First Foundation Inc. - Quarter Report: 2023 September (Form 10-Q)

September 30, 2023

December 31, 2022

(dollars in thousands)

Amount

Amount

Uninsured deposits

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023

☐	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	New York Stock Exchange

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

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

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



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

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

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

As of November 2, 2023, the registrant had 56,443,774 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents

FIRST FOUNDATION INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023

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	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	57

Part II. Other Information
Item 1A	Risk Factors	58
Item 2	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	58
Item 5	Other Information	58
Item 6	Exhibits	59

SIGNATURE		S-1

(i)

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PART I — FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

FIRST FOUNDATION INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)


	September 30,		December 31,
	2023		2022
		(unaudited)
ASSETS
Cash and cash equivalents	$	818,501	$	656,494

Securities available-for-sale ("AFS")		830,191		237,597
Securities held-to-maturity ("HTM")		800,742		862,544
Allowance for credit losses - investments		(8,490)		(11,439)
Net securities		1,622,443		1,088,702

Loans held for investment		10,283,353		10,726,193
Allowance for credit losses - loans		(29,195)		(33,731)
Net loans		10,254,158		10,692,462

Accrued interest receivable		51,303		51,359
Investment in FHLB stock		24,610		25,358
Deferred taxes		32,790		24,198
Premises and equipment, net		39,203		36,141
Real estate owned ("REO")		6,210		6,210
Goodwill		—		215,252
Core deposit intangibles		5,337		6,583
Other assets		197,009		211,420
Total Assets	$	13,051,564	$	13,014,179

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	10,812,194	$	10,362,612
Borrowings		984,289		1,196,601
Subordinated debt		173,382		173,335
Accounts payable and other liabilities		162,492		147,253
Total Liabilities		12,132,357		11,879,801

Shareholders’ Equity
Common Stock		56		56
Additional paid-in-capital		720,356		719,606
Retained earnings		216,591		426,659
Accumulated other comprehensive loss		(17,796)		(11,943)
Total Shareholders’ Equity		919,207		1,134,378
Total Liabilities and Shareholders’ Equity	$	13,051,564	$	13,014,179

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

CONSOLIDATED INCOME STATEMENTS - UNAUDITED

(In thousands, except share and per share amounts)


	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Interest income:
Loans	$	124,363	$	100,978	$	368,477	$	255,037
Securities		10,600		6,752		24,263		19,733
FHLB Stock, fed funds sold and interest-bearing deposits		9,802		1,016		34,353		3,091
Total interest income		144,765		108,746		427,093		277,861

Interest expense:
Deposits		84,814		15,595		219,886		25,293
Borrowings		6,158		3,686		42,280		3,881
Subordinated debt		1,720		1,793		5,115		4,716
Total interest expense		92,692		21,074		267,281		33,890

Net interest income		52,073		87,672		159,812		243,971

Provision (reversal) for credit losses		(2,015)		(22)		(711)		(641)

Net interest income after provision for credit losses		54,088		87,694		160,523		244,612

Noninterest income:
Asset management, consulting and other fees		8,812		8,975		26,624		29,065
Other income		2,886		3,209		8,851		11,946
Total noninterest income		11,698		12,184		35,475		41,011

Noninterest expense:
Compensation and benefits		19,632		29,531		65,944		86,986
Occupancy and depreciation		9,253		9,594		27,331		26,975
Professional services and marketing costs		3,748		3,039		11,685		9,486
Customer service costs		24,683		13,560		60,402		19,959
Goodwill impairment		—		—		215,252		—
Other expenses		6,890		4,618		15,696		13,359
Total noninterest expense		64,206		60,342		396,310		156,765

Income (loss) before income taxes		1,580		39,536		(200,312)		128,858
Income tax (benefit) expense		(600)		10,530		1,300		35,700
Net income (loss)	$	2,180	$	29,006	$	(201,612)	$	93,158

Net income (loss) per share:
Basic	$	0.04	$	0.51	$	(3.57)	$	1.65
Diluted	$	0.04	$	0.51	$	(3.57)	$	1.65
Shares used in computation:
Basic		56,443,539		56,387,451		56,417,252		56,441,305
Diluted		56,449,720		56,447,901		56,417,252		56,510,883

(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, 2022	56,325,242	$	56	$	719,606	$	426,659	$	(11,943)	$	1,134,378
Net loss	—		—		—		(201,612)		—		(201,612)
Other comprehensive loss	—		—		—		—		(5,853)		(5,853)
Stock based compensation	—		—		1,129		—		—		1,129
Cash dividend	—		—		—		(8,456)		—		(8,456)
Issuance of common stock:
Exercise of options	19,500		—		157		—		—		157
Stock grants – vesting of restricted stock units	134,386		—		—		—		—		—
Repurchase of shares from restricted shares vesting	(35,354)				(536)						(536)
Balance: September 30, 2023	56,443,774	$	56	$	720,356	$	216,591	$	(17,796)	$	919,207

Balance: June 30, 2023	56,443,070	$	56	$	719,779	$	215,540	$	(19,841)	$	915,534
Net income	—		—		—		2,180		—		2,180
Other comprehensive income	—		—		—		—		2,045		2,045
Stock based compensation	—		—		577		—		—		577
Cash dividend	—		—		—		(1,129)		—		(1,129)
Issuance of common stock:
Stock grants – vesting of restricted stock units	1,000		—		—		—		—		—
Repurchase of shares from restricted shares vesting	(296)		—		—		—		—		—
Balance: September 30, 2023	56,443,774	$	56	$	720,356	$	216,591	$	(17,796)	$	919,207

Balance: December 31, 2021	56,432,070	$	56	$	720,744	$	340,976	$	2,275	$	1,064,051
Net income	—		—		—		93,158		—		93,158
Other comprehensive loss	—		—		—		—		(15,828)		(15,828)
Stock based compensation	—		—		2,770		—		—		2,770
Cash dividend	—		—		—		(18,627)		—		(18,627)
Issuance of common stock:
Exercise of options	2,000		—		18		—		—		18
Stock grants – vesting of restricted stock units	134,374		—		—		—		—		—
Repurchase of shares from restricted shares vesting	(43,190)		—		(1,120)		—		—		(1,120)
Stock repurchase	(137,583)		—		(2,457)		—		—		(2,457)
Balance: September 30, 2022	56,387,671	$	56	$	719,955	$	415,507	$	(13,553)	$	1,121,965

Balance: June 30, 2022	56,386,914	$	56	$	719,222	$	392,704	$	(9,073)	$	1,102,909
Net income	—		—		—		29,006		—		29,006
Other comprehensive loss	—		—		—		—		(4,480)		(4,480)
Stock based compensation	—		—		733		—		—		733
Cash dividend	—		—		—		(6,203)		—		(6,203)
Issuance of common stock:
Stock grants – vesting of restricted stock units	1,000		—		—		—		—		—
Repurchase of shares from restricted shares vesting	(243)		—		—		—		—		—
Balance: September 30, 2022	56,387,671	$	56	$	719,955	$	415,507	$	(13,553)	$	1,121,965

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME - UNAUDITED

(In thousands)


	Quarter Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income (loss)	$	2,180	$	29,006	$	(201,612)	$	93,158
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities arising during the period		2,846		(6,257)		(11,086)		(7,812)
Credit loss expense		(85)		293		1,392		1,120
Other comprehensive income (loss) before tax		2,761		(5,964)		(9,694)		(6,692)
Income tax (expense) benefit related to items of other comprehensive income (loss)		(716)		1,484		3,841		(9,136)
Other comprehensive income (loss)		2,045		(4,480)		(5,853)		(15,828)
Total comprehensive income (loss)	$	4,225	$	24,526	$	(207,465)	$	77,330

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(In thousands)


	For the Nine Months Ended
	September 30,
	2023		2022
Cash Flows from Operating Activities:
Net (loss) income	$	(201,612)	$	93,158
Adjustments to reconcile net income to net cash provided by operating activities:
Goodwill impairment		215,252		—
Provision for credit losses - loans		(1,733)		(1,761)
Provision for credit losses - securities AFS		1,022		1,120
Stock–based compensation expense		1,129		2,770
Depreciation and amortization		3,240		3,056
Deferred tax (benefit) expense		(5,756)		944
Amortization of (discount) premium on securities		(2,783)		2,392
Amortization of core deposit intangible		1,246		1,458
Amortization of mortgage servicing rights - net		1,667		1,566
Amortization of OCI - securities transfer to HTM		1,005		(851)
Valuation allowance on mortgage servicing rights - net		(1,441)		(747)
Decrease (increase) in accrued interest receivable and other assets		15,262		(32,636)
Increase in accounts payable and other liabilities		13,955		29,772
Net cash provided by operating activities		40,453		100,241
Cash Flows from Investing Activities:
Net decrease (increase) in loans		438,567		(2,947,628)
Purchase of premises and equipment		(6,303)		(4,007)
Disposals of premises and equipment		—		3,388
Recovery of allowance for credit losses		1,735		355
Purchases of securities AFS		(617,506)		(398)
Purchases of securities HTM		—		(171,852)
Maturities of securities AFS		13,668		24,775
Maturities of securities HTM		62,164		202,899
Net decrease (increase) in FHLB stock		748		(12,954)
Proceeds from BOLI policy		—		326
Net cash used in investing activities		(106,927)		(2,905,096)
Cash Flows from Financing Activities:
Increase in deposits		449,582		737,896
Net (decrease) increase in FHLB & other advances		(105,000)		1,144,000
Net decrease in line of credit		(8,000)		(18,500)
Net increase in subordinated debt		47		147,623
Net (decrease) increase in repurchase agreements		(99,313)		13,206
Gain on sale leaseback		—		(1,123)
Dividends paid		(8,456)		(18,627)
Proceeds from exercise of stock options		157		18
Repurchase of stock		(536)		(3,577)
Net cash provided by financing activities		228,481		2,000,916
Increase (decrease) in cash and cash equivalents		162,007		(803,939)
Cash and cash equivalents at beginning of year		656,494		1,121,757
Cash and cash equivalents at end of period	$	818,501	$	317,818
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes	$	—	$	31,016
Interest		223,654		32,078
Noncash transactions:
Transfer of securities from available-for-sale to held-to-maturity		—		916,777
Goodwill acquisition adjustment		—		1,623
Right of use lease assets and liabilities recognized		1,019		21,649
Chargeoffs against allowance for credit losses - loans		4,273		372
Chargeoffs against allowance for credit losses - securities		3,971		—

(See accompanying notes to the consolidated financial statements)

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation

First Foundation Inc. (“FFI”) is a financial services holding company whose operations are conducted through 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 Public Finance (“FFPF”), First Foundation Insurance Services (“FFIS”) and Blue Moon Management, LLC (collectively the “Company”). FFI also has two inactive wholly owned subsidiaries, First Foundation Consulting and First Foundation Advisors, LLC. In addition, FFA has set up a limited liability company, which is not included in these consolidated financial statements, as a private investment fund to provide an investment vehicle for its clients. FFI is incorporated in the state of Delaware. The corporate headquarters for FFI is located in Dallas, Texas. The Company provides a comprehensive platform of financial services to individuals, businesses and other organizations and has offices in California, Nevada, Florida, Texas, and Hawaii.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 the accounts of the Company as of September 30, 2023 and December 31, 2022, and for the nine months ended September 30, 2023 and 2022, and include all information and footnotes required for interim financial reporting presentation. All intercompany accounts and transactions have been eliminated in consolidation. The results for the 2023 interim periods are not necessarily indicative of the results expected for the full year. These financial statements assume that readers have read the most recent Annual Report on Form 10-K filed with the SEC which contains the latest available audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2022.

Significant Accounting Policies

The accounting and reporting policies of the Company are based upon GAAP and conform to predominant practices within the banking industry. We have not made any changes in our significant accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

New Accounting Pronouncements

On January 1, 2023, the Company adopted 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. These disclosures are presented within Note 4: “Loans” in the accompanying unaudited financial statements. 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. This information is presented as part of the disclosure for risk categories of loans based on year of origination within Note 5: ‘‘Allowance for Credit Losses’’ in the accompanying unaudited financial statements.

In March 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-02, Investments – Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force) which permits reporting entities to elect to account

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method, which was previously allowed only for low-income housing tax credit (“LIHTC”) investments, if certain conditions are met. The proportional amortization method recognizes the amortization of the cost of the investment as a component of income tax expense. The provisions of this update are effective for interim and annual periods beginning after December 15, 2023. Early adoption is permitted. Currently, the Company’s holdings of tax credit program investments are limited to LIHTC investments, for which it already uses the proportional amortization method. Therefore, ASU 2023-02 is not expected to have a material 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 Company has permanently ceased originating any new loans or entering into any transaction that would increase its LIBOR-based exposure. For all new variable-rate loans and transactions, the Company primarily offers Prime, SOFR, and other indices as the variable-rate index. All variable rate loans tied to LIBOR will index to Prime, SOFR, or other indices at the next loan reset date. This transition did not have a material impact on the consolidated financial statements.

NOTE 2: FAIR VALUE MEASUREMENTS

Assets Measured at Fair Value on a Recurring Basis

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize 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 Nine Months Ended September 30, 2023 - 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
September 30, 2023:
Investment securities available for sale:
Collateralized mortgage obligations	$	7,541	$	—	$	7,541	$	—
Agency mortgage-backed securities		232,848		—		232,848		—
Municipal bonds		44,152		—		44,152		—
SBA securities		14,696		—		14,696		—
Beneficial interests in FHLMC securitization		7,351		—		—		7,351
Corporate bonds		121,462		—		121,462		—
U.S. Treasury		393,651		393,651		—		—
Investment in equity securities		9,774		—		—		9,774
Total assets at fair value on a recurring basis	$	831,475	$	393,651	$	420,699	$	17,125


December 31, 2022:
Investment securities available for sale:
Collateralized mortgage obligations	$	8,615	$	—	$	8,615	$	—
Agency mortgage-backed securities		7,576		—		7,576		—
Municipal bonds		46,790		—		46,790		—
SBA securities		18,955		—		18,955		—
Beneficial interests in FHLMC securitization		7,981		—		—		7,981
Corporate bonds		135,013		—		135,013		—
U.S. Treasury		1,228		1,228		—		—
Investment in equity securities		9,767		—		—		9,767
Total assets at fair value on a recurring basis	$	235,925	$	1,228	$	216,949	$	17,748

The decrease in Level 3 assets from December 31, 2022 was primarily due to securitization paydowns and the write-off of several interest-only strip securities in the year to date period ended September 30, 2023.

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 amortized cost basis of collateral dependent loans was $5.5 million and $6.5 million at September 30, 2023 and

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

December 31, 2022, respectively. Specific reserves related to these loans totaled $1.0 million and $0.6 million at September 30, 2023 and December 31, 2022, respectively.

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 September 30, 2023 included prepayment rates ranging from 20% to 30% and a discount rate of 10%. Mortgage servicing rights net of valuation allowance totaled $5.6 million and $5.9 million at September 30, 2023 and December 31, 2022, respectively and is classified as a component of other assets in the accompanying balance sheets.

Fair Value of Financial Instruments

FASB Accounting Standards Codification (“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 certain financial instruments:

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

Interest-Bearing Deposits with Financial Institutions. The fair values of interest-bearing deposits maturing within ninety days approximate their carrying values. These financial instruments are classified as a component of cash and cash equivalents in the accompanying consolidated balance sheets.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

Investment Securities. Investment securities classified as available-for-sale are measured at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the securities are classified as Level 3 and reliance is placed upon external third party models, and management judgment and evaluation for valuation. Level 1 investment 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 investment securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Investment securities classified as Level 3 include beneficial interests in FHLMC securitizations. Significant assumptions in the valuation of these Level 3 securities as of September 30, 2023 included prepayment rates ranging from 30% to 45% and discount rates ranging from 9.18% to 10.91%. Significant assumptions in the valuation of these Level 3 securities as of December 31, 2022 included prepayment rates ranging from 35% to 45% and discount rates ranging from 7.69% to 10%.

