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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 20212022

OR

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

For the transition period from ________ to ________

Commission File Number 001-38595

FIRST WESTERN FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Colorado

37-1442266

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

1900 16th Street, Suite 1200
Denver, CO

80202

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: 303.531.8100

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol

    

Name of each exchange on which registered

Common Stock, no par value

MYFW

The Nasdaq Stock Market LLC

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

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

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

Large accelerated filer 

Accelerated filer

Non-accelerated filer 

Smaller reporting company

Emerging growth company

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Shares outstanding as of
August 2, 20212022

Common Stock, no par value

7,996,4389,487,766

Table of Contents

FIRST WESTERN FINANCIAL, INC.

TABLE OF CONTENTS

June 30, 2022

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

6

Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2021 (Unaudited)2022 and December 31, 20202021

6

Condensed Consolidated Statements of Income (Unaudited) for the Three Months and Six Months Ended June 30, 20212022 and June 30, 20202021

7

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Six Months Ended June 30, 20212022 and June 30, 20202021

8

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Three Months and Six Months Ended June 30, 20212022 and June 30, 20202021

9

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 20212022 and June 30, 20202021

10

Notes to Condensed Consolidated Financial Statements (Unaudited)

11

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

4249

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

6978

Item 4.

Controls and Procedures

7079

PART II. OTHER INFORMATION

7080

Item 1.

Legal Proceedings

7080

Item 1A.

Risk Factors

7080

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

7080

Item 3.

Defaults upon Senior Securities

7180

Item 4.

Mine Safety Disclosures

7180

Item 5.

Other Information

7180

Item 6.

Exhibits

7281

SIGNATURES

7382

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Important Notice about Information in this Quarterly Report

Unless we state otherwise or the context otherwise requires, references in this Quarterly Report to "we," "our," "us," "the Company" and "First Western" refer to First Western Financial, Inc. and its consolidated subsidiaries, including First Western Trust Bank, which we sometimes refer to as "the Bank" or "our Bank."

The information contained in this Quarterly Report is accurate only as of the date of this Quarterly Report on Form 10-Q and as of the dates specified herein.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "should," "could," "predict," "potential," "believe," "will likely result," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would" and "outlook, " or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to COVID-19. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

The impact of the COVID-19 pandemic and actions taken by governmental authorities in response to the pandemic;
geographic concentration in Colorado, Arizona, Wyoming, Montana, and California;
changes in the economy affecting real estate values and liquidity;
risks associated with higher inflation;
our ability to continue to originate residential real estate loans and sell such loans;
risks specific to commercial loans and borrowers;
claims and litigation pertaining to our fiduciary responsibilities;
competition for investment managers and professionals and our ability to retain our associates;
fluctuation in the value of our investment securities;
the terminable nature of our investment management contracts;
changes to the level or type of investment activity by our clients;
investment performance, in either relative or absolute terms;
changes in interest rates;
the adequacy of our allowance for loan losses;
weak economic conditions and global trade;
legislative changes or the adoption of tax reform policies;
external business disruptors in the financial services industry;
liquidity risks;
our ability to maintain a strong core deposit base or other low-cost funding sources;
continued positive interaction with and financial health of our referral sources;
retaining our largest trust clients;
our ability to achieve our strategic objectives;
competition from other banks, financial institutions and wealth and investment management firms;
our ability to implement our internal growth strategy and manage the risks associated with our anticipated growth;

4

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the acquisition of other banks and financial services companies and integration risks and other unknown risks associated with acquisitions;
the accuracy of estimates and assumptions;
our ability to protect against and manage fraudulent activity, breaches of our information security, and cybersecurity attacks;
our reliance on communications, information, operating and financial control systems technology and related services from third-party service providers;
technological change;
our ability to attract and retain clients;
unforeseen or catastrophic events, including pandemics, terrorist attacks, extreme weather events or other natural disasters;
new lines of business or new products and services;
regulation of the financial services industry;
legal and regulatory proceedings, investigations and inquiries, fines and sanctions;
limited trading volume and liquidity in the market for our common stock;
fluctuations in the market price of our common stock;
potential impairment of goodwill recorded on our balance sheet and possible requirements to recognize significant charges to earnings due to impairment of intangible assets;
actual or anticipated issuances or sales of our common stock or preferred stock in the future;
the initiation and continuation of securities analysts coverage of the Company;
future issuances of debt securities;
our ability to manage our existing and future indebtedness;
available cash flows from the Bank; and
other factors that are discussed in "Item 1A - Risk Factors" in our Annual Report on Form 10-K.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in the section titled Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission ("SEC") on March 12, 2021.15, 2022. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share amounts)

June 30, 

December 31, 

    

2021

    

2020

ASSETS

 

 

  

Cash and cash equivalents:

 

  

 

  

Cash and due from banks

$

2,921

$

2,405

Interest-bearing deposits in other financial institutions

 

286,168

 

153,584

Total cash and cash equivalents

 

289,089

 

155,989

Available-for-sale securities, at fair value

 

25,532

 

36,666

Correspondent bank stock, at cost

 

2,053

 

2,552

Mortgage loans held for sale

 

48,563

 

161,843

Loans, net of allowance of $12,552 and $12,539

 

1,558,508

 

1,520,294

Premises and equipment, net

 

5,885

 

5,320

Accrued interest receivable

 

5,986

 

6,618

Accounts receivable

 

4,923

 

4,865

Other receivables

1,056

1,422

Other real estate owned, net

 

 

194

Goodwill and other intangible assets, net

 

24,250

 

24,258

Deferred tax assets, net

 

5,742

 

6,056

Company-owned life insurance

 

15,626

 

15,449

Other assets

 

22,091

 

32,129

Total assets

$

2,009,304

$

1,973,655

LIABILITIES

 

  

 

  

Deposits:

 

  

 

  

Noninterest-bearing

$

555,106

$

481,457

Interest-bearing

 

1,123,947

 

1,138,453

Total deposits

 

1,679,053

 

1,619,910

Borrowings:

 

  

 

  

Federal Home Loan Bank and Federal Reserve borrowings

 

120,762

 

149,563

Subordinated notes

 

24,261

 

24,291

Accrued interest payable

 

312

 

453

Other liabilities

 

16,930

 

24,476

Total liabilities

 

1,841,318

 

1,818,693

SHAREHOLDERS’ EQUITY

 

  

 

  

Preferred stock - 0 par value; 10,000,000 shares authorized; 0 issued and outstanding

 

 

Common stock - 0 par value; 90,000,000 shares authorized; 7,994,832 and 7,951,773 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

 

 

Additional paid-in capital

 

145,622

 

144,703

Retained earnings

 

21,855

 

9,579

Accumulated other comprehensive income

 

509

 

680

Total shareholders’ equity

 

167,986

 

154,962

Total liabilities and shareholders’ equity

$

2,009,304

$

1,973,655

June 30, 

December 31, 

    

2022

    

2021

Assets

 

 

  

Cash and cash equivalents:

 

  

 

  

Cash and due from banks

$

11,790

$

6,487

Federal funds sold

385

1,491

Interest-bearing deposits in other financial institutions

 

159,431

 

379,005

Total cash and cash equivalents

 

171,606

 

386,983

Available-for-sale securities, at fair value

 

 

55,562

Held-to-maturity securities, at amortized cost (fair value of $84,742 as of June 30, 2022)

87,029

Correspondent bank stock, at cost

 

4,352

 

2,584

Mortgage loans held for sale, at fair value

 

26,202

 

30,620

Loans (includes $21,477 and $0 measured at fair value, respectively)

 

2,146,394

 

1,949,137

Allowance for loan losses

(14,357)

(13,732)

Loans, net

2,132,037

1,935,405

Premises and equipment, net

 

24,236

 

23,976

Accrued interest receivable

 

7,884

 

7,151

Accounts receivable

 

5,192

 

5,267

Other receivables

4,575

1,949

Other real estate owned, net

378

Goodwill and other intangible assets, net

 

32,258

 

31,902

Deferred tax assets, net

 

7,662

 

6,845

Company-owned life insurance

 

15,976

 

15,803

Other assets

 

21,960

 

23,327

Assets held for sale

 

146

 

115

Total assets

$

2,541,493

$

2,527,489

Liabilities

 

  

 

  

Deposits:

 

  

 

  

Noninterest-bearing

$

668,342

$

636,304

Interest-bearing

 

1,501,656

 

1,569,399

Total deposits

 

2,169,998

 

2,205,703

Borrowings:

 

  

 

  

Federal Home Loan Bank and Federal Reserve borrowings

 

87,223

 

38,629

Subordinated notes

 

32,553

 

39,031

Accrued interest payable

 

304

 

355

Other liabilities

 

23,391

 

24,730

Total liabilities

 

2,313,469

 

2,308,448

Shareholders' Equity

 

  

 

  

Preferred stock - 0 par value; 10,000,000 shares authorized; 0 issued and outstanding

 

 

Common stock - 0 par value; 90,000,000 shares authorized; 9,478,710 and 9,419,271 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

 

 

Additional paid-in capital

 

189,494

 

188,629

Retained earnings

 

40,195

 

30,189

Accumulated other comprehensive (loss)/income

 

(1,665)

 

223

Total shareholders’ equity

 

228,024

 

219,041

Total liabilities and shareholders’ equity

$

2,541,493

$

2,527,489

See accompanying notes to condensed consolidated financial statements (unaudited).

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)

Three Months Ended June 30, 

 

Six Months Ended June 30, 

    

2021

    

2020

 

    

2021

    

2020

Interest and dividend income:

 

  

 

  

 

  

 

  

Loans, including fees

$

15,287

$

12,202

$

29,499

$

23,204

Investment securities

 

169

 

224

 

365

 

519

Federal funds sold and other

 

92

 

44

 

183

 

259

Total interest and dividend income

 

15,548

 

12,470

 

30,047

 

23,982

Interest expense:

 

  

 

  

 

  

 

  

Deposits

 

866

 

1,319

 

1,840

 

3,712

Other borrowed funds

 

459

 

355

 

931

 

543

Total interest expense

 

1,325

 

1,674

 

2,771

 

4,255

Net interest income

 

14,223

 

10,796

 

27,276

 

19,727

Less: Provision for loan losses

 

12

 

2,124

 

12

 

2,491

Net interest income, after provision for loan losses

 

14,211

 

8,672

 

27,264

 

17,236

Non-interest income:

 

  

 

  

 

  

 

  

Trust and investment management fees

 

5,009

 

4,609

 

9,856

 

9,340

Net gain on mortgage loans

 

3,914

 

10,173

 

9,110

 

12,654

Bank fees

 

394

 

221

 

767

 

589

Risk management and insurance fees

 

92

 

333

 

143

 

429

Income on company-owned life insurance

 

89

 

91

 

177

 

182

Other

60

Total non-interest income

 

9,498

 

15,427

 

20,113

 

23,194

Total income before non-interest expense

 

23,709

 

24,099

 

47,377

 

40,430

Non-interest expense:

 

  

 

  

 

  

 

  

Salaries and employee benefits

 

9,643

 

6,690

 

19,504

 

15,172

Occupancy and equipment

 

1,443

 

1,515

 

2,852

 

2,955

Professional services

 

1,370

 

1,231

 

2,649

 

2,254

Technology and information systems

 

904

 

993

 

1,846

 

1,962

Data processing

 

1,093

 

1,037

 

2,108

 

1,884

Marketing

 

398

 

253

 

719

 

668

Amortization of other intangible assets

 

4

 

38

 

8

 

40

Net loss on assets held for sale

553

Other

 

666

 

887

 

1,464

 

1,803

Total non-interest expense

 

15,521

 

12,644

 

31,150

 

27,291

Income before income taxes

 

8,188

 

11,455

 

16,227

 

13,139

Income tax expense

 

1,911

 

2,759

 

3,951

 

3,109

Net income available to common shareholders

$

6,277

$

8,696

$

12,276

$

10,030

Earnings per common share:

Basic

$

0.79

$

1.10

$

1.54

$

1.27

Diluted

$

0.76

$

1.10

$

1.50

$

1.26

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

    

2021

    

2022

    

2021

Interest and dividend income:

 

  

 

  

 

  

 

  

Loans, including fees

$

20,318

$

15,287

$

39,414

$

29,499

Loans accounted for under the fair value option

346

346

Investment securities

 

418

 

169

 

755

 

365

Interest-bearing deposits in other financial institutions

 

549

 

92

 

781

 

183

Total interest and dividend income

 

21,631

 

15,548

 

41,296

 

30,047

Interest expense:

 

  

 

  

 

  

 

  

Deposits

 

1,103

 

866

 

2,046

 

1,840

Other borrowed funds

 

390

 

459

 

828

 

931

Total interest expense

 

1,493

 

1,325

 

2,874

 

2,771

Net interest income

 

20,138

 

14,223

 

38,422

 

27,276

Less: Provision for loan losses

 

519

 

12

 

729

 

12

Net interest income, after provision for loan losses

 

19,619

 

14,211

 

37,693

 

27,264

Non-interest income:

 

  

 

  

 

  

 

  

Trust and investment management fees

 

4,784

 

5,009

 

9,952

 

9,856

Net gain on mortgage loans

 

1,152

 

3,914

 

3,646

 

9,110

Bank fees

 

601

 

394

 

1,290

 

766

Risk management and insurance fees

 

83

 

92

 

192

 

143

Income on company-owned life insurance

 

87

 

89

 

173

 

177

Net gain on equity interests

1

Net (loss)/gain on loans accounted for under the fair value option

(155)

(155)

Unrealized gains/(losses) recognized on equity securities

 

299

 

2

 

267

 

(10)

Other

89

174

60

Total non-interest income

 

6,940

 

9,500

 

15,540

 

20,102

Total income before non-interest expense

 

26,559

 

23,711

 

53,233

 

47,366

Non-interest expense:

 

  

 

  

 

  

 

  

Salaries and employee benefits

 

12,945

 

9,643

 

25,003

 

19,504

Occupancy and equipment

 

1,892

 

1,443

 

3,774

 

2,852

Professional services

 

2,027

 

1,370

 

3,553

 

2,649

Technology and information systems

 

1,076

 

904

 

2,122

 

1,846

Data processing

 

987

 

1,093

 

2,174

 

2,108

Marketing

 

428

 

398

 

985

 

719

Amortization of other intangible assets

 

77

 

4

 

154

 

8

Net (gain)/loss on assets held for sale

(2)

(3)

Other

 

1,153

 

668

 

2,179

 

1,453

Total non-interest expense

 

20,583

 

15,523

 

39,941

 

31,139

Income before income taxes

 

5,976

 

8,188

 

13,292

 

16,227

Income tax expense

 

1,494

 

1,911

 

3,286

 

3,951

Net income available to common shareholders

$

4,482

$

6,277

$

10,006

$

12,276

Earnings per common share:

Basic

$

0.47

$

0.79

$

1.06

$

1.54

Diluted

0.46

0.76

1.03

1.50

See accompanying notes to condensed consolidated financial statements (unaudited).

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

Three Months Ended June 30, 

 

Six Months Ended June 30, 

    

2021

    

2020

 

    

2021

    

2020

Net income

$

6,277

$

8,696

$

12,276

$

10,030

Other comprehensive income items, net of tax effect:

Net change in unrealized (losses)/gains on available-for-sale securities

 

(70)

 

1,601

 

(171)

 

1,008

Comprehensive income

$

6,207

$

10,297

$

12,105

$

11,038

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

    

2021

    

2022

    

2021

Net income

$

4,482

$

6,277

$

10,006

$

12,276

Other comprehensive income/(loss) items:

Unrealized losses on available-for-sale securities

 

 

(93)

 

(2,591)

 

(241)

Income tax effect

23

638

70

Reclassification adjustment of unrealized loss on available-for-sale securities transferred to held-to-maturity

86

86

Income tax effect

(21)

(21)

Total other comprehensive income/(loss) items

65

(70)

(1,888)

(171)

Comprehensive income

$

4,547

$

6,207

$

8,118

$

12,105

See accompanying notes to condensed consolidated financial statements (unaudited).

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share amounts)

    

    

    

Retained

    

Accumulated

    

Shares

Additional

Earnings

Other

Common

Paid-In

(Accumulated

Comprehensive

Stock

Capital

Deficit)

Income (Loss)

Total

Balance at April 1, 2020

 

7,917,489

$

143,081

$

(13,621)

$

(757)

$

128,703

Net income

 

 

 

8,696

 

 

8,696

Other comprehensive income, net of tax

 

 

 

 

1,601

 

1,601

Settlement of share awards

21,535

(170)

(170)

Stock-based compensation

 

 

587

 

 

 

587

Balance at June 30, 2020

 

7,939,024

$

143,498

$

(4,925)

$

844

$

139,417

Balance at April 1, 2021

7,957,900

$

145,282

$

15,578

$

579

$

161,439

Net income

 

 

 

6,277

 

 

6,277

Other comprehensive loss, net of tax

 

 

 

 

(70)

 

(70)

Settlement of share awards

36,932

(372)

(372)

Stock-based compensation

 

 

712

 

 

 

712

Balance at June 30, 2021

 

7,994,832

$

145,622

$

21,855

$

509

$

167,986

Balance at January 1, 2020

 

7,940,168

$

142,797

$

(14,955)

$

(164)

$

127,678

Net income

 

10,030

10,030

Other comprehensive income, net of tax

1,008

1,008

Settlement of share awards

 

21,535

(170)

(170)

Share repurchase

(22,679)

(370)

(370)

Stock-based compensation

 

1,241

1,241

Balance, June 30, 2020

 

7,939,024

$

143,498

$

(4,925)

$

844

$

139,417

Balance at January 1, 2021

 

7,951,773

$

144,703

$

9,579

$

680

$

154,962

Net income

 

 

 

12,276

 

 

12,276

Other comprehensive loss, net of tax

 

 

 

 

(171)

 

(171)

Settlement of share awards

43,059

 

(406)

 

 

(406)

Stock-based compensation

 

 

1,325

 

 

 

1,325

Balance, June 30, 2021

 

7,994,832

$

145,622

$

21,855

$

509

$

167,986

    

    

    

    

Accumulated

    

Shares

Additional

Other

Common

Paid-In

Retained

Comprehensive

Stock

Capital

Earnings

Income (Loss)

Total

Balance as of April 1, 2021

 

7,957,900

$

145,282

$

15,578

$

579

$

161,439

Net income

 

6,277

 

6,277

Other comprehensive loss, net of tax

 

(70)

 

(70)

Settlement of share awards

36,932

(372)

(372)

Stock-based compensation

 

712

 

712

Balance as of June 30, 2021

 

7,994,832

$

145,622

$

21,855

$

509

$

167,986

Balance as of April 1, 2022

9,430,007

$

189,283

$

35,713

$

(1,730)

$

223,266

Net income

 

 

 

4,482

 

 

4,482

Other comprehensive income, net of tax and reclassifications

 

 

 

 

65

 

65

Settlement of share awards

44,405

(557)

(557)

Options exercised

4,298

88

88

Stock-based compensation

 

 

680

 

 

 

680

Balance as of June 30, 2022

 

9,478,710

$

189,494

$

40,195

$

(1,665)

$

228,024

Balance as of January 1, 2021

 

7,951,773

$

144,703

$

9,579

$

680

$

154,962

Net income

 

12,276

12,276

Other comprehensive loss, net of tax

(171)

(171)

Settlement of share awards

 

43,059

(406)

(406)

Stock-based compensation

 

1,325

1,325

Balance as of June 30, 2021

 

7,994,832

$

145,622

$

21,855

$

509

$

167,986

Balance as of January 1, 2022

 

9,419,271

$

188,629

$

30,189

$

223

$

219,041

Net income

 

 

 

10,006

 

 

10,006

Other comprehensive loss, net of tax and reclassifications

 

 

 

 

(1,888)

 

(1,888)

Settlement of share awards

52,630

 

(688)

 

 

(688)

Options exercised

6,809

146

 

146

Stock-based compensation

 

 

1,407

 

 

 

1,407

Balance as of June 30, 2022

 

9,478,710

$

189,494

$

40,195

$

(1,665)

$

228,024

See accompanying notes to condensed consolidated financial statements (unaudited).

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

    

Six Months Ended June 30, 

2021

2020

Cash flows from operating activities

 

  

 

Net income

$

12,276

$

10,030

Adjustments to reconcile net income to net cash used in operating activities:

Depreciation and amortization

 

547

 

552

Deferred income tax expense/(benefits), net of valuation allowance

 

384

 

(1,314)

Stock-based compensation

 

1,325

 

1,241

Provision for loan losses

 

12

 

2,491

Net amortization of investment securities

 

278

 

231

Stock dividends received on correspondent bank stock

 

(43)

 

(12)

Increase in cash surrender value of company-owned life insurance

 

(177)

 

(182)

Net gain on mortgage loans

 

(9,110)

 

(12,654)

Origination of mortgage loans held for sale

 

(810,517)

 

(541,222)

Proceeds from mortgage loans

 

938,152

 

526,355

Loss on assets held for sale

553

Recognition of capitalized subordinated notes issuance costs

(30)

(116)

Change in accounts receivable

 

40

 

633

Change in accrued interest receivable and other assets

 

809

 

(2,444)

Change in accrued interest payable and other liabilities

 

(4,054)

 

6,588

Net cash provided by/(used in) operating activities

 

129,892

 

(9,270)

Cash flows from investing activities

Activity in available-for-sale securities:

Maturities, prepayments, and calls

 

10,877

 

12,662

Purchases of correspondent bank stock

 

(1)

 

(698)

Redemption of correspondent bank stock

543

Purchases of premises and equipment

 

(1,104)

 

(523)

Proceeds from sale of other real estate owned

194

Net cash paid on acquisitions

(61,316)

Loan and note receivable originations and principal collections, net

 

(37,237)

 

(304,658)

Net cash used in investing activities

 

(26,728)

 

(354,533)

Cash flows from financing activities

 

  

  

Net change in deposits

 

59,143

257,068

Proceeds from subordinated notes

8,000

Repurchase of common stock

(370)

Settlement of restricted stock

(406)

(170)

Payments to Federal Reserve borrowings

(112,475)

Proceeds from Federal Reserve borrowings

 

83,674

204,313

Payments to Federal Home Loan Bank borrowings

 

(27,000)

Proceeds from Federal Home Loan Bank borrowings

 

35,000

Net cash provided by financing activities

 

29,936

476,841

Net change in cash and cash equivalents

133,100

113,038

Cash and cash equivalents, beginning of year

 

155,989

78,638

Cash and cash equivalents, end of period

 

$

289,089

$

191,676

Supplemental cash flow information:

 

  

 

  

Interest paid on deposits and borrowed funds

$

2,912

$

4,349

Income tax payment, net of refunds received

2,488

1,122

Cash paid for amounts included in the measurement of lease liabilities

2,581

2,893

Supplemental noncash disclosures:

Change in unrealized gain on available-for-sale securities

(241)

1,334

    

Six Months Ended June 30, 

2022

2021

Cash flows from operating activities

 

  

 

Net income

$

10,006

$

12,276

Adjustments to reconcile net income to net cash provided by operating activities:

Net amortization of investment securities

 

126

 

278

Stock dividends received on correspondent bank stock

 

(33)

 

(43)

Provision for loan losses

 

729

 

12

Net gain on mortgage loans

 

(3,646)

 

(9,110)

Origination of mortgage loans held for sale

 

(293,170)

 

(810,517)

Proceeds from mortgage loans

 

301,580

 

938,152

Gain on disposal of fixed assets

(50)

Depreciation and amortization

 

1,191

 

573

Deferred income tax (benefit)/expense, net of valuation allowance

 

(2,310)

 

384

Increase in cash surrender value of company-owned life insurance

 

(173)

 

(177)

Stock-based compensation

 

1,407

 

1,325

Change in fair value of equity securities

(267)

Change in fair value of loans accounted for under the fair value option

155

Net changes in operating assets and liabilities:

Change in accounts receivable

 

364

 

40

Change in accrued interest receivable and other assets

 

(1,104)

 

809

Change in accrued interest payable and other liabilities

 

(3,070)

 

(4,054)

Net cash provided by operating activities

 

11,735

 

129,948

Cash flows from investing activities

Activity in available-for-sale securities:

Maturities, prepayments, and calls

 

3,218

 

10,877

Purchases

 

(9,000)

 

Activity in held-to-maturity securities:

Maturities, prepayments, and calls

3,124

Purchases

(28,439)

Purchases of correspondent bank stock

 

(2,978)

 

(1)

Redemption of correspondent bank stock

1,243

543

Contributions to low-income housing tax credit investments

(214)

Loan and note receivable originations and principal collections, net

 

(173,985)

 

(37,237)

Purchases of premises and equipment

(1,150)

(1,104)

Purchases of loans

 

(24,732)

 

Proceeds from sale of other real estate owned

194

Net cash used in investing activities

 

(232,913)

 

(26,728)

Cash flows from financing activities

 

  

  

Net change in deposits

 

(35,676)

59,143

Proceeds from Federal Home Loan Bank borrowings

 

70,000

Payments to Federal Reserve borrowings

(21,406)

(112,475)

Proceeds from Federal Reserve borrowings

 

83,674

Payments on subordinated notes

(6,575)

Proceeds from subordinated notes, net of issuance costs

(56)

Proceeds from the exercise of stock options

146

Settlement of restricted stock

(688)

(406)

Net cash provided by financing activities

 

5,801

29,880

Net change in cash and cash equivalents

(215,377)

133,100

Cash and cash equivalents, beginning of year

 

386,983

155,989

Cash and cash equivalents, end of period

 

$

171,606

$

289,089

Supplemental cash flow information:

 

  

 

  

Interest paid on deposits and borrowed funds

$

2,925

$

2,912

Income tax payment, net of refunds received

4,118

2,488

Cash paid for lease liabilities

2,934

2,581

Supplemental noncash disclosures:

Change in unrealized loss on available-for-sale securities

(2,591)

(241)

Transfer of securities from available-for-sale to held-to-maturity

58,727

Security purchase settled in subsequent period

(3,000)

Transfers from loans to other real estate owned

378

See Note 2 - Acquisitions regarding noncash transactions related to measurement period adjustments

See accompanying notes to condensed consolidated financial statements (unaudited).

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FIRST WESTERN FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Presentation:  The condensed consolidated financial statements include the accounts of First Western Financial, Inc. ("FWFI"), incorporated in Colorado on July 18, 2002, and its direct and indirect wholly-owned subsidiaries listed below (collectively referred to as the "Company", "we", "us", or "our").

FWFI is a bank holding company with financial holding company status registered with the Board of Governors of the Federal Reserve System. FWFI wholly owns the following subsidiaries: First Western Trust Bank (the "Bank") and Ryder, Stilwell Inc. ("RSI"). The Bank wholly owns the following subsidiaries, which are therefore indirectly wholly-owned by FWFI: First Western Merger Corporation ("Merger Corp"), and RRI, LLC ("RRI"). RSI and RRI are not active operating entities.

The Company provides a fully-integrated suite of wealth management services including, private banking, personal trust, investment management, mortgage loans, and institutional asset management services to individual and corporate clients principally in Colorado (metro Denver, Aspen, Boulder, Fort Collins, and Vail Valley), Arizona (Phoenix and Scottsdale), California (Century City), Montana (Bozeman), and Wyoming (Jackson Hole, Laramie, Pinedale, and Laramie)Rock Springs). The Company’s revenues are generated from its full range of product offerings as noted above, but principally from net interest income (the interest income earned on the Bank’s assets net of funding costs), fee-based wealth advisory, investment management, asset management and personal trust services, and net gains earned on mortgage loans.

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. The December 31, 20202021 condensed consolidated balance sheet has been derived from the audited financial statements for the year ended December 31, 2020.2021.

In the opinion of management, all adjustments that were recurring in nature and considered necessary have been included for fair presentation of the Company’s financial position and results of operations. Operating results for the three and six months ended June 30, 20212022 are not necessarily indicative of results that may be expected for the full year ending December 31, 2021.2022. In preparing the condensed consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could be significantly different from those estimates.

The condensed consolidated financial statements and notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 as filed with the SEC.

Consolidation:  The Company’s policy is to consolidate all majority-owned subsidiaries in which it has a controlling financial interest and variable-interest entities where the Company is deemed to be the primary beneficiary. All material intercompany accounts and transactions have been eliminated in consolidation.

Business Combinations and Divestitures: On May 15, 2020,December 31, 2021, the Company completed a branch purchaseits merger pursuant to an Agreement and assumption transaction ("Branch Acquisition"Plan of Merger (the “Merger Agreement”) with SimmonsTeton Financial Services, Inc. (“Teton”), parent company of Rocky Mountain Bank, ("Simmons").a Wyoming-chartered bank headquartered in Jackson, Wyoming. Management concluded that the acquisitionmerger represented a business combination, which is accounted for using the acquisition method, with the results of operations included in the Company’s condensed consolidated financial statements as of the acquisition date.

On November 13, 2020, the Company completed the sale of its LA fixed income team and certain related advisory and sub-advisory arrangements to Lido Advisors, LLC and Oakhurst Advisors, LLC.  As a result of this transaction, the Company recorded a contingent consideration asset with an initial fair value estimated at $3.1 million to be received in quarterly payments over three years and a portion will be received in perpetuity. The asset is carried at its net present value in our Other assets line item of the Condensed Consolidated Balance Sheets.

Use of Estimates:  To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the condensed consolidated financial statements and the disclosures provided, and actual results could differ. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including the impact of the COVID-19 pandemic, and changes in the financial condition of borrowers. Material estimates that are particularly susceptible to significant change include: the determination of the allowance for loan losses, the evaluation of goodwill impairment, and the fair value of financial instruments.

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The Company could experience a material adverse effect on its business as a result of the impact of the COVID-19 pandemic, and the resulting governmental actions to curtail its spread.

Concentration of Credit Risk:  Most of the Company’s lending activity is to clients located in and around metro Denver, Aspen, Fort Collins, and Vail, Colorado; Phoenix and Scottsdale, Arizona; Bozeman, Montana; and Jackson Hole, and Laramie, Wyoming. The Company does not believe it has significant concentrations in any one industry or customer. As of June 30, 20212022 and December 31, 2020, 71.6%2021, 75.5% and 66.9%76.1%, respectively, of the Company’s loan portfolio was secured by real estate collateral. Declines in real estate values in the primary markets the Company operates in could negatively impact the Company.

Mortgage Banking Derivatives:  Commitments to fund mortgage loans, interest rate lock commitments ("IRLC"), and forward sale commitments ("FSC"), to be sold in the secondary market for the future delivery of these loans are accounted for as free standing derivatives. The fair value of the IRLC is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. The Company sells mortgage loans to third party investors at the best execution available which includes best efforts, mandatory, and bulk bids. Loans committed under mandatory or bulk bid are considered FSC and qualify as financial derivatives. Fair values of these mortgage derivatives are estimated based on the change in the loan pricing from the date of the commitment to the period end date for any unsettled commitments. Changes in the fair values of these derivatives are included in the Net gain on mortgage loans line of the Condensed Consolidated Statements of Income.

In order to manage the interest rate risk on our uncommitted IRLC and mortgage loans held for sale pipeline, the Company enters into mortgage derivative financial instruments called To Be Announced ("TBA"), which we refer to as mortgage derivatives.forward commitments. TBA agreements are forward contracts to purchase mortgage backed securities ("MBS") that will be issued by a US Government Sponsored Enterprise. The Bank purchases or sells these derivatives to offset the changes in value of our mortgage loans held for sale and IRLC adjusted pipeline where we have exposure to interest rate volatility. Changes in the fair values of these derivatives are included in the Net gain on mortgage loans line of the Condensed Consolidated Statements of Income.

Revenue Recognition:  In accordance with the Financial Accounting Standards Board ("FASB"), Revenue Contracts with Customers ("Topic 606"), trust and investment management fees are earned by providing trust and investment services to customers. The Company’s performance obligation under these contracts is satisfied over time as the services are provided. Fees are recognized monthly based on the average monthly value of the assets under management and the corresponding fee rate based on the terms of the contract. There were 0 performance based incentive fees earned with respect to investment management contracts for the three and six months ended June 30, 2021. Performance based incentive fees earned with respect to investment management contracts for the year ended December 31, 2020 were immaterial. Receivables are recorded on the Condensed Consolidated Balance Sheets in the Accounts receivable line item. Income related to trust and investment management fees, bank fees, and risk management and insurance fees on the Condensed Consolidated Statements of Income for the three and six months ended June 30, 20212022 and 20202021 are considered in scope of Topic 606.

Transition of LIBOR to an Alternative Reference Rate:  In July 2017, the United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate ("LIBOR"), announced that after 2021 it will no longer persuade or compel banks to submit rates for the calculation of LIBOR. In response, the Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee to identify a set of alternative reference interest rates for possible use as market benchmarks. This committee has proposed the Secured Overnight Financing Rate ("SOFR") as its recommended alternative to U.S. dollar LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in the second quarter of 2018. SOFR is based on a broad segment of the overnight Treasury repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities.

The administrator12

Table of LIBOR has proposed to extend publicationContents

In March 2020, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU’) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the most commonly used U.S. DollarEffects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the LIBOR settingsor another reference rate expected to June 30, 2023,be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to cease publishing other LIBOR settingstailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on December 31, 2021.contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.

Certain of the Company’s assets and liabilities are indexed to LIBOR, with exposure extending beyond December 31, 2021. The Company is currently evaluating and planning for the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. In general, the transition away from LIBOR may result in increased market risk, credit risk, operational risk and business risk for the Company. The Company has developed a LIBOR transition plan, which addresses governance, risk management, legal, operational, systems, fallback language, and other aspects of planning. The Company has prepared a timelinecompany no longer originates LIBOR indexed loans and is working on transitioning existing LIBOR loans to transition from LIBOR before the end of 2021.SOFR. Consumer indexed loans are being managed in accordance with Interagency Guidance.

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COVID-19 and CARES Act:  On March 11, 2020 the World Health Organization declared the outbreak of COVID-19 a global pandemic, which continues to spread throughout the United States and the around the world. In response to the COVID-19 pandemic, the President signed the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") into law on March 27, 2020. The objective of the CARES Act is to prevent a severe economic downturn using various measures, including economic stimulus to significantly impacted industry sectors. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act and other government actions.

The CARES Act created the Paycheck Protection Program ("PPP"), which is administered by the Small Business Administration ("SBA"). The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA lender and supported the community and clients by originating PPP loans duringsince the six months ended June 30, 2021.program was created. PPP loans are classified in the Cash, Securities and Other portion of the loan portfolio. See Note 34 – Loans and the Allowance for Loan Losses for further discussion on our PPP loans.

As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic and had a risk rating of “pass” and had not been delinquent in making interest or principal payment by more than 30 days during the last two years.

The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as troubled debt restructurings ("TDR"). The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from Federal Reserve and the Federal Deposit Insurance Corporation ("FDIC") confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered a TDR. We believe our loan modification program meets that definition and have not classified any of these modifications as a TDR as of June 30, 2021.2022. See Note 34 – Loans and the Allowance for Loan Losses for further discussion on our loan modification program.

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The Company is a participant in the Federal Reserve’s Main Street Lending Program ("MSLP") to support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. The Company may sell a 95% participation in a new MSLP loan to the Main Street Special Purpose Vehicle ("SPV") at par value. The Company must retain 5% of the MSLP loan until (i) it matures or (ii) neither the Main Street SPV nor a Governmental Assignee holds an interest in MSLP Loan in any capacity, whichever comes first. See Note 34 – Loans and the Allowance for Loan Losses for further discussion on our participation in the program.

Reclassifications:  Certain items in prior year financial statements were reclassified to conform to the current presentation. Such reclassifications had no impact on net income or total shareholders’ equity.

Recently adopted accounting pronouncements:  The following reflects recent accounting pronouncements that were adopted by the Company since the end of the Company’s fiscal year ended December 31, 2020.

In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope" ("ASU 2021-01"). ASU 2021-01 clarifies the scope of Topic 848, originally issued in 2020 (ASU 2020-04). ASU 2021-01 clarifies that derivatives affected by the related discounting transition are explicitly eligible for certain optional expedients and exceptions. ASU 2021-01 also clarifies that a receive-variable-rate, pay-variable-rate cross-currency interest rate swap may be considered an eligible hedging instrument in a net investment hedge if both legs of the swap do not have the same repricing intervals and dates as a result of reference rate reform. ASU 2021-01 was effective for the Company on January 7, 2021 and did not have a material impact on the Company’s financial statement disclosures.

Recently issued accounting pronouncements, not yet adopted:  The following reflects pending pronouncements with an update to the expected impact since the end of the Company’s fiscal year ended December 31, 2020.

