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 ~~September~~June 30, ~~2021~~2022

☐ 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 ~~November 1, 2021~~August 2, 2022
Common Stock, no par value	~~8,032,457~~9,487,766

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FIRST WESTERN FINANCIAL, INC.

TABLE OF CONTENTS

~~September~~June 30, ~~2021~~2022
		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	6

	Condensed Consolidated Balance Sheets (Unaudited) as of ~~September~~June 30, ~~2021 (Unaudited)~~2022 and December 31, ~~2020~~2021	6

	Condensed Consolidated Statements of Income (Unaudited) for the Three Months and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021	7

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021	8

	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Three Months and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021	9

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021	10

	Notes to Condensed Consolidated Financial Statements (Unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4349

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7078

Item 4.	Controls and Procedures	7179

PART II. OTHER INFORMATION		7180

Item 1.	Legal Proceedings	7180

Item 1A.	Risk Factors	7180

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7180

Item 3.	Defaults upon Senior Securities	7280

Item 4.	Mine Safety Disclosures	7280

Item 5.	Other Information	7280

Item 6.	Exhibits	7381

SIGNATURES		7482

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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;

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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)

September 30,

December 31,


2021

2020
ASSETS


Cash and cash equivalents:




Cash and due from banks

$
2,829

$
2,405
Interest-bearing deposits in other financial institutions

307,406

153,584
Total cash and cash equivalents

310,235

155,989

Available-for-sale securities, at fair value

32,233

36,666
Correspondent bank stock, at cost

1,772

2,552
Mortgage loans held for sale

51,309

161,843
Loans, net of allowance of $12,964 and $12,539

1,590,086

1,520,294
Premises and equipment, net

6,344

5,320
Accrued interest receivable

6,306

6,618
Accounts receivable

5,500

4,865
Other receivables

1,553

1,422
Other real estate owned, net

—

194
Goodwill and other intangible assets, net

24,246

24,258
Deferred tax assets, net

5,926

6,056
Company-owned life insurance

15,715

15,449
Other assets

25,047

32,129
Total assets

$
2,076,272

$
1,973,655

LIABILITIES




Deposits:




Noninterest-bearing

$
596,635

$
481,457
Interest-bearing

1,185,664

1,138,453
Total deposits

1,782,299

1,619,910
Borrowings:




Federal Home Loan Bank and Federal Reserve borrowings

58,564

149,563
Subordinated notes

39,010

24,291
Accrued interest payable

357

453
Other liabilities

20,913

24,476
Total liabilities

1,901,143

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; 8,002,874 and 7,951,773 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively

—

—
Additional paid-in capital

146,380

144,703
Retained earnings

28,272

9,579
Accumulated other comprehensive income

477

680
Total shareholders’ equity

175,129

154,962
Total liabilities and shareholders’ equity

$
2,076,272

$
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 September 30,

Nine Months Ended September 30,


2021

2020


2021

2020
Interest and dividend income:








Loans, including fees

$
15,861

$
14,138

$
45,360

$
37,342
Investment securities

180

173

545

692
Interest-bearing deposits in other financial institutions

105

99

288

358
Total interest and dividend income

16,146

14,410

46,193

38,392

Interest expense:








Deposits

829

1,067

2,669

4,779
Other borrowed funds

471

425

1,402

968
Total interest expense

1,300

1,492

4,071

5,747
Net interest income

14,846

12,918

42,122

32,645
Less: Provision for loan losses

406

1,496

418

3,987
Net interest income, after provision for loan losses

14,440

11,422

41,704

28,658

Non-interest income:








Trust and investment management fees

5,167

4,814

15,023

14,154
Net gain on mortgage loans

4,480

12,304

13,590

24,958
Bank fees

458

340

1,225

929
Risk management and insurance fees

301

483

444

912
Income on company-owned life insurance

89

91

266

273
Other

—

—

60

—
Total non-interest income

10,495

18,032

30,608

41,226
Total income before non-interest expense

24,935

29,454

72,312

69,884

Non-interest expense:








Salaries and employee benefits

10,229

10,212

29,733

25,384
Occupancy and equipment

1,550

1,619

4,402

4,574
Professional services

1,660

1,288

4,309

3,542
Technology and information systems

945

1,032

2,791

2,994
Data processing

912

1,038

3,020

2,922
Marketing

397

395

1,116

1,063
Amortization of other intangible assets

5

4

13

44
Net loss on assets held for sale

—

—

—

553
Provision for other real estate owned

—

100

—

100
Other

771

944

2,235

2,747
Total non-interest expense

16,469

16,632

47,619

43,923
Income before income taxes

8,466

12,822

24,693

25,961
Income tax expense

2,049

3,192

6,000

6,301
Net income available to common shareholders

$
6,417

$
9,630

$
18,693

$
19,660
Earnings per common share:

Basic

$
0.80

$
1.22

$
2.35

$
2.49
Diluted

$
0.78

$
1.20

$
2.28

$
2.47


	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 September 30,

Nine Months Ended September 30,


2021

2020


2021

2020
Net income

$
6,417

$
9,630

$
18,693

$
19,660
Other comprehensive income items, net of tax effect:

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

(32)

(21)

(203)

987
Comprehensive income

$
6,385

$
9,609

$
18,490

$
20,647


	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									Accumulated
	Shares	Additional		Earnings		Other				Shares	Additional				Other
	Common	Paid-In		(Accumulated		Comprehensive				Common	Paid-In		Retained		Comprehensive
	Stock	Capital		Deficit)		Income (Loss)		Total		Stock	Capital		Earnings		Income (Loss)		Total
Balance at July 1, 2020	7,939,024	$	143,498	$	(4,925)	$	844	$	139,417
Balance as of April 1, 2021										7,957,900	$	145,282	$	15,578	$	579	$	161,439

Net income	—		—		9,630		—		9,630	—		—		6,277		—		6,277
Other comprehensive loss, net of tax	—		—		—		(21)		(21)	—		—		—		(70)		(70)
Settlement of share awards	12,725		(88)		—		—		(88)	36,932		(372)		—		—		(372)
Stock-based compensation	—		638		—		—		638	—		712		—		—		712
Balance at September 30, 2020	7,951,749	$	144,048	$	4,705	$	823	$	149,576
Balance as of June 30, 2021										7,994,832	$	145,622	$	21,855	$	509	$	167,986

Balance at July 1, 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	—		—		6,417		—		6,417	—		—		12,276		—		12,276
Other comprehensive loss, net of tax	—		—		—		(32)		(32)	—		—		—		(171)		(171)
Settlement of share awards	4,292		(46)		—		—		(46)	43,059		(406)		—		—		(406)
Options exercised	3,750		79		—		—		79
Stock-based compensation	—		725		—		—		725	—		1,325		—		—		1,325
Balance at September 30, 2021	8,002,874	$	146,380	$	28,272	$	477	$	175,129
Balance as of 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
Balance as of January 1, 2022										9,419,271	$	188,629	$	30,189	$	223	$	219,041

Net income	—		—		19,660		—		19,660	—		—		10,006		—		10,006
Other comprehensive income, net of tax	—		—		—		987		987
Settlement of share awards	34,260		(258)		—		—		(258)
Share repurchase	(22,679)		(370)		—		—		(370)
Stock-based compensation	—		1,879		—		—		1,879
Balance at September 30, 2020	7,951,749	$	144,048	$	4,705	$	823	$	149,576

Balance at January 1, 2021	7,951,773	$	144,703	$	9,579	$	680	$	154,962

Net income	—		—		18,693		—		18,693
Other comprehensive loss, net of tax	—		—		—		(203)		(203)
Other comprehensive loss, net of tax and reclassifications										—		—		—		(1,888)		(1,888)
Settlement of share awards	47,351		(452)		—		—		(452)	52,630		(688)		—		—		(688)
Options exercised	3,750		79		—		—		79	6,809		146		—		—		146
Stock-based compensation	—		2,050		—		—		2,050	—		1,407		—		—		1,407
Balance at September 30, 2021	8,002,874	$	146,380	$	28,272	$	477	$	175,129
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).

Table of Contents

FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

Nine Months Ended September 30,

2021

2020
Cash flows from operating activities



Net income

$
18,693

$
19,660
Adjustments to reconcile net income to net cash used in operating activities:

Net amortization of investment securities

411

346
Stock dividends received on correspondent bank stock

(60)

(12)
Provision for loan losses

418

3,987
Net gain on mortgage loans

(13,590)

(24,958)
Origination of mortgage loans held for sale

(1,066,612)

(917,524)
Proceeds from mortgage loans

1,195,896

889,208
Depreciation and amortization

877

832
Provision for other real estate owned

—

100
Deferred income tax expense/(benefits), net of valuation allowance

210

(1,699)
Increase in cash surrender value of company-owned life insurance

(266)

(273)
Loss on assets held for sale

—

553
Stock-based compensation

2,050

1,879
Net changes in operating assets and liabilities:

Change in accounts receivable

(21)

492
Change in accrued interest receivable and other assets

(248)

(5,531)
Change in accrued interest payable and other liabilities

(1,311)

3,394
Net cash provided by/(used in) operating activities

136,447

(29,546)
Cash flows from investing activities

Activity in available-for-sale securities:

Maturities, prepayments, and calls

6,370

20,890
Purchases

(2,250)

(2,000)
Purchases of correspondent bank stock

(1)

(698)
Redemption of correspondent bank stock

841

—
Contributions to low-income housing tax credit investments

(2,087)

—
Loan and note receivable originations and principal collections, net

(69,115)

(388,048)
Purchases of premises and equipment

(1,844)

(708)
Proceeds from sale of premises and equipment

—

10
Proceeds from sale of other real estate owned

194

—
Net cash paid on acquisitions

—

(61,316)
Net cash used in investing activities

(67,892)

(431,870)
Cash flows from financing activities




Net change in deposits

162,389

413,808
Payments to Federal Home Loan Bank borrowings

—

(27,000)
Proceeds from Federal Home Loan Bank borrowings

—

35,000
Payments to Federal Reserve borrowings

(174,673)

(238)
Proceeds from Federal Reserve borrowings

83,674

204,313
Proceeds from subordinated notes, net of issuance costs

14,674

7,881
Proceeds from the exercise of stock options

79

—
Repurchase of common stock

—

(370)
Settlement of restricted stock

(452)

(258)
Net cash provided by financing activities

85,691

633,136
Net change in cash and cash equivalents

154,246

171,720
Cash and cash equivalents, beginning of year

155,989

78,638
Cash and cash equivalents, end of period

$
310,235

$
250,358
Supplemental cash flow information:




Interest paid on deposits and borrowed funds

$
4,167

$
5,699
Income tax payment, net of refunds received

3,852

6,417
Cash paid for amounts included in the measurement of lease liabilities

3,874

4,267
Supplemental noncash disclosures:

Reclass of held for sale assets, net of liabilities

—

10
Change in unrealized (loss)/gain on available-for-sale securities

(283)

1,305
Lease right-of-use-asset obtained in exchange for lease liabilities

2,262

649


	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).

Table of Contents

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, ~~2020~~2021 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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, ~~2020,~~2021 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 purchase and assumption transaction ("Branch Acquisition") with Simmons Bank ("Simmons"). Management concluded that the acquisition represented a business combination, which is accounted for using the acquisition method, with the results of operations included in the Company’s 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~~merger pursuant 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.

~~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~~Management concluded that ~~subject to~~ the ~~terms and conditions set forth in~~merger represented a business combination, which is accounted for using the ~~Merger Agreement, Teton will be merged with into the Company (the “Merger”),~~acquisition method, 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. During the nine months ended September

~~Table~~results of ~~Contents~~

~~30, 2021, the Company has incurred $0.4 million in merger related expenses, which are~~operations included in the ~~Professional services line~~Company’s condensed consolidated financial statements as of the ~~Condensed Consolidated Statements of Income.~~

acquisition date.

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.

~~The Company could experience a material adverse effect on its business as a result~~11

Table of ~~the impact of the COVID-19 pandemic, and the resulting governmental actions to curtail its spread.~~Contents

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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020, 72.4%~~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 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 no performance based incentive fees earned with respect to investment management contracts for the three and nine months ended September 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 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.

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~~The administrator of LIBOR has proposed to extend publication~~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. Dollar~~Effects 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 ~~settings~~or 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 settings~~tailor 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 timeline~~company 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.

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 since the 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.

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 ~~September~~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.~~

~~Table of Contents~~

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 nine months ended September 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. On January 1, 2022, the Company adopted the new guidance. The adoption of this ASU has not had a material 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.

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 ~~early adopt~~implement the new standard beginning January 1, 2023.

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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.

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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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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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

NOTE 23 - INVESTMENT SECURITIES

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

Gross

Gross

Amortized

Unrealized

Unrealized

Fair
September 30, 2021

Cost

Gains

Losses

Value
Investment securities available-for-sale:








U.S. Treasury debt

$
250

$
—

$
(1)

$
249
Corporate bonds

8,117

249

(10)

8,356
GNMA mortgage-backed securities – residential

20,488

351

(28)

20,811
FNMA mortgage-backed securities – residential

1,102

53

—

1,155
Corporate CMO and MBS

1,645

35

(18)

1,662
Total securities available-for-sale

$
31,602

$
688

$
(57)

$
32,233


			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
June 30, 2022	Cost		Gains		Losses		Value
Investment securities held-to-maturity:
U.S. Treasury debt	$	240	$	—	$	(4)	$	236
U.S. Government Agency		252		—		(2)		250
Corporate bonds		24,085		6		(651)		23,440
GNMA mortgage-backed securities – residential		43,583		—		(1,089)		42,494
FNMA mortgage-backed securities – residential		7,184		—		(333)		6,851
Government CMO and MBS - commercial		7,426		14		(249)		7,191
Corporate CMO and MBS		4,259		74		(53)		4,280
Total securities held-to-maturity	$	87,029	$	94	$	(2,381)	$	84,742

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			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, 2022, the amortized cost and estimated fair value of held-to-maturity securities have contractual maturity dates shown in the table below (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.

Table of Contents

Gross

Gross


Amortized

Unrealized

Unrealized

Fair
December 31, 2020

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

As of September 30, 2021, the amortized cost and estimated fair value of available-for-sale securities have contractual maturity dates shown in the table below (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
September 30, 2021

Cost

Value
Due within one year

$
—

$
—
Due between one year and five years

250

249
Due between five years and ten years

8,117

8,356
Securities (agency, Corporate CMO, and MBS)

23,235

23,628
Total

$
31,602

$
32,233

In 2014, the Company began investing in a small business investment company ("SBIC") fund administered by the Small Business Administration. During the nine months ended September 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 September 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 September 30, 2021 and December 31, 2020, securities with carrying values totaling $2.3 million and $3.7 million, respectively, were pledged to secure various public deposits and credit facilities of the Company.

As of September 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 both September 30, 2021 and December 31, 2020, there were 7 securities in an unrealized loss position, with unrealized losses totaling $0.1 million. Of the securities in an unrealized loss position as of September 30, 2021, 1 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 September 30, 2021.