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.

Investment in 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 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.

Accrued Interest Receivable. The fair value of accrued interest receivable on loans and investment securities approximates its carrying value.

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

Borrowings. The fair value of borrowings in the form of overnight FHLB advances, federal funds purchased, holding company line of credit advances, and repurchase agreements approximate fair value because of their short-term maturity and are classified as Level 1 instruments. The fair value of borrowings in the form of term FHLB advances and FHLB putable advances also approximates fair value, and are classified as Level 2 instruments.

Subordinated debt. The fair value of term borrowings is derived by calculating the discounted value of future cash flows expected to be paid out by the Company resulting in a Level 3 classification.

Accrued Interest Payable. The fair value of accrued interest payable on deposits, borrowings, and subordinated debt approximates its carrying value.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

The carrying amounts and estimated fair values of financial instruments are as follows as of:


	Carrying		Fair Value Measurement Level
(dollars in thousands)	Value		1		2		3		Total
September 30, 2023:
Assets:
Cash and cash equivalents	$	818,501	$	818,501	$	—	$	—	$	818,501
Securities AFS, net		821,701		393,651		420,699		7,351		821,701
Securities HTM		800,742		—		694,496		—		694,496
Loans, net		10,254,158		—		—		9,818,852		9,818,852
Investment in FHLB stock		24,610		—		24,610		—		24,610
Investment in equity securities		9,774		—		—		9,774		9,774
Accrued interest receivable		51,303		51,303		—		—		51,303
Liabilities:
Deposits	$	10,812,194	$	7,833,509	$	2,949,392	$	—	$	10,782,901
Borrowings		984,289		84,289		900,000		—		984,289
Subordinated debt		173,382		—		—		132,928		132,928
Accrued interest payable		43,616		43,616		—		—		43,616

December 31, 2022:
Assets:
Cash and cash equivalents	$	656,494	$	656,494	$	—	$	—	$	656,494
Securities AFS, net		226,158		1,228		216,949		7,981		226,158
Securities HTM		862,544		—		773,061		—		773,061
Loans, net		10,692,462		—		—		10,354,052		10,354,052
Investment in FHLB stock		25,358		—		25,358		—		25,358
Investment in equity securities		9,767		—		—		9,767		9,767
Accrued interest receivable		51,359		51,359		—		—		51,359
Liabilities:
Deposits	$	10,362,612	$	8,483,770	$	1,865,502	$	—	$	10,349,272
Borrowings		1,196,601		1,176,601		—		—		1,176,601
Subordinated debt		173,335		—		—		153,121		153,121
Accrued interest payable		9,997		9,997		—		—		9,997

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

NOTE 3: SECURITIES

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


	Amortized		Gross Unrealized				Allowance for		Estimated
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Fair Value
September 30, 2023:
Collateralized mortgage obligations	$	9,084	$	—	$	(1,543)	$	—	$	7,541
Agency mortgage-backed securities		234,305		—		(1,457)		—		232,848
Municipal bonds		49,579		—		(5,426)		(1)		44,152
SBA securities		14,807		2		(113)		—		14,696
Beneficial interests in FHLMC securitization		14,696		89		(336)		(7,098)		7,351
Corporate bonds		138,897		—		(16,044)		(1,391)		121,462
U.S. Treasury		394,004		—		(353)		—		393,651
Total	$	855,372	$	91	$	(25,272)	$	(8,490)	$	821,701

December 31, 2022:
Collateralized mortgage obligations	$	9,865	$	—	$	(1,250)	$	—	$	8,615
Agency mortgage-backed securities		8,161		—		(585)		—		7,576
Municipal bonds		50,232		—		(3,442)		—		46,790
SBA securities		19,090		3		(138)		—		18,955
Beneficial interests in FHLMC securitization		19,415		108		(103)		(11,439)		7,981
Corporate bonds		145,024		—		(10,011)		—		135,013
U.S. Treasury		1,298		1		(71)		—		1,228
Total	$	253,085	$	112	$	(15,600)	$	(11,439)	$	226,158

As of September 30, 2023, U.S. Treasury securities of $393.7 million included in the table above are pledged as collateral to the States of California and Florida to meet regulatory requirements related to the Bank’s trust operations, and $225.7 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. A total of $71.0 million in SBA and agency mortgage-backed securities are pledged as collateral for repurchase agreements. A total of $880.7 million in SBA and agency mortgage-backed securities, corporate and municipal bonds, and loans are pledged as collateral to the Federal Reserve Bank’s discount window and bank term funding program from which the Bank may borrow.

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
September 30, 2023:
Agency mortgage-backed securities	$	800,742	$	—	$	(106,246)	$	—	$	694,496
Total	$	800,742	$	—	$	(106,246)	$	—	$	694,496

December 31, 2022:
Agency mortgage-backed securities	$	862,544	$	—	$	(89,483)	$	—	$	773,061
Total	$	862,544	$	—	$	(89,483)	$	—	$	773,061

In 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

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

through earnings over the remaining term of the securities. Subsequent to transfer, the allowance for credit losses (“ACL”) on these securities was evaluated under the accounting policy for securities HTM. The securities HTM portfolio consists solely of agency-backed MBS securities in which the Company has reason to believe the credit loss exposure is remote, as these securities are guaranteed by a U.S. government sponsored entity (“GSE”). As such, the ACL related to the securities HTM portfolio was zero at September 30, 2023 and December 31, 2022, respectively.

We monitor the credit quality of the securities in the investment portfolios 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, as defined by NRSROs, are generally considered by the rating agencies and market participants to be low credit risk. As of September 30, 2023, 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 tables below indicate 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 September 30, 2023
	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	$	—	$	—	$	7,541	$	(1,543)	$	7,541	$	(1,543)
Agency mortgage-backed securities		226,833		(878)		6,016		(579)		232,849		(1,457)
Municipal bonds		3,417		(198)		40,735		(5,228)		44,152		(5,426)
SBA securities		1,069		(1)		12,616		(112)		13,685		(113)
Beneficial interests in FHLMC securitization		—		—		4,093		(336)		4,093		(336)
Corporate bonds		15,000		—		107,853		(16,044)		122,853		(16,044)
U.S. Treasury		392,819		(286)		831		(67)		393,650		(353)
Total temporarily impaired securities	$	639,138	$	(1,363)	$	179,685	$	(23,909)	$	818,823	$	(25,272)


	Securities with Unrealized Loss at December 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	$	2	$	—	$	8,613	$	(1,250)	$	8,615	$	(1,250)
Agency mortgage-backed securities		6,882		(525)		696		(60)		7,578		(585)
Municipal bonds		44,971		(3,244)		1,819		(198)		46,790		(3,442)
SBA securities		17,237		(137)		121		(1)		17,358		(138)
Beneficial interests in FHLMC securitization		4,217		(103)		—		—		4,217		(103)
Corporate bonds		108,056		(6,476)		26,957		(3,535)		135,013		(10,011)
U.S. Treasury		376		(23)		451		(48)		827		(71)
Total temporarily impaired securities	$	181,741	$	(10,508)	$	38,657	$	(5,092)	$	220,398	$	(15,600)

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 the securities, it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in discount rates and assumptions regarding future interest rates. The fair value is expected to recover as the bonds approach maturity.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

The tables below indicate the gross unrecognized losses and fair values of our securities HTM portfolio, aggregated by investment category and length of time that the individual securities have been in a continuous unrecognized loss position.


	Securities with Unrecognized Loss at September 30, 2023
	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	$	—	$	—	$	694,496	$	(106,246)	$	694,496	$	(106,246)
Total temporarily impaired securities	$	—	$	—	$	694,496	$	(106,246)	$	694,496	$	(106,246)


	Securities with Unrecognized Loss at December 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	$	394,619	$	(37,418)	$	378,442	$	(52,065)	$	773,061	$	(89,483)
Total temporarily impaired securities	$	394,619	$	(37,418)	$	378,442	$	(52,065)	$	773,061	$	(89,483)

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


		Beginning		Provision (Reversal)						Ending
(dollars in thousands)		Balance		for Credit Losses		Charge-offs		Recoveries		Balance

Three Months Ended September 30, 2023:
Municipal bonds	$	—	$	1	$	—	$	—	$	1
Beneficial interests in FHLMC securitization		7,058		40		—		—		7,098
Corporate bonds		1,477		(86)		—		—		1,391
Total	$	8,535	$	(45)	$	—	$	—	$	8,490

Nine Months Ended September 30, 2023:
Municipal bonds	$	—	$	1	$	—	$	—	$	1
Beneficial interests in FHLMC securitization		11,439		(370)		(3,971)		—		7,098
Corporate bonds		—		1,391		—		—		1,391
Total	$	11,439	$	1,022	$	(3,971)	$	—	$	8,490

Year Ended December 31, 2022:
Municipal bonds	$	—	$	—	$	—	$	—	$	—
Beneficial interests in FHLMC securitization		10,399		1,040		—		—		11,439
Corporate bonds		—		—		—		—		—
Total	$	10,399	$	1,040	$	—	$	—	$	11,439

During the three and nine months ended September 30, 2023, the Company recorded a provision (reversal) for credit losses of ($45) thousand and $1.0 million, respectively. During the three and nine months ended September 30, 2023, the Company recorded charge-offs of $0 and $4.0 million, respectively related to several interest-only strip 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-

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

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. On a quarterly basis, the Company engages with an independent third party to perform an analysis of expected credit losses for its municipal and corporate bond securities in order to supplement our own internal review. The analysis for the quarter-ended September 30, 2023 concluded and the Company concurred that seventeen corporate bond securities and one municipal bond security were impacted by credit loss, compared to eighteen corporate bond securities impacted by credit loss for the quarter-ended June 30, 2023, which resulted in a reversal of the allowance for credit losses of $85 thousand for the quarter-ended September 30, 2023.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

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


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
September 30, 2023
Amortized Cost:
Collateralized mortgage obligations	$	—		$	—		$	514		$	8,570		$	9,084
Agency mortgage-backed securities		—			4,960			—			229,345			234,305
Municipal bonds		—			9,676			36,202			3,701			49,579
SBA securities		1			1,119			645			13,042			14,807
Beneficial interests in FHLMC securitization		—			8,958			—			5,738			14,696
Corporate bonds		5,026			45,441			82,901			5,529			138,897
U.S. Treasury		392,706			1,298			—			—			394,004
Total	$	397,733		$	71,452		$	120,262		$	265,925		$	855,372
Weighted average yield		5.19	%		5.45	%		3.28	%		5.86	%		5.15	%
Estimated Fair Value:
Collateralized mortgage obligations	$	—		$	—		$	452		$	7,089		$	7,541
Agency mortgage-backed securities		—			4,627			—			228,221			232,848
Municipal bonds		—			8,948			32,388			2,817			44,153
SBA securities		1			1,110			643			12,942			14,696
Beneficial interests in FHLMC securitization		—			8,958			—			5,491			14,449
Corporate bonds		4,951			44,368			69,792			3,742			122,853
U.S. Treasury		392,425			1,226			—			—			393,651
Total	$	397,377		$	69,237		$	103,275		$	260,302		$	830,191


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
December 31, 2022
Amortized Cost:
Collateralized mortgage obligations	$	—		$	—		$	686		$	9,179		$	9,865
Agency mortgage-backed securities		—			4,384			2,107			1,670			8,161
Municipal bonds		301			8,002			34,501			7,428			50,232
SBA securities		14			1,402			1,278			16,396			19,090
Beneficial interests in FHLMC securitization		—			9,860			—			9,555			19,415
Corporate bonds		6,006			28,993			104,494			5,531			145,024
U.S. Treasury		—			1,298			—			—			1,298
Total	$	6,321		$	53,939		$	143,066		$	49,759		$	253,085
Weighted average yield		4.36	%		3.96	%		3.38	%		1.91	%		3.24	%
Estimated Fair Value:
Collateralized mortgage obligations	$	—		$	—		$	623		$	7,992		$	8,615
Agency mortgage-backed securities		—			4,133			1,960			1,483			7,576
Municipal bonds		299			7,565			32,690			6,236			46,790
SBA securities		14			1,395			1,272			16,274			18,955
Beneficial interests in FHLMC securitization		—			9,860			—			9,560			19,420
Corporate bonds		6,001			28,022			96,734			4,256			135,013
U.S. Treasury		—			1,228			—			—			1,228
Total	$	6,314		$	52,203		$	133,279		$	45,801		$	237,597

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

The scheduled maturities of securities HTM and the related weighted average yields by contractual maturity date were as follows for the periods indicated:


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
September 30, 2023
Amortized Cost:
Agency mortgage-backed securities	$	—		$	3,465		$	14,411		$	782,866		$	800,742
Total	$	—		$	3,465		$	14,411		$	782,866		$	800,742
Weighted average yield		—	%		0.84	%		1.36	%		2.28	%		2.25	%

Estimated Fair Value:
Agency mortgage-backed securities	$	—		$	3,183		$	12,730		$	678,583		$	694,496
Total	$	—		$	3,183		$	12,730		$	678,583		$	694,496


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
December 31, 2022
Amortized Cost:
Agency mortgage-backed securities	$	—		$	208		$	17,689		$	844,647		$	862,544
Total	$	—		$	208		$	17,689		$	844,647		$	862,544
Weighted average yield		—	%		0.36	%		1.12	%		2.31	%		2.28	%

Estimated Fair Value:
Agency mortgage-backed securities	$	—		$	192		$	16,148		$	756,721		$	773,061
Total	$	—		$	192		$	16,148		$	756,721		$	773,061

NOTE 4: LOANS

The following is a summary of our loans as of:


	September 30,		December 31,
(dollars in thousands)	2023		2022
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily	$	5,240,385	$	5,341,596
Single family		960,139		1,016,498
Total real estate loans secured by residential properties		6,200,524		6,358,094
Commercial properties		1,043,930		1,203,292
Land and construction		141,216		158,565
Total real estate loans		7,385,670		7,719,951
Commercial and industrial loans		2,877,441		2,984,748
Consumer loans		3,545		4,481
Total loans		10,266,656		10,709,180
Premiums, discounts and deferred fees and expenses		16,697		17,013
Total	$	10,283,353	$	10,726,193

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

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


	Past Due and Still Accruing												Total Past
							90 Days						Due and
(dollars in thousands)	30–59 Days			60-89 Days			or More			Nonaccrual			Nonaccrual			Current		Total
September 30, 2023:
Real estate loans:
Residential properties	$	511		$	15,660		$	—		$	1,066		$	17,237		$	6,202,405	$	6,219,642
Commercial properties		8,704			—			2,171			3,015			13,890			1,029,215		1,043,105
Land and construction		—			—			—			—			—			140,665		140,665
Commercial and industrial loans		3,277			666			—			3,017			6,960			2,869,360		2,876,320
Consumer loans		160			—			—			—			160			3,461		3,621
Total	$	12,652		$	16,326		$	2,171		$	7,098		$	38,247		$	10,245,106	$	10,283,353

Percentage of total loans		0.12	%		0.16	%		0.02	%		0.07	%		0.37	%

December 31, 2022:
Real estate loans:
Residential properties	$	511		$	57		$	—		$	2,556		$	3,124		$	6,374,100	$	6,377,224
Commercial properties		15,000			946			1,213			4,547			21,706			1,180,357		1,202,063
Land and construction		—			—			—			—			—			157,630		157,630
Commercial and industrial loans		385			1,495			982			3,228			6,090			2,978,668		2,984,758
Consumer loans		—			167			—			—			167			4,351		4,518
Total	$	15,896		$	2,665		$	2,195		$	10,331		$	31,087		$	10,695,106	$	10,726,193

Percentage of total loans		0.15	%		0.02	%		0.02	%		0.10	%		0.29	%

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
September 30, 2023:
Real estate loans:
Residential properties	$	710	$	356
Commercial properties		—		3,015
Commercial and industrial loans		2,552		466
Consumer loans		—		—
Total	$	3,262	$	3,837

December 31, 2022:
Real estate loans:
Residential properties	$	—	$	2,556
Commercial properties		—		4,547
Commercial and industrial loans		2,016		1,212
Total	$	2,016	$	8,315

The Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures on January 1, 2023. The amendments in this ASU eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

experiencing financial difficulty. The amendments in this ASU were applied prospectively, and therefore, loan modification and charge off information is provided for only those items occurring after the January 1, 2023 adoption date.