In February 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) ("ASU 2016-13"). ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss ("CECL") model. The CECL model is applicable to the measurement of credit losses on the financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained earnings and the allowance for loan losses as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 was set to be effective for most public companies on January 1, 2020. However, at the October 16, 2019 FASB meeting,

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the FASB voted unanimously to delay the effective date of CECL adoption for smaller reporting companies ("SRCs") to January 1, 2023.

During the six months ended June 30, 2021, the CECL committee of the Company continued to work through its implementation plan. The Company has integrated historical and current loan level data as required by CECL and is working with its third-party vendor solution to begin evaluating the methodologies available under the CECL model on its loan portfolios. The Company also continues to evaluate documentation requirements, internal control structure, relevant data sources, and system configurations. The Company has completed a successful integration of the required fields and historical data for key loan, client and collateral data within the third-party solution and has been able to run parallels of our current allowance for loan and lease losses ("ALLL") calculation in the software to compare to our internal calculation and reconcile known differences. The Company has started the process of selecting the methodologies to be used for each segment of its loan portfolio and started preliminarily testing to determine the impact of each methodology. Currently, we are unable to estimate the impact the adoption of this update will have on the consolidated financial statements and disclosures. However, the Company expects the impact of the adoption will be significantly influenced by the composition and characteristics of its loan portfolios along with economic conditions prevalent as of the date of adoption. The Company expects to implement the new standard beginning January 1, 2023.2021.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which amended existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge of the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 was set to be effective for the Company on January 1, 2021. However, ASU 2019-10 amended the mandatory effective date for ASU 2014-07 to January 1, 2023 for SRC’s, with earlier adoption permitted. This update isOn January 1, 2022, the Company adopted the new guidance. The adoption of this ASU has not expected to havehad a significantmaterial impact on the consolidated financial statements, and the Company has not recorded goodwill impairment to date as of part of the acquisition activity.

Recently issued accounting pronouncements, not yet adopted:  The following reflects pending pronouncements with an update to the expected impact since the end of the Company’s fiscal year ended December 31, 2021.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This was issued to clarify the guidance in  Topic 820, Fair Value Measurement, when measuring fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The Company is currently assessing the impact of this guidance on our existing equity securities. This guidance is effective for the Company in fiscal years after December 15, 2023.

In February 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) ("ASU 2016-13"). ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss ("CECL") model. The CECL model is applicable to the measurement of credit losses on the financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained earnings and the allowance for credit losses as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 was set to be effective for most public companies on January 1, 2020. However, at the October 16, 2019 FASB meeting, the FASB voted unanimously to delay the effective date of CECL adoption for smaller reporting companies ("SRCs") to January 1, 2023.

During the six months ended June 30, 2022, the Company’s CECL project team continued to work through its implementation plan. The Company has selected a champion quantitative model to approximate expected losses by call code segment using regional and other appropriate peers. The Company has selected qualitative factors and evaluated those factors for each loan segment for the quarter ended June 30, 2022. The Company has begun to document policies and procedures, internal control structure, and process flows. Using this information, the Company successfully ran parallel models for both the first and second quarters of 2022 in order for management to review and compare results between the initial CECL model and existing ALLL model. Currently, we are unable to estimate the impact the adoption of this update will have on the condensed consolidated financial statements and disclosures. However, the Company expects the impact of the adoption will be significantly influenced by the composition and characteristics of its loan portfolios along with economic conditions prevalent as of the date of adoption. The Company expects to implement the new standard beginning January 1, 2023.

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Table of Contents

In March, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326); Troubled Debt Restructurings (“TDR”) and Vintage Disclosures. This ASU will be effective for the Company at the same time we adopt CECL, January 1, 2023. The amendments eliminate the TDR recognition and measurement guidance and instead require an entity to evaluate whether the modification represents a new loan or a continuation of an existing loan (consistent with accounting for other modifications). The amendments also enhance existing disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.

k

NOTE 2 – ACQUISITIONS

On July 22, 2021, the Company entered into the Merger Agreement with Teton, parent company of Rocky Mountain Bank, a Wyoming-chartered bank headquartered in Jackson, Wyoming. The Merger Agreement provided that, subject to the terms and conditions set forth in the Merger Agreement, Teton would merge into the Company, with the Company continuing as the surviving corporation. The Merger Agreement also provided that following the merger, Rocky Mountain Bank would merge with and into the Bank, with the Bank surviving the bank merger. The transaction closed on December 31, 2021 with an aggregate purchase price of $51.3 million. As part of its long-term growth strategy, the Teton Acquisition expands First Western’s presence in Wyoming and allows the Bank to deliver its unique approach to private and commercial banking to more clients in the region.

The Teton Acquisition was accounted for under the acquisition method of accounting and therefore all assets and liabilities were measured and recorded at their provisional fair values as of the acquisition close date of December 31, 2021 with final measurement period adjustments made as of March 31, 2022. All non-equity acquisition related costs were expensed as incurred. Certain acquisition costs related to the issuance of equity were capitalized as of December 31, 2021. Market value adjustments for assets acquired and liabilities assumed were amortized or accreted on a level yield basis over the estimated life of the asset or liability. Loans acquired were recorded at their estimated fair value and therefore no allowance for loan and lease losses was recorded at the date of acquisition. Goodwill of $6.2 million, which is not tax deductible, was recognized in the transaction and represents expected synergies and cost savings resulting from combining the expanded footprint and expertise of the associates. Additionally, core deposit intangible assets were identified and recorded at their estimated fair values and are amortized over their estimated useful life. On August 31, 2021, the Company completed the issuance and sale of subordinated notes, which provided partial funding of the transaction. See Note 8 – Borrowings for more information.

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Table of Contents

The following presents the estimated fair values of the assets acquired and liabilities assumed in the transaction with Teton as of December 31, 2021, including all measurement period adjustments to the provisional estimates (dollars in thousands):

Provisional

Measurement Period

December 31,

Fair value of consideration transferred

Estimates

Adjustments

2021

Cash consideration

$

11,501

$

$

11,501

Common stock issued

39,818

39,818

Total fair value of consideration transferred

51,319

51,319

Assets acquired

Cash and cash equivalents

132,498

132,498

Available-for-sale securities, at fair value

18,058

18,058

Correspondent bank stock, at cost

928

928

Mortgage loans held for sale

840

840

Loans

252,275

(857)

251,418

Premises and equipment

17,758

17,758

Accrued interest receivable

923

923

Accounts receivable

95

95

Other receivable

520

520

Core deposit intangible(1)

1,264

698

1,962

Other assets

226

242

468

Assets held for sale

115

5

120

Total assets acquired

425,500

88

425,588

Liabilities assumed

Deposits

379,227

(29)

379,198

Accrued interest payable

26

26

Other liabilities

 

1,283

1,283

Deferred tax liabilities/(assets), net

42

(71)

(29)

Total liabilities assumed

380,578

(100)

380,478

Net assets acquired

44,922

188

45,110

Goodwill recognized

$

6,397

$

(188)

$

6,209

(1)The core deposit intangible was determined to have an estimated life of 10 years.

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Table of Contents

The Company incurred $0.3 million and $0.9 million in expenses related to the acquisition during the three and six months ended June 30, 2022, respectively. The following presents the acquisition expenses within Non-interest expense of the Condensed Consolidated Statements of Income as of the date noted (dollars in thousands):

Three Months Ended

Six Months Ended

June 30, 2022

June 30, 2022

Mergers and acquisitions expense:

Salaries and employee benefits

$

152

$

381

Professional services

274

386

Technology and information systems

4

4

Data processing(1)

(93)

22

Marketing

5

75

Other

5

6

Total mergers and acquisitions expense

$

347

$

874

(1) Includes credit for avoided contract termination costs due to new contract terms.

The following table presents pro forma information for the three and six months ended June 30, 2022 and 2021, as if the Teton Acquisition had occurred on January 1, 2021. This table has been prepared for comparative purposes only, and is not indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the periods presented, nor is it indicative of future results (in thousands, except per share data):

Pro Forma

Three Months Ended June 30,

Six Months Ended June 30,

2022

2021

2022

2021

Net interest income after provision for loan losses

$

19,619

$

16,755

$

37,693

$

33,211

Non-interest income

6,940

10,039

15,540

21,359

Net income

4,482

10,736

10,006

14,392

Pro forma earnings per share:

Basic

0.47

1.15

1.06

1.54

Diluted

0.46

1.12

1.03

1.51

k

NOTE 23 - INVESTMENT SECURITIES

The following presents the amortized cost and fair value of securities held-to-maturity and securities available-for-sale withand the corresponding amounts of gross unrecognized gains and losses and gross unrealized gains and losses recognized in accumulated other comprehensive incomeloss as of June 30, 2021 and December 31, 2020 (inthe dates noted (dollars in thousands):

    

    

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

June 30, 2021

Cost

Gains

Losses

Value

Investment securities available-for-sale:

 

  

 

  

 

  

 

  

U.S. Treasury debt

$

250

$

1

$

$

251

Corporate bonds

6,000

157

(15)

6,142

GNMA mortgage-backed securities – residential

 

15,619

 

467

 

 

16,086

FNMA mortgage-backed securities – residential

1,113

47

1,160

CMO and MBS

 

1,875

 

41

 

(23)

 

1,893

Total securities available-for-sale

$

24,857

$

713

$

(38)

$

25,532

    

    

Gross

    

Gross

    

    

    

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Amortized

Unrecognized

Unrecognized

Fair

December 31, 2020

Cost

Gains

Losses

Value

Investment securities available-for-sale:

 

  

 

  

 

  

 

  

June 30, 2022

Cost

Gains

Losses

Value

Investment securities held-to-maturity:

 

  

 

  

 

  

 

  

U.S. Treasury debt

$

250

$

4

$

$

254

$

240

$

$

(4)

$

236

U.S. Government Agency

252

(2)

250

Corporate bonds

6,000

55

(11)

6,044

24,085

6

(651)

23,440

GNMA mortgage-backed securities – residential

 

23,806

 

798

 

 

24,604

 

43,583

 

 

(1,089)

 

42,494

FNMA mortgage-backed securities – residential

1,616

61

1,677

7,184

(333)

6,851

Government CMO and MBS - commercial

7,426

14

(249)

7,191

Corporate CMO and MBS

 

4,078

 

62

 

(53)

 

4,087

 

4,259

 

74

 

(53)

 

4,280

Total securities available-for-sale

$

35,750

$

980

$

(64)

$

36,666

Total securities held-to-maturity

$

87,029

$

94

$

(2,381)

$

84,742

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Table of Contents

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

December 31, 2021

Cost

Gains

Losses

Value

Investment securities available-for-sale:

 

  

 

  

 

  

 

  

U.S. Treasury debt

$

250

$

$

(3)

$

247

U.S. Government Agency

3,522

3,522

Corporate bonds

 

8,113

227

(15)

 

8,325

GNMA mortgage-backed securities – residential

26,611

 

185

 

(146)

26,650

FNMA mortgage-backed securities – residential

14,400

43

14,443

Government CMO and MBS - commercial

878

878

Corporate CMO and MBS

1,492

 

23

 

(18)

1,497

Total securities available-for-sale

$

55,266

$

478

$

(182)

$

55,562

The Company reassessed classification of investment securities and, effective April 1, 2022, elected to transfer all securities, fair valued at $58.7 million, from available-for-sale to held-to-maturity. The related unrealized loss of $2.3 million included in other comprehensive income remained in other comprehensive income and will be amortized out with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. NaN gain or loss was recorded at the time of transfer.

As of June 30, 2021,2022, the amortized cost and estimated fair value of available-for-saleheld-to-maturity securities have contractual maturity dates shown in the table below (in(dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

    

Amortized

    

Fair

June 30, 2022

Cost

Value

Due within one year

$

363

$

361

Due between one year and five years

2,233

2,196

Due between five years and ten years

21,582

20,975

Due after ten years

399

394

Securities (CMO and MBS)

 

62,452

 

60,816

Total

$

87,029

$

84,742

In the first quarter of 2022, the Company committed $3.0 million in capital to a bank technology fund. During the six months ended June 30, 2022, the Company made $0.5 million in contributions to the partnership. As of June 30, 2022, the Company held a balance of $0.5 million, which is included in Other assets in the accompanying Condensed Consolidated Balance Sheets. The Company may be obligated to invest up to an additional $2.5 million in future contributions.

In 2014, the Company began investing in a small business investment company ("SBIC") fund administered by the Small Business Administration. The Company did not make any contributions to the SBIC fund during the six months ended June 30, 2022 or the year ended December 31, 2021 and received a $0.1 million return of capital during each period. As of June 30, 2022 and December 31, 2021, the Company held a balance of $2.0 million with SBIC, which is included in Other assets in the accompanying Condensed Consolidated Balance Sheets. The Company may be obligated to invest up to an additional $1.0 million in future SBIC investments.

As of June 30, 2022 and December 31, 2021, securities with carrying values totaling $17.1 million and $17.3 million, respectively, were pledged to secure various public deposits and credit facilities of the Company.  

As of June 30, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities and agencies, in an amount greater than 10% of shareholders’ equity.

As of June 30, 2022 and December 31, 2021, NaN securities and 10 securities were in an unrealized loss position, with unrealized losses totaling $4.6 million and $0.2 million, respectively. Of the securities in an unrealized loss position as of June 30, 2022, 3 have been in a continuous unrealized loss position for more than twelve months and the remaining have been in a continuous unrealized loss position for less than twelve months. The unrealized loss positions were caused primarily by interest rate changes and market assumptions about prepayments of principal and interest on the underlying mortgages. Because the decline in market value is attributable to market conditions, not credit quality, and because the Company has the ability and intent to hold these investments to maturity, the Company does not consider these investments to be other-than-temporarily impaired as of June 30, 2022.

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Table of Contents

    

Amortized

    

Fair

June 30, 2021

Cost

Value

Due within one year

$

250

$

251

Due between one year and five years

1,250

1,245

Due between five years and ten years

4,750

4,897

Securities (agency, Corporate CMO, and MBS)

 

18,607

 

19,139

Total

$

24,857

$

25,532

In 2014, the Company began investing in a small business investment company ("SBIC") fund administered by the Small Business Administration. During the six months ended June 30, 2021, the Company did not make any contributions to the SBIC fund. During the year ended December 31, 2020, the Company invested $0.5 million in SBIC. As of June 30, 2021 and  December 31, 2020, the Company held a balance of $2.1 million with SBIC, which is included in Other assets in the accompanying Condensed Consolidated Balance Sheets. The Company may be obligated to invest up to an additional $0.9 million in future SBIC investments.

As of June 30, 2021 and December 31, 2020, securities with carrying values totaling $2.9 million and $3.7 million, respectively, were pledged to secure various public deposits and credit facilities of the Company.

As of June 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities and agencies, in an amount greater than 10%of shareholders’ equity.

As of June 30, 2021 and December 31, 2020, 5 securities and 7 securities were in an unrealized loss position, with unrealized losses totaling an immaterial amount and $0.1 million, respectively. NaN of the securities in an unrealized loss position as of June 30, 2021 has been in a continuous unrealized loss position for more than twelve months, and the remaining have been in a continuous unrealized loss position for less than twelve months. The unrealized loss positions were caused primarily by interest rate changes and market assumptions about prepayments of principal and interest on the underlying mortgages. Because the decline in market value is attributable to market conditions, not credit quality, and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be near or at maturity, the Company does not consider these investments to be other-than-temporarily impaired as of June 30, 2021.

The following table summarizespresents securities with unrealized losses as of June 30, 2021 and December 31, 2020, aggregated by major security type and length of time in a continuous unrealized loss position (inas of the dates noted (dollars in thousands, before tax):

    

Less than 12 Months

    

12 Months or Longer

    

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

June 30, 2021

Value

Losses

Value

Losses

Value

    

Losses

GNMA mortgage-backed securities – residential

$

286

$

*

$

$

$

286

$

*

Corporate bonds

1,735

(15)

1,735

(15)

Corporate CMO and MBS

 

 

 

615

 

(23)

 

615

 

(23)

Total

$

2,021

$

(15)

$

615

$

(23)

$

2,636

$

(38)

*Not meaningful

    

Less than 12 Months

    

12 Months or Longer

    

Total

    

Less than 12 Months

    

12 Months or Longer

    

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

December 31, 2020

    

Value

Losses

Value

Losses

    

Value

    

Losses

June 30, 2022

Value

Losses

Value

Losses

Value

    

Losses

Investment securities held-to-maturity:

U.S. Treasury debt

$

236

$

(14)

$

$

$

236

$

(14)

U.S. Government Agency

250

(2)

250

(2)

Corporate bonds

$

3,489

$

(11)

$

$

$

3,489

$

(11)

20,836

(689)

475

(26)

21,311

(715)

GNMA mortgage-backed securities – residential

40,306

(2,131)

2,094

(248)

42,400

(2,379)

FNMA mortgage-backed securities – residential

6,851

(760)

6,851

(760)

Government CMO and MBS - commercial

6,304

(657)

6,304

(657)

Corporate CMO and MBS

 

880

 

(40)

 

566

 

(13)

 

1,446

 

(53)

 

761

 

(36)

 

435

 

(43)

 

1,196

 

(79)

Total

$

4,369

$

(51)

$

566

$

(13)

$

4,935

$

(64)

$

75,544

$

(4,289)

$

3,004

$

(317)

$

78,548

$

(4,606)

    

Less than 12 Months

    

12 Months or Longer

    

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

December 31, 2021

    

Value

Losses

Value

Losses

    

Value

    

Losses

Investment securities available-for-sale:

U.S. Treasury debt

$

247

$

(3)

$

$

$

247

$

(3)

Corporate bonds

485

(15)

485

(15)

GNMA mortgage-backed securities – residential

17,205

(146)

17,205

(146)

Corporate CMO and MBS

 

 

 

521

 

(18)

 

521

 

(18)

Total

$

17,937

$

(164)

$

521

$

(18)

$

18,458

$

(182)

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Table of Contents

The Company did not sell any securities during the three and six months ended June 30, 20212022 or during the year ended December 31, 2020.2021.

NOTE 34 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

The following presents a summary of the Company’s loans as of the dates noted (in(dollars in thousands):

June 30, 

December 31, 

June 30, 

December 31, 

    

2021

    

2020

    

2022

    

2021

Cash, Securities and Other(1)

$

290,907

$

357,020

$

180,738

$

261,190

Consumer and Other(2)

47,855

34,758

Construction and Development

 

127,141

 

131,111

 

162,426

 

178,716

1-4 Family Residential

 

496,101

 

455,038

 

732,725

 

580,872

Non-Owner Occupied CRE

 

324,493

 

281,943

 

489,111

 

482,622

Owner Occupied CRE

178,847

163,042

224,597

212,426

Commercial and Industrial(2)

155,526

146,031

Commercial and Industrial(3)

312,696

203,584

Total loans held for investment

 

1,573,015

 

1,534,185

 

2,150,148

 

1,954,168

Deferred fees and unamortized premiums/(unaccreted discounts), net

 

(1,955)

 

(1,352)

Deferred fees and unamortized premiums/(unaccreted discounts), net(4)

 

(3,754)

 

(5,031)

Allowance for loan losses

 

(12,552)

 

(12,539)

 

(14,357)

 

(13,732)

Loans, net

$

1,558,508

$

1,520,294

$

2,132,037

$

1,935,405

(1) Includes PPP loans of $103.1$10.7 million and $142.9$46.8 million as of June 30, 20212022 and December 31, 2020,2021, respectively.

(2) Includes $21.1 million of unsecured consumer loans held for investment measured at fair value as of June 30, 2022.

(3) Includes MSLP loans of $6.7 million and $6.6$6.8 million as of June 30, 20212022 and December 31, 2020, respectively.2021.

(4) Includes fair value adjustments on loans held for investment accounted for under the fair value option.

As of June 30, 20212022 and December 31, 2020,2021, total loans held for investment included $116.1$287.6 million and $127.2$356.7 million, respectively, of performing loans purchased as partthrough mergers or acquisitions. As of the Branch Acquisition.June 30, 2022 and December 31, 2021, Consumer and Other included $21.1 million and $0.0 million, respectively, of loans held for investment measured at fair value. See Note 14 – Fair Value Option.

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Table of Contents

The CARES Act created the PPP, which is administered by the SBA. The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA lender and as of June 30, 2022, the Cash, Securities and Other portion of the loan portfolio included $10.7 million of PPP loans, or 5.9% of the total category. As of December 31, 2021, the Cash, Securities and Other portion of the loan portfolio included $103.1$46.8 million of PPP loans, or 35.5% of the total category. As of December 31, 2020, the Cash, Securities, and Other portion of the loan portfolio included $142.9 million of PPP loans, or 40.0%17.9% of the total category.

The Company is a participant in the Federal Reserve’s MSLP to support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. As of June 30, 2022, the Company’s Commercial and Industrial loans included 5 MSLP loans with the net carrying amount of $6.8 million, or 2.2% of the total category. As of December 31, 2021, the Company’s Commercial and Industrial loans included 65 MSLP loans with the net carrying amount of $6.7$6.8 million, or 4.3%3.3% of the total category. As of December 31, 2020, the Company’s Commercial and Industrial loans included 6 MSLP loans with the net carrying amount of $6.6 million, or 4.5% of the total category.

Loan Modifications

As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years.

In 2021, the deferral period ended for all non-acquired loans previously modified and payments resumed under the original terms. As of June 30, 2021,2022, the Company’s loan portfolio included 7655 non-acquired loans which were previously modified under the loan modification program, totaling $143.1$100.5 million. Through the Teton Acquisition, the Company acquired loans which were previously modified and are still in their deferral period. As of June 30, 2021, the deferral period has ended for all2022, there were 15 of these loans, previously modified and payments have resumed under the original terms.totaling $3.5 million.  

The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as a TDR. The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from Federal Reserve and the FDIC confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program meets that definition. In accordance with that guidance, the Company recognized interest income on all loans modified for temporary payment moratoriums, primarily for a period of 180 days or less.

All loans modified in response to COVID-19 are classified as performing and pass rated as of June 30, 2021.2022. These loans are included in the allowance for loan loss general reserve in accordance with ASC 450-20. Management has increased our loan level reviews and portfolio monitoring to address the changing environment. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of June 30, 2022, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

The following presents, by class, an aging analysis of the recorded investments (excluding accrued interest receivable, deferred fees, and unamortized premiums/(unaccreted discounts), which are not material) in loans past due as of the dates noted (dollars in thousands):

    

30-59

    

60-89

    

90 or

    

Total

    

    

Total

Days

Days

More Days

Loans

Recorded

June 30, 2022

Past Due

Past Due

Past Due

Past Due

Current

Investment

Cash, Securities and Other

$

3,803

$

149

$

4

$

3,956

$

176,782

$

180,738

Consumer and Other

36

35

8

79

47,776

47,855

Construction and Development

 

805

 

805

 

161,621

 

162,426

1-4 Family Residential

 

9,705

 

9,705

 

723,020

 

732,725

Non-Owner Occupied CRE

489,111

489,111

Owner Occupied CRE

278

278

224,319

224,597

Commercial and Industrial

 

19,021

47

1,893

 

20,961

 

291,735

 

312,696

Total

$

32,565

$

1,314

$

1,905

$

35,784

$

2,114,364

$

2,150,148

20

Table of Contents

    

30-59

    

60-89

    

90 or

    

Total

    

    

Total

Days

Days

More Days

Loans

Recorded

December 31, 2021

Past Due

Past Due

Past Due

Past Due

Current

Investment

Cash, Securities and Other

$

745

$

$

6

$

751

$

260,439

$

261,190

Consumer and Other

454

2

456

34,302

34,758

Construction and Development

 

2,758

 

2,758

 

175,958

 

178,716

1-4 Family Residential

 

1,449

 

1,449

 

579,423

 

580,872

Non-Owner Occupied CRE

2,548

2,548

480,074

482,622

Owner Occupied CRE

1,419

1,419

211,007

212,426

Commercial and Industrial

 

748

2,200

 

2,948

 

200,636

 

203,584

Total

$

7,573

$

2,548

$

2,208

$

12,329

$

1,941,839

$

1,954,168

As of June 30, 2022, the Company had 9 loans, totaling an immaterial amount, in the Consumer and Other portfolio that were more than 90 days delinquent and accruing interest. As of December 31, 2021, the Company had 1 loan, totaling an immaterial amount, in the Commercial and Industrial portfolio that was more than 90 days delinquent and accruing interest.

Non-Accrual Loans and Troubled Debt Restructurings

The following presents the recorded investment in non-accrual loans by class as of the dates noted (dollars in thousands):

June 30, 

December 31, 

    

2022

    

2021

Cash, Securities and Other

$

4

$

6

Consumer and Other

2

2

1-4 Family Residential

68

75

Owner Occupied CRE

1,200

1,241

Commercial and Industrial

 

2,603

 

2,938

Total

$

3,877

$

4,262

Non-accrual loans classified as TDRs accounted for $3.9 million of the recorded investment as of June 30, 2022 and $4.3 million as of December 31, 2021. Non-accrual loans are classified as impaired loans and individually evaluated for impairment.

The following presents a summary of the unpaid principal balance of loans classified as TDRs as of the dates noted (dollars in thousands):

June 30, 

December 31, 

    

2022

    

2021

Accruing

Non-Owner Occupied CRE

$

46

$

55

Non-accrual

Cash, Securities, and Other

4

6

1-4 Family Residential

68

75

Owner Occupied CRE

1,200

1,241

Commercial and Industrial

2,603

2,938

Total

3,921

4,315

Allowance for loan losses associated with TDR

 

(261)

 

(1,751)

Net recorded investment

$

3,660

$

2,564

As of June 30, 2022 and December 31, 2021, the Company had 0t committed any additional funds to a borrower with a loan classified as a TDR.

1621

Table of Contents

increased our loan level reviews and portfolio monitoring to address the changing environment. The Company continues to meet regularly with clients who could be more highly impacted by the recent COVID-19 pandemic. These are borrowers in accommodations, transportation and restaurant industries, which we believe may be more impacted by the pandemic, and those loans where there may be a greater than 50% probability of a downgrade, covenant violation or 20% reduction in collateral position. The portion of our credit exposure to the highest risk industries impacted by COVID-19, such as accommodations, transportation and restaurants, is less than 4.0% of our loan portfolio. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of June 30, 2021, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

The following presents, by class, an aging analysis of the recorded investments (excluding accrued interest receivable, deferred (fees) costs, and unamortized premiums/ (unaccreted discounts) which are not material) in loans past due as of June 30, 2021 and December 31, 2020 (in thousands):

    

30-59

    

60-89

    

90 or

    

Total

    

    

Total

Days

Days

More Days

Loans

Recorded

June 30, 2021

Past Due

Past Due

Past Due

Past Due

Current

Investment

Cash, Securities and Other

$

$

$

12

$

12

$

290,895

$

290,907

Construction and Development

 

 

 

127,141

 

127,141

1-4 Family Residential

 

76

 

76

 

496,025

 

496,101

Non-Owner Occupied CRE

324,493

324,493

Owner Occupied CRE

178,847

178,847

Commercial and Industrial

 

1,898

3,105

 

5,003

 

150,523

 

155,526

Total

$

1,898

$

76

$

3,117

$

5,091

$

1,567,924

$

1,573,015

    

30-59

    

60-89

    

90 or

    

Total

    

    

Total

Days

Days

More Days

Loans

Recorded

December 31, 2020

Past Due

Past Due

Past Due

Past Due

Current

Investment

Cash, Securities and Other

$

752

$

$

48

$

800

$

356,220

$

357,020

Construction and Development

 

 

 

 

 

131,111

 

131,111

1-4 Family Residential

 

1,283

 

 

 

1,283

 

453,755

 

455,038

Non-Owner Occupied CRE

281,943

281,943

Owner Occupied CRE

479

479

162,563

163,042

Commercial and Industrial

 

271

 

 

3,529

 

3,800

 

142,231

 

146,031

Total

$

2,785

$

$

3,577

$

6,362

$

1,527,823

$

1,534,185

As of June 30, 2021 and December 31, 2020, the Company did not have any loans which were more than 90 days delinquent and accruing interest.

Non-Accrual Loans and Troubled Debt Restructurings

The following presents the recorded investment in non-accrual loans by class as of the dates noted (in thousands):

June 30, 

December 31, 

    

2021

    

2020

Cash, Securities and Other

$

15

$

50

Owner Occupied CRE

479

Commercial and Industrial

 

3,105

 

3,529

Total

$

3,120

$

4,058

Non-accrual loans classified as TDRs accounted for $3.1 million of the recorded investment as of June 30, 2021 and $3.6 million as of December 31, 2020. Non-accrual loans are classified as impaired loans and individually evaluated for impairment.

17

Table of Contents

The following presents a summary of the unpaid principal balance of loans classified as TDRs as of the dates noted (in thousands):

June 30, 

December 31, 

    

2021

    

2020

Non-accrual

Cash, Securities, and Other

$

12

$

48

Commercial and Industrial

3,105

3,529

Total

3,117

3,577

Allowance for loan losses associated with TDR

 

(1,751)

 

(1,619)

Net recorded investment

$

1,366

$

1,958

As of June 30, 2021 and December 31, 2020, the Company had 0t committed any additional funds to a borrower with a loan classified as a TDR.

The Company did not modify any loans resulting in TDR status during the six months ended June 30, 2021.2022. The Company modified 1 loan3 loans resulting in TDR status during the year ended December 31, 2020.2021. The Borrowerfirst loan was having difficulty makinga small mortgage with a remaining balance of $0.1 million where the borrower was unable to make payments or obtain additional financing to pay off the mortgage. As a result, we modified the loan at the maturity date with a one-year renewal to allow the borrower time to seek a refinance. As of June 30, 2022, the loan matured and has not been paid as agreed in accordancethe loan modification. The Company continues to work with the original contract terms.borrower on a successful resolution. The second and third loans modified are in relation to one borrower who has two loans, one Commercial Real Estate Loan in the amount of $1.2 million, which is the space where the related business operates, and a Commercial loan with a balance of $0.7 million. The borrower had experienced a reduction in cash flow through ongoing impact from the pandemic and related shut downs and hiring shortages. As a result, the Company modified both loans allowing for a six month interest only period to provide cash flow relief. The Company restructuredobtained a reduced term on the business loan including receiving a large paydown and extendedas well as additional collateral from the maturity and lowered the interest rate as a resultBorrower. All three of the Borrower’s financial difficulties. The loan was paid off in full as of December 31, 2020.loans modified during 2021 were sufficiently collateralized and therefore did not require any specific reserve.  

TDRs are reviewed individually for impairment and are included in the Company’s specific reserves in the allowance for loan losses. If charged off, the amount of the charge-off is included in the Company’s charge-off factors, which impact the Company’s reserves on non-impaired loans.

The following table presents impaired loans by portfolio and related valuation allowance as ofduring the periods presented (in(dollars in thousands):

June 30, 2021

December 31, 2020

June 30, 2022

December 31, 2021

    

    

Unpaid

    

Allowance

    

Unpaid

    

Allowance

    

    

Unpaid

    

Allowance

    

Unpaid

    

Allowance

Total

Contractual

for

Total

Contractual

for

Total

Contractual

for

Total

Contractual

for

Recorded

Principal

Loan

Recorded

Principal

Loan

Recorded

Principal

Loan

Recorded

Principal

Loan

Investment

Balance

Losses

Investment

Balance

Losses

Investment

Balance

Losses

Investment

Balance

Losses

Impaired loans with a valuation allowance:

Cash, Securities, and Other

$

3

$

3

$

3

$

2

$

2

$

2

Consumer and Other

$

2

$

2

$

2

$

2

$

2

$

2

Commercial and Industrial

3,040

3,040

1,751

3,419

3,419

1,619

1,893

1,893

261

2,190

2,190

1,751

Total

$

3,043

$

3,043

$

1,754

$

3,421

$

3,421

$

1,621

$

1,895

$

1,895

$

263

$

2,192

$

2,192

$

1,753

Impaired loans with no related valuation allowance:

Cash, Securities, and Other

$

12

$

12

$

$

48

$

48

$

$

4

$

4

$

$

6

$

6

$

1-4 Family Residential

68

68

75

75

Owner Occupied CRE

479

479

1,200

1,200

1,241

1,241

Commercial and Industrial

65

65

110

110

710

710

748

748

Total

$

77

$

77

$

$

637

$

637

$

$

1,982

$

1,982

$

$

2,070

$

2,070

$

Total impaired loans:

Cash, Securities, and Other

$

15

$

15

$

3

$

50

$

50

$

2

$

4

$

4

$

$

6

$

6

$

Consumer and Other

2

2

2

2

2

2

1-4 Family Residential

68

68

75

75

Owner Occupied CRE

479

479

1,200

1,200

1,241

1,241

Commercial and Industrial

3,105

3,105

1,751

3,529

3,529

1,619

2,603

2,603

261

2,938

2,938

1,751

Total

$

3,120

$

3,120

$

1,754

$

4,058

$

4,058

$

1,621

$

3,877

$

3,877

$

263

$

4,262

$

4,262

$

1,753

The recorded investment in loans in the previous tables excludes accrued interest, deferred (fees) costs,fees, and unamortized premiums/ (unaccreted(unaccreted discounts), which are not material. Interest income, if any, was recognized on the cash basis on non-accrual loans.

1822

Table of Contents

The following presents the average balance of impaired loans and interest income recognized on impaired loans during the three months ended June 30, 2021 and 2020 are includedperiods presented (dollars in the table below (in thousands):

Three Months Ended June 30, 

Three Months Ended June 30, 

2021

2020

2022

2021

Average

Interest

Average

Interest

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized

Investment

Recognized

Investment

Recognized

Impaired loans with a valuation allowance:

Cash, Securities, and Other

$

4

$

$

$

$

$

$

2

$

Consumer and Other

2

2

Commercial and Industrial

3,230

21

3,462

2,041

3,230

21

Total

$

3,234

$

21

$

3,462

$

$

2,043

$

$

3,234

$

21

Impaired loans with no related valuation allowance:

Cash, Securities, and Other

$

15

$

$

1,493

$

$

4

$

$

15

$

Owner Occupied CRE

51

1,211

51

Commercial and Industrial

82

5,998

84

723

82

1-4 Family Residential

70

Total

$

97

$

51

$

7,491

$

84

$

2,008

$

$

97

$

51

Total impaired loans:

Cash, Securities, and Other

$

19

$

$

1,493

$

$

4

$

$

17

$

Consumer and Other

2

2

Owner Occupied CRE

51

1,211

51

Commercial and Industrial

3,312

21

9,460

84

2,764

3,312

21

1-4 Family Residential

70

Total

$

3,331

$

72

$

10,953

$

84

$

4,051

$

$

3,331

$

72

Six Months Ended June 30, 

2022

2021

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized

Impaired loans with a valuation allowance:

Cash, Securities, and Other

$

$

$

1

$

Consumer and Other

2

1

Commercial and Industrial

2,089

2,162

21

Total

$

2,091

$

$

2,164

$

21

Impaired loans with no related valuation allowance:

Cash, Securities, and Other

$

4

$

$

20

$

Owner Occupied CRE

1,221

51

Commercial and Industrial

731

*

58

1-4 Family Residential

72

Total

$

2,028

$

$

78

$

51

Total impaired loans:

Cash, Securities, and Other

$

4

$

$

21

$

Consumer and Other

2

1

Owner Occupied CRE

1,221

51

Commercial and Industrial

2,820

*

2,220

21

1-4 Family Residential

72

Total

$

4,119

$

$

2,242

$

72

* The average balanceCompany recognized an immaterial amount of impaired loans and interest income recognized on impaired loans during the six months ended June 30, 2021 and 2020 are included in the table below (in thousands):

Six Months Ended June 30, 

2021

2020

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized

Impaired loans with a valuation allowance:

Cash, Securities, and Other

$

2

$

$

$

Commercial and Industrial

2,162

21

3,476

Total

$

2,164

$

21

$

3,476

$

Impaired loans with no related valuation allowance:

Cash, Securities, and Other

$

20

$

$

1,925

$

Owner Occupied CRE

51

Commercial and Industrial

58

5,991

165

Total

$

78

$

51

$

7,916

$

165

Total impaired loans:

Cash, Securities, and Other

$

22

$

$

1,925

$

Owner Occupied CRE

51

Commercial and Industrial

2,220

21

9,467

165

Total

$

2,242

$

72

$

11,392

$

165

period.

