First Foundation Inc. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017

☐	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)

18101 Von Karman Avenue, Suite 700 Irvine, CA 92612		92612
(Address of principal executive offices)		(Zip Code)

(949) 202-4160

(Registrant’s telephone number, including area code)

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 and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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 6, 2017, there were 35,231,099 shares of registrant’s common stock outstanding

FIRST FOUNDATION INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

		Exhibit No.

Part I. Financial Information

Item 1.	Financial Statements	1

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	41

Part II. Other Information

Item 1A	Risk Factors	41

Item 6	Exhibits	42

SIGNATURES		S-1

(i)

PART I — FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

FIRST FOUNDATION INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	September 30, 2017			December 31, 2016
		(unaudited)
ASSETS

Cash and cash equivalents	$	123,210		$	597,946
Securities available-for-sale (“AFS”)		471,502			509,578
Loans held for sale		153,405			250,942
Loans, net of deferred fees		3,256,874			2,555,709
Allowance for loan and lease losses (“ALLL”)		(17,500	)		(15,400	)
Net loans		3,239,374			2,540,309

Investment in FHLB stock		17,250			33,750
Premises and equipment, net		6,732			6,730
Deferred taxes		14,925			16,811
Real estate owned (“REO”)		1,400			1,734
Goodwill and intangibles		2,021			2,177
Other assets		21,242			15,426
Total Assets	$	4,051,061		$	3,975,403

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Deposits	$	3,268,726		$	2,426,795
Borrowings		421,000			1,250,000
Accounts payable and other liabilities		20,882			14,344
Total Liabilities		3,710,608			3,691,139

Commitments and contingencies		—			—
Shareholders’ Equity
Common Stock, par value $0.01: 70,000,000 shares authorized; 35,169,653 and 32,719,632 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		35			16
Additional paid-in-capital		260,626			232,428
Retained earnings		82,374			57,065
Accumulated other comprehensive loss, net of tax		(2,582	)		(5,245	)
Total Shareholders’ Equity		340,453			284,264

Total Liabilities and Shareholders’ Equity	$	4,051,061		$	3,975,403

(See accompanying notes to the consolidated financial statements)

FIRST FOUNDATION INC.

CONSOLIDATED INCOME STATEMENTS - UNAUDITED

(In thousands, except share and per share amounts)

	Quarter Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Interest income:
Loans	$	31,236	$	22,231	$	87,709	$	61,362
Securities AFS		3,023		3,202		9,180		9,423
Fed funds sold, FHLB stock and deposits		619		571		2,001		1,490
Total interest income		34,878		26,004		98,890		72,275

Interest expense:
Deposits		4,899		2,426		12,103		6,194
Borrowings		1,539		415		4,394		1,636
Total interest expense		6,438		2,841		16,497		7,830

Net interest income		28,440		23,163		82,393		64,445

Provision for loan losses		701		1,231		1,862		2,881

Net interest income after provision for loan losses		27,739		21,932		80,531		61,564

Noninterest income:
Asset management, consulting and other fees		6,900		6,141		19,672		18,127
Gain on sale of loans		1,962		7,238		4,312		7,238
Gain (loss) on capital markets activities		—		997		—		(1,043	)
Other income		1,001		703		3,359		2,652
Total noninterest income		9,863		15,079		27,343		26,974

Noninterest expense:
Compensation and benefits		14,117		12,059		42,855		36,707
Occupancy and depreciation		3,801		3,072		11,094		8,783
Professional services and marketing costs		1,479		3,525		5,115		7,808
Other expenses		3,996		2,880		11,251		7,505
Total noninterest expense		23,393		21,536		70,315		60,803

Income before taxes on income		14,209		15,475		37,559		27,735
Taxes on income		4,629		6,417		12,250		10,949
Net income	$	9,580	$	9,058	$	25,309	$	16,786


Net income per share:
Basic	$	0.28	$	0.28	$	0.75	$	0.52
Diluted	$	0.27	$	0.27	$	0.73	$	0.50
Shares used to compute net income per share:
Basic		34,565,949		32,514,016		33,671,327		32,264,224
Diluted		35,259,632		33,575,894		34,599,813		33,365,614

(See accompanying notes to the consolidated financial statements)

FIRST FOUNDATION INC.

CONSOLIDATED STATEMENT OF CHANGES

IN SHAREHOLDERS’ EQUITY - Unaudited

(In thousands, except share amounts)


	Common Stock								Accumulated Other
	Number of Shares	Amount		Additional Paid-in Capital			Retained Earnings		Comprehensive Income (Loss)			Total
Balance: December 31, 2016	32,719,632	$	16	$	232,428		$	57,065	$	(5,245	)	$	284,264
Effect of stock split	—		16		(16	)		—		—			—
Net income	—		—		—			25,309		—			25,309
Other comprehensive income	—		—		—			—		2,663			2,663
Stock based compensation	—		—		912			—		—			912
Issuance of common stock:
Exercise of options	1,059,000		1		5,469			—		—			5,470
Issuance of restricted stock	64,961		—		—			—		—			—
Capital raise	1,326,060		2		21,833								21,835
Balance: September 30, 2017	35,169,653	$	35	$	260,626		$	82,374	$	(2,582	)	$	340,453

(See accompanying notes to the consolidated financial statements)

FIRST FOUNDATION INC.

CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME - UNAUDITED

(In thousands)

	Quarter Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017		2016

Net income	$	9,580	$	9,058		$	25,309	$	16,786
Other comprehensive income:
Unrealized holding gains (losses) on securities arising during the period		1,057		(1,033	)		4,526		9,805
Other comprehensive income before tax		1,057		(1,033	)		4,526		9,805
Income tax expense (benefit) related to items of other comprehensive income		435		(413	)		1,863		4,033
Other comprehensive income (loss)		622		(620	)		2,663		5,772

Reclassification adjustment for gains (losses) included in net earnings		—		(997	)		—		1,043
Income tax expense (benefit) related to reclassification adjustment		—		413			—		(412	)
Reclassification adjustment for gains (losses) included in net earnings, net of tax		—		(584	)		—		631
Other comprehensive income (loss), net of tax		622		(1,204	)		2,663		6,403
Total comprehensive income	$	10,202	$	7,854		$	27,972	$	23,189

(See accompanying notes to the consolidated financial statements)

FIRST FOUNDATION INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(In thousands)

	For the Nine Months Ended September 30,
	2017			2016
Cash Flows from Operating Activities:
Net income	$	25,309		$	16,786
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,862			2,881
Stock–based compensation expense		912			712
Depreciation and amortization		1,765			1,338
Deferred tax expense		23			758
Accretion of discounts on purchased loans, net		(430	)		(755	)
Gain on sale of loans		(4,312	)		(7,238	)
Gain on sale of capital market activities		—			(1,307	)
Gain on sale of REO		(104	)		—
Increase in other assets		(3,934	)		(1,429	)
Increase in accounts payable and other liabilities		6,538			1,970
Net cash provided by operating activities		27,629			13,716

Cash Flows from Investing Activities:
Net increase in loans (including changes in loans held for sale)		(889,326	)		(1,008,136	)
Proceeds from sale of loans		288,724			270,005
Proceeds from sale of REO		438			4,442
Purchases of premises and equipment		(1,767	)		(4,027	)
Purchases of securities AFS		(10,338	)		(130,829	)
Proceeds from sale of securities AFS		—			104,146
Maturities/payments – securities AFS		53,168			60,715
Purchases (net of redemptions) of FHLB stock		16,500			(4,185	)
Net cash used in investing activities		(542,601	)		(707,869	)

Cash Flows from Financing Activities:
Increase in deposits		841,931			816,561
FHLB Advances – net (decrease) increase		(844,000	)		155,000
Proceeds – term note		15,000			—
Proceeds from sale of stock, net		27,305			3,657
Net cash provided by financing activities		40,236			975,218

Increase (decrease) in cash and cash equivalents		(474,736	)		281,065
Cash and cash equivalents at beginning of year		597,946			215,748
Cash and cash equivalents at end of period	$	123,210		$	496,813

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	15,353		$	7,334
Income taxes		11,135			10,050
Noncash transactions:
Transfer of loans to loans held for sale	$	189,928		$	468,743
Mortgage servicing rights created from loan sales		1,954			1,945
Chargeoffs (recoveries) against allowance for loans losses		238			119
Transfer of loans to REO		—			950

(See accompanying notes to the consolidated financial statements)

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 - UNAUDITED

NOTE 1: BASIS OF PRESENTATION

The consolidated financial statements include First Foundation Inc. (“FFI”) and its wholly owned subsidiaries: First Foundation Advisors (“FFA”) and First Foundation Bank (“FFB” or the “Bank”) and the wholly owned subsidiaries of FFB, First Foundation Insurance Services (“FFIS”) and Blue Moon Management, LLC (collectively referred to as the “Company”). All inter-company balances and transactions have been eliminated in consolidation. The results of operations reflect any interim adjustments, all of which are of a normal recurring nature and which, in the opinion of management, are necessary for a fair presentation of the results for the interim period presented. The results for the 2017 interim periods are not necessarily indicative of the results expected for the full year.

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.

The accompanying unaudited consolidated financial statements include all information and footnotes required for interim financial statement presentation. These financial statements assume that readers have read the most recent Annual Report on Form 10-K which contains the latest available audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2016.

On January 18, 2017, the Company completed a two-for-one stock split in the form of a stock dividend. Each stockholder of record at the close of business of January 4, 2017 received one additional share of common stock for every share held. All share and per share amounts included in the financial statements have been adjusted to reflect the effect of this stock split.

Certain reclassifications have been made to the prior year consolidated financial statements to conform to the 2017 presentation.

In February 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-05 “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” which clarifies that the guidance in Accounting Standards Codification (“ASC”) 610-20 on accounting for derecognition of a nonfinancial asset and in-substance nonfinancial asset applies only when the asset (or asset group) does not meet the definition of a business and provides guidance for partial sales of nonfinancial assets. The adoption of ASU No. 2017-05 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” which provides updated guidance on how an entity is required to test goodwill for impairment. This update is effective for the Company for annual periods beginning after December 15, 2019, and interim periods within those annual periods. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01 “Business Combinations (Topic 805): Clarifying the Definition of a Business” which provides guidance in clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The adoption of ASU No. 2017-01 is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” which provides guidance for eight specific cash flow issues. FASB issued the standard to clarify areas where GAAP has been either unclear or lacking in specific guidance. This update is effective for the Company for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The adoption of ASU No. 2016-15 is not expected to have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which introduces new guidance for the accounting for credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new model, referred to as the current expected credit losses (CECL) model, will apply to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. Upon initial recognition of the exposure, the CECL model requires an entity to estimate the credit losses expected over the life of an exposure. This update is effective for the Company for annual periods beginning after December 15,

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

2019, and interim periods within those annual periods. The Company has begun analyzing the data requirements needed to implement the adoption of ASU 2016-13 and we expect that the adoption of ASU 2016-13 may have a significant impact on the Company’s recording of its allowance for loan losses. Management is continuing to evaluate the effects of 2016-13 and the impact of its implementation is undeterminable at this time.