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


	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
September 30, 2021	Value		Losses		Value		Losses		Value		Losses
June 30, 2022													Value		Losses		Value		Losses		Value		Losses
Investment securities held-to-maturity:
U.S. Treasury debt	$	249	$	(1)	$	—	$	—	$	249	$	(1)	$	236	$	(14)	$	—	$	—	$	236	$	(14)
U.S. Government Agency														250		(2)		—		—		250		(2)
Corporate bonds														20,836		(689)		475		(26)		21,311		(715)
GNMA mortgage-backed securities – residential		7,555		(28)		—		—		7,555		(28)		40,306		(2,131)		2,094		(248)		42,400		(2,379)
Corporate bonds		490		(10)		—		—		490		(10)
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		—		—		556		(18)		556		(18)		761		(36)		435		(43)		1,196		(79)
Total	$	8,294	$	(39)	$	556	$	(18)	$	8,850	$	(57)	$	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)

The Company did not sell any securities during the three and six months ended June 30, 2022 or during the year ended December 31, 2021.

NOTE 4 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

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


	June 30,		December 31,
	2022		2021
Cash, Securities and Other⁽¹⁾	$	180,738	$	261,190
Consumer and Other⁽²⁾		47,855		34,758
Construction and Development		162,426		178,716
1-4 Family Residential		732,725		580,872
Non-Owner Occupied CRE		489,111		482,622
Owner Occupied CRE		224,597		212,426
Commercial and Industrial⁽³⁾		312,696		203,584
Total loans held for investment		2,150,148		1,954,168
Deferred fees and unamortized premiums/(unaccreted discounts), net⁽⁴⁾		(3,754)		(5,031)
Allowance for loan losses		(14,357)		(13,732)
Loans, net	$	2,132,037	$	1,935,405

⁽¹⁾ Includes PPP loans of $10.7 million and $46.8 million as of June 30, 2022 and December 31, 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 $6.8 million as of June 30, 2022 and December 31, 2021.

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

As of June 30, 2022 and December 31, 2021, total loans held for investment included $287.6 million and $356.7 million, respectively, of performing loans purchased through mergers or acquisitions. As of 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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Less than 12 Months

12 Months or Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
December 31, 2020

Value

Losses

Value

Losses

Value

Losses
Corporate bonds

$
3,489

$
(11)

$
—

$
—

$
3,489

$
(11)
Corporate CMO and MBS

880

(40)

566

(13)

1,446

(53)
Total

$
4,369

$
(51)

$
566

$
(13)

$
4,935

$
(64)

~~The Company did not sell any securities during the three and nine months ended September 30, 2021 or during the year ended December 31, 2020.~~

~~NOTE 3 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES~~

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

September 30,

December 31,

2021

2020
Cash, Securities and Other⁽¹⁾

$
293,837

$
357,020
Construction and Development

132,141

131,111
1-4 Family Residential

502,439

455,038
Non-Owner Occupied CRE

358,369

281,943
Owner Occupied CRE

167,638

163,042
Commercial and Industrial⁽²⁾

148,959

146,031
Total loans held for investment

1,603,383

1,534,185
Deferred fees and unamortized premiums/(unaccreted discounts), net

(333)

(1,352)
Allowance for loan losses

(12,964)

(12,539)
Loans, net

$
1,590,086

$
1,520,294

⁽¹⁾ ~~Includes PPP loans of $61.9 million and $142.9 million as of September 30, 2021 and December 31, 2020, respectively.~~

⁽²⁾ ~~Includes MSLP loans of $6.8 million and $6.6 million as of September 30, 2021 and December 31, 2020, respectively.~~

As of September 30, 2021 and December 31, 2020, total loans held for investment included $117.4 million and $127.2 million, respectively, of performing loans purchased as part of the Branch Acquisition.

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 ~~September~~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 ~~$61.9~~$46.8 million of PPP loans, or ~~21.1% 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 ~~September~~June 30, ~~2021,~~2022, the Company’s Commercial and Industrial loans included 65 MSLP loans with the net carrying amount of $6.8 million, or ~~4.6%~~2.2% of the total category. As of December 31, ~~2020,~~2021, the Company’s Commercial and Industrial loans included 65 MSLP loans with the net carrying amount of ~~$6.6~~$6.8 million, or ~~4.5%~~3.3% of the total category.

Loan Modifications

~~As of September 30,~~In 2021, the deferral period ~~has~~ ended for all non-acquired loans previously modified and payments ~~have~~ resumed under the original terms. As of ~~September~~June 30, ~~2021,~~2022, the Company’s loan portfolio included 7255 non-acquired loans which were previously modified under the loan modification program, totaling ~~$135.0~~$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, 2022, there were 15 of these loans, totaling $3.5 million.

~~Table of Contents~~

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 ~~September~~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. 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 4.1% 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 ~~September~~June 30, ~~2021,~~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) costs,~~fees, and unamortized premiums/ ~~(unaccreted~~(unaccreted discounts), which are not material) in loans past due as of ~~September 30, 2021 and December 31, 2020 (in~~the dates noted (dollars in thousands):


	30-59		60-89		90 or		Total				Total		30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded		Days		Days		More Days		Loans				Recorded
September 30, 2021	Past Due		Past Due		Past Due		Past Due		Current		Investment
June 30, 2022													Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	727	$	14	$	40	$	781	$	293,056	$	293,837	$	3,803	$	149	$	4	$	3,956	$	176,782	$	180,738
Consumer and Other														36		35		8		79		47,776		47,855
Construction and Development		—		2,522		—		2,522		129,619		132,141		—		805		—		805		161,621		162,426
1-4 Family Residential		483		—		83		566		501,873		502,439		9,705		—		—		9,705		723,020		732,725
Non-Owner Occupied CRE		—		—		—		—		358,369		358,369		—		—		—		—		489,111		489,111
Owner Occupied CRE		—		—		—		—		167,638		167,638		—		278		—		278		224,319		224,597
Commercial and Industrial		—		—		2,230		2,230		146,729		148,959		19,021		47		1,893		20,961		291,735		312,696
Total	$	1,210	$	2,536	$	2,353	$	6,099	$	1,597,284	$	1,603,383	$	32,565	$	1,314	$	1,905	$	35,784	$	2,114,364	$	2,150,148

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

1720

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	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 ~~(in~~(dollars in thousands):


	September 30,		December 31,		June 30,		December 31,
	2021		2020		2022		2021
Cash, Securities and Other	$	41	$	50	$	4	$	6
Consumer and Other						2		2
1-4 Family Residential		83		—		68		75
Owner Occupied CRE		1,250		479		1,200		1,241
Commercial and Industrial		2,984		3,529		2,603		2,938
Total	$	4,358	$	4,058	$	3,877	$	4,262

Non-accrual loans classified as TDRs accounted for ~~$2.2~~$3.9 million of the recorded investment as of ~~September~~June 30, ~~2021~~2022 and ~~$3.6~~$4.3 million as of December 31, ~~2020.~~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 ~~(in~~(dollars in thousands):


	September 30,		December 31,		June 30,		December 31,
	2021		2020		2022		2021
Accruing
Non-Owner Occupied CRE					$	46	$	55
Non-accrual
Cash, Securities, and Other	$	9	$	48		4		6
1-4 Family Residential						68		75
Owner Occupied CRE						1,200		1,241
Commercial and Industrial		2,230		3,529		2,603		2,938
Total		2,239		3,577		3,921		4,315
Allowance for loan losses associated with TDR		(1,751)		(1,619)		(261)		(1,751)
Net recorded investment	$	488	$	1,958	$	3,660	$	2,564

As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 nine months ended September 30, 2021. The Company modified 1 loan resulting in TDR status during the year ended December 31, 2020. The Borrower was having difficulty making payments in accordance with the original contract terms. The Company restructured the loan including receiving a large paydown and extended the maturity and lowered the interest rate as a result of the Borrower’s financial difficulties. The loan was paid off in full as of December 31, 2020.

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.

1821

Table of Contents

The Company did not modify any loans resulting in TDR status during the six months ended June 30, 2022. The Company modified 3 loans resulting in TDR status during the year ended December 31, 2021. The first loan was a 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 the loan modification. The Company continues to work with the 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 obtained a reduced term on the business loan as well as additional collateral from the Borrower. All three of the loans modified during 2021 were sufficiently collateralized and therefore did not require any specific reserve.

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


	September 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	$	32	$	32	$	32	$	2	$	2	$	2
Consumer and Other													$	2	$	2	$	2	$	2	$	2	$	2
Commercial and Industrial		2,230		2,230		1,751		3,419		3,419		1,619		1,893		1,893		261		2,190		2,190		1,751
Total	$	2,262	$	2,262	$	1,783	$	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	$	9	$	9	$	—	$	48	$	48	$	—	$	4	$	4	$	—	$	6	$	6	$	—
1-4 Family Residential		83		83		—		—		—		—		68		68		—		75		75		—
Owner Occupied CRE		1,250		1,250		—		479		479		—		1,200		1,200		—		1,241		1,241		—
Commercial and Industrial		754		754		—		110		110		—		710		710		—		748		748		—
Total	$	2,096	$	2,096	$	—	$	637	$	637	$	—	$	1,982	$	1,982	$	—	$	2,070	$	2,070	$	—

Total impaired loans:
Cash, Securities, and Other	$	41	$	41	$	32	$	50	$	50	$	2	$	4	$	4	$	—	$	6	$	6	$	—
Consumer and Other														2		2		2		2		2		2
1-4 Family Residential		83		83		—		—		—		—		68		68		—		75		75		—
Owner Occupied CRE		1,250		1,250		—		479		479		—		1,200		1,200		—		1,241		1,241		—
Commercial and Industrial		2,984		2,984		1,751		3,529		3,529		1,619		2,603		2,603		261		2,938		2,938		1,751
Total	$	4,358	$	4,358	$	1,783	$	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.

1922

Table of Contents

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


	Three Months Ended September 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	$	18	$	—	$	1	$	—	$	—	$	—	$	2	$	—
Consumer and Other										2		—		2		—
Commercial and Industrial		2,635		—		3,427		—		2,041		—		3,230		21
Total	$	2,653	$	—	$	3,428	$	—	$	2,043	$	—	$	3,234	$	21

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	10	$	—	$	779	$	—	$	4	$	—	$	15	$	—
Owner Occupied CRE		625		—		—		—		1,211		—		—		51
Commercial and Industrial		410		220		6,462		85		723		—		82		—
1-4 Family Residential		41		—		—		—		70		—		—		—
Total	$	1,086	$	220	$	7,241	$	85	$	2,008	$	—	$	97	$	51

Total impaired loans:
Cash, Securities, and Other	$	28	$	—	$	780	$	—	$	4	$	—	$	17	$	—
Consumer and Other										2		—		2		—
Owner Occupied CRE		625		—		—		—		1,211		—		—		51
Commercial and Industrial		3,045		220		9,889		85		2,764		—		3,312		21
1-4 Family Residential		41		—		—		—		70		—		—		—
Total	$	3,739	$	220	$	10,669	$	85	$	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 balance~~Company recognized an immaterial amount of ~~impaired loans and~~ interest income ~~recognized on impaired loans~~ during the ~~nine months ended September 30, 2021 and 2020 are included in the table below (in thousands):~~

Nine Months Ended September 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

$
10

$
—

$
1

$
—
Commercial and Industrial

3,027

21

3,462

—
Total

$
3,037

$
21

$
3,463

$
—

Impaired loans with no related valuation allowance:

Cash, Securities, and Other

$
22

$
—

$
1,463

$
—
Owner Occupied CRE

313

51

—

—
Commercial and Industrial

257

220

6,088

250
1-4 Family Residential

21

—

—

—
Total

$
613

$
271

$
7,551

$
250

Total impaired loans:

Cash, Securities, and Other

$
32

$
—

$
1,464

$
—
Owner Occupied CRE

313

51

—

—
Commercial and Industrial

3,284

241

9,550

250
1-4 Family Residential

21

—

—

—
Total

$
3,650
��
$
292

$
11,014

$
250

period.

2023

Table of Contents

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~~during the periods presented ~~(in~~(dollars in thousands):


	Cash,		Construction		1-4		Non-Owner		Owner		Commercial				Cash,		Consumer		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		Family		Occupied		Occupied		and				Securities		and		and		Family		Occupied		Occupied		and
	and Other		Development		Residential		CRE		CRE		Industrial		Total		and Other		Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the three months ended September 30, 2021
Changes in allowance for loan losses for the three months ended June 30, 2022
Beginning balance	$	2,039	$	871	$	3,399	$	2,223	$	1,225	$	2,795	$	12,552	$	1,440	$	283	$	954	$	3,789	$	2,867	$	1,328	$	3,224	$	13,885
(Recovery of)/provision for loan losses		85		48		97		271		(67)		(28)		406
(Release)/provision for loan losses																(246)		(16)		120		1,056		368		149		(912)		519
Charge-offs		—		—		—		—		—		—		—		—		(95)		—		—		—		—		—		(95)
Recoveries		6		—		—		—		—		—		6		—		48		—		—		—		—		—		48
Ending balance	$	2,130	$	919	$	3,496	$	2,494	$	1,158	$	2,767	$	12,964	$	1,194	$	220	$	1,074	$	4,845	$	3,235	$	1,477	$	2,312	$	14,357

Changes in allowance for loan losses for the nine months ended September 30, 2021
Changes in allowance for loan losses for the six months ended June 30, 2022
Beginning balance	$	2,579	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539	$	1,598	$	266	$	1,092	$	3,553	$	2,952	$	1,292	$	2,979	$	13,732
(Recovery of)/provision for loan losses		(456)		(13)		263		490		(1)		135		418
(Release)/provision for loan losses																(404)		58		(18)		1,292		283		185		(667)		729
Charge-offs		—		—		—		—		—		—		—		—		(192)		—		—		—		—		—		(192)
Recoveries		7		—		—		—		—		—		7		—		88		—		—		—		—		—		88
Ending balance	$	2,130	$	919	$	3,496	$	2,494	$	1,158	$	2,767	$	12,964	$	1,194	$	220	$	1,074	$	4,845	$	3,235	$	1,477	$	2,312	$	14,357

Allowance for loan losses as of September 30, 2021 allocated to loans evaluated for impairment:
Allowance for loan losses as of June 30, 2022 allocated to loans evaluated for impairment:
Individually	$	32	$	—	$	—	$	—	$	—	$	1,751	$	1,783	$	—	$	2	$	—	$	—	$	—	$	—	$	261	$	263
Collectively		2,098		919		3,496		2,494		1,158		1,016		11,181		1,194		218		1,074		4,845		3,235		1,477		2,051		14,094
Ending balance	$	2,130	$	919	$	3,496	$	2,494	$	1,158	$	2,767	$	12,964	$	1,194	$	220	$	1,074	$	4,845	$	3,235	$	1,477	$	2,312	$	14,357

Loans as of September 30, 2021, evaluated for impairment:
Individually	$	41	$	—	$	83	$	—	$	1,250	$	2,984	$	4,358
Collectively		293,796		132,141		502,356		358,369		166,388		145,975		1,599,025
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	$	293,837	$	132,141	$	502,439	$	358,369	$	167,638	$	148,959	$	1,603,383	$	180,738	$	47,855	$	162,426	$	732,725	$	489,111	$	224,597	$	312,696	$	2,150,148

2124

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 September 30, 2020

Beginning balance

$
2,425

$
484

$
2,708

$
1,483

$
760

$
2,494

$
10,354
Provision for/(recovery of) loan losses

192

249

392

207

309

147

1,496
Charge-offs

(6)

—

—

—

—

—

(6)
Recoveries

1

—

—

—

—

—

1
Ending balance

$
2,612

$
733

$
3,100

$
1,690

$
1,069

$
2,641

$
11,845

Changes in allowance for loan losses for the nine months ended September 30, 2020

Beginning balance

$
1,058

$
200

$
2,850

$
1,176

$
911

$
1,680

$
7,875
Provision for/(recovery of) loan losses

1,571

533

250

514
��

158

961

3,987
Charge-offs

(30)

—

—

—

—

—

(30)
Recoveries

13

—

—

—

—

—

13
Ending balance

$
2,612

$
733

$
3,100

$
1,690

$
1,069

$
2,641

$
11,845

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 September 30, 2021 and December 31, 2020 (in thousands):

rated.

