8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 6, 2017

FIRST FOUNDATION INC.

(Exact name of registrant as specified in its charter)

Delaware	001-36461	20-8639702
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification Number)

18101 Von Karman Avenue, Suite 700

Irvine, California  92612

     (Address of Principal Executive Offices) (Zip Code)

(949) 202-4160

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐		Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition

On February 6, 2017, First Foundation Inc. issued a press release reporting its consolidated financial results for its fourth quarter and year ended December 31, 2016.  A copy of that press release is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference.

In accordance with General Instruction B.2 of Form 8-K, the information contained in this Current Report on Form 8-K, including Exhibit 99.1, are being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section, and such information and that Exhibit shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended.

The press release furnished as Exhibit 99.1 to this Current Report on Form 8-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and, as such, may involve known and unknown risks, uncertainties and assumptions. Such forward-looking statements relate to First Foundation’s current expectations and are subject to the limitations and qualifications set forth in First Foundation’s other documents filed with the U.S. Securities and Exchange Commission, including, without limitation, that actual events and/or results may differ materially from those projected in such forward-looking statements.

Item 9.01 Financial Statements and Exhibits

Exhibit No.	Description
99.1	Press Release dated February 6, 2017, announcing the consolidated financial results of First Foundation Inc. for its fourth quarter and year ended December 31, 2016.

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 hereunto duly authorized.

	FIRST FOUNDATION INC.
Date: February 6, 2017	By:	/s/ JOHN MICHEL
		John M. Michel Executive Vice President & Chief Financial Officer

INDEX TO EXHIBITS

Exhibit No.		Description
99.1	Press Release dated February 6, 2017, announcing the consolidated financial results of First Foundation Inc. for its fourth quarter and year ended December 31, 2016.

EX-99.1

Exhibit 99.1

First Foundation Announces 2016 Financial Results

• Increase in year-over-year earnings of 74% for 2016

• Earnings per diluted share of $0.19 for the fourth quarter and $0.70 for the year

• Strong loan and deposit growth

IRVINE, CA – First Foundation Inc. (NASDAQ: FFWM), a financial services company with two wholly-owned operating subsidiaries, First Foundation Advisors (“FFA”) and First Foundation Bank (“FFB”), announced today its financial results for the quarter and year ended December 31, 2016.

"I am pleased with our results that reflect another strong year of growth for First Foundation,” said Scott F. Kavanaugh, CEO. “We experienced record loan production, solid deposit growth, and an uptick in our wealth management AUM. Our increases in total revenues by 43% and earnings by 74% are a testament to the strength of our platform, the quality of our employees, and our commitment to serving our clients and delivering value for our shareholders.”

Highlights

Financial Results:

• 2016 fourth quarter compared to 2015 fourth quarter:

o Earnings per fully diluted share were $0.19, an increase of 27%

o Earnings were $6.5 million, an increase of 29%

o Total revenues (net interest income and noninterest income) were $32.6 million, an increase of 22%  

o Net interest income was $25.0 million, an increase of 43%

• 2016 compared to 2015:

o Earnings per fully diluted share were $0.70, an increase of 21%

o Earnings were $23.3 million, an increase of 74%

o Total revenues (net interest income and noninterest income) were $124.0 million, an increase of 43%  

o Net interest income was $89.4 million, an increase of 54%

• Financial ratios:

o Efficiency ratio of 62.0% for the quarter and 65.3% for the year

o Return on average assets of 0.80% for the quarter and the year

o Return on average equity of 9.1% for the quarter and 8.4% for the year

o Total shareholders’ equity of $284 million and tangible book value of $8.62 per share, in each case, as of December 31, 2016

Other Activity:

• Loan originations totaled $447 million for the fourth quarter and $1.77 billion for the year

• Deposits increased by $905 million for the year

• Assets under management (“AUM”) at FFA increased by $115 million for the year

“We were able to generate positive investment returns for our clients during a year characterized by unexpected events and challenging market conditions,” stated John Hakopian, President of FFA. “Our team remains focused on serving existing clients while also seeking new relationships that could benefit from our offering. As we head into 2017, we are seeing strong indicators of growth.”

1

Exhibit 99.1

Details of Growth

• Total loans, including loans held for sale, increased $1.04 billion during 2016 as a result of $1.77 billion of originations which was offset by the sale of $306 million of multifamily loans and payoffs or scheduled payments of $430 million.