Allowance for Loan Losses

Allocation of a portion of the allowance for loan losses to one category of loans does not preclude its availability to absorb losses in other categories. The following presents the activity in the Company’s allowance for loan losses by portfolio class for the periods presented (in thousands):

1923

Table of Contents

Cash,

Construction

1-4

Non-Owner

Owner

Commercial

Securities

and

Family

Occupied

Occupied

and

    

and Other

Development

Residential

CRE

CRE

Industrial

Total

Changes in allowance for loan losses for the three months ended June 30, 2021

Beginning balance

$

2,573

$

766

$

3,152

$

2,211

$

1,123

$

2,714

$

12,539

(Recovery of)/provision for loan losses

 

(535)

 

105

 

247

 

12

 

102

 

81

 

12

Charge-offs

 

 

 

Recoveries

 

1

 

 

1

Ending balance

$

2,039

$

871

$

3,399

$

2,223

$

1,225

$

2,795

$

12,552

Changes in allowance for loan losses for the six months ended June 30, 2021

Beginning balance

$

2,579

$

932

$

3,233

$

2,004

$

1,159

$

2,632

$

12,539

(Recovery of)/provision for loan losses

 

(541)

 

(61)

 

166

 

219

 

66

 

163

 

12

Charge-offs

 

 

 

 

 

 

 

Recoveries

 

1

 

 

 

 

 

 

1

Ending balance

$

2,039

$

871

$

3,399

$

2,223

$

1,225

$

2,795

$

12,552

Allowance for loan losses as of June 30, 2021 allocated to loans evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Individually

$

3

$

$

$

$

$

1,751

$

1,754

Collectively

 

2,036

 

871

 

3,399

 

2,223

 

1,225

 

1,044

 

10,798

Ending balance

$

2,039

$

871

$

3,399

$

2,223

$

1,225

$

2,795

$

12,552

Loans as of June 30, 2021, evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Individually

$

15

$

$

$

$

$

3,105

$

3,120

Collectively

 

290,892

 

127,141

 

496,101

 

324,493

 

178,847

 

152,421

 

1,569,895

Ending balance

$

290,907

$

127,141

$

496,101

$

324,493

$

178,847

$

155,526

$

1,573,015

Allowance for Loan Losses

Allocation of a portion of the allowance for loan losses to one category of loans does not preclude its availability to absorb losses in other categories. The following presents the activity in the Company’s allowance for loan losses by portfolio class during the periods presented (dollars in thousands):

Cash,

Consumer

Construction

1-4

Non-Owner

Owner

Commercial

Securities

and

and

Family

Occupied

Occupied

and

    

and Other

Other

Development

Residential

CRE

CRE

Industrial

Total

Changes in allowance for loan losses for the three months ended June 30, 2022

Beginning balance

$

1,440

$

283

$

954

$

3,789

$

2,867

$

1,328

$

3,224

$

13,885

(Release)/provision for loan losses

 

(246)

 

(16)

 

120

 

1,056

 

368

 

149

 

(912)

 

519

Charge-offs

 

 

(95)

 

 

(95)

Recoveries

 

 

48

 

 

48

Ending balance

$

1,194

$

220

$

1,074

$

4,845

$

3,235

$

1,477

$

2,312

$

14,357

Changes in allowance for loan losses for the six months ended June 30, 2022

Beginning balance

$

1,598

$

266

$

1,092

$

3,553

$

2,952

$

1,292

$

2,979

$

13,732

(Release)/provision for loan losses

 

(404)

 

58

 

(18)

 

1,292

 

283

 

185

 

(667)

 

729

Charge-offs

 

 

(192)

 

 

 

 

 

 

(192)

Recoveries

 

 

88

 

 

 

 

 

 

88

Ending balance

$

1,194

$

220

$

1,074

$

4,845

$

3,235

$

1,477

$

2,312

$

14,357

Allowance for loan losses as of June 30, 2022 allocated to loans evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Individually

$

$

2

$

$

$

$

$

261

$

263

Collectively

 

1,194

 

218

 

1,074

 

4,845

 

3,235

 

1,477

 

2,051

 

14,094

Ending balance

$

1,194

$

220

$

1,074

$

4,845

$

3,235

$

1,477

$

2,312

$

14,357

Loans as of June 30, 2022:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Individually evaluated for impairment

$

4

$

2

$

$

68

$

$

1,200

$

2,603

$

3,877

Collectively evaluated for impairment

180,734

 

26,704

 

162,426

 

732,657

 

489,111

 

223,397

 

310,093

 

2,125,122

Measured at fair value

 

 

21,149

 

 

 

 

 

 

21,149

Ending balance

$

180,738

$

47,855

$

162,426

$

732,725

$

489,111

$

224,597

$

312,696

$

2,150,148

2024

Table of Contents

Cash,

Construction

1-4

Non-Owner

Owner

Commercial

Securities

and

Family

Occupied

Occupied

and

    

and Other

Development

Residential

CRE

CRE

Industrial

Total

Changes in allowance for loan losses for the three months ended June 30, 2020

Beginning balance

$

1,092

$

186

$

3,008

$

1,403

$

884

$

1,669

$

8,242

Provision for/(recovery of) loan losses

 

1,345

 

298

 

(300)

 

80

 

(124)

 

825

 

2,124

Charge-offs

 

(24)

 

 

 

 

 

 

(24)

Recoveries

 

12

 

 

 

 

 

 

12

Ending balance

$

2,425

$

484

$

2,708

$

1,483

$

760

$

2,494

$

10,354

Changes in allowance for loan losses for the six months ended June 30, 2020

Beginning balance

$

1,058

$

200

$

2,850

$

1,176

$

911

$

1,680

$

7,875

Provision for/(recovery of) loan losses

 

1,379

 

284

 

(142)

 

307

 

(151)

 

814

 

2,491

Charge-offs

 

(24)

 

 

 

 

 

 

(24)

Recoveries

 

12

 

 

 

 

 

 

12

Ending balance

$

2,425

$

484

$

2,708

$

1,483

$

760

$

2,494

$

10,354

Allowance for loan losses as of December 31, 2020 allocated to loans evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Individually

$

2

$

$

$

$

$

1,619

$

1,621

Collectively

 

2,577

 

932

 

3,233

 

2,004

 

1,159

 

1,013

 

10,918

Ending balance

$

2,579

$

932

$

3,233

$

2,004

$

1,159

$

2,632

$

12,539

Loans as of December 31, 2020, evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Individually

$

50

$

$

$

$

479

$

3,529

$

4,058

Collectively

 

356,970

 

131,111

 

455,038

 

281,943

162,563

 

142,502

 

1,530,127

Ending balance

$

357,020

$

131,111

$

455,038

$

281,943

$

163,042

$

146,031

$

1,534,185

Cash,

Consumer

Construction

1-4

Non-Owner

Owner

Commercial

Securities

and

and

Family

Occupied

Occupied

and

    

and Other

Other

Development

Residential

CRE

CRE

Industrial

Total

Changes in allowance for loan losses for the three months ended June 30, 2021

Beginning balance

$

2,380

$

193

$

766

$

3,152

$

2,211

$

1,123

$

2,714

$

12,539

(Release)/provision for loan losses

 

(537)

 

2

 

105

 

247

 

12

 

102

 

81

 

12

Charge-offs

 

 

 

 

 

 

 

 

Recoveries

 

 

1

 

 

 

 

 

 

1

Ending balance

$

1,843

$

196

$

871

$

3,399

$

2,223

$

1,225

$

2,795

$

12,552

Changes in allowance for loan losses for the six months ended June 30, 2021

Beginning balance

$

2,439

$

140

$

932

$

3,233

$

2,004

$

1,159

$

2,632

$

12,539

(Release)/provision for loan losses

 

(596)

 

55

 

(61)

 

166

 

219

 

66

 

163

 

12

Charge-offs

 

 

 

 

 

 

 

 

Recoveries

 

 

1

 

 

 

 

 

 

1

Ending balance

$

1,843

$

196

$

871

$

3,399

$

2,223

$

1,225

$

2,795

$

12,552

Allowance for loan losses as of December 31, 2021 allocated to loans evaluated for impairment:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Individually

$

$

2

$

$

$

$

$

1,751

$

1,753

Collectively

 

1,598

 

264

 

1,092

 

3,553

 

2,952

 

1,292

 

1,228

 

11,979

Ending balance

$

1,598

$

266

$

1,092

$

3,553

$

2,952

$

1,292

$

2,979

$

13,732

Loans as of December 31, 2021:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Individually evaluated for impairment

$

6

$

2

$

$

75

$

$

1,241

$

2,938

$

4,262

Collectively evaluated for impairment

 

261,184

 

34,756

 

178,716

 

580,797

 

482,622

211,185

 

200,646

 

1,949,906

Ending balance

$

261,190

$

34,758

$

178,716

$

580,872

$

482,622

$

212,426

$

203,584

$

1,954,168

The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans by credit risk on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention—Loans classified as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies, or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified.

Substandard—Substandard loans are considered "classified" and are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrual status and may individually be evaluated for impairment if indicators of impairment exist.

Doubtful—Loans graded Doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. However, the amount of certainty of eventual loss is not known because of specific pending factors.

Loans accounted for under the fair value option are not meeting any of the three criteria above are considered to be pass-rated loans. The following presents, by class and by credit quality indicator, the recorded investment in the Company’s loans as of June 30, 2021 and December 31, 2020 (in thousands):

rated.

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Table of Contents

Special

June 30, 2021

    

Pass

    

Mention

    

Substandard

    

Total

Cash, Securities and Other

$

290,892

$

$

15

$

290,907

Construction and Development

 

127,141

 

 

 

127,141

1-4 Family Residential

496,101

496,101

Non-Owner Occupied CRE

318,512

5,981

324,493

Owner Occupied CRE

178,146

701

178,847

Commercial and Industrial

 

150,523

 

 

5,003

 

155,526

Total

$

1,561,315

$

5,981

$

5,719

$

1,573,015

Loans not meeting any of the three criteria above are considered to be pass-rated loans. The following presents, by class and by credit quality indicator, the recorded investment in the Company’s loans as of the dates noted (dollars in thousands):

Special

Special

December 31, 2020

    

Pass

    

Mention

    

Substandard

    

Total

June 30, 2022

    

Pass

    

Mention

    

Substandard

Not Rated

    

Total

Cash, Securities and Other

$

356,970

$

$

50

$

357,020

$

180,734

$

$

4

$

$

180,738

Consumer and Other

26,704

2

21,149

47,855

Construction and Development

131,111

 

 

 

131,111

 

162,426

 

 

 

162,426

1-4 Family Residential

451,918

3,120

455,038

732,657

68

732,725

Non-Owner Occupied CRE

275,627

6,316

281,943

483,848

5,263

489,111

Owner Occupied CRE

 

161,850

1,192

163,042

222,714

1,883

224,597

Commercial and Industrial

 

140,432

 

 

5,599

 

146,031

 

305,765

 

2,693

 

4,238

 

312,696

Total

$

1,517,908

$

6,316

$

9,961

$

1,534,185

$

2,114,848

$

7,956

$

6,195

$

21,149

$

2,150,148

Special

December 31, 2021

    

Pass

    

Mention

    

Substandard

Not Rated

    

Total

Cash, Securities and Other

$

261,184

$

$

6

$

$

261,190

Consumer and Other

34,756

2

34,758

Construction and Development

176,194

 

2,522

 

 

178,716

1-4 Family Residential

580,797

75

580,872

Non-Owner Occupied CRE

476,670

5,952

482,622

Owner Occupied CRE

 

210,493

1,933

212,426

Commercial and Industrial

 

198,368

 

401

 

4,815

 

203,584

Total

$

1,938,462

$

8,875

$

6,831

$

$

1,954,168

The Company had 0 loans graded doubtful as of June 30, 20212022 and December 31, 2020.2021.

NOTE 45 - GOODWILL

ChangesThe following presents changes in the carrying amount of goodwill were as follows (inof the dates noted (dollars in thousands):

June 30, 

December 31,

June 30, 

December 31,

2021

2020

2022

2021

Beginning balance

$

24,191

$

19,686

$

30,588

$

24,191

Acquisition activity

4,505

(188)

6,397

Ending balance

$

24,191

$

24,191

$

30,400

$

30,588

During the year ended December 31, 2020,2021, the Company recorded $4.5$6.4 million of goodwill as a result of the BranchTeton Acquisition on May 15, 2020.December 31, 2021. In the first quarter of 2022, goodwill was adjusted by ($0.2) million as a result of the measurement period adjustments. See Note 2 – Acquisitions for more information.

Goodwill is tested annually for impairment on October 31 or earlier upon the occurrence of certain events.

Step 1 of theThe goodwill impairment analysis includes the determination of the carrying value of the reporting unit, including the existing goodwill, and estimating the fair value of the reporting unit. If the fair value is less than its carrying amount, of a reporting unit exceeds itsgoodwill impairment is recognized equal to the difference between the fair value we are requiredand its carrying amount, not to perform the second step to the impairment test.

exceed its carrying amount. As of June 30, 20212022, there has not been any impairment of goodwill identified or recorded. Goodwill totaled $30.4 million and $30.6 million as of June 30, 2022 and December 31, 2020, the Company's reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded the carrying value. Therefore, the Company did not complete the two-step impairment test.2021, respectively.

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Table of Contents

NOTE 56 - LEASES

Leases in which the Company is determined to be the lessee are primarily operating leases comprised of real estate property and office space for our corporate headquarters and profit centers with terms that extend to 2032. Certain properties contain portions that are subleased with terms that ended in 2020. In accordance with ASC 842, operating leases are required to be recognized as a right-of-use asset with a corresponding lease liability.

The following table presents the classification of the right-of-use asset and corresponding liability within the Condensed Consolidated Balance Sheets. The Company elected to not include short-term leases with initial terms of twelve months or less on the Condensed Consolidated Balance Sheets. The following presents the classification of the right-of-use assets and corresponding liabilities within the Condensed Consolidated Balance Sheets, (inas of the dates noted (dollars in thousands).

    

June 30, 

December 31, 

    

June 30, 

December 31, 

2021

2020

2022

2021

Lease Right-of-Use Assets

Classification

Classification

Operating lease right-of-use assets

Other assets

$

10,064

$

11,341

Other assets

$

9,431

$

10,720

Lease Liabilities

Classification

Classification

Operating lease liabilities

Other liabilities

$

12,525

$

13,970

Other liabilities

$

12,325

$

13,863

The Company’s operating lease agreements typically include an option to renew the lease at the Company’s discretion. To the extent the Company is reasonably certain it will exercise the renewal option at the inception of the lease, the Company will include the extended term in the calculation of the right-of-use asset and lease liability. ASC 842 requires the use of the rate implicit in the lease when it is readily determinable. As this rate is typically not readily determinable, at the inception of the lease, the Company uses its collateralized incremental borrowing rate over a similar term. The amount of the right-of-use asset and lease liability are impacted by the discount rate used to calculate the present value of the minimum lease payments over the term of the lease.

June 30, 

December 31,

June 30, 

December 31,

2021

2020

2022

2021

Weighted-Average Remaining Lease Term

Operating leases

4.38

years

4.79

years

4.97

years

5.26

years

Weighted-Average Discount Rate

Operating leases

3.02

%

3.04

%

2.60

%

2.67

%

The Company’s operating leases contain fixed and variable lease components and it has elected to account for all classes of underlying assets as a single lease component. Variable lease costs primarily represent common area maintenance and parking. The Company recognized lease costs in Occupancy and equipment expense in the accompanying Condensed Consolidated Statements of Income. The following table representspresents the Company’s net lease costs (induring the periods presented (dollars in thousands):

Three Months Ended June 30, 

Six Months Ended June 30, 

2022

2021

2022

2021

Lease Costs

Operating lease cost

$

824

$

731

$

1,619

$

1,483

Variable lease cost

528

416

1,086

828

Lease costs, net

$

1,352

$

1,147

$

2,705

$

2,311

2327

Table of Contents

Three Months Ended June 30, 

Six Months Ended June 30, 

2021

2020

2021

2020

Lease Costs

Operating lease cost

$

731

$

814

$

1,483

$

1,615

Variable lease cost

416

498

828

959

Sublease income

(100)

(199)

Lease costs, net

$

1,147

$

1,212

$

2,311

$

2,375

The following table presents a maturity analysis of the Company’s operating lease liabilities on an annual basis for each of the next five years and total amounts thereafter (dollars in thousands):

Year Ending December 31,

Operating Leases

2022(1)

$

1,755

2023

 

3,210

2024

3,064

2025

 

2,073

2026

 

703

Thereafter

 

2,168

Total future minimum lease payments

12,973

Less: imputed interest

(648)

Present value of net future minimum lease payments

$

12,325

(1) Amount represents the remaining six months of year.

Leases in which the Company is determined to be the lessor are considered operating leases and consist of the partial lease of Company owned buildings. In accordance with ASC 842, these leases have been accounted for as ofoperating leases. During the three and six months ended June 30, 2021 (in2022, the Company recognized $0.1 million and $0.2 million of lease income, respectively.

The following presents a maturity analysis of the Company's operating payments to be received on an annual basis for each of the next five years and total amounts thereafter (dollars in thousands):

Undiscounted

Year Ending December 31,

Operating Leases

Operating Lease Income

2021(1)

$

1,676

2022(1)

 

3,239

$

134

2023

2,937

221

2024

 

2,784

199

2025

 

1,783

2026

Thereafter

 

876

Total future minimum lease payments

13,295

Less: imputed interest

(770)

Present value of net future minimum lease payments

$

12,525

Total undiscounted operating lease income

$

554

(1) Amount represents the remaining six months of year.

NOTE 67 - DEPOSITS

The following presents the Company’s interest-bearing deposits atas of the dates noted (in(dollars in thousands):

June 30, 

December 31, 

June 30, 

December 31, 

    

2021

    

2020

    

2022

    

2021

Money market deposit accounts

$

840,073

$

847,430

$

1,033,739

$

1,056,669

Time deposits

 

137,499

 

172,682

 

147,623

 

170,491

Negotiable order of withdrawal accounts

 

141,076

 

113,052

 

287,195

 

309,940

Savings accounts

 

5,299

 

5,289

 

33,099

 

32,299

Total interest-bearing deposits

$

1,123,947

$

1,138,453

$

1,501,656

$

1,569,399

Aggregate time deposits of $250,000 or greater

$

64,360

$

73,401

Aggregate time deposits of $250 or greater

$

70,492

$

75,747

Deposits acquired through acquisitions during the year ended 2020 totaled $63.1 million.

Overdraft balances classified as loans totaled $0.1 million and an immaterial amount as of June 30, 20212022 and December 31, 2020.

The following presents the scheduled maturities of all time deposits for the next five years ending June 30 (in thousands):

Year Ending December 31,

    

Time Deposits

2021(1)

$

69,580

2022

 

39,732

2023

 

23,155

2024

 

2,263

2025

 

1,540

Thereafter

 

1,229

Total

$

137,499

(1) Amount represents the remaining six months of year.

2021, respectively.

2428

Table of Contents

The following presents the scheduled maturities of all time deposits for each of the next five years and total amounts thereafter (dollars in thousands):

Year ending December 31,

    

Time Deposits

2022(1)

$

64,114

2023

 

46,252

2024

 

17,812

2025

 

3,029

2026

 

10,337

Thereafter

 

6,079

Total

$

147,623

(1) Amount represents the remaining six months of year.

NOTE 78 - BORROWINGS

The Bank has executed a blanket pledge and security agreement with the FHLB that requires certain loans and securities be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of June 30, 20212022 and December 31, 20202021 amounted to $698.3$856.6 million and $668.6$771.4 million, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $457.7$517.0 million as of June 30, 2021.2022. Each advance is payable at its maturity date.

The Company hadfollowing presents the followingCompany’s required maturities on FHLB borrowings as of the dates noted (in(dollars in thousands):

June 30, 

December 31, 

June 30, 

December 31, 

Maturity Date

    

Rate %

    

2021

    

2020

    

Rate %

    

2022

    

2021

April 22, 2022

0.37

$

5,000

$

5,000

0.37

$

$

5,000

July 1, 2022(1)

1.63

70,000

May 5, 2023

0.76

10,000

10,000

0.76

10,000

10,000

Total

 

  

$

15,000

$

15,000

 

  

$

80,000

$

15,000

(1)The borrowing has a one day, automatic daily renewal maturity date, subject to FHLB discretion not to renew.

To bolster the effectiveness of the SBA’s PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing collateralized by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility ("PPPLF") extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value and bearing interest at 35 bps. The terms of the loans are directly tied to the underlying PPP loans, which were originated at 2 or 5 years. As of June 30, 20212022 and December 31, 2020,2021, the Company utilized $105.8$7.2 million and $134.6$23.6 million, respectively, under the PPPLF program which is included in the FHLB and Federal Reserve borrowings line of the Condensed Consolidated Balance Sheets.

The Bank has borrowing capacity associated with 3 unsecured federal funds lines of credit up to $10.0 million, $19.0 million, and $25.0 million. As of June 30, 20212022 and December 31, 2020,2021, there were 0 amounts outstanding on any of the federal funds lines.

On October 28,January 1, 2022, the Company redeemed the subordinated notes due December 31, 2026 in the amount of $6.6 million, which were redeemable on or after January 1, 2022. The redemption price was equal to 100% of the principal amount being redeemed, plus accrued and unpaid interest up to, but excluding the date of redemption.

On August 31, 2021, the Company completed the issuance and sale of subordinated notes (the "Notes") totaling $15.0 million in aggregate principal amount. The issuance included $0.3 million of issuance costs and as of June 30, 2022, a net balance of $14.8 million is included in the Subordinated notes line of the Condensed Consolidated Balance Sheets. The Notes accrue interest at a rate of 3.25% per annum until September 1, 2026, at which time the rate will adjust each quarter to the then current three-month SOFR, or an alternative rate determined in accordance with the terms of the Notes, plus 258 basis points; mature on September 1, 2031; are redeemable at the option of the Company on or after September 1, 2026; and pay interest quarterly.

29

Table of Contents

On November 25, 2020, the Company entered into a Business Loan Agreementcompleted the issuance and associated Promissory Notesale of subordinated notes (the "Note"), dated June 30,"November 2020 with a correspondent lending partner.Sub Notes") totaling $10.0 million in aggregate principal amount. The Note is secured by stockissuance included $0.2 million of the Bankissuance costs and bears interest at the one month ICE Benchmark Administration ("IBA") LIBOR plus 2.5%. Asas of June 30, 20212022, a net balance of $9.9 million is included in the Subordinated notes line of the Condensed Consolidated Balance Sheets. The November 2020 Sub Notes accrue interest at a rate of 4.25% per annum until December 1, 2025, at which time the rate will adjust each quarter to the then current three-month term SOFR, or an alternative rate determined in accordance with the terms of the November 2020 Sub Notes, plus 402 basis points; mature on December 1, 2030; are redeemable at the option of the Company on or after December 1, 2025; and pay interest semi-annually prior to December 1, 2025 and quarterly after December 1, 2025.

On March 17, 2020, the Company completed the issuance and sale of subordinated notes (the ‘March 2020 Sub Notes”) totaling $8.0 million in aggregate principal amount. The issuance included $0.1 million of issuance costs and as of June 30, 2022, a net balance of $7.9 million is included in the Subordinated notes line of the Condensed Consolidated Balance Sheets. The March 2020 Sub Notes accrue interest at a rate of 5.125% per annum until March 31, 2025, at which time the rate will adjust each quarter to the then current three-month LIBOR, or an alternative rate determined in accordance with the terms of the March 2020 there were 0 amounts outstandingSub Notes, plus 450 basis points; mature on March 31, 2030; are redeemable at the option of the Company on or after March 31, 2025; and the borrowing capacity associated with this facility was $5.0 million.pay interest quarterly.

The Company’s borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies (seeagencies. See Note 1617 – Regulatory Capital Matters).Matters for additional information. As of June 30, 20212022 and December 31, 2020,2021, the Company was in compliance with the covenant requirements.

NOTE 89 - COMMITMENTS AND CONTINGENCIES

The Company is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Condensed Consolidated Balance Sheets. Commitments may expire without being utilized. The Company’s exposure to loan loss is represented by the contractual amount of these commitments, although material losses are not anticipated. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

The following presents the Company’s financial instruments whose contract amounts represent credit risk, as of the dates noted (in(dollars in thousands):

June 30, 2021

December 31, 2020

June 30, 2022

December 31, 2021

    

Fixed Rate

    

Variable Rate

    

Fixed Rate

    

Variable Rate

    

Fixed Rate

    

Variable Rate

    

Fixed Rate

    

Variable Rate

Unused lines of credit

$

65,274

$

424,856

$

78,506

$

360,883

$

128,605

$

575,094

$

136,289

$

442,035

Standby letters of credit

3,555

16,125

1,933

17,524

6,263

22,035

2,420

20,940

Commitments to make loans to sell

115,213

370,512

37,841

60,529

Commitments to make loans

$

44,384

$

31,840

$

24,225

$

25,316

52,056

17,749

16,256

14,920

Unused lines of credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Several of the commitments may expire without being drawn upon. Therefore, the total commitment amounts do

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not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the client.

Unused lines of credit under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing clients. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client’s obligation to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Substantially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The Company holds collateral supporting those commitments if deemed necessary.

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Commitments to make loans to sell are agreements to lend to a client which would then be sold to an investor in the secondary market for which the interest rate has been locked with the client, provided there is no violation of any condition within the contract with either party. Commitments to make loans to sell have fixed interest rates. Since commitments may expire without being extended, total commitment amounts may not necessarily represent cash requirements.

Commitments to make loans are agreements to lend to a client, provided there is no violation of any condition within the contract. Commitments to make loans generally have fixed expiration dates or other termination clauses. Since commitments may expire without being extended, total commitment amounts may not necessarily represent cash requirements.

Litigation, Claims and Settlements

The Company is, from time to time, involved in various legal actions arising in the normal course of business. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is the opinion of management, based on advice from legal counsel, that no proceedings exist, either individually or in the aggregate, which, if determined adversely to the Company, would have a material effect on the Company’s condensed consolidated financial statements.

NOTE 910 - SHAREHOLDERS’ EQUITY

Common Stock

The Company’s common stock has 0 par value and each holder of common stock is entitled to one vote for each share (though certain voting restrictions may exist on non-vested restricted stock) held.

On June 14, 2019,January 6, 2022, the Company filed a Form S-3 Registration Statement with the SEC providing that the Company may offer and sell from time to time, separately or together, in multiple series or in one or more offerings, any combination of common stock, preferred stock, debt securities, warrants, depository shares and units, up to a maximum aggregate offer price of $100 million.

On November 3, 2020, the Company announced that its board of directors had authorized a sharethe repurchase planof up to 400,000 shares of the Company’s common stock, 0 par value (the "2019"2020 Repurchase Plan") under which the Company may repurchase up to 300,000 shares of its common stock and that the Board of Governors of the Federal Reserve System advised the Company that it hadhas no objection to the Company’s 20192020 Repurchase Plan. The 20192020 Repurchase Plan was in effect for a one-year period, with the timing of purchases and the number of shares repurchased under the program dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements, and market conditions. The 20192020 Repurchase Plan expired in June of 2020.November 2021. During the six monthsyear ended June 30, 2020, the Company repurchased 22,679 shares at an average price of $16.50.

On November 3, 2020, the Company announced that its board of directors authorized the repurchase of up to 400,000 shares of the Company’s common stock, 0 par value, from time to time, within one year (the "2020 Repurchase Plan") and that the Board of Governors of the Federal Reserve System advised the Company that it has no objection to the Company’s 2020 Repurchase Plan. The Company may repurchase shares in privately negotiated transactions, in the open market, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 promulgated by the SEC, or otherwise in a manner that complies with applicable federal securities laws. The 2020 Repurchase Plan does not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice. During the three and six months ended June 30,December 31, 2021, the Company did not repurchase any shares under the 2020 Repurchase Plan.

During the six months ended June 30, 20212022 and 2020,2021, the Company sold 0 shares of common stock.

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Restricted Stock Awards

In 2017, the Company issued 105,264 shares of common stock ("Restricted Stock Awards") with a value of $3.0 million to the sole member of EMC Holdings, LLC ("EMC"), subject to forfeiture based on his continued employment with the Company. Half of the Restricted Stock Awards ($1.5 million or 52,632 shares) vests ratably over five-yearsfive years. The remaining $1.5 million, or 52,632 shares, may be earned based on performance of the mortgage division of the Company. During the six months ended June 30, 2020, the Company recognized compensation expense of $0.1 million, representing 14,114 shares, related to the performance-based awards. The performance based awards fully vested in the second quarter of 2020.

As of June 30, 2021,2022, the Restricted Stock Awards have a weighted-average grant date fair value of $28.50 per share. TheDuring the three months ended June 30, 2022 and 2021, the Company recognized compensation expense of $0.1 million for the three months ended June 30, 2021 and 2020, for the Restricted Stock Awards. During the six months ended June 30, 20212022 and 2020,2021, the Company recognized compensation expense of $0.2 million and $0.3 million, respectively, for the Restricted Stock Awards. As of June 30, 2021,2022, the Company has $0.40.1 million of unrecognized stock-based compensation expense related to the shares issued, which is expected to be recognized over a weighted average period of less than one year. NaN Restrictedrestricted Stock Awards vested during the six months ended June 30, 20212022 or 2020.2021.

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Stock-Based Compensation Plans

The 2008 Stock Incentive Plan ("the 2008 Plan") was frozen in connection with the adoption of the 2016 Plan and no new awards may be granted under the 2008 Plan. As of June 30, 2021,2022, there were a total of 389,468202,565 shares available for issuance under the First Western Financial, Inc. 2016 Omnibus Incentive Plan ("the 2016 Plan"). If the Awards outstanding under the 2008 Plan or the 2016 Plan are forfeited, cancelled or terminated with no consideration paid to the Company, those amounts will increase the number of shares eligible to be granted under the 2016 Plan.

Stock Options

The Company did 0t grant any stock options during the six months ended June 30, 20212022 and 2020.2021.

During the three and six months ended June 30, 2021 and 2020,2022, the Company recognized an immaterial amount and $0.1 million, respectively, of0 stock based compensation expense associated with stock options. During the three and six months ended June 30, 2021, and 2020, the Company recognized an immaterial amount and $0.1 million, respectively, of stock based compensation expense associated with stock options. As of June 30, 2021,2022, the Company has an immaterial amount of0 unrecognized stock-based compensation expense related to stock options which are unvested. That cost is expected to be recognized over a weighted-average period of less than one year.options.

The following summarizespresents activity for nonqualified stock options forduring the six months ended June 30, 2021:2022:

Weighted

Weighted

Weighted

Average

Weighted

Average

Number

Average

Remaining

Aggregate

Number

Average

Remaining

Aggregate

of

Exercise

Contractual

Intrinsic

of

Exercise

Contractual

Intrinsic

    

Options

    

Price

    

Term

    

Value

    

Options

    

Price

    

Term

    

Value

Outstanding as of December 31, 2020

419,197

$

29.02

Outstanding as of December 31, 2021

308,574

$

29.21

Granted

Exercised

(6,809)

21.47

Forfeited or expired

(34,050)

36.43

(116,100)

40.00

Outstanding as of June 30, 2021

385,147

28.36

2.2

(1)

Options fully vested / exercisable as of June 30, 2021

381,577

$

28.38

2.2

(1)

Outstanding as of June 30, 2022

185,665

22.75

2.6

(1)

Options fully vested / exercisable as of June 30, 2022

185,665

22.75

2.6

(1)

(1) Nonqualified stock options outstanding at the end of the period and those fully vested / vested/exercisable had immaterial aggregate intrinsic values.

As of June 30, 2021,2022, there were 381,577185,665 options that were exercisable. Exercise prices are between $20.00 and $40.00$27.00 per share, and the options are exercisable for a period of ten-yearsten years from the original grant date and expire on various dates between 20222023 and 2026.

Restricted Stock Units

Pursuant to the 2016 Plan, the Company can grant associates and non-associate directors long-term cash and stock-based compensation. Historically, the Company has granted certain associates restricted stock units which are earned over time or based on various performance measures and convert to common stock upon vesting, which are summarized here and expanded further below.

The following presents the activity for the Time Vesting Units, the Financial Performance Units, and the Market Performance Units during the six months ended June 30, 2022:

Time

Financial

Market

Vesting

Performance

Performance

    

Units

    

Units

    

Units

Outstanding as of December 31, 2021

249,821

183,483

13,746

Granted

126,004

64,629

Vested

(75,220)

(12,100)

Forfeited

(14,007)

(12,086)

(13,746)

Outstanding as of June 30, 2022

286,598

223,926

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over time or based on various performance measures and convert toDuring the three months ended June 30, 2022, the Company issued 53,461 shares of common stock upon vesting, which are summarized here and expanded further below.

the settlement of Restricted Stock Units. The following summarizesremaining 21,345 shares were surrendered with a combined market value at the activity for the Time Vesting Units, the Financial Performance Units and the Market Performance Units fordates of settlement of $0.7 million to cover employee withholding taxes. During the six months ended June 30, 2021:

Time

Financial

Market

Vesting

Performance

Performance

    

Units

    

Units

    

Units

Outstanding as of December 31, 2020

285,052

152,430

14,862

Granted

58,817

41,366

Vested

(60,428)

Forfeited

(8,771)

(3,953)

(611)

Outstanding as of June 30, 2021

274,670

189,843

14,251

2022, the Company issued 61,686 shares of common stock upon the settlement of Restricted Stock Units. The remaining 25,634 shares were surrendered with a combined market value at the dates of settlement of $0.8 million to cover employee withholding taxes. During the three months ended June 30, 2021, the Company issued 36,932 shares of common stock upon the settlement of Restricted Stock Units. The remaining 14,545 shares were surrendered with a combined market value at the dates of settlement of $0.4 million to cover employee withholding taxes. During the six months ended June 30, 2021, the Company issued 43,059 shares of common stock upon the settlement of Restricted Stock Units. The remaining 17,369 shares were surrendered with a combined market value at the dates of settlement of $0.4 million to cover employee withholding taxes. During the three and six months ended June 30, 2020, the Company issued 34,260 shares of common stock upon the settlement of Restricted Stock Units. The remaining 19,852 shares were surrendered with a combined market value at the dates of settlement of $0.3 million to cover employee withholding taxes.

Time Vesting Units

Time Vesting Units are granted to full-time associates and board members at the date approved by the Company’s board of directors. The Company granted 58,817126,004 Time Vesting Units with a five-year service period during the six months ended June 30, 2021,2022 that vest in equal installments of 20% on the anniversary of the grant date, assuming continuous employment through the scheduled vesting dates. During the three months ended June 30, 20212022 and 2020,2021, the Company recognized compensation expense of $0.4 million and $0.3 million, respectively, for the Time Vesting Units. During the six months ended June 30, 20212022 and 2020,2021, the Company recognized compensation expense of $0.8$0.9 million and $0.6$0.8 million, respectively, for the Time Vesting Units. As of June 30, 2021,2022, there was $4.5$6.4 million of unrecognized compensation expense related to the Time Vesting Units, which is expected to be recognized over a weighted-average period of 2.12.2 years.

Financial Performance Units

Financial Performance Units are granted to certain key associates and are earned based on the Company achieving various financial performance metrics. If the Company achieves the financial metrics, which include various thresholds from 0% up to 150%, then the Financial Performance Units will have a subsequent vesting period.

The following presents the Company’s existing Financial Performance Units as of June 30, 2022 (dollars in thousands, except share amounts):

Grant Period

Threshold Accrual

Maximum Issuable Shares at Current Threshold

Unrecognized Compensation Expense

Weighted-Average (1)

Financial Metric End Date

Vesting Requirement End Date

May 1, 2019 through April 30, 2020

150%

76,797

$

242

1.6 years

December 31, 2021

December 31, 2023

May 1, 2020 through December 31, 2020, excluding November 18, 2020

150%

76,886

345

2.5 years

December 31, 2022

December 31, 2023

On November 18, 2020

134%

29,212

278

2.4 years

December 31, 2022

50% November 18, 2023 & 2025

May 3, 2021 through August 11, 2021

150%

56,148

735

3.5 years

December 31, 2023

December 31, 2025

On May 2, 2022

79%

49,127

2,988

4.5 years

December 31, 2024

December 31, 2026

(1)Represents the expected unrecognized stock-based compensation expense recognition period.

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The following presents the Company’s existing Financial Performance Units as of June 30, 2021 (dollars in thousands, except share amounts):

Grant Period

Threshold Accrual

Maximum Issuable Shares at Current Threshold

Unrecognized Compensation Expense

Weighted-Average (1)

Financial Metric End Date

Vesting Requirement End Date

Prior to May 1, 2019

50% on half; 100% on other half

9,577

$

38

0.5 years

December 31, 2019

December 31, 2021

May 1, 2019 through April 30, 2020

150%

83,961

431

2.6 years

December 31, 2021

December 31, 2023

May 1, 2020 through December 31, 2020, excluding November 18, 2020

150%

85,044

533

3.5 years

December 31, 2022

December 31, 2023

On November 18, 2020

150%

34,752

$

363

3.4 years

December 31, 2022

50% November 18, 2023 & 2025

On May 3, 2021

150%

61,854

$

1,039

4.5 years

December 31, 2023

December 31, 2025

(1)Represents the expected unrecognized stock-based compensation expense recognition period.