Based on the guidance in ASU 2022-02, a loan modification or refinancing results in a new loan if the terms of the new loan are at least as favorable to the lender as the terms with customers with similar collection risks that are not refinancing or restructuring their loans and the modification to the terms of the loan are more than minor. If a loan modification or refinancing does not result in a new loan, it is classified as a loan modification.

There are additional disclosures for modification of loans with borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows. The disclosures are applicable to situations where there is interest rate reduction, term extensions, principal forgiveness, other-than-insignificant payment delays, or a combination of any of these items.

The following table presents our loan modifications made to borrowers experiencing financial difficulty by type of modification for the nine months ended September 30, 2023 with related amortized cost balances, respective percentage share of the total class of loans, and the related financial effect:


	September 30, 2023:
	Term Extension
		Amortized Cost Basis	% of Total Class of Loans		Financial Effect
Commercial and industrial loans	$	5,770	0.20	%	1 loan with 3-month term extension
Total	$	5,770

	Payment Deferrals
		Amortized Cost Basis	% of Total Class of Loans		Financial Effect
Commercial and industrial loans	$	400	—	%	4 loans each with partial payment deferrals for 3 months
Total	$	400

	Combination
		Amortized Cost Basis	% of Total Class of Loans		Financial Effect
Commercial real estate loans	$	645	0.10	%	1 loan with 10 year term extension and interest reduction
Total	$	645

	Total
		Amortized Cost Basis	% of Total Class of Loans
Commercial real estate loans	$	645	0.10	%
Commercial and industrial loans	$	6,170	0.20	%
Total	$	6,815

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

The following table presents the amortized cost basis of loans that had a payment default since modification during the nine months ended September 30, 2023:


	September 30, 2023:
	Payment Deferrals
		# of Loans Defaulted		Amortized Cost Basis
Commercial and industrial loans		1	$	1,339
Total		1	$	1,339

	Combination
		# of Loans Defaulted		Amortized Cost Basis
Commercial and industrial loans		1	$	950
Total		1	$	950

	Total
		# of Loans Defaulted		Amortized Cost Basis
Commercial and industrial loans		2		2,289
Total	$	2	$	2,289

The following table presents the payment status of our loan modifications made during the nine months ended September 30, 2023:


			30-89 Days		90+ Days
(dollars in thousands)		Current	Past Due		Past Due		Total
September 30, 2023:
Commercial real estate loans	$	645	$	—	$	—	$	645
Commercial and industrial loans		6,170		—		2,289		8,459
Total	$	6,815	$	—	$	2,289	$	9,104

FASB has provided transition guidance to assist with the implementation of ASU 2022-02. Per this guidance, FASB expects that for comparative periods presented before adoption, current TDR disclosures should continue to be provided. As such, the following table presents the loans classified as TDRs by accrual and nonaccrual status as of the comparative period ended December 31, 2022:


	December 31, 2022
(dollars in thousands)	Accrual		Nonaccrual		Total
Commercial real estate loans	$	929	$	1,066	$	1,995
Commercial and industrial loans		166		1,412		1,578
Total	$	1,095	$	2,478	$	3,573

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

NOTE 5: ALLOWANCE FOR CREDIT LOSSES

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


			Provision
	Beginning		(Reversal) for						Ending
(dollars in thousands)	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three Months Ended September 30, 2023:
Real estate loans:
Residential properties	$	8,234	$	140	$	—	$	—	$	8,374
Commercial properties		5,253		(979)		—		—		4,274
Land and construction		287		(13)		—		—		274
Commercial and industrial loans		17,690		(1,070)		(1,183)		814		16,251
Consumer loans		21		—		—		1		22
Total	$	31,485	$	(1,922)	$	(1,183)	$	815	$	29,195

Nine Months Ended September 30, 2023:
Real estate loans:
Residential properties	$	8,306	$	68	$	—	$	—	$	8,374
Commercial properties		8,714		(4,191)		(249)		—		4,274
Land and construction		164		110		—		—		274
Commercial and industrial loans		16,521		2,019		(4,022)		1,733		16,251
Consumer loans		26		(4)		(2)		2		22
Total	$	33,731	$	(1,998)	$	(4,273)	$	1,735	$	29,195

Year Ended December 31, 2022:
Real estate loans:
Residential properties	$	2,637	$	5,674	$	(5)	$	—	$	8,306
Commercial properties		17,049		(8,335)		—		—		8,714
Land and construction		1,995		(1,831)		—		—		164
Commercial and industrial loans		11,992		4,804		(711)		436		16,521
Consumer loans		103		(73)		(4)		—		26
Total	$	33,776	$	239	$	(720)	$	436	$	33,731

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - 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
September 30, 2023:
Allowance for credit losses:
Real estate loans:
Residential properties	$	80	$	8,294	$	8,374
Commercial properties		268		4,006		4,274
Land and construction		—		274		274
Commercial and industrial loans		1,144		15,107		16,251
Consumer loans		—		22		22
Total	$	1,492	$	27,703	$	29,195
Loans:
Real estate loans:
Residential properties	$	1,952	$	6,217,690	$	6,219,642
Commercial properties		10,625		1,032,480		1,043,105
Land and construction		—		140,665		140,665
Commercial and industrial loans		3,828		2,872,492		2,876,320
Consumer loans		—		3,621		3,621
Total	$	16,405	$	10,266,948	$	10,283,353

December 31, 2022:
Allowance for credit losses:
Real estate loans:
Residential properties	$	87	$	8,219	$	8,306
Commercial properties		1,834		6,880		8,714
Land and construction		—		164		164
Commercial and industrial loans		3,122		13,399		16,521
Consumer loans		—		26		26
Total	$	5,043	$	28,688	$	33,731
Loans:
Real estate loans:
Residential properties	$	3,479	$	6,373,745	$	6,377,224
Commercial properties		34,278		1,167,785		1,202,063
Land and construction		—		157,630		157,630
Commercial and industrial loans		9,397		2,975,361		2,984,758
Consumer loans		—		4,518		4,518
Total	$	47,154	$	10,679,039	$	10,726,193

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as loans secured

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

by multifamily or commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

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

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

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

A loan is considered impaired, when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

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

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

The following tables present risk categories of loans based on year of origination, as of the periods shown. In accordance with the adoption of ASU 2022-02 in January 2023, gross charge-off information is disclosed by vintage year (year of origination) on a prospective basis beginning in 2023:


													Revolving
(dollars in thousands)	2023		2022		2021		2020		2019		Prior		Loans		Total
September 30, 2023:
Loans secured by real estate:
Residential
Multifamily
Pass	$	24,064	$	2,356,617	$	1,540,345	$	781,098	$	290,865	$	245,232	$	—	$	5,238,221
Special mention		—		—		1,255		—		5,577		10,752		—		17,584
Substandard		—		—		—		—		—		—		—		—
Total	$	24,064	$	2,356,617	$	1,541,600	$	781,098	$	296,442	$	255,984	$	—	$	5,255,805
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Single family
Pass	$	13,662	$	260,643	$	267,758	$	92,856	$	38,772	$	213,131	$	55,122	$	941,944
Special mention		—		—		—		—		—		19,674		—		19,674
Substandard		—		—		—		—		—		1,806		413		2,219
Total	$	13,662	$	260,643	$	267,758	$	92,856	$	38,772	$	234,611	$	55,535	$	963,837
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate
Pass	$	17,133	$	220,871	$	150,796	$	123,193	$	82,461	$	410,961	$	—	$	1,005,415
Special mention		—		—		1,232		2,292		—		11,662		—		15,186
Substandard		—		—		117		608		11,515		10,264		—		22,504
Total	$	17,133	$	220,871	$	152,145	$	126,093	$	93,976	$	432,887	$	—	$	1,043,105
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	249	$	—	$	249

Land and construction
Pass	$	17,769	$	44,271	$	35,108	$	35,626	$	817	$	7,074	$	—	$	140,665
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	17,769	$	44,271	$	35,108	$	35,626	$	817	$	7,074	$	—	$	140,665
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial
Pass	$	182,895	$	1,096,699	$	279,697	$	132,636	$	25,226	$	27,138	$	1,087,507	$	2,831,798
Special mention		—		—		24,712		4,409		102		—		—		29,223
Substandard		—		215		1,039		496		1,347		479		11,723		15,299
Total	$	182,895	$	1,096,914	$	305,448	$	137,541	$	26,675	$	27,617	$	1,099,230	$	2,876,320
Gross charge-offs	$	34	$	1,047	$	874	$	538	$	117	$	48	$	1,364	$	4,022

Consumer
Pass	$	218	$	2	$	797	$	—	$	304	$	63	$	2,237	$	3,621
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	218	$	2	$	797	$	—	$	304	$	63	$	2,237	$	3,621
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	2	$	2

Total loans
Pass	$	255,741	$	3,979,103	$	2,274,501	$	1,165,409	$	438,445	$	903,599	$	1,144,866	$	10,161,664
Special mention		—		—		27,199		6,701		5,679		42,088		—		81,667
Substandard		—		215		1,156		1,104		12,862		12,549		12,136		40,022
Total	$	255,741	$	3,979,318	$	2,302,856	$	1,173,214	$	456,986	$	958,236	$	1,157,002	$	10,283,353
Gross charge-offs	$	34	$	1,047	$	874	$	538	$	117	$	297	$	1,366	$	4,273

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED


													Revolving
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Loans		Total
December 31, 2022:
Loans secured by real estate:
Residential
Multifamily
Pass	$	2,399,360	$	1,552,311	$	795,263	$	301,025	$	145,675	$	146,622	$	—	$	5,340,256
Special mention		—		—		—		5,666		9,767		1,545		—		16,978
Substandard		—		—		—		—		—		—		—		—
Total	$	2,399,360	$	1,552,311	$	795,263	$	306,691	$	155,442	$	148,167	$	—	$	5,357,234

Single family
Pass	$	270,589	$	276,244	$	96,183	$	40,010	$	49,676	$	215,209	$	68,575	$	1,016,486
Special mention		—		—		—		—		—		—		25		25
Substandard		—		—		—		—		—		3,434		45		3,479
Total	$	270,589	$	276,244	$	96,183	$	40,010	$	49,676	$	218,643	$	68,645	$	1,019,990

Commercial real estate
Pass	$	223,503	$	158,363	$	144,105	$	93,960	$	171,460	$	325,048	$	—	$	1,116,439
Special mention		—		13,425		2,340		7,088		11,734		7,905		—		42,492
Substandard		5,919		14,376		742		10,661		—		11,434		—		43,132
Total	$	229,422	$	186,164	$	147,187	$	111,709	$	183,194	$	344,387	$	—	$	1,202,063

Land and construction
Pass	$	43,846	$	58,268	$	47,212	$	854	$	5,044	$	2,406	$	—	$	157,630
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	43,846	$	58,268	$	47,212	$	854	$	5,044	$	2,406	$	—	$	157,630

Commercial
Pass	$	1,176,851	$	369,775	$	182,889	$	62,767	$	16,306	$	17,558	$	1,133,998	$	2,960,144
Special mention		—		542		1,212		383		—		—		5,573		7,710
Substandard		—		380		2,125		1,810		—		2,736		9,853		16,904
Total	$	1,176,851	$	370,697	$	186,226	$	64,960	$	16,306	$	20,294	$	1,149,424	$	2,984,758

Consumer
Pass	$	456	$	1,092	$	—	$	471	$	133	$	69	$	2,297	$	4,518
Special mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total	$	456	$	1,092	$	—	$	471	$	133	$	69	$	2,297	$	4,518

Total loans
Pass	$	4,114,605	$	2,416,053	$	1,265,652	$	499,087	$	388,294	$	706,912	$	1,204,870	$	10,595,473
Special mention		—		13,967		3,552		13,137		21,501		9,450		5,598		67,205
Substandard		5,919		14,756		2,867		12,471		—		17,604		9,898		63,515
Total	$	4,120,524	$	2,444,776	$	1,272,071	$	524,695	$	409,795	$	733,966	$	1,220,366	$	10,726,193

A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the operation or sale of the collateral. Collateral dependent loans are evaluated individually to determine expected credit losses and any ACL allocation is determined based upon the amount by which amortized costs exceed the estimated fair value of the collateral, adjusted for estimated selling costs (if

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

applicable). The following table presents the amortized cost basis of collateral dependent loans and the related ACL allocated to these loans as of the dates indicated:


					Equipment/					ACL
(dollars in thousands)	Real Estate		Cash		Receivables		Total			Allocation
September 30, 2023:
Loans secured by real estate:
Residential properties
Single family	$	356	$	—	$	—	$	356	$	—
Commercial real estate loans		2,555		—		—		2,555		—
Commercial loans		—		250		2,290		2,540		958
Total	$	2,911	$	250	$	2,290	$	5,451	$	958

December 31, 2022:
Loans secured by real estate:
Residential properties
Single family	$	2,435	$	—	$	—	$	2,435	$	—
Commercial real estate loans		3,171		—		—		3,171		—
Commercial loans		—		250		638		888		630
Total	$	5,606	$	250	$	638	$	6,494	$	630

NOTE 6: GOODWILL AND CORE DEPOSIT INTANGIBLES

Goodwill is recorded upon completion of a business combination as the difference between the purchase price and the fair value of net identifiable assets acquired. Goodwill is deemed to have an indefinite useful life and as such is not subject to amortization and instead is tested for impairment annually unless a triggering event occurs thereby requiring an updated assessment. Our regular annual impairment assessment occurs in the fourth quarter. Impairment exists when the carrying value of the goodwill exceeds its fair value. An impairment loss would be recognized in an amount equal to that excess as a charge to noninterest expense in the consolidated income statements.

The closure of three large regional banks during the six months ended June 30, 2023, coupled with the drastic change in macroeconomic conditions and persistent rate increases by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) caused a significant decline in bank stock prices including our own. These triggering events required an updated assessment of our goodwill as of June 30, 2023, which concluded that our goodwill was impaired. As a result, we recorded a goodwill impairment charge equal to our entire goodwill balance of $215.3 million in the second quarter of 2023 as the estimated fair value of equity was less than book value. The updated assessment utilized three approaches, each receiving equal weighting: (1) the guideline public company (“GPC”) method which compares benchmarking data of the Company to a set of comparable GPCs; (2) the guideline transaction (“GT”) method utilizing financial results of the Company for the latest twelve months and comparing to publicly available transaction data, and (3) a discounted cash flow method, taking into consideration expectations of the Company’s growth and profitability going forward. The goodwill impairment is a non-cash charge and has no impact on our regulatory capital ratios, cash flows, or liquidity position.

