10-K: First Foundation Reports Deepening Losses, Merger Ahead

First Foundation Inc. reported a net loss of $155.2 million for 2025, alongside a pending merger with FirstSun Capital Bancorp and identified material weaknesses in internal controls.

Summary

• First Foundation Inc. reported a net loss of $155.2 million for the year ended December 31, 2025, compared to a net loss of $92.4 million in 2024.
• The company recorded a $64.3 million provision for credit losses in 2025, an increase from $20.7 million in 2024, primarily due to revisions in allowance for credit loss quantitative assumptions.
• Income tax expense for 2025 was $83.6 million, largely impacted by a $98.7 million valuation allowance against the net deferred tax asset balance, indicating management's belief that these assets are unlikely to be fully realized.
• Net interest income increased to $187.4 million in 2025 from $182.6 million in 2024, with the net interest margin (NIM) improving to 1.58% from 1.40%.
• Total assets decreased by $742 million (5.9%) to $11.9 billion at December 31, 2025, from $12.6 billion at December 31, 2024.
• Total loans decreased by $2.2 billion, and total deposits decreased by $585.7 million to $9.3 billion at December 31, 2025.
• Assets Under Management (AUM) for the wealth management segment decreased to $5.1 billion at December 31, 2025, from $5.4 billion at December 31, 2024.
• A material weakness in internal controls over financial reporting was identified and has not yet been fully remediated.
• The company has not paid a quarterly dividend since the first quarter of 2024.
• A merger agreement with FirstSun Capital Bancorp was executed on October 27, 2025, with the transaction expected to close on April 1, 2026, subject to remaining conditions.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this as a challenging period marked by significant financial losses, a material weakness in internal controls, and a pending merger that introduces considerable uncertainty, despite some positive shifts in net interest margin and liquidity.

Positives

• Net interest income increased to $187.4 million in 2025 from $182.6 million in 2024.
• Net interest margin (NIM) improved to 1.58% in 2025 from 1.40% in 2024, driven by interest-bearing liabilities decreasing faster than interest-earning assets.
• Net charge-offs decreased significantly to $1.1 million (0.01% of average loans) in 2025, compared to $17.9 million (0.24% of average loans) in 2024.
• The company and its bank subsidiary (FFB) exceeded all minimum required capital ratios and qualified as 'well-capitalized' under prompt corrective action regulations as of December 31, 2025.
• Regulatory approvals for the proposed merger with FirstSun Capital Bancorp and the subsequent bank merger with Sunflower Bank have been received.
• The loan-to-deposit ratio at FFB improved to 75.3% at December 31, 2025, from 93.5% at December 31, 2024, indicating enhanced liquidity.

Negatives

• Reported a net loss of $155.2 million in 2025, a significant increase from the $92.4 million net loss in 2024.
• A substantial income tax expense of $83.6 million in 2025 was primarily due to recording a $98.7 million valuation allowance against the net deferred tax asset balance, reflecting management's assessment of non-realizability.
• Provision for credit losses increased to $64.3 million in 2025, up from $20.7 million in 2024, driven by changes in ACL methodology and increased economic uncertainty.
• Total assets decreased by $742 million (5.9%) to $11.9 billion at December 31, 2025.
• Total loans decreased by $2.2 billion and total deposits decreased by $585.7 million in 2025.
• Assets Under Management (AUM) declined to $5.1 billion in 2025 from $5.4 billion in 2024, largely due to terminations and net existing account withdrawals of $1.1 billion.
• A material weakness in internal controls over financial reporting was identified and has not yet been fully remediated, raising concerns about financial reporting reliability.
• The company has not paid a quarterly dividend since the first quarter of 2024, impacting shareholder returns.
• Noninterest income decreased to $47.4 million in 2025 from $51.6 million (excluding LOCOM adjustment) in 2024, partly due to a loss on the sale of loans.

