,515	$	1,179,308	$	11,580

The decrease in Level 3 assets from December 31, 2021 was due to securitization paydowns and to $0.3 million in provisions for credit losses in the first three months of 2022.

Assets Measured at Fair Value on a Nonrecurring Basis

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

Loans. Loans measured at fair value on a nonrecurring basis include collateral dependent loans held for investment. The specific reserves for these loans are based on collateral value, net of estimated disposition costs and other identified quantitative inputs. Collateral value is determined based on independent third-party appraisals or internally-developed discounted cash flow analyses. Internal discounted cash flow analyses are also utilized to estimate the fair value 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 $5.6 million and $2.8 million at March 31, 2022 and

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

December 31, 2021, respectively. There were no specific reserves related to these loans at March 31, 2022 and December 31, 2021.

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

Mortgage Servicing Rights. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income, resulting in a Level 3 classification. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Significant assumptions in the valuation of these Level 3 mortgage servicing rights as of March 31, 2022 included prepayment rates ranging from 20% to 30% and a discount rate ranging from 1.43% to 10%.

Fair Value of Financial Instruments

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

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

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

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

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

Investment Securities. Investment securities 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

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

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 March 31, 2022 and December 31, 2021 included prepayment rates ranging from 30% to 35% and discount rates ranging from 7.11% to 12.20%.

Investment in Equity Securities. The fair value on investment in equity securities is the carrying amount and is evaluated for impairment on an annual basis.

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 on repurchase agreements and subordinated debt are the carrying amounts. 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 Three Months Ended March 31, 2022 - 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
March 31, 2022:
Assets:
Cash and cash equivalents	$	931,710	$	931,710	$	—	$	—	$	931,710
Securities AFS, net		258,287		854		247,211		10,222		258,287
Securities HTM		920,408		—		880,751		—		880,751
Loans held for sale		501,424		—		515,965		—		515,965
Loans, net		7,364,642		—		—		7,578,756		7,578,756
Investment in FHLB stock		17,250		—		17,250		—		17,250
Investment in equity securities		8,569		—		—		8,569		8,569
Liabilities:
Deposits	$	8,957,518	$	8,317,757	$	639,761	$	—	$	8,957,518
Borrowings		325,969		152,680		—		173,289		325,969

December 31, 2021:
Assets:
Cash and cash equivalents	$	1,121,757	$	1,121,757	$	—	$	—	$	1,121,757
Securities AFS, net		1,191,378		490		1,179,308		11,580		1,191,378
Loans held for sale		501,436		—		515,978		—		515,978
Loans, net		6,872,952		—		—		7,072,878		7,072,878
Investment in FHLB stock		18,249		—		18,249		—		18,249
Investment in equity securities		16,025		16,025		—		—		16,025
Liabilities:
Deposits	$	8,811,960	$	8,143,473	$	668,487	$	—	$	8,811,960
Borrowings		210,127		165,930		—		44,197		210,127

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

NOTE 4: 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
March 31, 2022:
Collateralized mortgage obligations	$	11,761	$	—	$	(577)	$	—	$	11,184
Agency mortgage-backed securities		10,376		8		(306)		—		10,078
Municipal bonds		50,737		21		(2,244)		—		48,514
SBA securities		25,692		1		(21)		—		25,672
Beneficial interests in FHLMC securitization		20,631		334		—		(10,743)		10,222
Corporate bonds		153,451		1,105		(2,793)		—		151,763
U.S. Treasury		897		—		(43)		—		854
Total	$	273,545	$	1,469	$	(5,984)	$	(10,743)	$	258,287

December 31, 2021:
Collateralized mortgage obligations	$	13,862	$	—	$	(37)	$	—	$	13,825
Agency mortgage-backed securities		928,546		6,563		(6,120)		—		928,989
Municipal bonds		52,052		94		—		—		52,146
SBA securities		27,970		2		—		—		27,972
Beneficial interests in FHLMC securitization		21,606		373		—		(10,399)		11,580
Corporate bonds		154,027		2,441		(92)		—		156,376
U.S. Treasury		499		—		(9)		—		490
Total	$	1,198,562	$	9,473	$	(6,258)	$	(10,399)	$	1,191,378

As of March 31, 2022, US Treasury securities of $0.9 million included in the table above are pledged as collateral to the State of California to meet regulatory requirements related to the Bank’s trust operations, $216.3 million of agency mortgage-backed securities are pledged as collateral as support for the Bank’s obligations under loan sales and securitizations agreements entered into from 2018 and 2021, and $163.9 million of SBA securities are pledged as collateral for repurchase agreements obtained from the TGRF acquisition.

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


	Amortized		Gross Unrecognized				Allowance for		Estimated
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Fair Value
March 31, 2022:
Agency mortgage-backed securities	$	920,408	$	—	$	(39,657)	$	—	$	880,751
Total	$	920,408	$	—	$	(39,657)	$	—	$	880,751

There were no securities HTM as of December 31, 2021.

The Company reassessed classification of certain securities AFS and effective January 1, 2022, the Company transferred $917 million in securities AFS to securities HTM. The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The related unrealized gain (or loss) of $0.6 million included in other comprehensive income remained in other comprehensive income to be amortized, with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. Subsequent to transfer, the ACL on these securities was evaluated under the accounting policy for securities HTM.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

We monitor the credit quality of these securities by evaluating various quantitative attributes. The credit quality indicators the Company monitors include, but are not limited to, credit ratings of individual securities and the credit rating of government sponsored enterprises that guarantee the securities. Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is, those with ratings similar to BBB-/Baa3 or above, as defined by NRSROs, are generally considered by the rating agencies and market participants to be low credit risk. As of March 31, 2022, all of the Company’s securities were either investment grade or were issued by a U.S. government agency or a U.S. government sponsored enterprise with an investment grade rating.

The table below indicates, as of March 31, 2022 and December 31, 2021, the gross unrealized losses and fair values of our investments AFS, 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 March 31, 2022
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Collateralized mortgage obligations	$	11,182	$	(577)	$	—	$	—	$	11,182	$	(577)
Agency mortgage-backed securities		8,577		(306)		—		—		8,577		(306)
Municipal bonds		47,446		(2,244)		—		—		47,446		(2,244)
SBA securities		23,038		(21)		—		—		23,038		(21)
Corporate bonds		93,155		(2,793)		—		—		93,155		(2,793)
U.S. Treasury		854		(43)		—		—		854		(43)
Total temporarily impaired securities	$	184,252	$	(5,984)	$	—	$	—	$	184,252	$	(5,984)


	Securities with Unrealized Loss at December 31, 2021
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Collateralized mortgage obligations	$	12,971	$	(37)	$	—	$	—	$	12,971	$	(37)
Agency mortgage-backed securities		434,973		(5,051)		36,136		(1,069)		471,109		(6,120)
Corporate bonds		47,880		(92)		—		—		47,880		(92)
U.S. Treasury		491		(9)		—		—		491		(9)
Total temporarily impaired securities	$	496,315	$	(5,189)	$	36,136	$	(1,069)	$	532,451	$	(6,258)

The table below indicates, as of March 31, 2022, the gross unrealized losses and fair values of our investments HTM, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.


	Securities with Unrecognized Loss at March 31, 2022
	Less than 12 months				12 months or more				Total
	Fair		Unrecognized		Fair		Unrecognized		Fair		Unrecognized
(dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Agency mortgage-backed securities	$	844,511	$	(37,873)	$	36,240	$	(1,784)	$	880,751	$	(39,657)
Total temporarily impaired securities	$	844,511	$	(37,873)	$	36,240	$	(1,784)	$	880,751	$	(39,657)

There were no securities HTM as of December 31, 2021.

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

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

recovery, and the decline in fair value is largely due to changes in discount rates and assumptions regarding future interest rates. The fair value is expected to recover as the bonds approach maturity.

The following is a rollforward of the Bank’s allowance for credit losses related to investments for the following periods:


(dollars in thousands)		Total

Three Months Ended March 31, 2022:
Beginning balance	$	10,399
Provision for credit losses		344
Balance: March 31, 2022	$	10,743

Three Months Ended March 31, 2021:
Beginning balance	$	7,245
Provision for credit losses		1,633
Balance: March 31, 2021	$	8,878

Due to a change in expected cash flows of interest only strip securities, $0.3 million and $1.6 million in allowances were taken in the three months ended March 31, 2022 and 2021, respectively. The allowances were included as a charge in provision for credit losses on the consolidated income statement.