• The $905 million growth in deposits during 2016 was broken down as follows: $362 million increase in noninterest bearing demand deposits; $66 million decrease in interest bearing demand deposits; $449 million increase in money market and savings accounts; and $159 million increase in certificate of deposit accounts.   

• The $115 million growth in AUM for 2016 was the result of $321 million of new accounts and $221 million of portfolio gains which were partially offset by terminations of $279 million and net withdrawals of $148 million.

“Our growth in loans and deposits is a reflection of us beginning to realize the investments we have made in infrastructure over the past several quarters,” stated David DePillo, President of FFB. “We continue to focus on credit quality maintenance and optimizing operations to support our growth while delivering a valuable banking experience.”

As previously announced, First Foundation Bank acquired two branches located in Laguna Hills and Seal Beach, California with deposits of $179 million as of the closing date.

Additionally, as previously announced, effective January 18, 2017, the Company completed a two-for-one stock split in the form of a stock dividend. All share and per share amounts included in this news release have been adjusted to reflect the effect of this stock split.

About First Foundation

First Foundation, a financial institution founded in 1990, provides personal banking, business banking and private wealth management. The Company has offices in California, Nevada and Hawaii with headquarters in Irvine, California. For more information, please visit www.ff-inc.com.

We have two business segments, “Banking” and “Investment Management and Wealth Planning” (“Wealth Management”). Banking includes the operations of FFB and First Foundation Insurance Services, and Wealth Management includes the operations of FFA. The financial position and operating results of the stand-alone holding company, FFI, are included under the caption “Other” in certain of the tables that follow, along with any consolidation elimination entries.

Forward-Looking Statements

Statements in this news release regarding our expectations and beliefs about our future financial performance and financial condition, as well as trends in our business and markets are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," or "may." The forward looking statements in this news release are based on current information and on assumptions that we make about future events and circumstances that are subject to a number of risks and uncertainties that are often difficult to predict and beyond our control. As a result of those risks and uncertainties, our actual financial results in the future could differ, possibly materially, from those expressed in or implied by the forward looking statements contained in this news release and could cause us to make changes to our future plans. Those risks and uncertainties include, but are not limited to, the risk of incurring loan losses, which is an inherent risk of the banking business; the risk that we will not be able to continue our internal growth rate; the risk that we will not be able to access the securitization market on favorable terms or at all; the risk that the economic recovery in the United States will stall or will be adversely affected by domestic or international economic conditions and risks associated with the Federal Reserve Board taking actions with respect to interest rates, any of which could adversely

2

Exhibit 99.1

affect our interest income and interest rate margins and, therefore, our future operating results; the risk that the performance of our investment management business or of the equity and bond markets could lead clients to move their funds from or close their investment accounts with us, which would reduce our assets under management and adversely affect our operating results; risks associated with seeking new client relationships and maintaining existing client relationships. Additional information regarding these and other risks and uncertainties to which our business and future financial performance are subject is contained in Item 1A, entitled “Risk Factors” in our 2015 Annual Report on Form 10-K for the fiscal year ended December 31, 2015 that we filed with the SEC on March 15, 2016, and other documents we file with the SEC from time to time. We urge readers of this news release to review the Risk Factors section of that Annual Report and the Risk Factors section of other documents we file with the SEC from time to time. Also, our actual financial results in the future may differ from those currently expected due to additional risks and uncertainties of which we are not currently aware or which we do not currently view as, but in the future may become, material to our business or operating results. Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this news release, which speak only as of today's date, or to make predictions based solely on historical financial performance. We also disclaim any obligation to update forward-looking statements contained in this news release or in the above-referenced 2015 Annual Report on Form 10-K, whether as a result of new information, future events or otherwise, except as may be required by law or NASDAQ rules.

Contact:

John Michel

Chief Financial Officer

First Foundation Inc.

949-202-4160

jmichel@ff-inc.com

3

FIRST FOUNDATION INC.