Other intangible assets are deemed to have definite useful lives and as such are amortized over their estimated useful lives to their estimated residual values. Other intangible assets consist of core deposit intangible assets arising from whole bank acquisitions and are amortized on an accelerated method over their estimated useful lives, ranging from 7 to 10 years. At September 30, 2023 and December 31, 2022, core deposit intangible assets totaled $5.3 million and $6.6 million, respectively, and we recognized $0.4 million and $0.5 million in core deposit intangible amortization expense for the three month periods ended September 30, 2023 and September 30, 2022, respectively. Core deposit intangible

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

amortization expense for the nine month periods ended September 30, 2023 and September 30, 2022 totaled $1.2 million and $1.5 million, respectively.

NOTE 7: LOAN SALES AND MORTGAGE SERVICING RIGHTS

The Company retained servicing rights for the majority of the loans sold and recognized mortgage servicing rights in connection with multifamily loan sale transactions that occurred in 2021 and prior. As of September 30, 2023 and December 31, 2022, mortgage servicing rights were $5.6 million and $5.9 million respectively, net of valuation allowances of $8 thousand and $1.4 million, respectively. The amount of loans serviced for others totaled $986.7 million and $1.1 billion at September 30, 2023 and December 31, 2022. Servicing fees collected for the three month periods ended September 30, 2023 and September 30, 2022 were $0.6 million and $0.7 million, respectively. Servicing fees collected for the nine month periods ended September 30, 2023 and September 30, 2022 were $1.9 million and $2.3 million, respectively.

NOTE 8: DEPOSITS

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


	September 30, 2023				December 31, 2022
			Weighted				Weighted
(dollars in thousands)	Amount		Average Rate		Amount		Average Rate
Demand deposits:
Noninterest-bearing	$	2,412,670	—		$	2,736,691	—
Interest-bearing		2,275,351	3.353	%		2,568,850	3.109	%
Money market and savings		3,150,696	3.652	%		3,178,230	2.373	%
Certificates of deposit		2,973,477	4.594	%		1,878,841	3.741	%
Total	$	10,812,194	3.033	%	$	10,362,612	2.177	%

At September 30, 2023, of the $464 million of certificates of deposits of $250,000 or more, $457 million mature within one year and $7 million mature after one year. Of the $2.5 billion of certificates of deposit of less than $250,000, $1.4 billion mature within one year and $1.1 million mature after one year. At December 31, 2022, of the $436 million of certificates of deposits of $250,000 or more, $409 million mature within one year and $27 million mature after one year. Of the $1.4 billion of certificates of deposit of less than $250,000, $1.1 billion mature within one year and $345 million mature after one year.

NOTE 9: BORROWINGS

At September 30, 2023, our borrowings consisted of $800 million in FHLB putable advances at the Bank, $100 million of FHLB term advances at the Bank, $72 million in repurchase agreements at the Bank, and $12 million of borrowings under a holding company line of credit. At December 31, 2022 our borrowings consisted of $805 million in overnight FHLB advances at the Bank, $200 million in federal funds purchased at the Bank, $171 million in repurchase agreements at the Bank, and $20 million of borrowings under a holding company line of credit.

FHLB Advances

The FHLB putable advances outstanding at September 30, 2023 had a weighted average life of 5.75 years and a weighted average interest rate of 3.74%. The putable advances can be called quarterly until maturity at the option of the FHLB beginning in January 2024. The FHLB term advances bears an interest rate of 4.21% and matures on June 28, 2028. FHLB advances are collateralized primarily by loans secured by single family, multifamily, and commercial real estate properties with a carrying value of $5.4 billion as of September 30, 2023. The Bank’s total unused borrowing capacity from the FHLB as of September 30, 2023 was $2.0 billion. The Bank had in place $310 million of letters of credit

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

from the FHLB as of September 30, 2023, which are used to meet collateral requirements for deposits from the State of California and local agencies.

Federal Reserve Bank Borrowings:

The Bank has a secured line of credit with the Federal Reserve Bank of San Francisco (the “Federal Reserve Bank”) including the secured borrowing capacity through the Federal Reserve Bank’s Discount Window, Borrower-in-Custody (“BIC”), and Bank Term Funding (“BTFP”) programs. Borrowings under the BIC program are overnight advances with interest chargeable at the primary credit borrowing rate. Borrowings under the BTFP, which was established in March 2023, are for periods up to one year in length, with interest rates based on the one-year overnight index swap (“OIS”) rate plus a spread of 10 basis points. BTFP borrowings are collateralized by eligible investment securities valued at par and provide an additional source of liquidity. At September 30, 2023, the Bank had secured unused borrowing capacity of $880.7 million under this agreement. At September 30, 2023 and December 31, 2022, there were no balances outstanding under this agreement.

Uncommitted Credit Facilities:

The Bank has a total of $145.4 million in borrowing capacity through unsecured federal funds lines, ranging in size from $400 thousand to $100 million, with four correspondent financial institutions. At September 30, 2023, there were no balances outstanding under these arrangements. At December 31, 2022, the Bank had outstanding borrowings with one of the institutions under these arrangements totaling $100 million and an additional $100 million outstanding separate from these agreements with the same financial institution. The total $200 million outstanding at December 31, 2022 were in the form of federal funds purchased and were paid in full in early March, 2023.

Holding Company Line of Credit:

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 maturing in February 2024. The loan bears an interest rate of 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 the Bank. 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 September 30, 2023 and December 31, 2022, FFI was in compliance with the covenants contained in the loan agreement. As of September 30, 2023 and December 31, 2022, the balance outstanding under this line of credit agreement was $12 million and $20 million, respectively. The weighted average interest rate paid on borrowings during the nine months ended September 30, 2023 was 8.3%.

Repurchase Agreements:

The repurchase agreements are treated as overnight borrowings with the obligations to repurchase securities sold reflected as a liability. The investment securities underlying these agreements remain in the Company’s securities AFS portfolio. As of September 30, 2023 and December 31, 2022, the repurchase agreements are collateralized by investment securities with a fair value of approximately $71.0 million and $186.3 million, respectively.

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

NOTE 10: SUBORDINATED DEBT

At September 30, 2023 and December 31, 2022, FFI had two issuances of subordinated notes outstanding with an aggregate carrying value of $173.4 million. At September 30, 2023 and December 31, 2022, FFI was in compliance with all covenants under its subordinated debt agreements. The following table summarizes the outstanding subordinated notes as of the dates indicated:


		Current		Current			Carrying Value
	Stated	Interest		Principal			September 30,		December 31,
(dollars in thousands)	Maturity	Rate		Balance		2023		2022
Subordinated notes
Subordinated notes due 2032, 3.50% per annum until February 1, 2027, 3-month SOFR + 2.04% thereafter	February 1, 2032	3.50	%	$	150,000	$	147,998	$	147,817
Subordinated notes due 2030, 6.0% per annum until June 30, 2025, 3-month SOFR + 5.90% thereafter.	June 30, 2030	6.00	%		24,165		25,384		25,518
Total				$	174,165	$	173,382	$	173,335

NOTE 11: EARNINGS PER SHARE

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income or loss available to common shareholders 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 Company has excluded the effect of potential common shares used in the computation of diluted EPS for the nine months ended September 30, 2023 due to the net loss reported for such periods, as such losses are antidilutive by definition. The following table sets forth the Company’s unaudited earnings per share calculations for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended				Three Months Ended
	September 30, 2023				September 30, 2022
(dollars in thousands, except per share amounts)	Basic		Diluted		Basic		Diluted
Net income	$	2,180	$	2,180	$	29,006	$	29,006
Basic common shares outstanding		56,443,539		56,443,539		56,387,451		56,387,451
Effect of options, restricted stock and contingent shares issuable				6,181				60,450
Diluted common shares outstanding				56,449,720				56,447,901
Net income per share	$	0.04	$	0.04	$	0.51	$	0.51


	Nine Months Ended				Nine Months Ended
	September 30, 2023				September 30, 2022
(dollars in thousands, except share and per share amounts)	Basic		Diluted		Basic		Diluted
Net (loss) income	$	(201,612)	$	(201,612)	$	93,158	$	93,158
Basic common shares outstanding		56,417,252		56,417,252		56,441,305		56,441,305
Effect of options, restricted stock and contingent shares issuable				—				69,578
Diluted common shares outstanding				56,417,252				56,510,883
Net (loss) income per share	$	(3.57)	$	(3.57)	$	1.65	$	1.65

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED

NOTE 12: SEGMENT REPORTING

For the three and nine months ended September 30, 2023 and 2022, the Company had two reportable business segments: Banking and Investment Management and Wealth Planning (“Wealth Management”). Banking includes the operations of FFB, FFIS, FFPF, and Blue Moon Management LLC and Wealth Management includes the operations of FFA. The results of FFI and any elimination entries are included in the column labeled Other. The reportable segments are determined by products and services offered and the corporate structure. Business segment earnings before taxes are the primary measure of the segment’s performance as evaluated by management. Business segment earnings before taxes include direct revenue and expenses of the segment as well as corporate and inter-company cost allocations. Allocations of corporate expenses, such as finance and accounting, data processing and human resources are calculated based on estimated activity or usage levels. The management accounting process measures the performance of the operating segments based on the Company’s management structure and is not necessarily comparable with similar information for other financial services companies. If the management structures and/or the allocation process changes, allocations, transfers, and assignments may change. 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 September 30, 2023:
Interest income	$	144,765	$	—	$	—	$	144,765
Interest expense		90,960		—		1,732		92,692
Net interest income		53,805		—		(1,732)		52,073
Provision (reversal) for credit losses		(2,015)		—		—		(2,015)
Noninterest income		4,557		7,522		(381)		11,698
Noninterest expense		57,987		5,262		957		64,206
Income (loss) before income taxes		2,390		2,260		(3,070)		1,580
Income tax (benefit) expense		(409)		659		(850)		(600)
Net income (loss)	$	2,799	$	1,601	$	(2,220)	$	2,180

Three Months Ended September 30, 2022:
Interest income	$	108,746	$	—	$	—	$	108,746
Interest expense		19,281		—		1,793		21,074
Net interest income		89,465		—		(1,793)		87,672
Provision (reversal) for credit losses		(22)		—		—		(22)
Noninterest income		5,730		6,865		(411)		12,184
Noninterest expense		53,571		6,380		391		60,342
Income (loss) before income taxes		41,646		485		(2,595)		39,536
Income tax expense (benefit)		11,208		146		(824)		10,530
Net income (loss)	$	30,438	$	339	$	(1,771)	$	29,006

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FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2023 - UNAUDITED


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
Nine Months Ended September 30, 2023:
Interest income	$	427,093	$	—	$	—	$	427,093
Interest expense		261,948		—		5,333		267,281
Net interest income		165,145		—		(5,333)		159,812
Provision (reversal) for credit losses		(711)		—		—		(711)
Noninterest income		14,425		22,228		(1,178)		35,475
Noninterest expense
Goodwill impairment		215,252		—		—		215,252
Operating		160,332		16,944		3,782		181,058
(Loss) income before income taxes		(195,303)		5,284		(10,293)		(200,312)
Income tax expense (benefit)		2,672		1,552		(2,924)		1,300
Net (loss) income	$	(197,975)	$	3,732	$	(7,369)	$	(201,612)

Nine Months Ended September 30, 2022:
Interest income	$	277,861	$	—	$	—	$	277,861
Interest expense		29,170		—		4,720		33,890
Net interest income		248,691		—		(4,720)		243,971
Provision (reversal) for credit losses		(641)		—		—		(641)
Noninterest income		19,118		23,190		(1,297)		41,011
Noninterest expense		135,704		19,213		1,848		156,765
Income (loss) before income taxes		132,746		3,977		(7,865)		128,858
Income tax expense (benefit)		36,816		1,168		(2,284)		35,700
Net income (loss)	$	95,930	$	2,809	$	(5,581)	$	93,158

NOTE 13: SUBSEQUENT EVENTS

Cash Dividend

On October 26, 2023, the Company announced that its Board of Directors approved the payment of a quarterly cash dividend of $0.01 per common share to be paid on November 16, 2023 to shareholders of record as of the close of business on November 6, 2023.

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

The following discussion and analysis is intended to facilitate the understanding and assessment of significant changes and trends in our businesses that accounted for the changes in our results of operations in the three and nine months ended September 30, 2023 as compared to our results of operations in the three and nine months ended September 30, 2022; and our financial condition at September 30, 2023 as compared to our financial condition at December 31, 2022. 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, 2022, and the notes thereto, which are set forth in Item 8 of our Annual Report on Form 10-K (as amended “2022 10-K”) which we filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023 and amended on May 1, 2023.

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. As a result of those risks and uncertainties, our actual financial results in the future could differ, possibly materially, from those expressed in or implied by the forward-looking statements contained in this report and could cause us to make changes to our future plans.

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 2022 10-K and Item 1A of Part II of this report. Therefore, you are urged to read not only the information contained in this Item 2, but also the risk factors and other cautionary information contained under the heading “Risk Factors” in our 2022 10-K and in Item 1A of Part II of this report, which qualify the forward-looking statements contained in this report.

Also, our actual results in the future may differ from those currently expected due to additional risks and uncertainties of which we are not currently aware or which we do not currently view as, but in the future may become, material to our business or operating results. Due to these 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 2022 10-K, except as may otherwise be required by applicable law or government regulations.

Critical Accounting Policies

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

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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. Management has identified our most critical accounting policies and accounting estimates as: allowance for credit losses – investment securities, allowance for credit losses – loans, and deferred income taxes.

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 we deem a security to no longer possess shared risk characteristics. Under ASC 326-20, for investment securities where we have 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, we first evaluate whether we intend to sell, or whether it is more likely than not that we 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, we are 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, we consider 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, we record the decline in fair value through other comprehensive income, net of related income tax effects. We have made the election to exclude accrued interest receivable on securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met. See Note 3, “Securities” for additional information related to our allowance for credit losses on securities AFS.

Allowance for Credit Losses - Loans. Our ACL for loans 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 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 in our loan portfolios.

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

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

Overview and Recent Developments

At September 30, 2023, the Company had total assets of $13.1 billion, including $10.3 billion of total loans, net of deferred fees and allowance for credit losses, $0.8 billion of cash and cash equivalents, $0.8 billion in investment securities held-to-maturity, and $0.8 billion in investment securities available-for-sale. This compares to total assets of $13.0 billion, including $10.7 billion of total loans, net of deferred fees and allowance for credit losses, $0.7 billion of cash and cash equivalents, $0.9 billion in investment securities held-to-maturity, and $0.2 billion in investment securities available-for-sale at December 31, 2022. The $0.1 billion increase in total assets since year-end was primarily due to the $0.6 billion increase in investment securities available-for-sale, offset by the $0.4 billion decrease in total loans, net of deferred fees and allowance for credit losses. The $0.6 billion increase in investment securities available-for-sale is primarily the result of the purchase of $0.4 billion in U.S. treasury securities and $0.2 billion in GNMA mortgage-backed securities during the quarter ended September 30, 2023. The $0.4 billion decrease in total loans, net of deferred fees and allowance for credit losses is primarily the result of $1.2 billion in loan originations offset by $1.6 billion in loan payoffs and paydowns for the nine months ended September 30, 2023.