The ACL on investment securities is determined for both held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with ASC 326, and is evaluated on a quarterly basis. The ACL for held-to-maturity investment securities is determined on a collective basis, based on shared risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. Under ASC 326-20, for investment securities where the Company has reason to believe the credit loss exposure is remote, such as those guaranteed by the U.S. government or government sponsored entities, a zero loss expectation is applied and a company is not required to estimate and recognize an ACL.

For securities AFS in an unrealized loss position, the Company first evaluates whether it intends to sell, or whether it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the security amortized cost basis is written down to fair value through income. If neither criteria is met, the Company is required to assess whether the decline in fair value has resulted from credit losses or noncredit-related factors. In determining whether a security’s decline in fair value is credit related, the Company considers a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security, and (v) the ability of the issuer of the security to make scheduled principal and interest payments. If, after considering these factors, the present value of expected cash flows to be collected is less than the amortized cost basis, a credit loss exists, and an allowance for credit loss is recorded through income as a component of provision for credit loss expense. If the assessment indicates that a credit loss does not exist, the Company records the decline in fair value through other comprehensive income, net of related income tax effects. The Company has made the election to exclude accrued interest receivable on securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

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


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
March 31, 2022
Amortized Cost:
Collateralized mortgage obligations	$	—		$	319		$	742		$	10,700		$	11,761
Agency mortgage-backed securities		—			4,545			4,123			1,708			10,376
Municipal bonds		—			1,630			37,565			11,542			50,737
SBA securities		39			1,326			2,610			21,717			25,692
Beneficial interests in FHLMC securitization		—			11,125			—			9,506			20,631
Corporate bonds		9,526			10,019			128,371			5,535			153,451
U.S. Treasury		—			897			—			—			897
Total	$	9,565		$	29,861		$	173,411		$	60,708		$	273,545
Weighted average yield		1.06	%		1.99	%		3.34	%		1.90	%		2.80	%
Estimated Fair Value:
Collateralized mortgage obligations	$	—		$	319		$	703		$	10,162		$	11,184
Agency mortgage-backed securities		—			4,431			3,984			1,663			10,078
Municipal bonds		—			1,645			36,217			10,652			48,514
SBA securities		39			1,323			2,607			21,703			25,672
Beneficial interests in FHLMC securitization		—			11,125			—			9,840			20,965
Corporate bonds		9,519			9,748			127,257			5,239			151,763
U.S. Treasury		—			854			—			—			854
Total	$	9,558		$	29,445		$	170,768		$	59,259		$	269,030

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
December 31, 2021
Amortized Cost:
Collateralized mortgage obligations	$	—		$	710		$	802		$	12,350		$	13,862
Agency mortgage-backed securities		—			4,990			24,568			898,988			928,546
Municipal bonds		—			1,625			38,853			11,574			52,052
SBA securities		70			1,613			2,952			23,335			27,970
Beneficial interests in FHLMC securitization		—			11,902			—			9,704			21,606
Corporate bonds		9,534			10,519			128,438			5,536			154,027
U.S. Treasury		—			499			—			—			499
Total	$	9,604		$	31,858		$	195,613		$	961,487		$	1,198,562
Weighted average yield		(2.28)	%		2.06	%		3.03	%		1.63	%		1.84	%
Estimated Fair Value:
Collateralized mortgage obligations	$	—		$	710		$	799		$	12,316		$	13,825
Agency mortgage-backed securities		—			5,082			25,056			898,851			928,989
Municipal bonds		—			1,704			38,865			11,577			52,146
SBA securities		70			1,613			2,953			23,336			27,972
Beneficial interests in FHLMC securitization		—			11,902			—			10,077			21,979
Corporate bonds		9,529			10,499			130,754			5,594			156,376
U.S. Treasury		—			490			—			—			490
Total	$	9,599		$	32,000		$	198,427		$	961,751		$	1,201,777

The following is a summary of scheduled maturities of securities HTM and the related weighted average yields as of:


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
March 31, 2022
Amortized Cost:
Agency mortgage-backed securities	$	—		$	—		$	18,793		$	901,615		$	920,408
Total	$	—		$	—		$	18,793		$	901,615		$	920,408
Weighted average yield		—	%		—	%		0.82	%		1.77	%		1.75	%

Estimated Fair Value:
Agency mortgage-backed securities	$	—		$	—		$	17,934		$	862,817		$	880,751
Total	$	—		$	—		$	17,934		$	862,817		$	880,751

There were no securities HTM as of December 31, 2021.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

NOTE 5: LOANS

The following is a summary of our loans as of:


	March 31,		December 31,
(dollars in thousands)	2022		2021
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily	$	3,284,003	$	2,886,055
Single family		911,438		933,445
Total real estate loans secured by residential properties		4,195,441		3,819,500
Commercial properties		1,264,221		1,309,200
Land and construction		159,533		156,028
Total real estate loans		5,619,195		5,284,728
Commercial and industrial loans		1,754,279		1,598,422
Consumer loans		9,760		10,834
Total loans		7,383,234		6,893,984
Premiums, discounts and deferred fees and expenses		14,230		12,744
Total	$	7,397,464	$	6,906,728

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
March 31, 2022:
Real estate loans:
Residential properties	$	1,748		$	—		$	—		$	3,186		$	4,934		$	4,204,812	$	4,209,746
Commercial properties		2,892			936			—			4,401			8,229			1,256,568		1,264,797
Land and construction		—			—			—			—			—			159,231		159,231
Commercial and industrial loans		967			105			—			3,256			4,328			1,749,572		1,753,900
Consumer loans		10			—			—			—			10			9,780		9,790
Total	$	5,617		$	1,041		$	—		$	10,843		$	17,501		$	7,379,963	$	7,397,464

Percentage of total loans		0.08	%		0.01	%		—	%		0.15	%		0.24	%

December 31, 2021:
Real estate loans:
Residential properties	$	1,519		$	310		$	—		$	3,281		$	5,110		$	3,827,385	$	3,832,495
Commercial properties		2,934			—			—			1,529			4,463			1,305,112		1,309,575
Land and construction		—			—			—			—			—			155,926		155,926
Commercial and industrial loans		303			260			—			3,520			4,083			1,593,782		1,597,865
Consumer loans		—			—			—			—			—			10,867		10,867
Total	$	4,756		$	570		$	—		$	8,330		$	13,656		$	6,893,072	$	6,906,728

Percentage of total loans		0.07	%		0.01	%		—	%		0.12	%		0.20	%

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

The following table summarizes our nonaccrual loans as of:


	Nonaccrual		Nonaccrual
	with Allowance		with no Allowance
(dollars in thousands)	for Credit Losses		for Credit Losses
March 31, 2022:
Real estate loans:
Residential properties	$	—	$	3,186
Commercial properties		—		4,401
Commercial and industrial loans		1,227		2,029
Total	$	1,227	$	9,616

December 31, 2021:
Real estate loans:
Residential properties	$	—	$	3,280
Commercial properties		—		1,529
Commercial and industrial loans		1,733		1,788
Total	$	1,733	$	6,597

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


	March 31, 2022						December 31, 2021
(dollars in thousands)	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total
Residential loans	$	—	$	—	$	—	$	1,200	$	—	$	1,200
Commercial real estate loans		998		1,148		2,146		1,021		1,174		2,195
Commercial and industrial loans		32		1,856		1,888		493		2,030		2,523
Total	$	1,030	$	3,004	$	4,034	$	2,714	$	3,204	$	5,918

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
Year Ended December 31, 2021
Commercial and industrial loans	1	$	346	$	346	$	—
Total	1	$	346	$	346	$	—

There were no loans modified as TDRs for the first three months of 2022.