CONSOLIDATED BALANCE SHEETS - Unaudited

(in thousands, except share and per share amounts)

	December 31, 2016			December 31, 2015
ASSETS
Cash and cash equivalents	$	597,946		$	215,748
Securities available-for-sale (“AFS”)		509,578			565,135
Loans held for sale		250,942			-
Loans, net of deferred fees		2,555,709			1,765,483
Allowance for loan and lease losses (“ALLL”)		(15,400	)		(10,600	)
Net loans		2,540,309			1,754,883
Investment in FHLB stock		33,750			21,492
Deferred taxes		16,811			15,392
Premises and equipment, net		6,730			2,653
Real estate owned (“REO”)		1,734			4,036
Goodwill and intangibles		2,177			2,416
Other assets		15,426			10,824
Total Assets	$	3,975,403		$	2,592,579
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	2,426,795		$	1,522,176
Borrowings		1,250,000			796,000
Accounts payable and other liabilities		14,344			14,667
Total Liabilities		3,691,139			2,332,843
Commitments and contingencies		-			-
Shareholders’ Equity
Common Stock, par value $.001: 70,000,000 shares authorized; 32,719,632 and 31,961,052 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively		16			16
Additional paid-in-capital		232,428			227,262
Retained earnings		57,065			33,762
Accumulated other comprehensive income (loss), net of tax		(5,245	)		(1,304	)
Total Shareholders’ Equity		284,264			259,736
Total Liabilities and Shareholders’ Equity	$	3,975,403		$	2,592,579

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FIRST FOUNDATION INC.

CONSOLIDATED INCOME STATEMENTS - Unaudited

(in thousands, except share and per share amounts)

	For the Quarter Ended December 31,				For the Year Ended December 31,
	2016		2015		2016			2015
Interest income:
Loans	$	23,718	$	16,384	$	85,080		$	57,481
Securities		3,358		2,483		12,781			5,227
FHLB Stock, fed funds sold and deposits		1,291		345		2,781			1,763
Total interest income		28,367		19,212		100,642			64,471
Interest expense:
Deposits		2,722		1,520		8,916			4,886
Borrowings		641		258		2,277			1,395
Total interest expense		3,363		1,778		11,193			6,281
Net interest income		25,004		17,434		89,449			58,190
Provision for loan losses		1,800		1,200		4,681			2,673
Net interest income after provision for loan losses		23,204		16,234		84,768			55,517
Noninterest income:
Asset management, consulting and other fees		6,257		5,844		24,384			23,486
Gain on sale of loans		574		2,730		7,812			2,935
Gain (loss) on capital markets activities		-		-		(1,043	)		-
Other income		755		707		3,407			2,352
Total noninterest income		7,586		9,281		34,560			28,773
Noninterest expense:
Compensation and benefits		11,867		11,016		48,574			40,456
Occupancy and depreciation		3,195		2,774		11,978			9,260
Professional services and marketing costs		2,017		1,439		9,825			5,490
Other expenses		3,112		1,941		10,617			6,252
Total noninterest expense		20,191		17,170		80,994			61,458
Income before taxes on income		10,599		8,345		38,334			22,832
Taxes on income		4,082		3,297		15,031			9,454
Net income	$	6,517	$	5,048	$	23,303		$	13,378
Net income per share:
Basic	$	0.20	$	0.16	$	0.72		$	0.60
Diluted	$	0.19	$	0.15	$	0.70		$	0.58
Shares used in computation:
Basic		32,668,318		31,930,008		32,365,800			22,310,014
Diluted		33,788,114		32,922,796		33,471,816			23,151,710

5

FIRST FOUNDATION INC.

SELECTED FINANCIAL INFORMATION - Unaudited

(in thousands, except share and per share amounts and percentages)

	For the Quarter Ended December 31,						For the Year Ended December 31,
	2016			2015			2016			2015
Selected Income Statement Data:
Net interest income	$	28,367		$	17,434		$	100,642		$	58,190
Provision for loan losses		1,800			1,200			4,681			2,673
Noninterest Income:
Asset management, consulting and other fees		6,257			5,844			24,384			23,486
Gain on sale of loans		574			2,730			7,812			2,935
Gain (loss) on capital markets activities		-			-			(1,043	)		-
Other		755			707			3,407			2,352
Noninterest expense		20,191			17,170			80,994			61,458
Income before taxes		10,599			8,345			38,334			22,832
Net income		6,517			5,048			23,303			13,378
Net income per share:
Basic	$	0.20		$	0.16		$	0.72		$	0.60
Diluted		0.19			0.15			0.70			0.58
Selected Performance Ratios:
Return on average assets - annualized		0.80	%		0.91	%		0.80	%		0.76	%
Return on average equity - annualized		9.1	%		7.8	%		8.4	%		8.1	%
Net yield on interest-earning assets		3.11	%		3.26	%		3.13	%		3.39	%
Efficiency ratio (1)		62.0	%		64.3	%		65.3	%		70.7	%
Noninterest income as a % of total revenues		23.3	%		34.7	%		27.9	%		33.1	%
Other Information:
Loan originations	$	447,340		$	318,060		$	1,770,511		$	944,188
Charge-offs (recoveries) / average loans - annualized		0.00	%		0.46	%		(0.01)	%		0.15	%

(1) The efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income.