On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases, which is generally defined as a lease term of less than 12 months. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases accounted for as operating leases under current lease accounting guidance. The amendments in this update are effective for interim and annual periods beginning after December 15, 2018. We expect the adoption of ASU 2016-02 to impact the Company’s accounting for its building leases at each of its locations and the Company is evaluating the effects of the adoption of ASU 2016-02 on its financial statements and disclosures.

On January 5, 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). Changes made to the current measurement model primarily affect the accounting for equity securities with readily determinable fair values, where changes in fair value will impact earnings instead of other comprehensive income. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. This update also changes the presentation and disclosure requirements for financial instruments including a requirement that public business entities use exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. This update is generally effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40)”. The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. This update is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods therein and requires expanded disclosures. Management is continuing to evaluate the effects of 2014-09 and the impact of its implementation is undeterminable at this time.

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.

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – 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
	Total		Level 1		Level 2		Level 3
(dollars in thousands)
September 30, 2017:
Investment securities available for sale:
US Treasury securities	$	495	$	495	$	—	$	—
Agency mortgage-backed securities		432,448		—		432,448		—
Beneficial interest – FHLMC securitizations		38,559		—		—		38,559
Total assets at fair value on a recurring basis	$	471,502	$	495	$	432,448	$	38,559

December 31, 2016:
Investment securities available for sale:
US Treasury securities	$	297	$	297	$	—	$	—
Agency mortgage-backed securities		468,909		—		468,909		—
Beneficial interest – FHLMC securitizations		40,372		—		—		40,372
Total assets at fair value on a recurring basis	$	509,578	$	297	$	468,909	$	40,372

The decrease in level 3 assets from December 31, 2016 was due to beneficial interest – FHLMC securitization maturities.

Fair Value of Financial Instruments

We have elected to use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale are measured at fair value on a recurring basis. Additionally, from time to time, we may be required to measure at fair value other assets 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.

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

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

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

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

Investment Securities Available for Sale. Investment securities 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 internally developed models, and management judgment and evaluation for valuation. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include beneficial interests – FHLMC securitization. Significant assumptions in the valuation of these Level 3 securities as of September 30, 2017 included a prepayment rate of 15% and discount rates ranging from 4.0% to 10%.

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

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 that 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, other than impaired loans. 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. All loans have been adjusted to reflect changes in credit risk.

Loans Held For Sale. Loans held for sale are accounted for at the lower of amortized cost or fair value. The fair value of loans held for sale is generally based on observable market prices from other loans in the secondary market that have similar collateral, credit, and interest rate characteristics. If quoted market prices are not readily available, the Company may consider other observable market data such as dealer quotes for similar loans or forward sale commitments. In certain cases, the fair value may be based on a discounted cash flow model.

Deposits. The fair value of demand deposits, savings deposits, and money market deposits is defined as the amounts payable on demand at quarter-end. 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 $421 million in borrowings is the carrying value of overnight FHLB advances that approximate fair value because of the short-term maturity of this instrument, resulting in a Level 2 classification. The fair value of term borrowings is derived by calculating the discounted value of future cash flows expected to be paid out by the Company. The $25 million holding company line of credit is a variable rate loan for which the rate adjusts quarterly, and as such, its fair value is based on its carrying value resulting in a Level 3 classification.

Assets Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. ASC 820-10 applies to loans measured for impairment in accordance with ASC 310-10, “Accounting by Creditors for Impairment of a Loan”, at the fair value of the loan’s collateral (if the loan is collateral dependent) less estimated selling costs. 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 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 Level 3. The total collateral dependent impaired Level 3 loans were $14.4 million and $9.0 million at September 30, 2017 and December 31, 2016, respectively. There were no specific reserves related to these loans at September 30, 2017 and December 31, 2016.

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

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. As of September 30, 2017 and December 31, 2016, the fair value of real estate owned was $1.4 million and $1.7 million, respectively.

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, 2017:
Assets:
Cash and cash equivalents	$	123,210	$	123,210	$	—	$	—	$	123,210
Securities AFS		471,502		495		432,448		38,559		471,502
Loans		3,239,374		—		—		3,381,237		3,381,237
Loans held for sale		153,405		—		—		155,246		155,246
Investment in FHLB stock		17,250		—		17,250		—		17,250

Liabilities:
Deposits		3,268,726		2,385,687		883,359		—		3,269,046
Borrowings		421,000		—		406,000		15,000		421,000

December 31, 2016:
Assets:
Cash and cash equivalents	$	597,946	$	597,946	$	—	$	—	$	597,946
Securities AFS		509,578		297		468,909		40,372		509,578
Loans, net		2,540,309		—		—		2,529,360		2,529,360
Loans held for sale		250,942		—		—		253,953		253,953
Investment in FHLB stock		33,750		—		33,750		—		33,750

Liabilities:
Deposits		2,426,795		1,797,329		629,594		—		2,426,923
Borrowings		1,250,000		—		1,250,000		—		1,250,000

NOTE 3: SECURITIES

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

	Amortized		Gross Unrealized					Estimated
(dollars in thousands)	Cost		Gains		Losses			Fair Value
September 30, 2017:
US Treasury securities	$	499	$	—	$	(4	)	$	495
Agency mortgage-backed securities		436,415		497		(4,464	)		432,448
Beneficial interests in FHLMC securitization		38,975		1,756		(2,172	)		38,559
Total	$	475,889	$	2,253	$	(6,640	)	$	471,502

December 31, 2016:
US Treasury securities	$	300	$	—	$	(3	)	$	297
Agency mortgage-backed securities		476,163		160		(7,414	)		468,909
Beneficial interests in FHLMC securitization		42,028		711		(2,367	)		40,372
Total	$	518,491	$	871	$	(9,784	)	$	509,578

The US Treasury securities are pledged as collateral to the State of California to meet regulatory requirements related to the Bank’s trust operations.

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

The tables below indicate, as of September 30, 2017 and December 31, 2016, the gross unrealized losses and fair values of our investments, 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, 2017
	Less than 12 months					12 months or more					Total
(dollars in thousands)	Fair Value			Unrealized Loss		Fair Value			Unrealized Loss		Fair Value		Unrealized Loss
US Treasury securities	$	495	$	(4	)	$	—	$	—		$	495	$	(4	)
Agency mortgage backed securities		287,342		(2,670	)		58,044		(1,794	)		345,386		(4,464	)
Beneficial interests in FHLMC securitization		—		—			9,347		(2,172	)		9,347		(2,172	)
Total temporarily impaired securities	$	287,837	$	(2,674	)	$	67,391	$	(3,966	)	$	355,228	$	(6,640	)

	Securities with Unrealized Loss at December 31, 2016
	Less than 12 months					12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
US Treasury securities		297		(3	)		—		—		297		(3	)
Agency mortgage backed securities		445,591		(7,414	)		—		—		445,591		(7,414	)
Beneficial interests in FHLMC securitization		18,636		(2,367	)		—		—		18,636		(2,367	)
Total temporarily impaired securities	$	464,524	$	(9,784	)	$	—	$	—	$	464,524	$	(9,784	)

Unrealized losses in agency mortgage backed securities and beneficial interests in FHLMC securitizations have not been recognized into income because the issuer bonds are of high credit quality, management does not intend to sell, it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in discount rates and assumptions regarding future interest rates. The fair value is expected to recover as the bonds approach maturity.

The scheduled maturities of securities AFS and the related weighted average yields were as follows as of September 30, 2017:

(dollars in thousands)	Less than 1 Year			1 Through 5 years			5 Through 10 Years			After 10 Years			Total
Amortized Cost:
US Treasury securities	$	—		$	499		$	—		$	—		$	499
Weighted average yield		—	%		1.03	%		—	%		—	%		1.03	%

Estimated Fair Value:
US Treasury Securities	$	—		$	495		$	—		$	—		$	495

Agency mortgage backed securities and beneficial interests in FHLMC securitizations are excluded from the above table because such securities are not due at a single maturity date. The weighted average yield of the agency mortgage backed securities and beneficial interests as of September 30, 2017 was 2.54%.

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

NOTE 4: LOANS

The following is a summary of our loans as of:

(dollars in thousands)	September 30, 2017		December 31, 2016
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily	$	1,784,061	$	1,178,003
Single family		616,478		602,886
Total real estate loans secured by residential properties		2,400,539		1,780,889
Commercial properties		529,590		476,959
Land and construction		31,304		24,100
Total real estate loans		2,961,433		2,281,948
Commercial and industrial loans		259,958		237,941
Consumer loans		28,469		32,127
Total loans		3,249,860		2,552,016
Premiums, discounts and deferred fees and expenses		7,014		3,693
Total	$	3,256,874	$	2,555,709

As of September 30, 2017 and December 31, 2016, the principal balances shown above are net of unaccreted discount related to loans acquired in an acquisition of $1.1 million and $1.6 million, respectively.

In 2012 and 2015, the Company purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of these purchased credit impaired loans is as follows as of:

(dollars in thousands)	September 30, 2017			December 31, 2016
Outstanding principal balance:
Total real estate loans	$	285		$	295
Commercial and industrial loans		2,416			4,258
Consumer loans		—			17
Total loans		2,701			4,570
Unaccreted discount on purchased credit impaired loans		(884	)		(1,197	)
Total	$	1,817		$	3,373

Accretable yield, or income expected to be collected on purchased credit impaired loans, and the related changes, is as follows for the periods indicated:

(dollars in thousands)	Nine Months Ended September 30, 2017			Year Ended December 31, 2016

Beginning balance	$	289		$	582
Accretion of income		(82	)		(185	)
Reclassifications from nonaccretable difference		66			—
Disposals		—			(108	)
Ending balance	$	273		$	289

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

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

	Past Due and Still Accruing												Total Past
(dollars in thousands)	30–59 Days			60-89 Days			90 Days or More			Nonaccrual			Due and Nonaccrual			Current		Total
September 30, 2017:
Real estate loans:
Residential properties	$	53		$	—		$	—		$	—		$	53		$	2,400,486	$	2,400,539
Commercial properties		762			—			1,330			1,278			3,370			526,220		529,590
Land and construction		—			—			—			—			—			31,304		31,304
Commercial and industrial loans		10,926			—			815			5,216			16,957			243,001		259,958
Consumer loans		—			—			—			—			—			28,469		28,469
Total	$	11,741		$	—		$	2,145		$	6,494		$	20,380		$	3,229,480	$	3,249,860

Percentage of total loans		0.36	%		—	%		0.07	%		0.20	%		0.63	%

December 31, 2016:
Real estate loans:
Residential properties	$	—		$	—		$	—		$	3,759		$	3,759		$	1,777,130	$	1,780,889
Commercial properties		—			—			2,128			1,120			3,248			473,711		476,959
Land and construction		—			—			—			—			—			24,100		24,100
Commercial and industrial loans		—			2			3,800			3,359			7,161			230,780		237,941
Consumer loans		—			—			—			—			—			32,127		32,127
Total	$	—		$	2		$	5,928		$	8,238		$	14,168		$	2,537,848	$	2,552,016

Percentage of total loans		—	%		0.00	%		0.23	%		0.32	%		0.56	%

The level of delinquent loans and nonaccrual loans have been adversely impacted by the loans acquired from acquisitions. As of September 30, 2017, of the $8.6 million in loans over 90 days past due, including loans on nonaccrual, $3.1 million, or 36% were loans acquired from acquisitions.