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

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

NOTE 6: ALLOWANCE FOR CREDIT LOSSES

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


					Initial Allowance
	Beginning		Provision for		on Acquired						Ending
(dollars in thousands)	Balance		Credit Losses		PCD Loans		Charge-offs		Recoveries		Balance
Three Months Ended March 31, 2022:
Real estate loans:
Residential properties	$	2,637	$	561	$	—	$	—	$	—	$	3,198
Commercial properties		17,049		(1,413)		—		—		—		15,636
Land and construction		1,995		(227)		—		—		—		1,768
Commercial and industrial loans		11,992		149		—		(145)		134		12,130
Consumer loans		103		(13)		—		—		—		90
Total	$	33,776	$	(943)	$		$	(145)	$	134	$	32,822

Three Months Ended March 31, 2021:
Real estate loans:
Residential properties	$	5,115	$	918	$	—	$	—	$	—	$	6,033
Commercial properties		8,711		(2,755)		—		—		—		5,956
Land and construction		892		3,070		—		—		—		3,962
Commercial and industrial loans		9,249		(2,379)		—		(214)		406		7,062
Consumer loans		233		(66)		—		—		—		167
Total	$	24,200	$	(1,212)	$	—	$	(214)	$	406	$	23,180

Year Ended December 31, 2021:
Real estate loans:
Residential properties	$	5,115	$	(1,453)	$	93	$	(1,118)	$	—	$	2,637
Commercial properties		8,711		774		7,564		—		—		17,049
Land and construction		892		1,051		52		—		—		1,995
Commercial and industrial loans		9,249		614		1,836		(706)		999		11,992
Consumer loans		233		(130)		—		—		—		103
Total	$	24,200	$	856	$	9,545	$	(1,824)	$	999	$	33,776

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

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


	Allowance for Credit Losses
	Loans Evaluated
(dollars in thousands)	Individually		Collectively		Total
March 31, 2022:
Allowance for credit losses:
Real estate loans:
Residential properties	$	110	$	3,088	$	3,198
Commercial properties		7,662		7,974		15,636
Land and construction		69		1,699		1,768
Commercial and industrial loans		1,615		10,515		12,130
Consumer loans		—		90		90
Total	$	9,456	$	23,366	$	32,822
Loans:
Real estate loans:
Residential properties	$	8,524	$	4,201,222	$	4,209,746
Commercial properties		41,664		1,223,133		1,264,797
Land and construction		698		158,533		159,231
Commercial and industrial loans		10,220		1,743,680		1,753,900
Consumer loans		—		9,790		9,790
Total	$	61,106	$	7,336,358	$	7,397,464

December 31, 2021:
Allowance for credit losses:
Real estate loans:
Residential properties	$	111	$	2,526	$	2,637
Commercial properties		7,967		9,082		17,049
Land and construction		52		1,943		1,995
Commercial and industrial loans		2,386		9,606		11,992
Consumer loans		—		103		103
Total	$	10,516	$	23,260	$	33,776
Loans:
Real estate loans:
Residential properties	$	9,593	$	3,822,902	$	3,832,495
Commercial properties		41,313		1,268,262		1,309,575
Land and construction		694		155,232		155,926
Commercial and industrial loans		9,963		1,587,902		1,597,865
Consumer loans		—		10,867		10,867
Total	$	61,563	$	6,845,165	$	6,906,728

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

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


													Revolving
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Loans		Total
March 31, 2022:
Loans secured by Real Estate:
Residential
Multifamily
Pass	$	550,899	$	1,090,423	$	842,736	$	371,305	$	223,541	$	217,085	$	—	$	3,295,989
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	550,899	$	1,090,423	$	842,736	$	371,305	$	223,541	$	217,085	$	—	$	3,295,989

Single Family
Pass	$	47,217	$	298,721	$	111,237	$	46,046	$	54,166	$	275,813	$	72,007	$	905,207
Special Mention		—		—		—		—		—		—		26		26
Substandard		—		—		—		—		—		8,296		228		8,524
Total	$	47,217	$	298,721	$	111,237	$	46,046	$	54,166	$	284,109	$	72,261	$	913,757

Commercial Real Estate
Pass	$	42,530	$	186,500	$	109,749	$	144,150	$	175,153	$	514,500	$	—	$	1,172,582
Special Mention		—		—		2		15,872		12,888		12,889		—		41,651
Substandard		—		—		872		13,637		11,054		25,001		—		50,564
Total	$	42,530	$	186,500	$	110,623	$	173,659	$	199,095	$	552,390	$	—	$	1,264,797

Land and construction
Pass	$	11,784	$	45,496	$	34,478	$	36,069	$	21,438	$	9,268	$	—	$	158,533
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		698		—		—		—		—		698
Total	$	11,784	$	45,496	$	35,176	$	36,069	$	21,438	$	9,268	$	—	$	159,231

Commercial
Pass	$	190,819	$	450,214	$	206,463	$	99,132	$	46,572	$	53,223	$	686,999	$	1,733,422
Special Mention		—		—		941		466		—		—		4,854		6,261
Substandard		4		—		2,734		1,677		1,048		2,766		5,988		14,217
Total	$	190,823	$	450,214	$	210,138	$	101,275	$	47,620	$	55,989	$	697,841	$	1,753,900

Consumer
Pass	$	54	$	1,126	$	28	$	691	$	765	$	159	$	6,829	$	9,652
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		138		—		—		—		138
Total	$	54	$	1,126	$	28	$	829	$	765	$	159	$	6,829	$	9,790

Total loans
Pass	$	843,303	$	2,072,480	$	1,304,691	$	697,393	$	521,635	$	1,070,048	$	765,835	$	7,275,385
Special Mention		—		—		943		16,338		12,888		12,889		4,880		47,938
Substandard		4		—		4,304		15,452		12,102		36,063		6,216		74,141
Total	$	843,307	$	2,072,480	$	1,309,938	$	729,183	$	546,625	$	1,119,000	$	776,931	$	7,397,464

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED


													Revolving
(dollars in thousands)	2021		2020		2019		2018		2017		Prior		Loans		Total
December 31, 2021:
Loans secured by Real Estate:
Residential
Multifamily
Pass	$	1,092,903	$	868,483	$	418,346	$	265,872	$	141,433	$	108,529	$	—	$	2,895,566
Special Mention		—		—		1,177		—		—		—		—		1,177
Substandard		—		—		—		—		—		—		—		—
Total	$	1,092,903	$	868,483	$	419,523	$	265,872	$	141,433	$	108,529	$	—	$	2,896,743

Single Family
Pass	$	278,337	$	122,530	$	52,995	$	60,559	$	57,174	$	280,216	$	74,934	$	926,745
Special Mention		—		—		—		—		—		—		26		26
Substandard		—		—		—		—		1,873		6,830		278		8,981
Total	$	278,337	$	122,530	$	52,995	$	60,559	$	59,047	$	287,046	$	75,238	$	935,752

Commercial Real Estate
Pass	$	114,678	$	39,135	$	59,426	$	94,930	$	115,614	$	804,295	$	—	$	1,228,078
Special Mention		—		—		23,495		—		—		30,389		—		53,884
Substandard		—		—		2,934		—		2,217		22,462		—		27,613
Total	$	114,678	$	39,135	$	85,855	$	94,930	$	117,831	$	857,146	$	—	$	1,309,575

Land and construction
Pass	$	14,738	$	—	$	17,692	$	31,952	$	2,529	$	88,321	$	—	$	155,232
Special Mention		—		—		—		—		—		694		—		694
Substandard		—		—		—		—		—		—		—		—
Total	$	14,738	$	—	$	17,692	$	31,952	$	2,529	$	89,015	$	—	$	155,926

Commercial
Pass	$	471,431	$	191,405	$	88,050	$	20,709	$	5,531	$	167,201	$	636,507	$	1,580,834
Special Mention		883		1,101		833		—		—		1,370		2,790		6,977
Substandard		—		1,535		1,765		982		192		2,688		2,892		10,054
Total	$	472,314	$	194,041	$	90,648	$	21,691	$	5,723	$	171,259	$	642,189	$	1,597,865

Consumer
Pass	$	54	$	—	$	—	$	1,174	$	—	$	2,617	$	7,022	$	10,867
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	54	$	—	$	—	$	1,174	$	—	$	2,617	$	7,022	$	10,867

Total loans
Pass	$	1,972,141	$	1,221,553	$	636,509	$	475,196	$	322,281	$	1,451,179	$	718,463	$	6,797,322
Special Mention		883		1,101		25,505		—		—		32,453		2,816		62,758
Substandard		—		1,535		4,699		982		4,282		31,980		3,170		46,648
Total	$	1,973,024	$	1,224,189	$	666,713	$	476,178	$	326,563	$	1,515,612	$	724,449	$	6,906,728

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

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


					Equipment/					ACL
(dollars in thousands)	Real Estate		Cash		Receivables		Total			Allocation
March 31, 2022:
Loans secured by Real Estate:
Residential properties
Single family	$	2,488	$	—	$	—	$	2,488	$	—
Commercial real estate loans		2,918		—		—		2,918		—
Commercial loans		—		250		—		250		—
Total	$	5,406	$	250	$	—	$	5,656	$	—

December 31, 2021:
Loans secured by Real Estate:
Residential properties
Single family	$	2,568	$	—	$	—	$	2,568	$	—
Commercial loans		—		250		—		250		—
Total	$	2,568	$	250	$	—	$	2,818	$	—

NOTE 7: LOAN SALES AND MORTGAGE SERVICING RIGHTS

In 2021, FFB sold $559 million of multifamily loans and recognized a gain of $21.5 million. For the sales of multifamily loans in 2021, FFB retained servicing rights for the majority of these loans and recognized mortgage servicing rights as part of the transactions. As of March 31, 2022 and December 31, 2021, mortgage servicing rights were $9.5 million and $6.8 million, respectively. The mortgage servicing rights as of March 31, 2022 and December 31, 2021 are net of $3.1 million and $1.9 million valuation allowances, respectively. The amount of loans serviced for others totaled $1.2 billion and $1.7 billion at March 31, 2022 and December 31, 2021, respectively. Servicing fees for the first three months of 2022 and 2021 were $0.5 million and $0.5 million, respectively.