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FIRST FOUNDATION INC.

SELECTED FINANCIAL INFORMATION - Unaudited

(in thousands, except share and per share amounts and percentages)

	December 31, 2016			December 31, 2015
Selected Balance Sheet Data:
Cash and cash equivalents	$	597,946		$	215,748
Loans held for sale		250,942			-
Loans, net of deferred fees		2,555,709			1,765,483
Allowance for loan and lease losses (“ALLL”)		(15,400	)		(10,600	)
Total assets		3,975,403			2,592,579
Noninterest-bearing deposits		661,781			299,794
Interest-bearing deposits		1,765,014			1,222,382
Borrowings - FHLB Advances		1,250,000			796,000
Shareholders’ equity		284,264			259,736
Selected Capital Data:
Tangible common equity to tangible assets(2)		7.10	%		9.93	%
Tangible book value per share(2)	$	8.62		$	8.05
Shares outstanding at end of period		32,719,632			31,961,052
Other Information:
Assets under management (end of period)	$	3,586,672		$	3,471,237
Number of employees		335			295
Loan to deposit ratio		115.7	%		116.0	%
Nonperforming assets to total assets		0.25	%		0.32	%
Ratio of ALLL to loans(3)		0.60	%		0.61	%

(2) Tangible common equity, (also referred to as tangible book value) and tangible assets, are equal to common equity and assets, respectively, less $2.2 million and $2.4 million of intangible assets as of December 31, 2016 and December 31, 2015, respectively. We believe that this information is consistent with the treatment by bank regulatory agencies, which exclude intangible assets from the calculation of capital ratios. Accordingly, we believe that tangible common equity to tangible assets and tangible book value per share provide information that is important to investors and that is useful in understanding our capital position and ratios. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these measures, this presentation may not be comparable to other similarly titled measures reported by other companies.

(3) This ratio excludes loans acquired in an acquisition as GAAP requires estimated credit losses for acquired loans to be recorded as discounts to those loans.

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FIRST FOUNDATION INC.

SEGMENT REPORTING - Unaudited

(in thousands)

	For the Quarter Ended December 31,						For the Year Ended December 31,
	2016			2015			2016			2015
Banking:
Interest income	$	28,367		$	19,212		$	100,642		$	64,471
Interest expense		3,363			1,778			11,193			5,607
Net interest income		25,004			17,434			89,449			58,864
Provision for loan losses		1,800			1,200			4,681			2,673
Noninterest income		2,327			4,332			13,832			8,833
Noninterest expense		14,676			11,844			58,422			39,982
Income before taxes on income	$	10,855		$	8,722		$	40,178		$	25,042
Wealth Management:
Noninterest income	$	5,431		$	5,104		$	21,348		$	20,530
Noninterest expense		4,696			4,402			19,232			18,352
Income before taxes on income	$	735		$	702		$	2,116		$	2,178
Other and Eliminations:
Interest income	$	-		$	-		$	-		$	-
Interest expense		-			-			-			674
Net interest income		-			-			-			(674	)
Noninterest income		(172	)		(155	)		(620	)		(590	)
Noninterest expense		819			924			3,340			3,124
Income before taxes on income	$	(991	)	$	(1,079	)	$	(3,960	)	$	(4,388	)

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FIRST FOUNDATION INC.

ROLLING INCOME STATEMENTS - Unaudited

(in thousands, except share and per share amounts)