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 sixty days or more with respect to principal or interest. The accrual of interest may be continued on a well-secured loan contractually past due sixty 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 Bank considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The determination of past due, nonaccrual or impairment status of loans acquired in an acquisition, other than loans deemed purchased impaired, is the same as loans we originate.

During the first nine months of 2017 the Company did not have any additional loans classified as troubled debt restructurings (“TDR”). As of September 30, 2017 and December 31, 2016, the Company had five loans classified as TDR which are included as nonaccrual in the table below. These loans have been paying in accordance with the terms of their restructure.

	September 30, 2017							December 31, 2016
(dollars in thousands)	Accrual			Nonaccrual	Total			Accrual	Nonaccrual		Total
Commercial and industrial	$	225	$	2,522	$	2,747	$	317	$	3,109	$	3,426

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

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

NOTE 5: ALLOWANCE FOR LOAN LOSSES

The following is a roll forward of the Bank’s allowance for loan losses for the following periods:

(dollars in thousands)	Beginning Balance		Provision for Loan Losses			Charge-offs			Recoveries			Ending Balance
Quarter Ended September 30, 2017:
Real estate loans:
Residential properties	$	8,851	$	469		$	—		$	—		$	9,320
Commercial properties		3,285		281			—			—			3,566
Land and construction		287		66			—			—			353
Commercial and industrial loans		4,093		(119	)		—			(1	)		3,973
Consumer loans		284		4			—			—			288
Total	$	16,800	$	701		$	—		$	(1	)	$	17,500

Nine Months Ended September 30, 2017:
Real estate loans:
Residential properties	$	6,669	$	2,651		$	—		$	—		$	9,320
Commercial properties		2,983		583			—			—			3,566
Land and construction		233		120			—			—			353
Commercial and industrial loans		5,227		(1,492	)		—			238			3,973
Consumer loans		288		—			—			—			288
Total	$	15,400	$	1,862		$	—		$	238		$	17,500

Year Ended December 31, 2016:
Real estate loans:
Residential properties	$	6,799	$	(130	)	$	—		$	—		$	6,669
Commercial properties		1,813		1,051			(50	)		169			2,983
Land and construction		103		130			—			—			233
Commercial and industrial loans		1,649		3,578			—			—			5,227
Consumer loans		236		52			—			—			288
Total	$	10,600	$	4,681		$	(50	)	$	169		$	15,400

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

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

(dollars in thousands)	Allowance for Loan Losses								Unaccreted Credit
	Evaluated for Impairment				Purchased				Component
	Individually		Collectively		Impaired		Total		Other Loans
September 30, 2017:
Allowance for loan losses:
Real estate loans:
Residential properties	$	—	$	9,320	$	—	$	9,320	$	84
Commercial properties		—		3,566		—		3,566		78
Land and construction		—		353		—		353		—
Commercial and industrial loans		1,413		2,560		—		3,973		89
Consumer loans		—		288		—		288		6
Total	$	1,413	$	16,087	$	—	$	17,500	$	257
Loans:
Real estate loans:
Residential properties	$	—	$	2,400,539	$	—	$	2,400,539	$	9,043
Commercial properties		3,603		525,822		165		529,590		10,290
Land and construction		—		31,304		—		31,304		—
Commercial and industrial loans		10,747		247,559		1,652		259,958		14,771
Consumer loans		—		28,469		—		28,469		760
Total	$	14,350	$	3,233,693	$	1,817	$	3,249,860	$	34,864

December 31, 2016:
Allowance for loan losses:
Real estate loans:
Residential properties	$	—	$	6,669	$	—	$	6,669	$	128
Commercial properties		—		2,983		—		2,983		136
Land and construction		—		233		—		233		2
Commercial and industrial loans		—		5,227		—		5,227		147
Consumer loans		—		288		—		288		19
Total	$	—	$	15,400	$	—	$	15,400	$	432
Loans:
Real estate loans:
Residential properties	$	6,093	$	1,774,796	$	—	$	1,780,889	$	12,373
Commercial properties		2,148		474,634		177		476,959		24,796
Land and construction		—		24,100		—		24,100		437
Commercial and industrial loans		753		233,992		3,196		237,941		20,165
Consumer loans		—		32,127		—		32,127		1,266
Total	$	8,994	$	2,539,649	$	3,373	$	2,552,016	$	59,037

The column labeled “Unaccreted Credit Component Other Loans” represents the amount of unaccreted credit component discount for loans acquired in an acquisition that were not classified as purchased impaired or individually evaluated for impairment as of the dates indicated, and the stated principal balance of the related loans. The unaccreted credit component discount is equal to 0.74% and 0.73% of the stated principal balance of these loans as of September 30, 2017 and December 31, 2016, respectively. In addition to this unaccreted credit component discount, an additional $0.1 million and $0.5 million of the ALLL has been provided for these loans as of September 30, 2017 and December 31, 2016, respectively.

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

The Bank 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 Bank analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as loans secured 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 Bank 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.

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

Additionally, all loans classified as TDRs are considered impaired at the time they are restructured. Purchased credit impaired loans are not considered impaired loans for these purposes.

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.

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows as of:

(dollars in thousands)	Pass		Special Mention		Substandard		Impaired		Total
September 30, 2017:
Real estate loans:
Residential properties	$	2,398,246	$	—	$	2,293	$	—	$	2,400,539
Commercial properties		519,931		5,131		925		3,603		529,590
Land and construction		31,304		—		—		—		31,304
Commercial and industrial loans		246,499		815		1,897		10,747		259,958
Consumer loans		28,469		—		—		—		28,469
Total	$	3,224,449	$	5,946	$	5,115	$	14,350	$	3,249,860

December 31, 2016:
Real estate loans:
Residential properties	$	1,773,296	$	1,500	$	—	$	6,093	$	1,780,889
Commercial properties		470,484		1,913		2,414		2,148		476,959
Land and construction		24,100		—		—		—		24,100
Commercial and industrial loans		219,676		3,625		13,887		753		237,941
Consumer loans		32,127		—		—		—		32,127
Total	$	2,519,683	$	7,038	$	16,301	$	8,994	$	2,552,016

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

Impaired loans evaluated individually and any related allowance are as follows as of:

	With No Allowance Recorded				With an Allowance Recorded
(dollars in thousands)	Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Recorded Investment		Related Allowance
September 30, 2017:
Real estate loans:
Commercial properties	$	3,603	$	3,603	$	—	$	—	$	—
Commercial and industrial loans		501		501		10,246		10,246		1,413
Total	$	4,104	$	4,104	$	10,246	$	10,246	$	1,413

December 31, 2016:
Real estate loans:
Residential properties	$	6,093	$	6,093	$	—	$	—	$	—
Commercial properties		2,148		2,148		—		—		—
Commercial and industrial loans		753		753		—		—		—
Consumer loans		—		—		—		—		—
Total	$	8,994	$	8,994	$	—	$	—	$	—

The weighted average annualized average balance of the recorded investment for impaired loans, beginning from when the loan became impaired, and any interest income recorded on impaired loans after they became impaired is as follows for the:

	Nine months Ended September 30, 2017				Year Ended December 31, 2016
(dollars in thousands)	Average Recorded Investment		Interest Income after Impairment		Average Recorded Investment		Interest Income after Impairment
Real estate loans:
Residential properties	$	2,427	$	20	$	1,970	$	14
Commercial properties		2,201		16		2,252		17
Commercial and industrial loans		3,792		13		1,673		20
Consumer loans		—		—		4		—
Total	$	8,420	$	49	$	5,899	$	51

There was no interest income recognized on a cash basis in either 2017 or 2016 on impaired loans.

NOTE 6: LOAN SALES AND MORTGAGE SERVICING RIGHTS

During the first nine months of 2017, FFB recognized $4.3 million of gains on the sale of $286 million of multifamily loans and recorded mortgage servicing rights of $2.0 million on the sale of those loans. As of September 30, 2017 and December 31, 2016, mortgage servicing rights were $3.8 million and $2.2 million, respectively, and the amount of loans serviced for others totaled $620 million and $382 million, respectively. Servicing fees collected in the first nine months of 2017 and in all of 2016 were $0.8 million and $0.3 million, respectively.

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

NOTE 7: DEPOSITS

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

	September 30, 2017					December 31, 2016
(dollars in thousands)	Amount		Weighted Average Rate			Amount		Weighted Average Rate

Demand deposits:
Noninterest-bearing	$	1,096,472		—		$	661,781		—
Interest-bearing		278,917		0.654	%		194,274		0.471	%
Money market and savings		1,010,298		0.854	%		941,344		0.677	%
Certificates of deposits		883,039		1.094	%		629,396		0.589	%
Total	$	3,268,726		0.615	%	$	2,426,795		0.453	%

At September 30, 2017, of the $266.7 million of certificates of deposits of $250,000 or more, $186.9 million mature within one year and $79.8 million mature after one year. Of the $616.4 million of certificates of deposit of less than $250,000, $534.5 million mature within one year and $81.9 million mature after one year. At December 31, 2016, of the $189.9 million of certificates of deposits of $250,000 or more, $182.8 million mature within one year and $7.1 million mature after one year. Of the $439.5 million of certificates of deposit of less than $250,000, $416.3 million mature within one year and $23.2 million mature after one year.

NOTE 8: BORROWINGS

At September 30, 2017, our borrowings consisted of $406 million of overnight FHLB advances at the Bank and $15 million of borrowings under a holding company line of credit. At December 31, 2016, our borrowings consisted of $1.3 billion of overnight FHLB advances. The FHLB advances were paid in full in the early part of October 2017 and January 2017, respectively, and bore interest rates of 1.14% and 0.56%, respectively. Because the Bank utilizes overnight borrowings, the balance of outstanding borrowings fluctuates on a daily basis. The average balance of overnight borrowings during the first nine months of 2017 was $549.4 million, as compared to $507.0 million during all of 2016.