NOTE 8: DEPOSITS

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


	March 31, 2022				December 31, 2021
			Weighted				Weighted
(dollars in thousands)	Amount		Average Rate		Amount		Average Rate
Demand deposits:
Noninterest-bearing	$	3,296,118	—		$	3,280,455	—
Interest-bearing		2,429,202	0.104	%		2,242,684	0.070	%
Money market and savings		2,592,437	0.271	%		2,620,336	0.275	%
Certificates of deposits		639,761	0.200	%		668,485	0.145	%
Total	$	8,957,518	0.121	%	$	8,811,960	0.111	%

At March 31, 2022, of the $357 million of certificates of deposits of $250,000 or more, $352 million mature within one year and $5 million mature after one year. Of the $282 million of certificates of deposit of less than $250,000, $223 million mature within one year and $59 million mature after one year. At December 31, 2021, of the $367 million of certificates of deposits of $250,000 or more, $361 million mature within one year and $6 million mature after one year. Of the $301 million of certificates of deposit of less than $250,000, $229 million mature within one year and $72 million mature after one year.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

NOTE 9: BORROWINGS

At March 31, 2022, our borrowings consisted of $173 million in subordinated notes and $153 million of repurchase agreements. At December 31, 2021, our borrowings consisted of $26 million in subordinated notes, $166 million of repurchase agreements, and $18.5 million of borrowings under a holding company line of credit. As of March 31, 2022, $150 million of the subordinated notes are fixed-to-floating rate notes that mature in February 2032. The notes will initially bear a rate of 3.50% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 2022 until February 1, 2027. From and including February 1, 2027 to, but excluding February 1, 2032, or the date of earlier redemption, the notes will bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be Three-Month Term Secured Overnight Financing Rate, or “SOFR”), each as defined in and subject to the provisions of the indenture under which the notes were issued, plus 204 basis points (2.04%), payable quarterly in arrears on February 1, May 1, August 1, and November 1 of each year, commencing on May 1, 2027. $23 million of the subordinated notes mature in June 2030 and bear a fixed interest rate of 6.0%, until June 30, 2025, at which time they will convert to a floating rate based on three month SOFR, plus 590 basis points (5.90%), until maturity.

As a matter of practice, the Bank provides substantially all of its qualifying loans as collateral to the FHLB or the Federal Reserve Bank. FHLB advances are collateralized primarily by loans secured by single family, multifamily, and commercial real estate properties with a carrying value of $4.4 billion as of March 31, 2022. The Bank’s total borrowing capacity from the FHLB at March 31, 2022 was $2.8 billion. The Bank had in place $278 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 $20 million. The loan agreement matures in February 2023, with an option to extend the maturity date subject to certain conditions, and bears interest at Prime rate, plus 50 basis points (0.50%). 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 March 31, 2022 and December 31, 2021, FFI was in compliance with the covenants on this loan agreement.

The Bank also has $245 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 $148 million secured line with the Federal Reserve Bank, secured by single family loans. None of these lines had outstanding borrowings at March 31, 2022 or December 31, 2021. Combined, the Bank’s unused lines of credit as of March 31, 2022 and December 31, 2021 were $3.2 billion and $3.1 billion, respectively.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

NOTE 10: EARNINGS PER SHARE

Basic earnings per share excludes dilution and is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if contracts to issue common stock were exercised or converted into common stock that would then share in earnings. The following table sets forth the Company’s unaudited earnings per share calculations for the three months ended March 31:


	Three Months Ended				Three Months Ended
	March 31, 2022				March 31, 2021
(dollars in thousands, except per share amounts)	Basic		Diluted		Basic		Diluted
Net income	$	30,836	$	30,836	$	22,355	$	22,355
Basic common shares outstanding		56,465,855		56,465,855		44,707,718		44,707,718
Effect of options, restricted stock and contingent shares issuable				99,990				304,487
Diluted common shares outstanding				56,565,845				45,012,205
Earnings per share	$	0.55	$	0.55	$	0.50	$	0.50

Based on a weighted average basis, stock options and restricted stock units to purchase 99,990 and 102,708 shares of common stock were excluded for the three months ended March 31, 2022 and 2021, respectively, because their effect would have been anti-dilutive.

NOTE 11: SEGMENT REPORTING

For the three months ended March 31, 2022 and 2021, the Company had two reportable business segments: Banking (FFB, FFIS, Blue Moon, and FFPF) and Wealth Management (FFA). The results of FFI and any elimination entries are included in the column labeled Other. The following tables show key operating results for each of our business segments used to arrive at our consolidated totals for the following periods:


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
Three Months Ended March 31, 2022:
Interest income	$	79,144	$	—	$	—	$	79,144
Interest expense		3,413		—		1,237		4,650
Net interest income		75,731		—		(1,237)		74,494
Provision for credit losses		(792)		—		—		(792)
Noninterest income		7,531		8,345		(449)		15,427
Noninterest expense		40,101		6,644		873		47,618
Income (loss) before taxes on income	$	43,953	$	1,701	$	(2,559)	$	43,095

Three Months Ended March 31, 2021:
Interest income	$	59,138	$	—	$	—	$	59,138
Interest expense		4,848		—		61		4,909
Net interest income		54,290		—		(61)		54,229
Provision for credit losses		360		—		—		360
Noninterest income		5,309		6,923		(324)		11,908
Noninterest expense		28,579		5,731		201		34,511
Income (loss) before taxes on income	$	30,660	$	1,192	$	(586)	$	31,266

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2022 - UNAUDITED

NOTE 12: SUBSEQUENT EVENTS

Cash Dividend

On April 26, 2022, the Board of Directors of the Company declared a quarterly cash dividend of $0.11 per common share to be paid on May 16, 2022 to stockholders of record as of the close of business on May 6, 2022.

Stock Repurchase Program

On April 26, 2022, the Company announced that its Board of Directors authorized a stock repurchase program, pursuant to which the Company may repurchase up to $75 million of its common stock. This plan has no stated expiration date for the repurchases. This stock repurchase program replaces and supersedes the stock repurchase program approved by the Board of Directors on October 30, 2018, which had authorized the Company to repurchase up to 2,200,000 shares of its common stock, and which no additional shares were repurchased during the quarter ended March 31, 2022.

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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 months ended March 31, 2022 as compared to our results of operations in the three months ended March 31, 2021; and our financial condition at March 31, 2022 as compared to our financial condition at December 31, 2021. 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, 2021, and the notes thereto, which are set forth in Item 8 of our Annual Report on Form 10-K (“2021 10-K”) which we filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022.

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 2021 10-K. Therefore, you are urged to read not only the information contained in this Item 2, but also the risk factors and other cautionary information contained under the heading “Risk Factors” in our 2021 10-K, which qualify the forward-looking statements contained in this report.

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

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 2021 10-K, except as may otherwise be required by applicable law or government regulations.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and accounting practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make estimates and assumptions regarding

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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 – Investment Securities – The ACL on investment securities is determined for both held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with ASC 326, and is evaluated on a quarterly basis. The ACL for held-to-maturity investment securities is determined on a collective basis, based on shared risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. Under ASC 326-20, for investment securities where the Company has reason to believe the credit loss exposure is remote, such as those guaranteed by the U.S. government or government sponsored entities, a zero loss expectation is applied and a company is not required to estimate and recognize an ACL.

Allowance for Credit Losses - Loans. Our ACL for loans and investments 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 statement of income. Loans and investments are charged against the ACL when management believes that collectability of the principal is unlikely. The ACL for loans is an amount that management believes will be adequate to absorb estimated losses on existing loans that may become uncollectible based on an evaluation of the collectability of loans and prior loan loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions and certain other subjective factors that may affect the borrower’s ability to pay. While we use the best information available to make this evaluation, future adjustments to our ACL may be necessary if there are significant changes in economic or other conditions that can affect the collectability in full of loans and investments in our loan or investment portfolios.