At September 30, 2023, the Company had total liabilities of $12.1 billion, including $10.8 billion in deposits, and $1.2 billion in borrowings and subordinated debt. This compares to total liabilities of $11.9 billion, including $10.4 billion in deposits and $1.4 billion in borrowings and subordinated debt at December 31, 2022. The $0.2 billion increase in total liabilities since year-end was primarily due to the $0.4 billion increase in deposits, offset by the $0.2 billion decrease in borrowings and subordinated debt. Deposits increased $0.4 billion as deposit inflows and outflows normalized following the banking industry events in the first half of the year. Borrowings decreased $0.2 billion as the increase in deposits provided the opportunity to paydown borrowings.

At September 30, 2023, the Company had total shareholders’ equity of $0.9 billion, compared to $1.1 billion at December 31, 2022. The $0.2 billion decrease in shareholders’ equity since year-end is largely due to the $201.6 million net loss for the nine months ended September 30, 2023, which includes the $215.3 million goodwill impairment charge recorded in the quarter ended June 30, 2023. During the nine months ended September 30, 2023, shareholder’s equity activity also included dividends paid to shareholders for the fourth quarter of 2022, first quarter of 2023, and second quarter of 2023 of $6.2 million, $1.1 million, and $1.1 million, respectively, and $5.9 million decrease in other comprehensive income (loss) due to net unrealized losses on investment securities arising during the period.

Results of Operations

The primary sources of revenue for Banking are net interest income, fees from its deposits and trust services, 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”). Customer service costs and compensation and benefits constitute the largest components of noninterest expense accounting for 38% and 31% of total combined noninterest expense, respectively.

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


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
2023:
Interest income	$	144,765	$	—	$	—	$	144,765
Interest expense		90,960		—		1,732		92,692
Net interest income		53,805		—		(1,732)		52,073
Provision (reversal) for credit losses		(2,015)		—		—		(2,015)
Noninterest income		4,557		7,522		(381)		11,698
Noninterest expense		57,987		5,262		957		64,206
Income (loss) before income taxes		2,390		2,260		(3,070)		1,580
Income tax (benefit) expense		(409)		659		(850)		(600)
Net income (loss)	$	2,799	$	1,601	$	(2,220)	$	2,180

2022:
Interest income	$	108,746	$	—	$	—	$	108,746
Interest expense		19,281		—		1,793		21,074
Net interest income		89,465		—		(1,793)		87,672
Provision (reversal) for credit losses		(22)		—		—		(22)
Noninterest income		5,730		6,865		(411)		12,184
Noninterest expense		53,571		6,380		391		60,342
Income (loss) before income taxes		41,646		485		(2,595)		39,536
Income tax expense (benefit)		11,208		146		(824)		10,530
Net income (loss)	$	30,438	$	339	$	(1,771)	$	29,006

Third Quarter of 2023 Compared to Third Quarter of 2022

Combined net income for the third quarter of 2023 was $2.2 million, compared to net income of $29.0 million for the third quarter of 2022. Combined net income before taxes for the third quarter of 2023 was $1.6 million, compared to net income of $39.5 million for the third quarter of 2022. The $37.9 million decrease in combined net income before taxes from the year-ago quarter was primarily due to a decrease in net income before taxes in the Banking segment of $39.3 million, resulting primarily from a $35.7 million decrease in net interest income, and an increase in noninterest expense of $4.4 million. Wealth Management net income before taxes was $2.3 million for the third quarter of 2023, compared to $0.5 million for the third quarter of 2022. The $1.8 million increase in Wealth Management net income before taxes from the year-ago quarter was primarily due to an increase in noninterest income of $0.7 million and a decrease in noninterest expense of $1.1 million. Net interest income, noninterest income, and noninterest expense are discussed in more detail in the tables that follow.

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


			Wealth
(dollars in thousands)	Banking		Management		Other		Total
2023:
Interest income	$	427,093	$	—	$	—	$	427,093
Interest expense		261,948		—		5,333		267,281
Net interest income		165,145		—		(5,333)		159,812
Provision (reversal) for credit losses		(711)		—		—		(711)
Noninterest income		14,425		22,228		(1,178)		35,475
Noninterest expense
Goodwill impairment		215,252		—		—		215,252
Operating		160,332		16,944		3,782		181,058
(Loss) income before income taxes		(195,303)		5,284		(10,293)		(200,312)
Income tax expense (benefit)		2,672		1,552		(2,924)		1,300
Net (loss) income	$	(197,975)	$	3,732	$	(7,369)	$	(201,612)

2022:
Interest income	$	277,861	$	—	$	—	$	277,861
Interest expense		29,170		—		4,720		33,890
Net interest income		248,691		—		(4,720)		243,971
Provision (reversal) for credit losses		(641)		—		—		(641)
Noninterest income		19,118		23,190		(1,297)		41,011
Noninterest expense		135,704		19,213		1,848		156,765
Income (loss) before income taxes		132,746		3,977		(7,865)		128,858
Income tax expense (benefit)		36,816		1,168		(2,284)		35,700
Net income (loss)	$	95,930	$	2,809	$	(5,581)	$	93,158

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Combined net loss for the nine months ended September 30, 2023 was $201.6 million, compared to net income of $93.2 million for the nine months ended September 30, 2022. Combined net loss before taxes for the nine months ended September 30, 2023 was $200.3 million, compared to net income of $128.9 million for the nine months ended September 30, 2022. The $329.2 million decrease in combined net income before taxes from the year-ago period was primarily due to a decrease in net income before taxes in the Banking segment of $328.0 million, resulting primarily from the $215.3 million goodwill impairment charge which was recorded in the quarter ended June 30, 2023, a decrease in net interest income of $83.5 million, a decrease in noninterest income of $4.7 million, and an increase in operating noninterest expense of $24.6 million. Net interest income, noninterest income, and noninterest expense are discussed in more detail in the tables that follow. The increase in Wealth Management net income before taxes of $1.3 million was due to a $2.3 million decrease in operating noninterest expense, offset by a $1.0 million decrease in asset management fee income, classified as part of noninterest income.

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. For the three months ended September 30, 2023, we recorded a reversal of provision for credit losses of $2.0 million, compared to a reversal of provision for credit losses in the amount of $22 thousand for the year-ago period. The decrease in provision for credit losses for the three months ended September 30, 2023, was due primarily to a reversal of provision for credit losses on the loan portfolio. During the quarter, the allowance for credit losses on the loan portfolio decreased by $2.3

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million due primarily to a reduction in the calculated allowance required due to the loan portfolio’s natural attrition, reduction in the allowance associated with impaired and purchase credit deteriorated (“PCD”) loans due to payoffs or updated valuations, and a reduction in the allowance for unfunded commitments, offset by an increase in the qualitative reserve to reflect the impact of current market conditions and the continued high market interest rate environment. The decrease in provision for credit losses in the year-ago period was a result of improvement in the economic outlook at that time.

For the nine months ended September 30, 2023, we recorded a reversal of provision for credit losses of $0.7 million, compared to a reversal of provision for credit losses in the amount of $0.6 million for the year-ago period. The decrease in provision for credit losses for the nine months ended September 30, 2023, was due to a net decrease in loan portfolio credit losses, offset by a net increase in investment portfolio credit losses. The decrease in provision for credit losses in the year-ago period was a result of improvement in the economic outlook at that time.

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 September 30:
	2023						2022
	Average				Average		Average				Average
(dollars in thousands)	Balances		Interest		Yield /Rate		Balances		Interest		Yield /Rate
Interest-earning assets:
Loans	$	10,472,309	$	124,363	4.73	%	$	9,910,051	$	100,978	4.07	%
Securities AFS		501,625		6,068	4.84	%		258,654		2,066	3.19	%
Securities HTM		805,370		4,532	2.25	%		898,932		4,687	2.09	%
Cash, FHLB stock, and fed funds		866,707		9,802	4.49	%		229,798		1,015	1.75	%
Total interest-earning assets		12,646,011		144,765	4.56	%		11,297,435		108,746	3.84	%
Noninterest-earning assets:
Nonperforming assets		9,035						11,119
Other		249,021						457,965
Total assets	$	12,904,067					$	11,766,519
Interest-bearing liabilities:
Demand deposits	$	2,350,353	$	22,240	3.75	%	$	2,336,215	$	6,904	1.17	%
Money market and savings		3,136,053		28,275	3.58	%		2,928,102		6,652	0.90	%
Certificates of deposit		2,926,119		34,299	4.65	%		690,699		2,039	1.17	%
Total interest-bearing deposits		8,412,525		84,814	4.00	%		5,955,016		15,595	1.04	%
Borrowings		587,205		6,158	4.16	%		659,860		3,686	2.22	%
Subordinated debt		173,372		1,720	3.94	%		173,311		1,793	4.10	%
Total interest-bearing liabilities		9,173,102		92,692	4.01	%		6,788,187		21,074	1.23	%
Noninterest-bearing liabilities:
Demand deposits		2,676,340						3,742,460
Other liabilities		138,011						125,943
Total liabilities		11,987,453						10,656,590
Shareholders’ equity		916,614						1,109,929
Total liabilities and equity	$	12,904,067					$	11,766,519
Net Interest Income			$	52,073					$	87,672
Net Interest Rate Spread					0.55	%					2.61	%
Net Interest Margin					1.66	%					3.10	%

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	Nine Months Ended September 30:
	2023						2022
	Average				Average		Average				Average
(dollars in thousands)	Balances		Interest		Yield /Rate		Balances		Interest		Yield /Rate
Interest-earning assets:
Loans	$	10,568,012	$	368,477	4.65	%	$	8,654,252	$	255,037	3.93	%
Securities AFS		331,449		10,845	4.36	%		466,903		9,013	2.57	%
Securities HTM		828,952		13,418	2.16	%		723,941		10,720	1.97	%
FHLB stock, fed funds and deposits		1,038,722		34,353	4.42	%		666,925		3,091	0.62	%
Total interest-earning assets		12,767,135		427,093	4.47	%		10,512,021		277,861	3.53	%
Noninterest-earning assets:
Nonperforming assets		14,341						10,571
Other		402,266						448,218
Total assets	$	13,183,742					$	10,970,810
Interest-bearing liabilities:
Demand deposits	$	2,384,829	$	60,491	3.39	%	$	2,385,554	$	10,824	0.61	%
Money market and savings		3,131,660		75,323	3.22	%		2,728,660		11,225	0.55	%
Certificates of deposit		2,548,552		84,072	4.41	%		663,969		3,244	0.65	%
Total interest-bearing deposits		8,065,041		219,886	3.65	%		5,778,183		25,293	0.59	%
Borrowings		1,163,249		42,280	4.86	%		328,293		3,881	1.59	%
Subordinated debt		173,356		5,115	3.94	%		160,862		4,716	3.90	%
Total interest-bearing liabilities		9,401,646		267,281	3.80	%		6,267,338		33,890	0.72	%
Noninterest-bearing liabilities:
Demand deposits		2,588,053						3,514,047
Other liabilities		134,791						102,142
Total liabilities		12,124,490						9,883,527
Shareholders’ equity		1,059,252						1,087,283
Total liabilities and equity	$	13,183,742					$	10,970,810
Net Interest Income			$	159,812					$	243,971
Net Interest Rate Spread					0.67	%					2.81	%
Net Interest Margin					1.67	%					3.10	%

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Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by prior volume) and mix of interest-earning assets and interest-bearing liabilities. Variances attributable to both rate and volume changes, calculated by multiplying the change in rates by the change in average balances, have been allocated to the rate variance. The following table provides a breakdown of the changes in net interest income due to volume and rate changes for the three and nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022:


	Quarter Ended							Nine Months Ended
	September 30, 2023 vs. 2022						September 30, 2023 vs. 2022
	Increase (Decrease) due to						Increase (Decrease) due to
(dollars in thousands)	Volume		Rate		Total		Volume		Rate		Total
Interest earned on:
Loans	$	6,095	$	17,290	$	23,385	$	62,053	$	51,389	$	113,442
Securities AFS		2,585		1,417		4,002		(3,135)		4,967		1,832
Securities HTM		(510)		355		(155)		1,645		1,054		2,699
Cash, FHLB stock, and fed funds		5,648		3,139		8,787		2,603		28,657		31,260
Total interest-earning assets		13,818		22,201		36,019		63,166		86,067		149,233
Interest paid on:
Demand deposits		168		15,169		15,337		(3)		49,672		49,669
Money market and savings		678		20,944		21,622		1,898		62,200		64,098
Certificates of deposit		16,941		15,319		32,260		26,702		54,126		80,828
Borrowings		(421)		2,893		2,472		21,228		17,145		38,373
Subordinated debt		—		(73)		(73)		368		57		425
Total interest-bearing liabilities		17,366		54,252		71,618		50,193		183,200		233,393
Net interest (expense) income	$	(3,548)	$	(32,051)	$	(35,599)	$	12,973	$	(97,133)	$	(84,160)

Net interest income was $52.1 million for the three months ended September 30, 2023, compared to $87.7 million for the three months ended September 30, 2022. The overall decrease in net interest income from the year-ago period was primarily driven by rates on interest-bearing liabilities increasing faster than rates on interest-earning assets, and interest-bearing liability balances increasing at a higher rate than those of interest-earning assets. Interest income increased to $144.8 million for the three months ended September 30, 2023 compared to $108.7 million for the three months ended September 30, 2022. The increase in interest income was due to increases in both average interest-earning asset balances as well as average yields earned on such balances. Average interest-earning asset balances increased 12% to $12.6 billion for the three months ended September 30, 2023, compared to $11.3 billion for the three months ended September 30, 2022. Yields on interest-earning assets averaged 4.56% for the three months ended September 30, 2023, compared to 3.84% for the three months ended September 30, 2022. Interest expense increased to $92.7 million for the three months ended September 30, 2023 compared to $21.1 million for the three months ended September 30, 2022. The increase in interest expense was due to increases in both average interest-bearing liability balances as well as average rates paid on such balances. Average interest-bearing liability balances, consisting of interest-bearing deposits and borrowings, increased 35% to $9.2 billion for the three months ended September 30, 2023, compared to $6.8 billion for the three months ended September 30, 2022. Rates on interest-bearing liability balances averaged 4.01% for the three months ended September 30, 2023, compared to 1.23% for the three months ended September 30, 2022.

The 0.72% increase in average yield earned on interest-earning assets was offset by a 2.78% increase in average rate paid on interest-bearing liability balances, resulting in a contraction of net interest margin (“NIM”) for the three months ended September 30, 2023. NIM was 1.66% for the three months ended September 30, 2023 compared to 3.10% for the three months ended September 30, 2022. Yields on interest-earning assets increased primarily due to an increase in yields earned on new loan fundings. Yields on new loan fundings averaged 8.35% for the three months ended September 30, 2023, compared to 4.63% for the three months ended September 30, 2022. Rates paid on interest-bearing liabilities increased primarily due to an increase in rates paid on interest-bearing deposit accounts, which averaged 4.00% for the three months ended September 30, 2023, compared to 1.04% for the three months ended September 30, 2022. Rates paid on borrowings also increased to 4.16% for the three months September 30, 2023, compared to 2.22% for the three months ended September 30, 2022. The increase in rates paid on borrowings was offset by a decrease in average borrowings outstanding for the three months ended September 30, 2023 to $587.2 million compared to $659.9 million for the three

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months ended September 30, 2022. The increases in the rates paid on interest-bearing deposit accounts and borrowings were due to the significant increase in market interest rates over the prior year. The decrease in average borrowings was due to the paydown of additional borrowings which were used to increase on-balance sheet liquidity following the banking industry events which followed the announced closures of three regional banks in the first half of the year. As deposit flows stabilized, these additional borrowings were paid down largely beginning in the end of the second quarter and continuing throughout the third quarter of 2023.