During the first quarter of 2017, the Company entered into a loan agreement with an unaffiliated lender that provides for a revolving line of credit for up to $25 million. This line of credit was amended in the second quarter of 2017 to increase the maximum loan amount to $50 million. The loan agreement matures in five years, with an option to extend the maturity date subject to certain conditions, and bears interest at 90 day LIBOR plus 350 basis points (3.50%). We are required to meet certain financial covenants during the term of the loan, including minimum capital levels and limits on classified assets. The Company’s obligations under the loan agreement are secured by, among other things, a pledge of all of its equity in FFB. As of September 30, 2017, the balance was $15 million at a rate of 4.80%.

NOTE 9: EARNINGS PER SHARE

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

	Quarter Ended September 30, 2017				Quarter Ended September 30, 2016
(dollars in thousands, except per share amounts)	Basic		Diluted		Basic		Diluted

Net income	$	9,580	$	9,580	$	9,058	$	9,058

Basic common shares outstanding		34,565,949		34,565,949		32,514,016		32,514,016
Effect of contingent shares issuable				1,592				1,592
Effect of options and restricted stock				692,091				1,060,286
Diluted common shares outstanding				35,259,632				33,575,894

Earnings per share	$	0.28	$	0.27	$	0.28	$	0.27

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

	Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016
(dollars in thousands, except per share amounts)	Basic		Diluted		Basic		Diluted

Net income	$	25,309	$	25,309	$	16,786	$	16,786

Basic common shares outstanding		33,671,327		33,671,327		32,264,224		32,264,224
Effect of contingent shares issuable				1,592				1,592
Effect of options and restricted stock				926,894				1,099,798
Diluted common shares outstanding				34,599,813				33,365,614

Earnings per share	$	0.75	$	0.73	$	0.52	$	0.50

Based on a weighted average basis, options to purchase 8,802 shares of common stock were excluded for the nine months ended September 30, 2016, because their effect would have been anti-dilutive.

NOTE 10: SEGMENT REPORTING

For the quarter and nine months ended September 30, 2017 and 2016, the Company had two reportable business segments: Banking (FFB and FFIS) and Wealth Management (FFA). The results of FFI and any elimination entries are included in the column labeled Other. The following tables show key operating results for each of our business segments used to arrive at our consolidated totals for the following periods:

(dollars in thousands)	Banking		Wealth Management		Other			Total
Quarter ended September 30, 2017:
Interest income	$	34,877	$	1	$	—		$	34,878
Interest expense		6,210		—		228			6,438
Net interest income		28,667		1		(228	)		28,440
Provision for loan losses		701		—		—			701
Noninterest income		3,955		6,132		(224	)		9,863
Noninterest expense		17,333		5,096		964			23,393
Income (loss) before taxes on income	$	14,588	$	1,037	$	(1,416	)	$	14,209


Quarter ended September 30, 2016:
Interest income	$	26,004	$	—	$	—		$	26,004
Interest expense		2,841		—		—			2,841
Net interest income		23,163		—		—			23,163
Provision for loan losses		1,231		—		—			1,231
Noninterest income		9,923		5,319		(163	)		15,079
Noninterest expense		16,134		4,697		705			21,536
Income (loss) before taxes on income	$	15,721	$	622	$	(868	)	$	15,475

FIRST FOUNDATION INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Nine Months Ended September 30, 2017 – UNAUDITED

		Banking				Wealth Management				Other					Total
Nine months ended September 30, 2017:
Interest income		$		98,889		$		1		$		—			$		98,890
Interest expense				16,062				—				435					16,497
Net interest income				82,827				1				(435	)				82,393
Provision for loan losses				1,862				—				—					1,862
Noninterest income				10,636				17,334				(627	)				27,343
Noninterest expense				51,506				15,328				3,481					70,315
Income (loss) before taxes on income		$		40,095		$		2,007		$		(4,543	)		$		37,559

Nine months ended September 30, 2016:
Interest income	$		72,275		$		—		$		—			$		72,275
Interest expense			7,830				—				—					7,830
Net interest income			64,445				—				—					64,445
Provision for loan losses			2,881				—				—					2,881
Noninterest income			11,505				15,917				(448		)			26,974
Noninterest expense			43,746				14,536				2,521					60,803
Income (loss) before taxes on income	$		29,323		$		1,381		$		(2,969		)	$		27,735

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 quarter and nine months ended September 30, 2017 as compared to our results of operations in the quarter and nine months ended September 30, 2016; and our financial condition at September 30, 2017 as compared to our financial condition at December 31, 2016. 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, 2016, and the notes thereto, which are set forth in Item 8 of our Annual Report on Form 10-K (our “2016 10-K”) which we filed with the Securities and Exchange Commission (“SEC”) on March 15, 2017.

Forward-Looking Statements

Statements contained in this report that are not historical facts or that discuss our expectations, beliefs or views regarding our future financial performance or future financial condition, or financial or other trends in our business or in the markets in which we operate, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” “forecast” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Such forward-looking statements are based on current information that is available to us, and on assumptions that we make, about future events or economic or financial conditions or trends over which we do not have control. In addition, our businesses and the markets in which we operate are subject to a number of risks and uncertainties. Those risks and uncertainties, and unexpected future events, could cause our financial condition or actual operating results in the future to differ, possibly significantly, from our expected financial condition and operating results that are set forth in the forward-looking statements contained in this report.

The principal risks and uncertainties to which our businesses are subject are discussed in Item 1A in our 2016 10-K and in this Item 2 below. 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 in Item 1A of our 2016 10-K, which qualify the forward-looking statements contained in this report.

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 2016 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 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.

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

the deferred tax asset on our balance sheet to the amount with respect to which we believe it is still more likely, than not, that we will be able to use to offset or reduce taxes in the future. The establishment of such a valuation allowance, or any increase in an existing valuation allowance, would be effectuated through a charge to the provision for income taxes or a reduction in any income tax credit for the period in which such valuation allowance is established or increased.

Allowance for Loan and Lease Losses. Our ALLL is established through a provision for loan 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 ALLL when management believes that collectability of the principal is unlikely. The ALLL 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 ALLL 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 portfolio.

Adoption of new or revised accounting standards. For some accounting standards, we may elect to take advantage of the extended transition period afforded by the JOBS Act, for the implementation of new or revised accounting standards. As a result, we may not be required to comply with new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies or we cease to be an “emerging growth” company as defined in the JOBS Act. As a result of this election, our financial statements may not be comparable to the financials statements of companies that comply with public company effective dates.

We have two business segments, “Banking” and “Investment Management and Wealth Planning” (“Wealth Management”). Banking includes the operations of FFB and FFIS 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.

Recent Developments and Overview

We experienced strong growth during the first nine months of 2017 with loan originations of $1.2 billion, deposit growth of $842 million and a $585 million increase in our assets under management (“AUM”) in Wealth Management. Revenues and income before taxes continue to increase due to the higher level of interest earnings assets.

During the first nine months of 2017, the Company sold 1.3 million shares of its common stock through its ATM offering at an average price of $16.77 per share, generating net proceeds of $21.8 million.

After a determination that additional investment would not provide adequate returns, the Company has decided to discontinue its property and casualty insurance activities effective in the fourth quarter of 2017. The Company does not expect to incur any significant costs as a result of this action.

Results of Operations

Our net income for the quarter and nine months ending September 30, 2017 was $9.6 million and $25.3 million, respectively as compared to $9.1 million and $16.8 million for the corresponding periods in 2016. Income before taxes for the quarter and nine months ending September 30, 2017 was $14.2 million and $37.6 million, respectively, as compared to $15.5 million and $27.7 million for the corresponding periods in 2016.

The effective tax rate for the first nine months of 2017 was 32.6% as compared to 39.5% for the first nine months of 2016, and as compared to a statutory rate of approximately 41.5%, as the Company benefited from reductions in taxes on income related to excess tax benefits resulting from the exercise of stock awards in both periods.

The primary sources of revenue for Banking are net interest income, fees from its deposits, trust and insurance services, certain loan fees, and consulting fees. The primary source of revenue for Wealth Management is asset management fees assessed on the balance of AUM. Compensation and benefit costs, which represent the largest component of noninterest expense, accounted for 58% and 78%, respectively, of the total noninterest expense for Banking and Wealth Management in the first nine months of 2017.

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

(dollars in thousands)	Banking		Wealth Management		Other			Total
2017:
Interest income	$	34,877	$	1	$	—		$	34,878
Interest expense		6,210		—		228			6,438
Net interest income		28,667		1		(228	)		28,440
Provision for loan losses		701		—		—			701
Noninterest income		3,955		6,132		(224	)		9,863
Noninterest expense		17,333		5,096		964			23,393
Income (loss) before taxes on income	$	14,588	$	1,037	$	(1,416	)	$	14,209
2016:
Interest income	$	26,004	$	—	$	—		$	26,004
Interest expense		2,841		—		—			2,841
Net interest income		23,163		—		—			23,163
Provision for loan losses		1,231		—		—			1,231
Noninterest income		9,923		5,319		(163	)		15,079
Noninterest expense		16,134		4,697		705			21,536
Income (loss) before taxes on income	$	15,721	$	622	$	(868	)	$	15,475

General. Consolidated income before taxes for the third quarter of 2017 was $14.2 million as compared to $15.5 million for the third quarter of 2016. The decrease in income before taxes was the result of a $1.1 million decrease in income before taxes for Banking and a $0.5 million increase in corporate expenses which were partially offset by a $0.4 million increase in income before taxes for Wealth Management. The decrease in Banking was due to lower noninterest income and higher noninterest expenses which were partially offset by higher net interest income and a lower provision for loan losses. The increase in Wealth Management was due to higher noninterest income which was partially offset by higher noninterest expenses. Corporate interest expenses are related to the holding company line of credit which did not exist in 2016. Corporate noninterest expenses increased by $0.3 million due primarily to costs incurred related to the pending acquisition of Community 1st Bancorp. We expect to incur approximately $3.8 million in costs related to the acquisition of Community 1st Bancorp in the fourth quarter.