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

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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, FFIS, Blue Moon, and FFPF, while Wealth Management includes the operations of FFA. The financial position and operating results of the stand-alone holding company, FFI, are included under the caption “Other” in certain of the tables that follow, along with any consolidation elimination entries.

Overview and Recent Developments

Our results of operations for the first three months of 2022 include:

●

Total loans, including loans held for sale, increased $491 million in the three months ended March 31, 2022 when compared to the three months ended March 31, 2021 as a result of $1.1 billion of originations, which was partially offset by payoffs or scheduled payments of $657 million.

●

During the three months ended March 31, 2022, total deposits increased by $146 million and total revenues (net interest income and noninterest income) increased by 36% when compared to the three months ended March 31, 2021.

During the second quarter of 2022, the Company authorized a stock repurchase program, where the Company may repurchase up to $75 million of its common stock from time to time in open market transactions or in privately negotiated transactions as permitted under applicable rules and regulations. The extent to which the Company repurchases its shares and the timing of such repurchases will depend on market conditions and other considerations as may be considered in the Company’s sole discretion. The stock repurchase program, which has no stated expiration date, does not obligate the Company to repurchase any specific number of shares and may be modified, suspended or discontinued at any time without notice.

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 61% and 78%, respectively, of the total noninterest expense for Banking and Wealth Management in the three months ended March 31, 2022.

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The following table shows key operating results for each of our business segments for the quarter ended March 31:


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
2022:
Interest income	$	79,144	$	—	$	—	$	79,144
Interest expense		3,413		—		1,237		4,650
Net interest income		75,731		—		(1,237)		74,494
Provision for credit losses		(792)		—		—		(792)
Noninterest income		7,531		8,345		(449)		15,427
Noninterest expense		40,101		6,644		873		47,618
Income (loss) before taxes on income	$	43,953	$	1,701	$	(2,559)	$	43,095

2021:
Interest income	$	59,138	$	—	$	—	$	59,138
Interest expense		4,848		—		61		4,909
Net interest income		54,290		—		(61)		54,229
Provision for credit losses		360		—		—		360
Noninterest income		5,309		6,923		(324)		11,908
Noninterest expense		28,579		5,731		201		34,511
Income (loss) before taxes on income	$	30,660	$	1,192	$	(586)	$	31,266

General. Our net income and income before taxes in the three months ended March 31, 2022 were $30.8 million and $43.1 million, respectively, as compared to $22.4 million and $31.3 million, respectively, in the three months ended March 31, 2021. The $11.8 million increase in income before taxes was the result of a $13.3 million increase in income before taxes for Banking and a $0.5 million increase in income before taxes for Wealth Management, offset partially by a $2.0 million increase in corporate expenses. The increase in Banking was due to higher net interest income, higher noninterest income and lower provision for credit losses. The increase in Wealth Management was due to higher noninterest income. The increase in corporate expenses was due to higher interest expense as a result of the subordinated notes assumed by the Company in connection with the TGRF acquisition in the fourth quarter of 2021, the $150 million of subordinated notes issued by the Company in the first quarter of 2022, and higher noninterest expenses.

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


	Three Months Ended March 31:
	2022						2021
	Average				Average		Average				Average
(dollars in thousands)	Balances		Interest		Yield /Rate		Balances		Interest		Yield /Rate
Interest-earning assets:
Loans	$	7,529,037	$	72,027	3.84	%	$	5,383,745	$	53,531	3.99	%
Securities AFS		1,197,859		6,360	2.12	%		772,204		5,206	2.70	%
FHLB stock, fed funds, and deposits		1,212,777		757	0.25	%		714,379		401	0.23	%
Total interest-earning assets		9,939,673		79,144	3.19	%		6,870,328		59,138	3.45	%
Noninterest-earning assets:
Nonperforming assets		10,124						18,153
Other		449,275						189,640
Total assets	$	10,399,072					$	7,078,121
Interest-bearing liabilities:
Demand deposits	$	2,359,334	$	1,051	0.18	%	$	970,431	$	874	0.37	%
Money market and savings		2,611,007		1,872	0.29	%		2,342,511		2,582	0.45	%
Certificates of deposit		654,279		435	0.27	%		861,048		1,167	0.55	%
Total interest-bearing deposits		5,624,620		3,358	0.24	%		4,173,990		4,623	0.45	%
Borrowings		301,236		1,292	1.74	%		206,085		286	0.56	%
Total interest-bearing liabilities		5,925,856		4,650	0.32	%		4,380,075		4,909	0.45	%
Noninterest-bearing liabilities:
Demand deposits		3,315,139						1,930,737
Other liabilities		94,484						66,854
Total liabilities		9,335,479						6,377,666
Shareholders’ equity		1,063,593						700,455
Total liabilities and equity	$	10,399,072					$	7,078,121
Net Interest Income			$	74,494					$	54,229
Net Interest Rate Spread					2.87	%					3.00	%
Net Interest Margin					3.00	%					3.16	%

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Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by prior volume) and mix of interest-earning assets and interest-bearing liabilities. Variances attributable to both rate and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the rate variance. The following table provides a breakdown of the changes in net interest income due to volume and rate changes for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021:




	Increase (Decrease) due to				Net Increase
(dollars in thousands)	Volume		Rate		(Decrease)
Interest earned on:
Loans	$	20,546	$	(2,050)	$	18,496
Securities		2,437		(1,283)		1,154
Cash, FHLB stock, fed funds and deposits		313		43		356
Total interest-earning assets		23,296		(3,290)		20,006
Interest paid on:
Demand deposits		794		(617)		177
Money market and savings		283		(992)		(709)
Certificates of deposit		(228)		(505)		(733)
Borrowings		172		834		1,006
Total interest-bearing liabilities		1,021		(1,280)		(259)
Net interest income	$	22,275	$	(2,010)	$	20,265

Net interest income increased 37% from $54.2 million in the three months ended March 31, 2021, to $74.5 million in the three months ended March 31, 2022 due to a 45% increase in interest-earning assets and decrease in the cost of interest bearing liabilities. The cost of interest-bearing liabilities decreased, from 0.45% in the three months ended March 31, 2021, to 0.32% in the three months ended March 31, 2022. 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, which were partially offset by an increase in borrowings. The average balance outstanding on borrowings increased from $206.1 million in the three months ended March 31, 2021, to $301.2 million in the three months ended March 31, 2022. The increase in borrowings was due to the issuance of $150 million in subordinated notes in the first quarter of 2022, and the assumption of $165 million in repurchase agreements and $23 million in subordinated notes as a result of the TGRF acquisition in the fourth quarter of 2021. The net interest margin decreased, from 3.16% in the three months ended March 31, 2021, to 3.00% in the three months ended March 31, 2022. The decrease in the interest margin was due to an increase in average excess liquidity during the quarter brought on by the acquisition of TGRF, bringing our average fed funds and cash deposit balances up by $498 million compared to the first three months of 2021, earning an average rate of 0.25%. The yield on securities decreased due a decrease in market rates. The average balance outstanding under the holding company line of credit decreased from $6.6 million in the three months ended March 31, 2021 to $0.4 million in the three months ended March 31, 2022.

Provision for credit losses. The provision for credit losses represents our estimate of the amount necessary to be charged against the current period’s earnings to maintain the ACL for loans and investments at a level that we consider adequate in relation to the estimated losses inherent in the loan and investment portfolios. The provision for credit losses for loans is impacted by changes in loan balances as well as changes in estimated loss assumptions and charge-offs and recoveries. The amount of the provision for loans also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions and certain other subjective factors that may affect the ability of borrowers to meet their repayment obligations to us. The reversal of provision for credit losses in the three months ended March 31, 2022 was $0.8 million, and the provision for credit losses in the three months ended March 31, 2021 was $0.4 million. The decrease in provision for credit losses in the three months ended March 31, 2022 was a result of improvement in the economic scenario outlook.

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Noninterest income. Noninterest income for Banking includes fees charged to clients for trust services and deposit services, consulting fees, prepayment and late fees charged on loans, gain on sale of loans, and gains and losses from capital market activities and insurance commissions. The following table provides a breakdown of noninterest income for Banking for the three months ended March 31, 2022 and 2021:


(dollars in thousands)	2022		2021

Three Months Ended March 31:
Trust fees	$	2,108	$	1,668
Loan related fees		2,562		2,944
Deposit charges		644		379
Gain on sale leaseback		1,123		—
Consulting fees		95		101
Other		999		217
Total noninterest income	$	7,531	$	5,309

Noninterest income in Banking in the three months ended March 31, 2022 was $2.2 million higher than the three months ended March 31, 2021 due primarily to a $1.1 million gain on a sale leaseback transaction, a $0.4 million increase in trust fees, and a $0.3 million increase in deposit charges.