The following presents the Company’s Financial Performance Units activity forduring the years noted June 30periods presented (dollars in thousands, except share amounts):

Units Granted

Compensation Expense Recognized

Units Granted

Compensation Expense Recognized

Six Months Ended June 30,

Three Months Ended June 30,

Six Months Ended June 30,

Grant Period

2021

2020

2021

2020

2022

2021

2022

2021

2022

2021

Prior to May 1, 2019

$

18

$

34

$

3

$

18

May 1, 2019 through April 30, 2020

1,866

117

181

29

61

90

117

May 1, 2020 through December 31, 2020, excluding November 18, 2020

58,294

109

39

29

54

82

109

On November 18, 2020

64

(2)

30

28

64

On May 3, 2021

41,366

$

57

$

May 3, 2021 through August 11, 2021

41,366

58

57

139

57

On May 2, 2022

64,629

58

58

Market Performance Units

Market Performance Units were granted to certain key associates and are earned based on growth in the value of the Company’s common stock, and were dependent on the Company completing an initial public offering of stock during a defined period of time. On July 23, 2018, the Company completed its initial public offering and the Market Performance Units performance condition was met. Subsequent to the performance condition there is also a market condition as a vesting requirement for the Market Performance Units which affects the determination of the grant date fair value. The Company estimated the grant date fair value using various valuation assumptions. During the three and six months ended June 30, 20212022 and 2020,2021, the Company recognized an immaterial amount of compensation expense for the Market Performance Units. As of June 30, 2021, there was $0.4 million of2022, the Company has 0 unrecognized compensation expense related to the Market Performance Units which is expected to be recognized over a weighted-average period of 1 year.Units.

If the Company’s common stock is trading at or above certain prices, over a performance period which ended on June 30, 2020, the Market Performance Units would have been determined to be earned and vest following the completion of a subsequent service period, endingwhich ended on June 30, 2022. The Company’s common stock did not trade at or above the required prices over the performance period and as a result, no Market Performance Units arewere eligible to be earned.

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NOTE 1011 - EARNINGS PER COMMON SHARE

The table belowfollowing presents the calculation of basic and diluted earnings per common share forduring the periods indicatedpresented (dollars in thousands, except share and per share amounts):

Three Months Ended June 30, 

Six Months Ended June 30, 

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2021

    

2020

    

2021

    

2020

    

2022

    

2021

    

2022

    

2021

Earnings per common share - Basic

Numerator:

Net income available for common shareholders

$

6,277

 

$

8,696

$

12,276

 

$

10,030

$

4,482

 

$

6,277

$

10,006

 

$

12,276

Denominator:

Basic weighted average shares

 

7,961,785

 

 

7,890,337

 

7,948,796

 

 

7,876,951

 

9,450,987

 

 

7,961,785

 

9,434,742

 

 

7,948,796

Earnings per common share - basic

$

0.79

$

1.10

$

1.54

$

1.27

$

0.47

$

0.79

$

1.06

$

1.54

Earnings per common share - Diluted

Numerator:

Net income available for common shareholders

$

6,277

 

$

8,696

$

12,276

 

$

10,030

$

4,482

 

$

6,277

$

10,006

 

$

12,276

Denominator:

Basic weighted average shares

7,961,785

7,890,337

7,948,796

7,876,951

9,450,987

7,961,785

9,434,742

7,948,796

Diluted effect of common stock equivalents:

Stock options

35,849

20,386

52,870

35,849

55,005

20,386

Time Vesting Units

131,684

18,401

117,107

23,517

122,090

131,684

155,813

117,107

Financial Performance Units

70,746

6,558

59,953

15,804

91,720

70,746

92,524

59,953

Market Performance Units

13,836

13,222

14,017

13,294

13,836

6,827

14,017

Total diluted effect of common stock equivalents

252,115

38,181

211,463

52,615

266,680

252,115

310,169

211,463

Diluted weighted average shares

 

8,213,900

 

 

7,928,518

 

8,160,259

 

 

7,929,566

 

9,717,667

 

 

8,213,900

 

9,744,911

 

 

8,160,259

Earnings per common share - diluted

$

0.76

$

1.10

$

1.50

$

1.26

$

0.46

$

0.76

$

1.03

$

1.50

Diluted earnings per share was computed without consideration to potentially dilutive instruments as their inclusion would have been anti-dilutive.

The table belowfollowing presents potentially dilutive securities excluded from the diluted earnings per share calculation forduring the periods indicated:presented:

Three Months Ended June 30, 

Six Months Ended June 30, 

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2021

    

2020

2021

    

2020

    

2022

    

2021

2022

    

2021

Stock options

141,639

419,197

209,874

419,197

141,639

209,874

Time Vesting Units

92,388

1,991

89,656

121,942

60,971

1,991

Financial Performance Units

26,735

96,257

24,952

48,129

26,735

24,952

Restricted Stock Awards

41,830

10,527

51,749

10,527

Total potentially dilutive securities

168,374

649,672

247,344

608,731

121,942

168,374

60,971

247,344

NOTE 1112 - INCOME TAXES

During the three and six months ended June 30, 2022, the Company recorded an income tax provision of $1.5 million and $3.3 million, respectively, reflecting an effective tax rate of 25.0% and 24.7%, respectively. During the three and six months ended June 30, 2021, the Company recorded an income tax provision of $1.9 million and $4.0 million, respectively, reflecting an effective tax rate of 23.3% and 24.3%, respectively. During the three and six months ended June 30, 2020, the Company recorded an income tax provision of $2.8 million and $3.1 million, respectively, reflecting an effective tax rate of 24.1% and 23.7%, respectively.

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NOTE 1213 - RELATED-PARTY TRANSACTIONS

The Bank extends credit to certain covered parties including Company directors, executive officers, and their affiliates. As of June 30, 20212022 and December 31, 2020,2021, there were no delinquent or non-performing loans to any executive officer or director of the Company. These covered parties, along with principal owners, management, immediate family of management or principal owners, a parent company and its subsidiaries, trusts for the benefit of employees, and other parties, may be considered related parties. The following presents a summary of related-party loan activity as of the dates noted (in(dollars in thousands):

    

June 30, 2021

    

December 31, 2020

    

June 30, 2022

    

December 31, 2021

Balance, beginning of year

$

14,321

$

5,675

$

12,833

$

14,321

Funded loans

 

4,505

 

17,348

 

12,880

 

11,294

Payments collected

 

(6,000)

 

(8,702)

 

(7,102)

 

(12,782)

Balance, end of period

$

12,826

$

14,321

$

18,611

$

12,833

Deposits from related parties held by the Bank as of June 30, 20212022 and December 31, 20202021 totaled $24.1$38.6 million and $26.2$51.0 million, respectively.

The Company leases office spaces from entities controlled by one of the Company’s board members. During each of the six months ended June 30, 20212022 and 2020,2021, the Company incurred $0.1 million and $0.1 million, respectively, of expenses related to these leases.

NOTE 1314 - FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1:

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:

Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:

Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value:Recurring Fair Value

Investment SecuritiesAvailable-for-sale securities:  The fair values for available-for-sale investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Equity Securities:  Fair value of equity securities represents the market value of mutual funds based on quoted market prices (Level 1) and the value of stock held in other companies, which is based on recent market transactions or quoted rates that are not actively traded (Level 2).

Equity Warrants:  Fair value of equity warrants of private companies are priced using a Black-Scholes option pricing model to estimate the asset fair value by using strike prices, option expiration dates, risk-free interest rates, and option volatility assumptions (Level 3).

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Guarantee Asset and Liability:  The guarantee asset represents the fair value of the consideration received in exchange for the credit enhancement fee. The guarantee liability represents a financial guarantee to cover the second layer of any losses on loans sold to FHLB under the MPF 125 loan sales agreement. The guarantee liability value on day one is equivalent to the guarantee asset fair value, which is the consideration for the credit enhancement fee paid over the life of the loans. The liability is then carried at amortized cost. Significant inputs in the valuation analysis for the asset are Level 3, due to the nature of this asset and the lack of market quotes. The fair value of the guarantee asset is determined using a discounted cash flow model, for which significant unobservable inputs include assumed future prepayment rates ("CPR") and market discount rate (Level 3). An increase in prepayment rates or discount rate would generally reduce the estimated fair value of the guarantee asset.

Mortgage Related Derivatives:  Mortgage related derivatives include our IRLC, FSC, and the forward commitments on our loans held for sale pipeline. The fair value estimate of our IRLC is based on valuation models using market data from secondary market loan sales and direct contacts with third party investors as of the measurement date and pull through assumptions (Level 3). The FSC fair value estimate reflects the potential pair off fee associated with mandatory trades and is estimated by using a market differential and pair off penalty assessed by the investor (Level 3).

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The fair value estimate of the forward commitments is based on market prices of similar securities to the underlying MBS (Level 2).

Our mortgage derivatives are carried atLoans Held for Investment:  The fair value inof loans held for investment are typically determined based on discounted cash flow analysis using market-based interest rate spreads. Discounted cash flow analysis are adjusted, as appropriate, to reflect current market conditions and borrower specific credit risk. Due to the Company’s financial statements with changes innature of the fair value accountedvaluation inputs, loans held for investment are classified within Level 3 of the Condensed Consolidated Statements of Income.valuation hierarchy.

Mortgage Loans Held for Sale:  The fair value of mortgage loans held for sale is estimated based upon quotes from third party investors for similar assets resulting in a Level 2 classification.

Other Real Estate OwnedThe following presents assets and liabilities measured on a recurring basis as of the dates noted (dollars in thousands):  Assets acquired through

    

Quoted

    

    

    

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported

June 30, 2022

(Level 1)

(Level 2)

(Level 3)

Balance

Mortgage loans held for sale

$

$

26,202

$

$

26,202

Loans held at fair value

$

$

$

21,477

$

21,477

Forward commitments and FSC

$

$

239

$

$

239

Equity securities

$

655

$

122

$

$

777

Guarantee asset

$

$

$

174

$

174

IRLC, net

$

$

$

836

$

836

Equity warrants

$

$

$

725

$

725

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Quoted

    

    

    

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported

December 31, 2021

(Level 1)

(Level 2)

(Level 3)

Balance

Investment securities available-for-sale:

 

  

 

  

 

  

 

  

U.S. Treasury debt

$

247

$

$

$

247

U.S. Government Agency

3,522

3,522

Corporate bonds

6,212

2,113

8,325

GNMA mortgage-backed securities - residential

 

 

26,650

 

 

26,650

FNMA mortgage-backed securities - residential

14,443

14,443

Government CMO and MBS

878

878

Corporate CMO and MBS

 

 

1,497

 

 

1,497

Total securities available-for-sale

$

247

$

53,202

$

2,113

$

55,562

Mortgage loans held for sale

$

$

30,620

$

$

30,620

Forward commitments and FSC

$

$

(65)

$

(9)

$

(74)

Equity securities

$

709

$

489

$

$

1,198

Guarantee asset

$

$

$

237

$

237

IRLC, net

$

$

$

1,473

$

1,473

Equity warrants

$

$

$

160

$

160

There were no transfers between levels during the six months ended June 30, 2022 or insteadyear ended December 31, 2021. On April 1, 2022, the Company elected to transfer all securities classified as available-for-sale to held-to-maturity and are now carried at amortized cost.  See Note 3 – Investment Securities for more information.

As of loan foreclosure are initiallyDecember 31, 2021, U.S. Treasury debt was reported at fair value utilizing Level 1 inputs. Three Corporate bonds were reported at fair value utilizing Level 3 inputs.  The remaining portfolio of securities were reported at fair value with Level 2 inputs provided by a pricing service. The majority of the securities had credit support provided by the Federal Home Loan Mortgage Corporation, GNMA, and FNMA. Factors used to value the securities by the pricing service include: benchmark yields, reported trades, interest spreads, prepayments, and other market research. In addition, ratings and collateral quality were considered.

As of June 30, 2022, equity securities, equity warrants, IRLC, and guarantee assets have been recorded at fair value less costswithin the Other assets line item in the Condensed Consolidated Balance Sheets. All changes are recorded in the Other line item in the Condensed Consolidated Statements of Income.

Fair Value Option

The Company has elected to sell when acquired, establishing a new cost basis. They are subsequentlyaccount for certain purchased whole loans held for investment under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income on loans held for investment accounted for at lower of cost orunder the fair value less estimated costs to sell. Fair valueoption is commonly based on recent real estate appraisals which are updated no less frequently than on an annual basis. Appraisals may utilize a single valuation approach or a combination of approaches including comparable salesrecognized within Interest and thedividend income approach. Adjustments are routinely made in the appraisal process byaccompanying Condensed Consolidated Statements of Income. Not electing fair value generally results in a larger discount being recorded on the independent appraisers to adjust for differences between comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classificationsdate of the inputs for determining fair value. Other real estate ownedloan purchase. The discount is evaluated annually for additional impairment and adjusted accordingly.

Impaired Loans:  Thesubsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Additionally, management has elected the fair value of impairedoption for mortgage loans with specific allocations oforiginated and held for sale.

There were 0 loans accounted for under the allowance for loan losses is generally based on recent appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. Impaired loans are evaluated monthly for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources suchoption that were 90 days or more past due and still accruing interest as recent market dataof June 30, 2022 or industry-wide statistics.December 31, 2021. Additionally, there were 0 loans accounted for under the fair value option that were on nonaccrual as of June 30, 2022 or December 31, 2021.

3238

Table of Contents

The following provides more information about the fair value carrying amount and unpaid principal outstanding of loans accounted for under the fair value option as of the dates noted (dollars in thousands):

June 30, 2022

Total Loans

Non Accruals

90 Days or More Past Due

Fair Value Carrying Amount

Unpaid Principal Balance

Difference

Fair Value Carrying Amount

Unpaid Principal Balance

Difference

Fair Value Carrying Amount

Unpaid Principal Balance

Difference

Loans held for sale

$

26,202

$

25,858

$

344

$

$

$

$

$

$

Loans held for investment

21,477

21,149

328

$

47,679

$

47,007

$

672

$

$

$

$

$

$

December 31, 2021

Total Loans

Non Accruals

90 Days or More Past Due

Fair Value Carrying Amount

Unpaid Principal Balance

Difference

Fair Value Carrying Amount

Unpaid Principal Balance

Difference

Fair Value Carrying Amount

Unpaid Principal Balance

Difference

Loans held for sale

$

30,620

$

29,857

$

763

$

$

$

$

$

$

Loans held for investment

$

30,620

$

29,857

$

763

$

$

$

$

$

$

The following presents assets and liabilities measured on a recurring basisthe net (losses)/gains from changes in fair value of loans accounted for under the fair value option as of June 30, 2021 and December 31, 2020 (inthe dates noted (dollars in thousands):

    

Quoted

    

    

    

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported

June 30, 2021

(Level 1)

(Level 2)

(Level 3)

Balance

Investment securities available-for-sale:

 

  

 

  

 

  

 

  

U.S. Treasury debt

$

251

$

$

$

251

Corporate bonds

6,142

6,142

GNMA mortgage-backed securities - residential

 

 

16,086

 

 

16,086

FNMA mortgage-backed securities - residential

1,160

1,160

Corporate CMO and MBS

 

 

1,893

 

 

1,893

Total securities available-for-sale

$

251

$

25,281

$

$

25,532

Equity securities

$

719

$

$

$

719

Guarantee asset

$

$

$

196

$

196

IRLC, net

$

$

$

2,808

$

2,808

Forward commitments and FSC

$

$

(140)

$

$

(140)

Mortgage loans held for sale

$

$

48,563

$

$

48,563

    

Quoted

    

    

    

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported

December 31, 2020

(Level 1)

(Level 2)

(Level 3)

Balance

Investment securities available-for-sale:

 

  

 

  

 

  

 

  

U.S. Treasury debt

$

254

$

$

$

254

Corporate bonds

6,044

6,044

GNMA mortgage-backed securities - residential

 

 

24,604

 

 

24,604

FNMA mortgage-backed securities - residential

1,677

1,677

Corporate CMO and MBS

 

 

4,087

 

 

4,087

Total securities available-for-sale

$

254

$

36,412

$

$

36,666

Equity securities

$

730

$

$

$

730

Guarantee asset

$

$

$

232

$

232

IRLC, net

$

$

$

9,841

$

9,841

Forward commitments and FSC

$

$

(2,534)

$

(89)

$

(2,623)

Mortgage loans held for sale

$

$

161,843

$

$

161,843

Three Months Ended

Six Months Ended

June 30,

June 30,

2022

2021

2022

2021

Loans held for sale

$

(394)

$

417

$

(419)

$

(4,165)

Loans held for investment

328

328

$

(66)

$

417

$

(91)

$

(4,165)

The following presents a reconciliationsummarizes the activity pertaining to loans accounted for level 3 instruments measured atunder the fair value on a recurring basis (inoption as of the dates noted (dollars in thousands):

Three Months Ended June 30, 2021

    

Guarantee Asset

    

IRLC

    

FSC

Beginning balance

$

188

$

2,105

$

(173)

Acquisitions

 

5,823

Originations

 

2

(5,981)

Gains (losses) in net income, net

6

861

173

Other settlements

 

Ending balance

$

196

$

2,808

$

Three Months Ended

Six Months Ended

June 30, 

June 30, 

Loans held for sale

2022

2021

2022

2021

Balance at beginning of period

$

33,663

$

176,644

$

30,620

$

161,843

Loans originated

278,720

365,423

470,494

901,777

Fair value changes

(394)

417

(419)

(4,165)

Sales

(285,777)

(493,029)

(474,443)

(1,007,574)

Settlements

(10)

(892)

(50)

(3,318)

Balance at end of period

$

26,202

$

48,563

$

26,202

$

48,563

Three Months Ended

Six Months Ended

June 30, 

June 30, 

Loans held for investment

2022

2021

2022

2021

Balance at beginning of period

$

6,380

$

$

$

Loans acquired

17,869

24,249

Fair value changes

328

328

Settlements

(3,100)

(3,100)

Balance at end of period

$

21,477

$

$

21,477

$

3339

Table of Contents

Nonrecurring Fair Value

Other Real Estate Owned (“OREO”):  Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. They are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than on an annual basis. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. OREO is evaluated annually for additional impairment and adjusted accordingly.

Impaired Loans:  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. Impaired loans are evaluated monthly for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

The following presents assets measured on a nonrecurring basis as of the dates noted (dollars in thousands):

    

Quoted

    

    

    

    

    

    

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported

June 30, 2022

(Level 1)

(Level 2)

(Level 3)

Balance

OREO:

 

  

 

  

 

  

 

  

Commercial properties

$

$

$

378

$

378

Impaired loans(1):

Commercial and Industrial

$

$

$

1,632

$

1,632

    

Quoted

    

    

    

    

    

    

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported

December 31, 2021

(Level 1)

(Level 2)

(Level 3)

Balance

Impaired loans(1):

Commercial and Industrial

$

$

$

439

$

439

(1) NaN immaterial Consumer and Other loan was fully reserved for using a specific allowance as of June 30, 2022 and December 31, 2021.

The sales comparison approach was utilized for estimating the fair value of non-recurring assets.

In the second quarter of 2022, the Company recorded $0.4 million of OREO as a result of obtaining physical possession of a foreclosed property as partial consideration for amounts owed on an impaired loan. As of June 30, 2022, this OREO property had a carrying amount of $0.4 million. As of December 31, 2021, the Company did not own any OREO properties.  

As of June 30, 2022, total impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had carrying values of $1.9 million with valuation allowances of $0.3 million and were classified as Level 3. As of December 31, 2021, total impaired loans measured for impairment using the fair value of the collateral dependent loans had carrying values of $2.2 million with valuation allowances of $1.8 million and were classified as Level 3.

40

Table of Contents

Three Months Ended June 30, 2020

    

Guarantee Asset

    

IRLC

    

FSC

Beginning balance

$

$

4,025

$

(16)

Acquisitions

 

9,395

(84)

Originations

 

244

(6,574)

Gains (losses) in net income, net

16

720

16

Other settlements

(38)

Ending balance

$

222

$

7,566

$

(84)

Six Months Ended June 30, 2021

    

Guarantee Asset

    

IRLC

    

FSC

Beginning balance

$

232

$

9,841

$

(89)

Acquisitions

 

8,507

(173)

Originations

 

2

(12,997)

Gains (losses) in net income, net

(38)

(2,543)

262

Other settlements

 

Ending balance

$

196

$

2,808

$

Six Months Ended June 30, 2020

    

Guarantee Asset

    

IRLC

    

FSC

Beginning balance

$

$

1,184

$

Acquisitions

 

16,718

(100)

Originations

 

244

(10,983)

Gains (losses) in net income, net

16

647

16

Other settlements

(38)

Ending balance

$

222

$

7,566

$

(84)

U.S. Treasury debt is reported at fair value utilizing Level 1 inputs. The remaining portfolio of securities are reported at fair value with Level 2 inputs provided by a pricing service. As of June 30, 2021 and December 31, 2020, the majority of the securities had credit support provided by the Federal Home Loan Mortgage Corporation, GNMA, and FNMA. Factors used to value the securities by the pricing service include: benchmark yields, reported trades, interest spreads, prepayments, and other market research. In addition, ratings and collateral quality are considered.

As of June 30, 2021, equity securities, IRLC, and guarantee assets have been recorded at fair value within the Other assets line item and the FSC have been recorded at fair value with the Other liabilities line item in the Condensed Consolidated Balance Sheets. All changes are recorded in the Other line item in the Condensed Consolidated Statements of Income.

The following presents quantitative information about Level 3 assets measured on a recurring basis as of June 30, 2021 and December 31, 2020 (dollars in thousands):

Quantitative Information about Level 3 Fair Value Measurements as of June 30, 2021

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Guarantee asset

$

196

Discounted cash flow

Discount rate
Prepayment rate

3% (3%)
24% (24%)

IRLC, net

2,808

Best execution model

Pull through

72% to 100% (88%)

FSC

Internal pricing model

Market Differential

3bps to 61bps
(19bps)

34

Table of Contents

Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2020

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Guarantee asset

$

232

Discounted cash flow

Discount rate
Prepayment rate

3% (3%)
25% (25%)

IRLC, net

9,841

Best execution model

Pull through

55% to 100% (86%)

FSC

(89)

Internal pricing model

Market Differential

-59bps to -17bps
(-31bps)

The following presents assets measured on a nonrecurring basis as of June 30, 2021 and December 31, 2020 (in thousands):

    

Quoted

    

    

    

    

    

    

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported

June 30, 2021

(Level 1)

(Level 2)

(Level 3)

Balance

Impaired loans(1):

Commercial and Industrial

$

$

$

1,289

$

1,289

Quoted

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported

December 31, 2020

(Level 1)

(Level 2)

(Level 3)

Balance

Other real estate owned:

 

  

 

  

 

  

 

  

Commercial properties

$

$

$

194

$

194

Impaired loans(1):

Commercial and Industrial

$

$

$

1,800

$

1,800

(1) Two immaterial Cash, Securities, and Other loan were fully reserved for using a specific allowance as of June 30, 2021 and December 31, 2020.

The sales comparison approach was utilized for estimating the fair value of non-recurring assets.

As of June 30, 2021, the Company did not own any OREO properties. As of December 31, 2020, OREO had a carrying amount of $0.2 million, which is the cost basis of $2.1 million net of a valuation allowance of $1.9 million.

As of June 30, 2021, total impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had carrying values of $3.0 million with valuation allowances of $1.8 million and were classified as Level 3. As of December 31, 2020, impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had carrying values of $3.4 million with valuation allowances of $1.6 million and were classified as Level 3.

Impaired loans accounted for specific reserves of $1.8$0.3 million and $1.6$1.8 million as of June 30, 20212022 and December 31, 2020.2021, respectively. The Company did not have any charge offs during the six months ended June 30, 20212022 from the specific reserve. The Company charged off an immaterial amount during the year ended December 31, 20202021 from the specific reserve.

Level 3 Analysis

The following presents a reconciliation for Level 3 instruments measured at fair value on a recurring basis as of the dates noted (dollars in thousands):

Three Months Ended June 30, 2022

    

Corporate Bonds

    

Loans Held at Fair Value

FSC

    

Guarantee Asset

    

IRLC

    

Equity Warrants

Beginning balance

$

6,215

$

6,380

$

$

206

$

990

$

402

Acquisitions

 

18,352

 

1,083

 

Originations

 

 

(2,063)

 

Gains/(losses) in net income, net

(155)

(32)

826

323

Transfer to held-to-maturity

 

(6,215)

 

 

Settlements

(3,100)

Ending balance

$

$

21,477

$

$

174

$

836

$

725

Three Months Ended June 30, 2021

    

Corporate Bonds

    

Loans Held at Fair Value

FSC

    

Guarantee Asset

    

IRLC

    

Equity Warrants

Beginning balance

$

$

$

(173)

$

188

$

2,105

$

Acquisitions

 

 

5,823

 

Originations

 

 

2

(5,981)

 

Gains/(losses) in net income, net

173

6

861

Ending balance

$

$

$

$

196

$

2,808

$

Six Months Ended June 30, 2022

    

Corporate Bonds

    

Loans Held at Fair Value

FSC

    

Guarantee Asset

    

IRLC

    

Equity Warrants

Beginning balance

$

2,113

$

$

(9)

$

237

$

1,473

$

160

Acquisitions

 

4,000

24,732

9

 

2,697

 

242

Originations

 

 

(3,417)

 

Gains/(losses) in net income, net

(155)

(63)

83

323

Unrealized gains, net

102

Transfer to held-to-maturity

 

(6,215)

 

 

Settlements

��

(3,100)

Ending balance

$

$

21,477

$

$

174

$

836

$

725

Six Months Ended June 30, 2021

    

Corporate Bonds

    

Loans Held at Fair Value

FSC

    

Guarantee Asset

    

IRLC

    

Equity Warrants

Beginning balance

$

$

$

(89)

$

232

$

9,841

$

Acquisitions

 

 

(173)

 

2

8,507

 

Originations

 

 

 

(12,997)

 

Gains/(losses) in net income, net

262

(38)

(2,543)

Ending balance

$

$

$

$

196

$

2,808

$

3541

Table of Contents

The following presents quantitative information about Level 3 assets measured on a recurring and nonrecurring basis as of the dates noted (dollars in thousands):

Quantitative Information about Level 3 Fair Value Measurements as of June 30, 2022

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Recurring fair value

Loans held at fair value

$

21,477

Discounted cash flow

Discount rate

4% to 19% (10%)

Guarantee asset

174

Discounted cash flow

Discount rate
Prepayment rate

4% (4%)
8% (8%)

IRLC, net

836

Best execution model

Pull through

67% to 100% (94%)

Equity warrants

725

Black-Scholes option pricing model

Volatility
Risk-free interest rate
Remaining life

32.4% to 32.5% (32.5%)
1.78% to 2.95% (2.69%)
0 to 4 years

Nonrecurring fair value

OREO:

Commercial properties

378

Appraisal value

Commission, cost to sell, closing costs

9% (9%)

Impaired loans(1):

Commercial and Industrial

1,632

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

10% (10%)

42

Table of Contents

The following presents quantitative information about the significant unobservable inputs used in the fair value measurement of nonrecurring assets categorized within Level 3 of the fair value hierarchy as of June 30, 2021 and December 31, 2020 (dollars in thousands):

Quantitative Information about Level 3 Fair Value Measurements as of June 30, 2021

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Impaired loans(1):

Commercial and Industrial

$

1,289

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 45% (31%)

Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2020

Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2021

Valuation

Significant

Range

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Fair Value

Technique

Unobservable Input

(Weighted Average)

Other real estate owned:

 

  

 

  

 

  

 

  

Commercial properties

$

194

Sales contract

Commission, cost to sell, closing costs

5% (5%)

Recurring fair value

Corporate Bonds

$

2,113

Discounted cash flow

Discount rate

7% (7%)

FSC

(9)

Internal pricing model

Market Differential

-14bps to -2 bps
(-6bps)

Guarantee asset

237

Discounted cash flow

Discount rate
Prepayment rate

3% (3%)
18% (18%)

IRLC, net

1,473

Best execution model

Pull through

71% to 100% (88%)

Equity warrants

160

Black-Scholes option pricing model

Volatility
Risk-free interest rate
Remaining life

24% to 37% (32%)
0.30% to 1.10% (0.97%)
0 to 4 years

Nonrecurring fair value

Impaired loans(1):

Commercial and Industrial

$

1,800

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 35% (26%)

439

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 45% (39%)

(1) TwoOne immaterial Cash, Securities and Other loans were fully reserved for using a specific allowance as of June 30, 2021 and one immaterial Cash, SecuritiesConsumer and Other loan was fully reserved for using a specific allowance as of June 30, 2022 and December 31, 2020.2021.

Estimated Fair Value of Other Financial Instruments

The following presents carrying amounts and estimated fair values for financial instruments not carried at fair value as of June 30, 2021 and December 31, 2020 (inthe dates noted (dollars in thousands):

Carrying

Fair Value Measurements Using:

Carrying

Fair Value Measurements Using:

June 30, 2021

    

Amount

    

Level 1

    

Level 2

    

Level 3

June 30, 2022

    

Amount

    

Level 1

    

Level 2

    

Level 3

Assets:

Cash and cash equivalents

$

289,089

$

289,089

$

$

$

171,606

$

171,606

$

$

Held-to-maturity securities

87,029

236

75,699

8,807

Loans, net

 

1,558,508

 

 

 

1,552,344

 

2,132,037

 

 

 

2,105,608

Accrued interest receivable

 

5,986

 

 

19

 

5,967

 

7,884

 

3

 

333

 

7,548

Liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Deposits

1,679,053

1,680,464

2,169,998

2,022,624

148,933

Borrowings:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

FHLB borrowings – fixed rate

 

15,000

 

 

15,062

 

 

80,000

 

 

79,789

 

Federal Reserve borrowings – fixed rate

 

105,762

 

 

105,762

 

 

7,223

 

 

7,223

 

Subordinated notes – fixed-to-floating rate

 

24,261

 

 

 

23,895

 

32,553

 

 

 

32,476

Accrued interest payable

$

312

$

$

106

$

206

304

38

266

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Carrying

Fair Value Measurements Using:

Carrying

Fair Value Measurements Using:

December 31, 2020

Amount

Level 1

Level 2

Level 3

December 31, 2021

Amount

Level 1

Level 2

Level 3

Assets:

    

  

    

  

    

  

    

  

    

  

    

  

    

  

    

  

Cash and cash equivalents

$

155,989

$

155,989

$

$

$

386,983

$

386,983

$

$

Loans, net

 

1,520,294

 

 

 

1,512,699

 

1,935,405

 

 

 

1,919,625

Accrued interest receivable

 

6,618

 

 

90

 

6,528

 

7,151

 

2

 

203

 

6,946

Liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Deposits

1,619,910

1,621,648

2,205,703

2,035,212

172,240

Borrowings:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

FHLB borrowings – fixed rate

 

15,000

 

 

15,099

 

 

15,000

 

 

14,990

 

Federal Reserve borrowings – fixed rate

134,563

 

 

134,563

 

23,629

 

 

23,629

 

Subordinated notes – fixed-to-floating rate

24,291

 

 

 

25,750

39,031

 

 

 

40,325

Accrued interest payable

$

453

$

$

124

$

329

355

87

268

The fair value estimates presented and discussed above are based on pertinent information available to management as of the dates specified. The estimated fair value amounts are based on the exit price notion set forth by ASU 2016-01. Although management is not aware of any factors that would significantly affect the estimated fair values, such amounts have not been comprehensively revalued for purposes of these condensed consolidated financial statements since the balance sheet dates. Therefore, current estimates of fair value may differ significantly from the amounts presented herein.

The methods and assumptions, not previously presented, used to estimate fair values are described as follows.

Cash and Cash Equivalents and Restricted Cash: The carrying amounts of cash and cash equivalents and restricted cash approximate fair values as maturities are less than 90 days and balances are generally in accounts bearing current market interest rates.

Held-to-maturity securities: The fair values for held-to-maturity investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities is not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Loans, net: The fair values for all fixed-rate and variable-rate performing loans were estimated using the income approach and by discounting the projected cash flows of such loans. Principal and interest cash flows were projected based on the contractual terms of the loans, including maturity, contractual amortization, and adjustments for prepayments and expected losses, where appropriate. A discount rate was developed based on the relative risk of the cash flows, taking into accountconsidering the loan type, maturity, and a required return on capital.

Accrued Interest Receivable and Payable: The carrying amounts of accrued interest approximate fair value due to their short-term nature.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting dates. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Fixed Rate Borrowings: Borrowings with fixed rates are valued using inputs such as discounted cash flows and current interest rates for similar instruments and borrowers with similar credit ratings.

Fixed-to-Floating Rate Borrowings: Borrowings with fixed-to-floating rates are valued using inputs such as discounted cash flows and current interest rates for similar instruments and assume the Company will redeem the instrument prior to the first interest rate reset date.

NOTE 14 - SEGMENT REPORTING

The Company’s reportable segments consist of Wealth Management and Mortgage. The chief operating decision maker ("CODM") is the Chief Executive Officer. The measure of profit or loss used by the CODM to identify and measure the Company’s reportable segments is income before income tax.

The Company completed the sale of its LA fixed income team in the fourth quarter 2020. The LA fixed income team and the related assets made up a majority of the previously reported Capital Management Segment. As a result of the sale the Company evaluated its reportable segments and determined the remaining assets following the sale in the Capital

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NOTE 15 - SEGMENT REPORTING

The Company’s reportable segments consist of Wealth Management segment no longer meetand Mortgage. The chief operating decision maker ("CODM") is the thresholdsChief Executive Officer. The measure of profit or loss used by the CODM to identify and measure the Company’s reportable segments is income before income tax to be a reportable segment. The residual assets that remained in the Capital Management segment are now included in the Wealth Management segment.tax.

The Wealth Management segment consists of operations relative to the Company’s fully integrated wealth management products and services. Services provided include deposit, loan, insurance, and trust and investment management advisory products and services.

The Mortgage segment consists of operations relative to the Company’s residential mortgage service offerings. Mortgage products and services are financial in nature for which premiums are recognized net of expenses, upon the sale of mortgage loans to third parties.

For 2020 periods presented, the Wealth Management segment includes the previously reported key metrics of the previously reported Capital Management segment.