2225

Table of Contents

Special

September 30, 2021

Pass

Mention

Substandard


Total
Cash, Securities and Other

$
293,796

$
—

$
41

$
293,837
Construction and Development

129,618

2,523

—

132,141
1-4 Family Residential

502,356

—

83

502,439
Non-Owner Occupied CRE

352,429

5,940

—

358,369
Owner Occupied CRE

165,690

—

1,948

167,638
Commercial and Industrial

144,093

—

4,866

148,959
Total

$
1,587,982

$
8,463

$
6,938

$
1,603,383

Special

December 31, 2020

Pass

Mention

Substandard


Total
Cash, Securities and Other

$
356,970

$
—

$
50

$
357,020
Construction and Development

131,111

—

—

131,111
1-4 Family Residential

451,918

—

3,120

455,038
Non-Owner Occupied CRE

275,627

6,316

—

281,943
Owner Occupied CRE

161,850

—

1,192

163,042
Commercial and Industrial

140,432

—

5,599

146,031
Total

$
1,517,908

$
6,316

$
9,961

$
1,534,185

~~The Company had 0 loans graded doubtful as of September 30, 2021 and December 31, 2020.~~

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
June 30, 2022	Pass		Mention		Substandard		Not Rated			Total
Cash, Securities and Other	$	180,734	$	—	$	4	$	—	$	180,738
Consumer and Other		26,704		—		2		21,149		47,855
Construction and Development		162,426		—		—		—		162,426
1-4 Family Residential		732,657		—		68		—		732,725
Non-Owner Occupied CRE		483,848		5,263		—		—		489,111
Owner Occupied CRE		222,714		—		1,883		—		224,597
Commercial and Industrial		305,765		2,693		4,238		—		312,696
Total	$	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, 2022 and December 31, 2021.

NOTE 45 - GOODWILL

~~Changes~~The following presents changes in the carrying amount of goodwill ~~were~~ as ~~follows (in~~of the dates noted (dollars in thousands):


	September 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 ~~Branch~~Teton 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 the~~The 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 its~~goodwill impairment is recognized equal to the difference between the fair value ~~we are required~~and its carrying amount, not to ~~perform the second step to the impairment test.~~

exceed its carrying amount. As of ~~September~~June 30, ~~2021~~2022, 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.2021, respectively.

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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, ~~(in~~as of the dates noted (dollars in thousands).


		September 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	$	11,450	$	11,341	Other assets	$	9,431	$	10,720

Lease Liabilities	Classification					Classification
Operating lease liabilities	Other liabilities	$	14,608	$	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.


	September 30,		December 31,		June 30,			December 31,
	2021		2020		2022			2021
Weighted-Average Remaining Lease Term
Operating leases	5.42	years	4.79	years		4.97	years		5.26	years

Weighted-Average Discount Rate
Operating leases	2.69	%	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 represents~~presents the Company’s net lease costs ~~(in~~during 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

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Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020
Lease Costs

Operating lease cost
$
781

$
786

$
2,264

$
2,401
Variable lease cost

488

557

1,316

1,516
Sublease income

—

(33)

—

(232)
Lease costs, net
$
1,269

$
1,310

$
3,580

$
3,685

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 ~~as of September 30, 2021(~~(dollars in thousands):


Year Ending December 31,	Operating Leases		Operating Leases
2021⁽¹⁾	$	850
2022		3,450
2022⁽¹⁾			$	1,755
2023		3,210		3,210
2024		3,064		3,064
2025		2,073		2,073
2026				703
Thereafter		2,871		2,168
Total future minimum lease payments		15,518		12,973
Less: imputed interest		(910)		(648)
Present value of net future minimum lease payments	$	14,608	$	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 operating leases. During the three and six months ended June 30, 2022, 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 Lease Income
2022⁽¹⁾	$	134
2023		221
2024		199
2025		—
2026		—
Thereafter		—
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 as of the dates noted ~~(in~~(dollars in thousands):


	September 30,		December 31,		June 30,		December 31,
	2021		2020		2022		2021
Money market deposit accounts	$	905,196	$	847,430	$	1,033,739	$	1,056,669
Time deposits		137,015		172,682		147,623		170,491
Negotiable order of withdrawal accounts		137,833		113,052		287,195		309,940
Savings accounts		5,620		5,289		33,099		32,299
Total interest-bearing deposits	$	1,185,664	$	1,138,453	$	1,501,656	$	1,569,399
Aggregate time deposits of $250,000 or greater	$	64,902	$	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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021, respectively.

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The following presents the scheduled maturities of all time deposits for each of the next five years ~~ending September 30 (in~~and total amounts thereafter (dollars in thousands):


Year Ending December 31,		Time Deposits
2021⁽¹⁾	$	39,977
2022		63,709
Year ending December 31,				Time Deposits
2022⁽¹⁾			$	64,114
2023		24,819		46,252
2024		2,635		17,812
2025		1,541		3,029
2026				10,337
Thereafter		4,334		6,079
Total	$	137,015	$	147,623

⁽¹⁾ Amount represents the remaining ~~three~~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

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~~September~~ June 30, ~~2021~~2022 and December 31, ~~2020~~2021 amounted to ~~$767.8~~$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 ~~$504.7~~$517.0 million as of ~~September~~June 30, ~~2021.~~2022. Each advance is payable at its maturity date.

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


		September 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company utilized ~~$43.6~~$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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were 0 amounts outstanding on any of the federal funds lines.

On ~~October 28, 2020,~~January 1, 2022, the Company ~~entered into a Business Loan Agreement and associated Promissory Note (the "Note"), dated June 30, 2020, with a correspondent lending partner.~~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 ~~Note is secured by stock~~redemption price was equal to 100% of the ~~Bank~~principal amount being redeemed, plus accrued and ~~bears~~unpaid interest atup to, but excluding the ~~one month ICE Benchmark Administration ("IBA") LIBOR plus 2.5%. As~~date of December 31, 2020, there were 0 amounts outstanding and the borrowing capacity associated with this facility was $5.0 million. The Business Loan Agreement expired on June 30, 2021, in accordance with its terms, and was not renewed.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 ~~resulting in~~and as of June 30, 2022, a net balance of ~~$14.7~~$14.8 million ~~as of September 30, 2021~~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.

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On November 25, 2020, the Company completed the issuance and sale of subordinated notes (the "November 2020 Sub Notes") totaling $10.0 million in aggregate principal amount. The issuance included $0.2 million of issuance costs and as of June 30, 2022, 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 Sub 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 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 (see~~agencies. See Note 1617 – Regulatory Capital ~~Matters).~~Matters for additional information. As of ~~September~~June 30, ~~2021~~2022 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.

~~Table of Contents~~

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


	September 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	$	73,975	$	418,045	$	78,506	$	360,883	$	128,605	$	575,094	$	136,289	$	442,035
Standby letters of credit		3,540		20,940		1,933		17,524		6,263		22,035		2,420		20,940
Commitments to make loans to sell		113,746		—		370,512		—		37,841		—		60,529		—
Commitments to make loans		40,804		15,236		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 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 share~~the repurchase ~~plan~~of 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 ~~had~~has no objection to the Company’s ~~2019~~2020 Repurchase Plan. The ~~2019~~2020 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 ~~2019~~2020 Repurchase Plan expired in ~~June of 2020.~~November 2021. During the ~~nine months~~year ended ~~September 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

~~Table of Contents~~

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 nine months ended September 30,December 31, 2021, the Company did not repurchase any shares under the 2020 Repurchase Plan.

During the ~~the nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company sold 0 shares of common stock.

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-years~~five 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 the nine months ended September 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 ~~September~~June 30, ~~2021,~~2022, the Restricted Stock Awards have a weighted-average grant date fair value of $28.50 per share. ~~The~~During the three months ended June 30, 2022 and 2021, the Company recognized compensation expense of $0.1 million for the ~~three months ended September 30, 2021 and 2020, for the~~ Restricted Stock Awards. During the ~~the nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recognized compensation expense of $0.2 million ~~and $0.3 million, respectively,~~ for the Restricted Stock Awards. As of ~~September~~June 30, ~~2021,~~2022, the Company has $~~0.3~~0.1 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. ~~During~~NaN restricted Stock Awards vested during the ~~nine~~six months ended ~~September~~June 30, ~~2021, 10,526 shares~~2022 or 2021.

Table of ~~the Restricted Stock Awards vested. During the nine months ended September 30, 2020, 10,527 of the Restricted Stock Awards and 30,088 shares of the Performance based Restricted Stock Awards vested.~~Contents

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 ~~September~~June 30, ~~2021,~~2022, there were a total of ~~398,934~~202,565 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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021.

During the three and six months ended ~~September~~June 30, ~~2021 and 2020,~~2022, the Company recognized ~~an immaterial amount and $0.1 million, respectively, of~~0 stock based compensation expense associated with stock options. During the ~~nine~~three and six months ended ~~September~~June 30, 2021, ~~and 2020,~~ the Company recognized an immaterial amount ~~and $0.2 million, respectively,~~ of stock based compensation expense associated with stock options. As of ~~September~~June 30, ~~2021,~~2022, the Company has ~~an immaterial amount of~~0 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.

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The following ~~summarizes~~presents activity for nonqualified stock options ~~for~~during the ~~nine~~six months ended ~~September~~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	(3,750)		21.00				(6,809)		21.47
Forfeited or expired	(36,050)		35.91				(116,100)		40.00
Outstanding as of September 30, 2021	379,397		28.44	1.9	⁽¹⁾
Options fully vested / exercisable as of September 30, 2021	375,827		28.46	1.8	⁽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 ~~September~~June 30, ~~2021,~~2022, there were ~~375,827~~185,665 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-years~~ten years from the original grant date and expire on various dates between ~~2022~~2023 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 ~~summarizes~~presents the activity for the Time Vesting Units, the Financial Performance Units, and the Market Performance Units ~~for~~during the ~~nine~~six months ended ~~September~~June 30, ~~2021:~~2022:


	Time	Financial	Market	Time	Financial	Market
	Vesting	Performance	Performance	Vesting	Performance	Performance
	Units	Units	Units	Units	Units	Units
Outstanding as of December 31, 2020	285,052	152,430	14,862
Outstanding as of December 31, 2021				249,821	183,483	13,746
Granted	59,194	41,743	—	126,004	64,629	—
Vested	(66,453)	—	—	(75,220)	(12,100)	—
Forfeited	(14,307)	(10,149)	(1,116)	(14,007)	(12,086)	(13,746)
Outstanding as of September 30, 2021	263,486	184,024	13,746
Outstanding as of June 30, 2022				286,598	223,926	—

During the three months ended September 30, 2021, the Company issued 4,292 shares of common stock upon the settlement of Restricted Stock Units. The remaining 1,733 shares were surrendered with a combined market value at the dates of settlement of an immaterial amount to cover employee withholding taxes. During the nine months ended September 30, 2021, the Company issued 47,351 shares of common stock upon the settlement of Restricted Stock Units. The remaining 19,102 shares were surrendered with a combined market value at the dates of settlement of $0.5 million to cover employee withholding taxes. During the nine months ended September 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 59,194 Time Vesting Units with a five-year service period during the the nine months ended September 30, 2021, 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 September 30, 2021 and 2020, the Company recognized compensation expense of $0.4 million and $0.4 million, respectively, for the Time Vesting Units. During the nine months ended September 30, 2021 and 2020, the Company recognized compensation expense of $1.2 million and $1.0 million, respectively, for the Time Vesting Units. As of September 30, 2021, there was $3.9 million of unrecognized compensation expense related to the Time Vesting Units, which is expected to be recognized over a weighted-average period of 1.8 years.

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During the three months ended June 30, 2022, the Company issued 53,461 shares of common stock upon the settlement of Restricted Stock Units. The remaining 21,345 shares were surrendered with a combined market value at the dates of settlement of $0.7 million to cover employee withholding taxes. During the six months ended June 30, 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.

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 126,004 Time Vesting Units with a five-year service period during the six months ended June 30, 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, 2022 and 2021, the Company recognized compensation expense of $0.4 million for the Time Vesting Units. During the six months ended June 30, 2022 and 2021, the Company recognized compensation expense of $0.9 million and $0.8 million, respectively, for the Time Vesting Units. As of June 30, 2022, there was $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 2.2 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 ~~September~~June 30, ~~2021~~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

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

9,198

0.3 years

December 31, 2019

December 31, 2021

May 1, 2019 through April 30, 2020

150%

80,255

372

2.3 years

December 31, 2021

December 31, 2023

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%

81,516

474

3.3 years

December 31, 2022

December 31, 2023

150%

76,886

345

2.5 years

December 31, 2022

December 31, 2023

On November 18, 2020

150%

34,752

346

3.1 years

December 31, 2022

50% November 18, 2023 & 2025

134%

29,212

278

2.4 years

December 31, 2022

50% November 18, 2023 & 2025

May 3, 2021 through August 11, 2021

150%

61,118

970

4.3 years

December 31, 2023

December 31, 2025

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 Financial Performance Units activity ~~for~~during the ~~nine months ended September 30 of the years noted~~periods 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	—	—	$	23	$	49		—		—	$	—		3		—	$	18
May 1, 2019 through April 30, 2020	—	1,866		154		246		—		—		29		61		90		117
May 1, 2020 through December 31, 2020, excluding November 18, 2020	—	58,993		153		97		—		—		29		54		82		109
On November 18, 2020		—		94		—				—		(2)		30		28		64
May 3, 2021 through August 11, 2021	41,743	—		140		—		—		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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company recognized an immaterial amount of compensation expense for the Market Performance Units. As of ~~September~~June 30, ~~2021, there was $0.4 million of~~2022, 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 less than one 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, ~~ending~~which 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 ~~are~~were eligible to be earned.