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

(dollars in thousands)	Banking		Wealth Management		Other			Total
2017:
Interest income	$	98,889	$	1	$	—		$	98,890
Interest expense		16,062		—		435			16,497
Net interest income		82,827		1		(435	)		82,393
Provision for loan losses		1,862		—		—			1,862
Noninterest income		10,636		17,334		(627	)		27,343
Noninterest expense		51,506		15,328		3,481			70,315
Income (loss) before taxes on income	$	40,095	$	2,007	$	(4,543	)	$	37,559
2016:
Interest income	$	72,275	$	—	$	—		$	72,275
Interest expense		7,830		—		—			7,830
Net interest income		64,445		—		—			64,445
Provision for loan losses		2,881		—		—			2,881
Noninterest income		11,505		15,917		(448	)		26,974
Noninterest expense		43,746		14,536		2,521			60,803
Income (loss) before taxes on income	$	29,323	$	1,381	$	(2,969	)	$	27,735

General. Consolidated income before taxes for the first nine months of 2017 was $37.6 million as compared to $27.7 million for the first nine months of 2016. The increase in income before taxes was the result of a $10.8 million increase in income before taxes for Banking and a $0.6 million increase in income before taxes for Wealth Management, which were partially offset by a $1.4 million increase in corporate expenses. The increase in Banking was due to higher net interest income and a lower provision for loan losses which was partially offset by lower noninterest income and higher noninterest expenses. The increase in Wealth Management was due to higher noninterest income which was partially offset by higher noninterest expense. Corporate interest expenses are related to the holding company line of credit which did not exist in 2016. Corporate noninterest expenses increased by $1.0 million due to costs related to strategic activities, including the Company’s at the market stock offering and the proposed acquisition of Community 1st Bancorp, higher charitable contributions and other increases in costs, including legal and marketing.

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 yield on interest-earning assets:

	Quarter Ended September 30:
	2017							2016
(dollars in thousands)	Average Balances		Interest		Average Yield / Rate			Average Balances		Interest		Average Yield / Rate

Interest-earning assets:
Loans	$	3,345,159	$	31,236		3.73	%	$	2,357,956	$	22,231		3.77	%
Securities		481,741		3,023		2.51	%		508,193		3,202		2.52	%
Fed funds, FHLB stock, and deposits		103,960		619		2.36	%		77,731		571		2.92	%
Total interest-earning assets		3,930,860		34,878		3.55	%		2,943,880		26,004		3.53	%

Noninterest-earning assets:
Nonperforming assets		5,250							8,794
Other		31,869							38,379
Total assets	$	3,967,979						$	2,991,053

Interest-bearing liabilities:
Demand deposits	$	271,270		440		0.64	%	$	191,133		213		0.44	%
Money market and savings		1,027,892		2,194		0.85	%		761,778		1,307		0.68	%
Certificates of deposit		858,120		2,265		1.05	%		568,068		906		0.63	%
Total interest-bearing deposits		2,157,282		4,899		0.90	%		1,520,979		2,426		0.63	%
Borrowings		454,273		1,539		1.34	%		362,576		415		0.46	%
Total interest-bearing liabilities		2,61,555		6,438		0.98	%		1,883,555		2,841		0.60	%

Noninterest-bearing liabilities:
Demand deposits		1,013,753							806,861
Other liabilities		17,281							18,578
Total liabilities		3,642,589							2,708,994
Shareholders’ equity		325,390							282,059
Total liabilities and equity	$	3,967,979						$	2,991,053

Net Interest Income			$	28,440						$	23,163

Net Interest Rate Spread						2.57	%						2.93	%

Net Yield on Interest-earning Assets						2.90	%						3.15	%

	Nine Months Ended September 30:
	2017							2016
(dollars in thousands)	Average Balances		Interest		Average Yield / Rate			Average Balances		Interest		Average Yield / Rate

Interest-earning assets:
Loans	$	3,174,155	$	87,709		3.69	%	$	2,143,315	$	61,362		3.82	%
Securities		496,756		9,180		2.46	%		525,089		9,423		2.39	%
Fed funds, FHLB stock, and deposits		87,216		2,001		3.07	%		62,147		1,490		3.20	%
Total interest-earning assets		3,758,127		98,890		3.51	%		2,730,551		72,275		3.53	%

Noninterest-earning assets:
Nonperforming assets		6,227							6,682
Other		30,433							35,450
Total assets	$	3,794,787						$	2,772,683

Interest-bearing liabilities:
Demand deposits	$	259,660		1,100		0.57	%	$	223,490		779		0.47	%
Money market and savings		1,003,696		5,934		0.79	%		636,612		3,087		0.65	%
Certificates of deposit		780,228		5,069		0.87	%		509,790		2,328		0.61	%
Total interest-bearing deposits		2,043,584		12,103		0.79	%		1,369,892		6,194		0.60	%
Borrowings		588,590		4,394		1.00	%		499,191		1,636		0.44	%
Total interest-bearing liabilities		2,632,174		16,497		0.84	%		1,869,083		7,830		0.56	%

Noninterest-bearing liabilities:
Demand deposits		842,312							615,049
Other liabilities		15,233							15,573
Total liabilities		3,489,719							2,499,705
Shareholders’ equity		305,068							272,978
Total liabilities and equity	$	3,794,787						$	2,772,683

Net Interest Income			$	82,393						$	64,445

Net Interest Rate Spread						2.67	%						2.97	%

Net Yield on Interest-earning Assets						2.92	%						3.15	%

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. The following table provides a breakdown of the changes in net interest income due to volume and rate changes for the quarter and nine months ended September 30, 2017, as compared to corresponding periods in 2016:

	Quarter Ended September 30, 2017 vs. 2016									Nine Months Ended September 30, 2017 vs. 2016
(dollars in thousands)	Increase (Decrease) due to:										Increase (Decrease) due to:
		Volume			Rate			Total			Volume			Rate			Total
Interest earned on:
Loans	$	9,234		$	(229	)	$	9,005		$	28,572		$	(2,225	)	$	26,347
Securities		(167	)		(12	)		(179	)		(528	)		285			(243	)
Fed funds, FHLB stock, and deposits		170			(122	)		48			575			(64	)		511
Total interest-earning assets		9,237			(363	)		8,874			28,619			(2,004	)		26,615
Interest paid on:
Demand deposits		107			120			227			144			177			321
Money market and savings		524			363			887			2,073			774			2,847
Certificates of deposit		595			764			1,359			1,523			1,218			2,741
Borrowings		143			981			1,124			347			2,411			2,758
Total interest-bearing liabilities		1,369			2,228			3,597			4,087			4,580			8,667
Net interest income	$	7,868		$	(2,591	)	$	5,277		$	24,532		$	(6,584	)	$	17,948

Net interest income for Banking increased 24% from $23.2 million in the third quarter of 2016, to $28.7 million in the third quarter of 2017 due to a 34% increase in interest-earning assets, which was partially offset by a decrease in our net interest rate spread. The decrease in the net interest rate spread from 2.93% in the third quarter of 2016 to 2.57% in the third quarter of 2017 was due to an increase in the cost of interest-bearing liabilities from 0.60% in the third quarter of 2016 to 0.98% in the third quarter of 2017. The yield on interest-earning assets increased due to a higher proportion of loans even though the yield on loans decreased slightly due to prepayments of higher yielding loans. The increase in the cost of interest-bearing liabilities was due to increased costs of interest-bearing deposits, resulting from increases in deposit market rates, and increased costs of borrowings as the average rate on FHLB advances increased from 0.46% in the third quarter of 2016 to 1.20% in the third quarter of 2017. In addition, the Company had outstanding borrowings on its holding company line of credit during the third quarter of 2017.

Net interest income for Banking increased 29% from $64.4 million in the first nine months of 2016, to $82.8 million in the first nine months of 2017 due to a 38% increase in interest-earning assets, which was partially offset by a decrease in our net interest rate spread. The decrease in the net interest rate spread from 2.97% in the first nine months of 2016 to 2.67% in the first nine months of 2017 was due to a decrease in the yield on interest-earning assets and an increase in the cost of interest-bearing liabilities. The yield on interest-earning assets decreased from 3.53% to 3.51% due to a decrease in the yield on loans due to prepayments of higher yielding loans and the addition of loans at market rates in the latter half of 2016 which were lower than the then-current yield on our loan portfolio. The cost of interest-bearing liabilities increased from 0.56% to 0.84% due to increased costs of interest-bearing deposits, resulting from increases in deposit market rates, and increased costs of borrowings as the average rate on FHLB advances increased from 0.44% in the first nine months of 2016 to 0.92% in the first nine months of 2017. In addition, the Company borrowed on its holding company line of credit during the first nine months of 2017.

Provision for loan losses. The provision for loan losses represents our estimate of the amount necessary to be charged against the current period’s earnings to maintain the ALLL at a level that we consider adequate in relation to the estimated losses inherent in the loan portfolio. The provision for loan losses 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 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 quarter and nine months ended September 30, 2017, we recorded provisions for loan losses of $0.7 million and $1.9 million, respectively, as compared to $1.2 million and $2.9 million, respectively, for the quarter and nine months ended September 30, 2016. The lower provision recorded in the third quarter of 2017 as compared to the corresponding period of 2016 reflected the 46% lower growth in outstanding loans in the third quarter of 2017 as compared to the third quarter of 2016. During the first nine months of 2017, the Bank realized $0.2 million of recoveries and experienced improving credit trends in its criticized loans.

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 insurance commissions. The following table provides a breakdown of noninterest income for Banking for the quarter and nine months ended September 30:

(dollars in thousands)	2017		2016
Quarter Ended September 30:
Trust fees	$	825	$	799
Consulting fees		112		145
Deposit charges		100		105
Gain on capital markets activities		—		997
Gain on sale of loans		1,962		7,238
Gain on sale of REO		104		—
Prepayment fees		372		210
Other		480		429
Total noninterest income	$	3,955	$	9,923
Nine Months Ended September 30:
Trust fees	$	2,485	$	2,001
Consulting fees		334		536
Deposit charges		329		348
Loss on capital markets activities		—		(1,043	)
Gain on sale of loans		4,312		7,238
Gain on sale of REO		104		—
Prepayment fees		1,243		898
Other		1,829		1,527
Total noninterest income	$	10,636	$	11,505

Noninterest income in Banking was $5.9 million lower in the third quarter of 2017 as compared to the third quarter of 2016. During the third quarter of 2017, we realized $2.0 million in gains on the sale of $112 million of multifamily loans, while in the third quarter of 2016, we realized a gain of $7.2 million on the sale of $265 million of multifamily loans.

Noninterest income in Banking decreased $0.9 million from $11.5 million in the first nine months of 2016 to $10.6 million in the first nine months of 2017. During the first nine months of 2016, we realized $7.2 million in gains on the sale of multifamily loans and $1.0 million in losses from capital activities as compared to $4.3 million in gains on sales of loans for the first nine months of 2017.