The tables below presentfollowing presents the financial information for each segment that is specifically identifiable or based on allocations using internal methods as of or for the three and six months ended June 30, 2022 and 2021 and 2020 (in(dollars in thousands):

As of and for the three months ended June 30, 2021

Wealth
Management

Mortgage

Consolidated

As of or for the three months ended June 30, 2022

Wealth
Management

Mortgage

Consolidated

Income Statement

Total interest income

 

$

15,548

 

$

 

$

15,548

 

$

21,631

 

$

 

$

21,631

Total interest expense

1,325

1,325

1,493

1,493

Provision for loan losses

12

12

519

519

Net interest income, after provision for loan losses

14,211

14,211

19,619

19,619

Non-interest income

5,571

3,927

9,498

5,663

1,277

6,940

Total income before non-interest expense

19,782

3,927

23,709

25,282

1,277

26,559

Depreciation and amortization expense

262

 

13

 

275

522

 

12

 

534

Net (gain)/loss on assets held for sale

(2)

(2)

All other non-interest expense

12,537

2,709

15,246

17,836

2,215

20,051

Income before income taxes

$

6,983

$

1,205

$

8,188

$

6,926

$

(950)

$

5,976

Goodwill

$

24,191

 

$

 

$

24,191

$

30,400

 

$

 

$

30,400

Total assets

$

1,956,393

 

$

52,911

 

$

2,009,304

2,513,177

 

28,316

 

2,541,493

As of and for the three months ended June 30, 2020

Wealth
Management

Mortgage

 

Consolidated

As of or for the three months ended June 30, 2021

Wealth
Management

Mortgage

 

Consolidated

Income Statement

 

 

Total interest income

 

$

12,470

$

 

$

12,470

 

$

15,548

$

 

$

15,548

Total interest expense

1,674

 

1,674

1,325

 

1,325

Provision for loan losses

2,124

 

2,124

12

 

12

Net interest income, after provision for loan losses

8,672

 

8,672

14,211

 

14,211

Non-interest income

5,230

10,197

 

15,427

5,573

3,927

 

9,500

Total income before non-interest expense

13,902

10,197

 

24,099

19,784

3,927

 

23,711

Depreciation and amortization expense

255

21

 

276

262

13

 

275

All other non-interest expense

10,499

1,869

 

12,368

12,539

2,709

 

15,248

Income before income taxes

$

3,148

$

8,307

 

$

11,455

$

6,983

$

1,205

 

$

8,188

 

 

Goodwill

$

24,191

$

 

$

24,191

$

24,191

$

 

$

24,191

Assets held for sale

3,010

3,010

Total assets

$

1,730,957

$

79,569

 

$

1,810,526

1,956,393

52,911

 

2,009,304

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As of and for the six months ended June 30, 2021

Wealth
Management

Mortgage

Consolidated

Income Statement

Total interest income

 

$

30,047

 

$

 

$

30,047

Total interest expense

2,771

 

2,771

Provision for loan losses

12

 

12

Net interest income, after provision for loan losses

27,264

 

27,264

Non-interest income

10,989

9,124

 

20,113

Total income before non-interest expense

38,253

9,124

 

47,377

Depreciation and amortization expense

520

27

 

547

All other non-interest expense

24,833

5,770

 

30,603

Income before income taxes

$

12,900

$

3,327

 

$

16,227

 

Goodwill

$

24,191

$

 

$

24,191

Total assets

$

1,956,393

$

52,911

 

$

2,009,304

As of and for the six months ended June 30, 2020

Wealth
Management

Mortgage

 

Consolidated

As of or for the six months ended June 30, 2022

Wealth
Management

Mortgage

Consolidated

Income Statement

 

Total interest income

 

$

23,982

$

 

$

23,982

 

$

41,296

 

$

 

$

41,296

Total interest expense

4,255

 

4,255

2,874

 

2,874

Provision for loan losses

2,491

 

2,491

729

 

729

Net interest income, after provision for loan losses

17,236

 

17,236

37,693

 

37,693

Non-interest income

10,493

12,701

 

23,194

11,745

3,795

 

15,540

Total income before non-interest expense

27,729

12,701

 

40,430

49,438

3,795

 

53,233

Depreciation and amortization expense

510

42

 

552

1,070

24

 

1,094

Net loss on assets held for sale

(3)

(3)

All other non-interest expense

23,100

(1)

3,639

 

26,739

34,434

4,416

 

38,850

Income before income taxes

$

4,119

$

9,020

 

$

13,139

$

13,937

$

(645)

 

$

13,292

 

 

Goodwill

$

24,191

$

 

$

24,191

$

30,400

$

 

$

30,400

Assets held for sale

3,010

3,010

Total assets

$

1,730,957

$

79,569

 

$

1,810,526

2,513,177

28,316

 

2,541,493

F

As of or for the six months ended June 30, 2021

Wealth
Management

Mortgage

 

Consolidated

Income Statement

 

Total interest income

 

$

30,047

$

 

$

30,047

Total interest expense

2,771

 

2,771

Provision for loan losses

12

 

12

Net interest income, after provision for loan losses

27,264

 

27,264

Non-interest income

10,978

9,124

 

20,102

Total income before non-interest expense

38,242

9,124

 

47,366

Depreciation and amortization expense

520

27

 

547

All other non-interest expense

24,822

5,770

 

30,592

Income before income taxes

$

12,900

$

3,327

 

$

16,227

 

Goodwill

$

24,191

$

 

$

24,191

Total assets

1,956,393

52,911

 

2,009,304

(1) Includes loss on assets held for sale of $0.6 million.

NOTE 1516 – LOW-INCOME HOUSING TAX CREDIT INVESTMENTS

On December 19, 2019, the Company invested in a low-income housing tax credit ("LIHTC") investment. As of June 30, 20212022 and December 31, 2020,2021, the balance of the LIHTC investment for LIHTC was $0.9 million and $1.1 million, respectively.$2.6 million. These balances are reflected in the Other assets line item of the Condensed Consolidated Balance Sheets. TotalThere were 0 unfunded commitments related to the investment in the LIHTC total $2.1 million and $2.2 millioninvestment as of June 30, 2021 and2022. As of December 31, 2020, respectively. The Company expects to fulfill these2021, total unfunded commitments during the year ending 2021.were $0.2 million.

The Company uses the proportional amortization method to account for this investment. During the three and six months ended June 30, 2021, the Company recognized amortizationAmortization expense of $0.1 million and $0.2 million, respectively, which wasis included within the Income tax expense line item of the Condensed Consolidated Statements of Income. TheDuring the three months ended June 30, 2022 and 2021, the Company did not recognize any relatedrecognized amortization expense duringof $0.1 million. During the three and six months ended June 30, 2020.2022 and 2021, the Company recognized amortization expense of $0.2 million.

Additionally, during the three and six months ended June 30, 2022 and 2021, the Company recognized $0.1 million and $0.2 million of tax credits and other benefits from this investment in the LIHTC. The Company did not recognize any related tax credits or other benefits duringLIHTC investment. During the three and six months ended June 30, 2020.2022 and 2021, the Company recognized $0.2 million of tax credits and other benefits. During the three and six months ended June 30, 20212022 and 2020,2021, the Company did not0t incur any impairment losses.

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NOTE 1617 - REGULATORY CAPITAL MATTERS

First Western and the Bank are subject to various regulatory capital adequacy requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly

39

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additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s condensed consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, First Western and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

First Western and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings, and other factors. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks ("Basel III rules") hashave been fully phased in. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. During the year ended December 31, 2021, First Western made a capital injection of $2.9 million into the Bank. Management believes as of June 30, 2021,2022, First Western and the Bank meet all capital adequacy requirements to which they are subject to.subject.

Prompt corrective action regulations for First Western and the Bank provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

The standard ratios established by First Western and the Bank’s primary regulators to measure capital require First Western and the Bank to maintain minimum amounts and ratios, set forth in the following table. These ratios are common equity Tier 1 capital ("CET1"), Tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined).

The actual capital ratios of First Western and the Bank, along with the applicable regulatory capital requirements as of June 30, 2021,2022, were calculated in accordance with the requirements of Basel III. The final rules of Basel III also established a “capital conservation buffer” of 2.5% above new regulatory minimum capital ratios, which are fully effective following minimum ratios: (i) a CET1 ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. Banks are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that can be utilized for such activities.

As of June 30, 20212022 and December 31, 2020,2021, the most recent filings with the FDIC categorized First Western and the Bank as well capitalized under the regulatory guidelines. To be categorized as well capitalized, an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as set forth in the following table. Management believes there are 0 conditions or events since June 30, 2021,2022, that have changed the categorization of First Western and the Bank as well capitalized. Management believes First Western and the Bank met all capital adequacy requirements to which it was subject as of June 30, 20212022 and December 31, 2020.2021.

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Table of Contents

The following presents the actual and required capital amounts and ratios as of June 30, 2021 and December 31, 2020dates noted (dollars in thousands):

To be Well Capitalized

 

To be Well Capitalized

 

Under Prompt

 

Under Prompt

 

Required for Capital

Corrective Action

 

Required for Capital

Corrective Action

 

Actual

Adequacy Purposes(1)

Regulations

 

Actual

Adequacy Purposes(1)

Regulations

 

June 30, 2021

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

June 30, 2022

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Tier 1 capital to risk-weighted assets

 

 

Bank

$

148,443

 

11.03

%

$

80,738

 

6.0

%

$

107,650

8.0

%

$

214,993

 

10.99

%

$

117,361

 

6.0

%

$

156,482

8.0

%

Consolidated

144,728

10.68

N/A

N/A

N/A

N/A

199,379

10.15

N/A

N/A

N/A

N/A

CET1 to risk-weighted assets

Bank

148,443

 

11.03

60,553

 

4.5

87,466

 

6.5

214,993

 

10.99

88,021

 

4.5

127,141

 

6.5

Consolidated

144,728

10.68

N/A

N/A

N/A

N/A

199,379

10.15

N/A

N/A

N/A

N/A

Total capital to risk-weighted assets

 

 

Bank

161,335

 

11.99

 

107,650

 

8.0

 

134,563

 

10.0

229,777

 

11.75

 

156,482

 

8.0

 

195,602

 

10.0

Consolidated

182,180

13.45

N/A

N/A

N/A

N/A

247,164

12.58

N/A

N/A

N/A

N/A

Tier 1 capital to average assets

 

 

Bank

148,443

 

7.98

 

74,429

 

4.0

 

93,036

 

5.0

214,993

 

8.65

 

99,469

 

4.0

 

124,336

 

5.0

Consolidated

$

144,728

7.75

%

N/A

N/A

N/A

N/A

199,379

8.00

N/A

N/A

N/A

N/A

To be Well Capitalized

 

To be Well Capitalized

 

Under Prompt

 

Under Prompt

 

Required for Capital

Corrective Action

 

Required for Capital

Corrective Action

 

Actual

Adequacy Purposes(1)

Regulations

 

Actual

Adequacy Purposes(1)

Regulations

 

December 31, 2020

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

December 31, 2021

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Tier 1 capital to risk-weighted assets

Bank

$

133,963

 

10.22

%

$

78,660

 

6.0

%

$

104,880

8.0

%

$

203,164

 

11.40

%

$

106,945

 

6.0

%

$

142,594

8.0

%

Consolidated

131,507

9.96

N/A

N/A

N/A

N/A

188,777

10.54

N/A

N/A

N/A

N/A

CET1 to risk-weighted assets

Bank

133,963

 

10.22

58,995

 

4.5

85,215

 

6.5

203,164

 

11.40

80,209

 

4.5

115,858

 

6.5

Consolidated

131,507

9.96

N/A

N/A

N/A

N/A

188,777

10.54

N/A

N/A

N/A

N/A

Total capital to risk-weighted assets

 

 

Bank

146,853

 

11.20

 

104,880

 

8.0

 

131,100

 

10.0

217,215

 

12.19

 

142,594

 

8.0

 

178,242

 

10.0

Consolidated

168,957

12.80

N/A

N/A

N/A

N/A

242,388

13.54

N/A

N/A

N/A

N/A

Tier 1 capital to average assets

 

 

Bank

133,963

 

7.62

 

70,301

 

4.0

 

87,877

 

5.0

203,164

 

10.05

 

80,887

 

4.0

 

101,108

 

5.0

Consolidated

$

131,507

7.45

%

N/A

N/A

N/A

N/A

188,777

9.31

N/A

N/A

N/A

N/A

(1) Does not include capital conservation buffer.

NOTE 17 – SUBSEQUENT EVENTS

On July 22, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Teton Financial Services, Inc. (“Teton”), parent company of Rocky Mountain Bank, a Wyoming-chartered bank headquartered in Jackson, Wyoming. As of June 30, 2021, Teton had assets of $420.7 million, total deposits of $374.6 million, and total loans of $267.9 million. The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, Teton will be merged with into the Company (the “Merger”), with the Company continuing as the surviving corporation. The Merger Agreement also provides that following the Merger, Rocky Mountain Bank will be merged with and into the Bank, with the Bank surviving the bank merger.buffer.

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

The following discussion and analysis is intended to assist readers in understanding our financial condition and results of operations for the three and six months ended June 30, 20212022 and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included in this Quarterly Report on Form 10-Q (this "Form 10-Q") and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 12, 2021.15, 2022. Unless we state otherwise or the context otherwise requires, references in this Form 10-Q to "we," "our," "us," "the Company," and "First Western" refer to First Western Financial, Inc. and its consolidated subsidiaries, including First Western Trust Bank, which we sometimes refer to as "the Bank" or "our Bank."

The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs, and expected performance. We caution that assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the differences can be material. See "Cautionary Note Regarding Forward-Looking Statements." Also, see the risk factors and other cautionary statements described under the heading "Item 1A - Risk Factors" included in in our Annual Report Form 10-K filed with the SEC on March 12, 202115, 2022 and in Part II–Item 1A of this Form 10-Q. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Company Overview

We are a financial holding company founded in 2002 and headquartered in Denver, Colorado. We provide a fully integrated suite of wealth management services to our clients including banking, trust, and investment management products and services. Our mission is to be the best private bank for the Western wealth management client. We target entrepreneurs, professionals, and high-net worth individuals, typically with $1.0 million-plus in liquid net worth, and their related philanthropic and business organizations, which we refer to as the "Western wealth management client." We believe that the Western wealth management client shares our entrepreneurial spirit and values our sophisticated, high-touch wealth management services that are tailored to meet their specific needs. We partner with our clients to solve their unique financial needs through our expert integrated services provided in a team approach.

We offer our services through a branded network of boutique private trust bank offices, which we believe are strategically located in affluent and high-growth markets in locations across Colorado, Arizona, Wyoming, Montana, and California. Our profit centers, which are comprised of private bankers, lenders, wealth planners, and portfolio managers, under the leadership of a local chairman and/or president, are also supported centrally by teams providing management services such as operations, risk management, credit administration, marketing, technology support, human capital, and accounting/finance services, which we refer to as support centers.

From 2004, when we opened our first profit center, until June 30, 2021,2022, we have expanded our footprint into eleventhirteen full service profit centers, twothree loan production offices, and two trust offices located across fourfive states. As of and for the six months ended June 30, 2021,2022, we had $2.01$2.54 billion in total assets, $47.4$53.2 million in total revenues, and provided fiduciary and advisory services on $6.76$6.28 billion of assets under management ("AUM").

Response to COVID-19

The spread of COVID-19 has caused significant disruptions in the U.S. economy since it was declared a pandemic in March of 2020 by the World Health Organization. Disruptions include temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, and related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.legislation. The changes have impacted our clients and their industries, as well as the financial services industry. At this time, we cannot predict the impact or how long the economy or our impacted clients will be disrupted.

The Company activated its Business Continuity Management Plan in early 2020 in response to the emergence of COVID-19 and has continued to adjust as the crisis continues to impact our markets, clients, and business. A majority of our associates have been working remotely since early 2020. All of our offices are open, functioning, and continue to operate as usual. We are taking additional precautions within our profit centers, including enhanced cleaning procedures and physical distancing measures, to ensure the safety of our clients and our associates.

A provision in the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") created the Paycheck Protection Program ("PPP"), which is administered by the Small Business Administration ("SBA"). The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA lender and participated in all rounds of the program.

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program. AsThe last round of June 30, 2021, we held 516 PPP loans for a total of $103.1 million with an average loan size of $0.2 million. As of June 30, 2021, the Company had submitted loans with original loan amounts of $202.7 million to the SBA for forgiveness and had received forgiveness on 722 loans totaling $177.4 million.

During the second quarter of 2021, the Company funded an additional $5.4 million in new PPP loans before the program funds were depleted in early May.May 2021. With the originations closed, the SBA turned their attention to forgiveness, processing applications submitted by the Company and approved and paid $91.4 million in forgiveness payments.Company.  Loans funded in 2021 becomebecame eligible for forgiveness after the covered period of 8 to 24 weeks, which beginsbegan for some clients in the early second quarter of 2021. As of June 30, 2022, we have received forgiveness payments of $305.7 million from the SBA and have 47 PPP loans for a total of $10.7 million with an average loan size of $0.2 million remaining.

As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company has offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years. The Company had seventy-sixIn 2021, the deferral period ended for all non-acquired loans across multiple industries inpreviously modified and payments resumed under the amountoriginal terms. As of $143.1 million of loans that participated inJune 30, 2022, the Company’s COVID loan modification program. Noportfolio included 55 non-acquired loans inwhich were previously modified under the loan modification program, remaintotaling $100.5 million. Through the Teton Acquisition, the Company acquired loans which were previously modified and are still in their deferral period and there were no loans which were delinquent according to Bank policy asperiod. As of June 30, 2021.2022, there were 15 of these loans, totaling $3.5 million.

The Company also participated in the Federal Reserve’s Main Street Lending Program ("MSLP") to support lending to small and medium-sized for-profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. As of June 30, 2021,2022, the Company had sixfive loans with a balance held by the Bank of $6.7$6.8 million.

Primary Factors Used to Evaluate the Results of Operations

As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the comparative levels and trends of the line items in our Condensed Consolidated Balance Sheets and Statements of Income as well as various financial ratios that are commonly used in our industry. The primary factors we use to evaluate our results of operations include net interest income, non-interest income, and non-interest expense.

Net Interest Income

Net interest income represents interest income less interest expense. We generate interest income on interest-earning assets, primarily loans and available-for-saleinvestment securities. We incur interest expense on interest-bearing liabilities, primarily interest-bearing deposits and borrowings. To evaluate net interest income, we measure and monitor: (i) yields on loans, available-for-saleinvestment securities, and other interest-earning assets; (ii) the costs of deposits and other funding sources; (iii) the rates incurred on borrowings and other interest-bearing liabilities; and (iv) the regulatory risk weighting associated with the assets. Interest income is primarily impacted by loan growth and loan repayments, along with changes in interest rates on the loans. Interest expense is primarily impacted by changes in deposit balances, changes in interest rates on deposits, along with the volume and type of interest-bearing liabilities. Net interest income is primarily impacted by changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities.

Non-Interest Income

Non-interest income primarily consists of the following:

Trust and investment management fees—fees and other sources of income charged to clients for managing their trust and investment assets, providing financial planning consulting services, 401(k) and retirement advisory consulting services, and other wealth management services. Trust and investment management fees are primarily impacted by rates charged and increases and decreases in AUM. AUM is primarily impacted by opening and closing of client advisory and trust accounts, contributions and withdrawals, and the fluctuation in market values.
Net gain on mortgage loans—gain on originating and selling mortgages and origination fees, less commissions to loan originators, document review, and other costs specific to originating and selling the loan. The market adjustments for interest rate lock commitments ("IRLC"), mortgage derivatives, and gains and losses incurred on the mandatory trading of loans are also included in this line item. Net gain on mortgage

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loans is primarily impacted by the amount of loans sold, the type of loans sold, and market conditions.

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Bank fees—income generated through bank-related service charges such as: electronic transfer fees, treasury management fees, bill pay fees, servicing fees for Main Street Lending Program,MSLP, and other banking fees. Banking fees are primarily impacted by the level of business activities and cash movement activities of our clients.
Risk management and insurance fees—commissions earned on insurance policies we have placed for clients through our client risk management team who incorporate insurance services, primarily life insurance, to support our clients’ wealth planning needs. Our insurance revenues are primarily impacted by the type and volume of policies placed for our clients.
Income on company-owned life insurance—income earned on the growth of the cash surrender value of life insurance policies we hold on certain key associates. The income on the increase in the cash surrender value is non-taxable income.
Other—non-operating income generated through a transition services agreement with the buyer of the LA fixed income team.

Non-Interest Expense

Non-interest expense is comprised primarily of the following:

Salaries and employee benefits—all forms of compensation-related expenses including salary, incentive compensation, payroll-related taxes, stock-based compensation, benefit plans, health insurance, 401(k) plan match costs, and other benefit-related expenses. Salaries and employee benefit costs are primarily impacted by changes in headcount and fluctuations in benefits costs.
Occupancy and equipment—costs related to building and land maintenance, leasing our office space, depreciation charges for the buildings, building improvements, furniture, fixtures and equipment, amortization of leasehold improvements, utilities, and other occupancy-related expenses. Occupancy and equipment costs are primarily impacted by the number of locations we occupy.
Professional services—costs related to legal, accounting, tax, consulting, personnel recruiting, insurance, and other outsourcing arrangements. Professional services costs are primarily impacted by corporate activities requiring specialized services. FDIC insurance expense is also included in this line and represents the assessments that we pay to the FDIC for deposit insurance.
Technology and information systems—costs related to software and information technology services to support office activities and internal networks. Technology and information system costs are primarily impacted by the number of locations we occupy, the number of associates we have, and the level of service we require from our third-party technology vendors.
Data processing—costs related to processing fees paid to our third-party data processing system providers relating to our core private trust banking platform. Data processing costs are primarily impacted by the number of loan, deposit, and trust accounts we have and the level of transactions processed for our clients.
Marketing—costs related to promoting our business through advertising, promotions, charitable events, sponsorships, donations, and other marketing-related expenses. Marketing costs are primarily impacted by the levels of advertising programs and other marketing activities and events held throughout the year.
Amortization of other intangible assets—primarily represents the amortization of intangible assets including client lists, core deposit intangibles, and other similar items recognized in connection with acquisitions.
Net loss on assets held for sale—represents the fair value adjustment on disposal groups held for sale.
Other—includes costs related to operational expenses associated with office supplies, postage, travel

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expenses, meals and entertainment, dues and memberships, costs to maintain or prepare OREOother real estate owned (“OREO”) for sale, director compensation and travel, and other general corporate expenses that do not fit within one of the specific non-interest expense lines described above. Other operational expenses are generally impacted by our business activities and needs.

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Operating Segments

The Company’s reportable segments consist of Wealth Management and Mortgage. We measure the overall profitability of operating segments based on income before income tax. We believe this is a more useful measurement as our wealth management products and services are fully integrated with our private trust bank. We allocate costs to our segments, which consist primarily of compensation and overhead expense directly attributable to the products and services within the Wealth Management and Mortgage segments. We measure the profitability of each segment based on a post-allocation basis, as we believe it better approximates the operating cash flows generated by our reportable operating segments. A description of each segment is provided in Note 1415 - Segment Reporting of the accompanying Notes to the Condensed Consolidated Financial Statements.

Primary Factors Used to Evaluate our Balance Sheet

The primary factors we use to evaluate our balance sheet include asset and liability levels, asset quality, capital, liquidity, and potential profit production from assets.

We manage our asset levels to ensure our lending initiatives are efficiently and profitably supported and to ensure we have the necessary liquidity and capital to meet the required regulatory capital ratios. Funding needs are evaluated and forecasted by communicating with clients, reviewing loan maturity and draw expectations, and projecting new loan opportunities.

We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity, and trend of problem assets such as those determined to be classified, delinquent, non-accrual, non-performing or restructured; the adequacy of our allowance for loan losses; the diversification and quality of loan and investment portfolios; the extent of counterparty risks, credit risk concentrations, and other factors.

We manage our liquidity based upon factors that include the level and quality of capital and our overall financial condition, the trend and volume of problem assets, our balance sheet risk exposure, the level of deposits as a percentage of total loans, the amount of non-deposit funding used to fund assets, the availability of unused funding sources and off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold, and other factors.

Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The Company has adopted the Basel III regulatory capital framework. As of June 30, 2021,2022, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III.

Acquisitions and Divestitures

On July 22, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement” or “Teton Acquisition”) with Teton Financial Services, Inc. (“Teton”), parent company of Rocky Mountain Bank, a Wyoming-chartered bank headquartered in Jackson, Wyoming. The Merger Agreement provided that, subject to the terms and conditions set forth in the Merger Agreement, Teton would merge into the Company, with the Company continuing as the surviving corporation. The Merger Agreement also provided that following the merger, Rocky Mountain Bank would merge with and into the Bank, with the Bank surviving the bank merger. The transaction successfully closed on December 31, 2021. See Note 2 – Acquisitions of the accompanying Notes to the Condensed Consolidated Financial Statements for additional information.

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Results of Operations

Overview

The three months ended June 30, 20212022 compared with the three months ended June 30, 2020.2021. We reported net income available to common shareholders of $6.3$4.5 million for the three months ended June 30, 2021,2022, compared to $8.7$6.3 million of net income available to common shareholders for the three months ended June 30, 2020,2021, a $2.4$1.8 million, or 27.8%,28.6% decrease. For the three months ended June 30, 2021,2022, our income before income tax was $8.2$6.0 million, a $3.3$2.2 million, or 28.5%,27.0% decrease from the three months ended June 30, 2020.2021. The decrease was primarily driven by a $6.3$5.1 million increase in non-interest expense and a $2.8 million decrease in net gain on mortgage loans, and a $2.9 million increase in non-interest expense, partially offset by a $5.5$5.4 million increase in net interest income, after provision for loan losses. The increase in non-interest expense was primarily driven by the addition of Teton’s operations at the end of 2021 and additional headcount to support the growth of the Company. The decrease in net gain on mortgage loans was primarily driven by a slowdown in new lock volume on held for sale loans associated with the decrease in refinance activity. The increase in non-interest expense was primarily driven by a $2.9 million decrease in deferred compensation, an increase in personnel expenserising interest rates, reduced housing inventory, and origination volume more heavily weighted to support the growth in the balance sheet, and added personnel from the branch purchase and assumption transaction ("Branch Acquisition").portfolio loans held for investment. The increase in net interest income, after provision for loan losses was primarily due to an increase in average loan balances and a reductionan increase in our average cost of funds.  loan yields.

The six months ended June 30, 20212022 compared with the six months ended June 30, 2020.2021. We reported net income available to common shareholders of $12.3$10.0 million for the six months ended June 30, 2021,2022, compared to $10.0$12.3 million of net income available to common shareholders for the six months ended June 30, 2020,2021, a $2.2$2.3 million, or 22.4%, increase.

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18.5% decrease. For the six months ended June 30, 2021,2022, our income before income tax was $16.2$13.3 million, a $3.1$2.9 million, or 23.5%, increase18.1% decrease from the six months ended June 30, 2020.2021. The increasedecrease was primarily driven by a $10.0$8.8 million increase in non-interest expense and a $5.5 million decrease in net gain on mortgage loans, partially offset by a $10.4 million increase in net interest income, after provision for loan losses, partially offset by a $3.5 million decrease in net gain on mortgage loans and a $3.9 millionlosses. The increase in non-interest expense. The increase in net interest incomeexpense was dueprimarily driven by the addition of Teton’s operations at the end of 2021 and additional headcount to an increase in average loan balances and a reduction in our average costsupport the growth of funds.the Company. The decrease in net gain on mortgage loans was primarily driven by a slowdown in new lock volume on held for sale loans associated with the decrease in refinance activity.rising interest rates, reduced housing inventory, and origination volume more heavily weighted to portfolio loans held for investment. The increase in non-interest expensenet interest income, after provision for loan losses was primarily driven by a $1.9 million decrease in deferred compensation,due to an increase in personnel expense to support the growthaverage loan balances and an increase in the balance sheet, and added personnel from the Branch Acquisition.average loan yields.

Net Interest Income

The three months ended June 30, 20212022 compared with the three months ended June 30, 2020.2021. For the three months ended June 30, 2021,2022, net interest income, before the provision for loan losses, was $14.2$20.1 million, an increase of $3.4$5.9 million, or 31.7%41.6%, compared to the three months ended June 30, 2020.2021. The increase in net interest income was driven by a $304.8$436.5 million increase in average loans outstanding and a 2022 basis point increase in the average yield on loans, partially offset by a $382.2 million increase in average interest bearing deposit balances. Net interest margin increased 34 basis points to 3.35% in the second quarter of 2022 from 3.01% reported in the second quarter of 2021. The increase in net interest margin was primarily a result of a 22 basis point increase in average yield on loans.

The six months ended June 30, 2022 compared with the six months ended June 30, 2021. For the six months ended June 30, 2022, net interest income, before the provision for loan losses, was $38.4 million, an increase of $11.1 million, or 40.9%, compared to the six months ended June 30, 2021. The increase in net interest income was driven by a $402.3 million increase in average loans outstanding, a 27 basis point increase in the average yield on loans, and a 4 basis point decrease in the average cost of funds, partially offset by a $235.9$412.1 million increase in average interest bearing deposit balances. Net interest margin decreased 9increased 22 basis points to 3.01%,3.17% in the second quarter of 2021,six months ended June 30, 2022, from 3.10%2.95% reported in the second quarter of 2020.six months ended June 30, 2021. The decreaseincrease in net interest margin was primarily a result of a more liquid balance sheet mix resulting from continued strong deposit growth as a result of inflows from large commercial depositors and higher deposit balances across the Company’s clientele due to the improving economic and business environment.

The six months ended June 30, 2021 compared with the six months ended June 30, 2020. For the six months ended June 30, 2021, net interest income, before the provision for loan losses, was $27.3 million, an increase of $7.5 million, or 38.3%, compared to the six months ended June 30, 2020.  The increase in net interest income was driven by a $421.9 million27 basis point increase in average yield on loans outstanding and a 394 basis point decrease in the average cost of funds, partially offset by a $284.1 million increase in average interest bearing deposit balances.  Net interest margin decreased 16 basis points to 2.95%, in the six months ended June 30, 2021, from the 3.11% reported in the six months ended June 30, 2020. The decrease in net interest margin was primarily a result of a 29 basis point decrease in average loan yield and a more liquid balance sheet mix.funds.

The increase in average loans outstanding for the three and six months ended June 30, 20212022 compared to the same periods in 20202021 was due to three primary factors: organic growth, PPP loan originationsgrowth and the Branch Acquisition. Net interest income related to PPP loans increased $0.7 millionTeton acquisition at the end of 2021. Average loan yields were 4.11% and $1.5 million4.04% for the three and six months ended June 30, 2021.  Average loan yields were2022, compared to 3.89% and 3.77% for the three and six months ended June 30, 2021, compared to 3.85% and 4.06% for the three and six months ended June 30, 2020.2021. The increase in loan yields during the three-month period wasthree and six month periods were primarily driven by an increasethe addition of higher yielding loans from the Teton acquisition, a beneficial mix shift in the loan portfolio due to PPP net origination fees.  The decrease in loan yields duringforgiveness, and the six-month period was primarily driven by a lowerrising interest rate environment and higher PPP loans outstanding, offset partially by an increase in PPP net origination fees.

Interest income on our available-for-sale securities portfolio decreased as a result of lower average balances for the three and six months ended June 30, 2021 compared to the same period in 2020. Our average yield on available-for-sale securities during the three and six months ended June 30, 2021 was 2.55% and 2.50%, a 71 and 50 basis point increase, compared to the same period in 2020. The impact of the reduction in average balances was partially offset by a higher average yield on the securities portfolio.

Interest expense on deposits decreased during the three and six months ended June 30, 2021 compared to the same period in 2020. The decrease was driven primarily by a 20 and 41 basis point decline in cost of deposits for the three and six months ended June 30, 2021 compared to the same period in 2020. The decrease in cost of deposits was driven by a reduction in deposit rates consistent with the lower interest rate environment as well as the intentional reduction in higher rate non-relationship deposit balances. The reduction in cost of deposits was partially offset by an increase in average interest-bearing deposit accounts of $235.9 million and $284.1 million, for the three and six months ended June 30, 2021, compared to the same period in 2020.environment.

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Interest income on our investment securities portfolio increased as a result of higher average investment balances for the three and six months ended June 30, 2022 compared to the same period in 2021. Our average investment securities balance during the three and six months ended June 30, 2022 was $69.3 million and $62.5 million, an increase of $42.8 million and $33.3 million from the three and six months ended June 30, 2021. The impact on the increase in average balances was partially offset by a lower average yield on the securities portfolio.

Interest expense on deposits increased during the three and six months ended June 30, 2022 compared to the same period in 2021. The increase was driven primarily by a 32.8% and 35.4% increase in average interest-bearing deposits for the three and six months ended June 30, 2022 compared to the same period in 2021. The increase in average interest-bearing deposits was attributable to the Teton acquisition and organic growth in interest checking accounts.

The following tables presentpresents an analysis of net interest income and net interest margin forduring the periods presented, using daily average balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid, and the average rate earned or paid on those assets or liabilities.

As of and for the Three Months Ended June 30, 

 

2021

2020

 

    

    

Interest

    

Average

    

    

Interest

    

Average

 

Average

Earned /

Yield /

Average

Earned /

Yield /

 

(Dollars in thousands)

Balance(1)

Paid

Rate

Balance(1)

Paid

Rate

 

Assets

 

  

 

  

 

  

 

  

 

  

 

  

Interest-earning assets:

 

  

 

  

 

 

  

 

  

 

  

Interest-bearing deposits in other financial institutions

$

292,615

$

92

 

0.13

%

$

76,463

$

44

 

0.23

%

Available-for-sale securities(2)

 

26,474

 

169

 

2.55

 

48,614

 

224

 

1.84

Loans(3)

 

1,573,553

 

15,287

 

3.89

 

1,268,797

 

12,202

 

3.85

Interest-earning assets(4)

 

1,892,642

 

15,548

 

3.29

 

1,393,874

 

12,470

 

3.58

Mortgage loans held for sale(5)

 

86,760

 

625

 

2.88

 

68,212

 

550

 

3.23

Total interest-earning assets, plus mortgage loans held for sale

1,979,402

16,173

 

3.27

1,462,086

13,020

 

3.56

Allowance for loan losses

 

(12,540)

 

  

 

 

(8,694)

 

  

 

Noninterest-earning assets

 

93,629

 

  

 

 

89,817

 

  

 

Total assets

$

2,060,491

 

  

 

$

1,543,209

 

  

 

Liabilities and Shareholders’ Equity

 

  

 

  

 

 

  

 

  

 

Interest-bearing liabilities:

 

  

 

  

 

 

  

 

  

 

Interest-bearing deposits

$

1,165,734

866

 

0.30

$

929,805

1,319

 

0.57

FHLB and Federal Reserve borrowings

 

148,869

 

117

 

0.31

 

64,067

 

129

 

0.81

Subordinated notes

 

24,252

 

342

 

5.64

 

14,445

 

226

 

6.26

Total interest-bearing liabilities

1,338,855

1,325

 

0.40

1,008,317

1,674

 

0.66

Noninterest-bearing liabilities:

 

  

 

  

 

 

  

 

  

 

Noninterest-bearing deposits

 

539,613

 

  

 

 

379,374

 

  

 

Other liabilities

 

16,558

 

  

 

 

18,815

 

  

 

Total noninterest-bearing liabilities

556,171

 

  

 

398,189

 

  

 

Total shareholders’ equity

 

165,465

 

  

 

 

136,703

 

  

 

Total liabilities and shareholders’ equity

$

2,060,491

 

  

 

$

1,543,209

 

  

 

Net interest rate spread(6)

 

  

 

  

 

2.89

 

  

 

  

 

2.92

Net interest income(7)

 

  

$

14,223

 

 

  

$

10,796

 

Net interest margin(8)

 

  

 

  

 

3.01

%

 

  

 

  

 

3.10

%

As of or for the Three Months Ended June 30, 

 

2022

2021

 

    

    

Interest

    

Average

    

    

Interest

    

Average

 

Average

Earned /

Yield /

Average

Earned /

Yield /

 

(Dollars in thousands)

Balance(1)

Paid

Rate

Balance(1)

Paid

Rate

 

Assets

 

  

 

  

 

  

 

  

 

  

 

  

Interest-earning assets:

 

  

 

  

 

 

  

 

  

 

  

Interest-bearing deposits in other financial institutions

$

320,656

$

547

 

0.68

%

$

292,615

$

92

 

0.13

%

Federal funds sold

1,017

2

0.79

Investment securities(2)

 

69,320

 

418

 

2.41

 

26,474

 

169

 

2.55

Loans(3)

 

2,010,024

 

20,664

 

4.11

 

1,573,553

 

15,287

 

3.89

Interest-earning assets(4)

 

2,401,017

 

21,631

 

3.60

 

1,892,642

 

15,548

 

3.29

Mortgage loans held for sale(5)

 

19,452

 

229

 

4.71

 

86,760

 

625

 

2.88

Total interest-earning assets, plus mortgage loans held for sale

2,420,469

21,860

 

3.61

1,979,402

16,173

 

3.27

Allowance for loan losses

 

(13,257)

 

  

 

 

(12,540)

 

  

 

Noninterest-earning assets

 

119,857

 

  

 

 

93,629

 

  

 

Total assets

$

2,527,069

 

  

 

$

2,060,491

 

  

 

Liabilities and Shareholders’ Equity

 

  

 

  

 

 

  

 

  

 

Interest-bearing liabilities:

 

  

 

  

 

 

  

 

  

 

Interest-bearing deposits

$

1,547,901

1,103

 

0.29

$

1,165,734

866

 

0.30

FHLB and Federal Reserve borrowings

 

20,815

 

28

 

0.54

 

148,869

 

117

 

0.31

Subordinated notes

 

32,533

 

362

 

4.45

 

24,252

 

342

 

5.64

Total interest-bearing liabilities

1,601,249

1,493

 

0.37

1,338,855

1,325

 

0.40

Noninterest-bearing liabilities:

 

  

 

  

 

 

  

 

  

 

Noninterest-bearing deposits

 

679,531

 

  

 

 

539,613

 

  

 

Other liabilities

 

19,194

 

  

 

 

16,558

 

  

 

Total noninterest-bearing liabilities

698,725

 

  

 

556,171

 

  

 

Total shareholders’ equity

 

227,095

 

  

 

 

165,465

 

  

 

Total liabilities and shareholders’ equity

$

2,527,069

 

  

 

$

2,060,491

 

  

 

Net interest rate spread(6)

 

  

 

  

 

3.23

 

  

 

  

 

2.89

Net interest income(7)

 

  

$

20,138

 

 

  

$

14,223

 

Net interest margin(8)

 

  

 

  

 

3.35

 

  

 

  

 

3.01

4754

Table of Contents

As of and For the Six Months Ended June 30, 

 