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NOTE 1011 - EARNINGS PER COMMON SHARE

The ~~table below~~following presents the calculation of basic and diluted earnings per common share ~~for~~during the periods ~~indicated~~presented (dollars in thousands, except share and per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 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	$	6,417	$	9,630	$	18,693	$	19,660	$	4,482	$	6,277	$	10,006	$	12,276

Denominator:
Basic weighted average shares		7,979,869		7,911,871		7,959,268		7,888,675		9,450,987		7,961,785		9,434,742		7,948,796
Earnings per common share - basic	$	0.80	$	1.22	$	2.35	$	2.49	$	0.47	$	0.79	$	1.06	$	1.54

Earnings per common share - Diluted
Numerator:
Net income available for common shareholders	$	6,417	$	9,630	$	18,693	$	19,660	$	4,482	$	6,277	$	10,006	$	12,276

Denominator:
Basic weighted average shares		7,979,869		7,911,871		7,959,268		7,888,675		9,450,987		7,961,785		9,434,742		7,948,796
Diluted effect of common stock equivalents:
Stock options		35,428		—		25,400		—		52,870		35,849		55,005		20,386
Time Vesting Units		144,479		85,897		126,231		44,310		122,090		131,684		155,813		117,107
Financial Performance Units		73,135		7,786		64,542		16,176		91,720		70,746		92,524		59,953
Market Performance Units		13,442		13,453		13,825		13,347		—		13,836		6,827		14,017
Total diluted effect of common stock equivalents		266,484		107,136		229,998		73,833		266,680		252,115		310,169		211,463
Diluted weighted average shares		8,246,353		8,019,007		8,189,266		7,962,508		9,717,667		8,213,900		9,744,911		8,160,259
Earnings per common share - diluted	$	0.78	$	1.20	$	2.28	$	2.47	$	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 below~~following presents potentially dilutive securities excluded from the diluted earnings per share calculation ~~for~~during the periods ~~indicated:~~presented:


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended June 30,				Six Months Ended June 30,
	2021	2020	2021	2020	2022		2021		2022		2021
Stock options	139,639	419,197	186,462	419,197		—		141,639		—		209,874
Time Vesting Units	—	82,600	1,327	87,304		121,942		—		60,971		1,991
Financial Performance Units	40,745	116,051	30,216	70,769		—		26,735		—		24,952
Restricted Stock Awards	10,527	21,054	10,527	41,517		—		—		—		10,527
Total potentially dilutive securities	190,911	638,902	228,532	618,787		121,942		168,374		60,971		247,344

NOTE 1112 - INCOME TAXES

During the three and ~~nine~~six months ended ~~September~~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 ~~$2.0~~$1.9 million and ~~$6.0~~$4.0 million, respectively, reflecting an effective tax rate of ~~24.2%~~23.3% and 24.3%, respectively. During the three and nine months ended September 30, 2020, the Company recorded an income tax provision of $3.2 million and $6.3 million, respectively, reflecting an effective tax rate of 24.9% and 24.3%, 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 ~~September~~June 30, ~~2021~~2022 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):


	September 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		6,172		17,348		12,880		11,294
Payments collected		(7,381)		(8,702)		(7,102)		(12,782)
Balance, end of period	$	13,112	$	14,321	$	18,611	$	12,833

Deposits from related parties held by the Bank as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 totaled ~~$39.9~~$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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company incurred ~~$0.2 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 Securities~~Available-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 at~~Loans 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 in~~nature of the ~~fair value accounted~~valuation 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.

The following presents assets and liabilities measured on a recurring 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
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 year 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 December 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 within 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 account 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 under the fair value option is recognized within Interest and dividend income in the accompanying Condensed Consolidated Statements of Income. Not electing fair value generally results in a larger discount being recorded on the date of the loan purchase. The discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Additionally, management has elected the fair value option for mortgage loans originated and held for sale.

There were 0 loans accounted for under the fair value option that were 90 days or more past due and still accruing interest as of June 30, 2022 or 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.

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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 the net (losses)/gains from changes in fair value of loans accounted for under the fair value option as of the dates noted (dollars in thousands):


	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 summarizes the activity pertaining to loans accounted for under the fair value option as of the dates noted (dollars in thousands):


	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	$	—

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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. ~~Other real estate owned~~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 ~~other real estate owned~~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

Reported

December 31, 2021

(Level 1)

(Level 2)

(Level 3)

Balance

Impaired loans⁽¹⁾:

Commercial and Industrial

—

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.

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~~The following presents assets~~Impaired loans accounted for specific reserves of $0.3 million and ~~liabilities measured on a recurring basis~~$1.8 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020 (in thousands):~~2021, respectively. The Company did not have any charge offs during the six months ended June 30, 2022 from the specific reserve. The Company charged off an immaterial amount during the year ended December 31, 2021 from the specific reserve.

Quoted






Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported
September 30, 2021

(Level 1)

(Level 2)

(Level 3)

Balance
Investment securities available-for-sale:








U.S. Treasury debt

$
249

$
—

$
—

$
249
Corporate bonds

—

8,356

—

8,356
GNMA mortgage-backed securities - residential

—

20,811

—

20,811
FNMA mortgage-backed securities - residential

—

1,155

—

1,155
Corporate CMO and MBS

—

1,662

—

1,662
Total securities available-for-sale

$
249

$
31,984

$
—

$
32,233
Equity securities

$
716

$
—

$
—

$
716
Guarantee asset

$
—

$
—

$
231

$
231
IRLC, net

$
—

$
—

$
2,185

$
2,185
Forward commitments and FSC

$
—

$
498

$
(17)

$
481
Mortgage loans held for sale

$
—

$
51,309

$
—

$
51,309

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

Level 3 Analysis

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


Three Months Ended September 30, 2021	Guarantee Asset		IRLC		FSC
Three Months Ended June 30, 2022							Corporate Bonds		Loans Held at Fair Value		FSC		Guarantee Asset		IRLC		Equity Warrants
Beginning balance	$	196	$	2,809	$	—	$	6,215	$	6,380	$	—	$	206	$	990	$	402
Acquisitions		—		6,617		(17)		—		18,352		—		—		1,083		—
Originations		—		(7,705)		—		—		—		—		—		(2,063)		—
Gains (losses) in net income, net		35		464		—
Gains/(losses) in net income, net								—		(155)		—		(32)		826		323
Transfer to held-to-maturity								(6,215)		—		—		—		—		—
Settlements								—		(3,100)		—		—		—		—
Ending balance	$	231	$	2,185	$	(17)	$	—	$	21,477	$	—	$	174	$	836	$	725


Three Months Ended September 30, 2020	Guarantee Asset		IRLC		FSC
Three Months Ended June 30, 2021							Corporate Bonds		Loans Held at Fair Value		FSC		Guarantee Asset		IRLC		Equity Warrants
Beginning balance	$	222	$	7,566	$	(84)	$	—	$	—	$	(173)	$	188	$	2,105	$	—
Acquisitions		—		9,546		(89)		—		—		—		—		5,823		—
Originations		—		(6,466)		—		—		—		—		2		(5,981)		—
Gains (losses) in net income, net		23		1,065		84
Gains/(losses) in net income, net								—		—		173		6		861		—
Ending balance	$	245	$	11,711	$	(89)	$	—	$	—	$	—	$	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	$	—

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Nine Months Ended September 30, 2021

Guarantee Asset

IRLC

FSC
Beginning balance

$
232

$
9,841

$
(89)
Acquisitions

—

15,123

(190)
Originations

2

(20,702)

—
Gains (losses) in net income, net

(3)

(2,077)

262
Ending balance

$
231

$
2,185

$
(17)

Nine Months Ended September 30, 2020

Guarantee Asset

IRLC

FSC
Beginning balance

$
—

$
1,184

$
—
Acquisitions

—

26,264

(189)
Originations

—

(17,449)

—
Sales

245

—

—
Gains (losses) in net income, net

—

1,712

100
Ending balance

$
245

$
11,711

$
(89)

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 September 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 September 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 within 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 and nonrecurring basis as of ~~September 30, 2021 and December 31, 2020~~the dates noted (dollars in thousands):

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

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

Valuation

Significant

Range

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%)

Fair Value

Technique

Unobservable Input

(Weighted Average)

Guarantee asset

231

Discounted cash flow

Discount rate
Prepayment rate

3% (3%)

19% (19%)

174

Discounted cash flow

Discount rate
Prepayment rate

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

IRLC, net

2,185

Best execution model

Pull through

72% to 100% (90%)

836

Best execution model

Pull through

67% to 100% (94%)

FSC

(17)

Internal pricing model

Market Differential

-84bps to

-50bps

(-75bps)

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%)

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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 September 30, 2021 and December 31, 2020 (in thousands):~~

Quoted

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

Prices in

Significant

Valuation

Significant

Range

Active Markets

Other

Significant

Fair Value

Technique

Unobservable Input

(Weighted Average)

Recurring fair value

Corporate Bonds

2,113

Discounted cash flow

Discount rate

7% (7%)

for Identical

Observable

Unobservable

FSC

(9)

Internal pricing model

Market Differential

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

Assets

Inputs

Reported

December 31, 2020

(Level 1)

(Level 2)

(Level 3)

Balance

Other real estate owned:

Commercial properties

—

194

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

439

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 45% (39%)

⁽¹⁾ ~~Four~~One immaterial ~~Cash, Securities and Other loans were fully reserved for using a specific allowance as of September 30, 2021 and one immaterial Cash, Securities~~Consumer and Other loan was fully reserved for using a specific allowance as of ~~December 31, 2020.~~

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

~~As of September~~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 September 30, 2021, total impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had carrying values of $2.3 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 million and $1.6 million as of September 30, 2021~~2022 and December 31, ~~2020.~~ 2021.

Estimated Fair Value of Other Financial Instruments

The ~~Company did~~following presents carrying amounts and estimated fair values for financial instruments not ~~have any charge offs during~~carried at fair value as of the ~~nine months ended September 30, 2021 from the specific reserve. The Company charged off an immaterial amount during the year ended December 31, 2020 from the specific reserve.~~dates noted (dollars in thousands):


	Carrying		Fair Value Measurements Using:
June 30, 2022	Amount		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	171,606	$	171,606	$	—	$	—
Held-to-maturity securities		87,029		236		75,699		8,807
Loans, net		2,132,037		—		—		2,105,608
Accrued interest receivable		7,884		3		333		7,548
Liabilities:
Deposits		2,169,998		2,022,624		—		148,933
Borrowings:
FHLB borrowings – fixed rate		80,000		—		79,789		—
Federal Reserve borrowings – fixed rate		7,223		—		7,223		—
Subordinated notes – fixed-to-floating rate		32,553		—		—		32,476
Accrued interest payable		304		38		—		266

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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 September 30, 2021 and December 31, 2020 (dollars in thousands):

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

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)
Impaired loans⁽¹⁾:

Commercial and Industrial

$
479

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 45% (39%)

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

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)
Other real estate owned:








Commercial properties

$
194

Sales contract

Commission, cost to sell, closing costs

5% (5%)

Impaired loans⁽¹⁾:

Commercial and Industrial

1,800

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 35% (26%)

⁽¹⁾ Four immaterial Cash, Securities and Other loans were fully reserved for using a specific allowance as of September 30, 2021 and one immaterial Cash, Securities and Other loan was fully reserved for using a specific allowance as of December 31, 2020.

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

Carrying

Fair Value Measurements Using:
September 30, 2021

Amount

Level 1

Level 2

Level 3
Assets:

Cash and cash equivalents

$
310,235

$
310,235

$
—

$
—
Loans, net

1,590,086

—

—

1,577,103
Accrued interest receivable

6,306

—

20

6,286
Liabilities:








Deposits

1,782,299

—

1,783,610

—
Borrowings:








FHLB borrowings – fixed rate

15,000

—

15,056

—
Federal Reserve borrowings – fixed rate

43,564

—

43,564

—
Subordinated notes – fixed-to-floating rate

39,010

—

—

40,313
Accrued interest payable

357

—

173

184

~~Table of Contents~~


	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 account~~considering 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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Table of Contents

NOTE 15 - SEGMENT REPORTING

The Company’s reportable segments consist of Wealth Management ~~segment no longer meet~~and Mortgage. The chief operating decision maker ("CODM") is the ~~thresholds~~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 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 present~~following 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 ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020 (in~~(dollars in thousands):


As of and for the three months ended September 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	$	16,146	$	—	$	16,146	$	21,631	$	—	$	21,631
Total interest expense		1,300		—		1,300		1,493		—		1,493
Provision for loan losses		406		—		406		519		—		519
Net interest income, after provision for loan losses		14,440		—		14,440		19,619		—		19,619
Non-interest income		5,998		4,497		10,495		5,663		1,277		6,940
Total income before non-interest expense		20,438		4,497		24,935		25,282		1,277		26,559
Depreciation and amortization expense		272		13		285		522		12		534
Net (gain)/loss on assets held for sale								(2)		—		(2)
All other non-interest expense		13,967		2,217		16,184		17,836		2,215		20,051
Income before income taxes	$	6,199	$	2,267	$	8,466	$	6,926	$	(950)	$	5,976

Goodwill	$	24,191	$	—	$	24,191	$	30,400	$	—	$	30,400
Total assets		2,020,896		55,376		2,076,272		2,513,177		28,316		2,541,493


As of and for the three months ended September 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	$	14,410	$	—	$	14,410	$	15,548	$	—	$	15,548
Total interest expense		1,492		—		1,492		1,325		—		1,325
Provision for loan losses		1,496		—		1,496		12		—		12
Net interest income, after provision for loan losses		11,422		—		11,422		14,211		—		14,211
Non-interest income		5,709		12,323		18,032		5,573		3,927		9,500
Total income before non-interest expense		17,131		12,323		29,454		19,784		3,927		23,711
Depreciation and amortization expense		260		14		274		262		13		275
All other non-interest expense		14,291		2,067		16,358		12,539		2,709		15,248
Income before income taxes	$	2,580	$	10,242	$	12,822	$	6,983	$	1,205	$	8,188

Goodwill	$	24,191	$	—	$	24,191	$	24,191	$	—	$	24,191
Assets held for sale		3,000		—		3,000
Total assets		1,867,748		105,149		1,972,897		1,956,393		52,911		2,009,304

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As of and for the nine months ended September 30, 2021	Wealth Management		Mortgage		Consolidated
As of or for the six months ended June 30, 2022							Wealth Management		Mortgage		Consolidated
Income Statement
Total interest income	$	46,193	$	—	$	46,193	$	41,296	$	—	$	41,296
Total interest expense		4,071		—		4,071		2,874		—		2,874
Provision for loan losses		418		—		418		729		—		729
Net interest income, after provision for loan losses		41,704		—		41,704		37,693		—		37,693
Non-interest income		16,987		13,621		30,608		11,745		3,795		15,540
Total income before non-interest expense		58,691		13,621		72,312		49,438		3,795		53,233
Depreciation and amortization expense		792		40		832		1,070		24		1,094
Net loss on assets held for sale								(3)		—		(3)
All other non-interest expense		38,800		7,987		46,787		34,434		4,416		38,850
Income before income taxes	$	19,099	$	5,594	$	24,693	$	13,937	$	(645)	$	13,292

Goodwill	$	24,191	$	—	$	24,191	$	30,400	$	—	$	30,400
Total assets		2,020,896		55,376		2,076,272		2,513,177		28,316		2,541,493

As of and for the nine months ended September 30, 2020

Wealth
Management

Mortgage

Consolidated
Income Statement

Total interest income

$
38,392

$
—

$
38,392
Total interest expense

5,747

—

5,747
Provision for loan losses

3,987

—

3,987
Net interest income, after provision for loan losses

28,658

—

28,658
Non-interest income

16,202

25,024

41,226
Total income before non-interest expense

44,860

25,024

69,884
Depreciation and amortization expense

770

56

826
All other non-interest expense
��

37,391
⁽¹⁾

5,706

43,097
Income before income taxes

$
6,699

$
19,262

$
25,961

Goodwill

$
24,191

$
—

$
24,191
Assets held for sale

3,000

—

3,000
Total assets

1,867,748

105,149

1,972,897


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 and $0.2 million SEC penalty.~~

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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the balance of the LIHTC investment ~~for LIHTC~~ was ~~$2.8 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. ~~Total~~There were 0 unfunded commitments related to the ~~investment in the~~ LIHTC ~~total $0.2 million and $2.2 million~~investment as of ~~September~~June 30, ~~2021 and~~2022. As of December 31, ~~2020, respectively. The Company expects to fulfill these~~2021, 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 nine months ended September 30, 2021, the Company recognized amortization~~Amortization expense ~~of $0.1 million and $0.3 million, respectively, which was~~is included within the Income tax expense line item of the Condensed Consolidated Statements of Income. ~~The~~During the three months ended June 30, 2022 and 2021, the Company ~~did not recognize any related~~recognized amortization expense ~~during~~of $0.1 million. During the ~~three and nine~~six months ended ~~September~~June 30, ~~2020.~~2022 and 2021, the Company recognized amortization expense of $0.2 million.