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 a breakdown of noninterest income for Wealth Management for the quarter and nine months ended September 30:

(dollars in thousands)	2017			2016
Quarter Ended September 30:
Asset management fees	$	6,124		$	5,301
Financial consulting fees		16			22
Other		(8	)		(4	)
Total noninterest income	$	6,132		$	5,319

Nine Months Ended September 30:
Asset management fees	$	17,290		$	15,856
Financial consulting fees		54			73
Other		(10	)		(12	)
Total noninterest income	$	17,334		$	15,917

Noninterest revenue for Wealth Management increased by $0.8 million in the third quarter and $1.4 million for the nine months ended September 30, 2017 when compared to the corresponding periods in 2016 due to higher levels of AUM balances on which the asset management fees are calculated. AUM, which totaled $4.2 billion at September 30, 2017, increased by $585 million during the first nine months of 2017 as new account growth of $355 million and portfolio gains of $321 million were partially offset by net additions and account terminations of $91 million.

Noninterest Expense. The following table provides a breakdown of noninterest expense for Banking and Wealth Management for the quarter and nine months ended September 30:

	Banking				Wealth Management
(dollars in thousands)	2017		2016		2017		2016
Quarter Ended September 30:
Compensation and benefits	$	9,863	$	8,252	$	3,928	$	3,576
Occupancy and depreciation		3,221		2,506		537		547
Professional services and marketing		560		2,797		485		421
Other expenses		3,689		2,579		146		153
Total noninterest expense	$	17,333	$	16,134	$	5,096	$	4,697

Nine Months Ended September 30:
Compensation and benefits	$	29,913	$	24,887	$	11,956	$	11,068
Occupancy and depreciation		9,404		7,072		1,608		1,619
Professional services and marketing		2,320		5,511		1,320		1,397
Other expenses		9,869		6,276		444		452
Total noninterest expense	$	51,506	$	43,746	$	15,328	$	14,536

Noninterest expense in Banking increased from $16.1 million in the third quarter of 2016 to $17.3 million in the third quarter of 2017 due to increases in staffing and costs associated with the Bank’s expansion, the growth of its balances of loans and deposits, which was partially offset by lower legal costs. Compensation and benefits for Banking increased $1.6 million or 20% during the third quarter of 2017 as compared to the third quarter of 2016 as the number of full time equivalent employees (“FTE”) in Banking increased to 315.7 from 266.3 as a result of the increased staffing related to the December 2016 acquisition of two branches and additional personnel added to support the growth in loans and deposits. A $0.7 million increase in occupancy and depreciation for Banking in the third quarter of 2017 as compared to the third quarter of 2016 was due to costs associated with our expansion into additional corporate space and the acquisition and opening of new offices during 2016 and increases in our data processing costs due to increased volumes and the implementation of enhancements. Litigation related costs for Banking were $2.3 million lower in the

third quarter of 2017 as compared to the third quarter of 2016 due to the reimbursement from our insurance providers of previously incurred legal costs and costs incurred for a litigation matter in the third quarter of 2016. The $1.1 million increase in other expenses in Banking in the third quarter of 2017 as compared to the third quarter of 2016 was due to a $1.6 million increase in customer service costs related to the increases in noninterest demand deposits.

Noninterest expense in Banking increased from $43.7 million in the first nine months of 2016 to $51.5 million in the first nine months of 2017 due to increases in staffing and costs associated with the Bank’s expansion, the growth of its balances of loans and deposits, which was partially offset by lower legal costs. Compensation and benefits for Banking increased $5.0 million or 20% during the first nine months of 2017 as compared to the first nine months of 2016 as the number of FTE in Banking increased to 303.8 from 256.2 as a result of the increased staffing related to the December 2016 acquisition of two branches and additional personnel added to support the growth in loans and deposits. A $2.4 million increase in occupancy and depreciation for Banking in the first nine months of 2017 as compared to the first nine months of 2016 was due to costs associated with our expansion into additional corporate space, the acquisition and opening of new offices during 2016 and increases in our data processing costs due to increased volumes and the implementation of enhancements. Litigation related costs for Banking were $3.1 million lower in the first nine months of 2017 as compared to the first nine months of 2016 due to the reimbursement from our insurance providers of $1.8 million of previously incurred legal costs which was offset by costs incurred for a trial in 2016. A $3.6 million increase in other expenses in Banking in the first nine months of 2017 as compared to the first nine months of 2016 was due to a $3.2 million increase in customer service costs related to the increases in noninterest demand deposits and costs related to our growth, including deposit insurance.

The increases in noninterest expense in Wealth Management for the third quarter and nine months of 2017 as compared to the corresponding periods in 2016 were due to increases of $0.4 million and $0.9 million, respectively, in compensation and benefits. The increases in compensation and benefits were due to increases in FTE and cost of living increases.

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:

(dollars in thousands)	Banking		Wealth Management			Other and Eliminations			Total
September 30, 2017:
Cash and cash equivalents	$	123,030	$	3,837		$	(3,657	)	$	123,210
Securities AFS		471,502		—			—			471,502
Loans Held For Sale		153,405		—			—			153,405
Loans, net		3,239,374		—			—			3,239,374
FHLB Stock		17,250		—			—			17,250
Premises and equipment		5,600		996			136			6,732
Deferred taxes		14,857		161			(93	)		14,925
REO		1,400		—			—			1,400
Goodwill and intangibles		2,021		—			—			2,021
Other assets		18,015		264			2,963			21,242
Total assets	$	4,046,454	$	5,258		$	(651	)	$	4,051,061

Deposits	$	3,284,176	$	—		$	(15,450	)	$	3,268,726
Borrowings		406,000		—			15,000			421,000
Intercompany balances		3,490		(917	)		(2,573	)		—
Other liabilities		17,240		2,705			937			20,882
Shareholders’ equity		335,548		3,470			1,435			340,453
Total liabilities and equity	$	4,046,454	$	5,258		$	(651	)	$	4,051,061

December 31, 2016:
Cash and cash equivalents	$	597,795	$	2,576		$	(2,425	)	$	597,946
Securities AFS		509,578		—			—			509,578
Loans held for sale		250,942		—			—			250,942
Loans, net		2,540,309		—			—			2,540,309
FHLB Stock		33,750		—			—			33,750
Premises and equipment		5,603		991			136			6,730
Deferred taxes		16,602		283			(74	)		16,811
REO		1,734		—			—			1,734
Goodwill and Intangibles		2,177		—			—			2,177
Other assets		13,270		445			1,711			15,426
Total assets	$	3,971,760	$	4,295		$	(652	)	$	3,975,403

Deposits	$	2,435,538	$	—		$	(8,743	)	$	2,426,795
Borrowings		1,250,000		—			—			1,250,000
Intercompany balances		3,019		539			(3,558	)		—
Other liabilities		11,670		2,744			(70	)		14,344
Shareholders’ equity		271,533		1,012			11,719			284,264
Total liabilities and equity	$	3,971,760	$	4,295		$	(652	)	$	3,975,403

Our consolidated balance sheet is primarily affected by changes occurring in our Banking operations as our Wealth Management operations do not maintain significant levels of assets. Banking has experienced and is expected to continue to experience increases in its total assets as a result of our growth strategy.

During the first nine months of 2017, cash and cash equivalents decreased by $475 million, loans and loans held for sale increased by $604 million and deposits increased by $842 million. Total borrowings, which included $15 million outstanding on our holding company line of credit, decreased by $829 million.

Cash and cash equivalents, certificates of deposit and securities. Cash and cash equivalents, which primarily consist of funds held at the Federal Reserve Bank or at correspondent banks, including fed funds, decreased $475 million during the first nine months of 2017. Changes in cash equivalents are primarily affected by the funding of loans, investments in securities, and changes in our sources of funding: deposits, FHLB advances and FFI borrowings.

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

	Amortized		Gross Unrealized					Estimated
(dollars in thousands)	Cost		Gains		Losses			Fair Value
September 30, 2017:
US Treasury security	$	499	$	—	$	(4	)	$	495
Agency mortgage-backed securities		436,415		497		(4,464	)		432,448
Beneficial interest – FHLMC securitization		38,975		1,756		(2,172	)		38,559
Total	$	475,889	$	2,253	$	(6,640	)	$	471,502

December 31, 2016:
US Treasury security	$	300	$	—	$	(3	)	$	297
Agency mortgage-backed securities		476,163		160		(7,414	)		468,909
Beneficial interest – FHLMC securitization		42,028		711		(2,367	)		40,372
Total	$	518,491	$	871	$	(9,784	)	$	509,578

The US Treasury securities are pledged as collateral to the State of California to meet regulatory requirements related to FFB’s trust operations.

The scheduled maturities of securities AFS, other than agency mortgage-backed securities, and the related weighted average yield is as follows as of September 30, 2017:

(dollars in thousands)	Less than 1 Year			1 Through 5 years			5 Through 10 Years			After 10 Years			Total
Amortized Cost:
US Treasury securities	$	—		$	499		$	—		$	—		$	499
Weighted average yield		—	%		1.03	%		—	%		—	%		1.03	%

Estimated Fair Value:
US Treasury securities	$	—		$	495		$	—		$	—		$	495

Agency mortgage backed securities and beneficial interest – FHLMC securitizations are excluded from the above table because such securities are not due at a single maturity date. The weighted average yield of the agency mortgage backed securities as of September 30, 2017 was 2.54%.

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

(dollars in thousands)	September 30, 2017		December 31, 2016
Outstanding principal balance:
Loans secured by real estate:
Residential properties:
Multifamily	$	1,784,061	$	1,178,003
Single family		616,478		602,886
Total real estate loans secured by residential properties		2,400,539		1,780,889
Commercial properties		529,590		476,959
Land and construction		31,304		24,100
Total real estate loans		2,961,433		2,281,948
Commercial and industrial loans		259,958		237,941
Consumer loans		28,469		32,127
Total loans		3,249,860		2,552,016
Premiums, discounts and deferred fees and expenses		7,014		3,693
Total	$	3,256,874	$	2,555,709

Total loans, including loans held for sale, increased $604 million during the first nine months of 2017 as a result of $1.2 billion of originations and $8 million of purchases which were partially offset by the sale of $286 million of multifamily loans and payoffs or scheduled payments of $344 million.

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

	September 30, 2017					December 31, 2016
(dollars in thousands)	Amount		Weighted Average Rate			Amount		Weighted Average Rate

Demand deposits:
Noninterest-bearing	$	1,096,472		—		$	661,781		—
Interest-bearing		278,917		0.654	%		194,274		0.471	%
Money market and savings		1,010,298		0.854	%		941,344		0.677	%
Certificates of deposits		883,039		1.094	%		629,396		0.589	%
Total	$	3,268,726		0.615	%	$	2,426,795		0.453	%

During the first nine months of 2017, the weighted average rate of our interest-bearing deposits increased from 0.62% at December 31, 2016 to 0.93% at September 30, 2017, while the weighted average interest rates of both interest-bearing and noninterest-bearing deposits increased from 0.45% at December 31, 2016 to 0.62% at September 30, 2017. The increase in the weighted average rate of our interest-bearing deposits was the result of increases in market rates and our success in attracting higher balance accounts which generally bear higher interest rates. The increase in our overall cost of deposits was less than the increase in interest-bearing deposits as a result of a higher proportion of noninterest-bearing deposits at September 30, 2017 when compared to December 31, 2016.