Risks

• The value of the merger consideration will fluctuate based on the trading price of FirstSun common stock.
• The pendency of the Merger may adversely affect business, results of operations, and financial condition, including the ability to attract and retain key personnel and customers.
• Failure to consummate the Merger could negatively impact FFI, leading to adverse market reactions, diversion of management attention, and unrecouped expenses.
• Combining FFI and FirstSun and the balance sheet repositioning may be more difficult, costly, or time-consuming than expected, and anticipated benefits may not be realized.
• The combined company may be unable to retain FFI or FirstSun personnel successfully after the Merger is completed.
• Stockholder litigation related to the Merger could prevent or delay completion, result in damages, or negatively impact business.
• The Merger Agreement limits the ability to pursue alternatives to the Merger and may discourage other companies from trying to acquire FFI, including a $31.4 million termination fee under certain conditions.
• The Merger Agreement may be terminated in accordance with its terms, and the Merger may not be completed due to various conditions, including FFI maintaining consolidated tangible stockholders equity thresholds.
• Holders of FFI common stock will have a substantially reduced ownership and voting interest (approximately 40.5%) in the combined company after the Merger.
• The ability to use net operating loss carryforwards and other tax attributes may be limited in connection with the Merger or other ownership changes, potentially increasing future income tax liability.
• Business and operations may be adversely affected in numerous and complex ways by general economic conditions, including inflation.
• Incurring losses on loans made, and the allowance for credit losses may not be adequate to cover actual losses, especially with the Current Expected Credit Loss (CECL) model introducing volatility.
• Banking, investment advisory, and wealth management operations are geographically concentrated in California, Florida, Nevada, Texas, and Hawaii, leading to significant exposure to those markets.
• Loans secured by multifamily and commercial real estate represent a high percentage (59.9% in 2025) of loans, making results vulnerable to downturns in the real estate market.
• Changes in interest rates could reduce net interest margin and net interest income, or increase operating expenses.
• Significant losses may be incurred from ineffective hedging of interest rate risk, including the $19.515 million cost of the Hedge Strategy.
• Significant losses may be incurred from the balance sheet repositioning and future asset sales, as demonstrated by the $117.5 million LOCOM adjustment in 2024.
• Liquidity risk may adversely affect the ability to fund operations and hurt financial condition, especially with a high concentration of large depositors (9.7% of total deposits in 2025).
• Failure to meet capital adequacy standards and liquidity requirements may adversely affect financial condition and restrict activities.
• Inability to attract capital necessary to maintain regulatory ratios and fund growth, as the ability to raise additional capital depends on capital market conditions and financial performance.
• Actions and commercial soundness of other financial institutions could affect the ability to engage in routine funding transactions.
• Turnover in the Board of Directors and executive management team, and embarking upon a new strategic plan, create uncertainties and could harm the business.
• Completing the diversification of the loan portfolio may be more difficult, costly, or time-consuming than expected, and anticipated benefits may not be realized.
• Adverse developments affecting the banking industry, such as high-profile bank failures in 2023, may negatively impact customer confidence, liquidity, and stock price.
• New lines of business or new products and services may subject the company to additional risks.
• Intense competition from other banks, financial institutions, and wealth/investment management firms could hurt the business.
• Significant estimates and assumptions in financial statements may not be accurate, as evidenced by the material increase to the ACL and valuation allowance on deferred tax assets in 2025.
• The fair value of investment securities can fluctuate due to factors outside of control, leading to unrealized losses.
• A loss or material reduction of access to securitization markets for multifamily loans may adversely impact the business model, profitability, and growth.
• Technology and marketing costs may negatively impact future operating results without commensurate revenue increases.
• Fraudulent activity, breaches of information security systems, or cybersecurity incidents could have a material adverse effect on business, financial condition, results of operations, or future prospects.
• Reliance on communications, information, operating, and financial control systems technology and related services from third-party service providers carries risk of interruption.
• Reputational harm could adversely affect the ability to attract and retain clients and key employees.
• Significant losses may be incurred due to ineffective risk management processes and strategies.
• Natural disasters in operating regions (California, Florida, Nevada, Texas, Hawaii) could harm business operations and collateral values.
• Exposure to the risk of environmental liabilities with respect to real properties acquired through foreclosure.
• Investment management clients can terminate agreements without cause on short notice, making the business vulnerable to short-term declines in investment performance.
• The market for investment managers is extremely competitive, and the loss of a key investment manager could adversely affect the investment advisory and wealth management business.
• The soundness of certain securities brokerage firms used for client custodial arrangements could adversely affect client confidence.
• The banking industry is highly regulated, and legislative or regulatory actions may have a significant adverse effect on operations.
• Federal and state banking agencies periodically conduct examinations, which may subject the company to supervisory actions.
• Increased regulation due to having more than $10 billion in total consolidated assets, including CFPB oversight and Volcker Rule applicability.
• Failure to comply with consumer protection laws (e.g., Community Reinvestment Act, fair lending laws) could lead to sanctions.
• Risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
• Regulations relating to privacy, information security, and data protection could increase costs and limit business opportunities.
• First Foundation Advisors' business is highly regulated, and regulators have the ability to limit or restrict, and impose fines or other sanctions on, its business.
• Future legislation, regulatory reform, or policy changes could have a material effect on business and results of operations.
• The company may not resume the payment of dividends on common stock, which could adversely affect the market price.
• An investment in common stock is not an insured deposit and is not guaranteed by the FDIC, so investors could lose some or all of their investment.
• Failure to maintain effective internal control over financial reporting, or failure to remediate previously identified material weaknesses, could impair financial reporting accuracy and timeliness.
• The exercise of outstanding warrants (22,239 shares of Series C NVCE Stock convertible into approximately 22,239,000 shares of common stock) would increase shares eligible for future resale and result in dilution to existing stockholders.

Future Outlook

The merger with FirstSun Capital Bancorp is expected to close on April 1, 2026, with First Foundation Bank merging into Sunflower Bank immediately thereafter. The company anticipates continued heightened state-level activity and consumer expectations regarding privacy and cybersecurity. Management will continue to assess the need for a valuation allowance on deferred tax assets in future periods.

