More annual reports from First Foundation:
2023 ReportMorningstar® Document Research℠ FORM 10-KFirst Foundation Inc. - FFWMFiled: March 16, 2015 (period: December 31, 2014)Annual report with a comprehensive overview of the companyThe information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The userassumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot belimited or excluded by applicable law. Past financial performance is no guarantee of future results. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)xxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2014OR¨¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to Commission file number: 001-36461 FIRST FOUNDATION INC.(Exact name of Registrant as specified in its charter) California 20-8639702(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.) 18101 Von Karman Avenue, Suite 700Irvine, CA 92612 92612(Address of principal executive offices) (Zip Code)(949) 202-4160(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(b) of the Act:Common Stock, par value, $.001 per share(Title of Class)Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x.Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act. YES ¨ NO x.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 preceding12 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 x 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 andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit andpost such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of“accelerated filer and large accelerated filer” and “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer ¨Non-accelerated filer x Smaller reporting company xIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xNo market existed for registrant’s Common Stock on either the last day of the second quarter of fiscal 2014. Registrant’s shares were listed and commenced trading on theNASDAQ Global Stock Market on November 3, 2014.As of March 12, 2015, a total of 7,878,597 shares of registrant’s Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCENONE Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2014TABLE OF CONTENTS Page No.FORWARD-LOOKING STATEMENTS ii PART I Item 1 Business 1Item 1A Risk Factors 20Item 1B Unresolved Staff Comments 33Item 2 Properties 33Item 3 Legal Proceedings 33Item 4 Mine Safety Disclosures 33 PART II Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 34Item 6 Selected Financial Data 35Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 38Item 8 Financial Statements and Supplementary Data 63Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 100Item 9A Controls and Procedures 100Item 9B Other Information 104 PART III Item 10 Directors and Executive Officers of the Registrant 105Item 11 Executive Compensation 111Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 117Item 13 Certain Relationships and Related Transactions and Director Independence 118Item 14 Principal Accountant Fees and Services 120 PART IV Item 15 Exhibits and Financial Statements and Schedules 121Signatures S-1Index to Exhibits E-1 iSource: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FORWARD-LOOKING STATEMENTSIn addition to historical information, this document contains forward-looking statements (as such term is defined in Section 27A of the SecuritiesAct of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-lookingstatements are those that predict or describe future events or trends or that do not relate solely to historical matters. However, our actual results and financialperformance in the future will be affected by known and currently unknown risks, uncertainties and other factors that may cause our actual results or financialperformance in the future to differ materially from the results or financial performance that may be expressed, predicted or implied by such forward-lookingstatements. Such risks, uncertainties and other factors include, among others, those set forth below in ITEM 1A. RISK FACTORS, and readers of this report areurged to read the cautionary statements contained in that Section of this Report. In some cases, you can identify forward-looking statements by words like“may,” “will,” “should,” “could,” “believes,” “intends,” “expects,” “anticipates,” “plans,” “estimates,” “predicts,” “potential,” “project” and “continue” andsimilar expressions. Readers of this document are cautioned not to place undue reliance on any forward-looking statements, which speak only as of therespective dates on which such statements were made and which are subject to risks, uncertainties and other factors that could cause actual results and thetiming of certain events to differ materially from future results expressed or implied by such forward-looking statements.First Foundation Inc. expressly disclaims any intent or any obligation to release publicly any revisions or updates to any of the forward-lookingstatements contained in this report to reflect events or circumstances after the date of this document or the occurrence of currently unanticipated events ordevelopments or to conform such forward-looking statements to actual results or to changes in its opinions or expectations, except as may be required byapplicable law. iiSource: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PART IItem 1.BusinessOverviewUnless we state otherwise or the context otherwise requires, references in this Annual Report on Form 10-K to “we,” “our,” and “us” refer toFirst Foundation Inc., a California corporation, (or FFI or the Company) and its consolidated subsidiaries, First Foundation Advisors (or FFA) and FirstFoundation Bank (or FFB).We are a California based financial services company that provides a comprehensive platform of personalized financial services to high net-worthindividuals and their families, family businesses and other affiliated organizations. We consider high net-worth individuals to be individuals with net worth,excluding their primary residence, of over $1.0 million. Our integrated platform provides investment management, wealth planning, consulting, trust andbanking products and services to effectively and efficiently meet the financial needs of our clients. We have also established a lending platform that offersloans to individuals and entities that own and operate multifamily residential and commercial real estate properties. In addition, we provide business bankingproducts and services to small to moderate-sized businesses and professional firms, and consumer banking products and services to individuals and familieswho would not be considered high net-worth. As of December 31, 2014, we had $3.22 billion of assets under management (or AUM), $1.36 billion of totalassets, $1.17 billion of loans and $963 million of deposits. Our investment management, wealth planning, consulting, and trust services provide us withsubstantial, fee-based, recurring revenues, such that in 2014, our non-interest income was 37% of our total revenues.Our strategy is focused on expanding our strong and stable client relationships by delivering high quality, coordinated investment management,wealth planning, consulting, trust and banking products and services. We are able to maintain a client-focused approach by recruiting and retainingexperienced and qualified staff, including highly qualified relationship managers, private bankers and financial planners.We intend to continue to grow our business by (i) cross-selling our services among our wealth management and banking clients; (ii) obtaining newclient referrals from existing clients, attorney and accountant referral sources and through referral agreements with asset custodial firms; (iii) marketing ourservices directly to prospective new clients; (iv) adding experienced relationship managers and private bankers who may have established clientrelationships that we can serve; (v) establishing de novo wealth management offices in select markets, both within and outside our existing market areas; and(vi) making opportunistic acquisitions of complementary businesses.As a bank holding company, we are subject to regulation and examination by the Board of Governors of the Federal Reserve System (or the FederalReserve Board or FRB) and the Federal Reserve Bank of San Francisco (or the FRBSF) under delegated authority from the FRB. As an Federal DepositInsurance Corporation (or FDIC) insured, California state chartered bank, FFB is subject to regulation and examination by the FDIC and the CaliforniaDepartment of Business Oversight (or the DBO). FFB also is a member of the Federal Home Loan Bank of San Francisco (or “FHLB”), which provides it with asource of funds in the form of short-term and long-term borrowings. FFA is a registered investment adviser under the Investment Advisers Act of 1940, orInvestment Advisers Act, and is subject to regulation by the Securities and Exchange Commission, or SEC, under that Act.Through FFA and FFB, we offer a comprehensive platform of personalized financial services to high net-worth individuals and their families,family businesses and other affiliated organizations. Our integrated platform provides investment management, wealth planning, consulting, trust andbanking products and services to effectively and efficiently meet the financial needs of our clients. Our broad range of financial product and services are moreconsistent with those offered by larger financial institutions, while our high level of personalized service, accessibility and responsiveness to our clients aremore typical of the services offered by boutique investment management firms and community banks. We believe this combination of an integrated platformof comprehensive financial services and products and personalized and responsive service differentiates us from many of our competitors and has contributedto the growth of our client base and our business.Overview of our Investment Advisory and Wealth Management BusinessFFA is a fee-based investment adviser which provides investment advisory services primarily to high net-worth individuals, their families and theirfamily businesses, and other affiliated organizations. FFA strives to provide its clients with a high level of personalized service by its staff of experiencedrelationship managers. As of December 31, 2014, FFA had total $3.22 billion of AUM. FFA’s operations comprise the investment management, wealthplanning and consulting segment of our business.Overview of Our Banking BusinessFFB is engaged in private and commercial banking, offering a broad range of personal and business banking products and services and trustservices to its clients. Its private banking services include a variety of deposit products, including personal checking, 1Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. savings and money market deposits and certificates of deposit, single family real estate loans, and consumer loans. FFB also provides the convenience ofonline and other personal banking services to its clients. FFB’s business banking products and services include multifamily and commercial real estate loans,commercial term loans and lines of credit, transaction and other deposit accounts, online banking and enhanced business services. FFB has also established alending platform that offers loans to individuals and entities who own and operate multifamily residential and commercial real estate properties. In addition,FFB provides its products and services to individuals and families who would not be considered high net-worth, small to moderate sized businesses andprofessional firms. At December 31, 2014, FFB had $1.35 billion of total assets, $1.17 billion of loans and $972 million of deposits. FFB’s operationscomprise the trust and banking segment of our business.Relationship Managers and Private BankersOur operating strategy has been to build strong and stable long-term client relationships, one at a time, by delivering high quality, coordinatedinvestment management, wealth planning, consulting, trust and banking products and services. The success of this strategy is largely attributable to ourexperienced and high quality client relationship managers and private bankers. The primary role of our relationship managers and private bankers, inaddition to attracting new clients, is to develop and maintain a strong relationship with their clients and to coordinate the services we provide to their clients.We have experienced low turnover in our client service personnel and we believe we can continue to attract and retain experienced and client-focusedrelationship managers and private bankers. At December 31, 2014, we employed 16 relationship managers and 20 private bankers.Wealth Management Products and ServicesFFA provides fee-based investment advisory services and wealth management and consulting services primarily for high net-worth individuals andtheir families, family businesses and other affiliated organizations (including public and closely-held corporations, family foundations and private charitableorganizations). FFA provides high net-worth clients with personalized services designed to enable them to reach their personal and financial goals and bycoordinating FFA’s investment advisory and wealth management services with risk management and estate and tax planning services provided by outsideservice providers, for which FFA does not receive commissions or referral fees. FFA’s clients benefit from certain cost efficiencies available to institutionalmanagers, such as block trading, access to institutionally priced no-load mutual funds, ability to seek competitive bid/ask pricing for bonds, low transactioncosts and investment management fees charged as a percentage of the assets managed, with tiered pricing for larger accounts.FFA’s investment management team strives to create diversified investment portfolios for its clients that are individually designed, monitored andadjusted based on the discipline of fundamental investment analysis. FFA focuses on creating investment portfolios that are commensurate with a client’sobjectives, risk preference and time horizon, using traditional investments such as individual stocks and bonds and mutual funds. FFA also providescomprehensive and ongoing advice and coordination regarding estate planning, retirement planning, charitable and business ownership issues, and issuesfaced by executives of publicly-traded companies.AUM at FFA has grown at a compound annual growth rate of 21% over the three year period ending December 31, 2014. Changes in our AUMreflects additions from new clients, the gains or losses recognized from investment results, additional funds received from existing clients, withdrawals offunds by clients, and terminations. During the 3 year period ending December 31, 2014, additions from new clients and net gains from investment resultswere 72% and 28%, respectively, of the total of additions from new clients and net gains from investment results.FFA does not provide custodial services for its clients. Instead, client investment accounts are maintained under custodial arrangements with large,well established brokerage firms, either directly or through FFB. However, FFA advises its clients that they are not obligated to use those services and thatthey are free to select securities brokerage firms and custodial service providers of their own choosing. FFA has entered into referral agreements with certainof the asset custodial firms that provide custodial services to our clients. Under these arrangements, the asset custodial firms provide referrals of prospectivenew clients whose increase in wealth warrants a more personalized and expansive breadth of financial services that we are able to provide in exchange for afee. This fee is either a percentage of the fees we charge to the client or a percentage of the AUM of the client. The asset custodial firms are entitled tocontinue to receive these fees for as long as we continue to provide services to the referral client. These referral agreements do not require the client tomaintain their assets at the custodial firm and are fully disclosed to the client prior to our providing services to them.FFA also provides wealth management services, consisting of financial, investment and economic advisory and related services, to high-net-worthindividuals and their families, family businesses, and other affiliated organizations (including public and closely-held corporations, family foundations andprivate charitable organizations). Those services include education, instruction and consultation on financial planning and management matters, andInternet-based data processing administrative support services involving the processing and transmission of financial and economic data primarily forcharitable organizations. 2Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Banking Products and ServicesThrough FFB, we offer a wide range of loan products, deposit products, business and personal banking services and trust services. Our loanproducts are designed to meet the credit needs of our clients in a manner that, at the same time, enables us to effectively manage the credit and interest raterisks inherent in our lending activities. Deposits represent our principal source of funds for making loans and investments and acquiring other interest-earning assets. The yields we realize on our loans and other interest-earning assets and the interest rates we pay to attract and retain deposits are the principaldeterminants of our banking revenues. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in thisAnnual Report on Form 10-K.FFB also provides trust services to clients in California and Nevada. Those services, which consist primarily of the management of trust assets,complement the investment and wealth management services that FFA offers to our clients and, as a result, provide us with cross-selling opportunities.Additionally, trust service fees provide an additional source of noninterest income for us. At December 31, 2014, trust AUM totaled $415 million.Our lending activities serve the credit needs of high net-worth individuals and their businesses, owners of multifamily and commercial real estateproperties, individuals and families who would not be considered high net-worth, small to moderate size businesses and professional firms in our marketareas. As a result we offer a variety of loan products consisting of multifamily and single family residential real estate loans, commercial real estate loans,commercial term loans and lines of credit, and consumer loans. We handle all loan processing, underwriting and servicing at our administrative office inIrvine, California.The following table sets forth information regarding the types of loans that we make, by amounts and as a percentage of our total loans outstandingat December 31: 2014 2013 (dollars in thousands) Balance % of Total Balance % of Total Recorded Investment balance: Loans secured by real estate: Residential properties: Multifamily $481,491 41.3% $405,984 44.9%Single family 360,644 30.9% 227,096 25.2%Total loans secured by residential properties 842,135 72.2% 633,080 70.1%Commercial properties 205,320 17.6% 154,982 17.2%Land 4,309 0.4% 3,794 0.4%Total real estate loans 1,051,764 90.2% 791,856 87.7%Commercial and industrial loans 93,537 8.0% 93,255 10.3%Consumer loans 21,125 1.8% 18,484 2.0%Total loans $1,166,426 100.0% $903,595 100.0%Residential Mortgage Loans – Multi-family: We make multi-family residential mortgage loans for terms up to 30 years primarily for propertieslocated in Southern California. These loans generally are adjustable rate loans with interest rates tied to a variety of independent indexes; although in somecases these loans have fixed interest rates for periods ranging from 3 to 7 years and adjust thereafter based on an applicable index. These loans generally haveinterest rate floors, payment caps, and prepayment penalties. The loans are underwritten based on a variety of underwriting criteria, including an evaluationof the character and creditworthiness of the borrower and guarantors, loan-to-value and debt service coverage ratios, borrower liquidity and credit history. Inaddition, we perform stress testing for changes in interest rates, capitalization rates and other factors and review general economic trends such as lease rates,values and absorption rates. We typically require personal guarantees from the owners of the entities to which we make such loans.Residential Mortgage Loans – Single-family: We offer single family residential mortgage loans primarily as an accommodation to our existingclients. In most cases, these take the form of non-conforming loans and FFB does not sell or securitize any of its single family residential mortgage loanoriginations. FFB does not originate loans defined as high cost by state or federal banking regulators. The majority of FFB’s single family residential loanoriginations are collateralized by first mortgages on real properties located in Southern California. These loans are generally adjustable rate loans with fixedterms ranging from 3 to 7 years terms. These loans generally have interest rate floors and payment caps. The loans are underwritten based on a variety ofunderwriting criteria, including an evaluation of the character and creditworthiness of the borrower and guarantors, loan-to-value and debt to income ratios,borrower liquidity, income verification and credit history. In addition, we perform stress testing for changes in interest rates and other factors and reviewgeneral economic trends such as market values. 3Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Commercial Real Estate Loans: Our commercial real estate loans are secured by first trust deeds on nonresidential real property. These loansgenerally are adjustable rate loans with interest rates tied to a variety of independent indexes; although in some cases these loans have fixed interest rates forperiods ranging from 3 to 7 years and adjust thereafter based on an applicable index. These loans generally have interest rate floors, payment caps, andprepayment penalties. The loans are underwritten based on a variety of underwriting criteria, including an evaluation of the character and creditworthiness ofthe borrower and guarantors, loan-to-value and debt service coverage ratios, borrower liquidity and credit history. In addition, we perform stress testing forchanges in interest rates, cap rates and other factors and review general economic trends such as lease rates, values and absorption rates. We typically requirepersonal guarantees from the owners of the entities to which we make such loans.Commercial Loans: We offer commercial term loans and commercial lines of credit to our clients. Commercial loans generally are made tobusinesses that have demonstrated a history of profitable operations. To qualify for such loans, prospective borrowers generally must have operating cashflow sufficient to meet their obligations as they become due, and good payment histories. Commercial term loans are either fixed rate loans or adjustable rateloans with interest rates tied to a variety of independent indexes and are made for terms ranging from one to five years. Commercial lines of credit areadjustable rate loans with interest rates usually tied to the Wall Street Journal prime rate, are made for terms ranging from one to two years, and containvarious covenants, including a requirement that the borrower reduce its credit line borrowings to zero for specified time periods during the term of the line ofcredit. The loans are underwritten based on a variety of underwriting criteria, including an evaluation of the character and creditworthiness of the borrowerand guarantors, debt service coverage ratios, historical and projected client income, borrower liquidity and credit history. In addition, we perform stresstesting for changes in interest rates and other factors and review general economic trends in the client’s industry. We typically require personal guaranteesfrom the owners of the entities to which we make such loans.Consumer Loans: We offer a variety of consumer loans and credit products, including personal installment loans and lines of credit, and homeequity lines of credit designed to meet the needs of our clients. Consumer loans are either fixed rate loans or adjustable rate loans with interest rates tied to avariety of independent indexes and are made for terms ranging from one to ten years. The loans are underwritten based on a variety of underwriting criteria,including an evaluation of the character creditworthiness and credit history of the borrower and guarantors, debt to income ratios, borrower liquidity, incomeverification, and the value of any collateral securing the loan. Consumer loan collections are dependent on the borrower’s ongoing cash flows and financialstability and, as a result, generally pose higher credit risks than the other loans that we make.For all of our loan offerings, we utilize a comprehensive approach in our underwriting process. This includes the requirement that all factorsconsidered in our underwriting be appropriately documented. In our underwriting, our primary focus is always on the borrower’s ability to repay. However,because our underwriting process allows us to view the totality of the borrower’s capacity to repay, concerns or issues in one area can be compensated for byother favorable financial criteria. This personalized and detailed approach allows us to better understand and meet our clients’ lending needs. 4Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Bank Deposit Products: We offer a wide range of deposit products, including personal and business checking, savings accounts, interest-bearingnegotiable order of withdrawal accounts, money market accounts and time certificates of deposit. The following table sets forth information regarding thetype of deposits which our clients maintained with us and the average interest rates on those deposits as of December 31: 2014 2013 (dollars in thousands) Amount % of Total Weighted AverageRate Amount % of Total WeightedAverageRate Demand deposits: Noninterest-bearing $246,137 25.6% — $217,782 27.1% — Interest-bearing 291,509 30.3% 0.504% 217,129 27.1% 0.504%Money market and savings 171,958 17.8% 0.499% 121,260 15.1% 0.499%Certificates of deposits 253,350 26.3% 0.606% 245,866 30.7% 0.606%Total $962,954 100.0% 0.398% $802,037 100.0% 0.398%As of December 31, 2014, our 6 largest bank depositors accounted for, in the aggregate, 33% of our total deposits. See ITEM 1A—RISKFACTORS.Insurance Services: Through First Foundation Insurance Services (or FFIS), a wholly owned subsidiary of FFB, we offer life insurance productsprovided by unaffiliated insurance carriers from whom we collect a brokerage fee.CompetitionThe banking and investment and wealth management businesses in California and Las Vegas, Nevada, generally, and in FFI’s market areas, inparticular, are highly competitive. A relatively small number of major national and regional banks, operating over wide geographic areas, including WellsFargo, JP Morgan Chase, US Bank, Comerica, Union Bank and Bank of America, dominate the Southern California banking market. Those banks, or theiraffiliates, also offer private banking and investment and wealth management services. We also compete with large, well known private banking and wealthmanagement firms, including City National, First Republic, Northern Trust and Boston Private. Those banks and investment and wealth management firmsgenerally have much greater financial and capital resources than we do and as a result of their ability to conduct extensive advertising campaigns and theirrelatively long histories of operations in Southern California, are generally better known than us. In addition, by virtue of their greater total capitalization,the large banks have substantially higher lending limits than we do, which enables them to make much larger loans and to offer loan products that we are notable to offer to our clients.We compete with these much larger banks and investment and wealth management firms primarily on the basis of the personal and “one-on-one”service that we provide to our clients, which many of these competitors are unwilling or unable to provide, other than to their wealthiest clients, due to costsinvolved or their “one size fits all” approaches to providing financial services to their clients. We believe that our principal competitive advantage is ourability to offer our banking, trust, and investment and wealth management services through one integrated platform, enabling us to provide our clients withthe efficiencies and benefits of dealing with a cohesive group of professional advisors and banking officers working together to assist our clients to meet theirpersonal investment and financial goals. We believe that only the largest financial institutions in our area provide similar integrated platforms of productsand services, which they sometimes reserve for their wealthiest and institutional clients. In addition, while we also compete with many local and regionalbanks and numerous local and regional investment advisory and wealth management firms, we believe that only a very few of these banks offer investment orwealth management services and that a very few of these investment and wealth management firms offer banking services and, therefore, these competitors arenot able to provide such an integrated platform of comprehensive financial services to their clients. This enables us to compete effectively for clients who aredissatisfied with the level of service provided at larger financial institutions, yet are not able to receive an integrated platform of comprehensive financialservices from other regional or local financial service organizations.While we provide our clients with the convenience of technological access services, such as remote deposit capture and internet banking, wecompete primarily by providing a high level of personal service associated with our private banking focus. As a result, we do not try to compete exclusivelyon pricing. However, because we are located in a highly competitive market place and because we are seeking to grow our businesses, we attempt to maintainour pricing in line with our principal competitors. 5Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Supervision and RegulationBoth federal and state laws extensively regulate bank holding companies and banks. Such regulation is intended primarily for the protection ofdepositors and the FDIC’s deposit insurance fund and is not for the benefit of shareholders. Set forth below are summary descriptions of the material laws andregulations that affect or bear on our operations. Those summaries are not intended, and do not purport, to be complete and are qualified in their entirety byreference to the laws and regulations that are summarized below.First Foundation Inc.GeneralFirst Foundation Inc. is a registered bank holding company subject to regulation under the Bank Holding Company Act of 1956, as amended (the“Holding Company Act”). Pursuant to that Act, we are subject to supervision and periodic examination by, and are required to file periodic reports with theBoard of Governors of the Federal Reserve Board (or the Federal Reserve or the FRB).As a bank holding company, we are allowed to engage, directly or indirectly, only in banking and other activities that the Federal Reserve hasdetermined, or in the future may deem, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Businessactivities which the Federal Reserve has designated as being closely related to banking include the provision of investment advisory, securities brokerage,insurance agency and data processing services, among others.As a bank holding company, we also are required to obtain the prior approval of the FRB for the acquisition of more than 5% of the outstandingshares of any class of voting securities, or of substantially all of the assets, by merger or purchase, of (i) any bank or other bank holding company and (ii) anyother entities engaged in banking-related businesses or that provide banking-related services.Under FRB regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks andmay not conduct its operations in an unsafe or unsound manner. In addition, it is the FRB’s policy that a bank holding company, in serving as a source ofstrength to its subsidiary banks, should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods offinancial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiarybanks. For that reason, among others, the Federal Reserve requires all bank holding companies to maintain capital at or above certain prescribed levels. Abank holding company’s failure to meet these requirements will generally be considered by the Federal Reserve to be an unsafe and unsound bankingpractice or a violation of the FRB’s regulations or both, which could lead to the imposition of restrictions (including restrictions on growth) on, or aregulatory enforcement order against, the offending bank holding company.Additionally, among its powers, the Federal Reserve may require any bank holding company to terminate an activity or terminate control of, orliquidate or divest itself of, any subsidiary or affiliated company that the FRB determines constitutes a significant risk to the financial safety, soundness orstability of the bank holding company or any of its banking subsidiaries. The Federal Reserve also has the authority to regulate provisions of a bank holdingcompany’s debt, including authority to impose interest ceilings and reserve requirements on such debt. Subject to certain exceptions, bank holdingcompanies also are required to file written notice and obtain approval from the Federal Reserve prior to purchasing or redeeming their common stock or otherequity securities. A bank holding company and its non-banking subsidiaries also are prohibited from implementing so-called tying arrangements wherebyclients may be required to use or purchase services or products from the bank holding company or any of its non-bank subsidiaries in order to obtain a loan orother services from any of the holding company’s subsidiary banks.Financial Services Modernization ActThe Financial Services Modernization Act (or the Gramm-Leach-Bliley Act or the Modernization Act), was enacted into law in 1999 primarily toestablish a comprehensive framework that would permit affiliations among commercial banks, insurance companies, securities and investment banking firms,and other financial service providers. Accordingly, the Act amended the Holding Company Act to permit a bank holding company that meets certaineligibility requirements to qualify as a “financial holding company,” and its non-bank affiliated companies to engage in a broader range of financialactivities to foster greater competition among financial services companies both domestically and internationally. 6Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Modernization Act also contains provisions that expressly preempt and make unenforceable any state law restricting bank holding companiesor their affiliates from engaging in the insurance underwriting or related businesses. That Act also:●broadened the activities that may be conducted by national banks, bank subsidiaries of bank holding companies, and their financialsubsidiaries;●provided an enhanced framework for protecting the privacy of consumer information;●adopted a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernizethe Federal Home Loan Bank system;●modified the laws governing the implementation of the Community Reinvestment Act (“CRA”), which is described in greater detail below;and●addressed a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of banking institutions.According to current FRB regulations implementing the Modernization Act, activities that are financial in nature and may be engaged in byfinancial holding companies, through their non-bank subsidiaries, include●securities underwriting, dealing and market making;●sponsoring mutual funds and investment companies;●engaging in insurance underwriting; and●engaging in merchant banking activities.Before a bank holding company may engage in any of those financial activities, it must file an application with its Federal Reserve Bank thatconfirms that it meets certain qualitative eligibility requirements established by the FRB. A bank holding company that meets those qualifications and filessuch an application will be designated as a “financial holding company,” entitling it to affiliate with securities firms and insurance companies and engage inother activities, primarily through non-banking subsidiaries, that are financial in nature or are incidental or complementary to activities that are financial innature.A bank holding company that does not qualify as, or chooses not to submit an application to become, a financial holding company may notengage in such financial activities. Instead, as discussed above, it will be limited to engaging in banking and such other activities that have been determinedby the FRB to be closely related to banking.Acquisition of Control of a Bank Holding Company or a Bank.Subject to certain limited exemptions, the Holding Company Act and the Change in Bank Control Act of 1978, as amended (or the Change inControl Act), together with their implementing regulations, require:·the approval of the FRB before any person or company may acquire “control” of a bank holding company; and·the approval of an insured depository institution’s federal bank regulator before any person or company may acquire “control” of theinstitution.Under the Change in Control Act, control of a bank holding company or a bank or other insured depository institution is conclusively presumed toexist if an individual or company (i) acquires 25% or more of any class of voting securities of the bank holding company or the depository institution, or(ii) has the direct or indirect power to direct or cause the direction of the management and policies of the bank holding company or the insured depositoryinstitution, whether through ownership of voting securities, by contract or otherwise; except that no individual will be deemed to control a bank holdingcompany or an insured depository institution solely on account of being one of its directors, officers or employees. The Change in Control Act alsoestablishes a presumption, which is rebuttable, that a person will be deemed to control a bank holding company or an insured depository institution if thatperson acquires 10% or more, but less than 25%, of any class of voting securities of a bank holding company which has a class of equity securities registeredwith the SEC under the Exchange Act, or if no other person will own a greater percentage of that class of voting securities immediately after the transaction. However, as a bank holding company, we must obtain the prior approval of the FRB to acquire more than five percent of the outstanding shares ofvoting securities of a bank or another bank holding company. In addition, the Dodd Frank Act, which is discussed in greater detail below, provides that anacquisition by a bank holding company of a bank located outside the bank holding company’s home state may not be approved, unless the FRB hasdetermined that the bank holding company is well-capitalized and well managed. 7Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Capital Requirements Applicable to Bank Holding CompaniesBecause it requires bank holding companies to be a source of financial strength for their bank subsidiaries, the Federal Reserve has adoptedregulations that require bank holding companies to meet capital adequacy guidelines similar to those that apply to banks and other insured depositoryinstitutions. For additional information regarding these guidelines, see “‑‑‑ First Foundation Bank –‑ Capital Adequacy Guidelines” and New Basel IIICapital Requirements” below.Dividends. It is the policy of FRB that bank holding companies should generally pay dividends on common stock only out of income availableover the past year, and only if prospective earnings retention is consistent with the holding company’s expected future needs for capital and liquidity and tomaintain its financial condition. It is also an FRB policy that bank holding companies should not maintain dividend levels that undermine their ability to bea source of financial strength for their banking subsidiaries. Additionally, due to the current financial and economic environment, the FRB has indicated thatbank holding companies should carefully review their dividend policies and has discouraged dividend payment ratios that are at maximum allowable levelsunless both asset quality and capital are very strong.The Dodd-Frank ActFrom time to time, federal and state legislation is enacted which can affect our operations and our operating results by materially increasing ourcosts of doing business, limiting or expanding the activities in which banks and other financial institutions may engage, or altering the competitive balancebetween banks and non-bank financial service providers.The recent economic recession and credit crisis that required, among other measures, the federal government to provide substantial financialsupport to many of the largest of the banks and other financial service organizations in the United States, led the U.S. Congress to adopt a number of newlaws, and the federal banking regulators, including the FRB and the FDIC, to take broad actions, to address systemic risks and volatility in the U.S. bankingsystem. Set forth below is a summary of some of the provisions of the most significant of these laws, the Dodd-Frank Wall Street Reform and ConsumerProtection Act of 2010, or the Dodd-Frank Act or Dodd-Frank. The regulatory sweep of the Dodd-Frank Act is broad and its provisions apply not only to theregulation of bank holding companies and insured depository institutions, but also to investment banking and other financial companies and to publiccompanies that are regulated by the SEC. Accordingly, the following summary focuses primarily on the provisions of the Dodd-Frank Act that are applicableto banking organizations. It is not intended to be complete and is qualified in its entirety by reference to the Dodd-Frank Act itself and the regulationspromulgated thereunder.The Dodd-Frank Act, which was signed into law on July 21, 2010, has significantly changed federal regulation of bank holding companies andbanks and other insured depository institutions (collectively, “banking institutions”). Among other things, the Dodd-Frank Act has created a new FinancialStability Oversight Council to identify systemic risks in the country’s banking and financial system and gives federal banking regulators new authority totake control of and liquidate banking institutions, and large investment banking and other financial services firms, facing the prospect of imminent failure inany case where such failure would create systemic risks to the U.S. banking or financial system. The Dodd-Frank Act also created the Consumer FinancialProtection Bureau (or CFPB), which is a new independent federal regulatory agency with broad powers and authority to adopt regulations under, andadminister and regulate, federal consumer protection laws.Set forth below is a summary description of some of the key provisions of the Dodd-Frank Act that may affect the Company or FFB. Thedescription does not purport to be complete and is qualified in its entirety by reference to the Dodd-Frank Act itself and the regulations adopted thereunder.Imposition of New Capital Standards on Bank Holding Companies. The Dodd-Frank Act required the Federal Reserve to apply consolidatedcapital requirements to bank holding companies that are no less stringent than those currently applied to insured depository institutions, such as FFB. TheFederal Reserve implemented this requirement by its adoption of the new Basel III capital rules in June 2014. See “‑‑First Foundation Bank — New Basel IIICapital Requirements” below.Increase in Deposit Insurance and Changes Affecting the FDIC Deposit Insurance Fund. The Dodd-Frank Act permanently increased themaximum deposit insurance amount for banks, savings institutions and credit unions from $100,000 to $250,000 per depositor. The Dodd-Frank Act alsobroadened the base for FDIC insurance assessments which are used to fund the FDIC’s Deposit Insurance Fund (or DIF) which, as a result, are now based on aninsured depository institution’s the average consolidated total assets, less tangible equity capital, may lead to increases in FDIC insurance assessments formany FDIC insured banks. The Dodd-Frank Act also requires the FDIC to increase the reserve ratio of the DIF from 1.15% to 1.35% of the total depositsinsured by the FDIC by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceedscertain thresholds. See also, “‑‑First Foundation Bank –The Deposit Insurance Fund and FDIC Insurance Premiums” below. 8Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Payment of Interest on Business Checking Accounts. The Dodd-Frank Act has eliminated a federal statutory prohibition against the paymentof interest on business checking accounts, which is expected to increase the competition for and interest that banks are prepared to pay on such accounts. Limitations on Conversion of Bank Charters. The Dodd-Frank Act prohibits a bank or other depository institution from converting from astate to federal charter or vice versa while it is subject to a cease and desist order or other formal enforcement action or a memorandum of understanding withrespect to a significant supervisory matter, unless the federal or state banking regulatory agency that issued the enforcement action does not object to theproposed conversion within 30 days following its receipt of a notice of that conversion.Interstate Banking. The Dodd-Frank Act authorizes national and state banks to establish branches in other states to the same extent as a bankchartered by that state would be permitted to establish a branch in that state. Previously, banks could only establish branches in other states if the host stateexpressly permitted out-of-state banks to establish branches in its state. Accordingly, banks will be able to enter new markets more freely.The Volcker RulePursuant to the Dodd-Frank Act, the Federal Reserve and the FDIC have adopted regulations, which became effective on April 1, 2014, toimplement the “Volcker Rule” which prohibits insured depository institutions and companies affiliated with insured depository institutions (“bankingorganizations”) from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures, and options on these instruments, fortheir own account. Those regulations also impose limits on the investments that banking organizations may make in, and other relationships that bankingorganizations may have with, hedge funds or private equity funds. Certain collateralized debt obligations, securities backed by trust preferred securities,which were initially defined in the regulations as covered funds subject to the investment prohibitions of the Volker Rule, have been exempted from thoseprohibitions due to concerns that many community banks would otherwise have been required to recognize significant losses on such obligations andsecurities.These regulations provide exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations,insurance company activities, and organizing and offering hedge funds or private equity funds. The regulations also clarify that certain activities are notprohibited by the Volker Rule, including acting as agent, broker, or custodian. The compliance requirements under the regulations vary based on the size ofthe banking organization and the scope of its activities. Banking organizations with significant trading operations will be required to establish detailedcompliance programs and their CEOs will be required to attest that the programs are reasonably designed to achieve compliance with the finalregulations. Independent testing and analyses of a banking organization’s compliance program also will be required. On the other hand, the regulationsreduce the burden on smaller, less-complex banking organizations by limiting their compliance and reporting requirements. Additionally, a bankingorganization that does not engage in covered trading activities will not have to establish a compliance program.Neither the Company nor FFB held any investment positions at December 31, 2014 that were subject to these regulations. Therefore, we believethat these regulations will not require us to make any material changes in our operations or businesses.Executive Compensation RestrictionsIn June 2010, the Federal Reserve and the FDIC issued comprehensive guidelines on incentive compensation policies intended to ensure that theincentive compensation policies of banking organizations do not undermine the safety and soundness of the organizations by encouraging excessive risk-taking. The guidelines apply to any employees of a banking organization that have the ability to materially affect the risk profile of a banking organization,either individually or as part of a group. Pursuant to these guidelines, each federal bank regulatory agency, as part of it regular, risk-focused examination of the banking organizations itregulates, assesses their incentive compensation arrangements based on the key principles their incentive compensation arrangements should (i) provideincentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effectiveinternal controls and risk management, and (iii) be supported by strong corporate governance principles and practices, including active and effectiveoversight by the banking organization’s board of directors. The federal banking regulatory agencies have the authority to bring enforcement actions against abanking organization if the agency concludes that its incentive compensation arrangements, or related risk-management control or governance processes,pose an undue risk to the organization's safety and soundness and that the organization is not taking prompt and effective measures to correct thedeficiencies.In addition, the Dodd-Frank Act directs federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives ofdepository institutions and their holding companies that have assets of more than $1.0 billion. 9Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Moreover, if an insured bank has been determined by its federal banking regulatory agency to be a “troubled” institution, it may not adopt anynew, or make any payments or awards under any existing, incentive compensation plans, or make any change in control payments, to its executive officerswithout first obtaining the approval of its federal banking regulatory agency to do so.In February 2014, the Company adopted an incentive compensation clawback policy. Among other things, that policy provides that, if any of theCompany’s previously published financial statements are restated due to a material noncompliance with any financial reporting requirements under thefederal securities laws, the Company will seek to recover the amount by which any incentive compensation paid in the previous three years to any executiveofficer exceeds the incentive compensation which the Company’s audit committee determines would have been paid to such executive officer had suchcompensation been determined on the basis of the restated financial statements.Sarbanes-Oxley Act of 2002The Sarbanes-Oxley Act of 2002, or the ‘Sarbanes-Oxley Act” was enacted into law on July 30, 2002. The primary purposes of the Sarbanes-OxleyAct were to strengthen (i) the oversight of public accounting firms that audit, and (ii) the corporate governance policies and practices of, companies thecommon stock or other equity securities of which are publicly traded (“public companies”. The Act granted authority, primarily to the Securities andExchange Commission (or the SEC), to adopt rules for implementing that Act. Among other things, the Sarbanes-Oxley Act: ·provided for enhanced regulation of the independence, responsibilities and conduct of accounting firms which provide auditing services topublic companies;·established an independent board, known as the Public Company Accounting Oversight Board, or PCAOB, with the authority to set auditing,quality and ethical standards for, and the power to investigate and discipline, public accounting firms; ·increased the criminal penalties for financial fraud committed by public company executives and public accounting firms or their keypersonnel;·required enhanced monitoring of, and certifications by, the chief executive and chief financial officers of public companies of their financialdisclosures, internal financial controls and their audit processes;·required accelerated disclosures of material information by public companies; and·required enhanced disclosures by public companies of their corporate governance policies and practices.Additionally, pursuant to requirements of the Sarbanes-Oxley Act, the New York, American and NASDAQ Stock Exchanges promulgated rulesrequiring public companies to adopt and implement expanded corporate governance policies and practices as a condition to the listing, or continued listing,of their shares on those Exchanges. Among other things, those rules (i) require public companies to expand the authority, role and responsibilities of theirboards of directors, (ii) require that a majority of the members of their boards of directors be independent of management (“independent directors”) andestablish more stringent standards that directors needed to meet to qualify as independent directors, (iii) require boards of directors to establish standingaudit, compensation and nominating and corporate governance committees comprised of independent directors and (iv) increased the corporate transactionsfor which shareholder approval is required.Regulation of the Company by the California Department of Business OversightBecause FFB is a California state chartered bank, the Company is deemed to be a bank holding company within the meaning of Section 3700 ofthe California Financial Code. As such, we are subject to examination by, and may be required to file reports with, the DBO.First Foundation BankGeneral.FFB is subject to primary supervision, periodic examination and regulation by (i) the FDIC, which is its primary federal banking regulator, and(ii) the DBO, because FFB is a California state chartered bank. 10Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Various requirements and restrictions under Federal and California banking laws affect the operations of FFB. These laws and the implementingregulations, which are promulgated by federal and state bank regulatory agencies, can determine the extent of supervisory control to which a bank will besubject by its federal and state bank regulators. These laws and regulations cover most aspects of a bank’s operations, including:●the reserves a bank must maintain against deposits and for possible loan losses and other contingencies;●the types of deposits it may obtain and the interest it is permitted to pay on different types of deposit accounts;●the types of and limits on loans and investments that a bank may make;●the borrowings that a bank may incur;●the number and location of branch offices that a bank may establish;●the rate at which it may grow its assets and business;●the acquisition and merger activities of a bank;●the amount of dividends that a bank may pay; and●the capital requirements that a bank must satisfy.If, as a result of an examination of a federally regulated bank, its federal banking regulatory agency, such as the FDIC, were to determine that thefinancial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the bank’s operations had becomeunsatisfactory or that the bank or its management was in violation of any law or regulation, that agency would have the authority to take a number ofdifferent remedial actions as it deems appropriate under the circumstances. These actions include the power:●to enjoin any “unsafe or unsound” banking practices;●to require that affirmative action be taken to correct any conditions resulting from any violation of law or unsafe or unsound practice;●to issue an administrative order that can be judicially enforced against the bank;●to require the bank to increase its capital;●to restrict the bank’s growth;●to assess civil monetary penalties against the bank or its officers or directors;●to remove officers and directors of the bank; and●if the federal agency concludes that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate abank’s deposit insurance, which in the case of a California state chartered bank would result in revocation of its charter and require it to ceaseits banking operations.Additionally, under California law the DBO has many of these same remedial powers with respect to FFB.Permissible Activities and Subsidiaries. California law permits state chartered commercial banks to engage in any activity permissible for nationalbanks. Those permissible activities include conducting many so-called “closely related to banking” or “nonbanking” activities either directly or throughtheir operating subsidiaries.Federal Home Loan Bank System. FFB is a member of the FHLB. Among other benefits, each regional Federal Home Loan Bank serves as a reserveor central bank for its members within its assigned region and makes available loans or advances to its member banks. Each regional Federal Home LoanBank is financed primarily from the sale of consolidated obligations of the overall Federal Home Loan Bank system. As an FHLB member, FFB is required toown a certain amount of capital stock in the FHLB. At December 31, 2014, FFB was in compliance with the FHLB’s stock ownership requirement.Historically, the FHLB has paid dividends on its capital stock to its members.Federal Reserve Board Deposit Reserve Requirements. The FRB requires all federally-insured depository institutions to maintain reserves atspecified levels against their transaction accounts. At December 31, 2014, FFB was in compliance with these requirements. 11Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Limitations and Restrictions on the Payment of Dividends and Other Transfers of Funds by FFB.Cash dividends from FFB are one of the principal sources of cash (in addition to any cash dividends that might be paid to us by FFA) that isavailable to the Company for its operations and to fund any cash dividends that our board of directors might declare in the future. We are a legal entityseparate and distinct from FFB and FFB is subject to various statutory and regulatory restrictions on its ability to pay cash dividends to us. Those restrictionswould prohibit FFB, subject to certain limited exceptions, from paying cash dividends in amounts that would cause FFB to become undercapitalized.Additionally, the FDIC and the DBO have the authority to prohibit FFB from paying cash dividends, if either of those agencies deems the payment ofdividends by FFB to be an unsafe or unsound practice.The FDIC also has established guidelines with respect to the maintenance of appropriate levels of capital by banks under its jurisdiction.Compliance with the standards set forth in those guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions offederal law could limit the amount of dividends which FFB may pay. Also, until September 2014, we are required to obtain the prior approval of the FDICbefore FFB may pay any dividends.Restrictions on Transactions between FFB and the Company and its other Affiliates.FFB is subject to Sections 23A and 23B of and FRB Regulation W under, Federal Reserve Act, which impose restrictions on (i) any extensions ofcredit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or any of its other subsidiaries; (ii) the purchase of or investments inCompany stock or other Company securities; (iii) the taking of Company securities as collateral for the loans that FFB makes; (iv) the purchase of assets fromthe Company or any of its other subsidiaries and (v) transactions between a bank and its financial subsidiaries, as well as other affiliates. Thus, under the finalrule, transactions between a bank and its financial subsidiary, as well as other affiliates, are subject to the requirements of sections 23A and 23B. Theserestrictions prevent the Company and any of its subsidiaries from obtaining borrowings or extensions of credit from FFB, unless the borrowings are securedby marketable obligations in designated amounts, and such secured loans and any investments by FFB in the Company or any of its subsidiaries are limited,individually, to 10% of FFB’s capital and surplus (as defined by federal regulations), and in the aggregate are limited to 20%, of FFB’s capital and surplus.California law also imposes restrictions with respect to transactions involving the Company and any other persons that may be deemed under that law tocontrol FFB.The Dodd-Frank Act extended the application so Section 23A of the Federal Reserve Act to derivative transactions, repurchase agreementsand securities lending and borrowing transactions that create credit exposure to an affiliate or an insider of a bank. Any such transactions with any affiliatesmust be fully secured. In addition, the exemption from Section 23A for transactions with financial subsidiaries has been eliminated. The Dodd-Frank Act alsoexpands the definition of “affiliate” for purposes of quantitative and qualitative limitations of Section 23A of the Federal Reserve Act to include mutualfunds advised by a depository institution or any of its affiliates. Safety and Soundness Standards.Banking institutions may be subject to potential enforcement actions by the federal banking regulators for unsafe or unsound practices or forviolating any law, rule, regulation, or any condition imposed in writing by its primary federal banking regulatory agency or any written agreement with thatagency. The federal banking agencies have adopted guidelines designed to identify and address potential safety and soundness concerns that could, if notcorrected, lead to deterioration in the quality of a bank’s assets, liquidity or capital. Those guidelines set forth operational and managerial standards relatingto such matters as:●internal controls, information systems and internal audit systems;●risk management;●loan documentation;●credit underwriting;●asset growth;●earnings; and●compensation, fees and benefits. 12Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In addition, the federal banking agencies have adopted safety and soundness guidelines with respect to the quality of loans and other assets ofinsured depository institutions. These guidelines provide six standards for establishing and maintaining a system to identify problem loans and otherproblem assets and to prevent those assets from deteriorating. Under these standards, an FDIC-insured depository institution is expected to:●conduct periodic asset quality reviews to identify problem loans and any other problem assets, estimate the inherent losses in those loans andother assets and establish reserves that are sufficient to absorb those estimated losses;●compare problem loans and other problem asset totals to capital;●take appropriate corrective action to resolve problem loans and other problem assets;●consider the size and potential risks of material asset concentrations; and●provide periodic quality reports with respect to their loans and other assets which provide adequate information for the bank’s managementand the board of directors to assess the level of risk to its loans and other assets.These guidelines also establish standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenanceof adequate capital and reserves.Regulatory Guidelines for Commercial Real Estate Loan ConcentrationsThe Federal Reserve and the FDIC have published guidelines that call for the adoption of heightened risk mitigation measures by insured bankswith a concentration of commercial real estate loans in its loan portfolio. The guidelines provide that a bank will be deemed to have a concentration ofcommercial real estate loans if (i) the total reported loans for construction, land development and other land represent 100% or more of the bank's totalcapital, or (ii) the total reported loans secured by multifamily and non-farm residential properties, plus loans for construction, land development and otherland, represent 300% or more of the bank’s total capital and the bank’s commercial real estate loan portfolio has increased by 50% or more during the prior36 months. If such a concentration exists, the guidelines call for the bank (x) to implement heightened risk assessment and risk management practices,including board and management oversight and strategic planning, (y) to implement and maintain stringent loan underwriting standards, and to use marketanalyses and stress testing tools to monitor the condition of the bank’s commercial real estate loan portfolio and to assess the impact that adverse economicconditions affecting the real estate markets could have on the bank’s financial condition and (z) if determined to be necessary on the basis of the results ofsuch stress tests, to increase its allowance for loan losses and its capital.Single Borrower Loan Limitations.California law imposes on all California state-chartered banks, including FFB, “single borrower loan limitations” which consist of the following:·unsecured borrowings of any customer of a California state-chartered bank, together with the borrowings of any family members or affiliatesof the customer, to the bank may not exceed 15% of the sum of the bank’s shareholders’ equity, allowance for loan losses, capital notes anddebentures; and·the aggregate of secured and unsecured borrowings of any customer of a California state-chartered bank, together with the borrowings of anyfamily members or affiliates of the customer, to the bank may not exceed 25% of the sum of the bank’s shareholders’ equity, allowance forloan losses, capital notes and debentures.Technology Risk Management and Consumer PrivacyFederal and state banking regulatory agencies have issued various policy statements focusing on the importance of technology risk managementand supervision in evaluating the safety and soundness of the banks they regulate. According to those policy statements, the use by banking organizations oftechnology-related products, services, processes and delivery channels, such as the internet, exposes them to a number of risks which include operational,compliance, security, privacy, and reputational risk. The banking regulators generally expect the banking organizations they regulate to prudently managetechnology-related risks as part of their comprehensive risk management policies in order to identify, monitor, measure and control risks associated with theuse of technology. 13Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Pursuant to the Financial Services Modernization Act, the federal banking agencies have adopted rules and established standards to be followed inimplementing safeguards that are designed to ensure the security and confidentiality of customer records and information, protection against any anticipatedthreats or hazards to the security or integrity of such records and protection against unauthorized access to or use of such records or information in a way thatcould result in substantial harm or inconvenience to a customer. Among other requirements, these rules require each bank organization to implement acomprehensive written information security program that includes administrative, technical and physical safeguards relating to customer information.In addition, the Modernization Act requires banking organizations to provide each of their customers with a notice of their privacy policies andpractices and prohibits a banking organization from disclosing nonpublic personal information about a customer to nonaffiliated third parties unless thebanking organization satisfies various notice and “opt-out” requirements and the customer has not chosen to opt out of the disclosure. Additionally, thefederal banking agencies are authorized to issue regulations as necessary to implement those notice requirements and non-disclosure restrictions. Morespecifically, the Modernization Act privacy regulations require all banking organizations to develop initial and annual privacy notices that describe ingeneral terms the banking organization’s information sharing practices. Any banking organization that shares nonpublic personal information aboutcustomers with nonaffiliated third parties must also provide customers with notices advising them that, subject to certain limited exceptions, the customer hasthe opportunity and a reasonable time period to inform the bank that it may not share the customer’s nonpublic personal information with nonaffiliates of thebank. These regulations also place limitations on the extent to which a banking organization may disclose an account number or access code for credit card,deposit, or transaction accounts to any nonaffiliated third party for use in marketing such programs.Capital Adequacy and Prompt Corrective Action Provisions of the FDIC Improvement ActCapital Adequacy Guidelines. The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, established a framework forregulation of federally insured depository institutions, including banks, and their parent holding companies and other affiliates, by their federal bankingregulators. Among other things, FDICIA requires the relevant federal banking regulator to take “prompt corrective action” with respect to a depositoryinstitution if that institution does not meet certain capital adequacy standards, including requiring the prompt submission by that bank of an acceptablecapital restoration plan if its bank regulator has concluded that it needs additional capital.Supervisory actions by a bank’s federal regulator under the prompt corrective action rules generally depend upon an institution’s classificationwithin one of five capital categories, which is determined on the basis of a bank’s Tier 1 leverage ratio, Tier 1 capital ratio and total capital ratio. Tier 1capital consists principally of common stock and nonredeemable preferred stock and retained earnings.Under FIDICIA regulations, an insured depository institution’s capital category will depend upon how its capital levels compare with these capitalmeasures and the other factors established by the relevant federal banking regulator. Prior to January 1, 2015, those regulations provided that a bank wouldbe classified as:●“well capitalized” if it had a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and aTier 1 leverage ratio of 5.0% or greater, and was not subject to any order or written directive by any such regulatory agency to meet andmaintain a specific capital level for any capital measure;●“adequately capitalized” if it had a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater,and a Tier 1 leverage ratio of 4.0% or greater, but was not “well capitalized”;●“undercapitalized” if it had a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% and aTier 1 leverage ratio of less than 4.0%;●“significantly undercapitalized” if it had a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than3.0%, or a Tier 1 leverage ratio of less than 3.0%; and●“critically undercapitalized” if its tangible equity was equal to or less than 2.0% of average quarterly tangible assets.However, if a bank that was classified as “well-capitalized” is determined (after notice and opportunity for hearing), by its federal bankingregulator, to be in an unsafe or unsound condition or to be engaging in an unsafe or unsound practice, that agency could, under certain circumstances,reclassify the bank as adequately capitalized. The federal banking regulator of a bank that is classified as adequately capitalized or undercapitalized couldrequire the bank to comply with bank supervisory provisions and restrictions that would apply to a bank in the next lower capital classification, if thebanking regulator has obtained supervisory information regarding the bank (other than with respect to its capital levels) which raises safety or soundnessconcerns. However, a significantly undercapitalized bank may not be treated by its regulatory agency as critically undercapitalized by reason of such safetyor soundness concerns alone. 14Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The capital classification of a bank affects the frequency of examinations of the bank by its primary federal bank regulatory agency, impacts theability of the bank to engage in certain activities and affects the deposit insurance premiums that are payable by the bank. Under FDICIA, the federal bankingregulators are required to conduct a full-scope, on-site examination of every bank at least once every 12 months.Effective January 1, 2015, these capital adequacy guidelines were revised by Basel III. See “‑‑New Basel III Capital Requirements” below.Corrective Measures for Undercapitalized Banks. FDICIA generally prohibits a bank from paying any dividends or making any capitaldistributions or paying any management fee to its parent holding company if the bank would thereafter be “undercapitalized.” In addition “undercapitalized”banks are subject to growth limitations and are required to submit a capital restoration plan for approval by its federal regulatory agency. However, thatagency may not approve the bank’s capital restoration plan unless the agency determines, among other things, that the plan is based on realistic assumptionsand is likely to succeed in restoring the bank’s capital.An undercapitalized bank which fails to submit, or fails to obtain the approval by its federal banking regulator of a capital restoration plan will betreated as if it is “significantly undercapitalized.” In that event, the bank’s federal banking regulator may impose a number of additional requirements andrestrictions on the bank, including orders or requirements (i) to sell sufficient voting stock to become “adequately capitalized,” (ii) to reduce its total assets,and (iii) cease the receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver orconservator.If an undercapitalized bank is a subsidiary of a bank holding company, then, for its capital restoration plan to be approved, the bank’s parentholding company must guarantee that the bank will comply with, and provide assurances of the performance by the bank of, its capital restoration plan.Under such a guarantee and assurance of performance, if the bank fails to comply with its capital restoration plan, the parent holding company may becomesubject to liability for such failure in an amount up to the lesser of (i) 5.0% of its bank subsidiary’s total assets at the time it became undercapitalized, or(ii) the amount that is necessary (or would have been necessary) to bring the bank into compliance with all applicable capital standards as of the time it failedto comply with the plan.Corrective Measures for Significantly and Critically Undercapitalized Banks. If a bank is classified as “significantly undercapitalized” or“critically undercapitalized,” its federal banking regulator would be required to take one or more prompt corrective actions that would, among other thingsrequire the bank to (i) raise additional capital by means of sales of common stock or nonredeemable preferred shares, (ii) improve its management, (iii) limitthe interest rates it may pay on deposits, (iv) altogether prohibit transactions by the bank with its affiliates, (v) terminate certain activities that pose undue orunreasonable risks, and (vi) restrict the compensation being paid to its executive officers. If a bank is classified as critically undercapitalized, FDICIA requiresthe bank to be placed into conservatorship or receivership within 90 days, unless its federal banking regulatory agency determines that there are othermeasures that would enable the bank, within a relatively short period of time, to increase its capital in an amount sufficient to improve its capitalclassification under the prompt corrective action framework.New Basel III Capital Rules.Prior to 2015, the risk-based capital rules applicable to domestic banks and bank holding companies were based on the 1988 capital accord of theInternational Basel Committee on Banking Supervision (the “Basel Committee”), which is comprised of central banks and bank supervisors and regulatorsfrom the major industrialized countries. The Basel Committee develops broad policy guidelines for use by each country’s banking regulators in determiningthe banking supervisory policies and rules they apply. In December 2010, the Basel Committee issued a new set of international guidelines for determiningregulatory capital, known as “Basel III”. In June 2012, the FRB issued, for public comment, three notices of proposed rulemaking which, if adopted, wouldhave made significant changes, consistent with the Basel III guidelines, to the regulatory risk-based capital and leverage requirements for banks and bankholding companies (“banking organizations”) in the United States.In July 2012, the FRB adopted final rules (the “New Capital Rules”) establishing a new comprehensive capital framework for U.S. bankingorganizations, and the FDIC subsequently adopted substantially identical rules. The rules implement the Basel Committee’s December 2010 framework forstrengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The New Capital Rules substantially revised the risk-basedcapital requirements applicable to U.S. banking organizations, including the Company and FFB, from the prior U.S. risk-based capital rules, redefined thecomponents of capital and addressed other issues affecting the capital ratios applicable to banking organizations. The New Capital Rules also replaced theexisting approach used in risk-weighting of a banking organization’s assets with a more risk-sensitive approach. The New Capital Rules became effective forthe Company and FFB on January 1, 2015 (subject, in the case of certain of those Rules, to phase-in periods). 15Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Among other things, the New Capital Rules (i) introduced a new capital measure called “Common Equity Tier 1” ( or “CET-1”), (ii) specified thatTier 1 capital consists of CET-1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) made most deductions and adjustments toregulatory capital measures applicable to CET-,1 and not to the other components of capital, and expanded the scope of the deductions and adjustments fromcapital as compared to the prior capital rules, thus potentially requiring banking organizations to achieve and maintain higher levels of CET-1 in order tomeet minimum capital ratios.Under the New Capital Rules, beginning January 1, 2015, the minimum capital ratios are:CET-1 to risk-weighted assets 4.5%Tier 1 capital (i.e., CET-1 plus Additional Tier 1) to risk-weighted assets 6.0%Total capital (i.e., Tier 1 plus Tier 2) to risk-weighted assets 8.0%Tier 1 capital-to-average consolidated assets as reported on consolidated financial statements(1) 4.0%(1)Commonly referred to as a banking institution’s “leverage ratio”.When fully phased in on January 1, 2019, the New Capital Rules also will require the Company and FFB, as well as most other bank holdingcompanies and banks, to maintain a 2.5% “capital conservation buffer,” composed entirely of CET-1, on top of the minimum risk-weighted asset ratios setforth in the above table. This capital conservation buffer will have the effect of increasing (i) the CET-1-to-risk-weighted asset ratio to 7.0%, (ii) the Tier 1capital-to-risk-weighted asset ratio to 8.5%, and (iii) the Total capital-to-risk weighted asset ratio to 10.5%.The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking organizations with a ratio of CET-1 to risk-weighted assets above the minimum, but below the capital conservation buffer, will face constraints on dividends, equity repurchases and executivecompensation based on the amount of the shortfall. The implementation of the capital conservation buffer will begin on January 1, 2016 at 0.625%, and willincrease by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.The New Capital Rules provide for a number of deductions from and adjustments to CET-1. These include, for example, the requirement thatmortgage servicing rights, deferred tax assets dependent upon future taxable income, and significant investments in common equity issued bynonconsolidated financial entities, be deducted from CET-1 to the extent that any one such category exceeds 10% of CET-1 or all such categories, in theaggregate, exceed 15% of CET-1. Other deductions and adjustments to CET-1 will be phased in incrementally between January 1, 2015 and January 1, 2018.On the other hand, the impact of these deductions and adjustments may be mitigated prior to or during the phase-in period by the determination of other thantemporary impairments (“OTTI”) and additional accumulation of retained earnings. Under current capital standards, the effects of certain items ofAccumulated Other Comprehensive Income (“AOCI”) included in capital are excluded for purposes of determining regulatory capital ratios. By contrast,under the New Capital Rules, the effects of certain items of AOCI will not be excluded. However, most banking organizations, including the Company andFFB, were entitled to make a one-time permanent election, not later than January 1, 2015, to continue to exclude these items from capital. We have not yetdetermined whether to make this election.The New Capital Rules require that trust preferred securities be phased out from Tier 1 capital by January 1, 2016, except in the case of bankingorganizations with total consolidated assets of less than $15 billion, which will be permitted to include trust preferred securities issued prior to May 19, 2010in Tier 2 capital, without any limitations.In the case of FFB, the New Capital Rules also revise the “prompt corrective action” regulations under FIDICA, by (i) introducing a CET-1 ratiorequirement at each capital quality level (other than critically undercapitalized), with a minimum ratio of 6.5% for a bank to qualify as “well-capitalized”;(ii) increasing the minimum Tier 1 capital ratio for each category, with the minimum Tier 1 capital ratio of 8% (as compared to 6% prior to January 1, 2015)for a bank to be “well-capitalized”; and (iii) requiring a leverage ratio of 4% to be adequately capitalized (as compared to the 3% leverage ratio that wasformerly in effect), and a leverage ratio of 5% for a bank to be “well-capitalized”. The New Capital Rules do not, however, change the total risk-based capitalrequirement for any “prompt corrective action” category.The New Capital Rules prescribe a standardized approach for calculating risk-weighted assets that expand the risk-weighting categories from theformer four Basel I-derived categories (0%, 20%, 50% and 100%) to larger and a greater number of risk-sensitive categories, depending on the nature of theassets, generally ranging from 0% for U.S. Government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for avariety of asset categories. In addition, the New Capital Rules also provide more advantageous risk weights for derivatives and repurchase-style transactionscleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation. 16Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Deposit Insurance Fund and FDIC Deposit Insurance PremiumsThe FDIC insures the deposits of the customers of all FDIC insured depository institutions up to prescribed limits for each depositor through aDeposit Insurance Fund, or the DIF, from which it makes deposit insurance payments to depositors of failed depository institutions and from which it fundsthe costs incurred and against which it charges the losses sustained in connection with the closure or other resolution of those institutions. Due to higherlevels of bank failures resulting from the recent recession and credit crisis, the insurance payments and the resolution costs increased significantly and largelydepleted the DIF. In order to restore the DIF to a statutorily mandated minimum of 1.35% of total deposits which it insures (as compared to 1.15% prior toDodd-Frank), the FDIC has increased deposit insurance premium rates. The FDIC uses a risk-based system to determine a depository institution’s insurancepremium rate based on the institution’s classification. Institutions assigned to higher risk classifications (that is, institutions that pose a higher risk of loss tothe DIF) pay premiums at higher rates than institutions that pose a lower risk. A depository institution’s risk classification is assigned based primarily on itscapital levels and the level of supervisory concern which the institution poses to the DIF. The FDIC also has the authority, under certain circumstances, tofurther increase the insurance premium rates of depository institutions. Any increase in FDIC insurance premiums assessed on FFB in the future wouldincrease our noninterest expense and thereby reduce our profitability.Additionally, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the FinancingCorporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the DIF. The FICO assessment rates, which aredetermined quarterly, averaged 0.066% of insured deposits in fiscal 2014. These assessments will continue until the FICO bonds mature in 2017.Community Reinvestment Act and Fair Lending Developments.Like all other federally regulated banks, FFB is subject to fair lending requirements and the evaluation of its small business operations under theCommunity Reinvestment Act, or the CRA. The CRA generally requires the federal banking regulatory agencies to evaluate the record of a bank in meetingthe credit needs of its local communities, including those of low and moderate income neighborhoods in its service area. A bank’s compliance with its CRAobligations is based on a performance-based evaluation system which determines the bank’s CRA ratings on the basis of its community lending andcommunity development performance. A bank may have substantial penalties imposed on it and generally will be required to take corrective measures in theevent it fails to meet its obligations under the CRA. Federal banking agencies also may take compliance with the CRA and other fair lending laws intoaccount when regulating and supervising other activities of a bank or its bank holding company. Moreover, when a bank holding company files anapplication for approval to acquire a bank or another bank holding company, the federal banking regulatory agency to which the application is assigned willreview the CRA assessment of the subsidiary bank or banks of the applicant bank holding company, and a low CRA rating may be the basis for requiring theapplicant’s bank subsidiary to take corrective actions to improve its CRA performance as a condition to the approval of the acquisition or as a basis fordenying the application altogether.USA Patriot Act of 2001 and Bank Secrecy Act.In October 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism of 2001(USA Patriot Act) was enacted into law in response to the September 11, 2001 terrorist attacks. The USA Patriot Act was adopted to strengthen the ability ofU.S. law enforcement and intelligence agencies to work cohesively to combat terrorism on a variety of fronts. Of particular relevance to banks and otherfederally insured depository institutions are the USA Patriot Act’s sweeping anti-money laundering and financial transparency provisions and various relatedimplementing regulations that:●establish due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts and foreigncorrespondent accounts;●prohibit U.S. institutions from providing correspondent accounts to foreign shell banks;●establish standards for verifying client identification at account opening; and●set rules to promote cooperation among financial institutions, regulatory agencies and law enforcement entities in identifying parties thatmay be involved in terrorism or money laundering.Under implementing regulations issued by the U.S. Treasury Department, banking institutions are required to incorporate a client identificationprogram into their written money laundering plans that includes procedures for:●verifying the identity of any person seeking to open an account, to the extent reasonable and practicable;●maintaining records of the information used to verify the person’s identity; and●determining whether the person appears on any list of known or suspected terrorists or terrorist organizations. 17Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Company and FFB also are subject to the federal Bank Secrecy Act of 1970, as amended, or the Bank Secrecy Act, which establishesrequirements for recordkeeping and reporting by banks and other financial institutions designed to help identify the source, volume and movement ofcurrency and monetary instruments into and out of the United States to help detect and prevent money laundering and other illegal activities. The BankSecrecy Act requires financial institutions to develop and maintain a program reasonably designed to ensure and monitor compliance with its requirements,to train employees to comply with and to test the effectiveness of the program. Any failure to meet the requirements of the Bank Secrecy Act can result in theimposition of substantial penalties and in adverse regulatory action against the offending bank. FFI and FFB have each adopted policies and procedures tocomply with the Bank Secrecy Act.Consumer Laws and Regulations.The Company and FFB are subject to a broad range of federal and state consumer protection laws and regulations prohibiting unfair or fraudulentbusiness practices, untrue or misleading advertising and unfair competition. Those laws and regulations include:●The Home Ownership and Equity Protection Act of 1994, or HOEPA, which requires additional disclosures and consumer protections toborrowers designed to protect them against certain lending practices, such as practices deemed to constitute “predatory lending.”●The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, or the FACT Act, which requires bankinginstitutions and financial services businesses to adopt practices and procedures designed to help deter identity theft, including developingappropriate fraud response programs, and provides consumers with greater control of their credit data.●The Truth in Lending Act, or TILA, which requires that credit terms be disclosed in a meaningful and consistent way so that consumers maycompare credit terms more readily and knowledgeably.●The Equal Credit Opportunity Act, or ECOA, which generally prohibits, in connection with any consumer or business credit transactions,discrimination on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), or the fact that aborrower is receiving income from public assistance programs.●The Fair Housing Act, which regulates many lending practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status.●The Home Mortgage Disclosure Act, or HMDA, which includes a “fair lending” aspect that requires the collection and disclosure of dataabout applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.●The Real Estate Settlement Procedures Act, or RESPA, which requires lenders to provide borrowers with disclosures regarding the nature andcost of real estate settlements and prohibits certain abusive practices, such as kickbacks.●The National Flood Insurance Act, or NFIA, which requires homes in flood-prone areas with mortgages from a federally regulated lender tohave flood insurance.●The Secure and Fair Enforcement for Mortgage Licensing Act of 2008, or SAFE Act, which requires mortgage loan originator employees offederally insured institutions to register with the Nationwide Mortgage Licensing System and Registry, a database created by the states tosupport the licensing of mortgage loan originators, prior to originating residential mortgage loans. 18Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Consumer Financial Protection BureauThe Dodd-Frank Act created a new, independent federal agency, called the Consumer Financial Protection Bureau (“CFPB”), which has beengranted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal CreditOpportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer FinancialPrivacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect tothe compliance by depository institutions with $10 billion or more in assets with federal consumer protection laws and regulations. Smaller institutions aresubject to rules promulgated by the CFPB, but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. TheCFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Actalso (i) authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’sability to repay, and (ii) will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined bythe CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal leveland, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal financial consumer protection laws andregulations.In January 2013, the CFPB approved certain mortgage lending reform regulations impacting the Truth in Lending Act (the “TILA”) and the RealEstate Settlement Procedures Act (“RESPA”). Among other things, those reforms:●expand the population of loans that are subject to higher cost loan regulations and additional disclosures;●prohibit the payment of compensation to mortgage brokers based on certain fees or premiums, such as yield spread premiums, payable by orcharged to home borrowers;●increase the regulation of mortgage servicing activities, including with respect to error resolution, forced-placement insurance and lossmitigation and collection activities;●require financial institutions to make a reasonable and good faith determination that the borrower has the ability to repay the residentialmortgage loan before it is approved for funding and provides that the failure of a financial institution to make such a determination willentitle the borrower to assert that failure as a defense to any foreclosure action on the mortgage loan; and●impose appraisal requirements for high cost loans and loans secured by first mortgage liens on residential real estate.The CFPB also issued final rules for residential mortgage lending, which became effective January 10, 2013, including definitions for “qualifiedmortgages” and detailed standards by which leaders must satisfy themselves of the borrower’s ability to repay the loan and revised forms of disclosure underthe TILA and RESPA.Debit Card Fees. The Dodd-Frank Act provides that the amount of any interchange fee charged by a debit card issuer with respect to a debit cardtransaction must be reasonable and proportional to the cost incurred by the card issuer and requires the FRB to establish standards for reasonable andproportional fees which may take into account the costs of preventing fraud. As a result, the FRB adopted a rule, effective October 1, 2011, which limitsinterchange fees on debit card transactions to a maximum of 21 cents per transaction plus 5 basis points of the transaction amount. A debit card issuer mayrecover an additional one cent per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements prescribed by theFRB. Although, as a technical matter, this new limitation applies only to institutions with assets of more than $10 billion, it is expected that many smallerinstitutions will reduce their interchange fees in order to remain competitive with the larger institutions that are required to comply with this new limitation. 19Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. First Foundation AdvisorsRegistered Investment Adviser Regulation. FFA is a registered investment adviser under the Investment Advisers Act, and the SEC’s regulationspromulgated thereunder. The Investment Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary, recordkeeping,operational, and disclosure obligations. FFA is also subject to regulation under the securities laws and fiduciary laws of certain states and to EmployeeRetirement Income Security Act of 1974, or ERISA, and to regulations promulgated thereunder, insofar as it is a “fiduciary” under ERISA with respect tocertain of its clients. ERISA and the applicable provisions of the Code, impose certain duties on persons who are fiduciaries under ERISA, and prohibitcertain transactions by the fiduciaries (and certain other related parties) to such plans. The foregoing laws and regulations generally grant supervisoryagencies broad administrative powers, including the power to limit or restrict FFA from conducting its business in the event that it fails to comply with suchlaws and regulations. Possible sanctions that may be imposed in the event of such noncompliance include the suspension of individual employees,limitations on the business activities for specified periods of time, revocation of registration as an investment adviser and/or other registrations, and othercensures and fines. Changes in these laws or regulations could have a material adverse impact on the profitability and mode of operations of FFI and itssubsidiaries.Future LegislationCongress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enactlegislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agenciesalso periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact ofpending or future legislation or regulations, or the application thereof, cannot be predicted, although enactment of the proposed legislation could impact theregulatory structure under which we operate and may significantly increase our costs, impede the efficiency of our internal business processes, require us toincrease our regulatory capital, modify our business strategy and limit our ability to pursue business opportunities in an efficient manner. Item 1A.Risk FactorsOur business is subject to a number of risks and uncertainties that could prevent us from achieving our business objectives and could hurt ourfuture financial performance and the price performance of our common stock. Such risks and uncertainties also could cause our future financial condition andfuture financial performance to differ significantly from our current expectations, which are described in the forward-looking statements contained in thisreport. Those risks and uncertainties, many of which are outside of our ability to control or prevent, include the following:Risks Affecting our BusinessWe could incur losses on the loans we make.Loan defaults and the incurrence of losses on loans are inherent risks in our business. The incurrence of loan losses necessitate loan charge-offsand write-downs in the carrying values of a banking organization’s loans and, therefore, can adversely affect its results of operations and financialcondition. Accordingly, our results of operations will be directly affected by the volume and timing of loan losses, which for a number of reasons can varyfrom period to period. The risks of loan losses are exacerbated by economic recessions and downturns, as evidenced by the substantial magnitude of the loanlosses which many banks incurred as a result of the economic recession that commenced in 2008 and continued into 2010, or by other events that can lead tolocal or regional business downturns. Although an economic recovery in the U.S. has begun, unemployment remains relatively high, as compared to the pre-recessionary period, and there continue to be uncertainties about the strength and sustainability of that economic recovery. If the economic recovery were toremain weak or economic conditions were again to deteriorate, more of our borrowers may fail to perform in accordance with the terms of their loans, in whichevent loan charge-offs and asset write-downs could increase, which could have a material adverse effect on our business, financial condition, results ofoperations and prospects. 20Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Our allowance for loan losses is determined based upon both objective and subjective factors, and may not prove to be adequate to absorbfully the loan losses we incur, in which event our earnings may suffer.Like virtually all banks, we follow the practice of maintaining a reserve or allowance for possible loan losses, or ALLL, to absorb loanlosses. When it is determined that the payment in full of a loan has become unlikely, the carrying value of the loan is reduced (“written down”) to whatmanagement believes is its realizable value or, if it is determined that a loan no longer has any realizable value, the carrying value of the loan is written off inits entirety (a loan “charge-off”). Loan write-downs and charge-offs are charged against the ALLL. The amount of the ALLL is increased periodically (i) toreplenish the ALLL after it has been reduced due to loan write-downs and charge-offs, (ii) to reflect increases in the volume of outstanding loans, and (iii) totake account of changes in the risk of potential loan losses due to a deterioration in the condition of borrowers or adverse changes in economicconditions. Increases in the ALLL are made through a charge, recorded as an expense in the statement of income, referred to as the “provision for loan losses”and, therefore, can adversely affect earnings. On a quarterly basis, we make determinations with respect to the sufficiency of the ALLL, and the amount of the provisions for loan losses that webelieve will be necessary to maintain the sufficiency of the ALLL. We employ economic and loss migration models that are based on bank regulatoryguidelines, industry standards and our own historical loan loss experience, as well as a number of more subjective qualitative factors in order to make thesedeterminations. However, making these determinations involve judgments about changes and trends in current economic conditions and other events thatcan affect the ability of borrowers to meet their loan payment obligations to us and a weighting among the quantitative and qualitative factors we consider indetermining the sufficiency of the ALLL. If, as a result, or due to the occurrence of unexpected events or circumstances outside of our control or otherwise,those judgments subsequently prove to have been incorrect and, as a result, it becomes necessary to increase the amount of the ALLL, we would have toincrease the provisions we make for loan losses, which would reduce our earnings, possibly significantly. In addition, the FDIC and the DBO, as an integralpart of their examination processes, periodically review the adequacy of our ALLL. These agencies may require us to make additional provisions for loanlosses, over and above the provisions that we have already made, the effect of which also would be to reduce our earnings.Adverse changes in economic conditions in Southern California could disproportionately harm us.The substantial majority of our clients and the properties securing a large proportion of the loans we make are located in Southern California,where foreclosure rates and unemployment have remained high relative to most other regions of the country. A downturn in economic conditions, or eventhe continued weakness of the economic recovery in California, or the occurrence of natural disasters, such as earthquakes or fires, which are more common inSouthern California than in other parts of the country, could harm our business by:●reducing loan demand which, in turn, would lead to reductions in our net interest margins and net interest income;●adversely affecting the financial capability of borrowers to meet their loan obligations to us, which could result in increases in loan losses andrequire us to make additional provisions for loan losses, which would reduce our earnings; and●causing reductions in real property values that, due to our reliance on real properties to collateralize many of our loans, could make it moredifficult for us to prevent losses from being incurred on nonperforming loans through the foreclosure and sale of those real properties.Adverse changes in economic and market conditions, and changes in government regulations and government monetary policies couldmaterially and negatively affect our business and results of operations.Our business and results of operations are directly affected by factors such as political, economic and market conditions, broad trends in industryand finance, legislative and regulatory changes, changes in government monetary and fiscal policies and inflation, all of which are outside of our ability tocontrol. Deterioration in economic conditions, whether caused by global, national, regional or local concerns or problems, or a further downgrade in theUnited States debt rating, could result in the following consequences, any of which could have a material adverse effect on our business, financial condition,results of operations or prospects:●a deterioration in the credit quality of our banking clients;●an increase in loan delinquencies and loan losses;●an increase in problem assets and foreclosures●declines in the values of real properties collateralizing the loans we make;●the need to increase our ALLL; 21Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ●fluctuations in the value of, or impairment losses which may be incurred with respect to, FFB’s investment securities;●decreases in the demand for our services or financial products;●increases in competition for low cost or non-interest bearing deposits; and●decreases in the investment management and advisory fees we generate.Changes in interest rates could reduce our net interest margins and net interest income.Income and cash flows from our banking operations depend to a great extent on the difference. “spread” or “margin” between the interest we earnon interest-earning assets, such as loans and investment securities, and the rates at which we pay interest on interest-bearing liabilities, such as deposits andborrowings. However, interest rates are highly sensitive to many factors that are beyond our control, including (among others) general and regional and localeconomic conditions, the monetary policies of the Federal Reserve, bank regulatory requirements, competition from other banks and financial institutionsand a change over time in the mix of our loans, investment securities, on the one hand, and on our deposits and other liabilities, on the other hand. Changesin monetary policy will, in particular, influence the origination and market value of and the yields we can realize on loans and investment securities and theinterest we pay on deposits. Additionally, sustained low levels of market interest rates, as we have experienced during the past five years, could continue toplace downward pressure on our net interest margins and, therefore, on our earnings. Our net interest margins and earnings also could be adversely affected ifwe are unable to adjust our interest rates on loans and deposits on a timely basis in response to changes in economic conditions or monetary policies. Forexample, if the rates of interest we pay on deposits, borrowings and other interest-bearing liabilities increase faster than we are able to increase the rates ofinterest we charge on loans or the yields we realize on investments and other interest-earning assets, our net interest income and, therefore, our earnings willdecrease. On the other hand, increasing interest rates generally lead to increases in net interest income; however, such increases also may result in a reductionin loan originations, declines in loan prepayment rates and reductions in the ability of borrowers to repay their current loan obligations, which could result inincreased loan defaults and charge-offs and could require increases to our ALLL, thereby offsetting either partially or totally the increases in net interestincome resulting from the increase in interest rates. Additionally, we could be prevented from increasing the interest rates we charge on loans or fromreducing the interest rates we offer on deposits due to “price” competition from other banks and financial institutions with which we compete. Conversely, ina declining interest rate environment, our earnings could be adversely affected if the interest rates we are able to charge on loans or other investments declinemore quickly than those we pay on deposits and borrowings.Real estate loans represent a high percentage of the loans we make, making our results of operations vulnerable to downturns in the realestate market.At December 31, 2014, loans secured by multifamily and commercial real estate represented approximately 70% of FFB’s outstanding loans. Therepayment of such loans is highly dependent on the ability of the borrowers to meet their loan repayment obligations to us, which can be adversely affectedby economic downturns that can lead to (i) declines in the rents and, therefore, in the cash flows generated by those real properties on which the borrowersdepend to fund their loan payments to us, and (ii) decreases in the values of those real properties, which make it more difficult for the borrowers to sell thosereal properties for amounts sufficient to repay their loans in full. As a result, our operating results are more vulnerable to adverse changes in the real estatemarket than other financial institutions with more diversified loan portfolios and we could incur losses in the event of changes in economic conditions thatdisproportionately affect the real estate markets.Liquidity risk could adversely affect our ability to fund operations and hurt our financial condition.Liquidity is essential to our banking business, as we use cash to make loans and purchase investment securities and other interest-earning assetsand to fund deposit withdrawals that occur in the ordinary course of our business. Our principal sources of liquidity include earnings, deposits, Federal HomeLoan Bank (or FHLB) borrowings, sales of loans or investment securities held for sale, repayments by clients of loans we have made to them, and the proceedsfrom sales by us of our equity securities or from borrowings that we may obtain. If the ability to obtain funds from these sources becomes limited or the costsof those funds increase, whether due to factors that affect us specifically, including our financial performance, or due to factors that affect the financialservices industry in general, including weakening economic conditions or negative views and expectations about the prospects for the financial servicesindustry as a whole, then our ability to grow our banking and investment advisory and wealth management businesses would be harmed, which could have amaterial adverse effect on our business, financial condition, results of operations and prospects. 22Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Our 6 largest deposit clients account for 36% of our total deposits.As of December 31, 2014, our 6 largest bank depositors accounted for, in the aggregate, 36% of our total deposits. As a result, a material decrease inthe volume of those deposits by a relatively small number of our depositors could reduce our liquidity, in which event it could became necessary for us toreplace those deposits with higher-cost deposits, lower-yielding securities or FHLB borrowings, which would adversely affect our net interest income and,therefore, our results of operations.Although we plan to grow our business by acquiring other banks, there is no assurance that we will succeed in doing so.One of the key elements of our business plan is to grow our banking franchise and increase our market share, and for that reason, we intend to takeadvantage of opportunities to acquire other banks. However, there is no assurance that we will succeed in doing so. Our ability to execute on our strategy toacquire other banks may require us to raise additional capital and to increase FFB’s capital position to support the growth of our banking franchise, and willalso depend on market conditions, over which we have no control. Moreover, any bank acquisitions will require the approval of our bank regulators andthere can be no assurance that we will be able to obtain such approvals on acceptable terms, if at all.Growing our banking business may not increase our profitability and may adversely affect our future operating results.Since we commenced our banking business in October 2007, we have grown our banking franchise by establishing three new wealth managementoffices in Southern California and one in Las Vegas, Nevada and acquiring two new offices in Palm Desert and El Centro, California as part of our acquisitionof Desert Commercial Bank, or DCB, in August 2012. We plan to continue to grow our banking business both organically and through acquisitions of otherbanks. However, the implementation of our growth strategy poses a number of risks for us, including:●the risk that any newly established wealth management offices will not generate revenues in amounts sufficient to cover the start-up costs ofthose offices, which would reduce our earnings;●the risk that any bank acquisitions we might consummate in the future will prove not to be accretive to or may reduce our earnings if we donot realize anticipated cost savings or if we incur unanticipated costs in integrating the acquired banks into our operations or if a substantialnumber of the clients of any of the acquired banks move their banking business to our competitors;●the risk that such expansion efforts will divert management time and effort from our existing banking operations, which could adversely affectour future financial performance; and●the risk that the additional capital which we may need to support our growth or the issuance of shares in any bank acquisitions will bedilutive of the investments that our existing shareholders have in the shares of our common stock that they own and in their respectivepercentage ownership interests they have in the Company.We have obtained, from an unaffiliated bank, a $30.0 million term loan that is secured by a pledge of all of FFB’s shares, which could have amaterial adverse effect on our business, our financial condition and results of operations and future prospects if we are not able to meet financialcovenants applicable to that loan or to repay the loan when it becomes due.In April 2013, we entered into a five year term loan agreement pursuant to which we obtained $7.5 million of borrowings from another bank. Wehave increased our borrowings under that loan agreement on two occasions: (i) first to $21,875,000 in March 2014, and (ii) then on February 27, 2015 to$30,000,000, at which time the maturity date of the loan was extended from May 1, 2018 to May 1, 2022. We have used the proceeds of the loan primarily tosupport and fund the growth of our businesses, which included making contributions of equity to FFB and otherwise for working capital purposes. In order toobtain the loan, we were required to pledge 100% of the shares of FFB capital stock to the bank lender as security for our payment obligations under that loanagreement. Additionally, the loan agreement contains a number of financial and other covenants which we are required to meet over the remaining term ofthe loan. As a result, such borrowings may make us more vulnerable to general economic downturns and competitive pressures that could cause us to fail tomeet one or more of those financial covenants. If we are unable to meet any of those covenants, we could be required to repay the loan sooner than itsmaturity date in May 2022; and, if we are unable to repay the loan in full when due, whether at maturity or earlier, the lender will become entitled to sell ourFFB shares to recover the amounts that are due it under the loan agreement. Since the stock of FFB comprises our largest and most important asset on whichour success is dependent, an inability on our part to repay the loan when due would have a material adverse effect on our business, financial condition, resultsof operations and prospects and would cause us to incur significant losses. See the section below in this report entitled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Financial Condition—Term Loan” for additional information about this loan. 23Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We face intense competition from other banks and financial institutions and other wealth and investment management firms that could hurtour business.We conduct our business operations primarily in Southern California, where the banking business is highly competitive and is dominated by largemulti-state and in-state banks with operations and offices covering wide geographic areas. We also compete with other financial service businesses, includinginvestment advisory and wealth management firms, mutual fund companies, and securities brokerage and investment banking firms that offer competitivebanking and financial products and services as well as products and services that we do not offer. Larger banks and many of those other financial serviceorganizations have greater financial and marketing resources that enable them to conduct extensive advertising campaigns and to shift resources to regions oractivities of greater potential profitability. They also have substantially more capital and higher lending limits, which enable them to attract larger clientsand offer financial products and services that we are unable to offer, putting us at a disadvantage in competing with them for loans and deposits andinvestment management clients. If we are unable to compete effectively with those banking or other financial services businesses, we could find it moredifficult to attract new and retain existing clients and our net interest margins, net interest income and investment management advisory fees could decline,which would adversely affect our results of operations and could cause us to incur losses in the future.In addition, our ability to successfully attract and retain investment advisory and wealth management clients is dependent on our ability tocompete with competitors’ investment products, level of investment performance, client services and marketing and distribution capabilities. If we are notsuccessful in retaining existing and attracting new investment management clients, our business, financial condition, results of operations and prospects maybe materially and adversely affected.The loss of key personnel or inability to attract additional personnel could hurt our future financial performance.We currently depend heavily on the contributions and services provided by Rick Keller, our Executive Chairman, Scott Kavanaugh, ChiefExecutive Officer of FFI and FFB, John Hakopian, President of FFA, and John Michel, Chief Financial Officer of FFI, FFB and FFA, as well as a number ofother key management personnel. Our future success also will depend, in part, on our ability to retain our existing, and attract additional, qualified privatebanking officers, relationship managers and investment advisory personnel. Competition for such personnel is intense. If we are not successful in retainingand attracting key personnel, our ability to retain existing clients or attract new clients could be adversely affected and our business, financial condition,results of operations or prospects could as a result be significantly harmed.Banking laws and government regulations may adversely affect our operations, restrict our growth or increase our operating costs.We are subject to extensive supervision and regulation by federal and California state bank regulatory agencies. The primary objective of theseagencies is to protect bank depositors and not shareholders, whose respective interests often differ. These regulatory agencies have the legal authority toimpose restrictions on us if they believe that is necessary in order to protect depositors, even if those restrictions would adversely affect our ability to growour business, cause our operating costs to increase, or hinder our ability to compete with less regulated financial services companies.We are also subject to numerous laws and government regulations that are applicable to banks and other financial institutions, including thefollowing:Consumer Protection Laws and Regulations. We are required to comply with various consumer protection laws, including the CommunityReinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lendingrequirements on financial institutions.Bank Secrecy Act and other Anti-Money Laundering Laws and Regulations. As a financial institution, we are required by the Bank Secrecy Act,the USA PATRIOT Act of 2001 and other anti-money laundering laws and regulations, to institute and maintain an effective anti-money laundering programand file suspicious activity and currency transaction reports as appropriate. We are also subject to increased scrutiny of compliance with the rules enforcedby the Office of Foreign Assets Control. 24Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. If the policies, procedures or systems which we have adopted to comply with these laws and regulations are found by any regulatory or othergovernment agencies to be deficient or we fail to comply with any of these banking laws or regulations, we could be subject to penalties and regulatoryactions that may lead to the imposition of restrictions on our ability to grow our banking business. Additionally, a failure to maintain and implementadequate programs to combat money laundering and terrorist financing could have serious reputational consequences for us. Due, moreover, to the complexand technical nature of many of these laws and government regulations, inadvertent violations may and sometimes do occur. In such an event, we would berequired to correct and, depending on the nature and seriousness of the violation, we could be required implement measures to prevent a recurrence of suchviolations, which could increase our operating costs. If more serious violations were to occur or recur, our banking regulators could limit our activities orgrowth, fine us, or ultimately put FFB out of business if it was to encounter severe liquidity problems or a significant erosion of capital below the minimumamounts required under applicable regulatory capital guidelines. Any of these occurrences could have a material adverse effect on our business, financialcondition, results of operations or future prospects.The enactment of the Dodd-Frank Act, and the adoption of the new Basel III capital rules that became effective on January 1, 2015, poseuncertainties for our business and are likely to increase the costs of doing business in the future.The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, has significantly changed the U.S. banking lawsand regulations that apply to banks and other financial services organizations. Those changes include, among others: (i) the establishment of newrequirements and restrictions on derivative and investment activities by banking organizations; (ii) the repeal of the prohibition on the payment of intereston business checking deposits, (iii) the imposition of limitations on debit card interchange fees, (iv) the promulgation of enhanced financial institution safetyand soundness regulations that are applicable to FDIC-insured banks and to their bank holding companies, (v) increases in FDIC deposit insurance coverageand in FDIC insurance premiums that FDIC insured depository institutions are required to pay into the FDIC Deposit Insurance Fund, and (vi) theestablishment of new banking and financial services regulatory bodies, such as the Bureau of Consumer Financial Protection, or the BCFP. The BCFP hasbeen granted rulemaking authority over several federal consumer financial protection laws and, in some instances, has the authority to examine and superviseand enforce compliance by banks and other financial service organizations with these laws and regulations. We expect that the Dodd-Frank Act and itsimplementing regulations will increase our costs of doing business as well for other banking institutions. We also expect that the repeal of the prohibition onthe payment by banks of interest on business checking deposits will result in increased “price” competition among banks for such deposits, which couldincrease the costs of funds to us (as well as to other banks) and result in a reduction in our net interest income and earnings in the future.In July 2013, the FRB and the FDIC adopted final rules (the “New Capital Rules”) establishing a new comprehensive capital framework for U.S.banking organizations based on capital guidelines adopted by the International Basel Committee on Banking Supervision (the “Basel Committee”). Therules implement the Basel Committee’s December 2010 framework for strengthening international capital standards and also certain provisions of the Dodd-Frank Act. The New Capital Rules became effective for FFI and FFB on January 1, 2015 (subject in the case of certain of those rules to phase-in periods). TheNew Capital Rules have substantially revised and heightened the risk-based capital requirements applicable to U.S. banking organizations, including FFI andFFB, from the U.S. risk-based capital rules that were in effect prior to January 1, 2015 and instituted a new and more risk-sensitive approach for risk-weightinga banking organization’s assets which could have the practical effect of making it more difficult for banks and bank holding companies to meet the new risk-based capital requirements. These new Capital Rules will increase the amount of capital which both FFI and FFB, as well as other banks and bank holdingcompanies in the United States, will have to maintain and it is expected that the new rules will also increase the costs of capital for bank holding companiesand banks in the United States. See “BUSINESS‑‑Supervision and Regulation—First Foundation Bank—New Basel III Capital Requirements” above in thisreport for additional information regarding these new capital requirements.The fair value of our investment securities can fluctuate due to factors outside of our control.As of December 31, 2014, the fair value of our investment securities portfolio was $138.3 million. Factors beyond our control can significantlyinfluence and cause adverse changes to occur in the fair values of securities in that portfolio. These factors include, but are not limited to, rating agencyactions in respect of the securities, defaults by the issuers of the securities, concerns with respect to the enforceability of the payment or other key terms of thesecurities, changes in market interest rates and continued instability in the capital markets. Any of these factors, as well as others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially andadversely affect our business, results of operations, financial condition and prospects. In addition, the process for determining whether an impairment of asecurity is other-than-temporary usually requires complex, subjective judgments, which could subsequently prove to have been wrong, regarding the futurefinancial performance and liquidity of the issuer of the security, the fair value of any collateral underlying the security and whether and the extent to whichthe principal of and interest on the security will ultimately be paid in accordance with its payment terms. 25Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Premiums for federal deposit insurance have increased and may increase even more.The FDIC uses the Deposit Insurance Fund, or DIF, to cover insured deposits in the event of bank failures, and maintains that Fund by assessinginsurance premiums on FDIC-insured banks and other FDIC-insured depository institutions. As a result of (i) increases in bank failures during the three yearsended December 31, 2010 which caused the DIF to fall below the minimum balance required by law, and (ii) an increase, mandated by the Dodd-Frank Act, inthe minimum balance required to be maintained in the DIF, the FDIC has raised the insurance premiums assessed on FDIC-insured banks in order to rebuildthe DIF. Depending on the frequency and severity of bank failures in the future, the FDIC may further increase such premiums. In addition, our FDICinsurance premiums will increase as and to the extent that our banking business grows. Such increases in FDIC insurance premiums would increase our costsof doing business and, therefore, could adversely affect our results of operations and earnings in the future.Technology and marketing costs may negatively impact our future operating results.The financial services industry is constantly undergoing technological changes in the types of products and services provided to clients toenhance client convenience. Our future success will depend upon our ability to address the changing technological needs of our clients and to compete withother financial services organizations which have successfully implemented new technologies. The costs of implementing technological changes, newproduct development and marketing costs may increase our operating expenses without a commensurate increase in our business or revenues, in which eventour business, financial condition, results of operations and prospects could be materially and adversely affected.The occurrence of fraudulent activity, breaches of our information security, and cyber-security attacks could have a material adverse effecton our business, financial condition, results of operations or future prospects.As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may becommitted against us or our clients and that may result in financial losses or increased costs to us or our clients, disclosure or misuse of confidentialinformation belonging to us or personal or confidential information belonging to our clients, misappropriation of assets, litigation, or damage to ourreputation. Fraudulent activity may take many forms, including check “kiting” or fraud, electronic fraud, wire fraud, “phishing” and other dishonest acts.Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to data processing or data storage systemsused by us or by our clients, denial or degradation of service attacks, and malware or other cyber-attacks. We have been seeing increases in electronicfraudulent activity, security breaches and cyber-attacks within the financial services industry, including in the commercial banking sector, as cyber-criminalshave been targeting commercial bank and brokerage accounts on an increasing basis. Moreover, in recent periods, several large corporations, includingfinancial service organizations and retail companies, have suffered major data breaches, in some cases exposing not only their confidential and proprietarycorporate information, but also sensitive financial and other personal information of their clients or customers and their employees, and subjecting thosecorporations to potential fraudulent activity and their clients and customers to identity theft and fraudulent activity in their credit card and bankingaccounts. Therefore, security breaches and cyber-attacks can cause significant increases in operating costs, including the costs of compensating clients andcustomers for any resulting losses they may incur and the costs and capital expenditures required to correct the deficiencies in and strengthen the security ofdata processing and storage systems.Although we invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and we conduct periodictests of our security systems and processes, there is no assurance that we will succeed in anticipating or adequately protecting against or preventing allsecurity breaches and cyber-attacks from occurring due to a number of possible causes, many of which will be outside of our control, including the changingnature and increasing frequency of such attacks, the increasing sophistication of cyber-criminals, and possible weaknesses that go undetected in our datasystems notwithstanding the testing we conduct of those systems. If we are unable to detect or prevent a security breach or cyber-attack from occurring, then,we and our clients could incur losses or damages; and we could sustain damage to our reputation, lose clients and business, suffer disruptions to our businessand incur increased operating costs, and be exposed to additional regulatory scrutiny or penalties and to civil litigation and possible financial liability, anyof which could have a material adverse effect on our business, financial condition, results of operations and future prospects. 26Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We rely on communications, information, operating and financial control systems technology and related services from third-party serviceproviders and there can be no assurance that we will not suffer an interruption in those systems.We rely heavily on third-party service providers for much of our communications, information, operating and financial control systemstechnology, including our internet banking services and data processing systems. Any failure or interruption of, or security breaches in, these systems couldresult in failures or interruptions in our operations or in the client services we provide. Additionally, interruptions in service and security breaches coulddamage our reputation, lead existing clients to terminate their business relationships with us, make it more difficult for us to attract new clients and subject usto additional regulatory scrutiny and possibly financial liability, any of which could have a material adverse effect on our business, financial condition,results of operations and prospects.Our ability to attract and retain clients and key employees could be adversely affected if our reputation is harmed.The ability of FFB and FFA to attract and retain clients and key employees could be adversely affected if our reputation is harmed. Any actual orperceived failure to address various issues could cause reputational harm, including a failure to address any of the following types of issues: legal andregulatory requirements; the proper maintenance or protection of the privacy of client and employee financial or other personal information; record keepingdeficiencies or errors; money-laundering; potential conflicts of interest and ethical issues. Moreover, any failure to appropriately address any issues of thisnature could give rise to additional regulatory restrictions, and legal risks, which could lead to costly litigation or subject us to enforcement actions, fines, orpenalties and cause us to incur related costs and expenses. In addition, our banking, investment advisory and wealth management businesses are dependenton the integrity of our banking personnel and our investment advisory and wealth managers. Lapses in integrity could cause reputational harm to ourbusinesses that could lead to the loss of existing clients and make it more difficult for us to attract new clients and, therefore, could have a material adverseeffect on our business, financial condition, results of operations and prospects.We may incur significant losses due to ineffective risk management processes and strategies.We seek to monitor and control our risk exposures through a risk and control framework encompassing a variety of separate but complementaryfinancial, credit, operational and compliance systems, and internal control and management review processes. However, those systems and review processesand the judgments that accompany their application may not be effective and, as a result, we may not anticipate every economic and financial outcome in allmarket environments or the specifics and timing of such outcomes, particularly in the event of the kinds of dislocations in market conditions experiencedover the last several years, which highlight the limitations inherent in using historical data to manage risk. If those systems and review processes prove to beineffective in identifying and managing risks, we could be subjected to increased regulatory scrutiny and regulatory restrictions could be imposed on ourbusiness, including on our growth, as a result of which our business and operating results could be adversely affected.We are exposed to risk of environmental liabilities with respect to real properties that we may acquire.From time to time, in the ordinary course of our business, we acquire, by or in lieu of foreclosure, real properties which collateralize nonperformingloans (often referred to as “Real Estate Owned” or “REO”). As an owner of such properties, we could become subject to environmental liabilities and incursubstantial costs for any property damage, personal injury, investigation and clean-up that may be required due to any environmental contamination thatmay be found to exist at any of those properties, even if we did not engage in the activities that led to such contamination and those activities took placeprior to our ownership of the properties. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims bythird parties seeking damages for environmental contamination emanating from the site. If we were to become subject to significant environmental liabilitiesor costs, our business, financial condition, results of operations and prospects could be materially and adversely affected. 27Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Our investment advisory and wealth management business may be negatively impacted by changes in economic and market conditions.Our investment advisory and wealth management business may be negatively impacted by changes in general economic and market conditionsbecause the performance of that business is directly affected by conditions in the financial and securities markets. The performance of the financial marketsand the businesses operating in the securities industry can be highly volatile within relatively short periods of time and is directly affected by, among otherfactors, domestic and foreign economic conditions and general trends in business and finance, and by the threat, as well as the occurrence, of global conflicts,all of which are beyond our ability to control. We cannot assure you that broad market performance will be favorable in the future. Declines or a lack ofsustained growth in the financial markets may adversely affect the market value and performance of the investment securities that we manage, which couldlead to reductions in our investment management and advisory fees and, therefore, may result in a decline in the performance of our investment advisory andwealth management business. Additionally, if FFA’s performance were to decline, that could lead some of our clients to reduce their assets undermanagement by us and make it more difficult for us to retain existing clients and attract new clients. If any of these events or circumstances were to occur, theoperating results of our investment advisory and wealth management business and, therefore, our earnings could be materially and adversely affected.The investment management contracts we have with our clients are terminable without cause and on relatively short notice by our clients,which makes us vulnerable to short term declines in the performance of the securities under our management.Like most investment advisory and wealth management businesses, the investment advisory contracts we have with our clients are typicallyterminable by the client without cause upon less than 30 days’ notice. As a result, even short term declines in the performance of the securities we manage,which can result from factors outside our control, such as adverse changes in market or economic condition or the poor performance of some of theinvestments we have recommended to our clients, could lead some of our clients to move assets under our management to other asset classes such as broadindex funds or treasury securities, or to investment advisors which have investment product offerings or investment strategies different than ours. Therefore,our operating results are heavily dependent on the financial performance of our investment portfolios and the investment strategies we employ in ourinvestment advisory businesses and even short-term declines in the performance of the investment portfolios we manage for our clients, whatever the cause,could result in a decline in assets under management and a corresponding decline in investment management fees, which would adversely affect our results ofoperations.The market for investment managers is extremely competitive and the loss of a key investment manager to a competitor could adverselyaffect our investment advisory and wealth management business.We believe that investment performance is one of the most important factors that affect the amount of assets under our management and, for thatreason, the success of FFA’s business is heavily dependent on the quality and experience of our investment managers and their track records in terms ofmaking investment decisions that result in attractive investment returns for our clients. However, the market for such investment managers is extremelycompetitive and is increasingly characterized by frequent movement of investment managers among different firms. In addition, our individual investmentmanagers often have direct contact with particular clients, which can lead to a strong client relationship based on the client’s trust in that individualmanager. As a result, the loss of a key investment manager to a competitor could jeopardize our relationships with some of our clients and lead to the loss ofclient accounts, which could have a material adverse effect on our business, financial condition, results of operations and prospects. 28Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FFA’s business is highly regulated, and the regulators have the ability to limit or restrict, and impose fines or other sanctions on, FFA’sbusiness.FFA is registered as an investment adviser with the SEC under the Investment Advisers Act and its business is highly regulated. The InvestmentAdvisers Act imposes numerous obligations on registered investment advisers, including fiduciary, record keeping, operational and disclosureobligations. Moreover, the Investment Advisers Act grants broad administrative powers to regulatory agencies such as the SEC to regulate investmentadvisory businesses. If the SEC or other government agencies believe that FFA has failed to comply with applicable laws or regulations, these agencies havethe power to impose fines, suspensions of individual employees or other sanctions, which could include revocation of FFA’s registration under theInvestment Advisers Act. We are also subject to the provisions and regulations of ERISA to the extent that we act as a “fiduciary” under ERISA with respectto certain of our clients. ERISA and the applicable provisions of the federal tax laws, impose a number of duties on persons who are fiduciaries under ERISAand prohibit certain transactions involving the assets of each ERISA plan which is a client, as well as certain transactions by the fiduciaries (and certain otherrelated parties) to such plans. Additionally, like other investment advisory and wealth management companies, FFA also faces the risks of lawsuits byclients. The outcome of regulatory proceedings and lawsuits is uncertain and difficult to predict. An adverse resolution of any regulatory proceeding orlawsuit against FFA could result in substantial costs or reputational harm to FFA and, therefore, could have an adverse effect on the ability of FFA to retainkey relationship and wealth managers, and to retain existing clients or attract new clients, any of which could have a material adverse effect on our business,financial condition, results of operations and prospects.Changes in legal, regulatory, accounting, tax and compliance requirements also could adversely affect FFA’s operations and financial results, by,among other things, increasing its operating expenses and placing restrictions on the marketing of certain investment products. Recently, the ObamaAdministration directed the U.S. Department of Labor to adopt new rules that would require some financial advisors to act as “fiduciaries” for their clients inconnection with the management of 401-K retirement plan and IRA investments, which is a higher standard than currently applies to investment managersand brokers when managing investments in 401-K retirement plans and IRAs. We cannot predict whether these new rules will be adopted and we do not haveenough information at this time to determine whether these proposed new rules, if adopted, will apply to FFA or will have an impact on FFA’s business oroperating results. However, we expect that these rules, if adopted, would apply primarily to investment advisors and brokers who receive commissions fromthe issuers of investment securities that are purchased, based on the advice of such advisors or brokers, for the accounts of their clients. FFA, by contrast, iscompensated for its services primarily by investment advisory fees paid directly by its clients based on the market value of the investment securities that aremanaged by FFA for them and not by commissions paid by issuers of those investment securities.We may be adversely affected by the soundness of certain securities brokerage firms.FFA does not provide custodial services for its clients. Instead, client investment accounts are maintained under custodial arrangements with large,well established securities brokerage firms, either directly or through arrangements made by FFA with those firms. As a result, the performance of, or evenrumors or questions about the integrity or performance of, any of those brokerage firms could adversely affect the confidence of FFA’s clients in the servicesprovided by those firms or otherwise adversely impact their custodial holdings. Such an occurrence could negatively impact the ability of FFA to retainexisting or attract new clients and, as a result, could have a material adverse effect on our business, financial condition, results of operations and prospects.Risks related to Ownership of our Common StockWe do not plan to pay dividends for at least the foreseeable future. Additionally, our ability to pay dividends is subject to statutory, regulatoryand other restrictions.In order to support and fund the growth of our banking business, it is our policy to retain cash rather than pay dividends. As a result, we have notpaid any cash dividends since FFB commenced its banking operations in October 2007 and we have no plans to pay cash dividends at least for theforeseeable future. Additionally, our ability to pay dividends to our shareholders is restricted by California and federal law and the policies and regulationsof the Federal Reserve, which is our federal banking regulator. Moreover, the agreement governing the $30.0 million term loan that we obtained from anunaffiliated bank lender, prohibits us from paying cash dividends to our shareholders without the lender’s prior written consent. See the section of this reportbelow, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Term Loan,” foradditional information about this loan. 29Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Our ability to pay dividends to shareholders is also dependent on the payment to us of cash dividends by FFA and FFB. FFA and FFB arecorporations that are separate and distinct from us and, as a result, they are subject to separate statutory or regulatory dividend restrictions that can affect theirability to pay cash dividends to us. FFA’s ability to pay cash dividends to us is restricted under California corporate law. FFB’s ability to pay dividends tous is limited by various banking statutes and regulations. Moreover, based on their assessment of the financial condition of FFB or other factors, the FDIC orthe California DBO could find that payment of cash dividends by FFB to us would constitute an unsafe or unsound banking practice, in which event theycould restrict FFB from paying cash dividends, even if FFB meets the statutory requirements to do so. See the section entitled “Dividend Policy andRestrictions on the Payment of Dividends” in Item 5 of this report below for additional information about our dividend policy and the dividend restrictionsthat apply to us and to FFB and FFA.The Company’s shares have been limited and there is no assurance that a more active trading market for our shares will develop in thefuture. As a result, shareholders may not be able to sell their shares of our common stock at attractive prices if and when they need or desire to do so.On November 3, 2014, our common stock was listed and commenced trading on the NASDAQ Global Stock Market, under the ticker symbol“FFWM”. However, the trading volume in our common stock has been limited. For example, the average daily trading volume of our shares on NASDAQduring the month of February 2015 was approximately 12,410 shares. There can be no assurance that a more active trading market for our shares will developor can be sustained in the future. If a more active trading market does not develop, or cannot be sustained, our shareholders may have difficulty selling theirshares at attractive prices when they need or desire to do so. Additionally, the lack of an active trading market for our shares may make it more difficult for usto sell shares in the future to raise additional capital and to offer our shares as consideration for acquisitions of other banks or investment management orother financial services businesses, without diluting our existing shareholders.The market prices and trading volume of our common stock may be volatile.Even if an active market develops for our common stock, the market prices of our common stock may be volatile and the trading volume mayfluctuate and cause significant price variations to occur. We cannot assure you that, if a market does develop for our common stock, the market prices of ourcommon stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the prices of ours shares or result influctuations in those prices or in trading volume of our common stock could include the following, many of which are outside of our control:●quarterly variations in our operating results or in the quality of our earnings or assets;●operating results that differ from the expectations of management, securities analysts and investors;●changes in expectations as to our future financial performance;●the operating and securities price performance of other companies that investors believe are comparable to us;●the implementation of our growth strategy and performance of acquired businesses that vary from the expectations of securities analysts andinvestors;●the enactment of new more costly government regulations that are applicable to our businesses or the imposition of regulatory restrictions onus;●our dividend policy and any changes that might occur to that policy in the future;●future sales of by us of our common stock or any other of our equity securities;●changes in global financial markets and global economies and general market conditions, such as changes in interest rates or fluctuations instock, commodity or real estate valuations; and●announcements of strategic developments, material acquisitions and other material events in our business or in the businesses of ourcompetitors. 30Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Share ownership by our officers and directors and certain agreements may make it more difficult for third parties to acquire us or effectuatea change of control that might be viewed favorably by other shareholders.As of February 27, 2015, our executive officers and directors owned, in the aggregate, approximately 34% of our outstanding shares. As a result, ifthe officers and directors were to oppose a third party’s acquisition proposal for, or a change in control of, FFI, the officers and directors may have sufficientvoting power to be able to block or at least delay such an acquisition or change in control from taking place, even if other shareholders would support such asale or change of control. In addition, a number of FFI’s officers have change of control agreements which could increase the costs and, therefore, lessen theattractiveness of an acquisition of FFI to a potential acquiring party. For additional information regarding these change of control agreements, see theItem 11, entitled “Executive Compensation” below in this report.Our corporate governance documents, and certain corporate and banking laws applicable to us, could make a takeover attempt, which maybe beneficial to our shareholders, more difficult.Our Board of Directors, or Board, has the power under our articles of incorporation to issue additional shares of common stock and create andauthorize the sale of one or more series of preferred stock without having to obtain shareholder approval for such action. As a result, our Board couldauthorize the issuance of shares of a series of preferred stock to implement a shareholders rights plan (often referred to as a “poison pill”) or could sell andissue preferred shares with special voting rights or conversion rights, which could deter or delay attempts by our shareholders to remove or replacemanagement, and attempts of third parties either to engage in proxy contests or to acquire control of FFI. In addition, our charter documents:●enable our Board to fill any vacancy on the Board, unless the vacancy was created by the removal of a director;●enable our Board to amend our bylaws without shareholder approval, subject to certain exceptions; and●require compliance with an advance notice procedure with regard to any business that is to be brought by a shareholder before an annual orspecial meeting of shareholders and with regard to the nomination by shareholders of candidates for election as directors.Furthermore, federal and state banking laws and regulations applicable to us require anyone seeking to acquire more than 10% of our outstandingshares or otherwise effectuate a change of control of the Company or of FFB, to file an application with, and to receive approval from, the Federal Reserveand the FDIC to do so. These laws and regulations may discourage potential acquisition proposals and could delay or prevent a change of control of theCompany, including by means of a transaction in which our shareholders might receive a premium over the market price of our common stock.We may sell additional shares of common stock in the future which could result in dilution to our shareholders.A total of approximately 12 million authorized but unissued shares of our common stock are available for future sale and issuance by action of ourboard of directors alone. Accordingly, if we were to sell additional shares in the future, our shareholders could suffer dilution in their investment in theirshares of our common stock and in their percentage ownership of the Company.We may elect under the JOBS Act to use an extended transition period for complying with new or revised accounting standards.We are an “emerging growth company” under the Jumpstart our Business Startups Act of 2012, or the JOBS Act. That Act allows us, as anemerging growth company, to take advantage of extended transition periods for the implementation of new or revised accounting standards. As a result, wewill not be required to comply with new or revised accounting standards (i) until those standards apply to private companies, even if that is later than the dateor dates on which they become effective for public companies or (ii) if sooner, until we cease to be an “emerging growth company” as defined in the JOBSAct. As a result, our financial statements may not be fully comparable to the financial statements of public companies that contain new or revised accountingstandards not yet applicable to private companies, which could make our common stock less attractive to investors. 31Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The reduced disclosures and relief from certain other significant disclosure requirements that are available to emerging growth companiesmay make our common stock less attractive to investors.As an “emerging growth company” we are entitled to exemptions from certain reporting requirements that apply to public companies that are notemerging growth companies. These exemptions include the following:●An exemption from the requirements of the Section 404 of the Sarbanes-Oxley Act of 2002, which requires public companies that areaccelerated filers or large accelerated filers (within the meaning of the Securities Exchange Act) to obtain and include in their annual reportson Form 10-K an attestation report from their independent registered public accountants with respect to the effectiveness of their internalcontrol over financial reporting;●less extensive disclosure obligations regarding executive compensation in our proxy statements or other periodic reports that we file with theSEC; and●exemptions from the requirements to have our shareholders vote, on an advisory and nonbinding basis, on executive compensation and onany golden parachute payments.In addition, even if we choose voluntarily to comply with any of the requirements from which we are exempt, we may later rely on thoseexemptions to avail ourselves of the reduced reporting and disclosure requirements applicable to emerging growth companies.We may remain an emerging growth company for the period ending in December 2018, although we may cease to be an emerging growth companyearlier under certain circumstances, including if, before the end of that period, it is determined that we have become a large accelerated filer under the rules ofthe SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million). Because we will be relying on one or more of these exemptions, investors and securities analysts may find it more difficult to evaluate our commonstock, and some investors may find our common stock less attractive, and, as a result, there may be a less active trading market for our common stock thanwould be the case if we were not an emerging growth company, which could result in a reductions the trading volume and greater volatility in the prices ofour common stock.A failure to maintain effective internal control over financial reporting could have a material adverse effect on our business and stock prices.Although, as an emerging growth company, we are not required to obtain or include in our annual reports on Form 10-K an attestation report fromtheir independent registered accountants with respect to the effectiveness of our internal control over financial reporting, like all other public companies, ourChief Executive Officer and our Chief Financial Officer are required, annually, to assess, and disclose their findings in our annual reports on Form 10-K withrespect to, the effectiveness of our internal control over financial reporting in a manner that meets the requirements of Section 404(a) of the Sarbanes-OxleyAct. The rules governing the standards that must be met for our Chief Executive and Chief Financial Officers to assess and report on the effectiveness of ourinternal control over financial reporting are complex and require significant documentation, testing and possible remediation, which could significantlyincrease our operating expenses. See Item 9A of this report below, entitled “Controls and Procedures” to review the attestation report of our Chief ExecutiveOfficer and Chief Financial Officer regarding the effectiveness of our internal control over financial reporting as of December 31, 2014.Additionally, If we are unable to maintain the effectiveness of our internal control over financial reporting in the future, we may be unable to reportour financial results accurately and on a timely basis. In such an event, investors and clients may lose confidence in the accuracy and completeness of ourfinancial statements, as a result of which our liquidity, access to capital markets, and perceptions of our creditworthiness could be adversely affected and themarket prices of our common stock could decline. In addition, we could become subject to investigations by NASDAQ, the SEC, or the Federal Reserve, orother regulatory authorities, which could require us to expend additional financial and management resources. As a result, an inability to maintain theeffectiveness of our internal control over financial reporting in the future could have a material adverse effect on our business, financial condition, results ofoperations and prospects.Other Risks and Uncertainties.Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business, financialcondition, operating results and future prospects. 32Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Item 1B.Unresolved Staff Comments.Not applicable.Item 2.Properties.Our headquarters and administrative offices are located at 18101 Von Karman Avenue, Suite 700, Irvine, California 92612. In addition, we operateseven wealth management offices located, respectively, in Newport Beach, Pasadena, West Los Angeles, Palm Desert, El Centro and San Diego, Californiaand Las Vegas, Nevada. All of these offices are leased pursuant to non-cancelable operating leases that will expire between 2015 and 2020.Item 3.Legal Proceedings.In the ordinary course of business, we are subject to claims, counter claims, suits and other litigation of the type that generally arise from theconduct of financial services businesses. We are not aware of any threatened or pending litigation that we expect will have a material adverse effect on ourbusiness operations, financial condition or results of operations.Item 4.Mine Safety Disclosures.Not applicable. 33Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market InformationPrior to November 3, 2014, there was no public trading market or ANY publicly available quotations for our common stock. On November 3, 2014,our common stock became listed and commenced trading on the NASDAQ Global Stock Market under the trading symbol “FFWM”. The following tableshows the high and low sales prices of our shares for the respective periods set forth below, as reported on the NASDAQ Global Stock Market: Quarter Ended High Low2014: December 31 (November 3 to December 31)$23.00$17.50The closing per share sales price of our common stock, as reported by NASDAQ, on March 12, 2015 was $18.30. As of the same date, a total of7,878,597 shares of our common stock were issued and outstanding which were held of record by approximately 1,435 shareholders.Dividend Policy and Restrictions on the Payment of DividendsWe have not previously paid cash dividends on our common stock. It is our current intention to invest our cash flow and earnings in the growth ofour businesses and, therefore, we have no plans to pay cash dividends for the foreseeable future.Additionally, our ability to pay dividends to our shareholders is subject to the restrictions set forth in the California General Corporation Law (the“CGCL”). The CGCL provides that a corporation may pay a dividend to its shareholders if the amount of the corporation’s retained earnings immediatelyprior to the dividend, equals or exceeds the amount of the proposed dividend plus, if the corporation has shares of preferred stock outstanding, the amount ofthe unpaid accumulated dividends on those preferred shares. The CGCL further provides that, in the event that sufficient retained earnings are not availablefor the proposed dividend, a corporation may nevertheless pay a dividend to its shareholders if, immediately after the dividend, the value of its assets wouldequal or exceed the sum of its total liabilities plus, if the corporation has shares of preferred stock outstanding, the amount of the unpaid accumulateddividends on those preferred shares. In addition, since we are a bank holding company subject to regulation by the Federal Reserve Board, it may becomenecessary for us to obtain the approval of the FRB before we can pay cash dividends to our shareholders. In addition, the loan agreement governing our $20.1million term loan requires us to obtain the prior approval of the lender for the payment by us of any dividends to our shareholders.Cash dividends from our two wholly-owned subsidiaries, First Foundation Bank and First Foundation Advisors, represent the principal source offunds available to us, which we might use to pay cash dividends to our shareholders or for other corporate purposes. Since FFA is a California corporation, thesame dividend payment restrictions, described above, that apply to us under the CGCL also apply to FFA. In addition the laws of the State of California, asthey pertain to the payment of cash dividends by California state chartered banks, limit the amount of funds that FFB would be permitted to dividend to usmore strictly than does the CGCL. In particular, under California law, cash dividends by a California state chartered bank may not exceed, in any calendaryear, the lesser of (i) the sum of its net income for the year and its retained net income from the preceding two years (after deducting all dividends paid duringthe period), or (ii) the amount of its retained earnings.Also, because the payment of cash dividends has the effect of reducing capital, capital requirements imposed on the Bank by the DBO and theFDIC may operate, as a practical matter, to preclude the payment, or limit the amount of, cash dividends that might otherwise be permitted to be made underCalifornia law; and the DBO and the FDIC, as part of their supervisory powers, generally require insured banks to adopt dividend policies which limit thepayment of cash dividends much more strictly than do applicable state laws.Furthermore, the Loan Agreement governing the $30.0 million term loan that we obtained from NexBank SSB requires us to obtain its priorapproval for the payment by us of any dividends to our shareholders. See Item 7, entitled “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Recent Developments and Overview” below in this report. 34Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Restrictions on Intercompany TransactionsSections 23A and 23B of the Federal Reserve Act, and the implementing regulations thereunder, limit transactions between a bank and its affiliatesand limit a bank’s ability to transfer to its affiliates the benefits arising from the bank’s access to insured deposits, the payment system and the discountwindow and other benefits of the Federal Reserve System. Those Sections of the Act and the implementing regulations impose quantitative and qualitativelimits on the ability of a bank to extend credit to, or engage in certain other transactions with, an affiliate (and a non-affiliate if an affiliate benefits from thetransaction).Equity Compensation PlansCertain information with respect to our equity compensation plans, as of December 31, 2014, is set forth in Item 12, in Part III of this Report and isincorporated herein by this reference.Recent Sales of Unregistered SecuritiesDuring 2013, we sold the following securities in transactions that were exempt from the registration requirements under the Securities Act of 1933,as amended (or Securities Act):Sales of Common Stock:●In March 2013, we sold an aggregate of 38,734 shares of our common stock in a private offering to a total of 6 accredited investors at a priceof $15.00 per share in cash, which generated gross proceeds to us of $0.6 million.●In December 2013, we sold issued an aggregate 318,987 shares of our common stock in a private offering to a total of 32 accredited investorsat a price of $18.00 per share in cash, which generated gross proceeds to us of $5.7 million.The sales of these shares were made in reliance on the exemptions from registration under Section 4(2) of, and Regulation D and Rule 506promulgated under, the Securities Act. The sales were made solely to accredited investors exclusively by officers of FFI, for which they did not receive anycompensation (other than reimbursement for out-of-pocket expenses in accordance with FFI’s expense reimbursement policies), and no general advertising orsolicitations were employed in connection with the offer or sale of the shares. The purchasers of these shares represented their intention to acquire the sharesfor investment only, and not with a view to offer or sell any such shares in connection with any distribution of the shares, and appropriate restrictive legendswere set forth in the stock purchase agreements entered into by the investors, and on the share certificates issued, in such transactions.Grants of Stock Options and Restricted Stock. During 2013, we granted options to purchase up to 19,000 shares of our common stock at anexercise price of $15.00 per share, and up to 5,000 shares of our common stock at an exercise price of $18.00 per share and awarded 6,666 shares of restrictedshares of our common stock, the vesting of which is contingent on the continued service with the Company of the recipient over a period of three years fromthe date of grant.The issuance of shares on exercise of options and the issuances of restricted shares were deemed to be exempt from registration under the SecuritiesAct in reliance on either Section 4(2) of the Securities Act, including in some cases, Regulation D and Rule 506 promulgated thereunder, or Rule 701promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatorybenefit plans and contracts relating to compensation as provided under Rule 701. The purchasers of securities in each such transaction represented theirintention to acquire the shares for investment only and not with a view to offer or sell any such shares in connection with any distribution of the securities,and appropriate legends were affixed to the share certificates and instruments issued in such transactions.In January 2014, we filed a registration statement on Form S-8 to register, under the Securities Act, the shares of common stock issuable under ourEquity Incentive Plans, including the shares subject to the options and the restricted shares granted in 2013.Item 6.Selected Financial DataWith the exception of the certain items included in the selected performance and capital ratios, the following selected consolidated financialinformation as of and for the years ended December 31, 2014, 2013, and 2012 have been derived from our audited consolidated financial statementsappearing elsewhere in this Annual Report on Form 10-K, and the selected consolidated financial information as of and for the years ended December 31,2011 and 2010 have been derived from our audited consolidated financial statements not appearing in this Annual Report on Form 10-K. 35Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. You should read the following selected financial and operating data in conjunction with other information contained in this Annual Report onForm 10-K, including the information set forth in the sections entitled “Capitalization” and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations”, as well as our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.The average balances used in computing certain ratios, have been computed using daily averages, except for average equity, which is computed using theaverage of beginning and end of month balances. Our historical results as set forth below are not necessarily indicative of results to be expected in any futureperiod. In addition, as described elsewhere in this Annual Report on Form 10-K, on August 15, 2012 we consummated the acquisition of DCB. The results ofoperations and other financial data of DCB for all periods prior to the date of its acquisition are not included in the table below and, therefore, our results andother financial data for these prior periods are not comparable in all respects to those for the periods subsequent to that acquisition. In addition, the incomestatement data set forth below may not be predictive of our future operating results. As of and for the Year Ended December 31, (In thousands, except share and per share data) 2014 2013 2012(1) 2011 2010 Selected Income Statement Data: Net interest income $42,814 $35,674 $27,729 $20,141 $11,933 Provision for loan losses 235 2,395 2,065 2,297 1,700 Noninterest Income: Asset management, consulting and other fees 21,798 18,240 15,326 13,211 11,267 Other(2) 2,951 1,584 1,294 4,489 380 Noninterest expense 52,507 43,622 34,476 26,446 22,409 Income before taxes 14,821 9,481 7,808 9,098 (529)Net income 8,394 7,851 5,801 9,098 (529)Share and Per Share Data: Net income per share: Basic $1.08 $1.06 $0.88 $1.48 $(0.09)Diluted 1.03 1.01 0.85 1.42 (0.09)Shares used in computation: Basic 7,737,036 7,424,210 6,603,533 6,164,283 5,881,852 Diluted 8,166,343 7,742,215 6,831,955 6,393,713 5,881,852 Tangible book value per share(3) $12.66 $11.18 $9.94 $7.98 $6.41 Shares outstanding at end of period(4) 7,845,182 7,733,514 7,366,126 6,166,574 6,145,407 Selected Balance Sheet Data: Cash and cash equivalents $29,692 $56,954 $63,108 $10,098 $55,954 Loans, net of deferred fees 1,166,392 903,645 743,627 524,103 337,180 Allowance for loan and lease losses (“ALLL”) (10,150) (9,915) (8,340) (6,550) (4,210)Total assets 1,355,424 1,037,360 830,509 551,584 406,825 Noninterest-bearing deposits 246,137 217,782 131,827 66,383 42,803 Interest-bearing deposits 716,817 584,255 517,914 340,443 240,467 Borrowings(5) 282,886 141,603 100,000 91,000 80,000 Shareholders’ equity(4) 99,496 86,762 73,580 49,197 39,407 Selected Performance and Capital Ratios: Return on average assets 0.71% 0.86% 0.80% 1.91% (0.18)%Return on average equity 9.10% 10.2% 9.9% 20.7% (1.5)%Net yield on interest-earning assets 3.70% 4.06% 4.20% 4.43% 4.29%Efficiency ratio(6) 76.0% 78.6% 77.7% 77.4% 86.9%Noninterest income as a % of total revenues 36.6% 35.7% 37.5% 46.8% 49.4%Tangible common equity to tangible assets(3) 7.33% 8.34% 8.82% 8.92% 9.69%Tier 1 leverage ratio 7.32% 8.67% 9.19% 8.92% 8.04%Tier 1 risk-based capital ratio 11.01% 13.04% 13.60% 13.54% 12.18%Total risk-based capital ratio 12.26% 14.30% 14.85% 14.80% 13.43%Other Information: Assets under management (end of period) $3,221,674 $2,594,961 $2,229,116 $1,827,436 $1,558,650 NPAs to total assets 0.11% 0.32% 0.17% 0.00% 0.00%Charge-offs to average loans 0.00% 0.10% 0.04% 0.05% 0.00%Ratio of ALLL to loans(7) 0.87% 1.16% 1.25% 1.25% 1.25%Number of wealth management offices 7 7 6 4 2 (1)Includes the results of operations of DCB for the period from the date of its acquisition on August 15, 2012 to December 31, 2012. 36Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (2)Amounts include $1.0 million and $3.7 million of gains on sale of REO in 2014 and 2011, respectively.(3)Tangible common equity, (also referred to as tangible book value) and tangible assets, are equal to common equity and assets, respectively, less $0.2million of intangible assets as of December 31, 2014, and less $0.3 million of intangible assets as of December 31, 2013 and December 31, 2012.(4)As a result of private offerings, we sold and issued shares of our common stock, (i) in 2013, 318,987 shares at a price of $18.00 per share, and 38,734shares at a price of $15.00 per share; (ii) in 2012, 374,438 shares at a price of $15.00 per share; and (iii) in 2010, 586,572 shares at a price of $15.00 pershare. As a result of our acquisition of DCB, in 2012 we issued to the former DCB shareholders a total of 815,447 shares of our common stock, valued at$15.00 per share, in exchange for all of the outstanding shares of DCB, and in 2014, we issued 23,580 shares, valued at $15.00 per share, to the formerDCB shareholders as part of a contingent payout. In 2014, we issued 84,866 shares as a result of the exercise of stock options at an average exerciseprice of $11.19 per share.(5)Borrowings consist primarily of overnight and short-term advances obtained by FFB from the Federal Home Loan Bank.(6)The efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income. The efficiency ratio excludes (i) gainson sale of REO of $1.0 million and $3.7 million in 2014 and 2011, respectively; (ii) in 2014, $1.0 million of costs related to a cancelled initial publicoffering and $1.0 million of contingent payout expense related to the acquisition of DCB; and (iii) in 2010, a $1.9 million provision for REO losses.(7)This ratio excludes loans acquired in our acquisition of DCB, as generally accepted accounting principles in the United States, or GAAP, requiresestimated credit losses for acquired loans to be recorded as discounts to those loans. 37Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis is intended to facilitate the understanding and assessment of significant changes and trends in ourbusinesses that accounted for the changes in our results of operations in the year ended December 31, 2014, as compared to our results of operation in theyear ended December 31, 2013; in our results of operations in the year ended December 31, 2013, as compared to our results of operations in the year endedDecember 31, 2012, and our financial condition at December 31, 2014 as compared to our financial condition at December 31, 2013. This discussion andanalysis is based on and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto contained elsewherein this Annual Report on Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve risks,uncertainties and assumptions that could cause results to differ materially from management’s expectations. Some of the factors that could cause results todiffer materially from expectations are discussed in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”contained elsewhere in this Annual Report on Form 10-K.Critical Accounting PoliciesOur consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) andaccounting practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us tomake estimates and assumptions regarding circumstances or trends that could materially affect the value of those assets, such as economic conditions ortrends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets. Those estimates andassumptions are made based on current information available to us regarding those economic conditions or trends or other circumstances. If changes were tooccur in the events, trends or other circumstances on which our estimates or assumptions were based, or other unanticipated events were to occur that mightaffect 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 balancesheet, 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 taxcredit and tax loss carryforwards and tax deductions (collectively “tax benefits”) that we believe will be available to us to offset or reduce income taxes infuture periods. Under applicable federal and state income tax laws and regulations, tax benefits related to tax loss carryforwards will expire if they cannot beused within specified periods of time. Accordingly, the ability to fully use our deferred tax asset related to tax loss carryforwards to reduce income taxes inthe 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, wemake 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 estimatesand 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 theirexpiration, 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 amountof 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 stillmore 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 anexisting valuation allowance, would be effectuated through a charge to the provision for income taxes or a reduction in any income tax credit for the periodin 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 arecapture of previously established loss reserves, which are also reflected in the statement of income. Loans are charged against the ALLL when managementbelieves that collectability of the principal is unlikely. The ALLL is an amount that management believes will be adequate to absorb estimated losses onexisting loans that may become uncollectible based on an evaluation of the collectability of loans and prior loan loss experience. This evaluation also takesinto consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, currenteconomic conditions and certain other subjective factors that may affect the borrower’s ability to pay. While we use the best information available to makethis evaluation, future adjustments to our ALLL may be necessary if there are significant changes in economic or other conditions that can affect thecollectability in full of loans in our loan portfolio.Adoption of new or revised accounting standards. We have elected 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 will not be required to comply with new or revised accounting standards thathave 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 companiesthat comply with public company effective dates. 38Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We have two business segments, “Banking” and “Investment Management, Wealth Planning and Consulting” (“Wealth Management”). Bankingincludes 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 OverviewOn November 25, 2014, the Company and the Bank entered into an merger agreement with Pacific Rim Bank, or Pacific Rim, which provides for amerger pursuant to which (i) Pacific Rim will be merged with and into the Bank, which will be the surviving bank in the merger (ii) the Bank will succeed toall of Pacific Rim’s assets and liabilities, and the separate existence of Pacific Rim will cease, and (iii) each share of Pacific Rim common stock (other thanany dissenting shares) will be converted into a right to receive 0.395 of a share of FFI common stock. Based on the number of Pacific Rim shares that wereoutstanding as of December 31, 2014, it is expected that in the merger FFI will issue a total of 650,012 shares of its common stock to the former Pacific Rimshareholders. Pacific Rim’s headquarters office and banking office are located in Honolulu, Hawaii. As of December 31, 2014, Pacific Rim Bank reportedtotal assets and tangible capital of approximately $126.4 million and $9.7 million, respectively. Consummation of the transaction is subject to thesatisfaction of certain conditions, including the approval of federal and state banking regulators, the California DBO, and Pacific Rim’s shareholders. Themerger is expected to be consummated in the second quarter of 2015. However, there is no assurance that the required approvals from the bank regulatoryagencies and Pacific Rim’s shareholders will be obtained. The foregoing summary of the terms of the merger agreement is not intended to be complete and isqualified in its entirety by reference to that agreement, which was attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SECon December 1, 2014.In the second quarter of 2013, we entered into a secured loan agreement with an unaffiliated lender to borrow $7.5 million for a term of five years.In the first quarter of 2014, we entered into an amendment to this loan agreement pursuant to which we obtained an additional $15.0 million of borrowings.This amendment did not alter any of the terms of the loan agreement or the loan, other than to increase the principal amount and to correspondingly increasethe amount of the monthly installments of principal and interest payable on the loan. In the first quarter of 2015, we entered into a second amendment to thisloan agreement pursuant to which, we obtained an additional $10.3 million of borrowings, bringing the outstanding balance of this loan to $30.0 million asof February 28, 2015. This second amendment also reduced the interest rate on this loan to 3.75% over ninety day LIBOR from 4.00% over ninety dayLIBOR, extended the maturity date of this loan to May 1, 2022 and made corresponding changes to the amount of the principal payments required to bemade by us on this loan. This loan, as amended, is payable by us in 96 monthly installments of principal, each in the amount of $0.25 million, plus accruedand unpaid interest, commencing on April 1, 2015 and continuing to and including April 1, 2022, with a final installment in the amount of $8.75 million,plus all remaining accrued but unpaid interest, due and payable on May 1, 2022. We have the right, however, to prepay the principal amount of the TermLoan, at any time in whole or from time to time in part, without our having to pay any premium or penalty. We are required to meet certain financialcovenants during the term of the loan. As security for our repayment of the loan, we pledged all of the common stock of FFB to the lender. See “FinancialCondition—Term Loan” below for additional information regarding this loan.We have continued to grow both our Banking and Wealth Management operations. Comparing 2014 to 2013, we have increased our revenues (netinterest income and noninterest income) by 22%. This growth in revenues is the result of the growth in Banking’s total interest-earning assets and the growthin Wealth Management’s assets under management (or “AUM”). During 2014, total loans and total deposits in Banking increased 29% and 20%,respectively, while the AUM in Wealth Management increased by $627 million or 24% and totaled $3.2 billion as of December 31, 2014. The growth inAUM includes the addition of $663 million of new accounts and $125 million of gains realized in client accounts during 2014.The results of operations for Banking and Wealth Management reflect the benefits of this growth. Income before taxes for Banking increased $6.0million from $12.7 million in 2013 to $18.7 million in 2014. Income before taxes for Wealth Management increased $2.1 million from a loss before taxes of$0.7 million in 2013 to income before taxes of $1.4 million in 2014. On a consolidated basis, our earnings before taxes increased $5.3 million from $9.5million in 2013 to $14.8 million in 2014. During the second quarter of 2014, we expensed $1.0 million of costs related to an initial public offering (“IPO”)that we cancelled. If that IPO had been completed, rather than cancelled, these costs would have been netted against the gross proceeds of the offering and notrecorded as an expense. 39Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Results of OperationsYears Ended December 31, 2014 and 2013.Our net income for 2014 was $8.4 million, as compared to $7.9 million for 2013. The proportional increase in net income was less than theproportional increase in income before taxes because of an increase in our effective tax rate from 17% in 2013 to 43% in 2014. In 2013, the valuationallowance for deferred taxes was reduced by $2.4 million and certain credits under California tax laws were eliminated at the beginning of 2014 resulting in ahigher effective tax rate in 2014.The primary sources of revenue for Banking are net interest income, fees from its deposits, trust and insurance services, certain loan fees, and,beginning in the second half of 2014, fees charged for consulting and administrative services. The primary sources of revenue for Wealth Management areasset management fees assessed on the balance of AUM and, up through the first half of 2014, fees charged for consulting and administrative services.Compensation and benefit costs, which represent the largest component of noninterest expense accounted for 61% and 77%, respectively, of the totalnoninterest expense for Banking and Wealth Management in 2014.The following tables show key operating results for each of our business segments for the years ended December 31: (dollars in thousands) Banking WealthManagement Other Total 2014: Interest income $47,398 $— $— $47,398 Interest expense 3,844 — 740 4,584 Net interest income 43,554 — (740) 42,814 Provision for loan losses 235 — — 235 Noninterest income 5,866 19,422 (539) 24,749 Noninterest expense 30,509 17,979 4,019 52,507 Income (loss) before taxes on income $18,676 $1,443 $(5,298) $14,821 2013: Interest income $39,181 $— $— $39,181 Interest expense 3,288 — 219 3,507 Net interest income 35,893 — (219) 35,674 Provision for loan losses 2,395 — — 2,395 Noninterest income 3,514 16,715 (405) 19,824 Noninterest expense 24,302 17,400 1,920 43,622 Income (loss) before taxes on income $12,710 $(685) $(2,544) $9,481 General. Income before taxes was $14.8 million in 2014 as compared to $9.5 million in 2013. This increase was due to increases in income beforetaxes for Banking and Wealth Management of $6.0 million and $2.1 million, respectively, which were partially offset by a $2.8 million increase in corporateinterest and noninterest expenses. The $6.0 million increase in income before taxes for Banking in 2014 as compared to 2013 was due to higher net interestincome, higher noninterest income and a lower provision for loan losses, which were partially offset by higher noninterest expenses. For WealthManagement, a $0.7 million loss before taxes in 2013 improved to income before taxes of $1.4 million in 2014 due to higher noninterest income which waspartially offset by higher noninterest expenses.The increase in corporate interest and noninterest expenses in 2014 as compared to 2013 was primarily due to a $0.5 million increase in interestcosts related to the higher balance of the term loan, the expensing of $1.0 million in IPO costs, $0.3 million of increased allocations of executivecompensation related to the time spent on the IPO by management employees of the Bank and $0.3 million of costs related to the implementation of a newfirm-wide client relationship management system. 40Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Net Interest Income. The following tables set forth information regarding (i) the total dollar amount of interest income from interest-earning assetsand the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearingliabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net yield on interest-earning assets for the year ended December 31: 2014 2013 (dollars in thousands) AverageBalances Interest AverageYield /Rate AverageBalances Interest AverageYield /Rate Interest-earning assets: Loans $1,016,374 $44,140 4.34% $803,808 $37,918 4.69%Securities 105,755 2,545 2.41% 37,325 864 2.31%FHLB stock, fed funds and deposits 33,749 713 2.11% 37,918 399 1.05%Total interest-earning assets 1,155,878 47,398 4.10% 879,051 39,181 4.43%Noninterest-earning assets: Nonperforming assets 3,581 2,778 Other 16,116 18,875 Total assets $1,175,575 $900,704 Interest-bearing liabilities: Demand deposits $245,969 1,248 0.51% $165,736 856 0.52%Money market and savings 148,541 841 0.57% 99,826 434 0.44%Certificates of deposit 262,070 1,497 0.57% 279,470 1,876 0.67%Total interest-bearing deposits 656,580 3,586 0.55% 545,032 3,167 0.58%Borrowings 192,768 998 0.52% 84,409 340 0.40%Total interest-bearing liabilities 849,348 4,584 0.54% 629,441 3,507 0.56%Noninterest-bearing liabilities: Demand deposits 226,367 186,760 Other liabilities 8,484 7,813 Total liabilities 1,084,199 824,014 Stockholders’ equity 91,376 76,690 Total liabilities and equity $1,175,575 $900,704 Net Interest Income $42,814 $35,674 Net Interest Rate Spread 3.56% 3.87%Net Yield on Interest-earning Assets 3.70% 4.04%Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by priorvolume) and mix of interest-earning assets and interest-bearing liabilities. The following table provides a breakdown of the changes in net interest incomedue to volume and rate changes between 2014 as compared to 2013. Increase (Decrease) due to Net Increase(Decrease) (dollars in thousands) Volume Rate Interest earned on: Loans $9,178 $(2,956) $6,222 Securities 1,646 35 1,681 FHLB stock, fed funds and deposits (48) 362 314 Total interest-earning assets 10,776 (2,559) 8,217 Interest paid on: Demand deposits 408 (17) 391 Money market and savings 252 155 407 Certificates of deposit (111) (268) (379)Borrowings 538 120 658 Total interest-bearing liabilities 1,087 (10) 1,077 Net interest income $9,689 $(2,549) $7,140 41Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Net interest income increased 21% from $34.8 million in 2013, to $42.3 million in 2014 because of a 31% 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 3.87% for 2013 to 3.56% for 2014 wasdue to a decrease in yield on total interest earning assets which was partially offset by a decrease in rates paid on interest bearing liabilities. The yield oninterest earning assets decreased from 4.43% to 4.10% due to an increase in the proportion of lower yielding securities to total interest earning assets and adecrease in the yield on loans. The decrease in yield on loans was due to prepayments of higher yielding loans and the addition of loans at current marketrates which are lower than the current yield on our loan portfolio. The rate on interest bearing liabilities decreased as a decrease in the rate on interest bearingdeposits was partially offset by an increase in the rate on borrowings. The decrease in rates paid on deposits was due to lower market rates while the increasein the rates paid on borrowings was primarily due to the higher proportion of borrowings being from the term loan which bears interest at ninety day Liborplus 4.0% per annum as compared to the FHLB weighted average borrowing rate of 0.15% during 2014. We realized $1.3 million and $1.1 million on the netrecovery of mark to mark adjustments related to payoffs of acquired loans in 2014 and 2013, respectively.Provision for loan losses. The provision for loan losses represents our determination of the amount necessary to be charged against the currentperiod’s earnings to maintain the ALLL at a level that is considered adequate in relation to the estimated losses inherent in the loan portfolio. The provisionfor 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 ourprovision also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specificproblem loans, current economic conditions and certain other subjective factors that may affect the ability of borrowers to meet their repayment obligationsto us. The provision for loan losses was $0.2 million for 2014 and $2.4 million for 2013. The lower provision for loan losses in 2014 as compared to 2013reflects reductions in estimated loss assumptions and the lower amount of chargeoffs. We did not recognize any chargeoffs in the 2014, as compared to $0.8million of chargeoffs recognized in 2013.Noninterest income. Noninterest income for Banking includes fees charged to clients for trust services and deposit services, consulting fees,prepayment and late fees charged on loans, gain on sale or REO and insurance commissions. The following table provides a breakdown of noninterest incomefor Banking for the years ended December 31: (dollars in thousands) 2014 2013 Trust fees $2,153 $1,785 Consulting fees 576 — Deposit charges 397 366 Gain on sale of REO 1,038 — Prepayment fees 903 846 Other 799 517 Total noninterest income $5,866 $3,514 The $2.4 million increase in noninterest income for Banking in 2014 as compared to 2013 was due primarily to the $1.0 million gain on sale ofREO, $0.6 million of consulting fees, a $0.4 million increase in trust fees and a $0.2 million increase in insurance commissions. In June of 2014, thefoundation and family consulting activities were transferred from Wealth Management to Banking and, as a result, the related revenues are now recognizedunder Banking. The increase in trust fees is due to a 22% increase in trust AUM during 2014 and the increase in insurance commissions reflects a higher levelof large dollar cases closed in 2014 as compared to 2013Noninterest income for Wealth Management includes fees charged to high net-worth clients for managing their assets and for providing financialplanning consulting services. The following table provides a breakdown of noninterest income for Wealth Management for the years ended December 31: (dollars in thousands) 2014 2013 Asset management fees $18,904 $15,560 Consulting and administration fees 533 1,164 Other (15) (9)Total noninterest income $19,422 $16,715 42Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The $2.7 million increase in noninterest income in Wealth Management in 2014 as compared to 2013 was primarily due to increases in assetmanagement fees of 21% which was partially offset by a decrease in consulting and administration fees. The increases in asset management fees wereprimarily due to a 22% increase in the AUM balances used for computing the asset management fees in 2014, as compared to AUM balances used forcomputing the asset management fees in 2013. In June of 2014, the foundation and family consulting activities were transferred from Wealth Management toBanking and, as a result, the related revenues are now recognized under Banking.Noninterest Expense. The following table provides a breakdown of noninterest expense for Banking and Wealth Management for the years endedDecember 31: Banking Wealth Management (dollars in thousands) 2014 2013 2014 2013 Compensation and benefits $18,694 $14,971 $13,760 $13,176 Occupancy and depreciation 5,366 4,568 1,818 1,922 Professional services and marketing 2,420 1,752 1,645 1,536 Other expenses 4,029 3,011 756 766 Total noninterest expense $30,509 $24,302 $17,979 $17,400 The $6.2 million increase in noninterest expense in Banking in 2014 as compared to 2013 was due primarily to increases in staffing and costsassociated with the Bank’s higher balances of loans and deposits and our continuing expansion and a $1.0 million provision related to contingentconsideration to be paid to the former shareholders of DCB. Compensation and benefits for Banking increased $3.7 million during 2014 as compared to 2013as the number of FTE in Banking increased to 144.5 during 2014 from 123.1 during 2013 and the Bank recorded $0.5 million of severance costs. The $0.8million increase in occupancy and depreciation costs for Banking in 2014 as compared to 2013 was due to an office opening and the expansion intoadditional space at the administrative office in the second quarter of 2013. The $0.7 million increase in professional services and marketing was dueprimarily to higher legal costs related to ongoing litigation matters and increased management fees related to the increased trust AUM. The $1.0 millionincrease in other expenses in 2014 as compared to 2013 was primarily due to the $1.0 million provision related to contingent consideration to be paid to theformer shareholders of DCB. Noninterest expenses in Wealth Management increased $0.6 million in 2014 as compared to 2013 primarily due to increases in compensation andbenefits. The increase in compensation and benefits reflects increased incentive compensation incurred as a result of the increase in AUM.Years Ended December 31, 2013 and 2012.Our net income for 2013 was $7.9 million, as compared to $5.8 million for 2012. The proportional increase in net income was more than theproportional increase in income before taxes because of a decrease in our effective tax rate from 26% in 2012 to 17% in 2013. In 2013 and 2012, thevaluation allowance for deferred taxes was reduced by $2.4 million and $1.0 million, respectively, resulting in lower effective tax rates as compared to anormalized income tax provision of 42%. 43Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Income before taxes was $9.5 million in 2013 as compared to $7.8 million in 2012. The following is a comparison of our income before taxesbetween 2013 and 2012. The following tables show key operating results for each of our business segments for the years ended December 31: (dollars in thousands) Banking WealthManagement Other Total 2013: Interest income $39,181 $— $— $39,181 Interest expense 3,288 — 219 3,507 Net interest income 35,893 — (219) 35,674 Provision for loan losses 2,395 — — 2,395 Noninterest income 3,514 16,715 (405) 19,824 Noninterest expense 24,302 17,400 1,920 43,622 Income (loss) before taxes on income $12,710 $(685) $(2,544) $9,481 2012: Interest income $30,874 $— $— $30,874 Interest expense 3,145 — — 3,145 Net interest income 27,729 — — 27,729 Provision for loan losses 2,065 — — 2,065 Noninterest income 2,599 14,250 (229) 16,620 Noninterest expense 18,280 14,896 1,300 34,476 Income (loss) before taxes on income $9,983 $(646) $(1,529) $7,808 The primary sources of revenue for Banking are net interest income, fees from its deposits, trust and insurance services, and certain loan fees. Theprimary sources of revenue for Wealth Management are asset management fees assessed on the balance of AUM and fees charged for consulting andadministrative services. Compensation and benefit costs, which represent the largest component of noninterest expense accounted for 62% and 76%,respectively, of the total noninterest expense for Banking and Wealth Management in 2013.General: As a result of an increase in income before taxes for Banking, which was partially offset by an increase in corporate expenses,consolidated income before taxes increased $1.7 million in 2013 as compared to 2012. Income before taxes in Banking was $2.7 million higher in 2013 ascompared to 2012 as higher net interest income and higher noninterest income was partially offset by a higher noninterest expenses. The loss before taxes forWealth Management for 2013 was comparable to the loss for 2012 as increases in noninterest income were offset by increases in noninterest expenses. Ouroperating losses in Wealth Management are due in part to our continued investment in new relationship managers which are a key component in growing ourrevenues. Typically, it takes up to three years to realize enough revenues to cover the costs associated with hiring and retaining a new relationship manager.Corporate expenses were $1.0 million higher in 2013 as compared to 2012 due to increased sales and marketing activities, increased allocations ofcompensation costs from FFB and interest costs on the term loan. 44Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Net Interest Income: The following tables set forth information regarding (i) the total dollar amount of interest income from interest-earning assetsand the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearingliabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net yield on interest-earning assets for the years ended December 31: 2013 2012 (dollars in thousands) AverageBalances Interest AverageYield /Rate AverageBalances Interest AverageYield /Rate Interest-earning assets: Loans $803,808 $37,918 4.69% $626,866 $30,552 4.87%Securities 37,325 864 2.31% 16,047 193 1.20%FHLB stock, fed funds and deposits 37,918 399 1.05% 17,346 129 0.75%Total interest-earning assets 879,051 39,181 4.43% 660,259 30,874 4.68%Noninterest-earning assets: Nonperforming assets 2,778 1,232 Other 18,875 12,631 Total assets $900,704 $674,122 Interest-bearing liabilities: Demand deposits $165,736 856 0.52% $43,776 251 0.58%Money market and savings 99,826 434 0.44% 92,404 516 0.56%Certificates of deposit 279,470 1,877 0.67% 283,677 2,151 0.76%Total interest-bearing deposits 545,032 3,167 0.58% 419,857 2,918 0.70%Borrowings 84,409 340 0.40% 99,257 227 0.23%Total interest-bearing liabilities 629,441 3,507 0.56% 519,114 3,145 0.61%Noninterest-bearing liabilities: Demand deposits 186,760 92,641 Other liabilities 7,813 4,970 Total liabilities 824,014 616,725 Stockholders’ equity 76,690 57,397 Total liabilities and equity $900,704 $674,122 Net Interest Income $35,674 $27,729 Net Interest Rate Spread 3.87% 4.07%Net Yield on Interest-earning Assets 4.04% 4.20%Net interest income is impacted by the volume (changes in volume multiplied by prior rate), interest rate (changes in rate multiplied by priorvolume) and mix of interest-earning assets and interest-bearing liabilities. The following table provides a breakdown of the changes in net interest incomedue to volume and rate changes between 2013 as compared to corresponding period in 2012. Increase (Decrease) due to Net Increase (Decrease) (dollars in thousands) Volume Rate Interest earned on: Loans $8,373 $(1,007) $7,366 Securities 396 275 671 FHLB stock, fed funds and deposits 201 69 270 Total interest-earning assets 8,970 (663) 8,307 Interest paid on: Demand deposits 634 (29) 605 Money market and savings 39 (121) (82) Certificates of deposit (32) (242) (274)Borrowings (38) 151 113 Total interest-bearing liabilities 603 (241) 362 Net interest income $8,367 $(422) $7,945 45Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Net interest income increased 29% from $27.7 million in 2012 to $35.7 million in 2013 because of a 33% increase in interest-earning assets andbecause we realized $1.1 million of interest income in 2013 on the net recovery of mark to market adjustments related to payoffs of acquired loans, whichwere partially offset by a decrease in our net interest rate spread. Excluding this net recovery, the yield on total interest-earning assets would have been4.34%, the net interest rate spread would have been 3.78% and the net yield on interest-earning assets would have been 3.94% in 2013. Excluding the netrecovery on acquired loans, the decrease in the net interest rate spread from 4.07% in 2012 to 3.94% in 2013 was due to a decrease in yield on total interest-earning assets which was partially offset by a decrease in rates paid on interest-bearing liabilities. The decrease in yield on interest-earning assets reflected thedecrease in interest rates in the overall market, prepayments of higher yielding loans, and an increase in the proportion of lower yielding securities anddeposits to total interest-earning assets. The decrease in rates on interest-bearing liabilities from 0.61% in 2012 to 0.56% in 2013 was due to decreases inmarket interest rates on deposits which were partially offset by increased borrowing costs related to interest on the FFI term loan.Provision for loan losses: The provision for loan losses represents our determination of the amount necessary to be charged against the currentperiod’s earnings to maintain the ALLL at a level that is considered adequate in relation to the estimated losses inherent in the loan portfolio. The provisionfor 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 ourprovision also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specificproblem loans, current economic conditions and certain other subjective factors that may affect the ability of borrowers to meet their repayment obligationsto us. The provision for loan losses was $2.4 million for 2013 and $2.1 million for 2012. The increase in the provision for loan losses in 2013 as compared to2012 was the result of higher loan balances and a $0.5 million increase in charge-offs which were partially offset by reductions in estimated loss assumptions.Noninterest income: The following table provides a breakdown of noninterest income for Banking for the years ended December 31: (dollars in thousands) 2013 2012 Trust fees $1,785 $1,170 Deposit charges 366 143 Prepayment fees 846 779 Other 517 507 Total noninterest income $3,514 $2,599 The $0.9 million increase in noninterest income for Banking in 2013, as compared to 2012 was due primarily to higher trust fees. The increase intrust fees reflects the continuing growth of the trust operations as evidenced by the higher level of trust AUM, which has increased to $341 million as ofDecember 31, 2013.Noninterest income for Wealth Management includes fees charged to high net-worth clients for managing their assets and for providing financialplanning consulting services, as well as fees for administration services provided to family foundations and private charitable organizations. The followingtable provides a breakdown of noninterest income for Wealth Management for the years ended December 31:The following table provides a breakdown of noninterest income for Wealth Management for the years ended December 31: (dollars in thousands) 2013 2012 Asset management fees $15,560 $12,983 Consulting and administration fees 1,164 1,341 Other (9) (74)Total noninterest income $16,715 $14,250 The $2.5 million increase in noninterest income in Wealth Management in 2013, as compared to 2012 was primarily due to increases in assetmanagement fees of 20%. That increase was primarily due to the 19% increase in the AUM balances used for computing the asset management fees in 2013 ascompared to 2012. 46Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Noninterest Expense: The following table provides a breakdown of noninterest expense for Banking and Wealth Management for the years endedDecember 31: Banking Wealth Management (dollars in thousands) 2013 2012 2013 2012 Compensation and benefits $14,971 $11,208 $13,176 $11,673 Occupancy and depreciation 4,568 3,656 1,922 1,393 Professional services and marketing 1,752 1,000 1,536 1,179 Other expenses 3,011 2,416 766 651 Total noninterest expense $24,302 $18,280 $17,400 $14,896 The $6.0 million increase in noninterest expense in Banking during 2013 as compared to 2012 was due primarily to increases in staffing and costsassociated with FFB’s higher balances of loans and deposits and our continuing expansion, including the DCB Acquisition in August 2012. Compensationand benefits for Banking increased $3.8 million during 2013 as compared 2012 as the number of full-time equivalent employees, (“FTE”) in Bankingincreased to 123.1 during 2013 from 87.9 during 2012. The $0.9 million increase in occupancy and depreciation costs for Banking during 2013 as comparedto 2012 was due to the four additional offices being open at some time during 2013 as compared to 2012 and the expansion into additional space at theadministrative office in the second quarter of 2013. Those increases were partially offset by reduced operating system costs relating to $0.6 million of costsincurred in 2012 as part of FFB’s conversion to a new core processing system. Professional services and marketing for Banking, which includes costs forlegal, accounting, consulting and information technology services, as well as management fees paid to FFA for providing asset management services forFFB’s trust clients, increased $0.8 million during 2013 as compared to 2012. This increase was due primarily to additional consulting and legal costsincurred in relation to strategic activities of FFB and an increase in asset management fees related to trust clients. Other expenses for Banking, which includeoffice related costs, FDIC and other regulatory assessments, director fees, insurance costs, loan related expenses, employee reimbursements and REOexpenses, increased 0.6 million during 2013 as compared to 2012. This increase was primarily due to a $0.3 million charge to REO reserves in 2013 and $0.1million increases in employee reimbursements and in loan related expenses, both of which were related to our continued growth.The $2.5 million increase in noninterest expense in Wealth Management during 2013 as compared to 2012 was primarily due to increases instaffing and costs associated with our continuing expansion and growth. Compensation and benefits for Wealth Management increased $1.5 million during2013 as compared to 2012 as the number of FTE in Wealth Management increased to 53.4 during 2013 from 44.7 during 2012. The $0.5 million increase inoccupancy and depreciation costs for Wealth Management during 2013 as compared to 2012 was due to additional offices being open during all or a portionof 2013 as compared to 2012 and $0.2 million of costs incurred related to an upgrade of our asset management operating system. Professional services andmarketing for Wealth Management, which includes costs for legal, accounting and information technology services, as well as recurring referral fees paid tothird parties, increased $0.4 million during 2013 as compared to 2012. This $0.4 million increase was due primarily to higher referral fees related to theincreased asset management fees and higher recruiting fees paid related to the increase in staffing during 2013. Other expenses for Wealth Management,which include office related costs, insurance costs and employee reimbursements did not change significantly in 2013 as compared to 2012. 47Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Financial ConditionThe following table shows the financial position for each of our business segments, and of FFI and elimination entries used to arrive at ourconsolidated totals which are included in the column labeled Other, at December 31: (dollars in thousands) Banking WealthManagement Other andEliminations Total 2014: Cash and cash equivalents $29,585 $3,750 $(3,643) $29,692 Securities AFS 138,270 — — 138,270 Loans, net 1,156,021 221 — 1,156,242 Premises and equipment 1,539 548 100 2,187 FHLB Stock 12,361 — — 12,361 Deferred taxes 9,196 601 (49) 9,748 REO 334 — — 334 Other assets 4,827 500 1,263 6,590 Total assets $1,352,133 $5,620 $(2,329) $1,355,424 Deposits $972,319 $— $(9,365) $962,954 Borrowings 263,000 — 19,886 282,886 Intercompany balances 1,287 73 (1,360) — Other liabilities 6,352 2,486 1,250 10,088 Shareholders’ equity 109,175 3,061 (12,740) 99,496 Total liabilities and equity $1,352,133 $5,620 $(2,329) $1,355,424 2013: Cash and cash equivalents $56,795 $2,134 $(1,975) $56,954 Securities AFS 59,111 — — 59,111 Loans, net 893,364 366 — 893,730 Premises and equipment 2,286 863 100 3,249 FHLB Stock 6,721 — — 6,721 Deferred taxes 11,426 865 (239) 12,052 REO 375 — — 375 Other assets 3,840 717 611 5,168 Total assets $1,033,918 $4,945 $(1,503) $1,037,360 Deposits $809,306 $— $(7,269) $802,037 Borrowings 134,000 — 7,063 141,063 Intercompany balances 857 248 (1,105) — Other liabilities 4,018 2,590 890 7,498 Shareholders’ equity 85,737 2,107 (1,082) 86,762 Total liabilities and equity $1,033,918 $4,945 $(1,503) $1,037,360 2012: Cash and cash equivalents $62,965 $1,895 $(1,752) $63,108 Securities AFS 5,813 — — 5,813 Loans, net 734,778 509 — 735,287 Premises and equipment 1,661 657 66 2,384 FHLB Stock 8,500 — — 8,500 Deferred taxes 8,734 981 340 10,055 REO 650 — — 650 Other assets 3,509 638 565 4,712 Total assets $826,610 $4,680 $(781) $830,509 Deposits $653,671 $— $(3,930) $649,741 Borrowings 100,000 — — 100,000 Intercompany balances 1,451 205 (1,656) — Other liabilities 3,302 2,168 1,718 7,188 Shareholders’ equity 68,186 2,307 3,087 73,580 Total liabilities and equity $826,610 $4,680 $(781) $830,509 48Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Our consolidated balance sheet is primarily affected by changes occurring in our Banking operations as our Wealth Management operations do notmaintain significant levels of assets. Banking has experienced and is expected to continue to experience increases in its total assets as a result of our growthstrategy.During 2014, total assets for the Company and the Bank increased by $318 million. For the Bank, during 2014, loans increased by $263 million,deposits increased by $163 million, cash and cash equivalents decreased by $27 million, securities AFS increased by $79 million and FHLB advancesincreased by $129 million. Borrowings at FFI increased by $13 million during 2014. During 2013, total assets for the Company and FFB increased by $207million. For FFB, during 2013, loans and deposits increased $160 million and $156 million, respectively, cash and cash equivalents decreased by $6 million,securities AFS increased by $53 million and FHLB advances increased by $34 million. Borrowings at FFI increased by $7 million during 2013.Cash and cash equivalents, certificates of deposit and securities: Cash and cash equivalents, which primarily consist of funds held at the FederalReserve Bank or at correspondent banks, including fed funds, decreased by $27 million during 2014. Changes in cash equivalents are primarily affected bythe funding of loans, investments in securities, and changes in our sources of funding: deposits, FHLB advances and FFI borrowings. As the Company hasincreased its securities portfolio for liquidity purposes, it has been able to reduce the amount of cash held on its balance sheet.Securities available for sale: The following table provides a summary of the Company’s AFS securities portfolio at December 31: AmortizedCost Gross Unrealized EstimatedFair Value (dollars in thousands) Gains Losses 2014: US Treasury security $300 $— $— $300 FNMA and FHLB Agency notes 10,496 — (219) 10,277 Agency mortgage-backed securities 125,944 1,881 (132) 127,693 Total $136,740 $1,881 $(351) $138,270 2013: US Treasury Securities $300 $— $— $300 FNMA and FHLB Agency notes 10,496 — (716) 9,780 Agency mortgage-backed securities 50,983 30 (1,982) 49,031 Total $61,779 $30 $(2,698) $59,111 2012: US Treasury Securities $300 $— $— $300 FHLB Agency note 5,513 — — 5,513 Agency mortgage-backed securities — — — — Total $5,813 $— $— $5,813 The US Treasury Securities are pledged as collateral to the State of California to meet regulatory requirements related to FFB’s trust operations.The $79 million increase in AFS Securities reflected our actions to increase our on-balance sheet sources of liquidity.The scheduled maturities of securities AFS, other than agency mortgage backed securities, and the related weighted average yield is as follows asof December 31, 2014: (dollars in thousands) Less than 1 Year 1 Through 5 years 5 Through 10 Years After10 Years Total Amortized Cost: US Treasury securities $— $300 $— $— $300 FNMA and FHLB Agency notes — — 10,496 — 10,496 Total $— $300 $10,496 $— $10,796 Weighted average yield 0.00% 0.45% 1.78% 0.00% 1.74%Estimated Fair Value: US Treasury securities $— $300 $— $— $300 FNMA and FHLB Agency notes — — 10,277 — 10,277 Total $— $300 $10,277 $— $10,577 49Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Agency mortgage backed securities are excluded from the above table because such securities are not due at a single maturity date. The weightedaverage yield of the agency mortgage backed securities as of December 31, 2014 was 2.48%.Loans. The following table sets forth our loans, by loan category, as of December 31: (dollars in thousands) 2014 2013 2012 2011 2010 Recorded investment balance: Loans secured by real estate: Residential properties: Multifamily $481,491 $405,984 $367,412 $320,053 $196,059 Single family 360,644 227,096 155,864 85,226 44,281 Total real estate loans secured by residential properties 842,135 633,080 523,276 405,279 240,340 Commercial properties 205,320 154,982 132,217 75,542 57,633 Land 4,309 3,794 7,575 — — Total real estate loans 1,051,764 791,856 663,068 480,821 297,973 Commercial and industrial loans 93,537 93,255 67,920 35,377 30,696 Consumer loans 21,125 18,484 12,585 8,012 8,582 Total loans 1,166,426 903,595 743,573 542,210 337,251 Premiums, discounts and deferred fees and expenses (34) 50 54 (107) (71)Total $1,166,392 $903,645 $743,627 $524,103 $337,180 The $263 million increase in loans during 2014 was the result of loan originations and funding of existing credit commitments of $504 million,offset by $241 million of payoffs and scheduled principal payments. The $160 million increase in loans during 2013 was the result of loan originations andfunding of existing credit commitments of $353 million, offset by $193 million of payoffs and scheduled principal payments.The scheduled maturities, as of December 31, 2014, of the performing loans categorized as land loans and as commercial and industrial loans, areas follows: Scheduled Maturity Loans With a ScheduledMaturity After One Year (dollars in thousands) Due in One Year orLess Due After One Year ThroughFive Years Due AfterFive Years Loans WithFixed Rates Loan WithAdjustable Rates Land loans $653 $— $1,426 $645 $781 Commercial and industrial loans $55,301 $20,826 $17,067 $29,768 $8,125 Deposits: The following table sets forth information with respect to our deposits and the average rates paid on deposits, as of December 31: 2014 2013 2012 (dollars in thousands) Amount WeightedAverage Rate Amount WeightedAverage Rate Amount WeightedAverage Rate Demand deposits: Noninterest-bearing $246,137 — $217,782 — $131,827 Interest-bearing 291,509 0.502% 217,129 0.504% 103,085 0.558%Money market and savings 171,958 0.626% 121,260 0.499% 91,278 0.488%Certificates of deposits 253,350 0.619% 245,866 0.606% 323,551 0.732%Total $962,954 0.427% $802,037 0.398% $649,741 0.522%The $163 million and $152 million increases in deposits during 2014 and 2013, respectively, reflects the organic growth of our Bankingoperations. 50Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. During 2014, deposit market rates, which were declining in prior years, have been stable. As a result, the weighted average rate of interest-bearingdeposits, which had decreased from 0.65% at December 31, 2012 to 0.55% at December 31, 2013, increased slightly to 0.57%, while the weighted averageinterest rates of both interest-bearing and noninterest-bearing deposits, which decreased from 0.52% at December 31, 2012, to 0.40% at December 31, 2013,increased to 0.43% at December 31, 2014. As the company continues to grow, it has emphasized its money market products and has offered increased rates onpromotional products to attract new deposit clients.The maturities of our certificates of deposit of $100,000 or more were as follows as of December 31, 2014: (dollars in thousands) 3 months or less $83,833 Over 3 months through 6 months 70,338 Over 6 months through 12 months 57,507 Over 12 months 28,385 Total $240,063 FFB utilizes a third party program called CDARs 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 FDICinsurance coverage to its clients. As of December 31, 2014 FFB held $76.6 million of CDARs deposits. Under certain regulatory guidelines, these deposits areconsidered brokered deposits. As of December 31, 2014, FFB did not have any other brokered certificates of deposit.Borrowings: At December 31, 2014, our borrowings consisted of $263 million of overnight FHLB advances at FFB and a $20 million term loan atFFI. At December 31, 2013, our borrowings consisted of $134 million of overnight FHLB advances at FFB and a $7 million term loan at FFI. These FHLBadvances were paid in full in the early parts of January 2015 and January 2014, respectively. Because FFB utilizes overnight borrowings, the balance ofoutstanding borrowings fluctuates on a daily basis. The weighted average interest rate on these overnight borrowings was 0.15% for both 2014 and 2013. Theaverage balance of overnight borrowings was $175 million during 2014, as compared to $79 million during 2013. The maximum amount of short-term FHLBadvances outstanding at any month-end during 2014, and 2013, was $263 million, and $134 million, respectively.Term Loan. In the second quarter of 2013, we entered into a secured loan agreement with an unaffiliated lender to borrow $7.5 million for a term offive years. In the first quarter of 2014, we entered into an amendment to this loan agreement pursuant to which we obtained an additional $15.0 million ofborrowings. This amendment did not alter any of the terms of the loan agreement or the loan, other than to increase the principal amount and tocorrespondingly increase the amount of the monthly installments of principal and interest payable on the loan. In the first quarter of 2015, we entered into asecond amendment to this loan agreement pursuant to which, we obtained an additional $10.3 million of borrowings, bringing the outstanding balance ofthis loan to $30.0 million as of February 28, 2015. This second amendment also reduced the interest rate on this loan to 3.75% over ninety day LIBOR from4.00% over ninety day LIBOR, extended the maturity date of this loan to May 1, 2022 and made corresponding changes to the amount of the principalpayments required to be made by us on this loan. This loan, as amended, is payable by us in 96 monthly installments of principal, each in the amount of$0.25 million, plus accrued and unpaid interest, commencing on April 1, 2015 and continuing to and including April 1, 2022, with a final installment in theamount of $8.75 million, plus all remaining accrued but unpaid interest, due and payable on May 1, 2022. We have the right, however, to prepay theprincipal amount of the Term Loan, at any time in whole or from time to time in part, without our having to pay any premium or penalty. We have pledgedall of the common stock of FFB to the lender as security for the performance of our payment and other obligations under the loan agreement. The loanagreement obligates us to meet certain financial covenants, including the following:●a Tier 1 capital (leverage) ratio at FFB of at least 5.0% at the end of each calendar quarter;●a total risk-based capital ratio at FFB of not less than 10.0% at the end of each calendar quarter;●a ratio at FFB of nonperforming assets to net tangible capital, as adjusted, plus our ALLL, of not more than 40.0% at the end of each calendarquarter;●a ratio at FFB of classified assets to tier 1 capital, plus our ALLL, of no more than 50.0% at the end of each calendar quarter;●a consolidated fixed charge coverage ratio of not less than 1.50 to 1.0, measured quarterly for the immediately preceding 12 months; and●minimum liquidity at all times of not less than $1.0 million. 51Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. As of December 31, 2014, we were in compliance with all of those financial covenants and we expect to be in compliance for the foreseeable future.The loan agreement also prohibits FFI (but not FFB or FFA) from doing any of the following without the lender’s prior approval: (i) paying anycash dividends to our shareholders, (ii) incurring any other indebtedness, (iii) granting any security interests or permitting the imposition of any liens, otherthan certain permitted liens, on any of FFI’s assets, or (iv) entering into significant merger or acquisition transactions outside of our banking operations. Theloan agreement provides that if we fail to pay principal or interest when due, or we commit a breach of any of our other obligations or covenants in the loanagreement, or certain events occur that adversely affect us, then, unless we are able to cure such a breach, we will be deemed to be in default of the loanagreement and the lender will become entitled to require us to immediately pay in full the then principal amount of and all unpaid interest on the loan. If inany such event we fail to repay the loan and all accrued but unpaid interest, then the lender would become entitled to sell our FFB shares which we pledgedas security for the loan in order to recover the amounts owed to it.Delinquent Loans, Nonperforming Assets and Provision for Credit LossesLoans are considered past due following the date when either interest or principal is contractually due and unpaid. Loans on which the accrual ofinterest 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 theloan 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 andnonaccrual loans as of December 31: Past Due and Still Accruing Total PastDue andNonaccrual Current Total (dollars in thousands) 30–59 Days 60-89 Days 90 Daysor More Nonaccrual 2014: Real estate loans: Residential properties $— $— $— $— $— $842,135 $842,135 Commercial properties — 805 200 596 1,601 203,719 205,320 Land — — 651 — 651 3,658 4,309 Commercial and industrial loans 2,092 289 700 342 3,423 90,114 93,537 Consumer loans — — 637 163 800 20,325 21,125 Total $2,092 $1,094 $2,188 $1,101 $6,475 $1,159,951 $1,166,426 Percentage of total loans 0.18% 0.09% 0.19% 0.09% 0.56% 2013: Real estate loans: Residential properties $— $— $— $1,820 $1,820 $631,260 $633,080 Commercial properties — — 417 598 1,015 153,967 154,982 Land — — 1,480 — 1,480 2,314 3,794 Commercial and industrial loans — 2,744 1,315 344 4,403 88,852 93,255 Consumer loans — — — 132 132 18,352 18,484 Total $— $2,744 $3,212 $2,894 $8,850 $894,745 $903,595 Percentage of total loans 0.00% 0.30% 0.36% 0.32% 0.98% 2012: Real estate loans: Residential properties $— $— $— $146 $146 $523,130 $523,276 Commercial properties 2,012 — — — 2,012 130,205 132,217 Land — — 3,169 524 3,693 3,882 7,575 Commercial and industrial loans 1,188 1,113 11 97 2,409 65,511 67,920 Consumer loans — 147 — — 147 12,438 12,585 Total $3,200 $1,260 $3,180 $767 $8,407 $735,166 $743,573 Percentage of total loans 0.43% 0.17% 0.43% 0.10% 1.13% As of December 31, 2011, the Company had $0.5 million of loans 30 to 59 days past due which represented 0.10% of total loans outstanding. TheCompany did not have any loans over 60 days past due as of December 31, 2011. The Company did not have any loans over 30 days past due as ofDecember 31, 2010. 52Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Company did not have any loans classified as nonaccrual as of December 31, 2011 and December 31, 2010.The level of delinquent loans and nonaccrual loans have been adversely impacted by the loans acquired in an acquisition. As of December 31,2014, of the $3.3 million in loans over 90 days past due, including loans on nonaccrual, $1.8 million, or 54% were loans acquired in an acquisition. As ofDecember 31, 2014, the Company had two loans with a balance of $0.5 million classified as troubled debt restructurings (“TDR”) and as of December 31,2013, the Company had one loan with a balance of $0.1 million classified as a TDR, all of which are included as nonaccrual in the table above.The following is a breakdown of our loan portfolio by the risk category of loans at December 31:(dollars in thousands) Pass SpecialMention Substandard Impaired Total 2014: Real estate loans: Residential properties $841,538 $554 $— $43 $842,135 Commercial properties 198,112 1,266 200 5,742 205,320 Land 4,309 — — — 4,309 Commercial and industrial loans 81,067 5,276 1,559 5,635 93,537 Consumer loans 20,962 — 47 116 21,125 Total $1,145,988 $7,096 $1,806 $11,536 $1,166,426 2013: Real estate loans: Residential properties $630,832 $— $— $2,248 $633,080 Commercial properties 150,053 — 4,108 821 154,982 Land 2,314 — 1,480 — 3,794 Commercial and industrial loans 88,166 43 2,047 2,999 93,255 Consumer loans 18,309 — 175 — 18,484 Total $889,674 $43 $7,810 $6,068 $903,595 2012: Real estate loans: Residential properties $519,288 $— $1,731 $2,257 $523,276 Commercial properties 127,803 — 4,414 — 132,217 Land 3,818 — 3,214 543 7,575 Commercial and industrial loans 62,000 889 2,295 2,736 67,920 Consumer loans 12,387 127 71 — 12,585 Total $725,296 $1,016 $11,725 $5,536 $743,573 2011: Real estate loans: Residential properties $402,630 $291 $— $2,358 $405,279 Commercial properties 75,542 — — — 75,542 Commercial and industrial loans 31,627 3,750 — — 35,377 Consumer loans 7,860 152 — — 8,012 Total $517,659 $4,193 $— $2,358 $524,210 2010: Real estate loans: Residential properties $240,340 $— $— $— $240,340 Commercial properties 57,633 — — — 57,633 Commercial and industrial loans 26,743 3,721 — 232 30,696 Consumer loans 8,403 179 — — 8,582 Total $333,119 $3,900 $— $232 $337,251 53Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 tocollect all amounts due according to the contractual terms of the loan. We measure impairment using either the present value of the expected future cashflows discounted at the loan’s effective interest rate, or the fair value of the properties collateralizing the loan. Impairment losses are included in theallowance for loan losses through a charge to provision for loan losses. Adjustments to impairment losses due to changes in the fair value of the propertycollateralizing an impaired loan are considered in computing the provision for loan losses. Loans collectively reviewed for impairment include all loansexcept for loans which are individually reviewed based on specific criteria, such as delinquency, debt coverage, adequacy of collateral and condition ofproperty collateralizing the loans. Impaired loans include nonaccrual loans (excluding those collectively reviewed for impairment), certain restructuredloans and certain performing loans less than ninety days delinquent (“other impaired loans”) which we believe are not likely to be collected in accordancewith contractual terms of the loans.In 2012, we purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, atacquisition, that all contractually required payments would not be collected. The carrying amount of these purchased credit impaired loans is as follows atDecember 31: (dollars in thousands) 2014 2013 Outstanding principal balance: Loans secured by real estate: Commercial properties $206 $5,543 Land — 2,331 Total real estate loans 206 7,874 Commercial and industrial loans 2002 2,489 Consumer loans 249 260 Total loans 2,457 10,623 Unaccreted discount on purchased credit impaired loans (651) (2,945)Total $1,806 $7,678 54Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Allowance for Loan Losses. The following table summarizes the activity in our ALLL for the year ended December 31: (dollars in thousands) Beginning Balance Provision for Loan Losses Charge-offs Recoveries EndingBalance 2014: Real estate loans: Residential properties $6,157 $429 $— $— $6,586 Commercial properties / land 1,440 86 — — 1,526 Commercial and industrial loans 2,149 (252) — — 1,897 Consumer loans 169 (28) — — 141 Total $9,915 $235 $— $— $10,150 2013: Real estate loans: Residential properties $4,355 $1,802 $— $— $6,157 Commercial properties / land 936 561 (57) — 1,440 Commercial and industrial loans 2,841 71 (763) — 2,149 Consumer loans 208 (39) — — 169 Total $8,340 $2,395 $(820) $— $9,915 2012: Real estate loans: Residential properties $3,984 $646 $(275) $— $4,355 Commercial properties / land 1,218 (282) — — 936 Commercial and industrial loans 1,104 1,737 — — 2,841 Consumer loans 244 (36) — — 208 Total $6,550 $2,065 $(275) $— $8,340 2011: Real estate loans: Residential properties $2,185 $1,524 $— $275 $3,984 Commercial properties 900 318 — — 1,218 Commercial and industrial loans 955 381 (232) — 1,104 Consumer loans 170 74 — — 244 Total $4,210 $2,297 $(232) $275 $6,550 2010: Real estate loans: Residential properties $1,379 $806 $— $— $2,185 Commercial properties 333 567 — — 900 Commercial and industrial loans 413 542 — — 955 Consumer loans 385 (215) — — 170 Total $2,510 $1,700 $— $— $4,210 Excluding the loans acquired in an Acquisition and any related allocated ALLL, our ALLL as a percentage of total loans was 0.87% and 1.16% asof December 31, 2014, and December 31, 2013, 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 securingnon–performing loans or adverse changes in economic conditions. The amounts of the provisions we make for loan losses are based on our estimate of lossesin our loan portfolio. In estimating such losses, we use economic and loss migration models that are based on bank regulatory guidelines and industrystandards, and our historical charge-off experience and loan delinquency rates, local and national economic conditions, a borrower’s ability to repay itsborrowings, and the value of any property collateralizing the loan, as well as a number of subjective factors. However, these determinations involvejudgments about changes and trends in current economic conditions and other events that can affect the ability of borrowers to meet their loan obligations tous and a weighting among the quantitative and qualitative factors we consider in determining the sufficiency of the ALLL. Moreover, the duration andanticipated effects of prevailing economic conditions or trends can be uncertain and can be affected by a number of risks and circumstances that are outsideof our control. If changes in economic or market conditions or unexpected subsequent events were to occur, or if changes were made to bank regulatoryguidelines or industry standards that are used to assess the sufficiency of the ALLL, it could become necessary for us to incur additional, and possiblysignificant, charges to increase the ALLL, which would have the effect of reducing our income. 55Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In addition, the FDIC and the DBO, as an integral part of their examination processes, periodically review the adequacy of our ALLL. Theseagencies 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 beto reduce our income.The following table presents the balance in the ALLL and the recorded investment in loans by impairment method at December 31: (dollars in thousands) Allowance for Loan Losses UnaccretedCreditComponentOther Loans Evaluated for Impairment Purchased Impaired Total Individually Collectively 2014: Allowance for loan losses: Real estate loans: Residential properties $— $6,586 $— $6,586 $26 Commercial properties 26 1,500 — 1,526 193 Land — — — — 4 Commercial and industrial loans 686 1,211 — 1,897 45 Consumer loans — 141 — 141 — Total $712 $9,438 $— $10,150 $268 Loans: Real estate loans: Residential properties $43 $842,092 $— $842,135 $2,861 Commercial properties 5,742 199,378 200 205,320 21,126 Land — 4,309 — 4,309 1,099 Commercial and industrial loans 5,635 86,343 1,559 93,537 5,893 Consumer loans 116 20,962 47 21,125 8 Total $11,536 $1,153,084 $1,806 $1,166,426 $30,987 2013: Allowance for loan losses: Real estate loans: Residential properties $— $6,157 $— $6,157 $36 Commercial properties 190 1,250 — 1,440 290 Land — — — — 26 Commercial and industrial loans 925 1,224 — 2,149 126 Consumer loans — 169 — 169 11 Total $1,115 $8,800 $— $9,915 $489 Loans: Real estate loans: Residential properties $2,248 $630,832 $— $633,080 $3,449 Commercial properties 821 150,053 4,108 154,982 23,968 Land — 2,314 1,480 3,794 1,939 Commercial and industrial loans 2,999 88,209 2,047 93,255 10,354 Consumer loans — 18,441 43 18,484 160 Total $6,068 $889,849 $7,678 $903,595 $39,870 56Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (dollars in thousands) Allowance for Loan Losses UnaccretedCreditComponentOther Loans Evaluated for Impairment Purchased Impaired Total Individually Collectively 2012: Allowance for loan losses: Real estate loans: Residential properties $— $4,355 $— $4,355 $62 Commercial properties — 936 — 936 617 Land — — — — 129 Commercial and industrial loans 1,536 1,305 — 2,841 302 Consumer loans — 208 — 208 19 Total $1,536 $6,804 $— $8,340 $1,129 Loans: Real estate loans: Residential properties $2,257 $519,288 $1,731 $523,276 $5,121 Commercial properties — 128,035 4,182 132,217 39,862 Land 543 3,818 3,214 7,575 4,521 Commercial and industrial loans 2,736 62,989 2,195 67,920 16,512 Consumer loans — 12,514 71 12,585 324 Total $5,536 $726,644 $11,393 $743,573 $66,340 2011: Allowance for loan losses: Real estate loans: Residential properties $— $3,984 $— $3,984 $— Commercial properties — 1,218 — 1,218 — Commercial and industrial loans — 1,104 — 1,104 — Consumer loans — 244 — 244 — Total $— $6,550 $— $6,550 $— Loans: Real estate loans: Residential properties $2,358 $402,921 $— $405,279 $— Commercial properties — 75,542 — 75,542 — Commercial and industrial loans — 35,377 — 35,377 — Consumer loans — 8,012 — 8,012 — Total $2,358 $521,852 $— $524,210 $— 2010: Allowance for loan losses: Real estate loans: Residential properties $— $2,185 $— $2,185 $— Commercial properties — 900 — 900 — Commercial and industrial loans 232 723 — 955 — Consumer loans — 170 — 170 — Total $232 $3,978 $— $4,210 $— Loans: Real estate loans: Residential properties $— $240,340 $— $240,340 $— Commercial properties — 57,633 — 57,633 — Commercial and industrial loans 232 30,464 — 30,696 — Consumer loans — 8,582 — 8,582 — Total $232 $337,019 $— $337,251 $— 57Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The column labeled “Unaccreted Credit Component Other Loans” represents the amount of unaccreted credit component discount for the otherloans acquired in the DCB acquisition, and the stated principal balance of the related loans. The discount is equal to 0.86% and 1.23% of the stated principalbalance of these loans as of December 31, 2014 and 2013, respectively. In addition to this unaccreted credit component discount, an additional $0.3 millionand $0.2 million of the ALLL was provided for these loans as of December 31, 2014 and 2013, respectively.LiquidityLiquidity management focuses on our ability to generate, on a timely and cost-effective basis, cash sufficient to meet the funding needs of currentloan demand, deposit withdrawals, principal and interest payments with respect to outstanding borrowings and to pay operating expenses. Our liquiditymanagement is both a daily and long-term function of funds management. Liquid assets are generally invested in marketable securities or held as cash at theFRB or other financial institutions.We monitor our liquidity in accordance with guidelines established by our Board of Directors and applicable regulatory requirements. Our need forliquidity is affected by our loan activity, net changes in deposit levels and the maturities of our borrowings. The principal sources of our liquidity consist ofdeposits, loan interest and principal payments and prepayments, investment management and consulting fees, FHLB advances and proceeds from borrowingsand sales of shares by FFI. The remaining balances of the Company’s lines of credit available to draw down totaled $289 million at December 31, 2014.Cash Flows Provided by Operating Activities. During the year ended December 31, 2014 operating activities provided net cash of $9.4 million,comprised primarily of our net income of $8.4 million. In 2013, operating activities provided net cash of $8.0 million, comprised primarily of our net incomeof $7.9 million.Cash Flows Used in Investing Activities. During the year ended December 31, 2014, investing activities used net cash of $340.3 million, primarilyto fund a $262.3 million net increase in loans and a $83.5 million net increase in securities AFS. In 2013, investing activities used net cash of $213.8 million,primarily to fund a $157.6 million net increase in loans and a $62.7 million net increase in securities AFS.Cash Flow Provided by Financing Activities. During the year ended December 31, 2014, financing activities provided net cash of $303.7 million,consisting primarily of a net increase of $160.9 million in deposits and a net increase of $141.8 million in borrowings. In 2013, financing activities providednet cash of $199.7 million, consisting primarily of a net increase of $152.3 million in deposits, a net increase of $41.1 million in borrowings and $6.3 millionreceived from the sale of shares in a private offering.Ratio of Loans to Deposits. The relationship between gross loans and total deposits can provide a useful measure of a bank’s liquidity. Sincerepayment 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 liquidare 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 canadversely affect interest income and earnings. As a result, our goal is to achieve a loan-to-deposit ratio that appropriately balances the requirements ofliquidity and the need to generate a fair return on our assets. At December 31, 2014 and December 31, 2013, the loan-to-deposit ratios at FFB were 118.9%,and 110.4%, respectively.Off-Balance Sheet ArrangementsThe following table provides the off-balance sheet arrangements of the Company as of December 31, 2014: (dollars in thousands) Commitments to fund new loans $18,217 Commitments to fund under existing loans, lines of credit 106,060 Commitments under standby letters of credit 4,223 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 December 31, 2014, FFB was obligated on $68.5 million of letters of creditto the FHLB which were being used as collateral for public fund deposits, including $56.0 million of deposits from the State of California. 58Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Asset and Liability Management: Interest Rate RiskInterest rate risk is inherent in financial services businesses. Management of interest-earning assets and interest-bearing liabilities in terms of rateand maturity has an important effect on our liquidity and net interest margin. Interest rate risk results from interest-earning assets and interest-bearingliabilities maturing or repricing at different times, on a different basis or in unequal amounts. The Board of Directors of FFB approves policies and limitsgoverning the management of interest rate risk. The asset / liability committee formed by these policies is responsible for monitoring our interest rate risk andproviding periodic reports to the Board of Directors regarding our compliance with these policies and limits. We have established three primary measurementprocesses to quantify and manage our interest rate risk. These include: (i) gap analysis which measures the repricing mismatches of asset and liability cashflows; (ii) net interest income simulations which are used to measure the impact of instantaneous changes in interest rates on net interest income over a 12month forecast period; and (iii) economic value of equity calculations which measure the sensitivity of our economic value of equity to simultaneouschanges in interest rates.Gap Analysis. Under this analysis, rate sensitivity is measured by the extent to which our interest-earning assets and interest-bearing liabilitiesreprice or mature at different times. Rate sensitivity gaps in which the repricing of interest-earning assets exceed the repricing of interest-bearing liabilitiestend to produce an expanded net yield on interest-earning assets in rising interest rate environments and a reduced net yield on interest-earning assets indeclining interest rate environments. Conversely, when the repricing of interest-bearing liabilities exceed the repricing of interest-earning assets, the net yieldon interest-earning assets generally declines in rising interest rate environments and increases in declining interest rate environments. The following tablesets forth the interest-earning assets and interest-bearing liabilities on the basis of when they reprice or mature as of December 31, 2014: (dollars in thousands) Less than1 year From 1 to3 Years From 3 to5 Years Over 5Years Total Interest-earnings assets: Cash equivalents $24,049 $— $— $— $24,049 Securities, FHLB stock 30,857 30,094 23,180 65,160 149,291 Loans 166,598 211,590 456,168 331,328 1,165,684 Interest-bearing liabilities: Deposits: Interest-bearing checking (291,509) — — — (291,509) Money market and savings (171,958) — — — (171,958) Certificates of deposit (223,948) (29,402) — — (253,350) Borrowings (282,886) — — — (282,886) Net: Current Period $(748,797) $212,282 $479,348 $396,488 $339,321 Net: Cumulative $(748,797) $(536,515) $(57,167) $339,321 The cumulative positive total of $339 million reflects the funding provided by noninterest-bearing deposits and equity. Because we had a $749million net negative position at December 31, 2014 for the repricing period of less than one year, the result of this analysis indicate that we would beadversely impacted by a short term increase in interest rates and would benefit from a short term decrease in interest rates.However, the extent to which our net interest margin will be impacted by changes in prevailing interest rates will depend on a number of factors,including how quickly interest-earning assets and interest-bearing liabilities react to interest rate changes. It is not uncommon for rates on certain assets orliabilities to lag behind changes in the market rates of interest. Additionally, prepayments of loans and early withdrawals of certificates of deposit couldcause interest sensitivities to vary. As a result, the relationship or “gap” between interest-earning assets and interest-bearing liabilities, as shown in the abovetable, is only a general indicator of interest rate sensitivity and the effect of changing rates of interest on our net interest income is likely to be different fromthat predicted solely on the basis of the interest rate sensitivity analysis set forth in the above table. 59Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Net Interest Income Simulations (or NII). Under this analysis, we use a simulation model to measure and evaluate potential changes in our netinterest income resulting from changes in interest rates. This model measures the impact of instantaneous shocks of 100, 200, 300 and 400 basis points on ournet interest income over a 12 month forecast period. The computed changes to our net interest income between hypothetical rising and declining ratescenarios for the twelve month period beginning December 31, 2014 are as follows: Assumed Instantaneous Change in Interest Rates Estimated Increase(Decrease) in NetInterest Income + 100 basis points (7.37)%+ 200 basis points (13.95)%+ 300 basis points (20.81)%+ 400 basis points (27.15)% - 100 basis points 1.09 % - 200 basis points 0.94 % We did not include scenarios below the minus 200 basis point scenario because we believe those scenarios are not meaningful based on currentinterest rate levels. The NII results indicate that we would be adversely impacted by a short term increase in interest rates and would benefit from a short termdecrease in interest rates. The results of the NII are hypothetical, and a variety of factors might cause actual results to differ substantially from what isdepicted. These could include non-parallel yield curve shifts, changes in market interest rate spreads and the actual reaction to changes in interest rate levelsof interest-earning assets and interest-bearing liabilities. It is not uncommon for rates on certain assets or liabilities to lag behind changes in the market ratesof interest. Additionally, prepayments of loans and early withdrawals of certificates of deposit could cause interest sensitivities to vary.Economic Value of Equity Calculations (or EVE). The EVE measures the sensitivity of our market value equity to simultaneous changes in interestrates. EVE is derived by subtracting the economic value of FFB’s liabilities from the economic value of its assets, assuming current and hypothetical interestrate environments. EVE is based on all of the future cash flows expected to be generated by the FFB’s current balance sheet, discounted to derive theeconomic value of FFB’s assets & liabilities. These cash flows may change depending on the assumed interest rate environment and the resulting changes inother assumptions, such as prepayment speeds. The computed changes to our economic value of equity between hypothetical rising and declining ratescenarios as of December 31, 2014 are as follows: Assumed Simultaneous Change in Interest Rates EstimatedIncrease (Decrease)in EconomicValue of Equity + 100 basis points (0.02)% + 200 basis points (4.46)% + 300 basis points (3.34)% + 400 basis points (2.49)% - 100 basis points (12.16)% - 200 basis points (18.13)% We did not include scenarios below the minus 200 basis point scenario because we believe those scenarios are not meaningful based on currentinterest rate levels. The EVE results indicate that we would be adversely impacted by a short term increase in interest rates and a short term decrease ininterest rates. This differs from the NII results because, in the current interest rate environment, assumed interest rate floors for loans eliminates the benefitnormally derived for loans in a declining interest rate environment. The results of the EVE are hypothetical, and a variety of factors might cause actual resultsto differ substantially from what is depicted. These could include non-parallel yield curve shifts, changes in market interest rate spreads and the actualreaction to changes in interest rate levels of interest-earning assets and interest-bearing liabilities. It is not uncommon for rates on certain assets or liabilitiesto lag behind changes in the market rates of interest. Additionally, prepayments of loans and early withdrawals of certificates of deposit could cause interestsensitivities to vary.The results of these analyses and simulations do not contemplate all of the actions that we may undertake in response to changes in interest rates.In response to actual or anticipated changes in interest rates, we have various alternatives for managing and reducing FFB’s exposure to interest rate risk, suchas entering into hedges and obtaining long-term fixed rate FHLB advances. To date, we have not entered into any hedges or other derivative instruments forthis or any other purpose and it is our policy not to use derivatives or other financial instruments for trading or other speculative purposes. 60Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Capital Resources and DividendsUnder federal banking regulations that apply to all United States based bank holding companies and federally insured banks, the Company (on aconsolidated 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 eachfederally insured bank is determined by its primary federal bank regulatory agency to come within one of the following capital adequacy categories on thebasis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) criticallyundercapitalized.Certain qualitative assessments also are made by a banking institution’s primary federal regulatory agency that could lead the agency to determinethat the banking institution should be assigned to a lower capital category than the one indicated by the quantitative measures used to assess the institution’scapital adequacy. At each successive lower capital category, a banking institution is subject to greater operating restrictions and increased regulatorysupervision 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, ascompared to the respective regulatory requirements applicable to them: Actual For CapitalAdequacy Purposes To Be Well CapitalizedUnder Prompt Corrective Action Provisions (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio FFI December 31, 2014 Tier 1 leverage ratio $95,582 7.32% $52,200 4.00% Tier 1 risk-based capital ratio 95,582 11.02% 34,700 4.00% Total risk-based capital ratio 106,132 12.23% 69,399 8.00% December 31, 2013 Tier 1 leverage ratio $85,268 8.67% $39,321 4.00% Tier 1 risk-based capital ratio 85,268 13.04% 26,150 4.00% Total risk-based capital ratio 93,465 14.30% 52,300 8.00% December 31, 2012 Tier 1 leverage ratio $72,909 9.19% $31,730 4.00% Tier 1 risk-based capital ratio 72,909 13.60% 21,446 4.00% Total risk-based capital ratio 79,636 14.85% 42,891 8.00% FFB December 31, 2014 Tier 1 leverage ratio $105,261 8.09% $52,036 4.00% $65,045 5.00%Tier 1 risk-based capital ratio 105,261 12.18% 34,572 4.00% 51,858 6.00%Total risk-based capital ratio 115,811 13,40% 69,144 8.00% 86,340 10.00% December 31, 2013 Tier 1 (core) capital ratio $84,243 8.61% $39,115 4.00% $48,894 5.00%Tier 1 risk-based capital ratio 84,243 12.95% 26,017 4.00% 39,025 6.00%Total risk-based capital ratio 92,399 14.21% 52,034 8.00% 65,042 10.00%December 31, 2012 Tier 1 (core) capital ratio $67,515 8.56% $31,563 4.00% $39,454 5.00%Tier 1 risk-based capital ratio 67,515 12.68% 21,292 4.00% 31,939 6.00%Total risk-based capital ratio 74,194 13,94% 42,585 8.00% 53,231 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 applicableto it and FFB (on a stand-alone basis) qualified as a well-capitalized depository institution under the capital adequacy guidelines described above.As of December 31, 2014, the amount of capital at FFB in excess of amounts required to be Well Capitalized was $40.2 million for the Tier 1Leverage Ratio, $53.4 million for the Tier 1 risk-based capital ratio and $29.5 million for the Total risk-based capital ratio. 61Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. During the years ended December 31, 2014 and 2013, FFI made capital contributions to FFB of $10.5 million and $8.5 million, respectively. As ofDecember 31, 2014, FFI had $10.0 million of available capital and, therefore, has the ability and financial resources to contribute additional capital to FFB, ifneeded.In July 2013, the Federal Reserve Board and the FDIC adopted new capital adequacy rules and established a new comprehensive capital frameworkfor U.S. banking organizations (the “New Capital Rules”). Those new Rules are based on rules promulgated by the International Basel Committee onBanking Supervision (the “Basel Committee”) and also are designed to meet certain requirements of the Dodd-Frank Act. The New Capital Rules (sometimesreferred to as the “Basel III Rules”) substantially revise the risk-based capital requirements applicable to U.S. banking organizations, including the Companyand the Bank, from the U.S. risk-based capital rules that were in effect prior to January 1, 2015, redefined the components of capital and addressed otherissues affecting the capital ratios applicable to banking organizations. The New Capital Rules also replace the existing approach used in risk-weighting of abanking organization’s assets with a more risk-sensitive approach. The New Capital Rules became effective for the Company and FFB on January 1, 2015(subject, in the case of certain of those Rules, to phase-in periods). Among other things, the New Capital Rules will require bank holding companies andFDIC-insured banks, including FFI and the Bank, to maintain greater amounts of capital, which we expect will increase the costs of capital for bank holdingcompanies and FDIC-insured banks. For additional information regarding these New Capital Rules, see “BUSINESS—Supervision and Regulation NewBasel III Capital Rules” above in Item I of this report.We did not pay dividends in 2014 or 2013 and we have no plans to pay dividends at least for the foreseeable future. Instead, it is our intention toretain internally generated cash flow to support our growth. Moreover, the payment of dividends is subject to certain regulatory restrictions, which arediscussed in ITEM 1 – “Business—Supervision and Regulation—Dividends.” included elsewhere in this Annual Report on Form 10-K. In addition, theagreement governing the term loan obtained by FFI in April 2012 provides that we must obtain the prior consent of the lender to pay dividends to ourshareholders.We had no material commitments for capital expenditures as of December 31, 2014. However, we intend to take advantage of opportunities thatmay arise in the future to grow our businesses, including by opening additional wealth management offices or acquiring complementary businesses that webelieve will provide us with attractive risk-adjusted returns, although we do not have any immediate plans, arrangements or understandings relating to anymaterial acquisition. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which wemight need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additionalshares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, aswell as our future results of operations. See ITEM 1A – “RISK FACTORS. We may sell additional shares of common stock in the future which could result indilution to our shareholders” for information regarding the impact that future sales of our common stock may have on the share ownership of our existingshareholders. 62Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Item 8.Financial Statements and Supplementary DataFIRST FOUNDATION INCINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements 64Consolidated Balance Sheets: December 31, 2014 and December 31, 2013 65Consolidated Income Statements: Years Ended December 31, 2014 and December 31, 2013 66Consolidated Statements of Comprehensive Income: Years Ended December 31, 2014 and December 31, 2013 67Consolidated Statements of Changes in Shareholders’ Equity: Years Ended December 31, 2014 and December 31, 2013 68Consolidated Statements of Cash Flows: Years Ended December 31, 2014 and December 31, 2013 69Notes to the Consolidated Financial Statements 70 63Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and ShareholdersFirst Foundation Inc. and SubsidiariesIrvine, California We have audited the accompanying consolidated balance sheets of First Foundation Inc. and Subsidiaries as of December 31, 2014 and2013, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of theyears in the three year period ended December 31, 2014. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofFirst Foundation Inc. and Subsidiaries as of December 31, 2014 and 2013 and the results of their operations and their cash flows foreach of the years in the three year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FirstFoundation Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated March 16, 2015, expressed an unqualified opinion on the effectiveness of the Company’s internal controlover financial reporting.Laguna Hills, CaliforniaMarch 16, 2015 64Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.CONSOLIDATED BALANCE SHEETS(In thousands, except share and per share amounts) December 31, 2014 2013 ASSETS Cash and cash equivalents $29,692 $56,954 Securities available-for-sale (“AFS”) 138,270 59,111 Loans, net of deferred fees 1,166,392 903,645 Allowance for loan and lease losses (“ALLL”) (10,150) (9,915)Net loans 1,156,242 893,730 Premises and equipment, net 2,187 3,249 Investment in FHLB stock 12,361 6,721 Deferred taxes 9,748 12,052 Real estate owned (“REO”) 334 375 Other assets 6,590 5,168 Total Assets $1,355,424 $1,037,360 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits $962,954 $802,037 Borrowings 282,886 141,063 Accounts payable and other liabilities 10,088 7,498 Total Liabilities 1,255,928 950,598 Commitments and contingencies — — Shareholders’ Equity Common Stock, par value $.001: 20,000,000 shares authorized; 7,845,182 and 7,733,514 shares issued andoutstanding at December 31, 2014 and December 31, 2013, respectively 8 8 Additional paid-in-capital 78,204 76,334 Retained earnings 20,384 11,990 Accumulated other comprehensive income (loss), net of tax 900 (1,570)Total Shareholders’ Equity 99,496 86,762 Total Liabilities and Shareholders’ Equity $1,355,424 $1,037,360 (See accompanying notes to the consolidated financial statements) 65Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.CONSOLIDATED INCOME STATEMENTS(In thousands, except share and per share amounts) For the Year Ended December 31, 2014 2013 2012 Interest income: Loans $44,140 $37,918 $30,552 Securities 2,545 864 193 FHLB stock, fed funds sold and interest-bearing deposits 713 399 129 Total interest income 47,398 39,181 30,874 Interest expense: Deposits 3,586 3,167 2,918 Borrowings 998 340 227 Total interest expense 4,584 3,507 3,145 Net interest income 42,814 35,674 27,729 Provision for loan losses 235 2,395 2,065 Net interest income after provision for loan losses 42,579 33,279 25,664 Noninterest income: Asset management, consulting and other fees 21,798 18,240 15,326 Other income 2,951 1,584 1,294 Total noninterest income 24,749 19,824 16,620 Noninterest expense: Compensation and benefits 33,550 28,760 23,267 Occupancy and depreciation 7,325 6,556 5,068 Professional services and marketing costs 5,995 4,003 2,720 Other expenses 5,637 4,303 3,421 Total noninterest expense 52,507 43,622 34,476 Income before taxes on income 14,821 9,481 7,808 Taxes on income 6,427 1,630 2,007 Net income $8,394 $7,851 $5,801 Net income per share: Basic $1.08 $1.06 $0.88 Diluted $1.03 $1.01 $0.85 Shares used in computation: Basic 7,737,036 7,424,210 6,603,533 Diluted 8,166,343 7,742,215 6,831,955 (See accompanying notes to the consolidated financial statements) 66Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In thousands) For the Year Ended December 31, 2014 2013 2012 Net income $8,394 $7,851 $5,801 Other comprehensive income (loss): Unrealized holding gains (losses) on securities arising during the period 4,198 (2,668) 14 Other comprehensive income (loss) before tax 4,198 (2,668) 14 Income tax (expense) benefit related to items of other comprehensive income (1,728) 1,098 — Other comprehensive income (loss) 2,470 (1,570) 14 Total comprehensive income $10,864 $6,281 $5,815 (See accompanying notes to the consolidated financial statements) 67Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.CONSOLIDATED STATEMENTS OF CHANGESIN SHAREHOLDERS’ EQUITY(In thousands, except share amounts) Common Stock AdditionalPaid-in-Capital RetainedEarnings(Deficit) AccumulatedOtherComprehensiveIncome (Loss) Total Numberof Shares Amount Balance: December 31, 2011 6,166,574 $6 $50,867 $(1,662) $(14) $49,197 Net income — — — 5,801 — 5,801 Other comprehensive income — — — — 14 14 Issuance of restricted stock 9,667 — — — — — Issuance of common stock: Under merger agreement 815,447 1 12,230 — — 12,231 Capital raise 374,438 — 5,617 — — 5,617 Stock-based compensation — — 720 — — 720 Balance: December 31, 2012 7,366,126 7 69,434 4,139 — 73,580 Net income — — — 7,851 — 7,851 Other comprehensive loss — — — — (1,570) (1,570)Issuance of restricted stock 9,667 — — — — — Issuance of common stock 357,721 1 6,321 — — 6,322 Stock-based compensation — — 579 — — 579 Balance: December 31, 2013 7,733,514 8 76,334 11,990 (1,570) 86,762 Net income — — — 8,394 — 8,394 Other comprehensive income — — — — 2,470 2,470 Issuance of restricted stock 3,222 — — — — — Issuance of common stock: Exercise of options 84,866 — 949 — — 949 Payout of contingent consideration 23,580 — 354 — — 354 Stock-based compensation — — 451 — — 451 Tax windfall from exercise of stock options — — 116 — — 116 Balance: December 31, 2014 7,845,182 $8 $78,204 $20,384 $900 $99,496 (See accompanying notes to the consolidated financial statements) 68Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) For the Year Ended December 31, 2014 2013 2012 Cash Flows from Operating Activities: Net income $8,394 $7,851 $5,801 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 235 2,395 2,065 Depreciation and amortization 1,231 1,040 591 Stock–based compensation expense 451 579 720 Deferred tax expense (benefit) 576 (1,267) (2,051)Amortization of discounts (premiums) on purchased loans - net (2,310) (3,219) — Gain on sale of REO (1,038) — — Provision for REO losses — 250 — Increase in other assets (1,244) (366) (1,078)Increase in accounts payable and other liabilities 3,060 703 2,378 Net cash provided by operating activities 9,355 7,966 8,426 Cash Flows from Investing Activities: Net increase in loans (262,271) (157,619) (129,899)Purchases of AFS securities (83,527) (62,664) (19,100)Maturities of AFS securities 8,388 6,608 32,486 Proceeds from sale of REO 4,198 — — Purchase of note on REO property (1,285) — — Cash from acquisition — — 34,891 Sale (purchase) of FHLB stock, net (5,640) 1,779 (3,029)Purchase of premises and equipment (169) (1,905) (1,370)Net cash used in investing activities (340,306) (213,801) (86,021)Cash Flows from Financing Activities: Increase in deposits 160,917 152,296 115,988 Net increase in FHLB advances 129,000 34,000 9,000 Term note - borrowings 15,000 7,500 — Term note - payments (2,177) (437) — Proceeds from the sale of stock, net 949 6,322 5,617 Net cash provided by financing activities 303,689 199,681 130,605 Increase (decrease) in cash and cash equivalents (27,262) (6,154) 53,010 Cash and cash equivalents at beginning of year 56,954 63,108 10,098 Cash and cash equivalents at end of year $29,692 $56,954 $63,108 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $4,585 $3,506 $3,032 Income taxes $5,394 $3,490 $2,475 Noncash transactions: Chargeoffs against allowance for loans losses $— $820 $275 Transfer from loans to REO $1,834 $— $225 (See accompanying notes to the consolidated financial statements) 69Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSYears Ended December 31, 2014 and 2013NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBusinessFirst Foundation Inc. (“FFI”) is a financial services holding company whose operations are conducted through its wholly owned subsidiaries: FirstFoundation Advisors (“FFA”) and First Foundation Bank (“FFB” or the “Bank”), and First Foundation Insurance Services (“FFIS”), a wholly ownedsubsidiary of FFB (collectively the “Company”). FFI also has two inactive wholly owned subsidiaries, First Foundation Consulting (“FFC”) and FirstFoundation Advisors, LLC (“FFA LLC”). In addition, FFA has set up a limited liability company, which is not included in these consolidated financialstatements, as a private investment fund to provide an investment vehicle for its clients. The corporate headquarters for all of the companies is located inIrvine, California. The Company has wealth management offices in California in Newport Beach, Palm Desert, Pasadena, El Centro, West Los Angeles andSan Diego and in Las Vegas, Nevada.FFA, established in 1985 and incorporated in the State of California, began operating in 1990 as a fee based registered investment advisor. FFAprovides (i) investment management and financial planning services for high net-worth individuals, retirement plans, charitable institutions and privatefoundations; (ii) provides financial, investment and economic advisory and related services to high net-worth individuals and their families, family-ownedbusinesses, and other related organizations; and (iii) provides support services involving the processing and transmission of financial and economic data forcharitable organizations. At the end of 2014, these services were provided to approximately 1,300 clients, primarily located in Southern California, with anaggregate of $3.2 billion of assets under management.The Bank commenced operations in 2007 and currently operates primarily in Southern California and in Nevada. The Bank offers a wide range ofdeposit instruments including personal and business checking and savings accounts, including interest-bearing negotiable order of withdrawal (“NOW”)accounts, money market accounts, and time certificates of deposit (“CD”) accounts. As a lender, the Bank originates, and retains for its portfolio, loanssecured by real estate and commercial loans. Over 90% of the Bank’s loans are to clients located in California. The Bank also offers a wide range ofspecialized services including trust services, on-line banking, remote deposit capture, merchant credit card services, ATM cards, Visa debit cards, businesssweep accounts, and through FFIS, insurance brokerage services. The Bank has a state non-member bank charter and it is subject to continued examinationby the California Department of Business Oversight and Federal Deposit Insurance Corporation.At December 31, 2014, the Company employed 207.5 full-time equivalent employees.Basis of PresentationThe consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company balances andtransactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with accounting principlesgenerally 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 andrevenues and expenses for the period. Actual results could differ significantly from those estimates.ReclassificationsCertain amounts in the 2013 consolidated financial statements have been reclassified to conform to the 2014 presentation. 70Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 Cash and Cash EquivalentsFor purposes of reporting cash flows, cash and cash equivalents include cash, due from banks, certificates of deposits with maturities of less thanninety days, investment securities with original maturities of less than ninety days, money market mutual funds and Federal funds sold. At times, the Bankmaintains cash at major financial institutions in excess of Federal Deposit Insurance Corporation (“FDIC”) insured limits. However, as the Bank places thesedeposits with major well-capitalized financial institutions and monitors the financial condition of these institutions, management believes the risk of loss tobe minimal. The Bank maintains most of its excess cash at the Federal Reserve Bank, with well-capitalized correspondent banks or with other depositoryinstitutions at amounts less than the FDIC insured limits. At December 31, 2014, included in cash and cash equivalents were $20.7 million in funds held atthe Federal Reserve Bank.Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. TheBank was in compliance with its reserve requirements as of December 31, 2014.Certificates of DepositFrom time to time, the Company may invest funds with other financial institutions through certificates of deposit. Certificates of deposit withmaturities of less than ninety days are included as cash and cash equivalents. Certificates of deposit are carried at cost.Investment SecuritiesInvestment securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums anddiscounts that are recognized in interest income using the interest method over the period to maturity. Investments not classified as trading securities nor asheld-to-maturity securities are classified as available-for-sale securities and recorded at fair value. Unrealized gains or losses on available-for-sale securitiesare excluded from net income and reported as an amount net of taxes as a separate component of other comprehensive income included in shareholders’equity. Premiums or discounts on held-to-maturity and available-for-sale securities are amortized or accreted into income using the interest method.Realized gains or losses on sales of held-to-maturity or available-for-sale securities are recorded using the specific identification method. Declinesin the fair value of individual held-to-maturity and available-for-sale securities below their cost that are considered other-than-temporary impairment(“OTTI”) result in write-downs of the individual securities to their fair value. The credit component of any OTTI related write-downs is charged againstearnings.Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such anevaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition andnear-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security inan unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entiredifference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementionedcriteria, the amount of impairment is split into two components as follows; OTTI related to credit loss, which must be recognized in the income statementand; OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present valueof the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.Loan Origination Fees and CostsNet loan origination fees and direct costs associated with lending are deferred and amortized to interest income as an adjustment to yield over therespective lives of the loans using the interest method. The amortization of deferred fees and costs is discontinued on loans that are placed on nonaccrualstatus. When a loan is paid off, any unamortized net loan origination fees are recognized in interest income. 71Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 Purchased Credit Impaired LoansThe Company may purchase individual loans and groups of loans which have shown evidence of credit deterioration and are considered creditimpaired. Purchased credit impaired loans are recorded at the amount paid and there is no carryover of the seller’s allowance for loan losses.Purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as,credit score, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expectedcash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s orpool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan or pool, expected cashflows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded by an increase in the allowancefor loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.Allowance for Loan LossesThe allowance for loan losses is a valuation allowance for probable incurred credit losses. Provisions for loan losses are charged to operationsbased on management’s evaluation of the estimated losses in its loan portfolio. The major factors considered in evaluating losses are historical charge-offexperience, delinquency rates, local and national economic conditions, the borrower’s ability to repay the loan and timing of repayments, and the value ofany related collateral. Management’s estimate of fair value of the collateral considers current and anticipated future real estate market conditions, therebycausing these estimates to be particularly susceptible to changes that could result in a material adjustment to results of operations in the future. Recovery ofthe carrying value of such loans and related real estate is dependent, to a great extent, on economic, operating and other conditions that may be beyond theBank’s control.The Bank’s primary regulatory agencies periodically review the allowance for loan losses and such agencies may require the Bank to recognizeadditions to the allowance based on information and factors available to them at the time of their examinations. Accordingly, no assurance can be given thatthe Bank will not recognize additional provisions for loan losses with respect to its loan portfolio.The allowance consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired. Loan losses arecharged against the allowance when management believes a loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance.Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should becharged off.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 unableto collect all amounts due according to the contractual terms of the loan agreement. The Bank bases the measurement of loan impairment using either thepresent value of the expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the loan’s collateral properties. Impairmentlosses are included in the allowance for loan losses through a charge to provision for loan losses. Adjustments to impairment losses due to changes in the fairvalue of impaired loans’ collateral properties are included in the provision for loan losses. The Bank’s impaired loans include nonaccrual loans (excludingthose collectively reviewed for impairment), certain restructured loans and certain performing loans less than ninety days delinquent (“other impaired loans”)that the Bank believes will likely not be collected in accordance with contractual terms of the loans. Loans, for which the terms have been modified resultingin a concession, and for which the borrower is experiencing financial difficulties, are generally considered troubled debt restructurings and classified asimpaired.Commercial loans and loans secured by multifamily and commercial real estate are individually evaluated for impairment. If a loan is impaired, aportion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at thefair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer andresidential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. 72Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cashflows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, atthe fair value of the collateral. For troubled debt restructurings that subsequently default, the Bank determines the amount of reserve in accordance with theaccounting policy for the allowance for loan losses.General reserves cover non-impaired loans and are based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative orenvironmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience.Because the Bank is relatively new and has not experienced any meaningful amount of losses in any of its current portfolio segments, the Bank calculates thehistorical loss rates on industry data, specifically loss rates published by the FDIC. Qualitative factors include consideration of the following: changes inlending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability anddepth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changesin the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit and the effect of otherexternal factors such as competition and legal and regulatory requirements.Portfolio segments identified by the Bank include loans secured by residential real estate, including multifamily and single family properties,loans secured by commercial real estate, commercial and industrial loans and consumer loans. Relevant risk characteristics for these portfolio segmentsgenerally include debt service coverage, loan-to-value ratios and financial performance on non-consumer loans and debt-to income, collateral type and loan-to-value ratios for consumer loans.Financial InstrumentsIn the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit,commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or relatedfees are incurred or received.Real Estate OwnedREO represents the collateral acquired through foreclosure in full or partial satisfaction of the related loan. REO is recorded at the fair value lessestimated selling costs at the date of foreclosure. Any write-down at the date of transfer is charged to the allowance for loan losses. The recognition of gains orlosses on sales of REO is dependent upon various factors relating to the nature of the property being sold and the terms of sale. REO values are reviewed onan ongoing basis and any decline in value is recognized as foreclosed asset expense in the current period. The net operating results from these assets areincluded in the current period in noninterest expense as foreclosed asset expense (income).Premises and EquipmentPremises and equipment are stated at cost, less accumulated depreciation and amortization, which is charged to expense on a straight-line basisover the estimated useful lives of 3 to 10 years. Premises under leasehold improvements are amortized on a straight-line basis over the term of the lease or theestimated useful life of the improvements, whichever is shorter. Expenditures for major renewals and betterments of premises and equipment are capitalizedand those for maintenance and repairs are charged to expense as incurred. A valuation allowance is established for any impaired long-lived assets. TheCompany did not have impaired long-lived assets as of December 31, 2014 or 2013.Federal Home Loan Bank StockAs a member of the Federal Home Loan Bank (“FHLB”), the Bank is required to purchase FHLB stock in accordance with its advances, securitiesand deposit agreement. This stock, which is carried at cost, may be redeemed at par value. However, there are substantial restrictions regarding redemptionand the Bank can only receive a full redemption in connection with the Bank surrendering its FHLB membership. At December 31, 2014, the Bank held$12.4 million of FHLB stock. The Company does not believe that this stock is currently impaired and no adjustments to its carrying value have beenrecorded. 73Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 Other Intangible AssetsIntangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Other intangible assetsconsist of core deposit intangible assets arising from whole bank acquisitions and are amortized on an accelerated method over their estimated useful lives,which range from 7 to 10 years.Revenue RecognitionInterest on Loans: Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans isdiscontinued when reasonable doubt exists as to the full, timely collection of interest or principal and, generally, when a loan becomes contractually past duefor ninety days or more with respect to principal or interest. The accrual of interest may be continued on a well-secured loan contractually past due ninetydays 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.When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period income. Interest onsuch loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Accrual of interest is resumedon loans only when, in the judgment of management, the loan is estimated to be fully collectible. The Bank continues to accrue interest on restructured loanssince full payment of principal and interest is expected and such loans are performing or less than ninety days delinquent and, therefore, do not meet thecriteria for nonaccrual status. Restructured loans that have been placed on nonaccrual status are returned to accrual status when the remaining loan balance,net of any charge-offs related to the restructure, is estimated to be fully collectible by management and performing in accordance with the applicable loanterms.Other Fees: Asset management fees are billed on a monthly or quarterly basis based on the amount of assets under management and the applicablecontractual fee percentage. Asset management fees are recognized as revenue in the period in which they are billed and earned. Financial planning fees aredue and billed at the completion of the planning project and are recognized as revenue at that time.Stock-Based CompensationThe Company recognizes the cost of employee services received in exchange for awards of stock options, or other equity instruments, based on thegrant-date fair value of those awards. This cost is recognized over the period, which an employee is required to provide services in exchange for the award,generally the vesting period. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s commonstock at the date of grant is used for stock awards.Marketing CostsThe Company expenses marketing costs, including advertising, in the period incurred.Income TaxesThe Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets andliabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets andliabilities and their respective tax bases. A valuation allowance is established if it is “more likely than not” that all or a portion of the deferred tax asset willnot be realized.The tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likelythan not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.Comprehensive IncomeComprehensive income consists of net income and other comprehensive income. Changes in unrealized gains and losses on available-for-salesecurities and the related tax costs or benefits are the only components of other comprehensive income for the Company. 74Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 Earnings Per Share (“EPS”)Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common sharesoutstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential commonshares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by theCompany relate to outstanding stock options and restricted stock, which are determined using the treasury stock method, and stock to be issued as contingentconsideration related to an acquisition that occurred in 2012.Fair Value MeasurementFair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separatenote. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors,especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.New Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue fromContracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets andDeferred Costs-Contracts with Customers (Subtopic 340-40).” The guidance in this update supersedes the revenue recognition requirements in ASC Topic605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, this update will beeffective for interim and annual periods beginning after December 15, 2016. The Company is currently assessing the impact that this guidance will have onits consolidated financial statements, but does not expect the guidance to have a material impact on the Company’s consolidated financial statements.In January 2014, the FASB issued ASU No. 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40):Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of this guidance is to clarify when anin substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estateproperty collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASUNo. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential realestate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property uponcompletion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan throughcompletion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure ofboth (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loanscollateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASUNo. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected tohave a material impact on the Company’s Consolidated Financial Statements. 75Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 NOTE 2: ACQUISITIONSAugust 15, 2012, the Company acquired all the assets and assumed all the liabilities of Desert Commercial Bank (‘DCB”) in exchange for stockand a minimal amount of cash for fractional shares. The Company issued 815,447 shares of its common stock with an agreed-upon fair value of $15.00 pershare and paid $3,000 in cash. In addition, prior to the acquisition, the Company had acquired shares of DCB at a cost of $241,000. The primary reasons foracquiring DCB were to expand into the Coachella Valley and to grow our banking and investment management businesses within the Coachella Valley. Aspart of this acquisition, the Bank succeeded to DCB’s assets, liabilities and operations. As a result, the Bank acquired branches in Palm Desert and El Centro,California from DCB, and consolidated its existing branch in La Quinta, California into the Palm Desert branch.Pro Forma Information (unaudited)The following table presents unaudited pro forma information as if the DCB acquisition had occurred on January 1, 2012 after giving effect tocertain adjustments. The unaudited pro forma information for the year ended December 31, 2012 includes adjustments for interest income on loans acquired,amortization of intangibles arising from the transaction, adjustments for interest expense on deposits acquired, and the related income tax effects of all theseitems. The net effect of these pro forma adjustments was a $1.1 million decrease in net income for the year ended December 31, 2012. The unaudited proforma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on theassumed date. Pro Forma Summarized Income Statement Data (Unaudited) Pro FormaYear Ended December 31, 2012 (dollars in thousands) Net interest income $31,293Provision for loan losses2,670Noninterest income16,800Noninterest expenses 38,801 Income before taxes6,622Taxes on income1,967 Net income $4,655 Net income per share: Basic $0.65Diluted $0.63The amount of revenues (net interest income and noninterest income) for the period from August 16, 2012 to December 31, 2012 related to theloans, deposits and operations acquired from DCB and included in the results of operations for the year ended December 31, 2012 was approximately $2.3million. The earnings for the period from August 16, 2012 to December 31, 2012 related to the operations acquired from DCB and included in the results ofoperations for the year ended December 31, 2012 was approximately $0.5 million. 76Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 NOTE 3: FAIR VALUEAssets Measured at Fair Value on a Recurring BasisThe 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) December 31, 2014: Investment securities available for sale US Treasury securities $300 $300 $— $— FNMA and FHLB Agency notes 10,277 — 10,277 — Agency mortgage-backed securities 127,693 — 127,693 — Total assets at fair value on a recurring basis $138,270 $300 $137,970 $— December 31, 2013: Investment securities available for sale US Treasury securities $300 $300 $— $— FNMA and FHLB Agency notes 9,780 — 9,780 — Agency mortgage-backed securities 49,031 — 49,031 — Total assets at fair value on a recurring basis $59,111 $300 $58,111 $— Fair Value of Financial InstrumentsWe have elected to use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair valuedisclosures. 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 fairvalue other assets on a nonrecurring basis, such as loans held for investment and certain other assets. These nonrecurring fair value adjustments typicallyinvolve 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 financialinstruments. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based in large part on judgments wemake primarily regarding current economic conditions, risk characteristics of various financial instruments, prepayment rates, and future expected lossexperience. These estimates are subjective in nature and invariably involve some inherent uncertainties. Additionally, unexpected changes in events orcircumstances can occur that could require us to make changes to our assumptions and which, in turn, could significantly affect and require us to makechanges 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 valueof existing and anticipated future customer relationships and the value of assets and liabilities that are not considered financial instruments, such as premisesand 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.Interest-Bearing Deposits with Financial Institutions. The fair values of interest-bearing deposits maturing within ninety days approximate theircarrying values. 77Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 Investment Securities Available for Sale. Investment securities available-for-sale are measured at fair value on a recurring basis. Fair valuemeasurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or othermodel-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and otherfactors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasurysecurities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backedsecurities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as level 3 include asset-backedsecurities in less liquid markets.Federal Home Loan Bank and Federal Reserve Bank Stock. The Bank is a member of the Federal Home Loan Bank (the “FHLB”) and the FederalReserve Bank of San Francisco (the “FRB”). As members, we are required to own stock of the FHLB and the FRB, the amount of which is based primarily onthe level of our borrowings from those institutions. We also have the right to acquire additional shares of stock in either or both of the FHLB and the FRB;however, to date, we have not done so. The fair values of that stock are equal to their respective carrying amounts, are classified as restricted securities and areperiodically evaluated for impairment based on our assessment of the ultimate recoverability of our investments in that stock. Any cash or stock dividendspaid to us on such stock are reported as income.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 thediscounted value of future cash flows expected to be received by the various homogeneous categories of loans. All loans have been adjusted to reflectchanges in credit risk.Impaired Loans. ASC 820-10 applies to loans measured for impairment in accordance with ASC 310-10, “Accounting by Creditors for Impairmentof a Loan”, including impaired loans measured at an observable market price (if available), and at the fair value of the loan’s collateral (if the loan iscollateral dependent) less selling cost. The fair value of an impaired loan is estimated using one of several methods, including collateral value, market valueof similar debt, enterprise value, liquidation value and discounted cash flows. When the fair value of the collateral is based on an observable market price or acurrent appraised value, we measure the impaired loan at nonrecurring Level 2. When an appraised value is not available, or management determines the fairvalue 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 todetermine the fair value, we measure the impaired loan at nonrecurring Level 3.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 thedeposits.Borrowings. The fair value of $263 million in borrowings is the carrying value of overnight FHLB advances that approximate fair value because ofthe short-term maturity of this instrument, resulting in a Level 2 classification. The fair value of term borrowings is derived by calculating the discountedvalue of future cash flows expected to be paid out by the Company. The $19.9 million term loan 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.The following table sets forth the estimated fair values and related carrying amounts of our financial instruments as of: CarryingValue Fair Value Measurement Level (dollars in thousands) 1 2 3 Total December 31, 2014: Assets: Cash and cash equivalents $29,692 $29,692 $— $— $29,692 Securities AFS 138,270 300 137,970 — 138,270 Loans 1,156,242 — — 1,186,408 1,186,408 Investment in FHLB stock 12,361 12,361 — — 12,361 Liabilities: Deposits 962,954 709,604 253,244 — 962,848 Borrowings 282,886 — 263,000 19,886 282,886 78Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 CarryingValue Fair Value Measurement Level (dollars in thousands) 1 2 3 Total December 31, 2013: Assets: Cash and cash equivalents $56,954 $56,954 $— $— $56,954 Securities AFS 59,111 300 58,811 — 59,111 Loans 893,730 — — 933,695 933,695 Investment in FHLB stock 6,721 6,721 — — 6,721 Liabilities: Deposits 802,037 556,171 245,920 — 802,091 Borrowings 141,063 — 134,000 7,063 141,063 NOTE 4: SECURITIESThe following table provides a summary of the Company’s AFS securities portfolio at December 31: AmortizedCost Gross Unrealized EstimatedFair Value (dollars in thousands) Gains Losses 2014: US Treasury securities $300 $— $— $300 FNMA and FHLB Agency notes 10,496 — (219) 10,277 Agency mortgage-backed securities 125,944 1,881 (132) 127,693 Total $136,740 $1,881 $(351) $138,270 2013: US Treasury securities $300 $— $— $300 FNMA and FHLB Agency notes 10,496 — (716) 9,780 Agency mortgage-backed securities 50,983 30 (1,982) 49,031 Total $61,779 $30 $(2,698) $59,111 The US Treasury Securities are pledged as collateral to the State of California to meet regulatory requirements related to the Bank’s trustoperations.The table below indicates, as of December 31, 2014, the gross unrealized losses and fair values of our investments, aggregated by investmentcategory and length of time that the individual securities have been in a continuous unrealized loss position. Securities with Unrealized Loss at December 31, 2014 (dollars in thousands) Less than 12 months 12 months or more Total FairValue UnrealizedLoss FairValue UnrealizedLoss FairValue UnrealizedLoss FNMA and FHLB Agency notes $— $— $10,277 $(219) $10,277 $(219)Agency mortgage backed securities 4,878 (10) 12,789 (122) 17,667 (132)Total temporarily impaired securities $4,878 $(10) $23,066 $(341) $27,944 $(351)Unrealized losses on FNMA and FHLB agency notes and agency mortgage-backed securities have not been recognized into income because theissuer bonds are of high credit quality, management does not intend to sell and it is not more likely than not that management would be required to sell thesecurities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover asthe bonds approach maturity. 79Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 The scheduled maturities of securities AFS, other than agency mortgage backed securities, and the related weighted average yield is as follows asof December 31, 2014: (dollars in thousands) Less than 1 Year 1 Through 5 years 5 Through 10 Years After10 Years Total Amortized Cost: US Treasury securities $— $300 $— $— $300 FNMA and FHLB Agency notes — — 10,496 — 10,496 Total $— $300 $10,496 $— $10,796 Weighted average yield 0.00% 0.45% 1.78% 0.00% 1.74%Estimated Fair Value: US Treasury securities $— $300 $— $— $300 FNMA and FHLB Agency notes — — 10,277 — 10,277 Total $— $300 $10,277 $— $10,577 Agency mortgage backed securities are excluded from the above table because such securities are not due at a single maturity date. The weightedaverage yield of the agency mortgage backed securities as of December 31, 2014 was 2.48%. NOTE 5: LOANSThe following is a summary of our loans as of December 31: (dollars in thousands) 2014 2013 Recorded investment balance: Loans secured by real estate: Residential properties: Multifamily $481,491 $405,984 Single family 360,644 227,096 Total real estate loans secured by residential properties 842,135 633,080 Commercial properties 205,320 154,982 Land 4,309 3,794 Total real estate loans 1,051,764 791,856 Commercial and industrial loans 93,537 93,255 Consumer loans 21,125 18,484 Total loans 1,166,426 903,595 Deferred fees and expenses (34) 50 Total $1,166,392 $903,645 As of December 31, 2014 and 2013, the principal balances shown above are net of unaccreted discount related to loans acquired in an acquisitionof $0.8 million and $3.1 million, respectively. 80Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 In 2012, the Company purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it wasprobable, at acquisition, that all contractually required payments would not be collected. The carrying amount of these purchased credit impaired loans is asfollows at December 31: (dollars in thousands) 2014 2013 Outstanding principal balance: Loans secured by real estate: Commercial properties $206 $5,543 Land — 2,331 Total real estate loans 206 7,874 Commercial and industrial loans 2,002 2,489 Consumer loans 249 260 Total loans 2,457 10,623 Unaccreted discount on purchased credit impaired loans (651) (2,945)Total $1,806 $7,678 Accretable yield, or income expected to be collected on purchased credit impaired loans, is as follows at December 31: (dollars in thousands) 2014 2013 Beginning balance $2,349 $1,531 New loans purchased — — Accretion of income (1,076) (730)Reclassifications from nonaccretable difference (391) 1,879 Disposals (752) (331)Ending balance $130 $2,349 During 2013, the unaccreted discount related to certain purchased credit impaired loans was increased by $72,000, and recorded as a charge to theALLL to account for changes in the projected cash flows of these loans.The following table summarizes our delinquent and nonaccrual loans as of December 31: Past Due and Still Accruing Total PastDue andNonaccrual (dollars in thousands) 30–59 Days 60-89 Days 90 Daysor More Nonaccrual Current Total 2014: Real estate loans: Residential properties $— $— $— $— $— $842,135 $842,135 Commercial properties — 805 200 596 1,601 203,719 205,320 Land — — 651 — 651 3,658 4,309 Commercial and industrial loans 2,092 289 700 342 3,423 90,114 93,537 Consumer loans — — 637 163 800 20,325 21,125 Total $2,092 $1,094 $2,188 $1,101 $6,475 $1,159,951 $1,166,426 Percentage of total loans 0.18% 0.09% 0.19% 0.09% 0.56% 2013: Real estate loans: Residential properties $— $— $— $1,820 $1,820 $631,260 $633,080 Commercial properties — — 417 598 1,015 153,967 154,982 Land — — 1,480 — 1,480 2,314 3,794 Commercial and industrial loans — 2,744 1,315 344 4,403 88,852 93,255 Consumer loans — — — 132 132 18,352 18,484 Total $— $2,744 $3,212 $2,894 $8,850 $894,745 $903,595 Percentage of total loans 0.00% 0.30% 0.36% 0.32% 0.98% 81Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 The level of delinquent loans and nonaccrual loans have been adversely impacted by the loans acquired in an acquisition. As of December 31,2014, of the $3.3 million in loans over 90 days past due, including loans on nonaccrual, $1.8 million, or 54% were loans acquired in an acquisition.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 ninety days or more with respect to principal or interest. The accrual of interest may be continued on a well-secured loan contractually past due ninety days or more with respect to principal or interest if the loan is in the process of collection or collection of theprincipal and interest is deemed probable. The Bank considers a loan to be impaired when, based upon current information and events, it believes it isprobable 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.As of December 31, 2014, the Company had two loans with a balance of $0.5 million classified as troubled debt restructurings (“TDR”) which areincluded as nonaccrual in the table above. Both loans were classified as a TDR as a result of a reduction in required principal payments and an extension ofthe maturity date of the loans. As of December 31, 2013, the Company had one loan with a balance of $0.1 million classified as a troubled debt restructurings(“TDR”) which is included as nonaccrual in the table above. This loan was classified as a TDR as a result of a reduction in required principal payments and anextension of the maturity date of the loan. NOTE 6: ALLOWANCE FOR LOAN LOSSESThe following is a rollforward of the Bank’s allowance for loan losses for the years ended December 31: (dollars in thousands) BeginningBalance Provision forLoan Losses Charge-offs Recoveries EndingBalance 2014: Real estate loans: Residential properties $6,157 $429 $— $— $6,586 Commercial properties 1,440 86 — — 1,526 Commercial and industrial loans 2,149 (252) — — 1,897 Consumer loans 169 (28) — — 141 Total $9,915 $235 $— $— $10,150 2013: Real estate loans: Residential properties $4,355 $1,802 $— $— $6,157 Commercial properties 936 561 (57) — 1,440 Commercial and industrial loans 2,841 71 (763) — 2,149 Consumer loans 208 (39) — — 169 Total $8,340 $2,395 $(820) $— $9,915 2012: Real estate loans: Residential properties $3,984 $646 $(275) $— $4,355 Commercial properties 1,218 (282) — — 936 Commercial and industrial loans 1,104 1,737 — — 2,841 Consumer loans 244 (36) — — 208 Total $6,550 $2,065 $(275) $— $8,340 82Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 The following table presents the balance in the allowance for loan losses and the recorded investment in loans by impairment method as ofDecember 31: (dollars in thousands) Allowance for Loan Losses UnaccretedCreditComponentOther Loans Evaluated for Impairment PurchasedImpaired Total Individually Collectively 2014: Allowance for loan losses: Real estate loans: Residential properties $— $6,586 $— $6,586 $26 Commercial properties 26 1,500 — 1,526 193 Land — — — — 4 Commercial and industrial loans 686 1,211 — 1,897 45 Consumer loans — 141 — 141 — Total $712 $9,438 $— $10,150 $268 Loans: Real estate loans: Residential properties $43 $842,092 $— $842,135 $2,861 Commercial properties 5,742 199,378 200 205,320 21,126 Land — 4,309 — 4,309 1,099 Commercial and industrial loans 5,635 86,343 1,559 93,537 5,893 Consumer loans 116 20,962 47 21,125 8 Total $11,536 $1,153,084 $1,806 $1,166,426 $30,987 2013: Allowance for loan losses: Real estate loans: Residential properties $— $6,157 $— $6,157 $36 Commercial properties 190 1,250 — 1,440 290 Land — — — — 26 Commercial and industrial loans 925 1,224 — 2,149 126 Consumer loans — 169 — 169 11 Total $1,115 $8,800 $— $9,915 $489 Loans: Real estate loans: Residential properties $2,248 $630,832 $— $633,080 $3,449 Commercial properties 821 150,053 4,108 154,982 23,968 Land — 2,314 1,480 3,794 1,939 Commercial and industrial loans 2,999 88,209 2,047 93,255 10,354 Consumer loans — 18,441 43 18,484 160 Total $6,068 $889,849 $7,678 $903,595 $39,870 The column labeled “Unaccreted Credit Component Other Loans” represents the amount of unaccreted credit component discount for the otherloans acquired in the Merger, and the stated principal balance of the related loans. The discount is equal to 0.86% and 1.23% of the stated principal balanceof these loans as of December 31, 2014 and 2013, respectively. In addition to this unaccreted credit component discount, an additional $0.3 million and $0.2million of the ALLL was provided for these loans as of December 31, 2014 and 2013, respectively. 83Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as currentfinancial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Bankanalyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as loans securedby 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 thecollateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterizedby 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 allamounts due according to the contractual terms of the loan agreement.Additionally, all loans classified as troubled debt restructurings (“TDRs”) are considered impaired. Purchased credit impaired loans are notconsidered 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 notassessed 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 December 31: (dollars in thousands) Pass SpecialMention Substandard Impaired Total 2014: Real estate loans: Residential properties $841,538 $554 $— $43 $842,135 Commercial properties 198,112 1,266 200 5,742 205,320 Land 4,309 — — — 4,309 Commercial and industrial loans 81,067 5,276 1,559 5,635 93,537 Consumer loans 20,962 — 47 116 21,125 Total $1,145,988 $7,096 $1,806 $11,536 $1,166,426 2013: Real estate loans: Residential properties $630,832 $— $— $2,248 $633,080 Commercial properties 150,053 — 4,108 821 154,982 Land 2,314 — 1,480 — 3,794 Commercial and industrial loans 88,166 43 2,047 2,999 93,255 Consumer loans 18,309 — 175 — 18,484 Total $889,674 $43 $7,810 $6,068 $903,595 84Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 Impaired loans evaluated individually and any related allowance is as follows as of December 31: With No Allowance Recorded With an Allowance Recorded (dollars in thousands) UnpaidPrincipalBalance RecordedInvestment UnpaidPrincipalBalance RecordedInvestment RelatedAllowance 2014: Real estate loans: Residential properties $43 $43 $— $— $— Commercial properties 5,568 5,568 174 174 26 Commercial and industrial loans 2,094 2,094 3,541 3,451 686 Consumer loans 116 116 — — — Total $7,821 $7,821 $3,715 $3,715 $712 2013: Real estate loans: Residential properties $2,248 $2,248 $— $— $— Commercial properties 223 223 598 598 190 Commercial and industrial loans — — 2,999 2,999 925 Consumer loans — — — — — Total $2,471 $2,471 $3,597 $3,597 $1,115 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 years ending December 31: 2014 2013 2012 (dollars in thousands) AverageRecordedInvestment InterestIncome after Impairment AverageRecordedInvestment InterestIncome after Impairment AverageRecordedInvestment InterestIncome after Impairment Real estate loans: Residential properties $3,000 $25 $2,250 $32 $2,023 $98 Commercial properties 3,217 140 323 22 — — Commercial and industrial loans 1,196 241 2,690 168 45 — Consumer loans 126 — — — 225 14 Total $7,539 $406 $5,263 $222 $2,293 $112 There was no interest income recognized on a cash basis in either 2014 or 2013 on impaired loans. NOTE 7: PREMISES AND EQUIPMENTA summary of premises and equipment is as follows at December 31: (dollars in thousands) 2014 2013 Leasehold improvements and artwork $1,202 $1,339 Information technology equipment 3,073 3,131 Furniture and fixtures 1,969 1,638 Total 6,244 6,108 Accumulated depreciation and amortization (4,057) (2,859)Net $2,187 $3,249 85Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 NOTE 8: REAL ESTATE OWNEDThe activity in our portfolio of REO is as follows during the periods ending December 31: (dollars in thousands) 2014 2013 Beginning balance $375 $650 Loans transferred to REO 1,834 — Purchase of note on REO property 1,285 — REO chargeoffs — (275)Dispositions of REO (3,160) — Ending balance $334 $375 NOTE 9: DEPOSITSThe following table summarizes the outstanding balance of deposits and average rates paid thereon at December 31: 2014 2013 (dollars in thousands) Amount WeightedAverage Rate Amount WeightedAverage Rate Demand deposits: Noninterest-bearing $246,137 — $217,782 — Interest-bearing 291,509 0.502% 217,129 0.504%Money market and savings 171,958 0.626% 121,260 0.499%Certificates of deposits 253,350 0.619% 245,866 0.606%Total $962,954 0.427% $802,037 0.398%At December 31, 2014, of the $117.0 million of certificates of deposits of $250,000 or more, $96.9 million mature within one year and $20.1million mature after one year. Of the $136.4 million of certificates of deposit of less than $250,000, $127.1 million mature within one year and $9.3 millionmature after one year. At December 31, 2013, of the $93.8 million of certificates of deposits of $250,000 or more, $84.9 million mature within one year and$8.9 million mature after one year. Of the $152.1 million of certificates of deposit of less than $250,000, $136.5 million mature within one year and $15.6million mature after one year. NOTE 10: BORROWINGSBorrowings: At December 31, 2014, our borrowings consisted of $263.0 million of overnight FHLB advances and a $19.9 million term loanpayable by FFI. As described below, our outstanding borrowings under the term loan were increased to $30.0 million effective February 27, 2015. AtDecember 31, 2013, our borrowings consisted of $134.0 million of overnight FHLB advances and a $7.1 million note payable by FFI. These FHLB advanceswere paid in full in the early part of January 2015 and 2014, respectively, and bore interest rates of 0.27% and 0.06%, respectively. Because the Bank utilizesovernight borrowings, the balance of outstanding borrowings fluctuates on a daily basis.FHLB advances are collateralized by loans secured by multifamily and commercial real estate properties with a carrying value of $708.8 million asof December 31, 2014. As a matter of practice, the Bank provides substantially all of its qualifying loans as collateral to the FHLB. The Bank’s totalborrowing capacity from the FHLB at December 31, 2014 was $593.5 million. In addition to the $263.0 million borrowing, the Bank had in place $68.5million of letters of credit from the FHLB which are used to meet collateral requirements for borrowings from the State of California and local agencies. 86Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 The Bank also has a $10.0 million available unsecured fed funds line with Pacific Coast Banker’s Bank, a $2.0 million available unsecured fedfunds line with Wells Fargo Bank, and a $15.0 million available unsecured fed funds line at Zions Bank. None of these lines had outstanding borrowings asof December 31, 2014. Combined, the Bank’s unused lines of credit as of December 31, 2014 were $289.0 million. The average daily balance of borrowingsoutstanding during 2014 and 2013 was $192.8 million and $84.4 million, respectively.In the second quarter of 2013 FFI entered into a term loan agreement to borrow $7.5 million. In the first quarter of 2014, FFI entered into anamendment to this loan agreement pursuant to which we obtained an additional $15.0 million of borrowings. In February, 2015 FFI entered into a secondamendment to this loan agreement pursuant to which we obtained an additional $10.3 million of borrowings, increasing our total borrowing under this loanto $30.0 million as of February 28, 2015. In addition, the maturity date was extended to May 2022 and the interest rate on the loan was reduced from ninetyday LIBOR plus 4.00% to ninety day LIBOR plus 3.75%. These amendments did not alter any other terms of the Loan Agreement or the loan, other than theincreases in the principal amount of the loan and a corresponding increase in the amount of the monthly installments of principal and interest payable on theloan. The amended loan agreement requires us to make monthly payments of principal of $0.25 million plus interest, with a final payment of the unpaidprincipal balance, in the amount of $8.75 million, plus accrued but unpaid interest, at the maturity date of the loan in May 2022. We have the right, in ourdiscretion, to prepay the loan at any time in whole or, from time to time, in part, without any penalties or premium. As security for our repayment of the loan,we pledged all of the common stock of the Bank to the lender. We are required to meet certain financial covenants during the term of the loan, includinglimits on classified assets and nonperforming assets, the maintenance of required leverage ratios, fixed charge coverage ratios and capital ratios and themaintenance of required liquidity levels at FFI. As of December 31, 2014, the Company was in compliance with all of these covenants. The term loan noteagreement also contains restrictions against disposal of assets, incurrence of debt and the payment of dividends without the prior written consent of thelender. The scheduled payments of principal for the next five years under this amended term loan were as follows as of December 31, 2014: (dollars in thousands) Year Ending December 31, 2015 $2,449 2016 3,000 2017 3,000 2018 3,000 2019 3,000 NOTE 11: SHAREHOLDERS’ EQUITYIn August 2012, the Company acquired all of the assets and assumed all of the liabilities of Desert Commercial Bank. The merger agreement forthis acquisition included a contingent payout based on the performance of certain assets over a two year period. The Company has determined that theamount of the contingent payout to be $1.0 million, of which $0.9 million is to be paid out in common stock of FFI using an assumed value of $15.00 pershare and $0.1 million is to be paid out in cash. As of December 31, 2014, the Company had issued 23,580 shares of FFI common stock as part of this payoutand anticipates issuing up to an additional 32,004 shares. The potential issuance of 32,004 shares of FFI common stock has been included as dilutive sharesfor purposes of computing our earnings per share.During the first four months of 2013 FFI sold 38,734 shares of its common stock under a supplemental private placement in exchange for $0.6million. In December of 2013 FFI sold an additional 318,987 shares of its common stock under a supplemental private placement in exchange for $5.7million. As part of the acquisition of DCB in 2012, the Company issued 815,447 shares of its common stock to the shareholders of DCB. During 2012,374,438 shares of common stock were sold by FFI under a supplemental private placement in exchange for $5.6 million.FFI is a holding company and does not have any direct operating activities. Any future cash flow needs of FFI are expected to be met by itsexisting cash and cash equivalents and dividends from its subsidiaries. The Bank is subject to various laws and regulations that limit the amount of dividendsthat a bank can pay without obtaining prior approval from bank regulators. As of December 31, 2014, FFI’s cash and cash equivalents totaled $5.7 million. 87Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 NOTE 12: EARNINGS PER SHAREThe following table sets forth the Company’s earnings per share calculations for the years ended December 31: 2014 2013 2012 (dollars in thousands, except per shareamounts) Basic Diluted Basic Diluted Basic Diluted Net income $8,394 $8,394 $7,851 $7,851 $5,801 $5,801 Basic common shares outstanding 7,737,036 7,737,036 7,424,210 7,424,210 6,603,533 6,603,533 Effect of options, restricted stock and contingent sharesissuable 429,307 318,005 228,422 Diluted common shares outstanding 8,166,343 7,742,215 6,831,955 Earnings per share $1.08 $1.03 $1.06 $1.01 $0.88 $0.85 Based on a weighted average basis, options to purchase 66,324, 154,814, and 582,472 shares of common stock were excluded for 2014, 2013, and2012 respectively, because their effect would have been anti-dilutive. NOTE 13: STOCK BASED COMPENSATIONIn 2007, the Board of Directors of FFI approved two stock option plans (“the Plans”) that provide for future grants of options to employees anddirectors of the Company for the purchase of up to 1,300,282 shares of the FFI’s common stock. In 2010, the Shareholders approved an increase of 580,000 inthe number of shares available for issuance under one of these plans. The options, when granted, have an exercise price not less than the current market valueof the common stock and expire after ten years if not exercised. If applicable, vesting periods are set at the date of grant and the Plans provide for acceleratedvesting should a change in control occur. The Company recognized stock-based compensation expense of $0.5 million, $0.6 million, and $0.7 million in2014, 2013, and 2012, respectively. Included in the 2012 amount is $0.1 million of expense related to restricted stock grants. The fair value of the each option granted in 2014, 2013 and 2012 was estimated on the date of the grant using the Black-Scholes option pricingmodel with the following assumptions: Expected Volatility 20%Expected Term 6.5 years Expected Dividends None Weighted Average Risk Free Rate: 2014 grants 2.269%2013 grants 1.181%2012 grants 1.089%Weighted-Average Grant Fair Value: 2014 grants $4.77 2013 grants 3.79 2012 grants 3.46 Since the Company has limited historical stock activity, the expected volatility is based on the historical volatility of similar companies that havea longer trading history. The expected term represents the estimated average period of time that the options remain outstanding. Since the Company does nothave sufficient historical data on the exercise of stock options, the expected term is based on the “simplified” method that measures the expected term as theaverage of the vesting period and the contractual term. The risk free rate of return reflects the grant date interest rate offered for zero coupon U.S. Treasurybonds over the expected term of the options. 88Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 The following table summarizes the activities in the Plans during 2014: (dollars in thousands exceptper share amounts) Options Granted Weighted AverageExercise Price perShare Weighted AverageRemainingContractual Term AggregateIntrinsic Value Balance: December 31, 2013 1,430,967 $12.37 Options granted 71,735 18.08 Options exercised (84,866) 11.19 Options forfeited (32,668) 15.28 Balance: December 31, 2014 1,384,808 12.67 4.50 Years $7,378 Options exercisable 1,279,091 $12.32 4.15 Years $7,272 As of December 31, 2014, The Company had $0.4 million of unrecognized compensation costs related to outstanding stock options which will berecognized through August 2017, subject to the vesting requirements for these stock options. The intrinsic value of stock options exercised in 2014 was $0.6million.The following table summarizes the activities in the Plans during 2013: (dollars in thousands exceptper share amounts) Options Granted Weighted AverageExercise Price perShare Weighted AverageRemainingContractual Term AggregateIntrinsic Value Balance: December 31, 2012 1,423,965 $12.36 Options granted 26,000 15.58 Options exercised — — Options forfeited (18,998) 15.53 Balance: December 31, 2013 1,430,967 12.37 5.25 Years $8,051 Options exercisable 1,249,960 $11.98 4.83 Years $7,527 The following table summarizes the activities in the Plans during 2012: (dollars in thousands exceptper share amounts) Options Granted Weighted AverageExercise Price perShare Weighted AverageRemainingContractual Term AggregateIntrinsic Value Balance: December 31, 2011 1,364,467 $12.23 Options granted 70,000 15.00 Options exercised — — Options forfeited (10,502) 13.57 Balance: December 31, 2012 1,423,965 12.36 6.21 Years $3,845 Options exercisable 1,102,072 $11.55 5.44 Years $3,845 In 2011, the Company entered into agreements with five of its independent directors which provided for the issuance of 3,000 shares of restrictedcommon stock of FFI to each of these directors. For each director, 1,000 shares vested in 2011 and the remaining shares vested over a two year period subjectto continued service as a director. In 2013, the Company entered into an agreement with an officer which provided for the issuance of 6,666 shares ofrestricted common stock of FFI, in 2011, the Company entered into an agreement with an officer which provided for the issuance of 3,000 shares of restrictedcommon stock of FFI and in 2010, the Company entered into an agreement with an officer which provided for the issuance of 11,000 shares of restrictedcommon stock of FFI. These shares vest over a three year period subject to continued employment. 89Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 The following table provides a summary of the non-vested restricted stock grants issued by the Company under the Plans for the periods endedDecember 31: 2014 2013 Shares WeightedAverage GrantDate Fair Value Shares WeightedAverage GrantDate Fair Value Balance: January 1 7,666 $17.61 10,667 $15.00 New stock grants — — 6,666 18.00 Shares vested and issued (3,222) 17.07 (9,667) 15.00 Shares forfeited — — — — Balance December 31 4,444 18.00 7,666 17.61 The fair value of the shares vested and issued was $0.1 million and $0.2 million in 2014 and 2013, respectively. NOTE 14: 401(k) PROFIT SHARING PLANThe Company’s employees participate in the Company’s 401(k) profit sharing plan (the “401k Plan”) that covers all employees eighteen years ofage or older who have completed three months of employment. Each employee eligible to participate in the 401k Plan may contribute up to 100% of his orher compensation, subject to certain statutory limitations. In 2014, 2013 and 2012, the Company matched 50% of the participant’s contribution up to 5% ofemployee compensation, which is subject to the plan’s vesting schedule. The Company contributions of $0.5 million, $0.4 million and $0.3 million wereincluded in Compensation and Benefits for 2014, 2013 and 2012, respectively. The Company may also make an additional profit sharing contribution onbehalf of eligible employees. No profit sharing contributions were made in 2014, 2013 or 2012. NOTE 15: INCOME TAXESThe Company is subject to federal income tax and California franchise tax. Income tax expense (benefit) was as follows for the years endedDecember 31: (dollars in thousands) 2014 2013 2012 Current expense: Federal $4,485 $2,505 $3,302 State 1,366 392 756 Deferred expense (benefit): Federal 263 992 (554)State 313 354 (210)Benefit of net operating loss carryforwards — (172) (282)Change in valuation allowance — (2,441) (1,005)Total $6,427 $1,630 $2,007 90Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 The following is a comparison of the federal statutory income tax rates to the Company’s effective income tax rate for the years endedDecember 31: 2014 2013 2012 (dollars in thousands) Amount Rate Amount Rate Amount Rate Income before taxes $14,821 $9,481 $7,808 Federal tax statutory rate $5,070 34.20% $3,224 34.00% 2,655 34.00%State tax, net of Federal benefit 1,009 6.81% 664 7.00% 526 6.73%Change in valuation allowance — 0% (2,441) (25.74)% (1,005) (12.87)%DCB Asset Pool payout 154 1.04% — 0% — 0%Other items, net 194 1.31% 183 1.93% (169) (2.16)%Effective tax rate $6,427 43.36% $1,630 17.19% $2,007 25.70%Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income taxrecognition. The following is a summary of the components of the net deferred tax assets recognized in the accompanying consolidated balance sheets atDecember 31: (dollars in thousands) 2014 2013 Deferred tax assets (liabilities) Allowance for loan and REO losses $4,024 $4,197 Operating loss carryforwards 2,972 2,948 Market valuation: Acquired loans and REO 880 1,799 Stock-based compensation 1,396 1,402 Accumulated other comprehensive income (630) 1,098 Organizational expenses 321 367 Depreciation (435) (713)Prepaid expenses (489) (329)Other 1,709 1,283 Net deferred tax assets $9,748 $12,052 As part of the merger with DCB, the Company acquired operating loss carryforwards of approximately $13.4 million. These operating losscarryforwards are subject to limitation under Section 382 of the Internal Revenue Service Code and expire in 2032. As a result, the Company will only beable to utilize operating loss carryforwards of $8.2 million, ratably over a period of 20 years. Due to the uncertainty in realizing future earnings over anextended period of 20 years, at December 31, 2012, a valuation allowance of $2.6 million was established against the operating loss carryforward benefits notrealizable until after 12/31/15. At December 31, 2013, based on our continued strong earnings results and updated projections of earnings in future years, thevaluation allowance was eliminated.The Company has no other operating loss carryforwards. The Company is subject to federal income tax and franchise tax of the state of California.Income tax returns for the periods 2011 through 2014 are open to audit by federal authorities and for the periods 2012 through 2014 by California stateauthorities. 91Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 NOTE 16: COMMITMENTS AND CONTINGENCIESLeasesThe Company leases certain facilities for its corporate offices and branch operations under non-cancelable operating leases that expire through2020. Lease expense for 2014, 2013, and 2012 was $3.1 million, $2.7 million, and $1.8 million, respectively. Future minimum lease commitments under allnon-cancelable operating leases at December 31, 2014 are as follows: (dollars in thousands) Year Ending December 31, 2015 $2,896 2016 2,709 2017 2,630 2018 2,338 2019 and after 1,344 Total $11,917 Financial Instruments with Off-Balance Sheet RiskIn the normal course of business, the Bank is a party to financial instruments with off-balance sheet risk to meet the financing needs of customersand to reduce exposure to fluctuations in interest rates. These financial instruments may include commitments to extend credit and standby and commercialletters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in thecontract. Standby and commercial letters of credit and financial guarantees are conditional commitments issued by the Bank to guaranty the performance of acustomer to a third party. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The followingtable provides the off-balance sheet arrangements of the Bank as of December 31: (dollars in thousands) 2014 2013 Commitments to fund new loans $18,217 $3,580 Commitments to fund under existing loans, lines of credit 104,881 88,292 Commitments under standby letters of credit 5,402 1,527 Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily representfuture cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank uponextension of credit, is based on management’s credit evaluation of the counter-party. Collateral held varies but may include deposits, marketable securities,accounts receivable, inventory, property, plant and equipment, motor vehicles and real estate.LitigationFrom time to time, the Company may become party to various lawsuits, which have arisen in the course of business. While it is not possible topredict with certainty the outcome of such litigation, it is the opinion of management, based in part upon opinions of counsel, that the liability, if any, arisingfrom such lawsuits would not have a material adverse effect on the Company’s financial position or results of operations. 92Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 NOTE 17: RELATED-PARTY TRANSACTIONSLoans to related parties, including directors and executive officers of the Company and their affiliates, were as follows for the periods presented: (dollars in thousands) 2014 Balance, January 1 $1,776 New loans and advances — Principal payments received (1,322)Balance, December 31 $454 Interest earned from loans to related parties was $0.1 million in each of 2014, 2013 and 2012.The Bank held $6.1 million and $2.1 million of deposits from related parties, including directors and executive officers of the Company and theiraffiliates, as of December 31, 2014 and December 31, 2013, respectively. Interest paid on deposit accounts held by related parties was $9,000 in 2014,$5,000 in 2013 and 7,000 in 2012.During 2014 and 2013, an entity in which one of the directors of the Company had an ownership interest, provided insurance brokerage services to theCompany. Broker fees earned by this entity for the services it provided to the Company were $0.2 million in 2014 and $0.1 million in each of 2013 and2012. NOTE 18: REGULATORY MATTERSFFI and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimumcapital requirements can initiate certain mandatory, and possible additional discretionary, actions by regulators that, if undertaken, could have a directmaterial effect on FFI and the Bank’s financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, theCompany and the Bank must meet specific capital guidelines that involve quantitative measures of FFI and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. FFI’s and the Bank’s capital amounts and classification are also subject toqualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by the regulators to ensurecapital adequacy require FFI and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in theregulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to assets (as defined). Management believes, as of December 31, 2014 thatFFI and the Bank met all capital adequacy requirements. 93Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 The following table presents the regulatory standards for well-capitalized institutions and the capital ratios for FFI and the Bank as of: Actual For CapitalAdequacy Purposes To Be Well-CapitalizedUnder Prompt CorrectiveAction Provisions (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio FFI December 31, 2014 Tier 1 leverage ratio $95,582 7.32% $52,200 4.00% Tier 1 risk-based capital ratio 95,582 11.01% 34,711 4.00% Total risk-based capital ratio 106,426 12.26% 69,423 8.00% December 31, 2013 Tier 1 leverage ratio $85,268 8.67% $39,321 4.00% Tier 1 risk-based capital ratio 85,268 13.04% 26,150 4.00% Total risk-based capital ratio 93,465 14.30% 52,300 8.00% BANK December 31, 2014 Tier 1 leverage ratio $105,261 8.09% $52,036 4.00% $65,045 5.00%Tier 1 risk-based capital ratio 105,261 12.18% 34,572 4.00% 51,858 6.00%Total risk-based capital ratio 115,811 13.40% 69,144 8.00% 86,430 10.00%December 31, 2013 Tier 1 (core) capital ratio $84,243 8.61% $39,115 4.00% $48,894 5.00%Tier 1 risk-based capital ratio 84,243 12.95% 26,017 4.00% 39,025 6.00%Total risk-based capital ratio 92,399 14.21% 52,034 8.00% 65,042 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 applicableto it and FFB (on a stand-alone basis) qualified as a well-capitalized depository institution under the capital adequacy guidelines. NOTE 19: OTHER EXPENSESThe following items are included in the consolidated income statements as professional services and marketing costs and other expenses for theyears ended December 31: (dollars in thousands) 2014 2013 2012 Regulatory assessments $788 $650 $694 Directors’ compensation expenses 522 604 600 Contingent payout related to DCB acquisition 960 — — Costs related to cancelled initial public offering 1,000 — — 94Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 NOTE 20: SEGMENT REPORTINGIn 2014, 2013, and 2012 the Company had two reportable business segments: Banking (FFB) and Wealth Management (FFA). The results of FFIand any elimination entries are included in the column labeled Other. The reportable segments are determined by products and services offered and thecorporate structure. Business segment earnings before taxes are the primary measure of the segment's performance as evaluated by management. Businesssegment earnings before taxes include direct revenue and expenses of the segment as well as corporate and inter-company cost allocations. Allocations ofcorporate expenses, such as finance and accounting, data processing and human resources, are calculated based on estimated activity or usage levels. Themanagement accounting process measures the performance of the operating segments based on the Company's management structure and is not necessarilycomparable with similar information for other financial services companies. If the management structures and/or the allocation process changes, allocations,transfers and assignments may change. The following tables show key operating results for each of our business segments used to arrive at our consolidatedtotals for the years ended December 31: (dollars in thousands) Banking WealthManagement Other Total 2014: Interest income $47,398 $— $— $47,398 Interest expense 3,844 — 740 4,584 Net interest income 43,554 — (740) 42,814 Provision for loan losses 235 — — 235 Noninterest income 5,866 19,422 (539) 24,749 Noninterest expense 30,509 17,979 4,019 52,507 Income (loss) before taxes on income $18,676 $1,443 $(5,298) $14,821 2013: Interest income $39,181 $— $— $39,181 Interest expense 3,288 — 219 3,507 Net interest income 35,893 — (219) 35,674 Provision for loan losses 2,395 — — 2,395 Noninterest income 3,514 16,715 (405) 19,824 Noninterest expense 24,302 17,400 1,920 43,622 Income (loss) before taxes on income $12,710 $(685) $(2,544) $9,481 2012: Interest income $30,874 $— $— $30,874 Interest expense 3,145 — — 3,145 Net interest income 27,729 — — 27,729 Provision for loan losses 2,065 — — 2,065 Noninterest income 2,599 14,250 (229) 16,620 Noninterest expense 18,280 14,896 1,300 34,476 Income (loss) before taxes on income $9,983 $(646) $(1,529) $7,808 95Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 The following tables show the financial position for each of our business segments, and of FFI which is included in the column labeled Other, andthe eliminating entries used to arrive at our consolidated totals at December 31: (dollars in thousands) Banking WealthManagement Other Eliminations Total 2014: Cash and cash equivalents $29,585 $3,750 $5,722 $(9,365) $29,692 Securities AFS 138,270 — — — 138,270 Loans, net 1,156,021 221 — — 1,156,242 Premises and equipment 1,539 548 100 — 2,187 FHLB Stock 12,361 — — — 12,361 Deferred taxes 9,196 601 (49) — 9,748 REO 334 — — — 334 Other assets 4,827 500 113,499 (112,236) 6,590 Total assets $1,352,133 $5,620 $119,272 $(121,601) $1,355,424 Deposits $972,319 $— $— $(9,365) $962,954 Borrowings 263,000 — 19,886 — 282,886 Intercompany balances 1,287 73 (1,360) — — Other liabilities 6,352 2,486 1,250 — 10,088 Shareholders’ equity 109,175 3,061 99,496 (112,236) 99,496 Total liabilities and equity $1,352,133 $5,620 $119,272 $(121,601) $1,355,424 2013: Cash and cash equivalents $56,795 $2,134 $5,294 $(7,269) $56,954 Securities AFS 59,111 — — — 59,111 Loans, net 893,364 366 — — 893,730 Premises and equipment 2,286 863 100 — 3,249 FHLB Stock 6,721 — — — 6,721 Deferred taxes 11,426 865 (239) — 12,052 REO 375 — — — 375 Other assets 3,840 717 88,455 (87,844) 5,168 Total assets $1,033,918 $4,945 $93,610 $(95,113) $1,037,360 Deposits $809,306 $— $— $(7,269) $802,037 Borrowings 134,000 — 7,063 — 141,063 Intercompany balances 857 248 (1,105) — — Other liabilities 4,018 2,590 890 — 7,498 Shareholders’ equity 85,737 2,107 86,762 (87,844) 86,762 Total liabilities and equity $1,033,918 $4,945 $93,610 $(95,113) $1,037,360 96Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 NOTE 21: QUARTERLY FINANCIAL INFORMATION (Unaudited) (dollars in thousands,except per share amounts) FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Full Year Year Ended December 31, 2014: Interest income $10,675 $10,931 $12,384 $13,408 $47,398 Interest expense 925 1,115 1,237 1,307 4,584 Net interest income 9,750 9,816 11,147 12,101 42,814 Provision for loan losses 235 — — — 235 Noninterest income 5,551 6,416 6,737 6,045 24,749 Noninterest expense 12,546 13,871 13,095 12,995 52,507 Income before taxes on income 2,520 2,361 4,789 5,151 14,821 Taxes on income 1,058 1,094 2,130 2,145 6,427 Net income $1,462 $1,267 $2,659 $3,006 $8,394 Income per share Basic $0.19 $0.16 $0.34 $0.39 $1.08 Diluted $0.18 $0.16 $0.32 $0.37 $1.03 Year Ended December 31, 2013: Interest income $9,004 $10,350 $9,524 $10,303 $39,181 Interest expense 812 862 886 947 3,507 Net interest income 8,192 9,488 8,638 9,356 35,674 Provision for loan losses 622 686 445 642 2,395 Noninterest income 4,533 5,210 5,088 4,993 19,824 Noninterest expense 10,396 11,025 10,938 11,263 43,622 Income before taxes on income 1,707 2,987 2,343 2,444 9,481 Taxes on income 649 1,135 890 (1,044) 1,630 Net income $1,058 $1,852 $1,453 $3,488 $7,851 Income per share Basic $0.14 $0.25 $0.20 $0.47 $1.06 Diluted $0.14 $0.24 $0.19 $0.44 $1.01 Year Ended December 31, 2012: Interest income $6,663 $7,054 $7,972 $9,185 $30,874 Interest expense 725 740 835 845 3,145 Net interest income 5,938 6,314 7,137 8,340 27,729 Provision for loan losses 330 745 693 297 2,065 Noninterest income 3,771 4,074 4,010 4,765 16,620 Noninterest expense 7,670 8,054 8,886 9,866 34,476 Income before taxes on income 1,709 1,589 1,568 2,942 7,808 Taxes on income 632 588 580 207 2,007 Net income $1,077 $1,001 $988 $2,735 $5,801 Income per share Basic $0.17 $0.16 $0.15 $0.37 $0.88 Diluted $0.17 $0.16 $0.14 $0.36 $0.85 97Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 NOTE 22: PARENT ONLY FINANCIAL STATEMENTSBALANCE SHEETS (dollars in thousands) December 31, 2014 2013 ASSETS Cash and cash equivalents $5,722 $5,294 Premises and equipment, net 100 100 Deferred taxes (49) (239)Investment in subsidiaries 112,236 87,844 Intercompany receivable 1,360 1,105 Other assets 1,263 611 Total Assets $120,632 $94,715 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Borrowings $19,886 $7,063 Accounts payable and other liabilities 1,250 890 Total Liabilities 21,136 7,953 Shareholders’ Equity Common Stock 8 8 Additional paid-in-capital 78,204 76,334 Retained earnings 20,384 11,990 Accumulated other comprehensive income (loss), net of tax 900 (1,570)Total Shareholders’ Equity 99,496 86,762 Total Liabilities and Shareholders’ Equity $120,632 $94,715 INCOME STATEMENTS (dollars in thousands) For the Year EndedDecember 31, 2014 2013 2012 Interest expense—borrowings $740 $219 $— Noninterest income—earnings from investment in subsidiaries 11,050 9,883 5,701 Noninterest expense: Compensation and benefits 1,096 613 386 Occupancy and depreciation 141 66 19 Professional services and marketing costs 2,469 1,120 770 Other expenses 852 526 354 Total noninterest expense 4,558 2,325 1,529 Income before taxes on income 5,752 7,339 4,172 Taxes on income (2,642) (512) (1,629)Net income $8,394 $7,851 5,801 STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands) For the Year EndedDecember 31, 2014 2013 2012 Net income $8,394 $7,851 $5,801 Other comprehensive income (loss): Unrealized holding gains (losses) on securities arising during the period 4,198 (2,668) 14 Other comprehensive income (loss) before tax 4,198 (2,668) 14 Income tax (expense) benefit related to items of other comprehensive income (1,728) 1,098 — Other comprehensive income (loss) 2,470 (1,570) 14 Total comprehensive income $10,864 $6,281 $5,815 98Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. FIRST FOUNDATION INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)Years Ended December 31, 2014 and 2013 STATEMENTS OF CASH FLOWS (dollars in thousands) For the Year EndedDecember 31, 2014 2013 2012 Cash Flows from Operating Activities: Net income $8,394 $7,851 $5,801 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Earnings from investment in subsidiaries (11,050) (9,883) (5,701)Stock–based compensation expense 50 41 60 Deferred tax liability (benefit) (190) 579 (865)Increase in other assets (652) (46) (120)(Increase) decrease in accounts payable and other liabilities 829 (828) 1,230 Net cash provided by (used in) operating activities (2,619) (2,286) 405 Cash Flows from Investing Activities: Investment in subsidiaries (10,470) (8,500) (5,494)Purchase of premises and equipment — (34) (14)Net cash used in investing activities (10,470) (8,534) (5,508)Cash Flows from Financing Activities: Proceeds from borrowings 15,000 7,500 — Paydowns of borrowings (2,177) (437) — Proceeds from the sale of stock, net 949 6,322 5,617 Intercompany accounts, net decrease (increase) (255) 551 (288)Net cash provided by financing activities 13,517 13,936 5,329 Increase (decrease) in cash and cash equivalents 428 3,116 226 Cash and cash equivalents at beginning of year 5,294 2,178 1,952 Cash and cash equivalents at end of year $5,722 $5,294 $2,178 NOTE 23: PLAN OF MERGEROn November 25, 2014, the Company entered into an merger agreement with Pacific Rim Bank to acquire 100 percent of the outstanding commonstock of Pacific Rim Bank in exchange for common stock of FFI. Under the terms of the merger agreement, Pacific Rim Bank shareholders will becomeshareholders of FFI and each outstanding share of Pacific Rim Bank common stock will be converted into 0.3950 of a share of FFI common stock, with a totalof 650,012 shares of FFI commons stock to be issued. The one branch office and corporate offices of Pacific Rim Bank are located in Honolulu, Hawaii. As ofDecember 31, 2014, Pacific Rim Bank reported total assets and tangible capital of approximately $126.4 million and $9.7 million, respectively. Thetransaction is subject to regulatory approval and approval of Pacific Rim Bank’s shareholders and is expected to close in the second quarter of 2015. 99Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Item 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A.Controls and ProceduresDisclosure Controls and ProceduresWe maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under theExchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such informationis accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisionsregarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controlsand procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours aredesigned to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls andprocedures.As required by SEC rules, an evaluation was performed under the supervision and with the participation of the Chief Executive Officer and ChiefFinancial Officer of the effectiveness as of December 31, 2014, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) under theExchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2014, the Company’sdisclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file underthe Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information isaccumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regardingrequired disclosure.Changes in Internal ControlsThere was no change in the Company’s internal control over financial reporting in the quarter ended December 31, 2014 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.Internal Control Over Financial ReportingManagement’s Annual Report on Internal Control Over Financial ReportingManagement of First Foundation Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as definedin Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withaccounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies andprocedures that:·pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withaccounting principles generally accepted in the United States of America;·provide reasonable assurance that our receipts and expenditures are being made only in accordance with authorization of our managementand board of directors; and·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that couldhave a material effect on our consolidated financial statements.Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correctdeficiencies as identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of the effectiveness of such controls to future periods are subject to the risks that the controls may become inadequate becauseof changes in conditions or because the degree of compliance with the policies or procedures may deteriorate. 100Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Management’s Assessment of Internal Control over Financial ReportingOur management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, based on criteriafor effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of SponsoringOrganizations of the Treadway Commission. Management’s assessment included an evaluation of the design and the testing of the operational effectivenessof the Company’s internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board ofDirectors.Based on that assessment, management determined that, as of December 31, 2014, the Company maintained effective internal control overfinancial reporting.The foregoing report on internal control over financial reporting shall not be deemed “filed” for purposes of Section 18 of the Exchange Act orotherwise subject to the liabilities of that section.Vavrinek, Trine, Day & Co. LLP, independent registered public accounting firm, which audited our consolidated financial statements for the fiscalyear ended December 31, 2014 included in this Annual Report on Form 10-K, has audited the effectiveness of our internal control over financial reporting asof December 31, 2014, as stated in their report below. 101Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and ShareholdersFirst Foundation Inc. and SubsidiariesIrvine, California We have audited First Foundation, Inc. and Subsidiaries’ (the Company) internal control over financial reporting as of December 31,2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on theeffectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in conformity with U.S. generally acceptedaccounting principles. Because management's assessment and our audit were conducted to also meet the reporting requirement ofSection 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management's assessment and our audit of thecompany's internal control over financial reporting included controls over the preparation of financial statements in accordance withinstructions to the consolidated Financial Statements for Bank Holding companies (Form FR Y-9C). A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that (1) in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally acceptedaccounting principles, and the receipts and expenditures of the company are being made only in accordance with authorizations ofmanagement and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). 102Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of the Company as of December 31, 2014 and 2013 and the related consolidated statements of income,comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31,2014, and our report dated March 16, 2015 expressed an unqualified opinion on those financial statements.Laguna Hills, CaliforniaMarch 16, 2015 103Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Item 9B. Other Information.None. 104Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PART IIIItem 10.Directors, Executive Officers and Corporate Governance.Executive Officers and DirectorsThe following table sets forth the name, age and position with the Company of each of the persons who serve as directors and executive officers ofthe Company. The business address for all of these individuals is 18101 Von Karman Avenue, Suite 700, Irvine, California 92612. Name Age PositionUlrich Keller, Jr., CFP 58 Executive Chairman and DirectorScott Kavanaugh 54 Director, Vice Chairman of the Board and Chief Executive OfficerJohn Hakopian 46 President of FFA and DirectorJames Brakke(1) 72 DirectorMax Briggs, CFP(2)(3) 49 DirectorVictoria Collins, Ph.D., CFP 72 DirectorWarren Fix(2) 76 DirectorGerald Larsen, J.D., LL.M., CFP, CPA(1)(2) 66 DirectorMitchell Rosenberg, Ph.D.(1)(3) 61 DirectorJacob Sonenshine, J.D., CFA(3) 44 DirectorJohn Michel 55 Executive Vice President and Chief Financial Officer (1)Member of the compensation committee.(2)Member of the audit committee.(3)Member of the nominating and corporate governance committee.Set forth below is a biographical summary of the experience of the members of our Board of Directors and our executive officers.DirectorsUlrich Keller, Jr., CFP. Mr. Keller is one of the founders of the Company and currently is the Executive Chairman of FFI and FFA. Mr. Kellerserved as Chief Executive Officer (or CEO) of FFA from 1990, when it began operations as a fee-based investment advisor, until December 2009, at whichtime he became its Executive Chairman. In 2007, Mr. Keller became the Executive Chairman of FFI and from June 2007 until December 2009 he also servedas the CEO of FFI. Mr. Keller earned a Bachelor of Science degree in Finance from San Diego State University. Mr. Keller previously served as a trustee of theUniversity of California, Irvine (or UCI) Foundation, and currently serves as a consultant to the Investment Advisory Committee of The Board of Regents ofthe University of California and as a member of the Dean’s Advisory Board for the Center for Investment and Wealth Management at the Paul Merage Schoolof Business at UCI. As one the founders of the Company, who played a key role in the development and successful implementation of our business strategy ofproviding high quality and personalized wealth management and investment advisory services to our clients and the expansion of the financial services weoffer our clients, Mr. Keller brings to the Board considerable knowledge and valuable insights about the wealth management and investment advisorybusiness and the Southern California financial services market. 105Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Scott Kavanaugh. Mr. Kavanaugh is, and since December 2009 has been the CEO of FFI, and from June 2007 until December 2009, he served asPresident and Chief Operating Officer of FFI. Mr. Kavanaugh has been the Vice-Chairman of FFI since June 2007. He also is, and since September 2007 hasbeen, the Chairman and CEO of FFB. Mr. Kavanaugh was a founding stockholder and served as an Executive Vice President and Chief Administrative Officerand a member of the board of directors of Commercial Capital Bancorp, Inc. the parent holding company of Commercial Capital Bank. During his tenure asan executive officer and director of Commercial Capital Bancorp, Inc. that company became a publicly traded company, listed on NASDAQ, and its totalassets grew to more than $1.7 billion. From 1998 until 2003, Mr. Kavanaugh served as the Executive Vice President and Chief Operating Officer and adirector of Commercial Capital Mortgage. From 1993 to 1998, Mr. Kavanaugh was a partner and head of trading for fixed income and equity securities atGreat Pacific Securities, Inc., a west coast-based regional securities firm. Mr. Kavanaugh earned a Bachelor of Science degree in Business Administration andAccounting at the University of Tennessee and a Masters of Business Administration (or MBA) degree in Information Systems at North Texas StateUniversity. Mr. Kavanaugh is, and since 2008 has been, a member of the board of directors of Colorado Federal Savings Bank and its parent holdingcompany, Silver Queen Financial Services, Inc. Mr. Kavanaugh also is, and since December 2013 has been, a member of the boards of directors of NexBankSSB and its parent holding company, NexBank Capital, Inc. From January 2000 until June 2012, Mr. Kavanaugh served as Independent Trustee andChairman of the Audit Committee and from June 2012 until December 2013 served as Chairman of the Highland Mutual Funds, a mutual fund groupmanaged by Highland Capital Management. The Board believes that Mr. Kavanaugh’s extensive experience as an executive officer of banks and otherfinancial services organizations, combined with his experience as a director of both public and private companies, qualifies him to serve as a member of ourBoard of Directors. In addition, because Mr. Kavanaugh is the Company’s Chief Executive Officer, the Board of Directors believes that his participation as amember of the Board facilitates communication between the outside Board members and management.John Hakopian. Mr. Hakopian is, and since April 2009 has been, the President of FFA and is and since 2007 has been a member of the Company’sBoard of Directors. Mr. Hakopian was one of the founders of the Company in 1990, when it began its operations as a fee-based investment advisor and servedas its Executive Vice President and Co-Portfolio Manager from 1994 through April 2009. Mr. Hakopian earned a Bachelor of Arts degree in Economics fromUCI and a MBA degree in Finance from the University of Southern California. Mr. Hakopian’s extensive knowledge of the Company’s wealth managementand investment advisory business makes him a valuable member of the Board who is able to provide the outside Board members with insight in to theoperations and risks of that business.James Brakke. Mr. Brakke has served as a director of FFI since 2007. From 2001 until 2006 Mr. Brakke served as a director of Commercial CapitalBancorp, Inc. and from 2000 until 2006, Mr. Brakke served as a director of Commercial Capital Bank. Mr. Brakke is, and since 2001 has been, ExecutiveVice President and director of the Dealer Protection Group, an insurance brokerage firm that Mr. Brakke co-founded, which specializes in providing insuranceproducts to the automobile industry. Mr. Brakke also serves as a salesperson for Brakke-Schafnitz Insurance Brokers, a commercial insurance brokerage andconsulting firm that he co-founded and where he was President and Chairman from 1971 until 2009. Mr. Brakke currently serves as a director of MauryMicrowave Corporation and as Chairman of Advanced Wellness and Lasers. Mr. Brakke earned a Bachelor of Science degree in Business and Finance fromColorado State University. Mr. Brakke’s experience as a director of Commercial Capital Bancorp, Inc. and its wholly owned banking subsidiary, CommercialCapital Bank is valuable to other independent member of the Company’s Board of Directors. Moreover, we believe Mr. Brakke’s extensive knowledge of theinsurance industry provides valuable insight and support for our insurance operations.Max Briggs, CFP. From 2005 to 2012, Mr. Briggs served as Chairman of the Board of DCB. He was elected as a director of the Company followingour acquisition of DCB in August 2012. Mr. Briggs is, and since 1996 has been the President and CEO of FLC Capital Advisors, a wealth management firmwith over $340 million of assets under supervision. Mr. Briggs earned a Business Administration and Finance degree from Stetson University. We believeMr. Briggs is a valuable member of our Board of Directors due to his knowledge of the banking business, gained from his service as Chairman of DCB,particularly as conducted in Palm Desert, California and its surrounding communities, where we have two of our wealth management offices, and hisexperience as President and CEO of a wealth management firm.Victoria Collins, Ph.D., CFP. Dr. Collins is and has been a director of FFI since 2007. Beginning in 1990, Dr. Collins served as an executive officerof FFA, including as an Executive Vice President from 1990 until 2009 and as a Senior Managing Director from 2009, until her retirement in December 2011.Dr. Collins currently serves on the Dean’s Advisory Board for the Center for Investment and Wealth Management at the Paul Merage School of Business atUCI. Dr. Collins earned a Bachelor’s of Administration degree in Psychology from San Diego State University, a Master of Arts degree in EducationalPsychology from St. Mary’s College and a Doctor of Philosophy (or Ph.D.) degree in Cognitive Psychology from the University of California, Berkeley.Dr. Collins’ found that her knowledge of psychology was invaluable in her role as an executive officer and a senior wealth manager at FFA. We believe thatthe Board has found that Dr. Collins brings to the Board valuable insights about the FFA’s business from her knowledge of and her experience in wealthmanagement, and her management experience at FFA. 106Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Warren Fix. Mr. Fix has served as a director of FFI since 2007. Mr. Fix is, and since 1992 has been, a partner in The Contrarian Group, a businessinvestment and management company. From 1995 to 2008, Mr. Fix served in various management capacities and on the Board of Directors of WCH, Inc.,formerly Candlewood Hotel Company. From 1989 to 1992, Mr. Fix served as President of the Pacific Company, a real estate investment and developmentcompany. From 1964 to 1989, Mr. Fix held numerous positions at the Irvine Company, including serving as its Chief Financial Officer (or CFO) and adirector. Mr. Fix currently serves as a director of Healthcare Trust of America, a publicly traded real estate investment trust, Clark Investment Group, AccelNetworks and CT Realty. Mr. Fix earned a Bachelor of Administration degree from Claremont McKenna College. We believe Mr. Fix brings to the Board hisknowledge of accounting as a result of his long tenure as CFO of the Irvine Company and his experience as an independent director of both public andprivate companies.Gerald Larsen, J.D, LL.M, CFP, CPA. Mr. Larsen has served as a director of FFI since 2013. Mr. Larsen is, and since 1992 has served as thePresident, Principal and owner of the law firm of Larsen & Risley, located in Costa Mesa, California. Mr. Larsen’s law practice focuses on federal and statetaxation, probate, estate planning, partnerships and corporate law. Mr. Larsen earned a Bachelor of Science degree in Accounting from California StateUniversity, Northridge, a J.D. degree from Stetson University and a LL.M. degree from the University of Florida. We believe that Mr. Larsen’s extensiveexperience as a tax and estate planning lawyer provides the Board with valuable insights regarding the tax and estate planning aspects of wealthmanagement.Mitchell Rosenberg, Ph.D. Dr. Rosenberg has served as a director of FFI since 2007. Dr. Rosenberg is, and since 2005 has served as, President andfounder of the consulting firm of M. M. Rosenberg & Associates, which provides executive and organizational development services to technologycompanies, health care businesses and public entities. From 2002 to 2005, Dr. Rosenberg was Chief Executive Officer for The Picerne Group, an internationalinvestment firm investing primarily in real estate, and portfolios of loans. Prior to 2002, Dr. Rosenberg served as Executive Vice President and Director ofBusiness Services for Ameriquest Capital Corporation and directed the Human Resource and Organizational Development functions for Washington MutualBank, American Savings Bank and Great Western Bank. Dr. Rosenberg earned a Bachelor of Science degree in Psychology from Ohio University, a Masters ofScience degree in Industrial Psychology from California State University, Long Beach, and a Ph.D. degree in Psychology with an emphasis on OrganizationalBehavior from Claremont Graduate University. We believe that Dr. Rosenberg’s educational and operational experience in managing the human resource andorganizational development functions of a number of banking organizations and a real estate investment firm provides insight regarding the Company’shuman resource functions, including compensation considerations that impact the growth and expansion of the Company.Jacob Sonenshine, J.D., CFA. Mr. Sonenshine has served as a director of FFI since 2007. Mr. Sonenshine is, and since 2012, has served as co-chiefexecutive officer of Prell Restaurant Group, an operator of fast casual restaurants. From 2006 until 2012, Mr. Sonenshine served as the President and ChiefOperating Officer of Professional Retirement Strategy, a retirement planning and entity risk management firm. From 1999 to 2005, Mr. Sonenshine wasPresident and co-founder of RSM EquiCo, an investment bank specializing in mergers and acquisitions of privately-held middle market companies.Mr. Sonenshine currently serves on the Board of New Momentum, LLC, a software firm focusing on brand protection, anti-counterfeiting and channelintegrity. Mr. Sonenshine earned a Bachelor of Science degree in economics and a Bachelor of Administration degree in International Relations from theUniversity of Pennsylvania, and a J.D. degree and a MBA degree from the University of Southern California. We believe Mr. Sonenshine’s experience as CEOof a retirement planning firm is valuable to the Board in overseeing FFA’s wealth management and investment advisory business.The business address for each director and named executive officer listed is 18101 Von Karman Avenue, Suite 700, Irvine, California 92612.Executive OfficersJohn Michel. Mr. Michel, is, and since September 2007 has served as, the Executive Vice President and CFO of the Company and FFB. SinceJanuary 2009, he has also served as the CFO of FFA. Mr. Michel served as the Chief Financial Officer of Sunwest Bank from February 2005 to October 2006and of Fidelity Federal Bank from September 1998 to December 2001. Mr. Michel earned a Bachelor of Business Administration Accounting degree from theUniversity of Notre Dame. 107Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Corporate Governance Principles and Board MattersWe are committed to having sound corporate governance principles, which are essential to running our business efficiently and maintaining ourintegrity in the marketplace. We recently adopted a revised Code of Business and Ethical Conduct relating to the conduct of our business by all of ouremployees, officers and directors, as well as a Code of Business and Ethical Conduct for Chief Executive Officer and Other Senior Financial Officersspecifically for our Chief Executive Officer and senior financial officers, both of which will be posted on our website upon completion of the offering. Weexpect that any amendments to the Code of Business and Ethical Conduct or the Code of Business and Ethical Conduct for Chief Executive Officer andOther Senior Financial Officers, or any waivers of the requirements of either, will be disclosed on our website, as well as any other means required by theNASDAQ Stock Market rules.Director QualificationsWe believe that our directors should have the highest professional and personal ethics and values, consistent with our longstanding values andstandards. They should have broad experience at the policy-making level in business, government or banking. They should be committed to enhancingshareholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service onboards of other companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties.Each director must represent the interests of all shareholders. When considering potential director candidates, our Board of Directors also considers thecandidate’s character, judgment, diversity, age, skills, including financial literacy, and experience in the context of our needs and those of the Board ofDirectors.Director IndependenceUnder the rules of the NASDAQ Stock Market, independent directors must comprise a majority of our Board of Directors within a specified periodof time following this offering. The rules of the NASDAQ Stock Market, as well as those of the SEC, also impose several other requirements with respect tothe independence of our directors. Our Board of Directors has evaluated the independence of its members based upon the rules of the NASDAQ Stock Marketand the SEC. Applying these standards, our Board of Directors has affirmatively determined that, with the exception of Mr. Kavanaugh, Mr. Keller,Mr. Hakopian and Dr. Collins, each of our current directors is an independent director, as defined under the applicable rules.Family RelationshipsThere is no family relationship between any director, executive officer or person nominated to become a director or executive director.Board of DirectorsElection of DirectorsOur bylaws provide that our directors shall be elected at each annual meeting of shareholders but, if any such annual meeting is not held or thedirectors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. All directors shall hold office untiltheir respective successors are elected, subject to the CGCL and the provisions of these bylaws with respect to vacancies on the Board. A vacancy in theBoard of Directors shall be deemed to exist in case of the (i) death, (ii) resignation or removal of any director with or without cause, (iii) pursuant toSection 302 of the CGCL if a director has been declared of unsound mind by order of court or convicted of a felony, and (iv) if the authorized number ofdirectors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect thefull authorized number of directors to be voted for at that meeting.Vacancies on the Board of Directors, except for a vacancy created by the removal of a director, may be filled by a majority of the remainingdirectors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annualor a special meeting of the shareholders. A vacancy on the Board of Directors created by the removal of a director may only be filled by the vote of a majorityof the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of the holders of a majority of theoutstanding shares.Appointment of Executive OfficersOur current and future executive officers and significant employees serve at the discretion of our Board of Directors, subject to any employmentagreements under which any such officers may be employed. 108Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Board Leadership StructureThe Chairman of our Board of Directors is Rick Keller who is a member of senior management. However, the Board of Directors has decided toseparate the positions of Chairman and Chief Executive Officer because the board believes that doing so provides the appropriate leadership structure for usat this time, particularly since the separation of those two positions enables our Chief Executive Officer to focus on our day-to-day management of ourbusiness, while the Chairman leads the board of directors in the performance of its responsibilities.The Board’s Role in Risk OversightThe Board’s responsibilities in overseeing the Company’s management and business include oversight of the Company’s key risks andmanagement processes and controls to manage them appropriately. Management, in turn, is responsible for the day-to-day management of risk andimplementation of appropriate risk management controls and procedures.The risk of incurring losses on the loans we make is an inherent feature of the banking business and, if not effectively managed, such risks canmaterially affect our results of operations. Accordingly, the Board, as a whole, exercises oversight responsibility over the processes that our managementemploys to manage those risks. The Board fulfills that oversight responsibility by:·monitoring trends in the Company’s loan portfolio and the Company’s allowance for loan losses;·establishing internal limits related to the Company’s lending exposure and reviewing and determining whether or not to approve loans in amountsexceeding certain specified limits;·reviewing and discussing, at least quarterly and more frequently, if the Board deems necessary, reports from the FFB’s chief credit officer relatingto such matters as (i) risks in the Company’s loan portfolio, (ii) economic conditions or trends that could reasonably be expected to affect(positively or negatively) the performance of the loan portfolio or require increases in the ALLL and (iii) specific loans that have been classified as“special mention,” “substandard” or “doubtful” and, therefore, require increased attention from management;·reviewing, at least quarterly, management’s determinations with respect to the adequacy of, and any provisions required to be made to replenish orincrease, the ALLL;·reviewing management reports regarding collection efforts with respect to nonperforming loans; and·authorizing the retention of, and reviewing the reports of, external loan review consultants with respect to the risks in and the quality of the loanportfolio.Although risk oversight permeates many elements of the work of the full Board and its committees, the audit committee has direct and systematicresponsibility for overseeing other significant risk management processes.Committees of our Board of DirectorsOur Board of Directors has three standing committees: an audit committee, a compensation committee, and a nominating and governancecommittee. The Board of Directors has adopted a written charter for each of those committees, and copies of those charters will be available on our websiteupon the completion of this offering. In addition, from time to time, special committees may be established under the direction of our Board of Directorswhen necessary to address specific issues.Audit Committee. We have an audit committee the members of which are Mr. Briggs, Mr. Fix and Mr. Larsen. Mr. Fix serves as chairman. The Boardof Directors has determined that all of the members of the audit committee are independent within the meaning of the Listing Rules of the NASDAQ StockMarket and the enhanced independence requirements for audit committee members contained in Rule 10A-3 under the Exchange Act. Our Board of Directorsalso has determined that Mr. Fix and Mr. Briggs meet the definition of “audit committee financial expert” adopted by the SEC. The audit committee’sresponsibilities include:·Selecting and appointing the independent auditors, following the committee’s evaluation of their qualifications, and determining thecompensation of the independent auditors;·overseeing the work of and monitoring and evaluating the independent auditors’ performance and independence and making all decisionswith respect to the termination of the independent auditors; 109Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ·reviewing all audit and non-audit services to be performed by the independent auditors, taking into consideration whether the provision ofany non-audit services to us by the independent auditors is compatible with maintaining their independence;·reviewing and discussing with management and the independent auditors the annual and quarterly financial statements prior to their release;·reviewing and discussing with management and our independent auditors the adequacy and effectiveness of our accounting and financialreporting processes and internal controls and the audits of our financial statements;·establishing and overseeing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internalaccounting controls or auditing matters, including procedures for the confidential, anonymous submission by our employees of questions orconcerns regarding accounting or auditing matters;·investigating any matter brought to the audit committee’s attention within the scope of its duties and engaging independent counsel andother advisors as the audit committee deems necessary;·reviewing reports to management prepared by the internal audit function, as well as management’s responses;·reviewing and assessing the adequacy of the committee’s formal written charter on an annual basis;·reviewing and approving related party transactions for potential conflict of interest situations; and·overseeing such other matters that may be specifically delegated to the audit committee by our Board of Directors.The Audit Committee met five times during 2014. The Audit Committee has a written charter that specifies its responsibilities, which includeoversight of the Company’s financial reporting process and system of internal accounting controls, and appointment and oversight of the independentregistered public accounting firm engaged to audit the Company’s financial statements. A copy of the Audit Committee charter will be provided, withoutcharge, to any shareholder who sends a written request to the Chief Financial Officer of First Foundation Inc. at 18101 Von Karman Avenue, Suite 700 Irvine,CA. 92612.Compensation Committee. We have a compensation committee the members of which are Mr. Brakke, Mr. Larsen and Mr. Rosenberg.Mr. Rosenberg serves as chairman. The Board of Directors has determined that all of the members of the compensation committee are independent under theapplicable Listing Rules of the NASDAQ Stock Market. The compensation committee’s responsibilities include:·developing, reviewing, and approving our management compensation programs, and regularly reporting to the full Board of Directorsregarding the adoption and effectiveness of such programs;·developing, reviewing and approving our cash and equity incentive plans, including approving individual grants or awards thereunder, andregularly reporting to the full Board of Directors regarding the terms of such plans and individual grants or awards;·reviewing and approving individual and Company performance goals and objectives that may be relevant to the compensation of executiveofficers and other key management employees;·reviewing and approving the terms of any employment agreement, severance or change in control arrangements, or other compensatoryarrangement with any executive officers or other key management employees;·reviewing and discussing with management the narrative discussion to be included in the annual proxy statements with respect to executiveofficer and director compensation;·reviewing and assessing, on an annual basis, the adequacy of its formal written charter; and·overseeing any other matters that may be specifically delegated to the compensation committee by our Board of Directors.The Compensation Committee met two times during 2014.Nominating and Governance Committee. We have a nominating and governance committee, the members of which are Mr. Briggs, Mr. Rosenbergand Mr. Sonenshine. Mr. Rosenberg serves as chairman. The Board of Directors has determined that all of the members of the nominating and governancecommittee are independent under the Listing Rules of the NASDAQ Stock Market applicable to such committees. The nominating and governancecommittee’s responsibilities include:·identifying and recommending nominees for election to the Board of Directors; 110Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ·making recommendations to the Board of Directors regarding the directors to be appointed to each of its standing committees;·developing and recommending corporate governance guidelines for adoption by the Board of Directors; and·overseeing annual self-assessments by the directors of the performance of the Board and its committees.The Nominating and Governance Committee met once during 2014.Compensation Committee Interlocks and Insider ParticipationUpon completion of the offering, none of the members of our compensation committee will be or will have been an officer or employee of theCompany or any of our subsidiaries. In addition, none of our executive officers serves or has served as a member of the board of directors or compensationcommittee (or other board committee performing equivalent functions) of any entity that has one or more executive officers serving as one of our directors oras one of the members of our compensation committee.Codes of Business and Ethical ConductWe have adopted a Code of Business and Ethical Conduct for our officers and employees and a Code of Conduct which contains specific ethicalpolicies and principles that apply to our Chief Executive Officer, Chief Financial Officer, FFB Chief Operating Officer and other key accounting andfinancial personnel. Upon completion of this offering, a copy of our Code of Business and Ethical Conduct will be accessible at the Investor Relationssection of our website at www.ff-inc.com. We intend to disclose, at that same location on our website, any amendments to that Code and any waivers of therequirements of the Code of Conduct that may be granted to our Chief Executive Officer or Chief Financial Officer.Section 16(a) Beneficial Ownership Reporting CompliancePursuant to Section 16(a) of the Exchange Act and the related rules and regulations, our directors and executive officers and any beneficial ownersof more than 10% of any registered class of our equity securities, are required to file reports of their ownership, and any changes in the ownership, of ourcommon stock with the SEC pursuant to Section 16(a) of the Securities Exchange Act. To our knowledge, based solely on a review of copies of Section 16(a)reports furnished to us and on written representations from such reporting persons, during 2014, all of those persons complied with the Section 16(a) filingrequirements, except one of Mr. Fix’s Form 4s, to report a purchase of 500 shares of the Company’s common stock, was inadvertently filed 2 days late.Item 11.Executive CompensationNamed Executive OfficersOur “named executive officers” include our principal executive officer and our two other most highly compensated executive officers. For 2014,our named executive officers were:●Ulrich E. Keller, Jr., who currently serves as our Executive Chairman, as well as a member of the Board of Directors.●Scott F. Kavanaugh, who currently serves as our Chief Executive Officer, as well as Vice Chairman and a member of the Board of Directors.Mr. Kavanaugh is our Principal Executive Officer.●John Hakopian, who currently serves as President of FFA, as well as a member of the Board of Directors. 111Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Summary Compensation TableThe following table sets forth, for our named executive officers, the compensation earned in the years ended December 31: Name and Position Year Salary(1) Bonus(2) Stock Option Awards Total Ulrich E. Keller, Jr., Executive Chairman of 2014 $500,000 $200,000 $— $700,000 FFI and FFA 2013 450,000 180,000 — 630,000 Scott F. Kavanaugh, Chief Executive Officer of FFIand FFB, Vice Chairman of FFI, Chairman of FFB 2014 556,000(3) 412,500 — 968,500 2013 456,000(3) 337,500 — 793,500 John Hakopian, 2014 425,000 170,000 — 595,000 President of FFA 2013 365,000 146,000 — 511,000 (1)Although Messrs. Keller, Kavanaugh and Hakopian are directors of the Company, they do not receive any fees or other compensation for their service asdirectors.(2)In 2014 and 2013, the Board of Directors established target bonus awards for each of the named executive officers, the payment of which was madecontingent on FFI generating earnings, before taxes and bonuses, of $14.1 million in 2014 and $11.3 million in 2013. In 2014, and in 2013, Messrs.Kavanaugh and Hakopian each received 100% of their target bonus awards, the respective amounts of which are set forth in this column.(3)Mr. Kavanaugh’s salary includes a $6,000 per year automobile allowance for use of his personal automobile on Company business.In addition to the compensation set forth in the table above, each executive officer receives group health and life insurance benefits. Incidental jobrelated benefits, including employer contributions under the Company’s 401k plan, totaled less than $10,000 for each of the named executive officers in2014.Employment AgreementsEach of our named executive officers is employed under an employment agreement for a term ending on December 31, 2016. Set forth below aresummaries of the terms of those employment agreements. These summaries are not intended to be complete and are qualified in their entirety by reference tothe employment agreements themselves.Material Terms of the Employment AgreementsSalaries. Each employment agreement provides for the payment of a base annual salary as follows: Mr. Keller: $500,000; Mr. Kavanaugh:$550,000; and Mr. Hakopian: $425,000. Those salaries are subject to review and may be increased, but not reduced, by the Board of Directors in itsdiscretion.Participation in Incentive Compensation and Employee Benefit Plans. Each of the employment agreements provides that the named executiveofficer will be entitled to participate in any management bonus or incentive compensation plans adopted by the Board or its Compensation Committee andin any qualified or any other retirement plans, stock option or equity incentive plans, life, medical and disability insurance plans and other benefit planswhich FFI and its subsidiaries may have in effect, from time to time, for all or most of its senior executives.Termination and Severance Provisions. Each employment agreement provides that the named executive officer’s employment may be terminatedby the Company with or without cause or due to his death or disability or by the named executive officer with or without good reason. In the event of atermination of the named executive officer’s employment by the Company without cause or by the named executive officer for good reason, the Companywill become obligated to pay severance compensation to the named executive officer in an amount equal to 12 months of his annual base salary or theaggregate annual base salary that would have been paid to the named executive officer for the remainder of the term of his employment agreement if suchremaining term is shorter than 12 months (the “Termination Benefits Period”). In addition, during the Termination Benefits Period or until the namedexecutive officer obtains employment with another employer that offers comparable health insurance benefits, whichever period is shorter, the Company willbe obligated to continue to provide any group health plan benefits to the extent authorized by and consistent with 29 U.S.C. § 1161 et seq. (commonlyknown as “COBRA”), subject to payment of premiums by the named executive officer at the active employee’s rate then in effect. 112Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Change of Control AgreementsThe Company has entered into Change of Control Severance Agreements with each of its named executive officers. Each of those agreementsprovides that if the Company undergoes a Change of Control (as defined in such Agreements) while the named executive officer is still in the employ of theCompany or one of its subsidiaries and, within the succeeding 12 months, the named executive officer terminates his employment due to the occurrence ofany one of four “Good Reason Events” then the named executive officer will become entitled to receive the following severance compensation: (a) two timesthe sum of (i) his annual base salary as then in effect and (ii) the maximum bonus compensation that the named executive officer could have earned under anybonus or incentive compensation plan in which he was then participating, if any; (b) acceleration of the vesting of any then unvested stock options orrestricted stock held by the named executive officer, and (c) continuation of health insurance benefits for a period that is the shorter of two years or until thenamed executive officer obtains employment with another employer that offers comparable health insurance benefits. However, each Change of ControlAgreement provides that the severance compensation to which any named executive officer would otherwise receive under his agreement may not, in theaggregate, equal or exceed the amount which would result in the imposition of an excise tax pursuant to Section 280G of the Internal Revenue Code of 1986,as amended (the “Code”). Each of these Change of Control Agreements also provides that the payment of severance compensation to a named executiveofficer under such agreement will be in lieu of any severance compensation that the named executive officer would otherwise have been entitled to receiveunder his employment agreement. Each Agreement also provides that the payment of severance compensation must comply with the applicable requirementsof Section 409A of the Code.The Good Reason Events consist of the following: (i) a reduction or adverse change of the named executive officer’s authority; (ii) a materialreduction in the named executive officer’s salary; (iii) a relocation of the named executive officer’s principal place of employment of more than 30 miles; or(iv) a material breach by the Company of its obligations under the named executive officer’s employment agreement. However, each Change of ControlAgreement provides that in order for a named executive officer to become entitled to receive his severance compensation, he must give the Company writtennotice of his election to terminate his employment for Good Reason within 15 days of the date he is notified of the occurrence of the Good Reason Event. Ifthe named executive officer fails to provide such a notice within that 15-day period or if the Company rescinds the action taken that constituted the GoodReason Event following receipt of that notice, the named executive officer will not become entitled and the Company will not be obligated to pay anyseverance compensation by reason of the occurrence of the Good Reason Event.A Change of Control Agreement will terminate in the event the named executive officer’s employment is terminated by the Company for cause ordue to his death or disability, or by the named executive officer without Good Reason, irrespective of whether such termination occurs prior to or after theconsummation of a Change of Control of the Company. 113Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Outstanding Equity Awards at Fiscal Year EndThe following table sets forth information regarding outstanding stock options held by each of our named executive officers as of December 31,2014, including the number of unexercised vested and unvested stock options. The vesting schedule for each option is shown following this table. None ofour named executive officers has been granted any restricted stock.Outstanding Equity Awards at 2014 Fiscal Year End Option Awards(1) Number of SecuritiesUnderlying Options Name / Grant Date Exercisable Unexercisable Exercise Price(2) Expiration Date(3) Ulrich E. Keller, Jr. 9/17/2007 40,500 — $11.00 9/16/2017 1/27/2009 15,000 — 16.50 1/26/2019 10/25/2011 40,000 — 16.50 10/24/2021 Scott F. Kavanaugh 9/17/2007 160,000 — 10.00 9/16/2017 1/27/2009 20,000 — 15.00 1/26/2019 10/25/2011 80,000 — 15.00 10/24/2021 John Hakopian 9/17/2007 40,500 — 10.00 9/16/2017 1/27/2009 10,000 — 15.00 1/26/2019 10/25/2011 40,000 — 15.00 10/24/2021 (1)Stock options granted to the named executive officers generally vest over three years at the rate of 33 1/3% of the options as of each anniversary of thedate of grant, provided that the executive is still employed by the Company on that anniversary date.(2)In accordance with the Company’s Equity Plans, the exercise prices were equal to or greater than 100% of the fair market values of the Company’sshares as of the respective grant dates. The exercise prices of incentive options granted to Mr. Keller were equal to 110% of the fair market value of ashare of common stock on the date of grant because Mr. Keller owns more than 10% of the outstanding common stock of the Company. Since no activemarket existed for the Company’s shares at each grant date above, in each instance the fair market value was determined by the Board of Directors basedprimarily on the prices at which the Company had most recently sold shares to investors who were not affiliated with any of the Company’s directors orexecutive officers.(3)The expiration date of each option award is 10 years from the date of its grant, subject to earlier termination on a cessation of service with the Company.Compensation Risk AssessmentWe believe that, although a portion of the compensation provided to our executives and other employees is subject to the achievement of specifiedfinancial performance criteria, our executive compensation program does not encourage excessive or unnecessary risk-taking. We do not believe that ourcompensation programs are reasonably likely to have a material adverse effect on us. 114Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Director CompensationOnly non-employee directors are entitled to receive compensation for service on the Board and Committees of the Board. The compensation eachdirector received for their service on the Board and Board Committees is set forth in the following table for the year ended December 31 2014: Fees Earned or Paidin Cash Stock Option Awards All OtherCompensation Total James Brakke $60,000 $— $— $60,000 Max Briggs 60,000 — — 60,000 Victoria Collins 60,000 — — 60,000 Michael Criste(1) 15,000 — — 15,000 Warren D. Fix 60,000 — — 60,000 Gerald Larsen 60,000 — — 60,000 Mitchell M. Rosenberg 60,000 — — 60,000 Jacob Sonenshine 60,000 — — 60,000 Henri Tchen(1) 15,000 — — 15,000 (1)Mr. Criste and Mr. Tchen resigned from the Board of Directors effective March 31, 2014. This amount represents their compensation prior totheir resignation.Outstanding Equity Awards.Our non-employee directors also are eligible to receive stock options and restricted stock grants under the Equity Plans (as defined in the sectionentitled “Executive Compensation—Equity Incentive Plans”). No stock options or shares of restricted stock were granted to non-employee directors in 2014.Stock options and shares of restricted stock granted to our non-employee directors generally vest over three years at the rate of 33 1/3% of the options or ofthe restricted shares as of each anniversary of the date of grant, provided that the director is still a member of the Board on the vesting date.The following table sets forth information regarding outstanding stock options held by each non-employee director as of December 31, 2014,including the number of unexercised vested and unvested stock options. The vesting schedule for each option is shown following this table. 115Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Outstanding Equity Awards at 2014 Fiscal Year End Option Awards(1) Number of SecuritiesUnderlying Options Name / Grant Date Exercisable Unexercisable Exercise Price(2) Expiration Date(3) James Brakke 9/17/2007 15,000 — $10.00 9/16/2017 1/27/2009 1,500 — 15.00 1/26/2019 Max Briggs 8/28/2013 10,000 5,000 15.00 8/27/2022 Victoria Collins 9/17/2007 40,500 — $10.00 9/16/2017 1/27/2009 5,000 — 15.00 1/26/2019 Warren D. Fix 9/17/2007 15,000 — $10.00 9/16/2017 1/27/2009 1,500 — 15.00 1/26/2019 Gerald L. Larsen 7/22/2008 10,000 — $15.00 7/21/2018 1/27/2009 1,000 — 15.00 1/26/2019 1/27/2011 — — — — Mitchell M. Rosenberg 9/17/2007 15,000 — $10.00 9/16/2017 1/27/2009 1,500 — 15.00 1/26/2019 Jacob Sonenshine 9/17/2007 15,000 — $10.00 9/16/2017 1/27/2009 1,500 — 15.00 1/26/2019 (1)Stock options granted to the directors generally vest over three years at the rate of 33 1/3% of the options as of each anniversary of the date of grant,provided that the Director is still serving the Company on that anniversary date.(2)In accordance with the Company’s Equity Plans, the exercise prices of these options were equal to 100% of the fair market values of the Company’sshares as of the respective grant dates. Since no active market existed for the Company’s shares at each grant date above, in each instance the fair marketvalue was determined by the Board of Directors based primarily on the prices at which the Company had most recently sold shares to investors who werenot affiliated with any of the Company’s directors or executive officers.(3)The expiration date of each option award is 10 years from the date of its grant, subject to earlier termination on a cessation of service with the Company. 116Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Security Ownership of Certain Beneficial Owners and ManagementThe following table sets forth certain information with respect to the beneficial ownership of our common stock, as of March 12 , 2015 for:●each of our named executive officers;●each of our directors;●all our executive officers and directors as a group; and●each person, or group of affiliated persons, known by us to be the beneficial owner of more than 5% of our outstanding shares of our commonstock.For purposes of the table below, the percentage ownership calculations for purposes of determining the beneficial ownership of our directors andexecutive officers are based on 7,878,597 shares of our common stock outstanding as of March 12, 2015.Under the rules and regulations of the SEC, a person is deemed to be the beneficial owner of (i) shares with respect to which that person has, eitheralone or with others, the power to vote or dispose of those shares; and (ii) shares which that person may acquire on exercise of options or other rights topurchase shares of our common stock at any time during a 60 day period which, for purposes of this table, will end on May 11, 2015. The number of sharessubject to options that are exercisable or may become exercisable during that 60 day period are deemed outstanding for purposes of computing the number ofshares beneficially owned by, and the percentage ownership of, the person holding such options, but not for computing the percentage ownership of anyother shareholder named in this table. Except as otherwise noted below, we believe that the persons named in the table have sole voting and dispositivepower with respect to all shares shown as beneficially owned by them, subject to community property laws where applicable. As of March 12, 2015(1) Name and Title Number of Shares BeneficiallyOwned(2) Percent of Class Ulrich Keller, Jr., Executive Chairman 1,396,085(3) 17.5%Scott Kavanaugh, Vice Chairman and CEO 659,467 8.1%James Brakke, Director 60,392 * Max Briggs, Director 25,257(4) * Victoria Collins, Director 412,709(5) 5.2%Warren Fix, Director 53,167(6) * John Hakopian, Director and President of FFA 480,180 6.0%Gerald Larsen, Director 20,700 * Mitchell M. Rosenberg, Director 39,500 * Jacob Sonenshine, Director 39,500 * All Directors and Executive Officers as a Group (11 persons) 3,330,957 38.8% *Represents less than one (1%) percent of the shares outstanding as of March 12, 2015.(1)This table is based upon information supplied to us by our officers, directors and principal shareholders. Except as otherwise noted, we believe that eachof the shareholders named in the table has sole voting and investment power with respect to all shares of common stock shown as to which he or she isshown to be the beneficial owner, subject to applicable community property laws. The percentage ownership interest of each individual or group isbased upon the total number of shares of the Company’s common stock outstanding plus the shares which the respective individual or group has theright to acquire within 60 days after March 12, 2015 through the exercise of stock options.(2)Includes shares that may be acquired within 60 days of March 12, 2015 pursuant to the exercise of stock options. Shares subject to options are asfollows: Mr. Keller—95,500 shares; Mr. Kavanaugh—260,000 shares; Messrs. Brakke, Fix, Sonenshine and Dr. Rosenberg,—16,500 shares each; Mr.Briggs—10,000 shares; Dr. Collins—45,500 shares; Mr. Hakopian—90,500 shares; Mr. Larsen—11,000 shares; and Directors and Executive Officers asa Group—705,500 shares.(3)Includes 100,000 shares beneficially owned by Mr. Keller’s wife, as to which he disclaims beneficial ownership.(4)Includes 3,000 shares beneficially owned by Mr. Briggs wife, as to which he disclaims beneficial ownership.(5)Includes 8,533 shares beneficially owned by Dr. Collins husband, as to which she disclaims beneficial ownership. 117Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (6)Includes 5,000 shares beneficially owned by Mr. Fix’s wife, as to which he disclaims beneficial ownership.The following table provides information as of December 31, 2014, regarding the Company’s Equity Plans: Column (a) Column (b) Column (c) Plan Category Number ofSecurities to beIssued uponExercise ofOutstandingOptions,Warrants andRights Weighted-AverageExercise Price ofOutstandingOptions,Warrants andRights(1) Number ofSecuritiesRemainingAvailable forFuture Issuanceunder EquityCompensationPlans(ExcludingSecuritiesReflected inColumn(a)) Equity compensation plans approved by shareholders 1,384,808 $12.67 323,763 Equity compensation plans not approved by shareholders — — — Total 1,384,808 $12.67 323,763 (1)Options are granted at an exercise price equal to or greater than the fair market value per share of our common stock on their respective dates of grant.Item 13.Certain Relationships and Related Transactions, and Director Independence.In addition to the compensation arrangements with directors and executive officers described in “Executive Compensation” above, the followingis a description of each transaction since January 1, 2013, and each proposed transaction in which:●we have been or are to be a participant;●the amount involved exceeded or exceeds $120,000; and●any of our directors, executive officers or beneficial holders of more than 5% of our capital stock, or any immediate family member of orperson sharing the household with any of these individuals (other than tenants or employees), had or will have a direct or indirect materialinterest.Private Placement TransactionsIn December 2013 we sold a total of 318,987 shares of our common stock, at a price of $18.00 per share, in a private placement to a total of 32investors, (the “Private Placement”). Mr. Kavanaugh, our Chief Executive Officer, purchased 19,500 shares in the Private Placement, for which he paid $18.00per share, for a total purchase price of $351,000.Ordinary Banking RelationshipsFFB has had, and in the future may have, banking transactions in the ordinary course of its business with directors, principal shareholders and theirassociates, including the making of loans to directors and their associates. Such loans and other banking transactions were, and in the future will be, made onthe same terms, including interest rates and collateral securing the loans, as those prevailing at the time for comparable transactions with persons ofcomparable creditworthiness who have no affiliation with the Company, FFB or any other subsidiaries of the Company and will be made only if they do notinvolve more than the normal risk of collectability and do not present any other unfavorable features at the times the loans are made. 118Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Indemnification Agreements with our Directors and OfficersWe are incorporated under the laws of the State of California. Section 317 of the CGCL provides that a California corporation may indemnify anypersons who are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal,administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director,employee or agent of such corporation, or is or was serving at the request of such corporation as an officer, director, employee or agent of another corporationor enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonablyincurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and in a manner he or shereasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any criminal action or proceeding, had no reasonable causeto believe that his or her conduct was illegal. Section 317 of the CGCL further authorizes a corporation to purchase and maintain insurance on behalf of anyindemnified person against any liability asserted against and incurred by such person in any indemnified capacity, or arising out of such person’s status assuch, regardless of whether the corporation would otherwise have the power to indemnify such person under the CGCL.Section 204(a)(10) of the CGCL permits a corporation to provide in its articles of incorporation that a director of the corporation shall not bepersonally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duties as a director, except for certain liabilitiesincluding liability for any:●breach of a director’s duty of loyalty to the corporation or its shareholders;●act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;●unlawful payment of dividends or redemption of shares; or●transaction from which the director derives an improper personal benefit.Our articles of incorporation authorize us to, and our amended and restated bylaws provide that we must, indemnify our directors and officers to thefullest extent authorized by the CGCL and also pay expenses incurred in defending any such proceeding in advance of its final disposition upon delivery ofan undertaking, by or on behalf of an indemnified person, to repay all amounts so advanced if it should be determined ultimately that such person is notentitled to be indemnified under this section or otherwise.As permitted by the CGCL, we have entered into indemnification agreements with each of our directors and certain of our officers. Theseagreements require us to indemnify these individuals to the fullest extent permitted under California law against liabilities that may arise by reason of theirservice to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified.We have an insurance policy covering our officers and directors with respect to certain liabilities, including liabilities arising under the SecuritiesAct of 1933, as amended, or otherwise.Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrantpursuant to the foregoing provisions, the registrant has been informed that in the opinion of the SEC such indemnification is against public policy asexpressed in the Securities Act and is therefore unenforceable.Procedures for Approval of Related Party TransactionsTransactions by FFI or FFB with related parties are subject to regulatory requirements and restrictions. These requirements and restrictions includeSections 23A and 23B of the Federal Reserve Act (which govern certain transactions by a bank with its affiliates) and the Federal Reserve’s Regulation andRegulation O (which governs certain loans by FFB to its executive officers, directors, and principal shareholders). We have adopted policies to comply withthese regulatory requirements and restrictions.In addition our Board has adopted a written policy governing the approval of related party transactions that complies with all applicable SECrequirements. FFI’s related parties include directors (including any nominee for election as a director), executive officers, 5% shareholders and the immediatefamily members of these persons. Our Chief Financial Officer, in consultation with other members of management and outside counsel, as appropriate, willreview potential related party transactions to determine if they are subject to the policy. If so, the transaction will be referred to the Board of Directors forapproval. In determining whether to approve a related party transaction, the Board of Directors will consider, among other factors, the fairness of the proposedtransaction to the Company, the direct or indirect nature of the related party’s interest in the transaction, the appearance of any improper conflict of interestsfor any director or executive officer, taking into account the size of the transaction and the financial position of the related party, whether the transactionwould impair an outside director’s independence, the acceptability of the transaction to our regulators and any possible violations of other of our corporatepolicies. 119Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Director IndependenceOur Board of Directors has evaluated the independence of its members based on the definition of independence for purpose of Board membershipand membership on the Board’s standing committees that are applicable to the Company because its shares are listed on the NASDAQ Stock Market. Basedon that evaluation, our Board has concluded that (i) six of the ten members of the Board are independent: Messrs. Brakke, Briggs, Fix, Larsen, Rosenberg andSonenshine, and (ii) all of the members of the Audit Committee, Compensation Committee and Nominating Committee are independent.Item 14.Principal Accounting Fees and ServicesAudit and Non-Audit Services Pre-Approval PolicyThe Audit Committee’s Charter provides that the Audit Committee must pre-approve services to be performed by the Company’s independentregistered public accounting firm. In accordance with that requirement, the Audit Committee pre-approved the engagement of Vavrinek, Trine Day and Co.LLP, (“VTD”) pursuant to which it provided the services described below for the fiscal years ended December 31, 2014 and 2013.Audit and Other Fees Paid in Fiscal Year 2014 and 2013Aggregate fees for professional services rendered to the Company by VTD were as follows for the years ended December 31: 2014 2013 Audit services $125,000 $83,000 Audit related services — — Tax compliance services — — All other services — — Total $125,000 $83,000 Audit ServicesIn each of the years ended December 31, 2014 and 2013, VTD rendered audit services which consisted of the audit of the Company’s consolidatedfinancial statements for the years then ended.Audit Related ServicesVTD did not render any other audit related services to us during 2014 or 2013.Tax Compliance ServicesVTD did not render any tax compliance services to us during 2014 or 2013.Other ServicesVTD did not render any other professional or any consulting services to us during 2014 or 2013. 120Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PART IVItem 15.Exhibits and Financial Statement Schedules.(a)Financial Statements, Financial Statement SchedulesSee page 64 for an index of the financial statements filed as part of this Annual Report on Form 10-K. No financial statement schedules are providedbecause the information called for is not required or is shown either in the financial statements or the notes thereto.(b)ExhibitsSee the Index of Exhibits on page E-1 for a list of exhibits filed as part of this Annual Report on Form 10-K, which Index of Exhibits is incorporatedherein by reference. 121Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized in Irvine California on March 16, 2015. FIRST FOUNDATION INC.By: /S/ SCOTT F. KAVANAUGH Scott F. Kavanaugh, President andChief Executive OfficerPOWER OF ATTORNEYEach individual whose signature appears below constitutes and appoints Scott F. Kavanaugh, Ulrich E. Keller, Jr. and John M. Michel, and each ofthem, acting severally, his or her true and lawful attorneys-in-fact and agents with full power of substitution, for him or her and in his or her name, place andstead, in any and all capacities, to sign and file on his or her behalf and in each capacity stated below, all amendments and/or supplements to this AnnualReport on Form 10-K, which amendments or supplements may make changes and additions to this Report as such attorneys-in-fact, or any of them, actingseverally, may deem necessary or appropriate.Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons inthe capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ SCOTT F. KAVANAUGH Scott F. Kavanaugh Chief Executive Officer and Director(Principal Executive Officer) March 16, 2015 /s/ JOHN M. MICHEL John M. Michel Chief Financial Officer(Principal Financial and Accounting Officer) March 16, 2015 /s/ ULRICH E. KELLER, JR. Ulrich E. Keller, Jr. Chairman and Director March 16, 2015 /s/ JAMES BRAKKE James Brakke Director March 16, 2015 /s/ MAX BRIGGS Max Briggs Director March 16, 2015 /s/ VICTORIA COLLINS Victoria Collins Director March 16, 2015 /s/ WARREN D. FIX Warren D. Fix Director March 16, 2015 /s/ JOHN HAKOPIAN John Hakopian Director March 16, 2015 /s/ GERALD L. LARSEN Gerald L. Larsen Director March 16, 2015 /s/ MITCHELL M. ROSENBERG Mitchell M. Rosenberg Director March 16, 2015 /s/ JACOB SONENSHINE Jacob Sonenshine Director March 16, 2015 S-1Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. INDEX OF EXHIBITS Exhibit No. Description 21.1Subsidiaries of the Registrant.23.1Consent of Vavrinek, Trine, Day & Co., independent registered public accounting firm31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101XBRL (eXtensive Business Reporting Language). The following financial materials from the Company’s QuarterlyReport on Form 10-K for the period ended December 31, 2014, formatted in XBRL: (i) Condensed ConsolidatedBalance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Consolidated Statements of ComprehensiveLoss, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated FinancialStatements. E-1Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 21.1SUBSIDIARIES OF REGISTRANT Name and State or other Jurisdiction of Incorporation Registrant’sPercentageOwnership First Foundation Advisors, a California corporation 100%First Foundation Bank, a California corporation 100%In accordance with the instructions set forth in Paragraph (b) of Item 601 of Regulation S-K, we have omitted subsidiaries that, if considered in theaggregate as a single subsidiary, would not have constituted a significant subsidiary as of December 31, 2014. Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our report dated March 16, 2015 with respect to the accompanying the consolidated financial statements of First Foundation Inc. andSubsidiaries (the Company) for the years ended December 31, 2014 and 2013 included in the Company’s Annual Report on Form 10-K for the years endedDecember 31, 2014 and 2013. We hereby consent to the incorporation by reference of that report in the Company’s Registration Statement on Form S-8 (FileNo. 333-193658). /s/ Vavrinek, Trine, Day & Co. LLP Laguna Hills, CaliforniaMarch 16, 2015 Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 31.1CERTIFICATIONS OF CHIEF EXECUTIVE OFFICERUNDERSECTION 302 OF THE SARBANES-OXLEY ACTI, Scott F. Kavanaugh, certify that:1.I have reviewed this Annual Report on Form 10-K of First Foundation Inc. for the fiscal year ended December 31, 2014;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Dated: March 16, 2015 /S/ SCOTT F. KAVANAUGHScott F. KavanaughChief Executive Officer Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 31.2CERTIFICATIONS OF CHIEF FINANCIAL OFFICERUNDERSECTION 302 OF THE SARBANES-OXLEY ACTI, John M. Michel, certify that:1.I have reviewed this Annual Report on Form 10-K of First Foundation Inc. for the fiscal year ended December 31, 2014;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Dated: March 16, 2015 /s/ John M. MichelJohn M. MichelExecutive Vice Presidentand Chief Financial Officer Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERPursuant to Section 906 of the Sarbanes-Oxley Act of 2002FIRST FOUNDATION INC.Annual Report on Form 10-Kfor the Year ended December 31, 2014In connection with the accompanying Annual Report on Form 10-K of First Foundation Inc. (the “Company”), for the year ended December 31, 2014,as filed with the Securities and Exchange Commission as of the date hereof (the “Annual Report”), I, Scott F. Kavanaugh, Chief Executive Officer of theCompany, hereby certify pursuant to 18 U.S.C.§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:(1) The Annual Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended; and(2) The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: March 16, 2015 /s/ Scott F. Kavanaugh Scott F. Kavanaugh Chief Executive Officer A signed original of this written statement required by Section 906 has beenprovided to First Foundation Inc. and will be retained by First FoundationInc. and furnished to the Securities and Exchange Commission or its staffupon request. Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 32.2CERTIFICATION OF CHIEF FINANCIAL OFFICERPursuant to Section 906 of the Sarbanes-Oxley Act of 2002FIRST FOUNDATION INC.Annual Report on Form 10-Kfor the Year ended December 31, 2014In connection with the accompanying Annual Report on Form 10-K of First Foundation Inc. (the “Company”), for the year ended December 31, 2014,as filed with the Securities and Exchange Commission as of the date hereof (the “Annual Report”), I, John M. Michel, Chief Financial Officer of theCompany, hereby certify pursuant to 18 U.S.C.§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:(1) The Annual Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended; and(2) The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: March 16, 2015 /s/ John M. Michel John M. Michel Chief Financial Officer A signed original of this written statement required by Section 906 has beenprovided to First Foundation Inc. and will be retained by First FoundationInc. and furnished to the Securities and Exchange Commission or its staffupon request. Source: First Foundation Inc., 10-K, March 16, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
Continue reading text version or see original annual report in PDF format above