The $842 million growth in deposits during the first nine months of 2017 was primarily due to the organic growth in deposits from our specialty deposit group, which increased by 48%, and our branch offices, which increased by 21%.

The maturities of our Certificates of deposit of $100,000 or more were as follows as of September 30, 2017:

(dollars in thousands)

3 months or less	$	132,215
Over 3 months through 6 months		93,875
Over 6 months through 12 months		80,358
Over 12 months		138,897
Total	$	445,345

FFB utilizes third party programs called CDARs and ICS which allows FFB to transfer funds of its clients in excess of the FDIC insurance limit (currently $250,000) to other institutions in exchange for an equal amount of funds from clients of these other institutions. This has allowed FFB to provide FDIC insurance coverage to its clients. Under certain regulatory guidelines, these deposits are considered brokered deposits. From time to time, the Bank will utilize brokered deposits as a source of funding. As of September 30, 2017 the Bank held $493 million of deposits which are classified as brokered deposits, including $112 million of CDARs and ICS reciprocal deposits.

Borrowings. At September 30, 2017 our borrowings consisted of $406 million in overnight FHLB advances and $15 million of borrowings on our holding company line of credit. At December 31, 2016, our borrowings consisted of $1.3 billion in overnight FHLB advances. The FHLB advances were paid in full in the early parts of October 2017 and January 2017, respectively. Because FFB utilizes overnight borrowings, the balance of outstanding borrowings fluctuates on a daily basis. The average balance of overnight borrowings during the first nine months of 2017 was $549 million, as compared to $499 million during the first nine months of 2016. The weighted average interest rate on these overnight borrowings was 1.14% for the first nine months of 2017, as compared to 0.44% during 2016. The maximum amount of overnight borrowings outstanding at any month-end during the first nine months of 2017 and 2016 was $818 million and $951 million, respectively.

Delinquent Loans, Nonperforming Assets and Provision for Credit Losses

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

	Past Due and Still Accruing												Total Past
(dollars in thousands)	30–59 Days			60-89 Days			90 Days or More			Nonaccrual			Due and Nonaccrual			Current		Total
September 30, 2017:
Real estate loans:
Residential properties	$	53		$	—		$	—		$	—		$	53		$	2,400,486	$	2,400,539
Commercial properties		762			—			1,330			1,278			3,370			526,220		529,590
Land and construction		—			—			—			—			—			31,304		31,304
Commercial and industrial loans		10,926			—			815			5,216			16,957			243,001		259,958
Consumer loans		—			—			—			—			—			28,469		28,469
Total	$	11,741		$	—		$	2,145		$	6,494		$	20,380		$	3,229,480	$	3,249,860

Percentage of total loans		0.36	%		—	%		0.07	%		0.20	%		0.63	%

December 31, 2016:
Real estate loans:
Residential properties	$	—		$	—		$	—		$	3,759		$	3,759		$	1,777,130	$	1,780,889
Commercial properties		—			—			2,128			1,120			3,248			473,711		476,959
Land and construction		—			—			—			—			—			24,100		24,100
Commercial and industrial loans		—			2			3,800			3,359			7,161			230,780		237,941
Consumer loans		—			—			—			—			—			32,127		32,127
Total	$	—		$	2		$	5,928		$	8,238		$	14,168		$	2,537,848	$	2,552,016

Percentage of total loans		—	%		0.00	%		0.23	%		0.32	%		0.56	%

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

	September 30, 2017							December 31, 2016
(dollars in thousands)	Accrual			Nonaccrual	Total			Accrual	Nonaccrual		Total
Commercial and industrial	$	225	$	2,522	$	2,747	$	317	$	3,109	$	3,426

The following is a breakdown of our loan portfolio by the risk category of loans as of:

(dollars in thousands)	Pass		Special Mention		Substandard		Impaired		Total
September 30, 2017:
Real estate loans:
Residential properties	$	2,398,246	$	—	$	2,293	$	—	$	2,400,539
Commercial properties		519,931		5,131		925		3,603		529,590
Land and construction		31,304		—		—		—		31,304
Commercial and industrial loans		246,499		815		1,897		10,747		259,958
Consumer loans		28,469		—		—		—		28,469
Total	$	3,224,449	$	5,946	$	5,115	$	14,350	$	3,249,860

December 31, 2016:
Real estate loans:
Residential properties	$	1,773,296	$	1,500	$	—	$	6,093	$	1,780,889
Commercial properties		470,484		1,913		2,414		2,148		476,959
Land and construction		24,100		—		—		—		24,100
Commercial and industrial loans		219,676		3,625		13,887		753		237,941
Consumer loans		32,127		—		—		—		32,127
Total	$	2,519,683	$	7,038	$	16,301	$	8,994	$	2,552,016

We consider a loan to be impaired when, based upon current information and events, we believe that it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. We measure impairment using either the present value of the expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the properties collateralizing the loan, for collateral dependent loans. Impairment losses are included in the ALLL through a charge to provision for loan losses. Adjustments to impairment losses due to changes in the fair value of the property collateralizing an impaired loan are considered in computing the provision for loan losses. Loans collectively reviewed for impairment include all loans except for loans which are individually reviewed based on specific criteria, such as delinquency, debt coverage, adequacy of collateral and condition of property collateralizing the loans. Impaired loans include nonaccrual loans (excluding those collectively reviewed for impairment), certain restructured loans and certain performing loans less than 90 days delinquent (“other impaired loans”) which we believe are not likely to be collected in accordance with the contractual terms of the loans.

In 2015, we purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of these purchased credit impaired loans is as follows as of:

(dollars in thousands)	September 30, 2017			December 31, 2016
Outstanding principal balance:
Total real estate loans	$	285		$	295
Commercial and industrial loans		2,416			4,258
Consumer loans		—			17
Total loans		2,701			4,570
Unaccreted discount on purchased credit impaired loans		(884	)		(1,197	)
Total	$	1,817		$	3,373

Allowance for Loan Losses. The following table summarizes the activity in our ALLL for the periods indicated:

(dollars in thousands)	Beginning Balance		Provision for Loan Losses			Charge-offs			Recoveries			Ending Balance
Quarter ended September 30, 2017:
Real estate loans:
Residential properties	$	8,851	$	469		$	—		$	—		$	9,320
Commercial properties		3,285		281			—			—			3,566
Land and construction		287		66			—			—			353
Commercial and industrial loans		4,093		(119	)		—			(1	)		3,973
Consumer loans		284		4			—			—			288
Total	$	16,800	$	701		$	—		$	(1	)	$	17,500

Nine months ended September 30, 2017:
Real estate loans:
Residential properties	$	6,669	$	2,651		$	—		$	—		$	9,320
Commercial properties		2,983		583			—			—			3,566
Land and construction		233		120			—			—			353
Commercial and industrial loans		5,227		(1,492	)		—			238			3,973
Consumer loans		288		—			—			—			288
Total	$	15,400	$	1,862		$	—		$	238		$	17,500
Year ended December 31, 2016:
Real estate loans:
Residential properties	$	6,799	$	(130	)	$	—		$	—		$	6,669
Commercial properties		1,813		1,051			(50	)		169			2,983
Land and construction		103		130			—			—			233
Commercial and industrial loans		1,649		3,578			—			—			5,227
Consumer loans		236		52			—			—			288
Total	$	10,600	$	4,681		$	(50	)	$	169		$	15,400

Excluding the loans acquired in acquisitions, our ALLL represented 0.54%, and 0.60% of total loans outstanding as of September 30, 2017 and December 31, 2016, respectively.

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

In addition, the FDIC and the California Department of Business Oversight, as an integral part of their examination processes, periodically review the adequacy of our ALLL. These agencies may require us to make additional provisions for loan 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 ALLL and the recorded investment in loans by impairment method as of:

(dollars in thousands)	Allowance for Loan Losses								Unaccreted Credit
	Evaluated for Impairment				Purchased				Component
	Individually		Collectively		Impaired		Total		Other Loans
September 30, 2017:
Allowance for loan losses:
Real estate loans:
Residential properties	$	—	$	9,320	$	—	$	9,320	$	84
Commercial properties		—		3,566		—		3,566		78
Land and construction		—		353		—		353		—
Commercial and industrial loans		1,413		2,560		—		3,973		89
Consumer loans		—		288		—		288		6
Total	$	1,413	$	16,087	$	—	$	17,500	$	257
Loans:
Real estate loans:
Residential properties	$	—	$	2,400,539	$	—	$	2,400,539	$	9,043
Commercial properties		3,603		525,822		165		529,590		10,290
Land and construction		—		31,304		—		31,304		—
Commercial and industrial loans		10,747		247,559		1,652		259,958		14,771
Consumer loans		—		28,469		—		28,469		760
Total	$	14,350	$	3,233,693	$	1,817	$	3,249,860	$	34,864

(dollars in thousands)	Allowance for Loan Losses								Unaccreted Credit
	Evaluated for Impairment				Purchased				Component
	Individually		Collectively		Impaired		Total		Other Loans
December 31, 2016:
Allowance for loan losses:
Real estate loans:
Residential properties	$	—	$	6,669	$	—	$	6,669	$	128
Commercial properties		—		2,983		—		2,983		136
Land and construction		—		233		—		233		2
Commercial and industrial loans		—		5,227		—		5,227		147
Consumer loans		—		288		—		288		19
Total	$	—	$	15,400	$	—	$	15,400	$	432
Loans:
Real estate loans:
Residential properties	$	6,093	$	1,774,796	$	—	$	1,780,889	$	12,373
Commercial properties		2,148		474,634		177		476,959		24,796
Land and construction		—		24,100		—		24,100		437
Commercial and industrial loans		753		233,992		3,196		237,941		20,165
Consumer loans		—		32,127		—		32,127		1,266
Total	$	8,994	$	2,539,649	$	3,373	$	2,552,016	$	59,037

The column labeled “Unaccreted Credit Component Other Loans” represents the amount of unaccreted credit component discount for loans acquired in an acquisition that were not classified as purchased credit impaired or individually evaluated for impairment as of the dates indicated, and the stated principal balances of the related loans. The unaccreted credit component discount is equal to 0.74% and 0.73% of the stated principal balances of these loans as of September 30, 2017 and December 31, 2016, respectively. In addition to this unaccreted credit component discount, an additional $0.1 million and $0.5 million of the ALLL were provided for these loans as of September 30, 2017 and December 31, 2016.