Additionally, during the three ~~and nine~~ months ended ~~September~~June 30, 2022 and 2021, the Company recognized $0.1 ~~million and $0.3~~ million of tax credits and other benefits from ~~this investment in~~ the ~~LIHTC. The~~LIHTC investment. During the six months ended June 30, 2022 and 2021, the Company ~~did not recognize any related~~recognized $0.2 million of tax credits orand other ~~benefits during the three and nine months ended September 30, 2020.~~benefits. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the Company did ~~not~~0t 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 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") ~~has~~have 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 ~~September~~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 ~~September~~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 ~~September~~June 30, ~~2021~~2022 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 ~~September~~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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

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The following presents the actual and required capital amounts and ratios as of ~~September 30, 2021 and December 31, 2020~~dates 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
September 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	$	156,136	11.02	%	$	85,019	6.0	%	$	113,359	8.0	%	$	214,993	10.99	%	$	117,361	6.0	%	$	156,482	8.0	%
Consolidated		151,950	10.66			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		156,136	11.02			63,764	4.5			92,104	6.5			214,993	10.99			88,021	4.5			127,141	6.5
Consolidated		151,950	10.66			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		169,435	11.96			113,359	8.0			141,699	10.0			229,777	11.75			156,482	8.0			195,602	10.0
Consolidated		204,809	14.37			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		156,136	8.11			77,047	4.0			96,308	5.0			214,993	8.65			99,469	4.0			124,336	5.0
Consolidated		151,950	7.86			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~~.

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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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 our Annual Report Form 10-K filed with the SEC on March ~~12, 2021~~15, 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 ~~September~~June 30, ~~2021,~~2022, we have expanded our footprint into ~~twelve~~thirteen full service profit centers, ~~two~~three loan production offices, and two trust offices located across ~~four~~five states. As of and for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we had ~~$2.08~~$2.54 billion in total assets, ~~$72.3~~$53.2 million in total revenues, and provided fiduciary and advisory services on ~~$6.91~~$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. As of September 30, 2021, we held 240 PPP loans for a total of $61.9 million with an average loan size of $0.3 million. As of September 30, 2021, the Company had submitted loans with original loan amounts of $241.5 million to the SBA for forgiveness and had received forgiveness on 988 loans totaling $214.8 million.

The last round of program funds were depleted in early May 2021. With the originations closed, the SBA turned their attention to forgiveness, processing applications submitted by the Company. Loans funded in 2021 became eligible for forgiveness after the covered period of 8 to 24 weeks, which began 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-two~~In 2021, the deferral period ended for all non-acquired loans ~~across multiple industries in~~previously modified and payments resumed under the ~~amount~~original terms. As of ~~$135.0 million of loans that participated in~~June 30, 2022, the Company’s ~~COVID~~ loan ~~modification program. All~~portfolio included 55 non-acquired loans inwhich were previously modified under the loan modification program, totaling $100.5 million. Through the Teton Acquisition, the Company acquired loans which were ~~performing according to Bank policy as~~previously modified and are still in their deferral period. As of ~~September~~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 ~~September~~June 30, ~~2021,~~2022, the Company had ~~six~~five loans with a balance held by the Bank of $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-sale~~investment 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-sale~~investment 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 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

~~Table of Contents~~

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 expenses, meals and entertainment, dues and memberships, costs to maintain or prepare ~~OREO~~other 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~~Non-Interest Income

~~We measure the overall profitability of operating segments based on~~Non-interest 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 14 - Segment Reportingconsists of the ~~accompanying Notes to the Condensed Consolidated Financial Statements.~~following:

~~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 September 30, 2021, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III.

~~Results of Operations~~

~~Overview~~

~~The three months ended September 30, 2021 compared with the three months ended September 30, 2020.~~ We reported net income available to common shareholders of $6.4 million for the three months ended September 30, 2021, compared to $9.6 million of net income available to common shareholders for the three months ended September 30, 2020, a $3.2 million, or 33.4%, decrease. For the three months ended September 30, 2021, our income before income tax was $8.5 million, a $4.4 million, or 34.0%, decrease from the three months ended September 30, 2020. The decrease was primarily driven by a $7.8 million decrease in net gain on mortgage loans, partially offset by a $3.0 million increase in net interest income, after provision for loan losses. 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. The increase in net interest income, after provision for loan losses was primarily driven by a $1.7 million increase in interest income from loans and a $1.1 million decrease in provision for loan losses. Interest income increased as a result of a $97.0 million increase in total gross loans. Provison for loan losses decreased year over year due to additional provision recorded in the three months ended September 30, 2020 due to additional variability surrounding the COVID-19 loan modifications and increased economic uncertainty.

~~The nine months ended September 30, 2021 compared with the nine months ended September 30, 2020.~~ We reported net income available to common shareholders of $18.7 million for the nine months ended September 30, 2021, compared to $19.7 million of net income available to common shareholders for the nine months ended September 30, 2020, a $1.0 million, or 4.9%, decrease. For the nine months ended September 30, 2021, our income before income tax was $24.7 million, a $1.3 million, or 4.9%, decrease from the nine months ended September 30, 2020. The decrease was primarily driven by an $11.4 million decrease in net gain on mortgage loans and a $3.7 million increase in non-interest expense, partially offset by a $13.0 million increase in net interest income, after provision for loan losses. 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. The increase in non-interest expense was primarily driven by a $2.1 million decrease in deferred

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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 MSLP, and other banking fees. Banking fees are primarily impacted by the level of business activities and cash movement activities of our clients.

●

~~compensation, and a $2.4 million increase in personnel~~Non-Interest Expense

Non-interest expense to support the growth in the balance sheet, and added personnel from the Branch Acquisition. The increase in net interest income was due to an increase in average loan balances and a reduction in our average cost of funds.

~~Net Interest Income~~

~~The three months ended September 30, 2021 compared with the three months ended September 30, 2020.~~ For the three months ended September 30, 2021, net interest income, before the provision for loan losses, was $14.8 million, an increase of $1.9 million, or 14.9%, compared to the three months ended September 30, 2020. The increase in net interest income was driven by a $129.9 million increase in average loans outstanding, a 11 basis point increase in the average yield on loans, and a 7 basis point decrease in the average cost of funds, partially offset by a $115.1 million increase in average interest bearing deposit balances. Net interest margin increased 7 basis points to 3.14% in the third quarter of 2021 from 3.07% reported in the third quarter of 2020. The increase in net interest margin wasis comprised primarily ~~a result of a 11 basis point increase in average yield on loans and a 7 basis point decrease in the average cost of funds.~~

~~The nine months ended September 30, 2021 compared with the nine months ended September 30, 2020.~~ For the nine months ended September 30, 2021, net interest income, before the provision for loan losses, was $42.1 million, an increase of $9.5 million, or 29.0%, compared to the nine months ended September 30, 2020. The increase in net interest income was driven by a $323.9 million increase in average loans outstanding and a 26 basis point decrease in the average cost of funds, partially offset by a $227.4 million increase in average interest bearing deposit balances. Net interest margin decreased 8 basis points to 3.02%, in the nine months ended September 30, 2021, from the 3.10% reported in the nine months ended September 30, 2020. The decrease in net interest margin was primarily a result of a 14 basis point decrease in average loan yield and a more liquid balance sheet mix.

The increase in average loans outstanding for the three months ended September 30, 2021 compared to the same period in 2020 was due to organic growth, offset partially by forgiveness activity on PPP loans. The increase in average loans outstanding for the nine months ended September 30, 2021 compared to the same period in 2020 was due to organic growth and the Branch Acquisition. The net interest income related to PPP loans increased $0.4 million and $2.1 million for the three and nine months ended September 30, 2021. Average loan yields were 3.98% and 3.84% for the three and nine months ended September 30, 2021, compared to 3.87% and 3.98% for the three and nine months ended September 30, 2020. The increase in loan yields during the three-month period was primarily driven by an increase in PPP net origination fees. The decrease in loan yields during the nine-month period was primarily driven by a lower interest rate environment, offset partially by an increase in PPP net origination fees.

Interest income on our available-for-sale securities portfolio increased as a result of a 76 basis point increase in average yield for the three months ended September 30, 2021 compared to the same period in 2020. For the nine months ended September 30, 2021, compared to the same period in 2020, interest income decreased as a result of lower average balances. Our average yield on available-for-sale securities during the three and nine months ended September 30, 2021 was 2.47% and 2.49%, a 76 and 57 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.~~following:

Interest expense on deposits decreased during the three and nine months ended September 30, 2021 compared to the same period in 2020. The decrease was driven primarily by a 10 and 29 basis point decline in cost of deposits for the three and nine months ended September 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 $115.1 million and $227.4 million, for the three and nine months ended September 30, 2021, compared to the same period in 2020.

●

Other—includes costs related to operational expenses associated with office supplies, postage, travel expenses, meals and entertainment, dues and memberships, costs to maintain or prepare other 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.

4751

Table of Contents

The following tables present an analysis of net interest income and net interest margin for 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 September 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

$
266,614

$
105

0.16
%

$
178,756

$
99

0.22
%
Available-for-sale securities⁽²⁾

29,130

180

2.47

40,528

173

1.71

Loans⁽³⁾

1,592,800

15,861

3.98

1,462,872

14,138

3.87

Interest-earning assets⁽⁴⁾

1,888,544

16,146

3.42

1,682,156

14,410

3.43

Mortgage loans held for sale⁽⁵⁾

54,717

406

2.97

94,714

643

2.72

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

1,943,261

16,552

3.41

1,776,870

15,053

3.39

Allowance for loan losses

(12,740)



(10,965)



Noninterest-earning assets

92,901



101,874



Total assets

$
2,023,422



$
1,867,779



Liabilities and Shareholders’ Equity









Interest-bearing liabilities:









Interest-bearing deposits

$
1,160,433

829

0.29

$
1,045,321

1,067

0.41

FHLB and Federal Reserve borrowings

81,307

82

0.40

222,225

204

0.37

Subordinated notes

29,236

389

5.32

14,445

221

6.12

Total interest-bearing liabilities

1,270,976

1,300

0.41

1,281,991

1,492

0.47

Noninterest-bearing liabilities:









Noninterest-bearing deposits

562,569



417,502



Other liabilities

17,359



22,564



Total noninterest-bearing liabilities

579,928



440,066



Total shareholders’ equity

172,518



145,722



Total liabilities and shareholders’ equity

$
2,023,422



$
1,867,779



Net interest rate spread⁽⁶⁾





3.01





2.96

Net interest income⁽⁷⁾



$
14,846



$
12,918

Net interest margin⁽⁸⁾





3.14
%





3.07
%

~~Table of Contents~~

As of and For the Nine Months Ended September 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

$
257,796

$
288

0.15
%

$
108,010

$
358

0.44
%
Available-for-sale securities⁽²⁾

29,180

545

2.49

48,117

692

1.92

Loans⁽³⁾

1,573,919

45,360

3.84

1,250,052

37,342

3.98

Interest-earning assets⁽⁴⁾

1,860,895

46,193

3.31

1,406,179

38,392

3.64

Mortgage loans held for sale⁽⁵⁾

105,345

2,183

2.76

67,010

1,519

3.02

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

1,966,240

48,376

3.28

1,473,189

39,911

3.61

Allowance for loan losses

(12,608)



(9,230)



Noninterest-earning assets

95,612



91,924



Total assets

$
2,049,244



$
1,555,883



Liabilities and Shareholders’ Equity









Interest-bearing liabilities:









Interest-bearing deposits

$
1,163,050

2,669

0.31

$
935,689

4,779

0.68

FHLB and Federal Reserve borrowings

122,395

331

0.36

99,379

384

0.52

Subordinated notes

25,934

1,071

5.51

12,256

584

6.35

Total interest-bearing liabilities

1,311,379

4,071

0.41

1,047,324

5,747

0.73

Noninterest-bearing liabilities:









Noninterest-bearing deposits

553,314



350,475



Other liabilities

18,342



20,426



Total noninterest-bearing liabilities

571,656



370,901



Shareholders’ equity

166,209



137,658



Total liabilities and shareholders’ equity

$
2,049,244



$
1,555,883



Net interest rate spread⁽⁶⁾





2.90





2.91

Net interest income⁽⁷⁾

$
42,122



$
32,645

Net interest margin⁽⁸⁾





3.02
%





3.10
%

⁽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).~~

~~Table of Contents~~

The following table presents the dollar amount of changes in interest income and interest expense for 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 September 30, 2021

Nine Months Ended September 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

$
35

$
(29)

$
6

$
167

$
(237)

$
(70)
Available-for-sale securities

(70)

77

7

(354)

207

(147)
Loans

1,294

429

1,723

9,334

(1,316)

8,018
Total increase (decrease) in interest income

$
1,259

$
477

$
1,736

$
9,147

$
(1,346)

$
7,801
Interest-bearing liabilities:












Interest-bearing deposits

82

(320)

(238)

522

(2,632)

(2,110)
FHLB and Federal Reserve borrowings

(142)

20

(122)

62

(115)

(53)
Subordinated notes

197

(29)

168

565

(78)

487
Total increase (decrease) in interest expense

$
137

$
(329)

$
(192)

$
1,149

$
(2,825)

$
(1,676)
Increase in net interest income

$
1,122

$
806

$
1,928

$
7,998

$
1,479

$
9,477

~~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 nine months ended September 30, 2021, we recorded a $0.4 million provision for credit losses.

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 Income

~~The three months ended September 30, 2021 compared with~~Non-interest income primarily consists of the ~~three months ended September 30, 2020.~~ For the three months ended September 30, 2021 compared with the three months ended September 30, 2020, non-interest income decreased $7.5 million, or 41.8%, to $10.5 million. The decrease in non-interest income during the three months ended September 30, 2021 was primarily a result of a $7.8 million decrease in net gain on mortgage loans, compared to the same period in 2020.following:

~~The nine months ended September 30, 2021 compared with the nine months ended September 30, 2020.~~ For the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020, non-interest income decreased $10.6 million, or 25.8%, to $30.6 million. The decrease in non-interest income during the nine months ended September 30, 2021 was primarily a result of a $11.4 million decrease in net gain on mortgage loans, compared to the same period in 2020.