	For the Quarter Ended
	December 31, 2015		March 31, 2016		June 30, 2016			September 30, 2016		December 31, 2016
Interest income:
Loans	$	16,384	$	18,170	$	20,961		$	22,231	$	23,718
Securities		2,483		3,121		3,100			3,202		3,358
FHLB Stock, fed funds sold and deposits		345		407		512			571		1,291
Total interest income		19,212		21,698		24,573			26,004		28,367
Interest expense:
Deposits		1,520		1,795		1,973			2,426		2,722
Borrowings		258		542		679			415		641
Total interest expense		1,778		2,337		2,652			2,841		3,363
Net interest income		17,434		19,361		21,921			23,163		25,004
Provision for loan losses		1,200		400		1,250			1,231		1,800
Net interest income after provision for loan losses		16,234		18,961		20,671			21,932		23,204
Noninterest income:
Asset management, consulting and other fees		5,844		6,001		5,985			6,141		6,257
Gain on sale of loans		2,730		-		-			7,238		574
Gain (loss) on capital markets activities				311		(2,351	)		997		-
Other income		707		673		1,276			703		755
Total noninterest income		9,281		6,985		4,910			15,079		7,586
Noninterest expense:
Compensation and benefits		11,016		12,724		11,924			12,059		11,867
Occupancy and depreciation		2,774		2,815		2,896			3,072		3,195
Professional services and marketing costs		1,439		1,723		2,560			3,525		2,017
Other expenses		1,941		2,155		2,470			2,880		3,112
Total noninterest expense		17,170		19,417		19,850			21,536		20,191
Income before taxes on income		8,345		6,529		5,731			15,475		10,599
Taxes on income		3,297		2,711		1,821			6,417		4,082
Net income	$	5,048	$	3,818	$	3,910		$	9,058	$	6,517
Net income per share:
Basic	$	0.16	$	0.12	$	0.12		$	0.28	$	0.20
Diluted	$	0.15	$	0.12	$	0.12		$	0.27	$	0.19
Shares used in computation:
Basic		31,930,008		32,006,176		32,269,738			32,514,016		32,668,318
Diluted		32,922,796		33,169,064		33,348,678			33,575,894		33,788,114

The Company adopted ASU 2016-09, Improvement to Employee Share-Based Payment Accounting, in the third quarter of 2016. For purposes of this table, the taxes on income, net income per share and the diluted shares used in the computation of earnings per share for the first three quarters of 2016 have been restated to reflect the retroactive application of this standard.

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FIRST FOUNDATION INC.

ROLLING SEGMENT REPORTING - Unaudited

(in thousands)

	For the Quarter Ended
	December 31, 2015			March 31, 2016			June 30, 2016			September 30, 2016			December 31, 2016
Banking:
Interest income	$	19,212		$	21,698		$	24,573		$	26,004		$	28,367
Interest expense		1,778			2,337			2,652			2,841			3,363
Net interest income		17,434			19,361			21,921			23,163			25,004
Provision for loan losses		1,200			400			1,250			1,231			1,800
Noninterest income		4,332			1,752			(170	)		9,923			2,327
Noninterest expense		11,844			13,344			14,268			16,134			14,676
Income before taxes on income	$	8,722			7,369		$	6,233		$	15,721		$	10,855
Wealth Management:
Noninterest income	$	5,104			5,376		$	5,222		$	5,319		$	5,431
Noninterest expense		4,402			5,223			4,616			4,697			4,696
Income before taxes on income	$	702			153		$	606		$	622		$	735
Other and Eliminations:
Interest income	$	-			-		$	-		$	-		$	-
Interest expense		-			-			-			-			-
Net interest income		-			-			-			-			-
Noninterest income		(155	)		(143	)		(142	)		(163	)		(172	)
Noninterest expense		924			850			966			705			819
Income before taxes on income	$	(1,079	)		(993	)	$	(1,108	)	$	(868	)	$	(991	)

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FIRST FOUNDATION INC.

SELECTED INFORMATION: INTEREST MARGIN - Unaudited

(in thousands, except percentages)

	For the Quarter Ended December 31,						For the Year Ended December 31,
	2016			2015			2016			2015
Average Balances:
Loans	$	2,620,615		$	1,663,406		$	2,263,292		$	1,450,081
Securities		526,644			433,713			525,480			224,906
Total interest-earnings assets		3,219,269			2,137,051			2,853,398			1,716,343
Deposits: interest-bearing		1,666,499			1,105,059			1,444,449			914,887
Deposits: noninterest-bearing		757,897			321,075			650,956			282,822
Borrowings		530,357			472,978			507,025			369,225
Average Yield / Rate
Loans		3.62	%		3.93	%		3.76	%		3.96	%
Securities		2.55	%		2.29	%		2.43	%		2.32	%
Total interest-earnings assets		3.52	%		3.59	%		3.53	%		3.76	%
Deposits (interest-bearing only)		0.65	%		0.55	%		0.62	%		0.53	%
Deposits (noninterest and interest-bearing)		0.45	%		0.42	%		0.43	%		0.41	%
Borrowings		0.48	%		0.22	%		0.45	%		0.38	%
Total interest-bearing liabilities		0.61	%		0.45	%		0.57	%		0.49	%
Net Interest Rate Spread		2.91	%		3.14	%		2.95	%		3.27	%
Net Yield on Interest-earning Assets		3.11	%		3.26	%		3.13	%		3.39	%