Liquidity

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

We monitor our liquidity in accordance with guidelines established by our Board of Directors and applicable regulatory requirements. Our need for liquidity is affected by our loan activity, net changes in deposit levels and the maturities of our borrowings. The principal sources of our liquidity consist of deposits, loan interest and principal payments and prepayments, investment management and consulting fees, FHLB advances and proceeds from borrowings and sales of shares by FFI. The remaining balances of the Bank’s lines of credit available to draw down totaled $1.1 billion at September 30, 2017.

Cash Flows Provided by Operating Activities. During the nine months ended September 30, 2017, operating activities provided net cash of $28 million, comprised primarily of our net income of $25.3 million, and $6.5 million increase in accounts payable and other liabilities, offset partially by $4.3 million in gains on sales of loans. During the nine months ended September 30, 2016, operating activities provided net cash of $13.7 million, comprised primarily of our net income of $16.8 million, and $5.7 million of non-cash charges, including provisions for loan losses, stock based compensation expense, depreciation and amortization and deferred income tax provision, offset partially by $8.5 gains on sales of loans and securities and a $1.4 million increase in other assets.

Cash Flows Used in Investing Activities. During the nine months ended September 30, 2017, investing activities used net cash of $543 million, primarily to fund a $889 million net increase in loans, offset partially by $289 million in loan sales and $53 million in cash received in proceeds from the sale, principal collection, and maturities of securities. During the nine months ended September 30, 2016, investing activities used net cash of $708 million, primarily to fund a $1 billion net increase in loans and $131 million of securities purchases, offset partially by $270 million in cash received from the sale of loans and $165 million in cash received in proceeds from the sale, principal collection, and maturities of securities.

Cash Flow Provided by Financing Activities. During the nine months ended September 30, 2017, financing activities provided net cash of $40 million, consisting primarily of $15 million in proceeds from a holding company line of credit and $27.3 million in proceeds from the sale of stock. During the nine months ended September 30, 2016, financing activities provided net cash of $975 million, consisting primarily of a net increase of $817 million in deposits, and a $155 million increase in FHLB advances.

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, 2017 and December 31, 2016, the loan-to-deposit ratios at the Bank were 104% and 116%, respectively.

Off-Balance Sheet Arrangements

The following table provides the off-balance sheet arrangements of the Company as of September 30, 2017:


(dollars in thousands)
Commitments to fund new loans	$	39,308
Commitments to fund under existing loans, lines of credit		191,768
Commitments under standby letters of credit		2,334

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, 2017, the Bank was obligated on $157 million of letters of credit to the FHLB which were being used as collateral for public fund deposits, including $136 million of deposits from the State of California.

Capital Resources and Dividend Policy

On February 16, 2017, the Company and the Bank entered into an Equity Distribution Agreement (the “Distribution Agreement”) with FBR Capital Markets & Co., Raymond James & Associates, Inc., Sandler O’Neill & Partners, L.P., and D.A. Davidson & Co. (collectively, the “Distribution Agents”) to sell shares of the Company’s common stock, par value $0.001 per share (the “ATM Shares”), having an aggregate offering price of up to $80 million, from time to time, through an “at-the-market” equity offering program (the “ATM Program”).

The sales of the ATM Shares may be made in negotiated transactions or transactions that are deemed to be “at-the-market offerings” as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on or through the NASDAQ Global Market, sales made to or through a market maker other than on an exchange, in negotiated transactions at market prices prevailing at the time of sale or at prices related to such market prices, or any other method permitted by law. Subject to the terms and conditions of the Distribution Agreement, upon its acceptance of written instructions from the Company, the Distribution Agent designated by the Company to sell ATM Shares will use its commercially reasonable efforts to sell on the Company’s behalf all of the designated ATM Shares. The Company may also sell ATM Shares under the Distribution Agreement to each of the Distribution

Agents, as principals for their respective accounts, at a price per share agreed upon at the time of sale. Actual sales will depend on a variety of factors to be determined by the Company from time to time. The Company has no obligation to sell any of the ATM Shares under the Distribution Agreement, and may at any time suspend sales of the ATM Shares under the Distribution Agreement. The Company will pay the Distribution Agents’ commissions for their services in acting as agent in the sale of ATM Shares, and the Company advanced $90,000 to the Distribution Agents for their out-of-pocket legal fees incurred in connection with the ATM Program. The Distribution Agents will be entitled to compensation at a commission rate equal to 2.0% of the gross proceeds from the sale of ATM Shares pursuant to the Distribution Agreement; provided, however, that the compensation payable to each Distribution Agent upon the sale of ATM Shares pursuant to the Distribution Agreement will be reduced by $22,500 in a manner such that no compensation will be paid to a Distribution Agent until the amount of the commission earned by such Distribution Agent exceeds $22,500. The Distribution Agreement contains representations and warranties and covenants that are customary for transactions of this type. In addition, the Company has agreed to indemnify the Distribution Agents against certain liabilities on customary terms, subject to limitations on such arrangements imposed by applicable law and regulation.

During the second quarter of 2017, we commenced sales of common stock through the ATM Program. The details of the shares of common stock sold through the ATM Program during 2017 are as follows:


Month	Number of Shares Sold	Weighted Average Price		Net Proceeds
(in thousands, except share and per share amounts)

April, 2017	115,270	$	16.24	$	1,857
May, 2017	528,036	$	16.40		8,486
June, 2017	11,272	$	16.51		182
July, 2017	191,900	$	16.57		3,116
August, 2017	100,552	$	17.52		1,725
September, 2017	379,030	$	17.35		6,469

Total	1,326,060	$	16.77	$	21,835

As of September 30, 2017, the remaining dollar value of common stock we had available to sell under the ATM Program was $57.8 million. The actual number of shares of our common stock, if any, that may be sold under the ATM Program in the future will depend upon the sale price for such shares.

Under federal banking regulations that apply to all United States based bank holding companies and federally insured banks, the Company (on a consolidated basis) and FFB (on a stand-alone basis) must 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. Under those regulations, which are based primarily on those quantitative measures, each bank holding company must meet a minimum capital ratio and each federally insured bank is determined by its primary federal bank regulatory agency to come within one of the following capital adequacy categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized.

Certain qualitative assessments also are made by a banking institution’s primary federal regulatory agency that could lead the agency to determine that the banking institution should be assigned to a lower capital category than the one indicated by the quantitative measures used to assess the institution’s capital adequacy. At each successive lower capital category, a banking institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.

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

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
FFI
September 30, 2017
CET1 capital ratio	$	338,832		12.50	%	$	121,983		4.50	%
Tier 1 leverage ratio		338,832		8.54	%		158,711		4.00	%
Tier 1 risk-based capital ratio		338,832		12.50	%		162,644		6.00	%
Total risk-based capital ratio		356,932		13.17	%		216,859		8.00	%

December 31, 2016
CET1 capital ratio	$	285,754		12.80	%	$	100,432		4.50	%
Tier 1 leverage ratio		285,754		8.76	%		130,525		4.00	%
Tier 1 risk-based capital ratio		285,754		12.80	%		133,910		6.00	%
Total risk-based capital ratio		301,664		13.52	%		178,547		8.00	%

FFB
September 30, 2017
CET1 capital ratio	$	333,948		12.34	%	$	121,761		4.50	%	$	212,187		6.50	%
Tier 1 leverage ratio		333,948		8.42	%		158,575		4.00	%		175,373		5.00	%
Tier 1 risk-based capital ratio		333,948		12.34	%		162,348		6.00	%		171,600		8.00	%
Total risk-based capital ratio		352,048		13.01	%		216,464		8.00	%		135,584		10.00	%

December 31, 2016
CET1 capital ratio	$	272,221		12.23	%	$	100,166		4.50	%	$	144,685		6.50	%
Tier 1 leverage ratio		272,221		8.36	%		130,305		4.00	%		162,881		5.00	%
Tier 1 risk-based capital ratio		272,221		12.23	%		133,555		6.00	%		178,074		8.00	%
Total risk-based capital ratio		288,131		12.94	%		178,074		8.00	%		222,592		10.00	%

As of each of the dates set forth in the above table, the Company (on a consolidated basis) exceeded the minimum required capital ratios applicable to it and FFB (on a stand-alone basis) qualified as a well-capitalized depository institution under the capital adequacy guidelines described above.

As of September 30, 2017, the amount of capital at FFB in excess of amounts required to be Well Capitalized was $158.1 million for the CET-1 capital ratio, $135.7 million for the Tier 1 leverage ratio, $117.5 million for the Tier 1 risk-based capital ratio and $81.5 million for the Total risk-based capital ratio.

The “Basel III” rules adopted by the Federal Reserve Board and the FDIC (the “New Capital Rules”) introduced a capital conservation buffer which is an increment added to the minimum capital ratios. If a banking organization does not hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements, it will face constraints on dividends, equity repurchases and executive compensation based on the amount of the shortfall. The capital buffer is measured against risk weighted assets and is therefore not applicable to the tier 1 leverage ratio. The implementation of the capital conservation buffer began on January 1, 2016 at 0.625%, and will increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. The following table sets forth the minimum capital ratios plus the applicable increment of the capital conservation buffer as of the current year and when it is fully implemented in 2019:


	2016		2019
CET-1 to risk-weighted assets	5.125	%	7.000	%
Tier 1 capital (i.e., CET-1 plus Additional Tier 1) to risk-weighted assets	6.625	%	8.500	%
Total capital (i.e., Tier 1 plus Tier 2) to risk-weighted assets	8.625	%	10.500	%

During the nine months of 2017, and during the entirety of 2016, FFI made cash capital contributions to FFB of $35 million and $40 million, respectively. As of September 30, 2017, FFI had $19.1 million of available capital and, therefore, has the ability and financial resources to contribute additional capital to FFB, if needed.

We did not pay dividends in 2017 or 2016 and we have no plans to pay dividends at least for the foreseeable future. Instead, it is our intention to retain internally generated cash flow to support our growth. Moreover, the payment of dividends is subject to certain regulatory restrictions.

We had no material commitments for capital expenditures as of September 30, 2017.

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 March 15, 2017. There have been no material changes to our quantitative and qualitative disclosures about market risk since December 31, 2016.

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 2017, 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, 2017, 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 quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1A.

RISK FACTORS

There have been no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2016, which we filed with the SEC on March 15, 2017.

ITEM 6.

EXHIBITS

Exhibit No.		Description of Exhibit

31.1		Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

101		XBRL (eXtensive Business Reporting Language). The following financial materials from the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FIRST FOUNDATION INC.

Dated: November 8, 2017	By:	/s/ JOHN M. MICHEL
		John M. Michel
		Executive Vice President and Chief Financial Officer

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