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 months ended March 31, 2022 and 2021:


(dollars in thousands)	2022		2021
Noninterest income	$	8,345	$	6,923

Noninterest income for Wealth Management increased by $1.4 million in the three months ended March 31, 2022 when compared to the corresponding period in 2021 due primarily to higher levels of billable AUM in the quarter.

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


			Existing account
	Beginning		Additions/		New
(dollars in thousands)	Balance		Withdrawals		Accounts		Terminations		Performance		Ending balance
Three Months Ended March 31, 2022:
Equities	$	3,330,639	$	35,136	$	46,186	$	(29,451)	$	(285,233)	$	3,097,277
Fixed Income		1,303,760		22,003		44,040		(11,625)		(82,779)		1,275,399
Cash and other		1,046,206		(13,143)		32,975		(15,538)		32,566		1,083,066
Total	$	5,680,605	$	43,996	$	123,201	$	(56,614)	$	(335,446)	$	5,455,742

Year Ended December 31, 2021:
Equities	$	2,451,056	$	448,338	$	200,073	$	(156,809)	$	387,981	$	3,330,639
Fixed Income		1,474,479		(195,117)		71,181		(45,818)		(965)		1,303,760
Cash and other		1,001,256		(209,727)		146,701		(84,213)		192,189		1,046,206
Total	$	4,926,791	$	43,494	$	417,955	$	(286,840)	$	579,205	$	5,680,605

The $225 million decrease in AUM during the first quarter of 2022 was the net result of $123 million of new accounts, $335 million of portfolio losses, and terminations and net withdrawals of $13 million.

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


	Banking				Wealth Management
(dollars in thousands)	2022		2021		2022		2021

Three Months Ended March 31:
Compensation and benefits	$	24,276	$	16,823	$	5,212	$	4,447
Occupancy and depreciation		8,113		5,639		454		521
Professional services and marketing		2,343		1,771		815		639
Customer service costs		1,788		1,770		—		—
Other expenses		3,581		2,576		163		124
Total noninterest expense	$	40,101	$	28,579	$	6,644	$	5,731

Noninterest expense in Banking increased from $28.6 million in the three months ended March 31, 2021 to $40.1 million in the three months ended March 31, 2022 primarily due to higher compensation and benefits, occupancy and depreciation, professional services and marketing, and other expenses. Compensation and benefits in Banking were $7.5 million higher in the first quarter of 2022 primarily due to a 41.0% increase in average FTE largely associated with the TGRF acquisition. Occupancy and depreciation costs were $2.5 million higher due primarily to higher core processing costs related to higher volumes and services and due to the TGRF acquisition. Noninterest expenses for Wealth Management increased by $0.9 million in the three months ended March 31, 2022 due to higher compensation and benefits, and professional services and marketing expenses.

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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
March 31, 2022:
Cash and cash equivalents	$	930,984	$	11,908	$	(11,182)	$	931,710
Securities AFS, net		258,287		—		—		258,287
Securities HTM		920,408		—		—		920,408
Loans held for sale		501,424		—		—		501,424
Loans, net		7,364,642		—		—		7,364,642
Premises and equipment		35,402		366		136		35,904
Investment in FHLB Stock		17,250		—		—		17,250
Deferred taxes		17,422		70		555		18,047
REO		6,210		—		—		6,210
Goodwill and intangibles		223,239		—		—		223,239
Other assets		173,610		386		23,679		197,675
Total assets	$	10,448,878	$	12,730	$	13,188	$	10,474,796

Deposits	$	9,037,219	$	—	$	(79,701)	$	8,957,518
Borrowings		152,680		—		173,289		325,969
Intercompany balances		3,037		565		(3,602)		—
Other liabilities		84,297		2,965		21,472		108,734
Shareholders’ equity		1,171,645		9,200		(98,270)		1,082,575
Total liabilities and equity	$	10,448,878	$	12,730	$	13,188	$	10,474,796

December 31, 2021:
Cash and cash equivalents	$	1,121,089	$	3,195	$	(2,527)	$	1,121,757
Securities AFS, net		1,191,378		—		—		1,191,378
Loans held for sale		501,436		—		—		501,436
Loans, net		6,872,952		—		—		6,872,952
Premises and equipment		37,373		411		136		37,920
Investment in FHLB Stock		18,249		—		—		18,249
Deferred taxes		20,745		138		(48)		20,835
REO		6,210		—		—		6,210
Goodwill and intangibles		222,125		—		—		222,125
Other assets		179,385		365		23,592		203,342
Total assets	$	10,170,942	$	4,109	$	21,153	$	10,196,204

Deposits	$	8,836,250	$	—	$	(24,290)	$	8,811,960
Borrowings		165,930		—		44,197		210,127
Intercompany balances		4,605		(8,204)		3,599		—
Other liabilities		92,500		4,381		13,185		110,066
Shareholders’ equity		1,071,657		7,932		(15,538)		1,064,051
Total liabilities and equity	$	10,170,942	$	4,109	$	21,153	$	10,196,204

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 three months ended March 31, 2022 total assets increased by $279 million primarily due to an increase in loans, which was partially offset by decreases in cash and securities. During the three months ended March 31, 2022,

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total securities decreased by $12 million primarily due to payoffs of mortgage-backed securities. Loans and loans held for sale increased $491 million in the three months ended March 31, 2022, primarily as a result of $1.1 billion of originations, which were partially offset by payoffs or scheduled payments of $657 million. The $146 million growth in deposits during the first three months of 2022 was due primarily to an increase in corporate deposits of $175 million, offset by a decrease in branch deposits of $31 million. Borrowings increased by $116 million during the three months ended March 31, 2022 due to the addition of $150 million in subordinated debt, offset partially by the $18.5 million paydown on FFI’s credit line, and $13 million decrease in repurchase agreements.

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, decreased by $190 million during the three months ended March 31, 2022. 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
March 31, 2022:
Collateralized mortgage obligations	$	11,761	$	—	$	(577)	$	—	$	11,184
Agency mortgage-backed securities		10,376		8		(306)		—		10,078
Municipal bonds		50,737		21		(2,244)		—		48,514
SBA securities		25,692		1		(21)		—		25,672
Beneficial interests in FHLMC securitization		20,631		334		—		(10,743)		10,222
Corporate bonds		153,451		1,105		(2,793)		—		151,763
U.S. Treasury		897		—		(43)		—		854
Total	$	273,545	$	1,469	$	(5,984)	$	(10,743)	$	258,287

December 31, 2021:
Collateralized mortgage obligations	$	13,862	$	—	$	(37)	$	—	$	13,825
Agency mortgage-backed securities		928,546		6,563		(6,120)		—		928,989
Municipal bonds		52,052		94		—		—		52,146
SBA securities		27,970		2		—		—		27,972
Beneficial interest – FHLMC securitization		21,606		373		—		(10,399)		11,580
Corporate bonds		154,027		2,441		(92)		—		156,376
U.S. Treasury		499		—		(9)		—		490
Total	$	1,198,562	$	9,473	$	(6,258)	$	(10,399)	$	1,191,378

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 2021. SBA securities are pledged as collateral for repurchase agreements.

Excluding allowance for credit losses, the decrease in AFS securities in the first three months of 2022 was due primarily to the $920 million transfer of agency mortgage-backed securities to held-to-maturity.

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Securities held to maturity. The following table provides a summary of the Company’s HTM securities portfolio as of:


	Amortized		Gross Uncognized				Allowance for		Estimated
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Fair Value
March 31, 2022:
Agency mortgage-backed securities	$	920,408	$	—	$	(39,657)	$	—	$	880,751
Total	$	920,408	$	—	$	(39,657)	$	—	$	880,751

There were no securities HTM as of December 31, 2021.