Net interest income was $159.8 million for the nine months ended September 30, 2023, compared to $244.0 million for the nine months ended September 30, 2022. The overall decrease in net interest income from the year-ago period was primarily driven by rates on interest-bearing liabilities increasing faster than rates on interest-earning assets, and interest-bearing liability balances increasing at a higher rate than those of interest-earning assets. Interest income increased to $427.1 million for the nine months ended September 30, 2023 compared to $277.9 million for the nine months ended September 30, 2022. The increase in interest income was due to increases in both average interest-earning asset balances as well as average yields earned on such balances. Average interest-earning asset balances increased 21% to $12.8 billion for the nine months ended September 30, 2023, compared to $10.5 billion for the nine months ended September 30, 2022. Yields on interest-earning assets averaged 4.47% for the nine months ended September 30, 2023, compared to 3.53% for the nine months ended September 30, 2022. Interest expense increased to $267.3 million for the nine months ended September 30, 2023 compared to $33.9 million for the nine months ended September 30, 2022. The increase in interest expense was due to increases in both average interest-bearing liability balances as well as average rates paid on such balances. Average interest-bearing liability balances, consisting primarily of interest-bearing deposits and borrowings, increased 50% to $9.4 billion for the nine months ended September 30, 2023, compared to $6.3 billion for the nine months ended September 30, 2022. Rates on interest-bearing liability balances averaged 3.80% for the nine months ended September 30, 2023, compared to 0.72% for the nine months ended September 30, 2022.

The 0.94% increase in average yield earned on interest-earning assets was offset by a 3.08% increase in average rate paid on interest-bearing liability balances, resulting in a contraction of NIM for the nine months ended September 30, 2023. NIM was 1.67% for the nine months ended September 30, 2023 compared to 3.10% for the nine months ended September 30, 2022. Yields on interest-earnings assets increased primarily due to an increase in yields earned on new loan fundings. Yields on new loan fundings averaged 7.79% for the nine months ended September 30, 2023, compared to 3.93% for the nine months ended September 30, 2022. Rates paid on interest-bearing liabilities increased primarily due to an increase in rates paid on interest-bearing deposit accounts, which averaged 3.65% for the nine months ended September 30, 2023, compared to 0.59% for the nine months ended September 30, 2022. Rates paid on borrowings also increased to 4.86% for the nine months ended September 30, 2023, compared to 1.59% for the nine months ended September 30, 2022. Average borrowings for the nine months ended September 30, 2023 were $1.2 billion, compared to $328.3 million for the nine months ended September 30, 2022. The increases in the rates paid on interest-bearing deposit accounts and borrowings were due to the significant increase in market rates over the prior year. The increase in average borrowings was due to additional borrowings being used to increase on-balance sheet liquidity, following the banking industry events that followed the announced closures of three regional banks in the first half of the year. As deposit flows stabilized, these additional borrowings were paid down largely beginning in the end of the second quarter and continuing throughout the third quarter of 2023.

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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, 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 and nine months ended September 30, 2023 and 2022:


(dollars in thousands)	2023		2022
Three Months Ended September 30:
Trust fees	$	1,492	$	2,034
Loan related fees		1,765		2,071
Deposit charges		502		564
Consulting fees		85		100
Other		713		961
Total noninterest income	$	4,557	$	5,730

Nine Months Ended September 30:
Trust fees	$	5,039	$	6,291
Loan related fees		5,438		6,704
Deposit charges		1,530		1,873
Gain on sale leaseback		—		1,123
Consulting fees		266		295
Other		2,152		2,832
Total noninterest income	$	14,425	$	19,118

Noninterest income in Banking was $4.6 million for the third quarter of 2023, compared to $5.7 million for the third quarter of 2022. The $1.1 million decrease in noninterest income in Banking was due primarily to a $0.5 million decrease in trust fees and a $0.3 million decrease in loan related fees. The decrease in trust fees was due to a decrease in average fees earned on trust assets under advisement. Trust asset balances under advisement remained constant at $1.2 billion as of September 30, 2023, compared to September 30, 2022. The decrease in loan related fees was due to a decrease in prepayment fees, as early payoffs of loans decreased from year-ago levels. Noninterest income in Banking was $14.4 million for the nine months ended September 30, 2023, compared to $19.1 million for the nine months ended September 30, 2022. The $4.7 million decrease in noninterest income in Banking was due primarily to a $1.1 million gain on sale leaseback transaction recorded in the year-ago period, a $1.3 million decrease in trust fees, and a $1.3 million decrease in loan related fees. The decrease in trust fees was due to a decrease in average fees earned on trust assets under advisement,. The decrease in loan related fees was due to a decrease in other loan fees.

Noninterest income for Wealth Management includes fees charged to high net-worth clients for managing their assets and for providing financial planning consulting services. The following table provides the amounts of noninterest income for Wealth Management for the three and nine months ended September 30, 2023 and 2022:


(dollars in thousands)	2023		2022
Three Months Ended September 30:
Noninterest income	$	7,522	$	6,865

Nine Months Ended September 30:
Noninterest income	$	22,228	$	23,190

Noninterest income for Wealth Management was $7.5 million for the third quarter of 2023, compared to $6.9 million for the third quarter of 2022. The $0.6 million decrease in noninterest income for Wealth Management was due primarily to a $0.3 million loss on sale of securities transaction recorded in the year-ago period. Noninterest income for Wealth Management was $22.2 million for the nine months ended September 30, 2023, compared to $23.2 million for the nine months ended September 30, 2022. The $1.0 million decrease in noninterest income for the nine months ended September 30, 2023 compared to the year-ago period was due primarily to a decrease in average fees earned on AUM balances as the portfolio composition changed from equities which earn higher fees to fixed income funds which earn lower fees.

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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 September 30, 2023:
Fixed income	$	1,892,454	$	(53,242)	$	48,733	$	(40,827)	$	(39,274)	$	1,807,844
Equities		2,673,182		(56,911)		26,205		(125,670)		(97,072)		2,419,734
Cash and other		753,327		54,790		1,981		(25,937)		11,150		795,311
Total	$	5,318,963	$	(55,363)	$	76,919	$	(192,434)	$	(125,196)	$	5,022,889

Nine Months Ended September 30, 2023:
Fixed income	$	1,699,554	$	87,816	$	113,148	$	(94,951)	$	2,277	$	1,807,844
Equities		2,383,268		(161,622)		69,937		(172,003)		300,154		2,419,734
Cash and other		902,455		(184,133)		57,283		(35,754)		55,460		795,311
Total	$	4,985,277	$	(257,939)	$	240,368	$	(302,708)	$	357,891	$	5,022,889

Year Ended December 31, 2022:
Fixed income	$	1,303,760	$	451,841	$	154,827	$	(30,428)	$	(180,446)	$	1,699,554
Equities		3,330,639		(87,881)		108,003		(78,785)		(888,708)		2,383,268
Cash and other		1,046,206		(422,405)		305,747		(58,248)		31,155		902,455
Total	$	5,680,605	$	(58,445)	$	568,577	$	(167,461)	$	(1,037,999)	$	4,985,277

The $0.3 billion decrease in AUM during the three months ended September 30, 2023 was the result of $247.8 million in terminations and net withdrawals, $125.2 million in performance losses, offset by $76.9 million in new accounts. AUM balances for the nine months ended September 30, 2023 remained relatively unchanged at $5.0 billion, compared to balances as of December 31, 2022.

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)	2023		2022		2023		2022
Three Months Ended September 30:
Compensation and benefits	$	15,571	$	24,208	$	3,835	$	5,003
Occupancy and depreciation		8,798		9,158		455		436
Professional services and marketing		2,430		2,418		853		774
Customer service costs		24,683		13,560		—		—
Other		6,505		4,227		119		167
Total noninterest expense	$	57,987	$	53,571	$	5,262	$	6,380

Nine Months Ended September 30:
Compensation and benefits	$	52,515	$	71,051	$	12,453	$	15,016
Occupancy and depreciation		25,901		25,627		1,430		1,348
Professional services and marketing		7,180		6,998		2,569		2,319
Customer service costs		60,402		19,959		—		—
Other		14,334		12,069		492		530
Total operating expense		160,332		135,704		16,944		19,213
Goodwill impairment		215,252		—		—		—
Total noninterest expense	$	375,584	$	135,704	$	16,944	$	19,213

Noninterest expense in Banking was $58.0 million for the third quarter of 2023, compared to $53.6 million for the third quarter of 2022. The $4.4 million increase in noninterest expense in Banking was largely due to a $11.1 million increase in customer service costs, offset by a $8.6 million decrease in compensation and benefits. The increase in customer service costs was due to an increase in depository account balances receiving earnings credit as well as an increase in the rates paid on such accounts. The higher earnings credits paid are due to the increase in interest rates resulting from the Federal Reserve Board interest rate hikes over the past year. The decrease in compensation and benefit costs was primarily

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due to decreased staffing levels during the third quarter of 2023, compared to levels during the third quarter of 2022. Average quarterly Banking full-time equivalents (“FTEs”) were 508.5 for the third quarter of 2023, compared to 648.7 for the third quarter of 2022. Staffing levels were reduced in the first and second quarters of 2023, due to continued efforts to maximize efficiency and contain costs.

Noninterest expense in Wealth Management was $5.3 million for the third quarter of 2023, compared to $6.4 million for the third quarter of 2022. The $1.1 million decrease in noninterest expense in Wealth Management was largely due to a $1.2 million decrease in compensation and benefits, offset by a $0.1 million increase in other noninterest expense. The decrease in compensation and benefit costs was primarily due to a decrease in commission expense resulting from a fewer number of new accounts compared to the year-ago quarter, as well as a decrease in staffing levels. Average quarterly Wealth Management FTEs decreased slightly to 64.5 for the third quarter of 2023, compared to 68.5 for the third quarter of 2022.

Noninterest expense in Banking was $375.6 million for the nine months ended September 30, 2023, compared to $135.7 million for the nine months ended September 30, 2022. The $375.6 million in noninterest expense for the nine months ended September 30, 2023 included a non-cash goodwill impairment charge of $215.3 million, which was recorded in the second quarter. Excluding this one-time charge, operating noninterest expense totaled $160.3 million for the nine months ended September 30, 2023, compared to $135.7 million for the nine months ended September 30, 2022. The $24.6 million increase in operating noninterest expense in Banking was largely due to a $40.4 million increase in customer service costs, offset by a $18.5 million decrease in compensation and benefits. The increase in customer service costs was due to higher earnings credits paid on deposit balances earning such credits. The higher earnings credits paid are due to the increase in interest rates resulting from the Federal Reserve Board interest rate hikes over the past year. The decrease in compensation and benefit costs was primarily due to decreased staffing levels during the nine months ended September 30, 2023, compared to levels during the nine months ended September 30, 2022. Average Banking FTEs were 551.2 for the nine months ended September 30, 2023, compared to 647.2 for the nine months ended September 30, 2022. Staffing levels were reduced in the first and second quarters of 2023, due to continued efforts to maximize efficiency and contain costs.

Noninterest expense in Wealth Management was $16.9 million for the nine months ended September 30, 2023, compared to $19.2 million for the nine months ended September 30, 2022. The $2.3 million decrease in noninterest expense in Wealth Management was largely due to a $2.6 million decrease in compensation and benefits, offset by a $0.3 million increase in professional services and marketing expense. The decrease in compensation and benefit costs was primarily due to a decrease in commission expense resulting from a fewer number of new accounts compared to the year-ago period. Average Wealth Management FTEs were 66.2 for the nine months ended September 30, 2023, compared to 66.8 for the nine months ended September 30, 2022.

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Financial Condition

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


			Wealth		Other and
(dollars in thousands)	Banking		Management		Eliminations		Total
September 30, 2023:
Cash and cash equivalents	$	818,041	$	1,552	$	(1,092)	$	818,501
Securities AFS, net		821,701		—		—		821,701
Securities HTM		800,742		—		—		800,742
Loans, net		10,254,158		—		—		10,254,158
Accrued interest receivable		51,303		—		—		51,303
Premises and equipment		38,906		161		136		39,203
Investment in FHLB stock		24,610		—		—		24,610
Deferred taxes		31,080		146		1,564		32,790
Real estate owned ("REO")		6,210		—		—		6,210
Core deposit intangibles		5,337		—		—		5,337
Other assets		166,875		428		29,706		197,009
Total assets	$	13,018,963	$	2,287	$	30,314	$	13,051,564

Deposits	$	10,825,499	$	—	$	(13,305)	$	10,812,194
Borrowings		972,289		—		12,000		984,289
Subordinated debt		—		—		173,382		173,382
Intercompany balances		10,717		(11,113)		396		—
Accounts payable and other liabilities		145,149		2,396		14,947		162,492
Shareholders’ equity		1,065,309		11,004		(157,106)		919,207
Total liabilities and equity	$	13,018,963	$	2,287	$	30,314	$	13,051,564

December 31, 2022:
Cash and cash equivalents	$	656,247	$	16,757	$	(16,510)	$	656,494
Securities AFS, net		226,158		—		—		226,158
Securities HTM		862,544		—		—		862,544
Loans, net		10,692,462		—		—		10,692,462
Accrued interest receivable		51,359		—		—		51,359
Premises and equipment		35,788		216		136		36,140
Investment in FHLB stock		25,358		—		—		25,358
Deferred taxes		19,671		78		4,449		24,198
Real estate owned ("REO")		6,210		—		—		6,210
Goodwill		215,252		—		—		215,252
Core deposit intangibles		6,583		—		—		6,583
Other assets		182,262		428		28,731		211,421
Total assets	$	12,979,894	$	17,479	$	16,806	$	13,014,179

Deposits	$	10,403,205	$	—	$	(40,593)	$	10,362,612
Borrowings		1,176,601		—		20,000		1,196,601
Subordinated debt		—		—		173,335		173,335
Intercompany balances		1,001		971		(1,972)		—
Accounts payable and other liabilities		125,254		4,392		17,607		147,253
Shareholders’ equity		1,273,833		12,116		(151,571)		1,134,378
Total liabilities and equity	$	12,979,894	$	17,479	$	16,806	$	13,014,179

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.

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During the nine months ended September 30, 2023, total assets decreased by $37 million primarily due to a $216 million decrease in goodwill and intangibles, and a $442 million decrease in loans, offset by a $534 million increase in net securities and a $162 million increase in cash and cash equivalents. The $216 million decrease in goodwill and intangibles was largely the result of a $215.3 million non-cash goodwill impairment charge recorded during the second quarter of 2023. Cash and cash equivalents represented approximately 6.3% of total assets as of September 30, 2023. Loans decreased $442 million, the result of $1.2 billion in loan fundings for the nine months ended September 30, 2023 offset by loan payoffs and paydowns of $1.6 billion for the nine months ended September 30, 2023. Combined investment securities (AFS and HTM) balances net of allowance for credit losses increased by $534 million, largely the result of the purchase of $617 million (net of discount) in U.S. Treasury and GNMA mortgage-backed securities in the third quarter of 2023, offset by $76 million in principal collections received. Deposits increased by $450 million, the result of increases in wholesale, corporate, and digital bank deposits of $1.3 billion, $471 million, and $176 million respectively, offset by decreases in retail, and specialty deposits of $791 million and $694 million respectively. Borrowings decreased by $212 million, as the increase in deposits provided the opportunity to paydown borrowings.

Cash and cash equivalents. Cash and cash equivalents consist primarily of funds held at the Federal Reserve Bank or at correspondent banks, including fed funds. 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 and Federal Reserve Bank advances and FFI borrowings. Cash and cash equivalents increased by $162 million during the nine months ended September 30, 2023, compared to December 31, 2022, and represented approximately 6.3% of total assets, compared to 5.0% of total assets as of December 31, 2022.