2021

2020

 

    

    

Interest

    

Average

    

    

Interest

    

Average

 

Average

Earned /

Yield /

Average

Earned /

Yield /

 

(Dollars in thousands)

Balance(1)

Paid

Rate

Balance (1)

Paid

Rate

 

Assets

 

  

 

  

 

  

 

  

 

  

 

  

Interest-earning assets:

 

  

 

  

 

 

  

 

  

 

  

Interest-bearing deposits in other financial institutions

$

253,314

$

183

 

0.14

%

$

72,249

$

259

 

0.72

%

Available-for-sale securities(2)

 

29,205

 

365

 

2.50

 

51,911

 

519

 

2.00

Loans(3)

 

1,564,323

 

29,499

 

3.77

 

1,142,472

 

23,204

 

4.06

Interest-earning assets(4)

 

1,846,842

 

30,047

 

3.25

 

1,266,632

 

23,982

 

3.79

Mortgage loans held for sale(5)

 

131,079

 

1,777

 

2.71

 

53,005

 

876

 

3.31

Total interest-earning assets, plus mortgage loans held for sale

1,977,921

31,824

 

3.22

1,319,637

24,858

 

3.77

Allowance for loan losses

 

(12,541)

 

  

 

 

(8,352)

 

  

 

Noninterest-earning assets

 

96,988

 

  

 

 

86,936

 

  

 

Total assets

$

2,062,368

 

  

 

$

1,398,221

 

  

 

Liabilities and Shareholders’ Equity

 

  

 

  

 

 

  

 

  

 

Interest-bearing liabilities:

 

  

 

  

 

 

  

 

  

 

Interest-bearing deposits

$

1,164,379

1,840

 

0.32

$

880,270

3,712

 

0.84

FHLB and Federal Reserve borrowings

 

143,279

 

248

 

0.35

 

37,281

 

180

 

0.97

Subordinated notes

 

24,256

 

683

 

5.63

 

11,150

 

363

 

6.51

Total interest-bearing liabilities

1,331,914

2,771

 

0.42

928,701

4,255

 

0.92

Noninterest-bearing liabilities:

 

  

 

  

 

 

  

 

  

 

Noninterest-bearing deposits

 

548,610

 

  

 

 

316,593

 

  

 

Other liabilities

 

18,842

 

  

 

 

19,345

 

  

 

Total noninterest-bearing liabilities

567,452

 

  

 

335,938

 

  

 

Shareholders’ equity

 

163,002

 

  

 

 

133,582

 

  

 

Total liabilities and shareholders’ equity

$

2,062,368

 

  

 

$

1,398,221

 

  

 

Net interest rate spread(6)

 

  

 

  

 

2.84

 

  

 

  

 

2.87

Net interest income(7)

 

$

27,276

 

 

  

$

19,727

 

Net interest margin(8)

 

  

 

  

 

2.95

%

 

  

 

  

 

3.11

%

As of and For the Six Months Ended June 30, 

 

2022

2021

 

    

    

Interest

    

Average

    

    

Interest

    

Average

 

Average

Earned /

Yield /

Average

Earned /

Yield /

 

(Dollars in thousands)

Balance(1)

Paid

Rate

Balance (1)

Paid

Rate

 

Assets

 

  

 

  

 

  

 

  

 

  

 

  

Interest-earning assets:

 

  

 

  

 

 

  

 

  

 

  

Interest-bearing deposits in other financial institutions

$

397,199

$

778

 

0.39

%

$

253,314

$

183

 

0.14

%

Federal funds sold

1,182

3

0.51

Investment securities(2)

 

62,530

 

755

 

2.41

 

29,205

 

365

 

2.50

Loans(3)

 

1,966,639

 

39,760

 

4.04

 

1,564,323

 

29,499

 

3.77

Interest-earning assets(4)

 

2,427,550

 

41,296

 

3.40

 

1,846,842

 

30,047

 

3.25

Mortgage loans held for sale(5)

 

21,067

 

419

 

3.98

 

131,079

 

1,777

 

2.71

Total interest-earning assets, plus mortgage loans held for sale

2,448,617

41,715

 

3.41

1,977,921

31,824

 

3.22

Allowance for loan losses

 

(13,485)

 

  

 

 

(12,541)

 

  

 

Noninterest-earning assets

 

120,785

 

  

 

 

96,988

 

  

 

Total assets

$

2,555,917

 

  

 

$

2,062,368

 

  

 

Liabilities and Shareholders’ Equity

 

  

 

  

 

 

  

 

  

 

Interest-bearing liabilities:

 

  

 

  

 

 

  

 

  

 

Interest-bearing deposits

$

1,576,449

2,046

 

0.26

$

1,164,379

1,840

 

0.32

FHLB and Federal Reserve borrowings

 

26,925

 

67

 

0.50

 

143,279

 

248

 

0.35

Subordinated notes

 

32,735

 

761

 

4.65

 

24,256

 

683

 

5.63

Total interest-bearing liabilities

1,636,109

2,874

 

0.35

1,331,914

2,771

 

0.42

Noninterest-bearing liabilities:

 

  

 

  

 

 

  

 

  

 

Noninterest-bearing deposits

 

674,148

 

  

 

 

548,610

 

  

 

Other liabilities

 

21,363

 

  

 

 

18,842

 

  

 

Total noninterest-bearing liabilities

695,511

 

  

 

567,452

 

  

 

Shareholders’ equity

 

224,297

 

  

 

 

163,002

 

  

 

Total liabilities and shareholders’ equity

$

2,555,917

 

  

 

$

2,062,368

 

  

 

Net interest rate spread(6)

 

  

 

  

 

3.05

 

  

 

  

 

2.83

Net interest income(7)

 

$

38,422

 

 

  

$

27,276

 

Net interest margin(8)

 

  

 

  

 

3.17

%

 

  

 

  

 

2.95

%

(1) Average balance represents daily averages, unless otherwise noted.

(2) Represents monthly averages.

(3) Non-performing loans are included in the respective average loan balances. Income, if any, on such loans is recognized on a cash basis.

(4) Tax-equivalent yield adjustments are immaterial.

(5) Mortgage loans held for sale are separated from the interest-earning assets above, as these loans are held for a short period of time until sold in the     secondary market and are not held for investment purposes, with interest income recognized in the net gain on mortgage loans line in the Condensed Consolidated Statements of Income. These balances are excluded from the margin calculations in these tables.

(6) Net interest spread is the average yield on interest-earning assets (excluding mortgage loans held for sale) minus the average rate on interest-bearing liabilities.

(7) Net interest income is the difference between income earned on interest-earning assets, which does not include interest earned on mortgage loans held for sale, and expense paid on interest-bearing liabilities.

(8) Net interest margin is equal to net interest income divided by average interest-earning assets (excluding mortgage loans held for sale).

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Table of Contents

The following table presents the dollar amount of changes in interest income and interest expense forduring the periods presented for each component of interest-earning assets and interest-bearing liabilities (excluding mortgage loans held for sale), and distinguishes between changes attributable to volume and interest rates. Changes attributable to both rate and volume that cannot be separated have been allocated to volume.

Three Months Ended June 30, 2021

 

Six Months Ended June 30, 2021

Compared to 2020

 

Compared to 2020

Increase

 

Increase

(Decrease) Due

Total

 

(Decrease) Due

Total

to Change in:

Increase

 

to Change in:

Increase

(Dollars in thousands)

    

Volume

    

Rate

    

(Decrease)

 

Volume

    

Rate

    

(Decrease)

Interest-earning assets:

 

  

 

  

 

  

  

 

  

 

  

Interest-bearing deposits in other financial institutions

$

68

$

(20)

$

48

$

131

$

(207)

$

(76)

Available-for-sale securities

 

(142)

 

87

 

(55)

 

(284)

 

130

 

(154)

Loans

 

2,961

 

124

 

3,085

 

7,955

 

(1,660)

 

6,295

Total increase (decrease) in interest income

$

2,887

$

191

$

3,078

$

7,802

$

(1,737)

$

6,065

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits

 

175

 

(628)

 

(453)

 

449

 

(2,321)

 

(1,872)

FHLB and Federal Reserve borrowings

 

67

 

(79)

 

(12)

 

184

 

(116)

 

68

Subordinated notes

 

138

 

(22)

 

116

 

369

 

(49)

 

320

Total increase (decrease) in interest expense

$

380

$

(729)

$

(349)

$

1,002

$

(2,486)

$

(1,484)

Increase in net interest income

$

2,507

$

920

$

3,427

$

6,800

$

749

$

7,549

Non-Interest Income

The three months ended June 30, 2021 compared with the three months ended June 30, 2020. For the three months ended June 30, 2021 compared with the three months ended June 30, 2020, non-interest income decreased $5.9 million, or 38.4%, to $9.5 million. The decreasevolume (dollars in non-interest income during the three months ended June 30, 2021 was primarily a result of a $6.3 million decrease in net gain on mortgage loans, compared to the same period in 2020.thousands):

The six months ended June 30, 2021 compared with the six months ended June 30, 2020. For the six months ended June 30, 2021 compared with the six months ended June 30, 2020, non-interest income decreased $3.1 million, or 13.3%, to $20.1 million. The decrease in non-interest income during the six months ended June 30, 2021 was primarily a result of a $3.5 million decrease in net gain on mortgage loans, compared to the same period in 2020.

The tables below present the significant categories of our non-interest income for the three and six months ended June 30, 2021 and 2020:

Three Months Ended

 

June 30, 

Change

 

(Dollars in thousands)

    

2021

    

2020

    

$

    

%

Non-interest income:

 

  

 

  

 

  

  

Trust and investment management fees

$

5,009

$

4,609

$

400

8.7

%

Net gain on mortgage loans

 

3,914

 

10,173

 

(6,259)

(61.5)

Banking fees

 

394

 

221

 

173

78.3

Risk management and insurance fees

 

92

 

333

 

(241)

(72.4)

Income on company-owned life insurance

 

89

 

91

 

(2)

(2.2)

Total non-interest income

$

9,498

$

15,427

$

(5,929)

(38.4)

%

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Table of Contents

Six Months Ended

 

June 30, 

Change

 

(Dollars in thousands)

    

2021

    

2020

    

$

    

%

Non-interest income:

 

  

 

  

 

  

  

Trust and investment management fees

$

9,856

$

9,340

$

516

5.5

%

Net gain on mortgage loans

 

9,110

 

12,654

 

(3,544)

(28.0)

Bank fees

 

767

 

589

 

178

30.2

Risk management and insurance fees

 

143

 

429

 

(286)

(66.7)

Income on company-owned life insurance

177

182

(5)

(2.7)

Other

60

60

*

Total non-interest income

$

20,113

$

23,194

$

(3,081)

(13.3)

%

* Not meaningful

Trust and investment management fees—For the three months ended June 30, 2021 compared to the same period in 2020, our trust and investment management fees increased $0.4 million, or 8.7%. For the six months ended June 30, 2021 compared to the same period in 2020, our trust and investment management fees increased $0.5 million, or 5.5%. The increase is driven by asset growth, partially offset by a reduction in trust and investment management fees generated by the LA Fixed Income team that was sold in November 2020.

Net gain on mortgage loans—For the three months ended June 30, 2021 compared to the same period in 2020, our net gain on mortgage loans decreased by $6.3 million, or 61.5%, to $3.9 million. For the six months ended June 30, 2021 compared to the same period in 2020, our net gain on mortgage loans decreased by $3.5 million, or 28.0%, to $9.1 million. The decrease in net gain on mortgage loans was primarily driven by a slowdown in new lock volume associated with the decrease in refinance activity.  

Three Months Ended June 30, 2022

 

Six Months Ended June 30, 2022

Compared to 2021

 

Compared to 2021

Increase

 

Increase

(Decrease) Due

Total

 

(Decrease) Due

Total

to Change in:

Increase

 

to Change in:

Increase

    

Volume

    

Rate

    

(Decrease)

 

Volume

    

Rate

    

(Decrease)

Interest-earning assets:

 

  

 

  

 

  

  

 

  

 

  

Interest-bearing deposits in other financial institutions

$

48

$

407

$

455

$

282

$

313

$

595

Federal funds sold

2

2

3

3

Investment securities

 

258

 

(9)

 

249

 

402

 

(12)

 

390

Loans

 

4,487

 

890

 

5,377

 

8,134

 

2,127

 

10,261

Total increase (decrease) in interest income

4,795

1,288

6,083

8,821

2,428

11,249

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits

 

272

 

(35)

 

237

 

535

 

(329)

 

206

FHLB and Federal Reserve borrowings

 

(172)

 

83

 

(89)

 

(290)

 

109

 

(181)

Subordinated notes

 

92

 

(72)

 

20

 

197

 

(119)

 

78

Total increase (decrease) in interest expense

192

(24)

168

442

(339)

103

Increase in net interest income

$

4,603

$

1,312

$

5,915

$

8,379

$

2,767

$

11,146

Provision for Loan Losses

We have a dedicated problem loan resolution team comprised of associates from our credit, senior leadership, risk, and accounting teams that meets frequently to ensure that watch list and problem credits are identified early and actively managed. We work to identify potential losses in a timely manner and proactively manage the problem credits to minimize losses. For the three and six months ended June 30, 2021,2022, we recorded an immateriala $0.5 million and $0.7 million provision for credit losses. The provision during the three months ended June 30, 2022 was partially offset by a release of specific reserve on an impaired loan.

The Company has increased loan level reviews and portfolio monitoring to address the changing environment.  Management believes the financial strength of the Company’s clientele and the diversity of the portfolio continues to mitigate the credit risk within the portfolio.

Non-Interest ExpenseIncome

The three months ended June 30, 20212022 compared with the three months ended June 30, 20202021.. The increase in non-interest expense of 22.8% to $15.5 million for For the three months ended June 30, 2022 compared with the three months ended June 30, 2021, non-interest income decreased $2.6 million, or 26.9%, to $6.9 million. The decrease in non-interest income during the three months ended June 30, 2022 was primarily duea result of a $2.8 million decrease in net gain on mortgage loans, compared to higher salaries and employee benefits, professional services, and marketing expenses, offset partially by a reductionthe same period in other non-interest expense.2021.

The six months ended June 30, 20212022 compared with the six months ended June 30, 20202021.. The increase in non-interest expense of 14.1% to $31.2 million for For the six months ended June 30, 2022 compared with the six months ended June 30, 2021, non-interest income decreased $4.6 million, or 22.7%, to $15.5 million. The decrease in non-interest income during the six months ended June 30, 2022 was primarily due to higher salaries and employee benefits, professional services, and data processing expenses, offset partially by a reductionresult of a $5.5 million decrease in net lossgain on assets held for sale and other non-interest expense.

mortgage loans, compared to the same period in 2021.

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Table of Contents

The tables below presentfollowing presents the significant categories of our non-interest expense forincome during the periods noted:presented (dollars in thousands):

Three Months Ended

 

June 30, 

Change

 

(Dollars in thousands)

    

2021

    

2020

    

$

    

%

Non-interest expense:

 

  

 

  

 

  

  

Salaries and employee benefits

$

9,643

$

6,690

$

2,953

44.1

%

Occupancy and equipment

 

1,443

 

1,515

 

(72)

(4.8)

Professional services

 

1,370

 

1,231

 

139

11.3

Technology and information systems

 

904

 

993

 

(89)

(9.0)

Data processing

 

1,093

 

1,037

 

56

5.4

Marketing

 

398

 

253

 

145

57.3

Amortization of other intangible assets

 

4

 

38

 

(34)

(89.5)

Other

 

666

 

887

 

(221)

(24.9)

Total non-interest expense

$

15,521

$

12,644

$

2,877

22.8

%

Six Months Ended

 

June 30, 

Change

 

(Dollars in thousands)

    

2021

    

2020

    

$

    

%

Non-interest expense:

 

  

 

  

 

  

  

Salaries and employee benefits

$

19,504

$

15,172

$

4,332

28.6

%

Occupancy and equipment

 

2,852

 

2,955

 

(103)

(3.5)

Professional services

 

2,649

 

2,254

 

395

17.5

Technology and information systems

 

1,846

 

1,962

 

(116)

(5.9)

Data processing

 

2,108

 

1,884

 

224

11.9

Marketing

 

719

 

668

 

51

7.6

Amortization of other intangible assets

 

8

 

40

 

(32)

(80.0)

Net loss on assets held for sale

 

553

(553)

*

Other

1,464

 

1,803

 

(339)

(18.8)

Total non-interest expense

$

31,150

$

27,291

$

3,859

14.1

%

Three Months Ended

 

June 30, 

Change

 

(Dollars in thousands)

    

2022

    

2021

    

$

    

%

Non-interest income:

 

  

 

  

 

  

  

Trust and investment management fees

$

4,784

$

5,009

$

(225)

(4.5)

%

Net gain on mortgage loans

 

1,152

 

3,914

 

(2,762)

(70.6)

Bank fees

 

601

 

394

 

207

52.5

Risk management and insurance fees

 

83

 

92

 

(9)

(9.8)

Income on company-owned life insurance

 

87

 

89

 

(2)

(2.2)

Net gain/(loss) on loans accounted for under the fair value option

(155)

(155)

*

Unrealized gains/(losses) recognized on equity securities

299

2

297

*

Other

89

89

*

Total non-interest income

$

6,940

$

9,500

$

(2,560)

(26.9)

Six Months Ended

 

June 30, 

Change

 

(Dollars in thousands)

    

2022

    

2021

    

$

    

%

Non-interest income:

 

  

 

  

 

  

  

Trust and investment management fees

$

9,952

$

9,856

$

96

1.0

%

Net gain on mortgage loans

 

3,646

 

9,110

 

(5,464)

(60.0)

Bank fees

 

1,290

 

766

 

524

68.4

Risk management and insurance fees

 

192

 

143

 

49

34.3

Income on company-owned life insurance

173

177

(4)

(2.3)

Net gain on equity interests

1

1

*

Net gain/(loss) on loans accounted for under the fair value option

(155)

(155)

*

Unrealized gains/(losses) recognized on equity securities

267

(10)

277

*

Other

174

60

114

190.0

Total non-interest income

$

15,540

$

20,102

$

(4,562)

(22.7)

* Not meaningful

SalariesTrust and employee benefits—Salariesinvestment management fees—For the three months ended June 30, 2022 compared to the same period in 2021, our trust and employee benefits increased $3.0investment management fees decreased $0.2 million, or 44.1%,4.5%. For the six months ended June 30, 2022 compared to the same period in 2021, our trust and $4.3investment management fees increased $0.1 million, or 28.6%,1.0%. The decrease for the three andmonths ended June 30, 2022, is due to a decreased value of AUM balances caused by unfavorable market conditions, primarily during 2022. The increase for the six months endingended June 30, 2021, respectively. The increase in the three-month period was2022, is driven by a $2.9favorable market conditions experienced in 2021.

Net gain on mortgage loans—For the three months ended June 30, 2022 compared to the same period in 2021, our net gain on mortgage loans decreased by $2.8 million, or 70.6%, to $1.2 million. For the six months ended June 30, 2022 compared to the same period in 2021, our net gain on mortgage loans decreased by $5.5 million, or 60.0%, to $3.6 million. The decrease in deferred compensation. The increase during the six-month periodnet gain on mortgage loans was primarily driven by a $1.9slowdown in new lock volume on held for sale loans associated with rising interest rates, reduced housing inventory, and origination volume more heavily weighted to portfolio loans held for investment.

Bank fees— For the three months ended June 30, 2022 compared to the same period in 2021, our bank fees increased by $0.2 million decreaseor 52.5%. For the six months ended June 30, 2022 compared to the same period in deferred compensation and an increase in personnel expense to support the growth in the balance sheet, and added personnel from the Branch Acquisition.  

Professional services—2021, our bank fees increased by $0.5 million or 68.4%. The increase in professional services of $0.1 million, or 11.3%, and $0.4 million, or 17.5%, forduring the three and six months ending June 30, 2021, respectively, wasmonth periods were primarily driven by additional FDIC insurance expense related to our balance sheetincreased activity consistent with the growth and expenses related to the PPP program.

Data processing—The increase in data processing costs of $0.1 million, or 5.4%, and $0.2 million, or 11.9%, for the three and six months ending June 30, 2021, respectively, was primarily driven by an increase in core systems cost as a result of an increase in accounts and transactions related to the balance sheet growth and growth in our Mortgage segment.

Net loss on assets held for sale—The decrease in net loss on assets held for sale of $0.6 million for the six months ending June 30, 2021 was driven by the completion of the sale of held for sale assets in 2020.

Other—The decrease in other of $0.2 million, or 24.9%, and $0.3 million, or 18.8% for the three and six months ending June 30, 2021, respectively, was primarily driven by an SEC penalty of $0.2 million and other fraud losses in 2020.sheet.

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Table of Contents

Net gain/(loss) on loans accounted for under the fair value option— The Company elected the fair value option on certain new loans purchased in 2022. During the three and six months ended June 30, 2022, the Company recorded a net loss on loans accounted for under the fair value option of $0.2 million. There were no loans accounted for under the fair value option in the same periods in 2021.

Unrealized gains/(losses) on Equity Securities— For the three and six months ended June 30, 2022 compared to the same period in 2021, our unrealized gains on equity securities increased by $0.3 million. The increase was primarily driven by fair value adjustments on equity warrants.

Non-Interest Expense

The three months ended June 30, 2022 compared with the three months ended June 30, 2021. The increase in non-interest expense of 32.6% to $20.6 million for the three months ended June 30, 2022, was primarily driven by the addition of Teton’s operations and additional headcount to support the growth of the Company.

The six months ended June 30, 2022 compared with the six months ended June 30, 2021. The increase in non-interest expense of 28.3% to $39.9 million for the six months ended June 30, 2022, was primarily driven by the addition of Teton’s operations and additional headcount to support the growth of the Company.

The following presents the significant categories of our non-interest expense during the periods presented (dollars in thousands):

Three Months Ended

 

June 30, 

Change

 

(Dollars in thousands)

    

2022

    

2021

    

$

    

%

Non-interest expense:

 

  

 

  

 

  

  

Salaries and employee benefits

$

12,945

$

9,643

$

3,302

34.2

%

Occupancy and equipment

 

1,892

 

1,443

 

449

31.1

Professional services

 

2,027

 

1,370

 

657

48.0

Technology and information systems

 

1,076

 

904

 

172

19.0

Data processing

 

987

 

1,093

 

(106)

(9.7)

Marketing

 

428

 

398

 

30

7.5

Amortization of other intangible assets

 

77

 

4

 

73

*

Net gain on assets held for sale

(2)

(2)

*

Other

 

1,153

 

668

 

485

72.6

Total non-interest expense

$

20,583

$

15,523

$

5,060

32.6

Six Months Ended

 

June 30, 

Change

 

(Dollars in thousands)

    

2022

    

2021

    

$

    

%

Non-interest expense:

 

  

 

  

 

  

  

Salaries and employee benefits

$

25,003

$

19,504

$

5,499

28.2

%

Occupancy and equipment

 

3,774

 

2,852

 

922

32.3

Professional services

 

3,553

 

2,649

 

904

34.1

Technology and information systems

 

2,122

 

1,846

 

276

15.0

Data processing

 

2,174

 

2,108

 

66

3.1

Marketing

 

985

 

719

 

266

37.0

Amortization of other intangible assets

 

154

 

8

 

146

*

Net gain on assets held for sale

 

(3)

(3)

*

Other

2,179

 

1,453

 

726

50.0

Total non-interest expense

$

39,941

$

31,139

$

8,802

28.3

* Not meaningful

58

Table of Contents

Salaries and employee benefits— The increase in salaries and employee benefits of $3.3 million, or 34.2%, and $5.5 million, or 28.2%, for the three and six months ended June 30, 2022, respectively, was primarily related to the additional associates added through the Teton acquisition and additional headcount to support the growth of the Company.

Occupancy and equipmentThe increase in occupancy and equipment of $0.4 million, or 31.1%, and $0.9 million, or 32.3%, for the three and six months ended June 30, 2022, respectively, was primarily driven by building depreciation on the locations acquired with the Teton acquisition and an increase in office lease space as we increase office locations.

Professional services— The increase in professional services of $0.7 million, or 48.0%, and $0.9 million, or 34.1%, for the three and six months ended June 30, 2022, respectively, was primarily driven by additional expenses related to the addition of Teton’s operations, acquisition related expenses of $0.3 million and $0.4 million for the three and six months ended June 30, 2022, respectively, and corporate activities to support balance sheet growth.

Technology and information systemsThe increase in technology and information systems of $0.2 million, or 19.0%, and $0.3 million, or 15.0%, for the three and six months ended June 30, 2022, respectively, was primarily driven by the addition of Teton’s operations and increased expenses to support balance sheet growth.

Data processingThe decrease in data processing of $0.1 million, or 9.7%, for the three months ended June 30, 2022, was driven by reduced mortgage processing expenses. The increase in data processing of $0.1 million, or 3.1%, for the six months ended June 30, 2022 was primarily driven by additional expenses related to the addition of Teton’s operations and increased expenses to support balance sheet growth, offset partially by reduced mortgage processing expenses.

Marketing— The increase in marketing of $0.3 million, or 37.0%, for the six months ended June 30, 2022, was primarily driven by marketing expenses associated with the onboarding of new clients from the Teton acquisition and event sponsorships.

Amortization of other intangible assetsThe increase in amortization of other intangible assets of $0.1 million for the three and six months ended June 30, 2022, was primarily driven by amortization of intangibles acquired through the Teton acquisition.

Other—The increase in other of $0.5 million, or 72.6%, and $0.7 million, or 50.0%, for the three and six months ended June 30, 2022, respectively, was driven by the addition of Teton’s operations and additional travel and training expenses as the Company travels to meet with clients and associates participate in more trainings in 2022 compared to 2021.

Income Tax

The Company recorded an income tax provision of $1.9$1.5 million and $2.8$1.9 million, respectively, for the three months ended June 30, 20212022 and 2020,2021, reflecting an effective tax rate of 23.3%25.0% and 24.1%23.3%, respectively. The Company recorded an income tax provision of $4.0$3.3 million and $3.1$4.0 million, respectively, for the six months ended June 30, 20212022 and 2020,2021, reflecting an effective tax rate of 24.3%24.7% and 23.7%24.3%, respectively. The decrease in effective tax for the three months ended June 30, 2021 was primarily attributable to a favorable benefit from vested shares with a vesting date fair value greater than the grant date fair value.

Segment Reporting

We have two reportable operating segments: Wealth Management and Mortgage. Our Wealth Management segment consists of operations relating to the Company’s fully integrated wealth management products and services. Services provided include deposit, loan, insurance, and trust and investment management advisory products and services. Our Mortgage segment consists of operations relating to the Company’s residential mortgage service offerings. Mortgage products and services are financial in nature, for which premiums are recognized net of expenses, upon the sale of mortgage loans to third parties. Services provided by our Mortgage segment include soliciting, originating, and selling mortgage loans into the secondary market. Mortgage loans originated and held for investment purposes are recorded in the Wealth Management segment, as this segment provides ongoing services to our clients.

The Company completed the sale59

Table of its LA fixed income team in the fourth quarter 2020. The LA fixed income team and the related assets made up a majority of the previously reported Capital Management Segment. As a result of the sale, the Company evaluated its reportable segments and determined the remaining assets in the Capital Management segment no longer met the thresholds to be a reportable segment.Contents

For all periods presented, the Wealth Management segment includes the key metrics of the previously reported Capital Management segment.

The following tables presentpresents key metrics related to our segments:segments during the periods presented (dollars in thousands):

Three Months Ended June 30, 2021

Six Months Ended June 30, 2021

 

Three Months Ended June 30, 2022

Six Months Ended June 30, 2022

 

    

Wealth

    

    

Wealth

    

    

 

    

Wealth

    

    

Wealth

    

    

 

(Dollars in thousands)

Management

Mortgage

Consolidated

Management

Mortgage

Consolidated

 

Management

Mortgage

Consolidated

Management

Mortgage

Consolidated

 

Income(1)

$

19,782

$

3,927

$

23,709

$

38,253

$

9,124

$

47,377

$

25,282

$

1,277

$

26,559

$

49,438

$

3,795

$

53,233

Income before taxes

$

6,983

$

1,205

$

8,188

$

12,900

$

3,327

$

16,227

6,926

(950)

5,976

13,937

(645)

13,292

Profit margin

 

35.3

%  

 

30.7

%  

 

34.5

%

 

33.7

%  

 

36.5

%  

 

34.3

%

 

27.4

%  

 

(74.4)

%  

 

22.5

%

 

28.2

%  

 

(17.0)

%  

 

25.0

%

Three Months Ended June 30, 2020

Six Months Ended June 30, 2020

Three Months Ended June 30, 2021

Six Months Ended June 30, 2021

    

Wealth

    

    

Wealth

    

    

    

Wealth

    

    

Wealth

    

    

(Dollars in thousands)

Management

Mortgage

Consolidated

Management

Mortgage

Consolidated

Management

Mortgage

Consolidated

Management

Mortgage

Consolidated

Income(1)

$

13,902

$

10,197

$

24,099

$

27,729

$

12,701

$

40,430

$

19,784

$

3,927

$

23,711

$

38,242

$

9,124

$

47,366

Income before taxes

$

3,148

$

8,307

$

11,455

$

4,119

$

9,020

$

13,139

6,983

1,205

8,188

12,900

3,327

16,227

Profit margin

 

22.6

%  

 

81.5

%  

 

47.5

%

 

14.9

%  

 

71.0

%  

 

32.5

%

 

35.3

%  

 

30.7

%  

 

34.5

%

 

33.7

%  

 

36.5

%  

 

34.3

%

(1) Net interest income after provision plus non-interest income.

52

Table of Contents

The tables below presentfollowing presents selected financial metrics of each segment as of and forduring the periods presented:presented (dollars in thousands):

Wealth Management

As of and for the Three Months Ended June 30, 

 

As of or for the Three Months Ended June 30, 

 

(Dollars in thousands)

    

2021

    

2020(1)

    

$ Change

    

% Change

 

    

2022

    

2021

    

$ Change

    

% Change

 

Total interest income

$

15,548

$

12,470

$

3,078

 

24.7

%

$

21,631

$

15,548

$

6,083

 

39.1

%

Total interest expense

 

1,325

 

1,674

 

(349)

 

(20.8)

 

1,493

 

1,325

 

168

 

12.7

Provision for loan losses

 

12

 

2,124

 

(2,112)

 

(99.4)

 

519

 

12

 

507

 

*

Net interest income, after provision for loan losses

 

14,211

 

8,672

 

5,539

 

63.9

 

19,619

 

14,211

 

5,408

 

38.1

Non-interest income

 

5,571

 

5,230

 

341

 

6.5

 

5,663

 

5,573

 

90

 

1.6

Total income

 

19,782

 

13,902

 

5,880

 

42.3

 

25,282

 

19,784

 

5,498

 

27.8

Depreciation and amortization expense

 

262

 

255

 

7

 

2.7

 

522

 

262

 

260

 

99.2

Net loss on assets held for sale

(2)

(2)

*

All other non-interest expense

 

12,537

 

10,499

 

2,038

 

19.4

 

17,836

 

12,539

 

5,297

 

42.2

Income before income tax

$

6,983

$

3,148

$

3,835

 

121.8

%

$

6,926

$

6,983

$

(57)

 

(0.8)

Goodwill

$

24,191

$

24,191

$

 

$

30,400

$

24,191

$

6,209

 

25.7

Assets held for sale

3,010

(3,010)

 

*

Total assets

$

1,956,393

$

1,730,957

$

225,436

 

13.0

%

2,513,177

1,956,393

556,784

 

28.5

As of and for the Six Months Ended June 30, 

 

As of or for the Six Months Ended June 30, 

 

(Dollars in thousands)

    

2021

    

2020(1)

    

$ Change

    

% Change

 

    

2022

    

2021

    

$ Change

    

% Change

 

Total interest income

$

30,047

$

23,982

$

6,065

 

25.3

%

$

41,296

$

30,047

$

11,249

 

37.4

%

Total interest expense

 

2,771

 

4,255

 

(1,484)

 

(34.9)

 

2,874

 

2,771

 

103

 

3.7

Provision for loan losses

 

12

 

2,491

 

(2,479)

 

(99.5)

 

729

 

12

 

717

 

*

Net interest income, after provision for loan losses

 

27,264

 

17,236

 

10,028

 

58.2

 

37,693

 

27,264

 

10,429

 

38.3

Non-interest income

 

10,989

 

10,493

 

496

 

4.7

 

11,745

 

10,978

 

767

 

7.0

Total income

 

38,253

 

27,729

 

10,524

 

38.0

 

49,438

 

38,242

 

11,196

 

29.3

Depreciation and amortization expense

 

520

 

510

 

10

 

2.0

 

1,070

 

520

 

550

 

105.8

Net loss on assets held for sale

(3)

(3)

*

All other non-interest expense

 

24,833

 

23,100

(2)

 

1,733

 

7.5

 

34,434

 

24,822

 

9,612

 

38.7

Income before income tax

$

12,900

$

4,119

$

8,781

 

213.2

%

$

13,937

$

12,900

$

1,037

 

8.0

Goodwill

$

24,191

$

24,191

$

 

%

$

30,400

$

24,191

$

6,209

 

25.7

Assets held for sale

3,010

(3,010)

 

*

Total assets

$

1,956,393

$

1,730,957

$

225,436

 

13.0

%

2,513,177

1,956,393

556,784

 

28.5

* Not meaningful

(1) Period includes financial information previously reported under the Capital Management segment.60

(2) Includes loss on assets held for saleTable of $0.6 million previously reported Capital Management segment.Contents

The Wealth Management segment reported income before income tax of $7.0$6.9 million and $12.9$13.9 million for the three and six months ended June 30, 2021,2022, respectively, compared to $3.1$7.0 million and $4.1$12.9 million for the same periods in 2020.2021. The majority of our assets and liabilities are on the Wealth Management segment balance sheet and the increase in income before taxes is primarily driven by an increase in net interest income, after provision for loan losses, offset partially by an increase in non-interest expense.  AsThe increase in net interest income, after provision for loan losses, was primarily driven by an increase in average loans outstanding and an increase in average loan yields. The increase in non-interest expense was primarily driven by the revenues have increased corresponding withaddition of Teton’s operations and additional headcount to support the growth inof the balance sheet, non-interest expense has increased at a slower pace.Company.

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Table of Contents

Mortgage

As of and for the Three Months Ended June 30, 

 

As of or for the Three Months Ended June 30, 

 

(Dollars in thousands)

    

2021

    

2020

    

$ Change

    

% Change

 

    

2022

    

2021

    

$ Change

    

% Change

 

Total interest income

$

$

$

 

%

$

$

$

 

%

Total interest expense

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

 

 

 

 

 

 

Net interest income, after provision for loan losses

 

 

 

 

 

 

 

 

Non-interest income

 

3,927

 

10,197

 

(6,270)

 

(61.5)

 

1,277

 

3,927

 

(2,650)

 

(67.5)

Total income

 

3,927

 

10,197

 

(6,270)

 

(61.5)

 

1,277

 

3,927

 

(2,650)

 

(67.5)

Depreciation and amortization expense

 

13

 

21

(8)

 

(38.1)

 

12

 

13

(1)

 

(7.7)

All other non-interest expense

 

2,709

 

1,869

 

840

 

44.9

 

2,215

 

2,709

 

(494)

 

(18.2)

Income before income tax

$

1,205

$

8,307

$

(7,102)

 

(85.5)

$

(950)

$

1,205

$

(2,155)

 

(178.8)

Total assets

$

52,911

$

79,569

$

(26,658)

 

(33.5)

%

$

28,316

$

52,911

$

(24,595)

 

(46.5)

As of and for the Six Months Ended June 30, 

 

As of or for the Six Months Ended June 30, 

 

(Dollars in thousands)

    

2021

    

2020

    

$ Change

    

% Change

 

    

2022

    

2021

    

$ Change

    

% Change

 

Total interest income

$

$

$

 

%

$

$

$

 

%

Total interest expense

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

 

 

 

 

 

 

Net interest income, after provision for loan losses

 

 

 

 

 

 

 

 

Non-interest income

 

9,124

 

12,701

 

(3,577)

 

(28.2)

 

3,795

 

9,124

 

(5,329)

 

(58.4)

Total income

 

9,124

 

12,701

 

(3,577)

 

(28.2)

 

3,795

 

9,124

 

(5,329)

 

(58.4)

Depreciation and amortization expense

 

27

 

42

(15)

 

(35.7)

 

24

 

27

(3)

 

(11.1)

All other non-interest expense

 

5,770

 

3,639

 

2,131

 

58.6

 

4,416

 

5,770

 

(1,354)

 

(23.5)

Income before income tax

$

3,327

$

9,020

$

(5,693)

 

(63.1)

%

$

(645)

$

3,327

$

(3,972)

 

(119.4)

Total assets

$

52,911

$

79,569

$

(26,658)

 

(33.5)

%

$

28,316

$

52,911

$

(24,595)

 

(46.5)

The Mortgage segment reported a loss before income tax of ($1.0) million and ($0.6) million for the three and six months ended June 30, 2022, respectively, compared to income before income tax of $1.2 million and $3.3 million for the three and six months ended June 30, 2021, respectively, compared to $8.3 million and $9.0 million for the same periods in 2020.2021. The overall decrease in non-interest income was primarily driven by a slowdown in new lock volume on held for sale loans associated with therising interest rates, reduced housing inventory, and origination volume more heavily weighted to portfolio loans held for investment. The decrease in refinance activity. The overall increase in non-interest expense was primarily driven by variable costs associateda reduction in headcount to better align the operations functions with the increaseslowdown in mortgage originations during the three and six months ended June 30, 2021, compared to the three and six months ended June 30, 2020.volume.