The scheduled maturities of securities AFS, as well as the related weighted average yield, are as follows, as of March 31, 2022:


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
Amortized Cost:
Collateralized mortgage obligations	$	—		$	319		$	742		$	10,700		$	11,761
Agency mortgage-backed securities		—			4,545			4,123			1,708			10,376
Municipal bonds		—			1,630			37,565			11,542			50,737
SBA securities		39			1,326			2,610			21,717			25,692
Beneficial interests in FHLMC securitization		—			11,125			—			9,506			20,631
Corporate bonds		9,526			10,019			128,371			5,535			153,451
U.S. Treasury		—			897			—			—			897
Total	$	9,565		$	29,861		$	173,411		$	60,708		$	273,545
Weighted average yield		1.06	%		1.99	%		3.34	%		1.90	%		2.80	%
Estimated Fair Value:
Collateralized mortgage obligations	$	—		$	319		$	703		$	10,162		$	11,184
Agency mortgage-backed securities		—			4,431			3,984			1,663			10,078
Municipal bonds		—			1,645			36,217			10,652			48,514
SBA securities		39			1,323			2,607			21,703			25,672
Beneficial interests in FHLMC securitization		—			11,125			—			9,840			20,965
Corporate bonds		9,519			9,748			127,257			5,239			151,763
U.S. Treasury		—			854			—			—			854
Total	$	9,558		$	29,445		$	170,768		$	59,259		$	269,030

The scheduled maturities of securities HTM, and the related weighted average yield is as follows, as of March 31, 2022:


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
March 31, 2022
Amortized Cost:
Agency mortgage-backed securities	$	—		$	—		$	18,793		$	901,615		$	920,408
Total	$	—		$	—		$	18,793		$	901,615		$	920,408
Weighted average yield		—	%		—	%		0.82	%		1.77	%		1.75	%

Estimated Fair Value:
Agency mortgage-backed securities	$	—		$	—		$	17,934		$	862,817		$	880,751
Total	$	—		$	—		$	17,934		$	862,817		$	880,751

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


	March 31,		December 31,
(dollars in thousands)	2022		2021
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily	$	3,284,003	$	2,886,055
Single family		911,438		933,445
Total real estate loans secured by residential properties		4,195,441		3,819,500
Commercial properties		1,264,221		1,309,200
Land and construction		159,533		156,028
Total real estate loans		5,619,195		5,284,728
Commercial and industrial loans		1,754,279		1,598,422
Consumer loans		9,760		10,834
Total loans		7,383,234		6,893,984
Premiums, discounts and deferred fees and expenses		14,230		12,744
Total	$	7,397,464	$	6,906,728

Loans and loans held for sale increased $491 million during the three months ended March 31, 2022 primarily as a result of $1.1 billion in originations, which were partially offset by payoffs or scheduled payments of $657 million.

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


	March 31, 2022				December 31, 2021
			Weighted				Weighted
(dollars in thousands)	Amount		Average Rate		Amount		Average Rate
Demand deposits:
Noninterest-bearing	$	3,296,118	—		$	3,280,455	—
Interest-bearing		2,429,202	0.104	%		2,242,684	0.070	%
Money market and savings		2,592,437	0.271	%		2,620,336	0.275	%
Certificates of deposits		639,761	0.200	%		668,485	0.145	%
Total	$	8,957,518	0.121	%	$	8,811,960	0.111	%

During the first three months of 2022, our deposit rates have moved in a manner consistent with overall deposit market rates. The weighted average rate of our interest-bearing deposits increased from 0.18% at December 31, 2021, to 0.19% at March 31, 2022 due to increased costs of interest-bearing deposits, while the weighted average interest rates of both interest-bearing and noninterest-bearing deposits have decreased from 0.15% at December 31, 2021 to 0.12% at March 31, 2022. 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 March 31, 2022:


(dollars in thousands)
3 months or less	$	302,445
Over 3 months through 6 months		65,581
Over 6 months through 12 months		111,750
Over 12 months		57,687
Total	$	537,463

From time to time, the Bank will utilize brokered deposits as a source of funding. As of March 31, 2022, the Bank held $90 million of deposits which are classified as brokered deposits.

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Borrowings. At March 31, 2022, our borrowings consisted of $173 million in subordinated notes and $153 million of repurchase agreements. At December 31, 2021, our borrowings consisted of $26 million in subordinated notes, $166 million of repurchase agreements, and $18.5 million of borrowings under a holding company line of credit. As of March 31, 2022, $150 million of the subordinated notes are fixed-to-floating rate notes that mature in February 2032. The notes will initially bear a rate of 3.50% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 2022 until February 1, 2027. From and including February 1, 2027 to, but excluding February 1, 2032, or the date of earlier redemption, the notes will bear interest at a floating rate per annum equal to the Benchmark rate (which is expected to be Three-Month Term Secured Overnight Financing Rate, or “SOFR”), each as defined in and subject to the provisions of the indenture under which the notes were issued, plus 204 basis points (2.04%), payable quarterly in arrears on February 1, May 1, August 1, and November 1 of each year, commencing on May 1, 2027. $23 million of the subordinated notes mature in June 2030 and bear a fixed interest rate of 6.0%, until June 30, 2025, at which time they will convert to a floating rate based on three month SOFR, plus 590 basis points (5.90%), until maturity. The maximum amount of borrowings at the Bank outstanding at any month-end during the three months ended March 31, 2022, and during all of 2021, was $177 million and $255 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
March 31, 2022:
Real estate loans:
Residential properties	$	1,748		$	—		$	—		$	3,186		$	4,934		$	4,204,812	$	4,209,746
Commercial properties		2,892			936			—			4,401			8,229			1,256,568		1,264,797
Land and construction		—			—			—			—			—			159,231		159,231
Commercial and industrial loans		967			105			—			3,256			4,328			1,749,572		1,753,900
Consumer loans		10			—			—			—			10			9,780		9,790
Total	$	5,617		$	1,041		$	—		$	10,843		$	17,501		$	7,379,963	$	7,397,464
Percentage of total loans		0.08	%		0.01	%		—	%		0.15	%		0.24	%

December 31, 2021:
Real estate loans:
Residential properties	$	1,519		$	310		$	—		$	3,281		$	5,110		$	3,827,385	$	3,832,495
Commercial properties		2,934			—			—			1,529			4,463			1,305,112		1,309,575
Land and construction		—			—			—			—			—			155,926		155,926
Commercial and industrial loans		303			260			—			3,520			4,083			1,593,782		1,597,865
Consumer loans		—			—			—			—			—			10,867		10,867
Total	$	4,756		$	570		$	—		$	8,330		$	13,656		$	6,893,072	$	6,906,728
Percentage of total loans		0.07	%		0.01	%		—	%		0.12	%		0.20	%

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The following table summarizes our nonaccrual loans as of:


	Nonaccrual		Nonaccrual
	with Allowance		with no Allowance
(dollars in thousands)	for Credit Losses		for Credit Losses
March 31, 2022
Real estate loans:
Residential properties	$	—	$	3,186
Commercial properties		—		4,401
Commercial and industrial loans		1,227		2,029
Total	$	1,227	$	9,616

December 31, 2021
Real estate loans:
Residential properties	$	—	$	3,281
Commercial properties		—		1,529
Commercial and industrial loans		1,733		1,788
Total	$	1,733	$	6,598

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


	March 31, 2022						December 31, 2021
(dollars in thousands)	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total
Residential loans	$	—	$	—	$	—	$	1,200	$	—	$	1,200
Commercial real estate loans		998		1,148		2,146		1,021		1,174		2,195
Commercial and industrial loans		32		1,856		1,888		493		2,030		2,523
Total	$	1,030	$	3,004	$	4,034	$	2,714	$	3,204	$	5,918

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

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


					Allowance
	Beginning		Provision for		on Acquired						Ending
(dollars in thousands)	Balance		Credit Losses		PCD Loans		Charge-offs		Recoveries		Balance
Three months ended March 31, 2022:
Real estate loans:
Residential properties	$	2,637	$	561	$	—	$	—	$	—	$	3,198
Commercial properties		17,049		(1,413)		—		—		—		15,636
Land and construction		1,995		(227)		—		—		—		1,768
Commercial and industrial loans		11,992		149		—		(145)		134		12,130
Consumer loans		103		(13)		—		—		—		90
Total	$	33,776	$	(943)	$	—	$	(145)	$	134	$	32,822

Three months ended March 31, 2021:
Real estate loans:
Residential properties	$	5,115	$	918	$	—	$	—	$	—	$	6,033
Commercial properties		8,711		(2,755)		—		—		—		5,956
Land and construction		892		3,070		—		—		—		3,962
Commercial and industrial loans		9,249		(2,379)		—		(214)		406		7,062
Consumer loans		233		(66)		—		—		—		167
Total	$	24,200	$	(1,212)	$	—	$	(214)	$	406	$	23,180

Year ended December 31, 2021:
Real estate loans:
Residential properties	$	5,115	$	(1,453)	$	93	$	(1,118)	$	—	$	2,637
Commercial properties		8,711		774		7,564		—		—		17,049
Land and construction		892		1,051		52		—		—		1,995
Commercial and industrial loans		9,249		614		1,836		(706)		999		11,992
Consumer loans		233		(130)		—		—		—		103
Total	$	24,200	$	856	$	9,545	$	(1,824)	$	999	$	33,776

Our ACL related to loans represented 0.44% and 0.49% of total loans outstanding as of March 31, 2022 and December 31, 2021, respectively.