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


	Amortized		Gross Unrealized				Allowance for		Estimated
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Fair Value
September 30, 2023:
Collateralized mortgage obligations	$	9,084	$	—	$	(1,543)	$	—	$	7,541
Agency mortgage-backed securities		234,305		—		(1,457)		—		232,848
Municipal bonds		49,579		—		(5,426)		(1)		44,152
SBA securities		14,807		2		(113)		—		14,696
Beneficial interests in FHLMC securitization		14,696		89		(336)		(7,098)		7,351
Corporate bonds		138,897		—		(16,044)		(1,391)		121,462
U.S. Treasury		394,004		—		(353)		—		393,651
Total	$	855,372	$	91	$	(25,272)	$	(8,490)	$	821,701

December 31, 2022:
Collateralized mortgage obligations	$	9,865	$	—	$	(1,250)	$	—	$	8,615
Agency mortgage-backed securities		8,161		—		(585)		—		7,576
Municipal bonds		50,232		—		(3,442)		—		46,790
SBA securities		19,090		3		(138)		—		18,955
Beneficial interest in FHLMC securitization		19,415		108		(103)		(11,439)		7,981
Corporate bonds		145,024		—		(10,011)		—		135,013
U.S. Treasury		1,298		1		(71)		—		1,228
Total	$	253,085	$	112	$	(15,600)	$	(11,439)	$	226,158

As of September 30, 2023, U.S. Treasury securities of $393.7 million included in the table above are pledged as collateral to the States of California and Florida to meet regulatory requirements related to the Bank’s trust operations, and $225.7 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. A total of $71.0 million in SBA and agency mortgage-backed securities are pledged as collateral for repurchase agreements. A total of $880.7 million in SBA and agency mortgage-backed securities, corporate and municipal bonds, and loans are pledged as collateral to the Federal Reserve Bank’s discount window, BIC, and BTFP programs, from which the Bank may borrow.

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Excluding allowance for credit losses, the increase in AFS securities in the nine months ended September 30, 2023 was due primarily to the purchase of $617 million (net of discount) in U.S. Treasury and GNMA mortgage-backed securities in the third quarter of 2023, offset by $76 million in principal collections received, and increases in the gross unrealized losses on the securities.

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


		Beginning		Provision (Reversal)						Ending
(dollars in thousands)		Balance		for Credit Losses		Charge-offs		Recoveries		Balance

Three Months Ended September 30, 2023:
Municipal bonds	$	—	$	1	$	—	$	—	$	1
Beneficial interests in FHLMC securitization		7,058		40		—		—		7,098
Corporate bonds		1,477		(86)		—		—		1,391
Total	$	8,535	$	(45)	$	—	$	—	$	8,490

Nine Months Ended September 30, 2023:
Municipal bonds	$	—	$	1	$	—	$	—	$	1
Beneficial interests in FHLMC securitization		11,439		(370)		(3,971)		—		7,098
Corporate bonds		—		1,391		—		—		1,391
Total	$	11,439	$	1,022	$	(3,971)	$	—	$	8,490

Year Ended December 31, 2022:
Municipal bonds	$	—	$	—	$	—	$	—	$	—
Beneficial interests in FHLMC securitization		10,399		1,040		—		—		11,439
Corporate bonds		—		—		—		—		—
Total	$	10,399	$	1,040	$	—	$	—	$	11,439

During the three months ended September 30, 2023, the Company recorded a reversal for credit losses of $45 thousand and during the nine months ended September 30, 2023, the Company recorded a provision for credit losses of $1.0 million. During the three and nine months ended September 30, 2023, the Company recorded charge-offs of $0 and $4.0 million, respectively related to several interest-only strip securities.

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


	Amortized		Gross Unrecognized				Allowance for		Estimated
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Fair Value
September 30, 2023:
Agency mortgage-backed securities	$	800,742	$	—	$	(106,246)	$	—	$	694,496
Total	$	800,742	$	—	$	(106,246)	$	—	$	694,496

December 31, 2022:
Agency mortgage-backed securities	$	862,544	$	—	$	(89,483)	$	—	$	773,061
Total	$	862,544	$	—	$	(89,483)	$	—	$	773,061

The decrease in HTM securities in the nine months ended September 30, 2023 was due to principal payments received. There were no purchases of investment securities or other additions to the portfolio during the nine months ended September 30, 2023.

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The scheduled maturities of securities AFS, other than agency mortgage-backed securities, and the related weighted average yields by contractual maturity date were as follows, as of September 30, 2023:


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
Amortized Cost:
Collateralized mortgage obligations	$	—		$	—		$	514		$	8,570		$	9,084
Agency mortgage-backed securities		—			4,960			—			229,345			234,305
Municipal bonds		—			9,676			36,202			3,701			49,579
SBA securities		1			1,119			645			13,042			14,807
Beneficial interests in FHLMC securitization		—			8,958			—			5,738			14,696
Corporate bonds		5,026			45,441			82,901			5,529			138,897
U.S. Treasury		392,706			1,298			—			—			394,004
Total	$	397,733		$	71,452		$	120,262		$	265,925		$	855,372
Weighted average yield		5.19	%		5.45	%		3.28	%		5.86	%		5.15	%
Estimated Fair Value:
Collateralized mortgage obligations	$	—		$	—		$	452		$	7,089		$	7,541
Agency mortgage-backed securities		—			4,627			—			228,221			232,848
Municipal bonds		—			8,948			32,388			2,817			44,153
SBA securities		1			1,110			643			12,942			14,696
Beneficial interests in FHLMC securitization		—			8,958			—			5,491			14,449
Corporate bonds		4,951			44,368			69,792			3,742			122,853
U.S. Treasury		392,425			1,226			—			—			393,651
Total	$	397,377		$	69,237		$	103,275		$	260,302		$	830,191

The scheduled maturities of securities HTM, and the related weighted average yields by contractual maturity date were as follows, as of September 30, 2023:


	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
September 30, 2023
Amortized Cost:
Agency mortgage-backed securities	$	—		$	3,465		$	14,411		$	782,866		$	800,742
Total	$	—		$	3,465		$	14,411		$	782,866		$	800,742
Weighted average yield		—	%		0.84	%		1.36	%		2.28	%		2.25	%

Estimated Fair Value:
Agency mortgage-backed securities	$	—		$	3,183		$	12,730		$	678,583		$	694,496
Total	$	—		$	3,183		$	12,730		$	678,583		$	694,496

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


	September 30, 2023				December 31, 2022

			Percentage of				Percentage of
(dollars in thousands)	Amount		Total Loans		Amount		Total Loans
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily	$	5,240,385	51.0	%	$	5,341,596	49.9	%
Single family		960,139	9.4	%		1,016,498	9.5	%
Total real estate loans secured by residential properties		6,200,524	60.4	%		6,358,094	59.4	%
Commercial properties		1,043,930	10.2	%		1,203,292	11.2	%
Land and construction		141,216	1.4	%		158,565	1.5	%
Total real estate loans		7,385,670	71.9	%		7,719,951	72.1	%
Commercial and industrial loans		2,877,441	28.0	%		2,984,748	27.9	%
Consumer loans		3,545	0.0	%		4,481	0.0	%
Total loans		10,266,656	100.0	%		10,709,180	100.0	%
Premiums, discounts and deferred fees and expenses		16,697				17,013
Total	$	10,283,353			$	10,726,193

Total loans decreased by $443 million, as a result of $1.2 billion in loan fundings for the nine months ended September 30, 2023 offset by loan payoffs and paydowns of $1.6 billion for the nine months ended September 30, 2023. The decrease in loans from prior year end reflects the strategic actions undertaken to maintain a disciplined approach to our loan production in light of the current rising interest rate environment.

The loan portfolio is largely concentrated in the geographic markets in which we operate. As of September 30, 2023, approximately 85.8% of the loans in our portfolio were made to borrowers who live and/or conduct business in California (73.2%), Florida (8.9%), and Texas (3.7%).

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


	September 30, 2023				December 31, 2022
			Weighted				Weighted
(dollars in thousands)	Amount		Average Rate		Amount		Average Rate
Demand deposits:
Noninterest-bearing	$	2,412,670	—		$	2,736,691	—
Interest-bearing		2,275,351	3.353	%		2,568,850	3.109	%
Money market and savings		3,150,696	3.652	%		3,178,230	2.373	%
Certificates of deposit		2,973,477	4.594	%		1,878,841	3.741	%
Total	$	10,812,194	3.033	%	$	10,362,612	2.177	%

During the nine months ended September 30, 2023, our deposit rates have moved in a manner consistent with overall deposit market rates and market rates continued to rise as a result of the actions taken by the Federal Reserve Board. The weighted average interest rates of total deposits increased from 2.18% at December 31, 2022 to 3.03% at September 30, 2023.

The Bank may utilize brokered deposits as a source of funding and as a component of its overall liquidity management process. As of September 30, 2023, the Bank held $2.7 billion of brokered deposits, consisting of $2.3 billion in certificates of deposit and $0.4 billion in interest-bearing demand deposits and money market accounts. As of December 31, 2022, the Bank held $1.3 billion of brokered deposits, consisting of $1.2 billion in certificates of deposit and $0.1 billion in money market accounts. The increase in brokered deposits was due to the Bank’s utilization of brokered deposits

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as a means to replace some of the outflow of non-brokered deposits that occurred following the closure of three regional banks in the first half of 2023 and for the purpose of increasing its on-balance liquidity. The weighted average rate paid on brokered deposit balances was 4.92% and 4.73% for the quarter and nine months ended September 30, 2023, respectively.

As of September 30, 2023, large depositor relationships, consisting of deposit relationships which exceed 2% of total deposits, accounted for, in the aggregate, 18.4% of our total deposits. The composition of large depositor relationships did not change materially from either a quantitative or qualitative perspective since December 31, 2022.

The deposits held by the Bank are insured by the Federal Deposit Insurance Corporation’s (the “FDIC”) Deposit Insurance Fund up to applicable limits. The Dodd-Frank Act permanently increased the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor. Insured and collateralized deposits comprised approximately 87.4% of total deposits at September 30, 2023.

The following table sets forth the estimated deposits exceeding the FDIC insurance limit:

The maturities of our certificates of deposit of greater than $250,000 was $464.2 million and $433.9 million at September 30, 2023, and December 31, 2022, respectively. The following table sets forth the maturity distribution of the estimated time deposits as of September 30, 2023:


(dollars in thousands)
3 months or less	$	370,962
Over 3 months through 12 months		86,173
1 to 3 years		7,031
Over 3 years		—
Total	$	464,166

Borrowings. At September 30, 2023, our borrowings consisted of $800 million in FHLB putable advances at the Bank, $100 million of FHLB term advances at the Bank, $72 million in repurchase agreements at the Bank, and $12 million of borrowings under a holding company line of credit. At December 31, 2022 our borrowings consisted of $805 million in overnight FHLB advances at the Bank, $200 million in federal funds purchased at the Bank, $171 million in repurchase agreements at the Bank, and $20 million of borrowings under a holding company line of credit.

The average balance of borrowings and the weighted average interest rate on such borrowings was $1.2 billion and 4.86%, respectively for the nine months ended September 30, 2023. The average balance of borrowings and the weighted average interest rate on such borrowings was $328 million and 1.59%, respectively for the nine months ended September 30, 2022. The average balance of borrowings and the weighted average interest rate on such borrowings was $587 million and 4.16%, respectively for the quarter ended September 30, 2023. The average balance of borrowings and the weighted average interest rate on such borrowings was $1.54 billion and 3.79%, respectively for the quarter ended December 31, 2022. At September 30, 2023, total borrowings represented 7.5% of total assets, compared to 9.2% at December 31, 2022.

As of September 30, 2023, our unused borrowing capacity was $3.0 billion, which consisted of $2.0 billion in available lines of credit with the FHLB, $880.7 million in available borrowing capacity with the Federal Reserve Bank, $145.4 million in borrowing capacity through unsecured federal funds lines with four correspondent financial institutions, and $8 million in available borrowing capacity through line of credit arrangement that our holding company maintains with an unaffiliated lender.

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For additional information about borrowings, see Note 9: “Borrowings” to the consolidated financial statements in this Quarterly Report on Form 10-Q.

Subordinated debt. At September 30, 2023 and December 31, 2022, FFI had two issuances of subordinated notes with an aggregate carrying value of $173.4 million. For additional information about subordinated debt, see Note 10: “Subordinated Debt” to the consolidated financial statements in this Quarterly Report on Form 10-Q.

Delinquent Loans, Nonperforming Assets and Provision for Credit Losses

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


							90 Days						Total Past Due
(dollars in thousands)	30–59 Days			60-89 Days			or More			Nonaccrual			and Nonaccrual			Current		Total
September 30, 2023:
Real estate loans:
Residential properties	$	511		$	15,660		$	—		$	1,066		$	17,237		$	6,202,405	$	6,219,642
Commercial properties		8,704			—			2,171			3,015			13,890			1,029,215		1,043,105
Land and construction		—			—			—			—			—			140,665		140,665
Commercial and industrial loans		3,277			666			—			3,017			6,960			2,869,360		2,876,320
Consumer loans		160			—			—			—			160			3,461		3,621
Total	$	12,652		$	16,326		$	2,171		$	7,098		$	38,247		$	10,245,106	$	10,283,353
Percentage of total loans		0.12	%		0.16	%		0.02	%		0.07	%		0.37	%

December 31, 2022:
Real estate loans:
Residential properties	$	511		$	57		$	—		$	2,556		$	3,124		$	6,374,100	$	6,377,224
Commercial properties		15,000			946			1,213			4,547			21,706			1,180,357		1,202,063
Land and construction		—			—			—			—			—			157,630		157,630
Commercial and industrial loans		385			1,495			982			3,228			6,090			2,978,668		2,984,758
Consumer loans		—			167			—			—			167			4,351		4,518
Total	$	15,896		$	2,665		$	2,195		$	10,331		$	31,087		$	10,695,106	$	10,726,193
Percentage of total loans		0.15	%		0.02	%		0.02	%		0.10	%		0.29	%

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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
September 30, 2023
Real estate loans:
Residential properties	$	710	$	356
Commercial properties		—		3,015
Commercial and industrial loans		2,552		466
Consumer loans		—		—
Total	$	3,262	$	3,837

December 31, 2022
Real estate loans:
Residential properties	$	—	$	2,556
Commercial properties		—		4,547
Commercial and industrial loans		2,016		1,212
Total	$	2,016	$	8,315

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


			Provision
	Beginning		(Reversal) for						Ending
(dollars in thousands)	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three months ended September 30, 2023:
Real estate loans:
Residential properties	$	8,234	$	140	$	—	$	—	$	8,374
Commercial properties		5,253		(979)		—		—		4,274
Land and construction		287		(13)		—		—		274
Commercial and industrial loans		17,690		(1,070)		(1,183)		814		16,251
Consumer loans		21		—		—		1		22
Total	$	31,485	$	(1,922)	$	(1,183)	$	815	$	29,195

Nine months ended September 30, 2023:
Real estate loans:
Residential properties	$	8,306	$	68	$	—	$	—	$	8,374
Commercial properties		8,714		(4,191)		(249)		—		4,274
Land and construction		164		110		—		—		274
Commercial and industrial loans		16,521		2,019		(4,022)		1,733		16,251
Consumer loans		26		(4)		(2)		2		22
Total	$	33,731	$	(1,998)	$	(4,273)	$	1,735	$	29,195

Year ended December 31, 2022:
Real estate loans:
Residential properties	$	2,637	$	5,674	$	(5)	$	—	$	8,306
Commercial properties		17,049		(8,335)		—		—		8,714
Land and construction		1,995		(1,831)		—		—		164
Commercial and industrial loans		11,992		4,804		(711)		436		16,521
Consumer loans		103		(73)		(4)		—		26
Total	$	33,776	$	239	$	(720)	$	436	$	33,731

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On January 1, 2020, we adopted a new accounting standard, commonly referred to as “CECL”, which replaces the “incurred loss” approach with an “expected loss” model over the life of the loan, as further described in Note 1 Summary of Significant Accounting Policies of the notes contained in our Annual Report on Form 10-K for the year ended December 31, 2022. The allowance for credit losses for loans totaled $29.2 million as of September 30, 2023, compared to $33.7 million as of December 31, 2022. Our ACL for loans represented 0.28% of total loans outstanding as of September 30, 2023 compared to 0.31% of total loans outstanding as of December 31, 2022. The ACL for loans decreased $4.5 million as of September 30, 2023 compared to December 31, 2022. Activity for the nine months ended September 30, 2023 included a reversal in provision for credit losses of $2.0 million, charge-offs of $4.3 million, and recoveries of $1.7 million.