●

Table of Contents

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

Three Months Ended

September 30,

Change

(Dollars in thousands)

2021

2020

$

%

Non-interest income:









Trust and investment management fees

$
5,167

$
4,814

$
353

7.3
%
Net gain on mortgage loans

4,480

12,304

(7,824)

(63.6)

Bank fees

458

340

118

34.7

Risk management and insurance fees

301

483

(182)

(37.7)

Income on company-owned life insurance

89

91

(2)

(2.2)

Total non-interest income

$
10,495

$
18,032

$
(7,537)

(41.8)
%

Nine Months Ended

September 30,

Change

(Dollars in thousands)

2021

2020

$

%

Non-interest income:









Trust and investment management fees

$
15,023

$
14,154

$
869

6.1
%
Net gain on mortgage loans

13,590

24,958

(11,368)

(45.5)

Bank fees

1,225

929

296

31.9

Risk management and insurance fees

444

912

(468)

(51.3)

Income on company-owned life insurance

266

273

(7)

(2.6)

Other

60

—

60

*

Total non-interest income

$
30,608

$
41,226

$
(10,618)

(25.8)
%

* Not meaningful

~~Trust and investment management fees~~—For the three months ended September 30, 2021 compared to the same period in 2020, our trust and investment management fees increased $0.4 million, or 7.3%. For the nine months ended September 30, 2021 compared to the same period in 2020, our trust and investment management fees increased $0.9 million, or 6.1%. 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 September 30, 2021 compared to the same period in 2020, our net gain on mortgage loans decreased by $7.8 million, or 63.6%, to $4.5 million. For the nine months ended September 30, 2021 compared to the same period in 2020, our net gain on mortgage loans decreased by $11.4 million, or 45.5%, to $13.6 million. The decrease in net gain on mortgage loans was primarily driven by a slowdown in new interest rate locks with customers associated with the decrease in refinance activity.

~~Bank fees~~— For the three months ended September 30, 2021 compared to the same period in 2020, our bank fees increased by $0.1 million or 34.7%. For the nine months ended September 30, 2021 compared to the same period in 2020, our bank fees increased $0.3 million, or 31.9%. The increase during the three month period was primarily driven by an increase in loan pre-payment penalty fees. The increase during the nine month period was primarily driven by servicing fees related to participation in the Main Street Lending Program.

●

Non-Interest Expense

~~The three months ended September 30, 2021 compared with~~Non-interest expense is comprised primarily of the ~~three months ended September 30, 2020~~. The decrease in non-interest expense of 1.0% to $16.5 million for the three months ended September 30, 2021, was primarily due to lower data processing, provision for other real estate owned, and other expenses, partially offset by an increase in professional services expense.following:

~~The nine months ended September 30, 2021 compared with the nine months ended September 30, 2020~~. The increase in non-interest expense of 8.4% to $47.6 million for the nine months ended September 30, 2021, was primarily due to higher salaries and employee benefits, and professional services expenses, offset partially by a reduction in net loss on assets held for sale and other non-interest expense.

●

Other—includes costs related to operational expenses associated with office supplies, postage, travel expenses, meals and entertainment, dues and memberships, costs to maintain or prepare other 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.

Table of Contents

Operating Segments

The ~~tables below present~~Company’s reportable segments consist of Wealth Management and Mortgage. We measure the ~~significant categories~~overall profitability of operating segments based on income before income tax. We believe this is a more useful measurement as our ~~non-interest expense for the periods noted:~~

Three Months Ended

September 30,

Change

(Dollars in thousands)

2021

2020

$

%

Non-interest expense:









Salaries and employee benefits

$
10,229

$
10,212

$
17

0.2
%
Occupancy and equipment

1,550

1,619

(69)

(4.3)

Professional services

1,660

1,288

372

28.9

Technology and information systems

945

1,032

(87)

(8.4)

Data processing

912

1,038

(126)

(12.1)

Marketing

397

395

2

0.5

Amortization of other intangible assets

5

4

1

25.0

Provision on other real estate owned

—

100

(100)

*

Other

771

944

(173)

(18.3)

Total non-interest expense

$
16,469

$
16,632

$
(163)

(1.0)
%

Nine Months Ended

September 30,

Change

(Dollars in thousands)

2021

2020

$

%

Non-interest expense:









Salaries and employee benefits

$
29,733

$
25,384

$
4,349

17.1
%
Occupancy and equipment

4,402

4,574

(172)

(3.8)

Professional services

4,309

3,542

767

21.7

Technology and information systems

2,791

2,994

(203)

(6.8)

Data processing

3,020

2,922

98

3.4

Marketing

1,116

1,063

53

5.0

Amortization of other intangible assets

13

44

(31)

(70.5)

Net loss on assets held for sale

—

553

(553)

*

Provision on other real estate owned

—

100

(100)

*

Other

2,235

2,747

(512)

(18.6)

Total non-interest expense

$
47,619

$
43,923

$
3,696

8.4
%

* Not meaningful

~~Salaries~~wealth management products and ~~employee benefits—~~Salaries and employee benefits increased an immaterial amount, or 0.2%, and $4.3 million, or 17.1%, for the three and nine months ended September 30, 2021, respectively. The increase during the nine-month period wasservices are fully integrated with our private trust bank. We allocate costs to our segments, which consist primarily ~~driven by a $2.1 million decrease related to deferred~~of compensation and ~~an increase in personnel~~overhead expense ~~to support the growth in the balance sheet, and added personnel from the Branch Acquisition.~~

~~Professional services—~~Professional services increased by $0.4 million, or 28.9%, and $0.8 million, or 21.7%, for the three and nine months ended September 30, 2021, respectively. The increase during the three month period was primarily driven by additional expenses related to M&A due diligence and the PPP program. The increase during the nine month period was primarily driven by additional expenses related to M&A due diligence, additional expenses relateddirectly attributable to the ~~PPP program~~products and ~~additional FDIC insurance expense related~~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 15 - 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 ~~growth.~~include asset and liability levels, asset quality, capital, liquidity, and potential profit production from assets.

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, 2022, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III.

Acquisitions and Divestitures

~~Technology~~On July 22, 2021, the Company entered into an Agreement and ~~information systems—Technology~~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 ~~information systems decreased $0.1 million, or 8.4%,~~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 ~~$0.2 million, or 6.8% for~~into the ~~three and nine months ended September 30,~~Bank, with the Bank surviving the bank merger. The transaction successfully closed on December 31, 2021. ~~The decrease during the three and nine-month periods was driven by the sale~~See Note 2 – Acquisitions of the ~~LA fixed income team.~~

~~Data processing—Data processing decreased by $0.1 million, or 12.1%, and increased by $0.1 million, or 3.4%,~~accompanying Notes to the Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2021, respectively. The decrease during the three-month period was primarily driven by a decrease in core systems cost as a result of renegotiated contracts. The increase during the nine-month period was primarily driven by an increase 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 nine months ended September 30, 2021 was driven by the completion of the sale of held for sale assets in 2020.~~additional information.

Table of Contents

~~Other—~~Results of Operations

Overview

The three months ended June 30, 2022 compared with the three months ended June 30, 2021. We reported net income available to common shareholders of $4.5 million for the three months ended June 30, 2022, compared to $6.3 million of net income available to common shareholders for the three months ended June 30, 2021, a $1.8 million, or 28.6% decrease. For the three months ended June 30, 2022, our income before income tax was $6.0 million, a $2.2 million, or 27.0% decrease from the three months ended June 30, 2021. The decrease was primarily driven by a $5.1 million increase in non-interest expense and a $2.8 million decrease in net gain on mortgage loans, partially offset by a $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 ~~other~~net gain on mortgage loans was primarily driven by a slowdown 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. The increase in net interest income, after provision for loan losses was primarily due to an increase in average loan balances and an increase in average loan yields.

The six months ended June 30, 2022 compared with the six months ended June 30, 2021. We reported net income available to common shareholders of ~~$0.2~~$10.0 million for the six months ended June 30, 2022, compared to $12.3 million of net income available to common shareholders for the six months ended June 30, 2021, a $2.3 million, or ~~18.3%, and $0.5~~18.5% decrease. For the six months ended June 30, 2022, our income before income tax was $13.3 million, a $2.9 million, or ~~18.6%~~18.1% decrease from the six months ended June 30, 2021. The decrease was primarily driven by a $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. 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 rising interest rates, reduced housing inventory, and origination volume more heavily weighted to 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 an increase in average loan yields.

Net Interest Income

The three months ended June 30, 2022 compared with the three months ended June 30, 2021. For the three months ended June 30, 2022, net interest income, before the provision for loan losses, was $20.1 million, an increase of $5.9 million, or 41.6%, compared to the three months ended June 30, 2021. The increase in net interest income was driven by a $436.5 million increase in average loans outstanding and a 22 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 $412.1 million increase in average interest bearing deposit balances. Net interest margin increased 22 basis points to 3.17% in the six months ended June 30, 2022, from 2.95% reported in the six months ended June 30, 2021. The increase in net interest margin was primarily a result of a 27 basis point increase in average yield on loans and a 4 basis point decrease in the average cost of funds.

The increase in average loans outstanding for the three and ~~nine~~six months ended ~~September~~June 30, 2022 compared to the same periods in 2021 was due to organic loan growth and the Teton acquisition at the end of 2021. Average loan yields were 4.11% and 4.04% for the three and six months ended June 30, 2022, compared to 3.89% and 3.77% for the three and six months ended June 30, 2021. The increase in loan yields during the three and six month periods were primarily driven by the addition of higher yielding loans from the Teton acquisition, a beneficial mix shift in the loan portfolio due to PPP loan forgiveness, and the rising interest rate environment.

Table of Contents

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 presents an analysis of net interest income and net interest margin during 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 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

Table of Contents


	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.

⁽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.

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

Table of Contents

The following presents the dollar amount of changes in interest income and interest expense during 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 (dollars in thousands):


	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, 2022, we recorded a $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.

Non-Interest Income

The three months ended June 30, 2022 compared with the three months ended June 30, 2021. 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 a result of a $2.8 million decrease in net gain on mortgage loans, compared to the same period in 2021.

The six months ended June 30, 2022 compared with the six months ended June 30, 2021. 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 a result of a $5.5 million decrease in net gain on mortgage loans, compared to the same period in 2021.

Table of Contents

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


	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

Trust and investment management fees—For the three months ended June 30, 2022 compared to the same period in 2021, our trust and investment management fees decreased $0.2 million, or 4.5%. For the six months ended June 30, 2022 compared to the same period in 2021, our trust and investment management fees increased $0.1 million, or 1.0%. The decrease for the three months 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 ended June 30, 2022, is driven by favorable 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 net gain on mortgage loans was primarily driven by a slowdown 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 or 52.5%. For the six months ended June 30, 2022 compared to the same period in 2021, our bank fees increased by $0.5 million or 68.4%. The increase during the three and six month periods were primarily driven by increased activity consistent with the growth of the balance sheet.

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

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 equipment—The 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 ~~SEC penalty~~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 systems—The 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 processing—The 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 ~~fraud losses~~intangible assets—The increase in ~~2020.~~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 ~~$2.0~~$1.5 million and ~~$3.2~~$1.9 million, respectively, for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, reflecting an effective tax rate of ~~24.2%~~25.0% and ~~24.9%~~23.3%, respectively. The Company recorded an income tax provision of ~~$6.0~~$3.3 million and ~~$6.3~~$4.0 million, respectively, for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, reflecting an effective tax rate of 24.7% and 24.3% ~~for both periods.~~, respectively.

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 sale~~59

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 present~~presents key metrics related to our ~~segments:~~segments during the periods presented (dollars in thousands):


	Three Months Ended September 30, 2021									Nine Months Ended September 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⁾	$	20,438		$	4,497		$	24,935		$	58,691		$	13,621		$	72,312		$	25,282		$	1,277		$	26,559		$	49,438		$	3,795		$	53,233
Income before taxes	$	6,199		$	2,267		$	8,466		$	19,099		$	5,594		$	24,693			6,926			(950)			5,976			13,937			(645)			13,292
Profit margin		30.3	%		50.4	%		34.0	%		32.5	%		41.1	%		34.1	%		27.4	%		(74.4)	%		22.5	%		28.2	%		(17.0)	%		25.0	%


	Three Months Ended September 30, 2020									Nine Months Ended September 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⁾	$	17,131		$	12,323		$	29,454		$	44,860		$	25,024		$	69,884		$	19,784		$	3,927		$	23,711		$	38,242		$	9,124		$	47,366
Income before taxes	$	2,580		$	10,242		$	12,822		$	6,699		$	19,262		$	25,961			6,983			1,205			8,188			12,900			3,327			16,227
Profit margin		15.1	%		83.1	%		43.5	%		14.9	%		77.0	%		37.1	%		35.3	%		30.7	%		34.5	%		33.7	%		36.5	%		34.3	%

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

~~Table of Contents~~

The ~~tables below present~~following presents selected financial metrics of each segment as of and ~~for~~during the periods ~~presented:~~presented (dollars in thousands):

Wealth Management


	As of and for the Three Months Ended September 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	$	16,146	$	14,410		$	1,736	12.0	%	$	21,631	$	15,548	$	6,083		39.1	%
Total interest expense		1,300		1,492			(192)	(12.9)			1,493		1,325		168		12.7
Provision for loan losses		406		1,496			(1,090)	(72.9)			519		12		507		*
Net interest income, after provision for loan losses		14,440		11,422			3,018	26.4			19,619		14,211		5,408		38.1
Non-interest income		5,998		5,709			289	5.1			5,663		5,573		90		1.6
Total income		20,438		17,131			3,307	19.3			25,282		19,784		5,498		27.8
Depreciation and amortization expense		272		260			12	4.6			522		262		260		99.2
Net loss on assets held for sale											(2)		—		(2)		*
All other non-interest expense		13,967		14,291			(324)	(2.3)			17,836		12,539		5,297		42.2
Income before income tax	$	6,199	$	2,580		$	3,619	140.3	%	$	6,926	$	6,983	$	(57)		(0.8)
Goodwill	$	24,191	$	24,191		$	—	—		$	30,400	$	24,191	$	6,209		25.7
Assets held for sale		—		3,000			(3,000)	*
Total assets	$	2,020,896	$	1,867,748		$	153,148	8.2	%		2,513,177		1,956,393		556,784		28.5


	As of and for the Nine Months Ended September 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	$	46,193	$	38,392		$	7,801	20.3	%	$	41,296	$	30,047	$	11,249		37.4	%
Total interest expense		4,071		5,747			(1,676)	(29.2)			2,874		2,771		103		3.7
Provision for loan losses		418		3,987			(3,569)	(89.5)			729		12		717		*
Net interest income, after provision for loan losses		41,704		28,658			13,046	45.5			37,693		27,264		10,429		38.3
Non-interest income		16,987		16,202			785	4.8			11,745		10,978		767		7.0
Total income		58,691		44,860			13,831	30.8			49,438		38,242		11,196		29.3
Depreciation and amortization expense		792		770			22	2.9			1,070		520		550		105.8
Net loss on assets held for sale											(3)		—		(3)		*
All other non-interest expense		38,800		37,391	⁽²⁾		1,409	3.8			34,434		24,822		9,612		38.7
Income before income tax	$	19,099	$	6,699		$	12,400	185.1	%	$	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		—		3,000			(3,000)	*
Total assets	$	2,020,896	$	1,867,748		$	153,148	8.2	%		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 sale~~Table of ~~$0.6 million and $0.2 million SEC penalty previously reported under the Capital Management segment.~~Contents

The Wealth Management segment reported income before income tax of ~~$6.2~~$6.9 million and ~~$19.1~~$13.9 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, compared to ~~$2.6~~$7.0 million and ~~$6.7~~$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. The increase in net interest income, after provision for loan losses, was primarily driven by an increase in average loans outstanding and ~~a decrease~~an increase in ~~the~~ average ~~cost of funds. Provision for~~ loan ~~losses decreased as a result of additional provision recorded in 2020 due to additional variability surrounding the COVID-19 loan modifications and increased economic uncertainty.~~yields. The ~~growth in revenues have outpaced the growth~~increase in non-interest expense inwas primarily driven by the ~~Wealth Management segment.~~addition of Teton’s operations and additional headcount to support the growth of the Company.