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Table of Contents

Financial Condition

The table belowfollowing presents our Condensed Consolidated Balance Sheets as of the dates presented:noted (dollars in thousands):

June 30, 

December 31,

 

(Dollars in thousands)

    

2022

2021

    

$ Change

    

% Change

 

Balance Sheet Data:

 

  

  

 

  

 

  

Cash and cash equivalents

$

171,606

$

386,983

$

(215,377)

 

(55.7)

%

Investment securities

 

87,029

 

55,562

 

31,467

 

56.6

Loans (includes $21,477 and $0 measured at fair value, respectively)

 

2,146,394

 

1,949,137

 

197,257

 

10.1

Allowance for loan losses

 

(14,357)

 

(13,732)

 

(625)

 

4.6

Loans, net of allowance

 

2,132,037

 

1,935,405

 

196,632

 

10.2

Mortgage loans held for sale, at fair value

 

26,202

 

30,620

 

(4,418)

 

(14.4)

Goodwill and other intangible assets, net

 

32,258

 

31,902

 

356

 

1.1

Company-owned life insurance

 

15,976

 

15,803

 

173

 

1.1

Other assets

 

76,239

 

71,099

 

5,140

 

7.2

Assets held for sale

146

115

31

 

27.0

Total assets

$

2,541,493

$

2,527,489

$

14,004

 

0.6

Deposits

$

2,169,998

$

2,205,703

$

(35,705)

 

(1.6)

Borrowings

 

119,776

 

77,660

 

42,116

 

54.2

Other liabilities

 

23,695

 

25,085

 

(1,390)

 

(5.5)

Total liabilities

 

2,313,469

 

2,308,448

 

5,021

 

0.2

Total shareholders’ equity

 

228,024

 

219,041

 

8,983

 

4.1

Total liabilities and shareholders’ equity

$

2,541,493

$

2,527,489

$

14,004

 

0.6

* Not meaningful

Cash and cash equivalents decreased by $215.4 million, or 55.7%, to $171.6 million as of June 30, 2022 compared to December 31, 2021. The decrease in liquidity was driven by record loan production in the second quarter of 2022. During the same period, investments increased by $31.5 million, or 56.6%, to $87.0 million as of June 30, 2022. The increase is due to held-to-maturity securities purchased during the second quarter of 2022.

Loans increased by $197.3 million, or 10.1%, to $2.15 billion as of June 30, 2022 compared to December 31, 2021. The increase was primarily driven by loan growth in the residential mortgage, commercial and industrial, and commercial real estate portfolios.

Mortgage loans held for sale decreased $4.4 million, or 14.4%, to $26.2 million as of June 30, 2022 compared to December 31, 2021. The decrease was driven by a reduction in the origination of loans held for sale.

Goodwill and other intangible assets, net increased by $0.4 million, or 1.1%, to $32.3 million as of June 30, 2022 compared to December 31, 2021. The increase was driven by measurement period adjustments of $0.7 million to core deposit intangibles and ($0.2) million to goodwill during the first quarter of 2022.

Other assets increased by $5.1 million, or 7.2%, to $76.2 million as of June 30, 2022 compared to December 31, 2021. This was related to a $3.0 million purchase of correspondent bank stock during the quarter and an increase in tax receivables.

Deposits decreased $35.7 million, or 1.6%, to $2.17 billion as of June 30, 2022 compared to December 31, 2021. The decrease was primarily attributable to client depository activities including seasonal outflows related to tax payments, real estate acquisitions, and client operating cash outflows.

Money market deposit accounts decreased $22.9 million, or 2.2%, to $1.03 billion as of June 30, 2022 compared to December 31, 2021. Time deposit accounts decreased $22.9 million, or 13.4%, from December 31, 2021 to $147.6 million as of June 30, 2022. Negotiable order of withdrawal, or NOW accounts, decreased $22.7 million, or 7.3%, to $287.2 million from December 31, 2021 to June 30, 2022.

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Table of Contents

June 30, 

December 31,

 

(Dollars in thousands)

    

2021

2020

    

$ Change

    

% Change

 

Balance Sheet Data:

 

  

  

 

  

 

  

Cash and cash equivalents

$

289,089

$

155,989

$

133,100

 

85.3

%

Investments

 

25,532

 

36,666

 

(11,134)

 

(30.4)

Gross loans

 

1,571,060

 

1,532,833

 

38,227

 

2.5

Allowance for loan losses

 

(12,552)

 

(12,539)

 

(13)

 

*

Loans, net of allowance

 

1,558,508

 

1,520,294

 

38,214

 

2.5

Mortgage loans held for sale

 

48,563

 

161,843

 

(113,280)

 

(70.0)

Goodwill & other intangible assets, net

 

24,250

 

24,258

 

(8)

 

(0.0)

Company-owned life insurance

 

15,626

 

15,449

 

177

 

1.1

Other assets

 

47,736

 

59,156

 

(11,420)

 

(19.3)

Total assets

$

2,009,304

$

1,973,655

$

35,649

 

1.8

Deposits

$

1,679,053

$

1,619,910

$

59,143

 

3.7

Borrowings

 

145,023

 

173,854

 

(28,831)

 

(16.6)

Other liabilities

 

17,242

 

24,929

 

(7,687)

 

(30.8)

Total liabilities

 

1,841,318

 

1,818,693

 

22,625

 

1.2

Total shareholders’ equity

 

167,986

 

154,962

 

13,024

 

8.4

Total liabilities and shareholders’ equity

$

2,009,304

$

1,973,655

$

35,649

 

1.8

%

* Not meaningful

Cash and cash equivalentsBorrowings increased by $133.1$42.1 million, or 85.3%54.2%, to $289.1$119.8 million as of June 30, 20212022 compared to December 31, 2020.2021. The increase in liquidity was driven by organic growth in deposits and a reduction in mortgage loans held for sale.  Deposit growth was driven by new client relationships, in addition to increases in existing client accounts, and corporate initiatives to support current and future balance sheet growth.  The decrease in mortgage loans held for sale balances was due to the increase in loan sale volume.  During the same period, investments decreased by $11.1 million, or 30.4%, to $25.5 million as of June 30, 2021. The decrease was driven by the Company's decision to not reinvest cash flows due to the low rate environment.

Loans, net of allowance increased by $38.2 million, or 2.5%, to $1.56 billion as of June 30, 2021 compared to December 31, 2020. The increase was driven by organic growth net of PPP loan forgiveness. We experienced growth in all categories excluding PPP loans that are included in the Cash, Securities and Other category.

Mortgage loans held for sale decreased $113.3 million, or 70.0%, to $48.6 million as of June 30, 2021 compared to December 31, 2020. The decrease was driven by an increase in loan sale volume.

Other assets decreased by $11.4 million, or 19.3%, to $47.7 million as of June 30, 2021 compared to December 31, 2020. This was primarily related to a $7.0 million decrease in balances related to unfunded mortgage IRLC.

Deposits increased $59.1 million, or 3.7%, to $1.68 billion as of June 30, 2021 compared to December 31, 2020. The increase was primarily attributable to an increase in non-interest bearing and money market deposits resulting from inflows from large commercial depositors and higher deposit balances across the Company’s clientele due to the improving economic and business environment.

Money market deposit accounts decreased $7.4 million, or 0.9%, to $840.1 million as of June 30, 2021 compared to December 31, 2020. Time deposit accounts decreased $35.2 million, or 20.4%, from December 31, 2020 to $137.5 million as of June 30, 2021. Negotiable order of withdrawal, or NOW accounts, increased $28.0 million, or 24.8%, to $141.1 million from December 31, 2020 to June 30, 2021.

Borrowings decreased $28.8 million, or 16.6%, to $145.0 million as of June 30, 2021 compared to December 31, 2020. The decrease is attributed to additional FHLB borrowings to support the strong loan growth in 2022, partially offset by the redemption of subordinated notes on January 1, 2022 in the amount of $6.6 million and a reduction in outstanding advances on the Federal Reserve’s Paycheck Protection Program Loan Facility. Borrowing from this facility is expected to match fundtrend in the balances ofsame direction as the PPP loans.loan balances.

Other liabilities decreased $7.7$1.4 million, or 30.8%5.5%, to $17.2$23.7 million as of June 30, 20212022 compared to December 31, 2020.2021. The decrease is primarily attributed to decreases in salaries payable and payables related to the mortgage hedge position.payment of 2021 incentive compensation.

Total shareholders’ equity increased $13.0$9.0 million, or 8.4%4.1%, from December 31, 20202021 to $168.0$228.0 million as of June 30, 2021.2022. The increase is primarily due to an increase in net income.

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Assets Under Management

Three Months Ended

Six Months Ended

Three Months Ended

Six Months Ended

June 30, 

June 30, 

June 30, 

June 30, 

(Dollars in millions)

2021

    

2020

    

2021

    

2020

2022

    

2021

    

2022

    

2021

Managed Trust Balance at Beginning of Period

$

1,821

$

1,471

$

1,890

$

1,750

Managed Trust Balance as of Beginning of Period

$

2,095

$

1,821

$

2,204

$

1,890

New relationships

1

2

16

12

8

1

32

16

Closed relationships

(1)

(1)

(1)

(11)

-

(1)

(1)

(1)

Contributions

10

11

28

65

5

10

7

28

Withdrawals

(34)

(11)

(154)

(100)

(70)

(34)

(171)

(154)

Market change, net

95

48

113

(196)

(259)

95

(292)

113

Ending Balance

$

1,892

$

1,520

$

1,892

$

1,520

$

1,779

$

1,892

$

1,779

$

1,892

Yield*

0.18

%

0.21

%

0.18

%

0.21

%

0.19

%

0.18

%

0.20

%

0.18

%

��

Directed Trust Balance at Beginning of Period

$

1,031

$

881

$

951

$

989

Directed Trust Balance as of Beginning of Period

$

1,297

$

1,031

$

1,309

$

951

New relationships

6

5

82

5

6

6

6

82

Closed relationships

(7)

(7)

(5)

-

(7)

(7)

Contributions

13

23

18

24

14

13

21

18

Withdrawals

(9)

(2)

(14)

(70)

(14)

(9)

(17)

(14)

Market change, net

35

(24)

39

(60)

(99)

35

(115)

39

Ending Balance

$

1,069

$

883

$

1,069

$

883

$

1,204

$

1,069

$

1,204

$

1,069

Yield*

0.09

%

0.08

%

0.08

%

0.08

%

0.09

%

0.09

%

0.09

%

0.08

%

Investment Agency Balance at Beginning of Period

$

1,933

$

1,796

$

1,840

$

2,009

Investment Agency Balance as of Beginning of Period

$

1,943

$

1,933

$

2,063

$

1,840

New relationships

20

40

61

79

21

20

32

61

Closed relationships

(9)

(3)

(23)

(9)

(24)

(9)

(40)

(23)

Contributions

73

53

168

107

19

73

72

168

Withdrawals

(53)

(50)

(128)

(129)

(146)

(53)

(196)

(128)

Market change, net

80

120

126

(101)

(179)

80

(297)

126

Ending Balance

$

2,044

$

1,956

$

2,044

$

1,956

$

1,634

$

2,044

$

1,634

$

2,044

Yield*

0.68

%

0.66

%

0.66

%

0.67

%

0.77

%

0.68

%

0.82

%

0.66

%

Custody Balance at Beginning of Period

$

595

$

458

$

518

$

452

Custody Balance as of Beginning of Period

$

704

$

595

$

633

$

518

New relationships

14

14

Closed relationships

(2)

(1)

(2)

(1)

(1)

(1)

Contributions

1

71

76

-

1

78

71

Withdrawals

(8)

(14)

(10)

(15)

(57)

(8)

(66)

(10)

Market change, net

26

32

36

(37)

(94)

26

(92)

36

Ending Balance

$

614

$

474

$

614

$

474

$

566

$

614

$

566

$

614

Yield*

0.03

%

0.03

%

0.03

%

0.03

%

0.03

%

0.03

%

0.03

%

0.03

%

401(k)/Retirement Balance at Beginning of Period

$

1,106

$

1,030

$

1,056

$

988

401(k)/Retirement Balance as of Beginning of Period

$

1,160

$

1,106

$

1,143

$

1,056

New relationships

1

3

8

4

1

1

14

8

Closed relationships

-

(38)

(52)

(44)

(1)

(39)

(52)

Contributions

28

29

55

60

28

28

51

55

Withdrawals

(30)

(20)

(58)

(41)

(22)

(30)

(55)

(58)

Market change, net

38

(85)

134

(48)

(71)

38

(19)

134

Ending Balance(1)

$

1,143

$

919

$

1,143

$

919

$

1,095

$

1,143

$

1,095

$

1,143

Yield*

0.15

%

0.16

%

0.15

%

0.17

%

0.16

%

0.15

%

0.16

%

0.15

%

Total Assets Under Management at Beginning of Period

$

6,486

$

5,636

$

6,255

$

6,188

Total Assets Under Management as of Beginning of Period

$

7,199

$

6,486

$

7,352

$

6,255

New relationships

28

50

167

100

50

28

98

167

Closed relationships

(17)

(44)

(84)

(71)

(26)

(17)

(81)

(84)

Contributions

125

116

340

332

66

125

229

340

Withdrawals

(134)

(97)

(364)

(355)

(309)

(134)

(505)

(364)

Market change, net

274

91

448

(442)

(702)

274

(815)

448

Total Assets Under Management

$

6,762

$

5,752

$

6,762

$

5,752

$

6,278

$

6,762

$

6,278

$

6,762

Yield*

0.30

%

0.32

%

0.29

%

0.32

%

0.30

%

0.30

%

0.32

%

0.29

%

* Trust & investment management fees divided by period end balance.

(1) AUM reported for the current period are one quarter in arrears.

5664

Table of Contents

Assets under management increased $276.5decreased $921.7 million, or 4.3%12.8%, for the three months ended June 30, 20212022 and increased $506.8 million,decreased $1.07 billion, or 8.1%14.6%, for the six months ended June 30, 2021.2022. The increasedecrease was primarily attributable to improvingunfavorable market conditions resulting in an increasea decrease in the value of assets under managementAUM balances.

Available-for-sale securitiesInvestment Securities

Investments we intend to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale and are recorded at fair value using current market information from a pricing service, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax. All our investments in securities were classified as available-for-sale for the periods presented below. The carrying values of our investment securities classified as available-for-sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity.

Investments for which we have the intent and ability to hold to their maturity are classified as held-to-maturity securities and are recorded at amortized cost. Securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity.

As of December 31, 2021, all our investments in securities were classified as available-for-sale. The Company reassessed classification of investment securities and, effective April 1, 2022, elected to transfer all securities, fair valued at $58.7 million, from available-for-sale to held-to-maturity. The related unrealized loss of $2.3 million included in other comprehensive income remained in other comprehensive income and will be amortized out with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities.  No gain or loss was recorded at the time of transfer. As of June 30, 2022, all our investments in securities were classified as held-to-maturity.

The following tables summarizepresents the amortized cost and estimated fair value of our investment securities as of June 30, 2021 and December 31, 2020:the dates noted (dollars in thousands):

June 30, 2021

June 30, 2022

    

    

Gross

    

Gross

    

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

Amortized

Unrecognized

Unrecognized

Fair

(Dollars in thousands)

Cost

Gains

Losses

Value

Cost

Gains

Losses

Value

Investment securities available-for-sale:

 

  

 

  

 

  

 

  

Investment securities held-to-maturity:

 

  

 

  

 

  

 

  

U.S. Treasury debt

$

250

$

1

$

$

251

$

240

$

$

(4)

$

236

U.S Government Agency

252

(2)

250

Corporate bonds

6,000

157

(15)

6,142

24,085

6

(651)

23,440

Government National Mortgage Association ("GNMA") mortgage -backed securities—residential

 

15,619

 

467

 

 

16,086

 

43,583

 

 

(1,089)

 

42,494

Federal National Mortgage Association ("FNMA") mortgage-backed securities—residential

1,113

 

47

 

1,160

7,184

 

 

(333)

6,851

Government collateralized mortgage obligations ("GMO") and mortgage-backed securities ("MBS") - commercial

7,426

14

(249)

7,191

Corporate collateralized mortgage obligations ("CMO") and mortgage-backed securities ("MBS")

 

1,875

 

41

 

(23)

 

1,893

 

4,259

 

74

 

(53)

 

4,280

Total securities available-for-sale

$

24,857

$

713

$

(38)

$

25,532

Total securities held-to-maturity

$

87,029

$

94

$

(2,381)

$

84,742

December 31, 2020

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

(Dollars in thousands)

Cost

Gains

Losses

Value

Investment securities available-for-sale:

 

  

 

  

 

  

 

  

U.S. Treasury debt

$

250

$

4

$

$

254

Corporate bonds

6,000

55

(11)

6,044

GNMA mortgage -backed securities—residential

 

23,806

 

798

 

 

24,604

FNMA mortgage-backed securities—residential

1,616

 

61

 

1,677

Corporate CMO and MBS

 

4,078

 

62

 

(53)

 

4,087

Total securities available-for-sale

$

35,750

$

980

$

(64)

$

36,666

65

Table of Contents

December 31, 2021

    

    

Gross

    

Gross

    

Amortized

Unrealized

Unrealized

Fair

(Dollars in thousands)

Cost

Gains

Losses

Value

Investment securities available-for-sale:

 

  

 

  

 

  

 

  

U.S. Treasury debt

$

250

$

$

(3)

$

247

U.S. Government Agency

3,522

3,522

Corporate bonds

8,113

227

(15)

8,325

GNMA mortgage -backed securities—residential

 

26,611

 

185

 

(146)

 

26,650

FNMA mortgage-backed securities—residential

14,400

 

43

 

14,443

GMO and MBS - commercial

878

878

CMO and MBS

1,492

23

(18)

1,497

Total securities available-for-sale

$

55,266

$

478

$

(182)

$

55,562

The following tables representpresents the book value of our contractual maturities and weighted average yield for our investment securities as of the dates presented. Contractual maturities may differ from expected maturities because issuers can have the right to call or prepay obligations without penalties. Our investments are taxable securities. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security as of June 30, 2022.  Weighted average

57

Table of Contents

yields are not presented on a taxable equivalent basis. Securities not due at a single maturity date are included as after ten years.

Maturity as of June 30, 2021

 

Maturity as of June 30, 2022

 

One Year or Less

One to Five Years

Five to Ten Years

After Ten Years

 

One Year or Less

One to Five Years

Five to Ten Years

After Ten Years

 

    

    

Weighted

    

    

Weighted

    

    

Weighted

    

    

Weighted

 

    

    

Weighted

    

    

Weighted

    

    

Weighted

    

    

Weighted

 

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average

 

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average

 

(Dollars in thousands)

Cost

Yield

Cost

Yield

Cost

Yield

Cost

Yield

 

Cost

Yield

Cost

Yield

Cost

Yield

Cost

Yield

 

Available-for-sale:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Held-to-maturity:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Treasury debt

$

250

 

0.03

%  

$

 

%  

$

 

%  

$

 

%

$

 

—  

%  

$

240

 

*

%  

$

 

—  

%  

$

 

—  

%

U.S. Government agency

252

*

—  

—  

—  

Corporate bonds

1,250

0.24

4,750

0.87

111

*

1,993

0.10

21,582

1.12

399

0.01

GNMA mortgage-backed securities - residential

 

 

 

 

 

 

 

15,619

 

1.53

 

 

—  

 

133

 

*

 

 

—  

 

43,450

 

1.27

FNMA mortgage-backed securities - residential

1,113

0.09

—  

—  

1,466

0.02

5,718

0.12

Government CMO and MBS - commercial

—  

86

*

1,369

0.03

5,971

0.12

Corporate CMO and MBS

 

 

 

 

 

41

 

*

 

1,834

 

0.22

—  

—  

27

*

4,232

0.17

Total available-for-sale

$

250

 

0.03

%  

$

1,250

 

0.24

%  

$

4,791

 

0.87

%  

$

18,566

 

1.84

%

Total held-to-maturity

$

363

 

*

%  

$

2,452

 

0.10

%  

$

24,444

 

1.17

%  

$

59,770

 

1.69

%

Maturity as of December 31, 2020

 

Maturity as of December 31, 2021

 

One Year or Less

One to Five Years

Five to Ten Years

After Ten Years

 

One Year or Less

One to Five Years

Five to Ten Years

After Ten Years

 

    

    

Weighted

    

    

Weighted

    

    

Weighted

    

    

Weighted

 

    

    

Weighted

    

    

Weighted

    

    

Weighted

    

    

Weighted

 

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average

 

Amortized

Average

Amortized

Average

Amortized

Average

Amortized

Average

 

(Dollars in thousands)

Cost

Yield

Cost

Yield

Cost

Yield

Cost

Yield

 

Cost

Yield

Cost

Yield

Cost

Yield

Cost

Yield

 

Available-for-sale:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Treasury debt

$

250

 

0.02

%  

$

 

—  

%  

$

 

—  

%  

$

 

—  

%

$

 

%  

$

250

 

*

%  

$

 

%  

$

 

%

U.S. Government agency

506

0.02

164

*

1,190

0.04

1,662

0.07

Corporate bonds

—  

1,250

0.17

—  

4,750

0.60

8,113

0.71

GNMA mortgage-backed securities - residential

 

 

—  

 

 

—  

 

 

—  

 

23,806

 

1.59

 

 

 

 

 

 

 

26,611

 

0.92

FNMA mortgage-backed securities - residential

—  

—  

—  

1,616

0.10

176

0.01

2,183

0.10

12,041

0.36

Government CMO and MBS - commercial

202

0.01

676

0.04

Corporate CMO and MBS

 

 

—  

 

 

—  

 

43

 

*

 

4,035

 

0.31

33

*

1,459

0.07

Total available-for-sale

$

250

 

0.02

%  

$

1,250

 

0.17

%  

$

43

 

%  

$

34,207

 

2.60

%

$

506

 

0.02

%  

$

792

 

0.02

%  

$

11,519

 

0.85

%  

$

42,449

 

1.46

%

* Not meaningful

As of June 30, 20212022 and December 31, 2020,2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

66

Table of Contents

Loan Portfolio

Our primary source of interest income is derived through interest earned on loans to high net worth individuals and their related commercial interests. Our senior lending and credit team consists of seasoned, experienced personnel and we believe that our officers are well versed in the types of lending in which we are engaged. Underwriting policies and decisions are managed centrally and the approval process is tiered based on loan size, making the process consistent, efficient, and effective. The management team and credit culture demands prudent, practical, and conservative approaches to all credit requests in compliance with the loan policy guidelines to ensure strong credit underwriting practices.

In addition to originating loans for our own portfolio, we conduct mortgage banking activities in which we originate and sell servicing-released, whole loans in the secondary market. Our mortgage banking loan sale activities are primarily directed at originating single family mortgages that are priced and underwritten to conform to previously agreed-upon criteria before loan funding and are delivered to the investor shortly after funding. The level of future loan originations, loan sales, and loan repayments depends on overall credit availability, the interest rate environment, the strength of the general economy, local real estate markets and the housing industry, and conditions in the secondary loan sale market. The amount of gain or loss on the sale of loans is primarily driven by market conditions and changes in interest rates, as well as our pricing and asset liability management strategies. As of June 30, 20212022 and December 31, 2020,2021, we had mortgage loans held for sale of $48.6$26.2 million and $161.8$30.6 million, respectively, in residential mortgage loans we originated.

Beginning in the first quarter of 2022, the Company entered into whole loan purchase agreements to acquire third party originated and serviced unsecured consumer loans to hold for investment. As of June 30, 2021,2022, the Company had purchased $21.1 million in loan balances which were accounted for under the fair value option and had a carrying value of $21.5 million. See Note 14 – Fair Value in the Notes to Condensed Consolidated Financial Statements.

As of June 30, 2022, the Company has $103.1$10.7 million in PPP loans outstanding with $2.1$0.2 million in remaining fees to be recognized. The remaining fees represent the net amount of the fees from the SBA for participation in the PPP less the loan origination costs on these loans. The current amortization of this income is being recognized over a two or

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five-year period based onfrom the PPP loan terms. If the loan receives partial forgiveness, the income related to the unforgiven balance is amortized over the remaining lifetime of the loan based on the term in the note, which is five years for most PPP loans. Iforigination, however, if a loan receives full forgiveness from the SBA, the remaining income will be recognized upon receipt of the funds from the SBA.As of June 30, 2021, the Company had submitted loans with original loan amounts of $202.7 million to the SBA for forgiveness and had received forgiveness on 722 loans totaling $177.4 million.

The following table summarizespresents our loan portfolio by type of loan as of the dates indicated:noted (dollars in thousands):

June 30, 

December 31,

June 30,

December 31,

2021

2020

2022

2021

(Dollars in thousands)

    

Amount

    

% of Total

    

Amount

    

% of Total

    

    

Amount

    

% of Total

    

Amount

    

% of Total

    

Cash, Securities and Other(1)

$

290,907

18.5

%  

$

357,020

23.3

%  

$

180,738

8.5

%  

$

261,190

13.4

%  

Consumer and Other(2)

47,855

2.2

34,758

1.8

Construction and Development

 

127,141

8.1

 

131,111

8.5

 

162,426

7.6

 

178,716

9.1

1-4 Family Residential

 

496,101

31.5

 

455,038

29.7

 

732,725

34.1

 

580,872

29.7

Non-Owner Occupied CRE

 

324,493

20.6

 

281,943

18.4

 

489,111

22.7

 

482,622

24.7

Owner Occupied CRE

 

178,847

11.4

 

163,042

10.6

 

224,597

10.4

 

212,426

10.9

Commercial and Industrial

 

155,526

9.9

 

146,031

9.5

 

312,696

14.5

 

203,584

10.4

Total loans held for investment(1)

$

1,573,015

100.0

%  

$

1,534,185

100.0

%  

Mortgage loans held for sale

$

48,563

  

$

161,843

  

Total loans held for investment(3)

$

2,150,148

100.0

%  

$

1,954,168

100.0

%  

Mortgage loans held for sale, at fair value

$

26,202

  

$

30,620

  

(1) Includes PPP loans of $10.7 million and $46.8 million as of June 30, 2022 and December 31, 2021, respectively.

(2) Includes loans held for investment accounted for under fair value option of $21.1 million as of June 30, 2022.

(3)Loans held for investment exclude deferred (fees) costs andfees, unamortized premiums/ (unaccreted(unaccreted discounts), net, of $(2.0)and fair value adjustments on loans held for investment accounted for under fair value option, which collectively totaled ($3.8) million and $(1.4)($5.0) million as of June 30, 20212022 and December 31, 2020,2021, respectively.

Cash, Securities and Other—consists of consumer and commercial purpose loans, which are primarily secured by securities managed and under custody with us, cash on deposit with us, or life insurance policies. In addition, loans in this portfolio are collateralized with other sources of consumer collateral and an immaterial amount of each loan may be unsecured.collateral. This segment of our portfolio is affected by a variety of local and national economic factors affecting borrowers’ employment prospects, income levels, and overall economic sentiment. PPP loans that are fully guaranteed by the SBA are classified within this line item.item and had balances of $10.7 million and $46.8 million as of June 30, 2022 and December 31, 2021, respectively.

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Consumer and Other—consists of  unsecured consumer loans. Loans held for investment accounted for under the fair value option are also classified within this line item and had a balance of $21.1 million as of June 30, 2022. There were no loans held for investment accounted for under the fair value option as of December 31, 2021.
Construction and Development—consists of loans to finance the construction of residential and non-residential properties. These loans are dependent on the strength of the industries of the related borrowers and the risks consistent with construction projects.
1-4 Family Residential—consists of loans and home equity lines of credit secured by 1-4 family residential properties. These loans typically enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the owner. In addition, some borrowers secure a commercial purpose loan with owner occupied or non-owner occupied 1-4 family residential properties. Loans in this segment are dependent on the industries tied to these loans as well as the national and local economies, and local residential and commercial real estate markets.
Commercial Real Estate, Owner Occupied, and Non-Owner Occupiedconsists of commercial loans collateralized by real estate. These loans may be collateralized by owner occupied or non-owner occupied real estate, as well as multi-family residential real estate. These loans are dependent on the strength of the industries of the related borrowers and the success of their businesses.
Commercial and Industrialconsists of commercial and industrial loans, including working capital lines of credit, permanent working capital term loans, business asset loans, acquisition, expansion and development loans, and other loan products, primarily in our target markets. This portfolio primarily consists of term loans and lines of credit which are dependent on the strength of the industries of the related borrowers and the success of their businesses. MSLP loans of $6.8 million as of June 30, 2022 and December 31, 2021 are classified within this line item.

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The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range, excluding deferred (fees) costs,fees, and unamortized premiums/ (unaccreted(unaccreted discounts), as of the date indicateddates noted, are summarized in the following tables:

As of June 30, 2021

As of June 30, 2022

    

One Year

    

One Through

    

After

    

    

One Year

    

One Through

    

Five Through

    

After

    

(Dollars in thousands)

or Less

Five Years

Five Years

Total

or Less

Five Years

Fifteen Years

Fifteen Years

Total

Cash, Securities and Other

$

85,690

$

197,819

(1)

$

7,398

$

290,907

$

57,832

(1)

$

119,368

(1)

$

2,695

$

843

$

180,738

Consumer and Other

18,755

(2)

25,965

(2)

2,157

(2)

978

47,855

Construction and Development

 

59,576

 

64,831

 

2,734

 

127,141

 

61,066

 

95,329

 

6,031

 

 

162,426

1-4 Family Residential

 

55,588

 

80,906

 

359,607

 

496,101

 

56,083

 

129,876

 

42,656

 

504,110

 

732,725

Non-Owner Occupied CRE

 

34,543

 

194,555

 

95,395

 

324,493

 

38,220

 

270,580

 

163,288

 

17,023

 

489,111

Owner Occupied CRE

 

19,456

 

56,011

 

103,380

 

178,847

 

7,166

 

69,845

 

135,327

 

12,259

 

224,597

Commercial and Industrial

 

63,870

 

51,981

 

39,675

 

155,526

 

71,010

 

188,751

 

52,935

 

 

312,696

Total loans

$

318,723

$

646,103

$

608,189

$

1,573,015

$

310,132

$

899,714

$

405,089

$

535,213

$

2,150,148

Amounts with fixed rates

$

100,818

$

426,474

$

225,447

$

752,739

$

92,054

$

539,597

$

285,574

$

22,205

$

939,430

Amounts with floating rates

 

217,905

 

219,629

 

382,742

 

820,276

 

218,078

 

360,117

 

119,515

 

513,008

 

1,210,718

Total loans

$

318,723

$

646,103

$

608,189

$

1,573,015

$

310,132

$

899,714

$

405,089

$

535,213

$

2,150,148

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As of December 31, 2021

    

One Year

    

One Through

    

Five Through

    

After

    

(Dollars in thousands)

 

or Less

 

Five Years

 

Fifteen Years

Fifteen Years

Total

Cash, Securities and Other

$

113,984

(1)

$

137,675

(1)

$

5,434

$

4,097

$

261,190

Consumer and Other

22,314

11,214

127

1,103

34,758

Construction and Development

 

74,111

 

96,817

 

7,788

 

 

178,716

1-4 Family Residential

 

24,824

 

126,681

 

33,085

 

396,282

 

580,872

Non-Owner Occupied CRE

 

66,036

 

275,057

 

125,330

 

16,199

 

482,622

Owner Occupied CRE

 

5,255

 

66,656

 

129,890

 

10,625

 

212,426

Commercial and Industrial

 

46,742

 

107,596

 

49,246

 

 

203,584

Total loans

$

353,266

$

821,696

$

350,900

$

428,306

$

1,954,168

Amounts with fixed rates

$

120,549

$

506,040

$

253,223

$

26,682

$

906,494

Amounts with floating rates

 

232,717

 

315,656

 

97,677

 

401,624

 

1,047,674

Total loans

$

353,266

$

821,696

$

350,900

$

428,306

$

1,954,168

(1) Includes PPP loans.

As of December 31, 2020

    

One Year

    

One Through

    

After

    

(Dollars in thousands)

 

or Less

 

Five Years

 

Five Years

Total

Cash, Securities and Other

$

90,053

$

259,611

(1)

$

7,356

$

357,020

Construction and Development

 

78,900

 

50,703

 

1,508

 

131,111

1-4 Family Residential

 

41,212

 

78,359

 

335,467

 

455,038

Non-Owner Occupied CRE

 

25,801

 

175,476

 

80,666

 

281,943

Owner Occupied CRE

 

8,355

 

54,403

 

100,284

 

163,042

Commercial and Industrial

 

47,397

 

68,607

 

30,027

 

146,031

Total loans

$

291,718

$

687,159

$

555,308

$

1,534,185

Amounts with fixed rates

$

76,131

$

469,155

$

205,548

$

750,834

Amounts with floating rates

 

215,587

 

218,004

 

349,760

 

783,351

Total loans

$

291,718

$

687,159

$

555,308

$

1,534,185

(1) (2)Includes PPP loans.loans held for investment accounted for under fair value option.

Loan Modifications

As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company was offering loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years.

The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as a TDR. The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from Federal Reserve and the FDIC confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program meets that definition. In accordance with that guidance, the Company is recognizing interest income on all loans modified for temporary payment moratoriums, primarily for a period of 180 days or less.

In 2021, the deferral period ended for all non-acquired loans previously modified and payments resumed under the original terms. As of June 30, 2021,2022, the Company’s loans include seventy-six modified loans, including acquired loans, across multiple industries in the amount of $143.1 million, representing 9.1% of total loans. Noloan portfolio included 55 non-acquired loans which participated inwere previously modified under the loan modification program, were delinquent according to Bank policy as of June 30, 2021. Nototaling $100.5 million. Through the Teton Acquisition, the Company acquired loans which participated in the loan modification program were previously modified and are still in their deferral period asperiod. As of June 30, 2021.2022, there were 15 of these loans, totaling $3.5 million.

All loans modified in response to COVID-19 are classified as performing and pass rated as of June 30, 2021.2022. These loans are included in the allowance for loan loss general reserve in accordance with ASC 450-20. Management has increased our

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loan level reviews and portfolio monitoring to address the changing environment. The Company continues to meet regularly with clients who could be more highly impacted by the recent COVID-19 pandemic. These are borrowers in industries we believe may be more impacted by the pandemic, for instance those loans where there may be a greater than 50% probability of a downgrade, covenant violation or 20% reduction in collateral position. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of June 30, 2021,2022, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

Non-Performing Assets

Non-performing assets include non-accrual loans, TDRs, loans past due 90 days or more and still accruing interest, and OREO. The accrual of interest on loans is discontinued at the time the loan becomes 90 or more days delinquent unless the loan is well secured and in the process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged off if collection of interest or principal is considered doubtful.

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OREO represents assets acquired through, or in lieu of, foreclosure. The amounts reported as OREO are supported by recent appraisals, with the appraised values adjusted, where applicable, for expected transaction fees likely to be incurred upon sale of the property. We incur recurring expenses relating to OREO in the form of maintenance, taxes, insurance, and legal fees, among others, until the OREO parcel is disposed. While disposition efforts with respect to our OREO are generally ongoing, if these properties are appraised at lower-than-expected values or if we are unable to sell the properties at the prices for which we expect to be able to sell them, we may incur additional losses. In the second quarter of 2022, the Company recorded $0.4 million of OREO as a result of obtaining physical possession of a foreclosed property as partial consideration for amounts owed on an impaired loan.

The amount of lost interest for non-accrual loans was immaterial and $0.1 million for each of the three months ended June 30, 20212022 and 2020,2021, respectively. For the six months ended June 30, 20212022 and 2020,2021, the amount of lost interest for non-accrual loans was $0.1 million.