Under the CECL methodology, for which our ACL for loans is based, estimates of expected credit losses over the life of a loan are determined and utilized considering the effect of various major factors. The major factors considered in evaluating losses are historical charge-off experience, delinquency rates, local and national economic conditions, the borrower’s ability to repay the loan and timing of repayments, and the value of any related collateral. Management’s estimate of fair value of the collateral considers current and anticipated future real estate market conditions, thereby causing these estimates to be particularly susceptible to changes that could result in a material adjustment to results of operations in the future. Provisions to credit losses are charged to operations based on management’s evaluation of estimated losses in its loan portfolio.

In addition, the FDIC and the California Department of Financial Protection and Innovation (the “DFPI”), 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

September 30, 2023:
Allowance for credit losses:
Real estate loans:
Residential properties	$	80	$	8,294	$	8,374
Commercial properties		268		4,006		4,274
Land and construction		—		274		274
Commercial and industrial loans		1,144		15,107		16,251
Consumer loans		—		22		22
Total	$	1,492	$	27,703	$	29,195
Loans:
Real estate loans:
Residential properties	$	1,952	$	6,217,690	$	6,219,642
Commercial properties		10,625		1,032,480		1,043,105
Land and construction		—		140,665		140,665
Commercial and industrial loans		3,828		2,872,492		2,876,320
Consumer loans		—		3,621		3,621
Total	$	16,405	$	10,266,948	$	10,283,353

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	Allowance for Credit Losses
	Loans Evaluated
(dollars in thousands)	Individually		Collectively		Total
December 31, 2022:
Allowance for credit losses:
Real estate loans:
Residential properties	$	87	$	8,219	$	8,306
Commercial properties		1,834		6,880		8,714
Land and construction		—		164		164
Commercial and industrial loans		3,122		13,399		16,521
Consumer loans		—		26		26
Total	$	5,043	$	28,688	$	33,731
Loans:
Real estate loans:
Residential properties	$	3,479	$	6,373,745	$	6,377,224
Commercial properties		34,278		1,167,785		1,202,063
Land and construction		—		157,630		157,630
Commercial and industrial loans		9,397		2,975,361		2,984,758
Consumer loans		—		4,518		4,518
Total	$	47,154	$	10,679,039	$	10,726,193

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. Liquidity management also includes the ability to manage unplanned decreases or changes in funding sources, as well as abnormal and unexpected needs. To meet such abnormal and unexpected needs, lines of credit are maintained with the FHLB, the Federal Reserve Bank, and correspondent banks. Liquidity management is both a daily and long-term function of funds management. Liquidity management takes into consideration liquid assets, which includes: cash and cash equivalents; unencumbered eligible investment securities; and unused investment securities pledged under the Federal Reserve Bank’s discount window and BTFP programs which can be drawn at-will. Liquidity management also takes into consideration available liquidity sources such as available unused funds from both the FHLB and Federal Reserve Bank credit lines. The Bank’s Federal Reserve Bank credit line is secured by pledged collateral in the form of qualifying loans and investment securities. As of September 30, 2023, the Bank had secured unused borrowing capacity of $880.7 million under this agreement. The Bank’s unused borrowing capacity with the FHLB as of September 30, 2023 was $2.0 billion. The Bank had a total of $145.4 million in unused borrowing capacity available through its correspondent bank lines of credit as of September 30, 2023.

We monitor our liquidity in accordance with guidelines established by our Board of Directors and applicable regulatory requirements. Our need for liquidity is affected by our loan activity, net changes in deposit levels and the maturities of our borrowings. The principal sources of our liquidity consist of deposits, loan interest and principal payments and prepayments, investment management and consulting fees, FHLB advances and proceeds from borrowings and sales of FFI common stock. The remaining balances of the Company’s lines of credit available to draw down totaled $3.0 billion at September 30, 2023.

We believe our liquid assets and available liquidity sources is sufficient to meet current funding needs and that we have the ability to manage unplanned decreases or changes in funding sources, as well as abnormal and unexpected needs. The Company regularly monitors liquidity to ensure levels are in compliance with minimum requirements established by our Board of Directors. As of September 30, 2023, our available liquidity ratio was 34.8%, which is above the Company’s minimum policy requirement of 25%. The Company regularly models liquidity stress scenarios to ensure that adequate liquidity is available, and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis.

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Cash Flows Provided by Operating Activities. During the nine months ended September 30, 2023, operating activities provided net cash of $40.5 million, primarily due to net income of $13.6 million, a decrease in accrued interest receivable and other assets of $15.3 million, and an increase in accounts payable and other liabilities of $14.0 million. The net income of $13.6 million provided by operating activities consisted of the net loss of $201.6 million for the nine months ended September 30, 2023 excluding the non-cash goodwill impairment charge of $215.3 million. During the nine months ended September 30, 2022, operating activities provided net cash of $100.2 million, primarily due to net income of $93.2 million, a net increase of $29.8 million in accounts payable and other liabilities, and an increase in accrued interest receivable and other assets of $32.6 million.

Cash Flows Used in Investing Activities. During the nine months ended September 30, 2023, investing activities used net cash of $106.9 million, primarily due to $617.5 million (net of discount) in purchases of U.S. Treasury and GNMA mortgage-backed securities, offset by a $438.6 million net decrease in loans, and $75.8 million in cash received in principal collection and maturities of securities. During the nine months ended September 30, 2022, investing activities used net cash of $2.9 billion, primarily due to $2.9 billion net increase in loans.

Cash Flows Provided by Financing Activities. During the nine months ended September 30, 2023, financing activities provided net cash of $228.5 million, consisting primarily of a net increase of $449.6 million in deposits, offset by a net decrease in FHLB and other advances of $105 million, a $8.0 million decrease in our line of credit, a $99.3 million net decrease in repurchase agreements, and $8.5 million in dividends paid. During the nine months ended September 30, 2022, financing activities provided net cash of $2.0 billion, consisting primarily of a net increase of $737.9 million in deposits, $1.1 billion net increase in FHLB and other advances and a $147.6 million net increase in subordinated debt, offset partially by $18.5 million net paydowns in our line of credit, and $18.6 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 September 30, 2023 and December 31, 2022, the loan-to-deposit ratios at FFB were 95.1% and 103.5%, respectively.

Off-Balance Sheet Arrangements

The following table provides the off-balance sheet arrangements of the Company as of September 30, 2023:


(dollars in thousands)
Commitments to fund under existing loans, lines of credit	$	1,228,985
Commitments under standby letters of credit		17,193

Some of the commitments to fund existing loans, lines of credit and letters of credit are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. As of September 30, 2023, FFB was obligated on $315 million of letters of credit to the FHLB which were being used as collateral for public fund deposits, including $300 million of deposits from the State of California.

Interest Rate Risk Management

Interest rate risk (“IRR”) refers to the vulnerability of an institution’s financial condition to movements in interest rates. Excessive IRR poses a significant threat to an institution’s earnings and capital. Change in interest rates affect an institution’s earnings by altering interest-sensitive income and expenses. Changes in interest rates also affect the underlying value of an institutions’ assets, liabilities, and off-balance sheet instruments because the present value of future cash flows (and in some cases, the cash flows themselves) change when interest rates change. The Board of Directors of the Bank has adopted a policy to govern the management of the Bank’s exposure to IRR. This policy is an integral part of the Bank’s overall asset/liability management. The goals of this policy are to (1) optimize profits through the

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management of IRR; (2) limit the exposure of the Bank’s earnings and capital to fluctuations in interest rates; (3) ensure that the Bank’s management of IRR meets applicable regulatory guidelines.

We assess our interest rate exposure within our major balance sheet categories individually, as well as in our balance sheet holistically, focusing on the interest rate sensitivity of our assets and liabilities. Our processes identify potential areas of vulnerability, particularly those influenced by fluctuations in market interest rates. Our IRR assessment process considers the repricing and liquidity characteristics of various financial instruments, including loans, investment securities, deposits, and borrowings. We establish a desired risk profile that aligns with our strategic goals and the prevailing interest rate environment. This profile considers factors such as the mix of fixed and floating rate assets and liabilities, taking into account our outlook on interest rates. We set clear policy limits and guidelines that guide our IRR management strategies, consistent with regulatory guidance. We employ various strategies to mitigate IRR by managing our asset and liability mix, including adjusting the duration of our assets to align with our liabilities. Our IRR management process is dynamic and includes regular monitoring and review. Our management team conducts ongoing assessments of asset and liability maturities and repricing characteristics, ensuring they remain consistent with our desired risk profile. By proactively identifying, assessing, and managing IRR, we aim to maintain the stability of our financial performance, protect interests of our stakeholders, and ensure our continued ability to meet the financial needs of our customers.

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.

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


									To Be Well Capitalized
					For Capital				Under Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
FFI
September 30, 2023:
CET1 capital ratio	$	926,864	9.70	%	$	430,120	4.50	%
Tier 1 leverage ratio		926,864	7.18	%		516,274	4.00	%
Tier 1 risk-based capital ratio		926,864	9.70	%		573,493	6.00	%
Total risk-based capital ratio		1,136,202	11.89	%		764,658	8.00	%

December 31, 2022:
CET1 capital ratio	$	931,125	9.18	%	$	456,603	4.50	%
Tier 1 leverage ratio		931,125	7.44	%		500,327	4.00	%
Tier 1 risk-based capital ratio		931,125	9.18	%		608,804	6.00	%
Total risk-based capital ratio		1,145,765	11.29	%		811,739	8.00	%

FFB
September 30, 2023:
CET1 capital ratio	$	1,073,396	11.28	%	$	428,285	4.50	%	$	618,633	6.50	%
Tier 1 leverage ratio		1,073,396	8.34	%		514,984	4.00	%		643,729	5.00	%
Tier 1 risk-based capital ratio		1,073,396	11.28	%		571,046	6.00	%		761,395	8.00	%
Total risk-based capital ratio		1,109,351	11.66	%		761,395	8.00	%		951,744	10.00	%

December 31, 2022:
CET1 capital ratio	$	1,070,648	10.60	%	$	454,655	4.50	%	$	656,724	6.50	%
Tier 1 leverage ratio		1,070,648	8.59	%		498,725	4.00	%		623,400	5.00	%
Tier 1 risk-based capital ratio		1,070,648	10.60	%		606,207	6.00	%		808,276	8.00	%
Total risk-based capital ratio		1,111,952	11.01	%		808,276	8.00	%		1,010,345	10.00	%

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

As of September 30, 2023, the amount of capital at FFB in excess of amounts required to be well capitalized for purposes of the prompt corrective action regulations was $455 million for the CET1 capital ratio, $430 million for the Tier 1 Leverage Ratio, $312 million for the Tier 1 risk-based capital ratio and $158 million for the Total risk-based capital ratio.

During the nine months ended September 30, 2023, the Company paid a total of $8.5 million in dividends consisting of $6.2 million ($0.11 per common share) for the fourth quarter of 2022 which was declared and paid in the first quarter of 2023, $1.1 million ($0.02 per common share) for the first quarter of 2023 which was declared and paid in the second quarter of 2023, and $1.1 million ($0.02 per common share) for the second quarter of 2023 which was declared and paid in the third quarter of 2023. On October 26, 2023, the Company announced that its Board of Directors approved the payment of a quarterly cash dividend of $0.01 per common share, to be paid on November 16, 2023 to shareholders of record as of the close of business on November 6, 2023. 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 1 of our Annual Report on Form 10-K for the year ended December 31, 2022. In addition, we have agreed that FFB will not pay any dividends to FFI without the FDIC and DFPI’s prior written approval. Additionally, under the terms of the holding company line of credit agreement, FFI

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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 $24.8 million in dividends ($0.44 per share) in 2022.

We had no material commitments for capital expenditures as of September 30, 2023. 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, 2023 and amended on May 1, 2023. Updates to quantitative and qualitative disclosures regarding market risk are included in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Risk Management” and should be read in conjunction with the information contained in our 2022 Form 10-K.

ITEM 4.CONTROLS AND PROCEDURES

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

In accordance with SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness, as of September 30, 2023, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting that occurred during the three months ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1A.RISK FACTORS

We disclosed certain risks and uncertainties that we face under the caption “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022, which we filed with the SEC on February 28, 2023 and amended on May 1, 2023. The information presented below provides an update to, and should be read in conjunction with, the risk factors and other information contained in our 2022 Form 10-K.

Adverse developments affecting the banking industry have eroded customer confidence in the banking system and could have a material effect on our operations and/or stock price.

The recent high-profile failures of several depository institutions have generated significant market volatility among publicly traded bank holding companies. These developments have negatively impacted customer confidence in the safety and soundness of some regional and community banks. As a result, we face the risk that customers may choose to maintain deposits or trust assets with larger financial institutions or invest in short-term fixed income securities instead of bank deposits, any of which could materially and adversely impact our liquidity, cost of funding, capital, and results of operations. Media reports about other depository institutions, the financial services industry generally or us could exacerbate liquidity concerns. In addition, concerns about the banking industry’s operating environment and the public trading prices of bank holding companies are often correlated, particularly during times of financial stress, which could adversely impact the trading price of our stock.

If we are required to sell securities to meet liquidity needs, we could realize significant losses.

As a result of increases in interest rates over the last year, the market values of previously issued government and other debt securities have declined significantly, resulting in unrealized losses in our securities portfolio. While we do not expect or intend to sell these securities, if we were required to sell these securities to meet liquidity needs, we may incur significant losses, which could impair our capital and financial condition and adversely affect our results of operations. Further, while we have taken actions to maximize our sources of liquidity, there is no guarantee that such sources will be available or sufficient in the event of sudden liquidity needs.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

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 three months ended September 30, 2023.

ITEM 5.OTHER INFORMATION

None of our directors or executive officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K) during the third quarter of 2023.

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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		Certificate of Amendment to 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 June 10, 2022).

3.3		Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on June 29, 2023).

10.1		Employment Agreement, dated August 14, 2023, between First Foundation Inc. and James Britton (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on August 15, 2023).

10.2		Change in Control Severance Compensation Agreement, dated August 14, 2023, between First Foundation Inc. and James Britton (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on August 15, 2023).

10.3		Inline XBRL Taxonomy Extension Calculation Linkbase First Amendment to Employment Agreement, dated August 14, 2023, between First Foundation Bank and Amy Djou (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed on August 15, 2023).

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.

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SIGNATURE

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. (Registrant)

Dated: November 8, 2023	By:	/s/ JAMIE BRITTON
		Jamie Britton
		Executive Vice President and Chief Financial Officer

S-1