~~Table of Contents~~

Mortgage


	As of and for the Three Months Ended September 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		4,497		12,323		(7,826)	(63.5)			1,277		3,927		(2,650)		(67.5)
Total income		4,497		12,323		(7,826)	(63.5)			1,277		3,927		(2,650)		(67.5)
Depreciation and amortization expense		13		14		(1)	(7.1)			12		13		(1)		(7.7)
All other non-interest expense		2,217		2,067		150	7.3			2,215		2,709		(494)		(18.2)
Income before income tax	$	2,267	$	10,242	$	(7,975)	(77.9)		$	(950)	$	1,205	$	(2,155)		(178.8)
Total assets	$	55,376	$	105,149	$	(49,773)	(47.3)	%	$	28,316	$	52,911	$	(24,595)		(46.5)

	As of and for the Nine Months Ended September 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		13,621		25,024		(11,403)	(45.6)			3,795		9,124		(5,329)		(58.4)
Total income		13,621		25,024		(11,403)	(45.6)			3,795		9,124		(5,329)		(58.4)
Depreciation and amortization expense		40		56		(16)	(28.6)			24		27		(3)		(11.1)
All other non-interest expense		7,987		5,706		2,281	40.0			4,416		5,770		(1,354)		(23.5)
Income before income tax	$	5,594	$	19,262	$	(13,668)	(71.0)	%	$	(645)	$	3,327	$	(3,972)		(119.4)
Total assets	$	55,376	$	105,149	$	(49,773)	(47.3)	%	$	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 ~~$2.3~~$1.2 million and ~~$5.6 million for the three and nine months ended September 30, 2021, respectively, compared to $10.2 million and $19.3~~$3.3 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 ~~the~~rising 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 associated~~a reduction in headcount to better align the operations functions with the ~~increase~~slowdown in ~~mortgage originations during the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020.~~volume.

Table of Contents

Financial Condition

The ~~table below~~following 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.

5562

Table of Contents

September 30,

December 31,

(Dollars in thousands)

2021

2020

$ Change

% Change

Balance Sheet Data:









Cash and cash equivalents

$
310,235

$
155,989

$
154,246

98.9
%
Investments

32,233

36,666

(4,433)

(12.1)

Gross loans

1,603,050

1,532,833

70,217

4.6

Allowance for loan losses

(12,964)

(12,539)

(425)

3.4

Loans, net of allowance

1,590,086

1,520,294

69,792

4.6

Mortgage loans held for sale

51,309

161,843

(110,534)

(68.3)

Goodwill & other intangible assets, net

24,246

24,258

(12)

(0.0)

Company-owned life insurance

15,715

15,449

266

1.7

Other assets

52,448

59,156

(6,708)

(11.3)

Total assets

$
2,076,272

$
1,973,655

$
102,617

5.2

Deposits

$
1,782,299

$
1,619,910

$
162,389

10.0

Borrowings

97,574

173,854

(76,280)

(43.9)

Other liabilities

21,270

24,929

(3,659)

(14.7)

Total liabilities

1,901,143

1,818,693

82,450

4.5

Total shareholders’ equity

175,129

154,962

20,167

13.0

Total liabilities and shareholders’ equity

$
2,076,272

$
1,973,655

$
102,617

5.2
%

* Not meaningful

~~Cash and cash equivalents~~Borrowings increased ~~by $154.2~~$42.1 million, or ~~98.9%~~54.2%, to ~~$310.2~~$119.8 million as of ~~September~~June 30, ~~2021~~2022 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 $4.4 million, or 12.1%, to $32.2 million as of September 30, 2021.

Loans, net of allowance increased by $69.8 million, or 4.6%, to $1.59 billion as of September 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 $110.5 million, or 68.3%, to $51.3 million as of September 30, 2021 compared to December 31, 2020. The decrease was driven by an increase in loan sale volume.

Other assets decreased by $6.7 million, or 11.3%, to $52.4 million as of September 30, 2021 compared to December 31, 2020. This was primarily related to a $7.7 million decrease in balances related to unfunded mortgage IRLC.

Deposits increased $162.4 million, or 10.0%, to $1.78 billion as of September 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 commercial depositors and higher deposit balances across the Company’s clientele due to the improving economic and business environment.

Money market deposit accounts increased $57.8 million, or 6.8%, to $905.2 million as of September 30, 2021 compared to December 31, 2020. Time deposit accounts decreased $35.7 million, or 20.7%, from December 31, 2020 to $137.0 million as of September 30, 2021. Negotiable order of withdrawal, or NOW accounts, increased $24.8 million, or 21.9%, to $137.8 million from December 31, 2020 to September 30, 2021.

~~Borrowings decreased $76.3 million, or 43.9%, to $97.6 million as of September 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 trend in the same direction as the PPP loan balances.

Other liabilities decreased ~~$3.7~~$1.4 million, or ~~14.7%~~5.5%, to ~~$21.3~~$23.7 million as of ~~September~~June 30, ~~2021~~2022 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 ~~$20.2~~$9.0 million, or ~~13.0%~~4.1%, from December 31, ~~2020~~2021 to ~~$175.1~~$228.0 million as of ~~September~~June 30, ~~2021.~~2022. The increase is primarily due to ~~an increase in~~ net income.

5663

Table of Contents

Assets Under Management


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	September 30,						September 30,						June 30,						June 30,
(Dollars in millions)	2021			2020			2021			2020			2022			2021			2022			2021
Managed Trust Balance at Beginning of Period	$	1,892		$	1,520		$	1,890		$	1,750
Managed Trust Balance as of Beginning of Period													$	2,095		$	1,821		$	2,204		$	1,890
New relationships		9			-			25			13			8			1			32			16
Closed relationships		(1)			(1)			(2)			(12)			-			(1)			(1)			(1)
Contributions		13			11			41			75			5			10			7			28
Withdrawals		(25)			(10)			(179)			(110)			(70)			(34)			(171)			(154)
Market change, net		74			140			187			(56)			(259)			95			(292)			113
Ending Balance	$	1,962		$	1,660		$	1,962		$	1,660		$	1,779		$	1,892		$	1,779		$	1,892
Yield*		0.17	%		0.19	%		0.17	%		0.19	%		0.19	%		0.18	%		0.20	%		0.18	%

Directed Trust Balance at Beginning of Period	$	1,069		$	883		$	951		$	989
Directed Trust Balance as of Beginning of Period													$	1,297		$	1,031		$	1,309		$	951
New relationships		9			9			91			14			6			6			6			82
Closed relationships		—			—		��	(7)			(5)			-			(7)			—			(7)
Contributions		7			9			25			33			14			13			21			18
Withdrawals		(3)			(21)			(17)			(91)			(14)			(9)			(17)			(14)
Market change, net		17			28			56			(32)			(99)			35			(115)			39
Ending Balance	$	1,099		$	908		$	1,099		$	908		$	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	$	2,044		$	1,956		$	1,840		$	2,009
Investment Agency Balance as of Beginning of Period													$	1,943		$	1,933		$	2,063		$	1,840
New relationships		12			18			73			97			21			20			32			61
Closed relationships		(35)			(2)			(58)			(11)			(24)			(9)			(40)			(23)
Contributions		73			71			241			178			19			73			72			168
Withdrawals		(45)			(45)			(173)			(174)			(146)			(53)			(196)			(128)
Market change, net		(30)			41			96			(60)			(179)			80			(297)			126
Ending Balance	$	2,019		$	2,039		$	2,019		$	2,039		$	1,634		$	2,044		$	1,634		$	2,044
Yield*		0.72	%		0.67	%		0.69	%		0.65	%		0.77	%		0.68	%		0.82	%		0.66	%

Custody Balance at Beginning of Period	$	614		$	474		$	518		$	452
Custody Balance as of Beginning of Period													$	704		$	595		$	633		$	518
New relationships		-			7			—			7			14			—			14			—
Closed relationships		-			—			(1)			(2)			(1)			—			(1)			(1)
Contributions		3			2			74			78			-			1			78			71
Withdrawals		(11)			(57)			(21)			(72)			(57)			(8)			(66)			(10)
Market change, net		7			36			43			(1)			(94)			26			(92)			36
Ending Balance	$	613		$	462		$	613		$	462		$	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	$	1,143		$	919		$	1,056		$	988
401(k)/Retirement Balance as of Beginning of Period													$	1,160		$	1,106		$	1,143		$	1,056
New relationships		-			8			8			12			1			1			14			8
Closed relationships		(4)			(2)			(56)			(46)			(1)			—			(39)			(52)
Contributions		30			41			85			101			28			28			51			55
Withdrawals		(23)			(20)			(81)			(61)			(22)			(30)			(55)			(58)
Market change, net		67			116			201			68			(71)			38			(19)			134
Ending Balance⁽¹⁾	$	1,213		$	1,062		$	1,213		$	1,062		$	1,095		$	1,143		$	1,095		$	1,143
Yield*		0.14	%		0.14	%		0.14	%		0.15	%		0.16	%		0.15	%		0.16	%		0.15	%

Total Assets Under Management at Beginning of Period	$	6,762		$	5,752		$	6,255		$	6,188
Total Assets Under Management as of Beginning of Period													$	7,199		$	6,486		$	7,352		$	6,255
New relationships		30			42			197			143			50			28			98			167
Closed relationships		(40)			(5)			(124)			(76)			(26)			(17)			(81)			(84)
Contributions		126			134			466			465			66			125			229			340
Withdrawals		(107)			(153)			(471)			(508)			(309)			(134)			(505)			(364)
Market change, net		135			361			583			(81)			(702)			274			(815)			448
Total Assets Under Management	$	6,906		$	6,131		$	6,906		$	6,131		$	6,278		$	6,762		$	6,278		$	6,762
Yield*		0.30	%		0.31	%		0.29	%		0.31	%		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.

5764

Table of Contents

Assets under management ~~increased $143.8~~decreased $921.7 million, or ~~2.1%~~12.8%, for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~increased $650.6 million,~~decreased $1.07 billion, or ~~10.4%~~14.6%, for the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~2022. The ~~increase~~decrease was primarily attributable to ~~improving~~unfavorable market conditions resulting in ~~an increase~~a decrease in the value of ~~assets under management~~AUM balances.

~~Available-for-sale securities~~Investment 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 summarize~~presents the amortized cost and estimated fair value of our investment securities as of ~~September 30, 2021 and December 31, 2020:~~the dates noted (dollars in thousands):


	September 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)	$	249	$	240	$	—	$	(4)	$	236
U.S Government Agency										252		—		(2)		250
Corporate bonds		8,117		249		(10)		8,356		24,085		6		(651)		23,440
Government National Mortgage Association ("GNMA") mortgage -backed securities—residential		20,488		351		(28)		20,811		43,583		—		(1,089)		42,494
Federal National Mortgage Association ("FNMA") mortgage-backed securities—residential		1,102		53		—		1,155		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")		1,645		35		(18)		1,662		4,259		74		(53)		4,280
Total securities available-for-sale	$	31,602	$	688	$	(57)	$	32,233
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

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	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 represent~~presents 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

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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 September 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	*	%	$	—	—	%	$	—	—	%	$	—		—	%	$	240		*	%	$	—		—	%	$	—		—	%
U.S. Government agency																		252		*			—		—			—		—			—		—
Corporate bonds		—	—			—	—			8,117	1.24			—	—			111		*			1,993		0.10			21,582		1.12			399		0.01
GNMA mortgage-backed securities - residential		—	—			—	—			—	—			20,488	1.30			—		—			133		*			—		—			43,450		1.27
FNMA mortgage-backed securities - residential		—	—			—	—			—	—			1,102	0.08			—		—			—		—			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		—	—			—	—			34	*			1,611	0.15			—		—			—		—			27		*			4,232		0.17
Total available-for-sale	$	—	—	%	$	250	*	%	$	8,151	1.24	%	$	23,201	1.53	%
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 ~~September~~June 30, ~~2021~~2022 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.

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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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, we had mortgage loans held for sale of ~~$51.3~~$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 ~~September~~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 ~~$61.9~~$10.7 million in PPP loans outstanding with ~~$1.2~~$0.2 million in

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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~~ five-year period ~~based on~~from the ~~PPP loan terms. If a loan receives partial forgiveness, the income related to the unforgiven balance is amortized over the remaining life~~time of ~~the loan based on the term in the note, which is five years for most PPP loans. If~~origination, 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 September 30, 2021, the Company had submitted loans with original loan amounts of $241.5 million to the SBA for forgiveness and had received forgiveness totaling $214.8 million.~~

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


	September 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)	$	293,837	18.3	%	$	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		132,141	8.2			131,111	8.5			162,426		7.6			178,716		9.1
1-4 Family Residential		502,439	31.3			455,038	29.7			732,725		34.1			580,872		29.7
Non-Owner Occupied CRE		358,369	22.4			281,943	18.4			489,111		22.7			482,622		24.7
Owner Occupied CRE		167,638	10.5			163,042	10.6			224,597		10.4			212,426		10.9
Commercial and Industrial		148,959	9.3			146,031	9.5			312,696		14.5			203,584		10.4
Total loans held for investment⁽¹⁾	$	1,603,383	100.0	%	$	1,534,185	100.0	%
Mortgage loans held for sale	$	51,309			$	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 and~~fees, unamortized premiums/(unaccreted discounts), net, ~~of $(0.3)~~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 ~~September~~June 30, ~~2021~~2022 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 Occupied—consists 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 Industrial—consists 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 discounts), as of the ~~date indicated~~dates noted, are summarized in the following tables:


	As of September 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	$	92,277	⁽¹⁾	$	195,500	⁽¹⁾	$	6,060	$	293,837	$	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		54,187			72,132			5,822		132,141		61,066			95,329			6,031			—		162,426
1-4 Family Residential		35,447			87,384			379,608		502,439		56,083			129,876			42,656			504,110		732,725
Non-Owner Occupied CRE		46,750			213,542			98,077		358,369		38,220			270,580			163,288			17,023		489,111
Owner Occupied CRE		5,404			50,447			111,787		167,638		7,166			69,845			135,327			12,259		224,597
Commercial and Industrial		67,861			43,410			37,688		148,959		71,010			188,751			52,935			—		312,696
Total loans	$	301,926		$	662,415		$	639,042	$	1,603,383	$	310,132		$	899,714		$	405,089		$	535,213	$	2,150,148
Amounts with fixed rates	$	78,586		$	423,108		$	236,481	$	738,175	$	92,054		$	539,597		$	285,574		$	22,205	$	939,430
Amounts with floating rates		223,340			239,307			402,561		865,208		218,078			360,117			119,515			513,008		1,210,718
Total loans	$	301,926		$	662,415		$	639,042	$	1,603,383	$	310,132		$	899,714		$	405,089		$	535,213	$	2,150,148

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

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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.

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

Loan Modifications

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 ~~September~~June 30, ~~2021,~~2022, the Company’s ~~loans include seventy-two modified loans, including acquired loans, across multiple industries in the amount of $135.0 million, representing 8.4% of total loans. No~~loan portfolio included 55 non-acquired loans which ~~participated in~~were previously modified under the loan modification program, ~~were delinquent according to Bank policy as of September 30, 2021. No~~totaling $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 as~~period. As of ~~September~~June 30, ~~2021.~~2022, there were 15 of these loans, totaling $3.5 million.