	For the Quarter Ended
	December 31, 2015			March 31, 2016			June 30, 2016			September 30, 2016			December 31, 2016
Average Balances:
Loans	$	1,663,406		$	1,860,838		$	2,208,793		$	2,357,956		$	2,620,615
Securities		433,713			533,823			533,435			508,193			526,644
Total interest-earnings assets		2,137,051			2,446,667			2,798,763			2,943,880			3,219,269
Deposits: interest-bearing		1,105,059			1,261,044			1,325,994			1,520,979			1,666,499
Deposits: noninterest-bearing		321,075			438,029			598,150			806,861			757,897
Borrowings		472,978			505,201			631,297			362,576			530,357
Average Yield / Rate:
Loans		3.93	%		3.91	%		3.80	%		3.77	%		3.62	%
Securities		2.29	%		2.34	%		2.32	%		2.52	%		2.55	%
Total interest-earnings assets		3.59	%		3.55	%		3.51	%		3.53	%		3.52	%
Deposits (interest-bearing only)		0.55	%		0.57	%		0.60	%		0.63	%		0.65	%
Deposits (noninterest and interest-bearing)		0.42	%		0.43	%		0.41	%		0.41	%		0.45	%
Borrowings		0.22	%		0.43	%		0.43	%		0.46	%		0.48	%
Total interest-bearing liabilities		0.45	%		0.53	%		0.54	%		0.60	%		0.61	%
Net Interest Rate Spread		3.14	%		3.02	%		2.97	%		2.93	%		2.91	%
Net Yield on Interest-earning Assets		3.26	%		3.17	%		3.13	%		3.15	%		3.11	%

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Discussion of Changes in Results of Operations and Financial Position

Quarter Ended December 31, 2016 as Compared to Quarter Ended December 31 2015

Our net income and income before taxes in the fourth quarter of 2016 were $6.5 million and $10.6 million, respectively, as compared to $5.0 million and $8.3 million, respectively, in the fourth quarter of 2015. The increase in income before taxes was primarily the result of a $2.1 million increase in income before taxes for Banking. The increase in Banking was due to higher net interest income and higher noninterest income which was partially offset by a higher provision for loan losses and higher noninterest expenses. Income before taxes for Wealth Management for the fourth quarter of 2016 was consistent with the fourth quarter of 2015 as a $0.3 million increase in noninterest income was offset by a $0.3 million increase in noninterest expenses. Corporate noninterest expenses decreased by $0.1 million.

The effective tax rate for the fourth quarter of 2016 was 38.5% as compared to 39.5% for the fourth quarter of 2015, with the benefit primarily due to the reductions in taxes on income from excess tax benefits resulting from the exercise of stock awards.

Net interest income for Banking increased 43% from $17.4 million in the fourth quarter of 2015, to $25.0 million in the fourth quarter of 2016 due to a 51% 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 3.14% in the fourth quarter of 2015 to 2.91% in the fourth quarter of 2016 was due to a decrease in yield on total interest-earning assets and an increase in the cost of interest-bearing liabilities. The yield on interest-earning assets decreased from 3.93% to 3.62% due to an increase in the proportion of lower yielding securities to total interest-earning assets and a decrease in the yield on loans which was partially offset by a $0.9 million increase in FHLB dividends. The decrease in yield on loans was due to prepayments of higher yielding loans and the addition of loans at current market rates which are lower than the current yield on our loan portfolio. The increase in the cost of interest-bearing liabilities was due to increased costs of interest-bearing deposits, due to increases in deposit market rates and the use of promotional rates to attract deposits, and increased costs of borrowings as the average rate on FHLB advances increased from 0.22% in the fourth quarter of 2015 to 0.48% in the fourth quarter of 2016.  

The higher provision for loan losses in the fourth quarter of 2016 as compared to the fourth quarter of 2015 was due to a larger increase in the balance of loans during the fourth quarter of 2016 as compared to the fourth quarter of 2015.