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

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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:


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

March 31, 2022:
Allowance for credit losses:
Real estate loans:
Residential properties	$	110	$	3,088	$	3,198
Commercial properties		7,662		7,974		15,636
Land and construction		69		1,699		1,768
Commercial and industrial loans		1,615		10,515		12,130
Consumer loans		—		90		90
Total	$	9,456	$	23,366	$	32,822
Loans:
Real estate loans:
Residential properties	$	8,524	$	4,201,222	$	4,209,746
Commercial properties		41,664		1,223,133		1,264,797
Land and construction		698		158,533		159,231
Commercial and industrial loans		10,220		1,743,680		1,753,900
Consumer loans		—		9,790		9,790
Total	$	61,106	$	7,336,358	$	7,397,464


	Allowance for Credit Losses
	Loans Evaluated
(dollars in thousands)	Individually		Collectively		Total
December 31, 2021:
Allowance for credit losses:
Real estate loans:
Residential properties	$	111	$	2,526	$	2,637
Commercial properties		7,967		9,082		17,049
Land and construction		52		1,943		1,995
Commercial and industrial loans		2,386		9,606		11,992
Consumer loans		—		103		103
Total	$	10,516	$	23,260	$	33,776
Loans:
Real estate loans:
Residential properties	$	9,593	$	3,822,902	$	3,832,495
Commercial properties		41,313		1,268,262		1,309,575
Land and construction		694		155,232		155,926
Commercial and industrial loans		9,963		1,587,902		1,597,865
Consumer loans		—		10,867		10,867
Total	$	61,563	$	6,845,165	$	6,906,728

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Liquidity

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

We monitor our liquidity in accordance with guidelines established by our Board of Directors and applicable regulatory requirements. Our need for liquidity is affected by our loan activity, net changes in deposit levels and the maturities of our borrowings. The principal sources of our liquidity consist of deposits, loan interest and principal payments and prepayments, investment management and consulting fees, FHLB advances and proceeds from borrowings and sales of FFI common stock. The remaining balances of the Company’s lines of credit available to draw down totaled $3.2 billion at March 31, 2022.

Cash Flows Provided by Operating Activities. During the quarter ended March 31, 2022, operating activities provided net cash of $40 million, primarily due to net income of $31 million and a net increase of $5 million in other assets. During the quarter ended March 31, 2021, operating activities provided net cash of $33 million, primarily due to net income of $22 million and a net decrease of $5 million in other assets.

Cash Flows Used in Investing Activities. During the quarter ended March 31, 2022, investing activities used net cash of $483 million, primarily due to a $491 million net increase in loans and $83 million in purchases of securities AFS, offset partially by $88 million in cash received in principal collection and maturities of securities. During the quarter ended March 31, 2021, investing activities used net cash of $265 million, primarily due to a $321 million net increase in loans, offset partially by $53 million in cash received in principal collection and maturities of securities, and $3 million in proceeds from a redemption of securities.

Cash Flows Provided by Financing Activities. During the quarter ended March 31, 2022, financing activities provided net cash of $253 million, consisting primarily of a net increase of $146 million in deposits and $148 million net increase in subordinated debt, offset partially by $19 million net paydowns in our line of credit, $6 million in dividends paid, and a $13 million net decrease in repurchase agreements. During the quarter ended March 31, 2021, financing activities provided net cash of $71 million, consisting primarily of a net increase of $332 million in deposits, offset partially by a $250 million decrease in FHLB advances, $7 million net paydowns in our line of credit, and $4 million in dividends paid.

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 March 31, 2022 and December 31, 2021, the loan-to-deposit ratios at FFB were 88% and 84%, respectively.

Off-Balance Sheet Arrangements

The following table provides the off-balance sheet arrangements of the Company as of March 31, 2022:


(dollars in thousands)
Commitments to fund new loans	$	77,012
Commitments to fund under existing loans, lines of credit		1,223,173
Commitments under standby letters of credit		24,745

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

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March 31, 2022, FFB was obligated on $278 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 corrective action regulations place a federally insured depository institution, such as FFB, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution’s primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.

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


									To Be Well Capitalized
					For Capital				Under Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
FFI
March 31, 2022:
CET1 capital ratio	$	862,092	10.98	%	$	356,437	4.50	%
Tier 1 leverage ratio		862,092	8.52	%		408,396	4.00	%
Tier 1 risk-based capital ratio		862,092	10.98	%		475,249	6.00	%
Total risk-based capital ratio		902,747	13.68	%		633,665	8.00	%

December 31, 2021:
CET1 capital ratio	$	846,515	11.34	%	$	335,801	4.50	%
Tier 1 leverage ratio		846,515	8.43	%		401,645	4.00	%
Tier 1 risk-based capital ratio		846,515	11.34	%		447,735	6.00	%
Total risk-based capital ratio		887,821	11.90	%		596,980	8.00	%

FFB
March 31, 2022:
CET1 capital ratio	$	958,976	12.16	%	$	354,965	4.50	%	$	512,727	6.50	%
Tier 1 leverage ratio		958,976	9.14	%		419,807	4.00	%		524,759	5.00	%
Tier 1 risk-based capital ratio		958,976	12.16	%		473,286	6.00	%		631,048	8.00	%
Total risk-based capital ratio		999,631	12.67	%		631,048	8.00	%		788,810	10.00	%

December 31, 2021:
CET1 capital ratio	$	854,075	11.49	%	$	334,608	4.50	%	$	483,323	6.50	%
Tier 1 leverage ratio		854,075	8.53	%		400,616	4.00	%		500,770	5.00	%
Tier 1 risk-based capital ratio		854,075	11.49	%		446,144	6.00	%		594,859	8.00	%
Total risk-based capital ratio		895,381	12.04	%		594,859	8.00	%		743,574	10.00	%

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

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As of March 31, 2022, FFI had $84.0 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 March 31, 2022, the amount of capital at FFB in excess of amounts required to be well capitalized for purposes of the prompt corrective action regulations was $446 million for the CET1 capital ratio, $434 million for the Tier 1 Leverage Ratio, $328 million for the Tier 1 risk-based capital ratio and $211 million for the Total risk-based capital ratio.

The Company paid a quarterly cash dividend of $0.11 per common share in the first quarter of 2022. 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, 2021. 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 $16.1 million in dividends ($0.36 per share) in 2021.

We had no material commitments for capital expenditures as of March 31, 2022. However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain financial risks, which are discussed in detail in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the section titled Asset and Liability Management: Interest Rate Risk in our Annual Report on Form 10-K which we filed with the Securities and Exchange Commission on February 28, 2022. There have been no material changes to our quantitative and qualitative disclosures about market risk since December 31, 2021.

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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 March 31, 2022, 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 March 31, 2022, 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 March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1A.RISK FACTORS

There have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2021, which we filed with the SEC on February 28, 2022.

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

On April 26, 2022, the Company announced that its Board of Directors authorized a stock repurchase program, pursuant to which the Company may repurchase up to $75 million of its common stock. This plan has no stated expiration date. This stock repurchase program replaces and supersedes the stock repurchase program approved by the Board of Directors on October 30, 2018, which had authorized the Company to repurchase up to 2,200,000 shares of its common stock, and which no additional shares were repurchased during the quarter ended March 31, 2022.

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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).

4.1		Indenture, dated January 24, 2022, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on January 24, 2022).

4.2		First Supplemental Indenture, dated January 24, 2022, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed on January 24, 2022).

4.3		Form of 3.50% Fixed-to-Floating Rate Subordinated Notes due 2032 (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K, filed on January 24, 2022).

10.1		Fifth Amendment to Loan Agreement, dated as of March 22, 2022, by and between the Company and NexBank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on March 24, 2022).

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

101.INS		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH		Inline XBRL Taxonomy Extension Schema

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB		Inline XBRL Taxonomy Extension Labels Linkbase

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase

104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

(1)	Filed herewith.

Table of Contents

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: May 9, 2022	By:	/s/ KEVIN L. THOMPSON
		Kevin L. Thompson
		Executive Vice President and Chief Financial Officer

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