We had $3.1$4.3 million in non-performing assets as of June 30, 2021 compared to $4.3 million as of2022 and December 31, 2020. The decrease in our non-performing assets was primarily related to the sale of the final OREO, resulting in a decrease of $0.2 million, and the payoffs of a $0.4 million loan in our Commercial and Industrial portfolio and a $0.5 million loan in our Owner-Occupied CRE portfolio.2021.

The following table presents information regarding non-performing loans as of the dates indicated:noted (dollars in thousands):

June 30, 

December 31,

June 30,

December 31,

(Dollars in thousands)

    

2021

    

2020

    

    

2022

    

2021

    

Non-accrual loans by category (1)

 

  

 

  

 

 

  

 

  

 

Cash, Securities and Other

$

15

$

50

$

4

$

6

Construction and Development

 

 

Consumer and Other

2

2

1-4 Family Residential

 

 

 

68

 

75

Non-Owner Occupied CRE

 

 

Owner Occupied CRE

 

 

479

 

1,200

 

1,241

Commercial and Industrial

 

3,105

 

3,529

 

2,603

 

2,938

Total non-accrual loans

 

3,120

 

4,058

 

3,877

 

4,262

TDRs still accruing

 

 

 

46

 

55

Accruing loans 90 or more days past due

 

8

 

10

Total non-performing loans

 

3,120

 

4,058

 

3,931

 

4,327

OREO

 

 

194

 

378

 

Total non-performing assets

$

3,120

$

4,252

$

4,309

$

4,327

Non-accrual loans to total loans(2)

0.18

%  

0.22

%  

Non-performing loans to total loans(2)

 

0.20

%  

 

0.26

%  

 

0.18

 

0.22

Non-performing assets to total assets

 

0.16

 

0.22

 

0.17

 

0.17

Allowance for loan losses to non-accrual loans

370.31

322.20

Allowance for loan losses to non-performing loans

 

402.31

%  

 

308.99

%  

 

365.23

 

317.36

(1) As of June 30, 2022 and December 31, 2021, twoall but one non-accrual loans,loan, totaling an immaterial amount, were not classified as TDRs. As of December 31, 2020, two non-accrual loans were notalso classified as TDRs. See Note 34 – Loans and the Allowance for Loan Losses to the condensed consolidated financial statements.

(2) Excludes mortgage loans held for sale of $48.6$26.2 million and $161.8$30.6 million as of June 30, 20212022 and December 31, 2020,2021, respectively.

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Potential Problem Loans

We categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans by credit risk on a quarterly basis, which are segregated into the following definitions for risk ratings:

Special Mention—Loans categorized as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies, or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified.

Substandard—Substandard loans are considered "classified" and are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrual status and may individually be evaluated for impairment if indicators of impairment exist.

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Doubtful—Loans graded doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. However, the amount or certainty of eventual loss is not known because of specific pending factors.

Loans accounted for under the fair value option are not rated.

Loans not meeting any of the three criteria above are considered to be pass-rated loans.

As of June 30, 20212022 and December 31, 20202021, non-performing loans of $3.1$3.9 million and $4.1$4.3 million, respectively, were included in the substandard category in the table below. The following tables present,presents, by class and by credit quality indicator, the recorded investment in our loans as of the dates indicated:noted (dollars in thousands):

As of June 30, 2021

As of December 31, 2020

As of June 30, 2022

    

    

Special

    

    

    

    

Special

    

    

    

    

Special

    

    

(Dollars in thousands)

Pass

Mention

Substandard

Total

Pass

Mention

Substandard

Total

Pass

Mention

Substandard

Not Rated

Total

Cash, Securities and Other(1)

$

290,892

$

$

15

$

290,907

$

356,970

$

$

50

$

357,020

$

180,734

$

$

4

$

$

180,738

Consumer and Other(2)

26,704

2

21,149

47,855

Construction and Development

 

127,141

 

 

 

127,141

 

131,111

 

 

 

131,111

 

162,426

 

 

 

162,426

1-4 Family Residential

 

496,101

 

 

 

496,101

 

451,918

 

 

3,120

 

455,038

 

732,657

 

 

68

 

732,725

Non-Owner Occupied CRE

 

318,512

 

5,981

 

 

324,493

 

275,627

 

6,316

 

 

281,943

 

483,848

 

5,263

 

 

489,111

Owner Occupied CRE

 

178,146

 

 

701

 

178,847

 

161,850

 

 

1,192

 

163,042

 

222,714

 

 

1,883

 

224,597

Commercial and Industrial

 

150,523

 

 

5,003

 

155,526

 

140,432

 

 

5,599

 

146,031

 

305,765

 

2,693

 

4,238

 

312,696

Total

$

1,561,315

$

5,981

$

5,719

$

1,573,015

$

1,517,908

$

6,316

$

9,961

$

1,534,185

$

2,114,848

$

7,956

$

6,195

$

21,149

$

2,150,148

As of December 31, 2021

    

Special

    

    

Pass

Mention

Substandard

Not Rated

Total

Cash, Securities and Other(1)

$

261,184

$

$

6

$

$

261,190

Consumer and Other

34,756

2

34,758

Construction and Development

 

176,194

 

2,522

 

 

178,716

1-4 Family Residential

 

580,797

 

 

75

 

580,872

Non-Owner Occupied CRE

 

476,670

 

5,952

 

 

482,622

Owner Occupied CRE

 

210,493

 

 

1,933

 

212,426

Commercial and Industrial

 

198,368

 

401

 

4,815

 

203,584

Total

$

1,938,462

$

8,875

$

6,831

$

$

1,954,168

(1) Includes PPP loans of $10.7 million and $46.8 million as of June 30, 2022 and December 31, 2021, respectively.

(2) Includes loans held for investment accounted for under fair value option of $21.1 million as of June 30, 2022.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses, which is a noncash charge to earnings. Loan losses are charged against the allowance when management believes that a loan balance is confirmed uncollectable. Subsequent recoveries, if any, are credited to the allowance for loan losses.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and dollar volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off.

We are closely monitoring the changing dynamics in the economy and the client impact driven by the COVID-19 pandemic. We have intensified our portfolio management, focusing on higher impacted industries and commercial property types.related client. Our clientele is generally comprised of high net-worth individuals and commercial borrowers with strong credit profiles and multiple sources of repayment. There was an immaterial provision expense taken duringDuring the second quarter of 2021.2022, the impact of loan growth on provision for loan losses was partially offset by a release of specific reserve on an impaired loan, resulting in a quarterly provision of $0.5 million. Management will continue to closely monitor the loan portfolio and analyze the economic data to assess the impact on the allowance for loan loss. We believe the allowance for loan losses is adequate as of June 30, 2021.2022.

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The following table presents summary information regarding our allowance for loan losses forduring the periods indicated:presented (dollars in thousands):

Three Months Ended June 30, 

Six Months Ended June 30, 

Three Months Ended June 30, 

Six Months Ended June 30, 

(Dollars in thousands)

    

2021

    

2020

    

2021

    

2020

    

    

2022

    

2021

    

2022

    

2021

    

Average loans outstanding(1)(2)

$

1,573,553

$

1,268,797

$

1,564,323

$

1,142,472

$

2,010,024

$

1,573,553

$

1,966,639

$

1,564,323

Gross loans outstanding at end of period(3)

$

1,571,060

$

1,422,440

$

1,571,060

$

1,422,440

Total loans outstanding at end of period(3)

$

2,146,394

$

1,571,060

$

2,146,394

$

1,571,060

Allowance for loan losses at beginning of period

$

12,539

$

8,242

$

12,539

$

7,875

$

13,885

$

12,539

$

13,732

$

12,539

Provision for loan losses

 

12

 

2,124

 

12

 

2,491

 

519

 

12

 

729

 

12

Charge-offs:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Cash, Securities and Other

 

 

24

 

 

24

 

 

 

 

Consumer and Other

95

192

Construction and Development

 

 

 

 

 

 

 

 

1-4 Family Residential

 

 

 

 

 

 

 

 

Non-Owner Occupied CRE

 

 

 

 

 

 

 

 

Owner Occupied CRE

 

 

 

 

 

 

 

 

Commercial and Industrial

 

 

 

 

 

 

 

 

Total charge-offs

 

 

24

 

 

24

 

95

 

 

192

 

Recoveries:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Cash, Securities and Other

 

1

 

12

 

1

 

12

 

 

 

 

Consumer and Other

48

1

88

1

Construction and Development

 

 

 

 

 

 

 

 

1-4 Family Residential

 

 

 

 

 

 

 

 

Non-Owner Occupied CRE

 

 

 

 

 

 

 

 

Owner Occupied CRE

 

 

 

 

 

 

 

 

Commercial and Industrial

 

 

 

 

 

 

 

 

Total recoveries

 

1

 

12

 

1

 

12

 

48

 

1

 

88

 

1

Net charge-offs (recoveries)

 

(1)

 

12

 

(1)

 

12

 

47

 

(1)

 

104

 

(1)

Allowance for loan losses at end of period

$

12,552

$

10,354

$

12,552

$

10,354

$

14,357

$

12,552

$

14,357

$

12,552

Allowance for loan losses to total loans(4)

 

0.80

%  

 

0.73

%  

 

0.80

%  

 

0.73

%  

 

0.67

%  

 

0.80

%  

 

0.67

%  

 

0.80

%  

Net charge-offs to average loans(5)

 

%  

 

%  

 

%  

 

%  

 

 

 

0.01

 

(1) Average balances are average daily balances.

(2) Excludes average outstanding balances of mortgage loans held for sale of $86.8$19.5 million and $68.2$86.8 million for the three months ended June 30, 20212022 and 2020,2021, respectively and $131.1$21.1 million and $53.0131.1 million for the six months ended June 30, 20212022 and 2020,2021, respectively.

(3) Excludes mortgage loans held for sale of $48.6$26.2 million and $69.6$48.6 million as of June 30, 20212022 and 2020,2021, respectively.

(4) End of period loans as of June 30, 20212022 include $116.1$287.6 million in acquired loans, $102.4$9.1 million in bank originated PPP loans, and $0.7$1.6 million of acquired PPP loans.loans, and $21.1 million of loans held for investment accounted for under the fair value option. No reserve is allocated for those loans. Excluding these loans would result in an increase of the ratio for the three months ended June 30, 2021.2022.

(5) For percentages shown as a dash, the ratio of net charge-offs to average loans is negligible or immaterial.

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The following table representspresents the allocation of the allowance for loan losses among loan categories and other summary information. The allocation for loan losses by category should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The allocation of a portion of the allowance for loan losses to one category of loans does not preclude its availability to absorb losses in other categories.

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Table of Contents

As of June 30, 

As of December 31,

As of June 30,

As of December 31,

2021

2020

2022

2021

(Dollars in thousands)

    

Amount

    

%(1)

    

Amount

    

%(1)

    

Amount

    

%(1)

    

Amount

    

%(1)

Cash, Securities and Other

$

2,039

 

18.5

%  

$

2,579

 

23.3

%  

$

1,194

 

8.5

%  

$

1,598

 

13.4

%  

Consumer and Other

220

2.2

266

1.8

Construction and Development

 

871

 

8.1

 

932

 

8.5

 

1,074

 

7.6

 

1,092

 

9.1

1-4 Family Residential

 

3,399

 

31.5

 

3,233

 

29.7

 

4,845

 

34.1

 

3,553

 

29.7

Non-Owner Occupied CRE

 

2,223

 

20.6

 

2,004

 

18.4

 

3,235

 

22.7

 

2,952

 

24.7

Owner Occupied CRE

 

1,225

 

11.4

 

1,159

 

10.6

 

1,477

 

10.4

 

1,292

 

10.9

Commercial and Industrial

 

2,795

 

9.9

 

2,632

 

9.5

 

2,312

 

14.5

 

2,979

 

10.4

Total allowance for loan losses

$

12,552

 

100.0

%  

$

12,539

 

100.0

%  

$

14,357

 

100.0

%  

$

13,732

 

100.0

%  

(1) Represents the percentage of loans to total loans in the respective category.

Deferred Tax Assets, Net

Deferred tax assets, net represent the differences in timing of when items are recognized for GAAP purposes and when they are recognized for tax purposes, as well as our net operating losses. Our deferred tax assets, net are valued based on the amounts that are expected to be recovered in the future utilizing the tax rates in effect at the time recognized. Our deferred tax assets, net as of June 30, 2021, decreased $0.32022, increased $0.8 million, or 5.2%11.9%, from December 31, 2020.2021.

Deposits

Our deposit products include money market accounts, demand deposit accounts, time deposit accounts (typically certificates of deposit), NOW accounts (interest checking accounts), and saving accounts. Our accounts are federally insured by the FDIC up to the legal maximum amount.

Total deposits increaseddecreased by $59.1$35.7 million, or 3.7%1.6%, to $1.68$2.17 billion as of June 30, 20212022 from December 31, 2020.2021. Total average deposits for the three months ended June 30, 20212022 were $1.71$2.23 billion, an increase of $396.2$522.1 million, or 30.3%30.6%, compared to $1.31$1.71 billion as of June 30, 2020.2021. The increasedecrease in total deposits from December 31, 20202021 was attributable to continued organic growth with newseasonal outflow related to tax payments, real estate acquisitions, and client accounts as well as increased deposit balances within the existing deposit accounts,operating cash outflows, offset partially by intentional runoff of higher rate non-relationship deposits.inflows from new business development efforts.

The following tables present the average balances and average rates paid on deposits for the periods below:

For the Three Month Period Ending June 30, 

2021

2020

    

Average

    

Average

    

Average

    

Average

 

(Dollars in thousands)

Balance

Rate

Balance

Rate

 

Deposits

 

  

 

  

 

  

 

  

Money market deposit accounts

$

878,341

 

0.22

%  

$

687,900

 

0.36

%

Demand deposit accounts

 

130,197

 

0.16

 

85,414

 

0.28

Certificates and other time deposits > $250k

 

67,408

 

1.29

 

54,996

 

2.03

Certificates and other time deposits < $250k

 

83,088

 

0.51

 

95,894

 

1.51

Total time deposits

 

150,496

 

0.86

 

150,890

 

1.72

Savings accounts

 

6,700

 

0.03

 

5,601

 

0.05

Total interest-bearing deposits

 

1,165,734

 

0.30

 

929,805

 

0.57

Noninterest-bearing accounts

 

539,613

 

  

 

379,374

 

  

Total deposits

$

1,705,347

 

0.20

%  

$

1,309,179

 

0.40

%

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For the Six Month Period Ending June 30, 

2021

2020

    

Average

    

Average

    

Average

    

Average

 

(Dollars in thousands)

Balance

Rate

Balance

Rate

 

Deposits

 

  

 

  

 

  

 

  

Money market deposit accounts

$

878,173

 

0.24

%  

$

647,092

 

0.68

%

NOW accounts

 

122,917

 

0.17

 

85,707

 

0.29

Certificates and other time deposits > $250k

 

67,000

 

1.33

 

53,261

 

2.09

Certificates and other time deposits < $250k

 

89,803

 

0.56

 

89,279

 

1.81

Total time deposits

 

156,803

 

0.89

 

142,540

 

1.93

Savings accounts

 

6,486

 

0.03

 

4,931

 

0.13

Total interest-bearing deposits

 

1,164,379

 

0.32

 

880,270

 

0.84

Noninterest-bearing accounts

 

548,610

 

  

 

316,593

 

  

Total deposits

$

1,712,989

 

0.21

%  

$

1,196,863

 

0.62

%

The following presents the average balances and average rates paid on deposits during the periods presented (dollars in thousands):

For the Three Month Period Ending June 30, 

2022

2021

    

Average

    

Average

    

Average

    

Average

 

Balance

Rate

Balance

Rate

 

Deposits

 

  

 

  

 

  

 

  

Money market deposit accounts

$

1,057,026

 

0.27

%  

$

878,341

 

0.22

%

Demand deposit accounts

 

306,590

 

0.15

 

130,197

 

0.16

Uninsured time deposits

 

55,137

 

1.06

 

67,408

 

1.29

Other time deposits

 

96,774

 

0.49

 

83,088

 

0.51

Total time deposits

 

151,911

 

0.70

 

150,496

 

0.86

Savings accounts

 

32,374

 

0.03

 

6,700

 

0.03

Total interest-bearing deposits

 

1,547,901

 

0.29

 

1,165,734

 

0.30

Noninterest-bearing accounts

 

679,531

 

  

 

539,613

 

  

Total deposits

$

2,227,432

 

0.20

$

1,705,347

 

0.20

For the Six Month Period Ending June 30, 

2022

2021

    

Average

    

Average

    

Average

    

Average

 

(Dollars in thousands)

Balance

Rate

Balance

Rate

 

Deposits

 

  

 

  

 

  

 

  

Money market deposit accounts

$

1,076,066

 

0.24

%  

$

878,173

 

0.24

%

NOW accounts

 

307,579

 

0.15

 

122,917

 

0.17

Uninsured time deposits

 

53,696

 

1.04

 

67,000

 

1.33

Other time deposits

 

106,501

 

0.47

 

89,803

 

0.56

Total time deposits

 

160,197

 

0.66

 

156,803

 

0.89

Savings accounts

 

32,607

 

0.04

 

6,486

 

0.03

Total interest-bearing deposits

 

1,576,449

 

0.26

 

1,164,379

 

0.32

Noninterest-bearing accounts

 

674,148

 

 

548,610

 

  

Total deposits

$

2,250,597

 

0.18

$

1,712,989

 

0.21

Average noninterest-bearing deposits to average total deposits was 31.6%30.5% and 29.0%31.6% for the three months ended June 30, 20212022 and 2020,2021, respectively, and 32.0%30.0% and 26.5%32.0% for the six months ended June 30, 20212022 and 2020,2021, respectively.

Our average cost of funds was 0.28%0.26% and 0.48%0.28% for the three months ended June 30, 20212022 and 2020,2021, respectively, and 0.29%0.25% and 0.68%0.29% for the six months ended June 30, 20212022 and 2020,2021, respectively.  The decrease in cost of funds was driven by a reduction in interest bearing deposit rates consistent withcosts due to the lower interest rate environment, and increase in noninterest-bearing deposits and the intentional reduction in higher rate non-relationship deposit balances.repricing of term deposits.

Total money market accounts as of June 30, 20212022 were $840.1 million,$1.03 billion, a decrease of $7.4$22.9 million, or 0.9%2.2%, compared to $847.4 million as of December 31, 2020.2021. NOW accounts increased $28.0decreased $22.7 million, or 24.8%7.3%, to $141.1$287.2 million compared to December 31, 2020.2021.

Total time deposits as of June 30, 20212022 were $137.5$147.6 million, a decrease of $35.2$22.9 million, or 20.4%13.4%, from December 31, 2020.2021.

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The following table representspresents the amount of certificates of deposit by time remaining until maturity as of June 30, 2021:2022 (dollars in thousands):

As of June 30, 2021

    

Three Months or Less

    

Three to Six Months

    

Six to 12 Months

    

After 12 Months

    

Total

Maturity Within:

(Dollars in thousands)

    

Three Months or Less

    

Three to Six Months

    

Six to 12 Months

    

After 12 Months

    

Total

Time, $250,000 and over

$

7,103

$

19,366

$

16,887

$

21,004

$

64,360

Uninsured Time Deposits

$

9,679

$

14,633

$

10,973

$

38,929

$

74,214

Other

21,470

21,641

10,262

19,766

73,139

16,526

23,277

13,254

20,352

73,409

Total

$

28,573

$

41,007

$

27,149

$

40,770

$

137,499

$

26,205

$

37,910

$

24,227

$

59,281

$

147,623

Borrowings

We have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs. As of June 30, 20212022 and December 31, 2020,2021, borrowings totaled $145.0$119.8 million and $173.9$77.7 million, respectively. On January 1, 2022, the Company redeemed subordinated notes due December 31, 2026 in the amount of $6.6 million, which were redeemable on or after January 1, 2022.

The decreaseincrease in other borrowings is primarily attributed to additional FHLB borrowings to support the strong loan growth in 2022, partially offset by the paydown of loans in the Paycheck Protection Program Loan Facility (“PPPLF”) from the Federal Reserve with a period end balance of $105.8 million.$7.2 million and the redemption of $6.6 million in subordinated notes. Borrowing from this facilitythe PPPLF is expected to match fundtrend in the balances ofsame direction as the PPP loans.loan balances. The table belowfollowing presents balances of each of the borrowing facilities as of the dates indicated:noted (dollars in thousands):

June 30, 

December 31, 

(Dollars in thousands)

    

2021

    

2020

Borrowings

 

  

 

  

FHLB borrowings

$

15,000

$

15,000

Federal Reserve borrowings

105,762

134,563

Subordinated notes

 

24,261

 

24,291

Total

$

145,023

$

173,854

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June 30, 

December 31, 

    

2022

    

2021

Borrowings

 

  

 

  

FHLB borrowings

$

80,000

$

15,000

Federal Reserve borrowings

7,223

23,629

Subordinated notes

 

32,553

 

39,031

Total

$

119,776

$

77,660

FHLB

We have a blanket pledge and security agreement with FHLB that requires certain loans and securities to be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of June 30, 20212022 and December 31, 20202021 amounted to $698.3$856.6 million and $668.6$771.4 million, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $457.7$517.0 million as of June 30, 2021.2022.

    

As of and for the

 

    

As of and for the

 

 

Six Months Ended

 

Six Months Ended

 

June 30, 

 

June 30, 

(Dollars in thousands)

 

2021

Short-term borrowings:

 

2022

Short-term borrowings

Maximum outstanding at any month-end during the period

$

15,000

$

80,000

Balance outstanding at end of period

15,000

80,000

Average outstanding during the period

$

15,000

13,260

Average interest rate during the period

 

0.32

%

 

0.54

%

Average interest rate at the end of the period

 

0.32

%

 

0.76

The Bank has borrowing capacity associated with three unsecured federal funds lines of credit up to $10.0 million, $19.0 million, and $25.0 million. As of June 30, 20212022 and December 31, 2020,2021, there were no amounts outstanding on any of the federal funds lines.

As of June 30, 2021 and December 31, 2020, we had a Promissory Note with a correspondent lending partner and the borrowing capacity associated with this facility was $5.0 million with no balance outstanding.

Our borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies. As of June 30, 20212022 and December 31, 2020,2021, the Company was in compliance with the covenant requirements.

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Table of Contents

Liquidity and Capital Resources

Liquidity resources primarily include interest-bearing and noninterest-bearing deposits which primarily contribute to our ability to raise funds to support asset growth, acquisitions, and meet deposit withdrawals and other payment obligations. Access to purchased funds primarily include the ability to borrow from FHLB, other correspondent banks, and the use of brokered deposits.

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Table of Contents

The following table illustrates, during the periods presented,presents the composition of our funding sources and the average assets in which those funds are invested as a percentage of average total assets forduring the period indicated.periods presented.

Average Percentage for the Three Months Ended

Average Percentage for the Six Months Ended

Three Months Ended

Six Months Ended

June 30, 

June 30, 

June 30, 

June 30, 

    

2021

    

2021

    

    

2022

    

2022

    

Sources of Funds:

Deposits:

 

  

 

  

 

 

  

 

  

 

Noninterest-bearing

 

26.19

%  

26.60

%  

 

26.89

%  

26.38

%  

Interest-bearing

 

56.58

56.46

 

61.25

61.67

FHLB and Federal Reserve borrowings

 

7.22

6.95

 

0.82

1.05

Subordinated notes

 

1.18

1.18

 

1.29

1.28

Other liabilities

 

0.80

0.91

 

0.76

0.84

Shareholders’ equity

 

8.03

7.90

 

8.99

8.78

Total

 

100.00

%  

100.00

%  

 

100.00

%  

100.00

%  

Uses of Funds:

 

  

 

  

 

  

 

  

Total loans

 

75.76

%  

75.24

%  

 

79.02

%  

76.41

%  

Available-for-sale securities

 

1.28

1.42

Investment securities

 

2.74

2.45

Mortgage loans held for sale

 

4.21

6.36

 

0.77

0.82

Interest-bearing deposits in other financial institutions

 

14.20

12.28

 

12.69

15.54

Federal funds sold

0.04

0.05

Noninterest-earning assets

 

4.55

4.70

 

4.74

4.73

Total

 

100.00

%  

100.00

%  

 

100.00

%  

100.00

%  

Average noninterest-bearing deposits to total average deposits

 

31.64

%  

32.03

%  

 

30.51

%  

29.95

%  

Average loans to total average deposits

 

92.27

91.32

 

90.24

87.38

Average interest-bearing deposits to total average deposits

 

68.36

%  

67.97

%  

 

69.49

70.05

Our primary source of funds is interest-bearing and noninterest-bearing deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future.

Capital Resources

Total shareholders’ equity increased $13.0$9.0 million, or 8.4%4.1%, from December 31, 20202021 to $168.0$228.0 million as of June 30, 2021.2022. The increase is primarily due to an increase in net income.

On January 6, 2022, the Company filed a Form S-3 Registration Statement with the SEC providing that the Company may offer and sell from time to time, separately or together, in multiple series or in one or more offerings, any combination of common stock, preferred stock, debt securities, warrants, depository shares and units, up to a maximum aggregate offer price of $100 million.

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Table of Contents

On November 3, 2020, the Company announced that its board of directors authorized the repurchase of up to 400,000 shares of the Company’s common stock, no par value from time to time, within one year (the "2020 Repurchase Plan") and that the Board of Governors of the Federal Reserve System advised the Company that it has no objection to the Company’s 2020 Repurchase Plan. The Company may repurchase2020 Repurchase Plan was in effect for a one-year period, with the timing of purchases and the number of shares in privately negotiated transactions, inrepurchased under the openprogram dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements, and market including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 promulgated by the SEC, or otherwise in a manner that complies with applicable federal securities laws.conditions. The 2020 Repurchase Plan does not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice.expired in November 2021. During the three and six monthsyear ended June 30,December 31, 2021, the Company did not repurchase any shares under the authorization of the 2020 Repurchase Plan.

We are subject to various regulatory capital adequacy requirements at a consolidated level and the Bank level. These requirements are administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our condensed consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

Capital levels are viewed as important indicators of an institution’s financial soundness by banking regulators. Generally, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. As of June 30, 20212022 and December 31, 2020,2021, our holding company and Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized," for purposes of the prompt corrective action regulations. As we continue to grow our operations and maintain

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Table of Contents

capital requirements, our regulatory capital levels may decrease depending on our level of earnings. We continue to monitor growth and control our capital activities in order to remain in compliance with all applicable regulatory capital standards.

The following table presents our regulatory capital ratios forduring the dates noted.periods presented (dollars in thousands):

June 30, 2021

December 31, 2020

 

June 30, 2022

December 31, 2021

 

(Dollars in thousands)

    

Amount

    

Ratio

    

Amount

    

Ratio

 

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Tier 1 capital to risk-weighted assets

 

  

 

  

 

  

 

  

 

 

 

 

Bank

$

148,443

 

11.03

%

$

133,963

 

10.22

%

$

214,993

 

10.99

%

$

203,164

 

11.40

%

Consolidated Company

 

144,728

 

10.68

 

131,507

 

9.96

 

199,379

 

10.15

 

188,777

 

10.54

Common Equity Tier 1(CET1) to risk-weighted assets

 

 

 

 

 

  

 

  

 

  

 

  

Bank

 

148,443

 

11.03

 

133,963

 

10.22

214,993

 

10.99

203,164

 

11.40

Consolidated Company

 

144,728

 

10.68

 

131,507

 

9.96

 

199,379

 

10.15

 

188,777

 

10.54

Total capital to risk-weighted assets

 

 

 

 

 

 

 

 

Bank

 

161,335

 

11.99

 

146,853

 

11.20

 

229,777

 

11.75

 

217,215

 

12.19

Consolidated Company

 

182,180

 

13.45

 

168,957

 

12.80

247,164

 

12.58

242,388

 

13.54

Tier 1 capital to average assets

 

 

 

 

 

 

 

 

Bank

 

148,443

 

7.98

 

133,963

 

7.62

 

214,993

 

8.65

 

203,164

 

10.05

Consolidated Company

$

144,728

 

7.75

%

$

131,507

 

7.45

%

199,379

 

8.00

188,777

 

9.31

Contractual Obligations and Off-Balance Sheet Arrangements

We enter into credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our clients. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Condensed Consolidated Balance Sheets. Commitments may expire without being utilized. Our exposure to loan loss is represented by the contractual amount of these commitments, although material losses are not anticipated. We follow the same credit policies in making commitments as we do for on-balance sheet instruments.

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The following table presents future contractual obligations to make future payments forduring the periods indicated:presented (dollars in thousands):

As of June 30, 2021

As of June 30, 2022

    

    

More than

    

More than

    

    

    

    

More than

    

More than

    

    

1 Year

1 Year but Less

3 Years but Less

5 Years

1 Year

1 Year but Less

3 Years but Less

5 Years

(Dollars in thousands)

or Less

than 3 Years

than 5 Years

or More

Total

or Less

than 3 Years

than 5 Years

or More

Total

FHLB and Federal Reserve

$

29,397

$

15,000

$

76,365

$

$

120,762

$

80,000

$

$

7,223

$

$

87,223

Subordinated notes

 

 

 

 

24,261

(1)

 

24,261

 

 

 

 

32,553

(1)

 

32,553

Time deposits

69,580

62,887

3,803

1,229

137,499

88,342

42,453

11,852

4,976

147,623

Minimum lease payments

3,300

5,973

3,382

640

13,295

3,415

6,073

1,628

1,857

12,973

Total

$

102,277

$

83,860

$

83,550

$

26,130

$

295,817

$

171,757

$

48,526

$

20,703

$

39,386

$

280,372

(1) Reflects contractual maturity dates of December 31, 2026, March 31, 2030, and December 1, 2030.2030, and September 1, 2031.

The following table presents financial instruments whose contract amounts represent credit risk, as of the periods indicated.presented (dollars in thousands):

June 30, 

December 31, 

June 30, 2022

December 31, 2021

2021

2020

    

Fixed Rate

    

Variable Rate

    

Fixed Rate

    

Variable Rate

(Dollars in thousands)

    

Fixed Rate

    

Variable Rate

    

Fixed Rate

    

Variable Rate

Unused lines of credit

$

65,274

$

424,856

$

78,506

$

360,883

$

128,605

$

575,094

$

136,289

$

442,035

Standby letters of credit

3,555

16,125

1,933

17,524

6,263

22,035

2,420

20,940

Commitments to make loans to sell

115,213

370,512

37,841

60,529

Commitments to make loans

$

44,384

$

31,840

$

24,225

$

25,316

52,056

17,749

16,256

14,920

We may enter into contracts for services in the conduct of ordinary business operations, which may require payment for services to be provided in the future and may contain penalty clauses for early termination of the contracts. We do not believe these off-balance sheet arrangements have or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. However, there can be no assurance that such arrangements will not have an effect on future operations.

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Critical Accounting Policies

Our accounting policies and procedures are described in Note 1 - Organization and Summary of Significant Accounting Policies in the accompanying Notes to the Condensed Consolidated Financial Statements as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 as filed with the SEC.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity and Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices, and equity prices. Our market risk arises primarily from interest rate risk inherent in lending, investing, and deposit taking activities. To that end, management actively monitors and manages interest rate risk exposure. We do not have any market risk sensitive instruments entered into for trading purposes.

Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within established guidelines of acceptable levels of risk-taking.

The board of directors monitors interest rate risk by analyzing the potential impact on the net economic value of equity and net interest income from potential changes in interest rates and considers the impact of alternative strategies or changes in balance sheet structure. We manage our balance sheet in part to maintain the potential impact on economic value of equity and net interest income within acceptable ranges despite changes in interest rates.

Our exposure to interest rate risk is reviewed at least quarterly by the board of directors. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the change in net interest income and economic value of equity in the event of hypothetical changes in interest rates. If potential changes to net economic value of equity and net interest income resulting from hypothetical interest rate changes are not within the limits established by our board of directors, the board of directors may direct management to adjust the asset and liability mix to bring interest rate risk within board-approved limits.

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Table of Contents

The following table summarizespresents the sensitivity in net interest income and fair value of equity overduring the periods indicated,presented, using a parallel ramp scenario.

As of June 30, 2021

As of December 31, 2020

 

As of June 30, 2022

As of December 31, 2021

 

    

Percent Change

    

Percent Change

    

Percent Change

    

Percent Change

 

    

Percent Change

    

Percent Change

    

Percent Change

    

Percent Change

 

in Net Interest

 in Fair Value of 

in Net Interest

 in Fair Value of 

 

in Net Interest

 in Fair Value of 

in Net Interest

 in Fair Value of 

 

Change in Interest Rates (Basis Points)

Income

Equity

Income

Equity

 

Income

Equity

Income

Equity

 

300

12.10

%  

11.50

%  

9.04

%  

19.52

%

4.36

%  

(3.28)

%  

11.85

%  

11.17

%

200

 

8.23

10.44

5.77

16.02

 

3.80

0.89

9.31

11.43

100

 

4.03

6.58

2.73

9.58

 

2.20

1.93

4.88

7.78

Base

 

 

−100

 

(2.63)

%  

(26.86)

%  

(2.83)

%  

(27.89)

%

 

(3.99)

(8.80)

(2.58)

(26.39)

The model simulations as of June 30, 20212022 imply that our balance sheet is slightly moreless asset sensitive compared to our balance sheet as of December 31, 2020.2021.

Although the simulation model is useful in identifying potential exposure to interest rate changes, actual results for net interest income and economic value of equity may differ. There are a variety of factors that can impact the outcomes such as timing and magnitude of interest rate changes, asset and liability mix, pre-payment speeds, deposit beta assumptions, and decay rates that differ from our projections. Additionally, the results do not account for actions implemented to manage our interest rate risk exposure.

Impact of Inflation

Our Condensed Consolidated Financial Statements and related notes included within this Form 10-Q have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

Our assets and liabilities are substantially monetary in nature. Therefore, changes in interest rates can significantly impact on our performance beyond the general effects of inflation. Interest rates do not necessarily move in the same

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Table of Contents

direction or magnitude as prices of general goods and services, while other operating expenses can be correlated with the impact of general levels of inflation.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Operating Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief FinancialOperating Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act”) were effective as of the end of the period covered by this report.

Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended June 30, 20212022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

The Company, from time to time, is involved in various legal actions arising in the normal course of business. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is the opinion of management, after consulting with our legal counsel, that no proceedings exist, either individually or in the aggregate, which, if determined adversely to the Company, would have a material effect on the Company��sCompany’s condensed consolidated financial statements. See Note 89 - Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements.

Item 1A. Risk Factors

There has been no material change in the risk factors previously disclosed under Item 1A of the Company in its 2020Company’s 2021 Annual Report on Form 10-K filed with the SEC on March 12, 2021.15, 2022.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Equity Securities

    

    

    

    

Maximum number (or

    

    

    

    

Maximum number (or

Total number of

approximate dollar

Total number of

approximate dollar

shares purchased

value) of shares

shares purchased

value) of shares

Total number

Average

as part of publically

that may yet be

Total number

Average

as part of publicly

that may yet be

of shares

price paid

announced plans

purchased under the

of shares

price paid

announced plans

purchased under the

    

purchased (1)

    

per share

    

or programs

    

plans or programs

    

purchased (1)

    per share

    

or programs

    

plans or programs

April 1, 2021 through April 30, 2021

6,729

$

25.67

399,574

May 1, 2021 through May 31, 2021

7,816

25.67

399,574

June 1, 2021 through June 30, 2021

$

399,574

April 1, 2022 through April 30, 2022

6,729

$

32.82

 

May 1, 2022 through May 31, 2022

10,293

32.94

 

June 1, 2022 through June 30, 2022

4,323

27.19

________________________________________

(1) These shares relate to the net settlement by employees related to vested, restricted stock awards and do not impact the shares available for repurchase under the 2020 Repurchase Plan.repurchase. Net settlements represent instances where employees elect to satisfy their income tax liability related to the vesting of restricted stock through the surrender of a proportionate number of the vested shares to the Company.

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Table of Contents

Item 3.Defaults upon Senior Securities

Not applicable.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

Not applicable.

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Table of Contents

Item 6.Exhibits

Exhibit No.

    

Description

31.1*

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*

Inline XBRL Instance Document

101.SCH*

Inline XBRL Taxonomy Extension Schema Document

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*     Filed herewith.

**   These exhibits are furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

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SIGNATURES

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

First Western Financial, Inc.

August 6, 20215, 2022

By:

/s/ Scott C. Wylie

Date

Scott C. Wylie

Chairman, Chief Executive Officer, and President

August 6, 20215, 2022

By:

/s/ Julie A. Courkamp

Date

Julie A. Courkamp

Director,Chief Operating Officer, Chief Financial Officer, and Treasurer

7382