Noninterest income in Banking decreased from $4.3 million in the fourth quarter of 2015 to $2.3 million in the fourth quarter of 2016 due to $2.1 million higher gain on the sale of loans realized in the fourth quarter of 2015 as compared to the fourth quarter of 2016. We realized a 2.7% gain on sale on the sale of $102 million of loans in the fourth quarter of 2015 as compared to a 1.4% gain on the sale of $41 million of loans in the fourth quarter of 2016. Included in noninterest income in the fourth quarter of 2016 are $0.2 million of revenues related to our insurance agency operations.Noninterest revenue for Wealth Management increased by $0.3 million to $5.4 million in the fourth quarter of 2016 when compared to thecorresponding period in 2015 due to higher levels of AUM.

Noninterest expense in Banking increased from $11.8 million in the fourth quarter of 2015 to $14.7 million in the fourth quarter of 2016 due primarily to increases in staffing and costs associated with the Bank’s expansion, the growth of its balances of loans and deposits and costs associated with our property and casualty insurance agency operations which started during the second quarter of 2015. Compensation and benefits for Banking increased $0.7 million or 9% during the fourth quarter of 2016 as compared to the fourth quarter of 2015 as the number of full time equivalent employees (“FTE”) in Banking increased to 272.0 from 224.8 as a result of the increased staffing to support the growth in loans and deposits, a portion of which was offset by increased deferred costs relating to the higher loan originations. A $2.1 million increase in occupancy and depreciation, professional

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services and marketing and other expenses were related tohigher legal costs related to ongoing litigation matters, costs associated with our expansion into additional corporate space and opening of new offices, and costs related to the higher levels of loans and deposits, including FDIC insurance and customer service costs. Included in noninterest expense in the fourth quarter of 2016 are $0.3 million of costs related to our insurance agency operations.

2016 as Compared to 2015

Our net income and income before taxes for 2016 were $23.3 million and $38.3 million, respectively, as compared to $13.4 million and $22.8 million, respectively, for 2015. The increase in income before taxes was the result of a $15.1 million increase in income before taxes for Banking and a $0.5 million decrease in corporate expenses. Earnings before taxes for Wealth Management for 2016 were consistent with 2015 as a $0.8 million increase in noninterest income was offset by a commensurate increase in noninterest expenses. The increase in income before taxes in Banking was due to higher net interest income and higher noninterest income which was partially offset by a higher provision for loan losses and higher noninterest expenses. Corporate interest expense decreased by $0.7 million due to the payoff of a term note in 2015, while corporate noninterest expenses increased by $0.2 million.

The effective tax rate for 2016 was 39.2% as compared to 41.4% for 2015, with the benefit primarily due to the reductions in taxes on income from excess tax benefits resulting from the exercise of stock awards.

Net interest income for Banking increased 52% from $58.9 million for 2015, to $89.4 million for 2016 due to a 66% 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 3.27% for 2015 to 2.95% for 2016 was primarily due to a decrease in yield on total interest-earning assets and an increase in the cost of interest-bearing liabilities. The yield on interest-earning assets decreased from 3.76% to 3.53% due to an increase in the proportion of lower yielding securities to total interest-earning assets and a decrease in the yield on loanswhich was partially offset by a $0.9 million increase in FHLB dividends. The decrease in yield on loans was due to prepayments of higher yielding loans and the addition of loans at current market rates which are lower than the current yield on our loan portfolio.The increase in the cost of interest-bearing liabilities was due to increased costs of interest-bearing deposits which was the result of increases in deposit market rates and the use of promotional rates to attract deposits.

The higher provision for loan losses for 2016 as compared to 2015 was due to a larger increase in the balance of loans during 2016 as compared to 2015.

Noninterest income for Banking increased from $8.8 million for 2015 to $13.8 million for 2016. This $5.0 million increase was due to the recognition of the following during 2016:  a $7.8 million gain on the sale of loans as compared to a $2.9 million gain on sale of loans in 2015; a $1.3 million gain on the sale of securities, $2.4 million of costs incurred to close out a swap and a $0.7 million increase in revenues related to our insurance agency operations. The gain on sale of loans was realized on the sale of $306 million of loans secured by multifamily properties in 2016 as compared to the sale of $102 million of loans secured by multifamily properties in 2015. During 2016, at times we deemed market conditions to be favorable, we sold securities with less desirable features and higher prepayment risk to better position our securities portfolio. Included in noninterest income for 2016 are $1.2 million of revenues related to our insurance agency operations. Noninterest revenue for Wealth Management increased by $0.8 million to $21.3 million for 2016 when compared to the corresponding period in 2015 due to higher levels of AUM.