Management Comments

• The increase in compensation and benefits expense was largely due to an increase in staffing levels as well as investments made to bring in and retain institutional knowledge needed to organize around the Company's strategic initiatives and strengthen the Company going forward.
• The increase in compensation and benefit costs was primarily due to investments made to retain institutional knowledge in the competitive wealth management industry.
• Management believes our liquid assets and available liquidity sources are 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.
• Management believes, as of December 31, 2025 and December 31, 2024, that FFI and the Bank met all capital adequacy requirements.
• Management is continuing to evaluate and test the operating effectiveness of the enhanced controls.
• Management is redesigning its internal controls to ensure the timely receipt and review of service organization reports.

Industry Context

StockSavvy.ai notes that First Foundation Inc. operates in a highly competitive banking and wealth management market, dominated by larger multi-state and in-state banks. The company's integrated platform and personalized service are highlighted as key differentiators against these larger competitors. The industry continues to face ongoing technological changes, requiring significant investment, and increasing regulatory scrutiny on cybersecurity and consumer privacy. The high-profile failures of several depository institutions during 2023 negatively impacted customer confidence in regional and community banks, posing a risk to deposit retention and overall market sentiment for companies like First Foundation Inc.

Comparison to Industry Standards

• Capital Ratios: First Foundation Inc. (FFI) and First Foundation Bank (FFB) exceeded all minimum required capital ratios and qualified as 'well-capitalized' under prompt corrective action regulations as of December 31, 2025. This indicates a strong capital position relative to regulatory benchmarks, which is crucial in the current banking environment.
• Loan-to-Deposit Ratio: FFB's loan-to-deposit ratio improved to 75.3% at December 31, 2025, from 93.5% at December 31, 2024. This reduction suggests improved liquidity and a more conservative funding profile, which is a positive trend in the banking industry, especially following recent liquidity concerns among regional banks.
• Allowance for Credit Losses (ACL): The significant increase in ACL to $93.9 million (1.39% of total loans held for investment) in 2025 from $32.3 million (0.41%) in 2024, driven by revised methodology and economic uncertainty, indicates a more conservative and potentially robust risk posture. This aligns with heightened regulatory expectations for credit loss provisioning post-2023 bank failures, suggesting a proactive approach to potential credit deterioration.

Management Changes

Corporate Governance

Legal Proceedings

• The company is not aware of any threatened or pending litigation that it expects will have a material adverse effect on its business operations, financial condition, or results of operations.

Related Party Transactions

• The Bank held $1.4 million in deposits from related parties (directors, executive officers, and their affiliates) as of December 31, 2025, a decrease from $2.4 million in 2024.
• Interest paid on deposit accounts held by related parties was $8,000 in 2025, $17,000 in 2024, and $180,000 in 2023.
• As of December 31, 2023, related parties held $4.8 million in assets under management with First Foundation Advisors and First Foundation Bank, generating $20,000 in fees in 2023.

Stakeholder Impact

• Shareholders: Face significant net losses, suspension of dividends, potential dilution from warrants, and a substantially reduced ownership interest (approx. 40.5%) in the combined company post-merger, indicating a challenging investment outlook.
• Employees: Experience uncertainty due to Board and executive management turnover, potential disruptions from the pending merger, and ongoing efforts to retain institutional knowledge in competitive markets.
• Customers: May experience impacts on service quality or continuity due to merger integration, and the company's geographic and loan portfolio concentrations expose them to regional economic downturns.
• Regulators: Are actively scrutinizing the company due to identified material weaknesses in internal controls and ongoing compliance requirements, potentially leading to further supervisory actions.
• Creditors: Are exposed to the company's financial performance, though the company maintains sufficient capital ratios and has secured waivers for debt covenant breaches, indicating active management of these relationships.

Next Steps

• The proposed merger of First Foundation Inc. with FirstSun Capital Bancorp is expected to close on April 1, 2026.
• Immediately following the merger, First Foundation Bank will merge with and into Sunflower Bank.
• The company expects to file its Definitive Proxy Statement for the 2026 Annual Meeting of Stockholders on or before April 30, 2026.
• Management is continuing to evaluate and test the operating effectiveness of enhanced controls to remediate the identified material weakness in internal controls over financial reporting.
• Management is redesigning internal controls to ensure the timely receipt and review of service organization reports.
• The company will continue to assess the need for a valuation allowance on its deferred tax asset balance in future periods.

Key Dates

Recommendation

The company reported a substantial net loss for 2025, exacerbated by a significant valuation allowance on deferred tax assets and increased credit loss provisions, indicating underlying financial distress. The identified material weakness in internal controls over financial reporting raises serious concerns about financial reliability. While a merger is pending, the terms involve a reduced ownership for current shareholders, and the integration process carries significant risks. The suspension of dividends further diminishes shareholder returns. These factors collectively point to considerable downside risk and operational instability, making the stock a 'sell' for seasoned investors.

Keywords

Banking, Financial Services, Wealth Management, SEC Filing, 10-K, Net Loss, Credit Losses, Merger, FirstSun Capital Bancorp, Internal Controls, Cybersecurity, Regulatory Compliance, Interest Rate Risk, Capital Adequacy, Loan Portfolio, Deposits, Assets Under Management, Valuation Allowance, California, Texas, Florida, Nevada, Hawaii