Noninterest expense in Banking increased from $40.0 million for 2015 to $58.4 million for 2016 due primarily to increases in staffing and costs associated with the Bank’s expansion, the acquisition of Pacific Rim Bank (“PRB”) in June of 2015, the growth of our balances of loans and deposits and costs associated with our property

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and casualty insurance agency operations which started during the second quarter of 2015. Compensation and benefits for Banking increased $7.8 million or 31%during 2016 as compared to 2015 as the number of FTE in Banking increased to 260.2 from 191.3as a result of the acquisition of PRB and increased staffing to support the growth in loans and deposits. A $10.7 million increase in occupancy and depreciation, professional services and marketing and other expenses were related to increased costs related to the acquisition of PRB, higher legal costs related to ongoing litigation matters, costs associated with our expansion into additional corporate space and opening of new offices, and costs related to the higher levels of loans and deposits, including FDIC insurance and customer service costs. Included in noninterest expense for 2016 are $2.1 million of costs related to our insurance agency operations. Noninterest expense in Wealth Management increased $0.8 million for 2016 as compared to 2015 primarily due to increased compensation costs related to the increase in FTE from 55.8 for 2015 to 58.8 for 2016.

Quarter Ended December 31, 2016 as Compared to Quarter Ended September 30, 2016

Our net income and income before taxes in the fourth quarter of 2016 were $6.5 million and $10.6 million, respectively, as compared to $9.1 million and $15.5 million, respectively, in the third quarter of 2016. The decrease in income before taxes was the result of a $4.9 million decrease in income before taxes for Banking and a $0.1 million increase in corporate expenses which was partially offset by a $0.1 million increase in income before taxes for Wealth Management. The decrease in Banking was due to lower noninterest income and a higher provision for loan losses which was partially offset by higher net interest income and lower noninterest expenses. The increase in Wealth Management was due to higher noninterest income.

The effective tax rate for the fourth quarter of 2016 was 38.5% as compared to 41.5% for the third quarter of 2016 due primarily differences in the reductions in taxes on income from excess tax benefits resulting from the exercise of stock awards.

Net interest income for Banking increased 8% from $23.2 million in the third quarter of 2016 to $25.0 million in the fourth quarter of 2016 due primarily to a 9% increase in interest-earning assets.

The higher provision for loan losses for the fourth quarter of 2016 as compared to the third quarter of 2016 was primarily due to a larger increase in the balance of loans.

Noninterest income for Banking decreased from $9.9 million in the third quarter of 2016 to income of $2.3 million in the fourth quarter of 2016. This $7.6 million decrease was due to a $7.2 million gain on the sale of loans in the third quarter of 2016 as compared to a $0.6 million gain on sale of loans in the fourth quarter of 2016 and a $1.0 million gain on the sale of securities.The Bank realized a 2.7% gain on the sale of $265 million of loans in the third quarter of 2016 as compared to a 1.4% gain on sale of $41 million of loans in the fourth quarter of 2016.During the third quarter of 2016, we sold $64 million of mortgage backed securities that carried higher risks of prepayments, resulting in the gain on sale of securities. Noninterest revenue for Wealth Management increased by $0.1 million in the fourth quarter of 2016 when compared to the third quarter of 2016 due to higher levels of AUM.

Noninterest expense in Banking decreased from $16.1 million in the third quarter of 2016 to $14.7 million in the fourth quarter of 2016 due primarily to a $1.7 million decrease in legal costs.

Changes in Financial Position

During 2016, total assets increased by $1.4 billion as loans and loans held for sale increased by $1.04 billion, deposits increased by $905 million, securities decreased by $56 million, cash and cash equivalents increased by $382 million and FHLB advances increased by $454 million. The $1.4 billion increase in loans during 2016 was the result of loan originations and funding of existing credit commitments of $1.77 billion which was partially offset by the

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sale of $306 million of loans and$430 million of payoffs and scheduled principal payments. The growth in deposits was due to the organic growth in deposits from our specialty deposit group and our branch offices.

Our credit quality remains strong as our ratio of non-performing assets to total assets decreased from 0.32% at December 31, 2015 to 0.25% at December 31, 2016. We realized net recoveries of $0.1 million during the 2016 and the ratio of the allowance for loan and lease losses to loans, excluding loans acquired in acquisitions, was 0.60% at December 31, 2016.

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