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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.

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 ~~an an~~ immaterial ~~amount~~and $0.1 million for the three months ended ~~September~~June 30, 2022 and 2021, ~~and 2020~~respectively. For ~~each of~~ the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, the amount of lost interest was ~~$0.2~~$0.1 million.

We had ~~$4.4~~$4.3 million in non-performing assets as of ~~September~~June 30, ~~2021 compared to $4.3 million as of~~2022 and December 31, ~~2020. The increase in our non-performing assets was primarily~~ ~~due to one relationship being downgraded into non-accrual status, offset by continued pay downs on outstanding balances and the disposal of one remaining OREO property.~~2021.

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


	September 30,			December 31,			June 30,			December 31,
(Dollars in thousands)	2021			2020
							2022			2021
Non-accrual loans by category⁽¹⁾
Cash, Securities and Other	$	41		$	50		$	4		$	6
Construction and Development		—			—
Consumer and Other								2			2
1-4 Family Residential		83			—			68			75
Non-Owner Occupied CRE		—			—
Owner Occupied CRE		1,250			479			1,200			1,241
Commercial and Industrial		2,984			3,529			2,603			2,938
Total non-accrual loans		4,358			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		4,358			4,058			3,931			4,327
OREO		—			194			378			—
Total non-performing assets	$	4,358		$	4,252		$	4,309		$	4,327
Non-accrual loans to total loans⁽²⁾								0.18	%		0.22	%
Non-performing loans to total loans⁽²⁾		0.27	%		0.26	%		0.18			0.22
Non-performing assets to total assets		0.21			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		297.48	%		308.99	%		365.23			317.36

⁽¹⁾ As of ~~September~~June 30, ~~2021, seven non-accrual loans, totaling $2.1 million, were not classified as TDRs. As of~~2022 and December 31, ~~2020, two~~2021, all but one non-accrual ~~loans~~loan, totaling an immaterial amount, were ~~not~~also 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 ~~$51.3~~$26.2 million and ~~$161.8~~$30.6 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

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,

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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.

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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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021, non-performing loans of ~~$4.4~~$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 September 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)	$	293,796	$	—	$	41	$	293,837	$	356,970	$	—	$	50	$	357,020	$	180,734	$	—	$	4	$	—	$	180,738
Consumer and Other⁽²⁾																		26,704		—		2		21,149		47,855
Construction and Development		129,618		2,523		—		132,141		131,111		—		—		131,111		162,426		—		—		—		162,426
1-4 Family Residential		502,356		—		83		502,439		451,918		—		3,120		455,038		732,657		—		68		—		732,725
Non-Owner Occupied CRE		352,429		5,940		—		358,369		275,627		6,316		—		281,943		483,848		5,263		—		—		489,111
Owner Occupied CRE		165,690		—		1,948		167,638		161,850		—		1,192		163,042		222,714		—		1,883		—		224,597
Commercial and Industrial		144,093		—		4,866		148,959		140,432		—		5,599		146,031		305,765		2,693		4,238		—		312,696
Total	$	1,587,982	$	8,463	$	6,938	$	1,603,383	$	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 a $0.4 million provision expense taken during~~During the ~~third~~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 ~~September~~June 30, ~~2021.~~2022.

6371

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


	Three Months Ended September 30,						Nine Months Ended September 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⁾	$	1,592,800		$	1,462,872		$	1,573,919		$	1,250,052		$	2,010,024		$	1,573,553		$	1,966,639		$	1,564,323
Gross loans outstanding at end of period⁽³⁾	$	1,603,050		$	1,506,076		$	1,603,050		$	1,506,076
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	$	12,552		$	10,354		$	12,539		$	7,875		$	13,885		$	12,539		$	13,732		$	12,539
Provision for loan losses		406			1,496			418			3,987			519			12			729			12
Charge-offs:
Cash, Securities and Other		—			6			—			30			—			—			—			—
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		—			6			—			30			95			—			192			—
Recoveries:
Cash, Securities and Other		6			1			7			13			—			—			—			—
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		6			1			7			13			48			1			88			1
Net charge-offs (recoveries)		(6)			5			(7)			17			47			(1)			104			(1)
Allowance for loan losses at end of period	$	12,964		$	11,845		$	12,964		$	11,845		$	14,357		$	12,552		$	14,357		$	12,552
Allowance for loan losses to total loans⁽⁴⁾		0.81	%		0.79	%		0.81	%		0.79	%		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 ~~$54.7~~$19.5 million and ~~$94.7~~$86.8 million for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively and ~~$105.3~~$21.1 million and ~~$67.0~~131.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

⁽³⁾ Excludes mortgage loans held for sale of ~~$51.3~~$26.2 million and ~~$89.9~~$48.6 million as of ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

⁽⁴⁾ End of period loans as of ~~September~~June 30, ~~2021~~2022 include ~~$117.4~~$287.6 million in acquired loans, ~~$61.8~~$9.1 million in bank originated PPP loans, ~~and $0.1~~$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 ~~September~~June 30, ~~2021.~~2022.

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

Table of Contents

The following ~~table represents~~presents 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.

~~Table of Contents~~


	As of September 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	$	2,130	18.3	%	$	2,579	23.3	%	$	1,194	8.5	%	$	1,598	13.4	%
Consumer and Other										220	2.2			266	1.8
Construction and Development		919	8.2			932	8.5			1,074	7.6			1,092	9.1
1-4 Family Residential		3,496	31.3			3,233	29.7			4,845	34.1			3,553	29.7
Non-Owner Occupied CRE		2,494	22.4			2,004	18.4			3,235	22.7			2,952	24.7
Owner Occupied CRE		1,158	10.5			1,159	10.6			1,477	10.4			1,292	10.9
Commercial and Industrial		2,767	9.3			2,632	9.5			2,312	14.5			2,979	10.4
Total allowance for loan losses	$	12,964	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 ~~September~~June 30, ~~2021, decreased $0.1~~2022, increased $0.8 million, or ~~2.1%~~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 ~~increased~~decreased by ~~$162.4~~$35.7 million, or ~~10.0%~~1.6%, to ~~$1.78~~$2.17 billion as of ~~September~~June 30, ~~2021~~2022 from December 31, ~~2020.~~2021. Total average deposits for the three months ended ~~September~~June 30, ~~2021~~2022 were ~~$1.72~~$2.23 billion, an increase of ~~$260.2~~$522.1 million, or ~~17.8%~~30.6%, compared to ~~$1.46~~$1.71 billion as of ~~September~~June 30, ~~2020.~~2021. The ~~increase~~decrease in total deposits from December 31, ~~2020~~2021 was attributable to ~~continued organic growth with new~~seasonal 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 September 30,

2021

2020


Average

Average

Average

Average

(Dollars in thousands)

Balance

Rate

Balance

Rate

Deposits









Money market deposit accounts

$
881,853

0.22
%
$
774,615

0.28
%
Demand deposit accounts

133,681

0.16

95,000

0.23

Certificates and other time deposits > $250k

64,971

1.19

69,821

1.66

Certificates and other time deposits < $250k

74,298

0.49

99,481

0.73

Total time deposits

139,269

0.82

169,302

1.11

Savings accounts

5,630

0.03

6,404

0.04

Total interest-bearing deposits

1,160,433

0.29

1,045,321

0.41

Noninterest-bearing accounts

562,569



417,502



Total deposits

$
1,723,002

0.19
%
$
1,462,823

0.29
%

6573

Table of Contents

For the Nine Month Period Ending September 30,

2021

2020


Average

Average

Average

Average

(Dollars in thousands)

Balance

Rate

Balance

Rate

Deposits









Money market deposit accounts

$
879,413

0.23
%
$
689,911

0.53
%
NOW accounts

126,544

0.17

88,852

0.27

Certificates and other time deposits > $250k

61,356

1.28

58,839

1.92

Certificates and other time deposits < $250k

89,539

0.58

92,661

1.43

Total time deposits

150,895

0.87

151,500

1.62

Savings accounts

6,198

0.03

5,426

0.09

Total interest-bearing deposits

1,163,050

0.31

935,689

0.68

Noninterest-bearing accounts

553,314



350,475



Total deposits

$
1,716,364

0.21
%
$
1,286,164

0.50
%

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 ~~32.7%~~30.5% and ~~28.5%~~31.6% for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~32.2%~~30.0% and ~~27.3%~~32.0% for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Our average cost of funds was ~~0.28%~~0.26% and ~~0.35%~~0.28% for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~0.29%~~0.25% and ~~0.55%~~0.29% for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The decrease in cost of funds was driven by a reduction in interest bearing deposit ~~rates consistent with~~costs 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 ~~September~~June 30, ~~2021~~2022 were ~~$905.2 million, an increase~~$1.03 billion, a decrease of ~~$57.8~~$22.9 million, or ~~6.8%~~2.2%, compared to ~~$847.4 million as of~~ December 31, ~~2020.~~2021. NOW accounts ~~increased $24.8~~decreased $22.7 million, or ~~21.9%~~7.3%, to ~~$137.8~~$287.2 million compared to December 31, ~~2020.~~2021.

Total time deposits as of ~~September~~June 30, ~~2021~~2022 were ~~$137.0~~$147.6 million, a decrease of ~~$35.7~~$22.9 million, or ~~20.7%~~13.4%, from December 31, ~~2020.~~2021.

Table of Contents

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


	As of September 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	$	18,001	$	6,514	$	19,404	$	20,983	$	64,902
Uninsured Time Deposits											$	9,679	$	14,633	$	10,973	$	38,929	$	74,214
Other		21,976		18,751		12,675		18,711		72,113		16,526		23,277		13,254		20,352		73,409
Total	$	39,977	$	25,265	$	32,079	$	39,694	$	137,015	$	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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, borrowings totaled ~~$97.6~~$119.8 million and ~~$173.9~~$77.7 million, respectively. On ~~August 31, 2021,~~January 1, 2022, the Company ~~completed the issuance and sale of~~redeemed subordinated notes ~~totaling $15.0 million.~~due December 31, 2026 in the amount of $6.6 million, which were redeemable on or after January 1, 2022.

The ~~decrease~~increase 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 ~~$43.6 million.~~$7.2 million and the redemption of $6.6 million in subordinated notes. Borrowing from ~~this facility~~the PPPLF is expected to trend in the same direction as the PPP loan balances. The ~~table below~~following presents balances of each of the borrowing facilities as of the dates ~~indicated:~~noted (dollars in thousands):

September 30,

December 31,
(Dollars in thousands)

2021

2020
Borrowings




FHLB borrowings

$
15,000

$
15,000
Federal Reserve borrowings

43,564

134,563
Subordinated notes

39,010

24,291
Total

$
97,574

$
173,854

~~Table of Contents~~


	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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 amounted to ~~$767.8~~$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 ~~$504.7~~$517.0 million as of ~~September~~June 30, ~~2021.~~2022.


	As of and for the			As of and for the
	Nine Months Ended			Six Months Ended
	September 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were no amounts outstanding on any of the federal funds lines.

As of 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. The Promissory Note expired on June 30, 2021 and was not renewed.

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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company was in compliance with the covenant requirements.

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.

~~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 ~~for~~during the ~~period indicated.~~periods presented.


	Average Percentage for the Three Months Ended		Average Percentage for the Nine Months Ended		Three Months Ended		Six Months Ended
	September 30,		September 30,		June 30,		June 30,
	2021		2021		2022		2022
Sources of Funds:
Deposits:
Noninterest-bearing	27.80	%	27.00	%	26.89	%	26.38	%
Interest-bearing	57.35		56.76		61.25		61.67
FHLB and Federal Reserve borrowings	4.02		5.97		0.82		1.05
Subordinated notes	1.44		1.27		1.29		1.28
Other liabilities	0.86		0.89		0.76		0.84
Shareholders’ equity	8.53		8.11		8.99		8.78
Total	100.00	%	100.00	%	100.00	%	100.00	%
Uses of Funds:
Total loans	78.09	%	76.19	%	79.02	%	76.41	%
Available-for-sale securities	1.44		1.42
Investment securities					2.74		2.45
Mortgage loans held for sale	2.70		5.14		0.77		0.82
Interest-bearing deposits in other financial institutions	13.18		12.58		12.69		15.54
Federal funds sold					0.04		0.05
Noninterest-earning assets	4.59		4.67		4.74		4.73
Total	100.00	%	100.00	%	100.00	%	100.00	%
Average noninterest-bearing deposits to total average deposits	32.65	%	32.24	%	30.51	%	29.95	%
Average loans to total average deposits	92.44		91.70		90.24		87.38
Average interest-bearing deposits to total average deposits	67.35	%	67.76	%	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

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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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 repurchase~~2020 Repurchase Plan was in effect for a one-year period, with the timing of purchases and the number of shares ~~in privately negotiated transactions, in~~repurchased under the ~~open~~program 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 nine months~~year ended ~~September 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 ~~September~~June 30, ~~2021~~2022 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

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maintain 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 ~~for~~during the ~~dates noted.~~periods presented (dollars in thousands):


	September 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	$	156,136	11.02	%	$	133,963	10.22	%	$	214,993		10.99	%	$	203,164		11.40	%
Consolidated Company		151,950	10.66			131,507	9.96			199,379		10.15			188,777		10.54
Common Equity Tier 1(CET1) to risk-weighted assets
Bank		156,136	11.02			133,963	10.22			214,993		10.99			203,164		11.40
Consolidated Company		151,950	10.66			131,507	9.96			199,379		10.15			188,777		10.54
Total capital to risk-weighted assets
Bank		169,435	11.96			146,853	11.20			229,777		11.75			217,215		12.19
Consolidated Company		204,809	14.37			168,957	12.80			247,164		12.58			242,388		13.54
Tier 1 capital to average assets
Bank		156,136	8.11			133,963	7.62			214,993		8.65			203,164		10.05
Consolidated Company	$	151,950	7.86	%	$	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 ~~for~~during the periods ~~indicated:~~presented (dollars in thousands):


	As of September 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	$	10,437	$	10,000	$	38,127	$	—		$	58,564	$	80,000	$	—	$	7,223	$	—		$	87,223
Subordinated notes		—		—		—		39,010	⁽¹⁾		39,010		—		—		—		32,553	⁽¹⁾		32,553
Time deposits		39,977		88,528		4,176		4,334			137,015		88,342		42,453		11,852		4,976			147,623
Minimum lease payments		3,422		6,419		3,356		2,321			15,518		3,415		6,073		1,628		1,857			12,973
Total	$	53,836	$	104,947	$	45,659	$	45,665		$	250,107	$	171,757	$	48,526	$	20,703	$	39,386		$	280,372

⁽¹⁾ Reflects contractual maturity dates of ~~December 31, 2026,~~ March 31, 2030, December 1, 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):


	September 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	$	73,975	$	418,045	$	78,506	$	360,883	$	128,605	$	575,094	$	136,289	$	442,035
Standby letters of credit		3,540		20,940		1,933		17,524		6,263		22,035		2,420		20,940
Commitments to make loans to sell		113,746		—		370,512		—		37,841		—		60,529		—
Commitments to make loans	$	40,804	$	15,236	$	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, ~~2020~~2021 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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The following ~~table summarizes~~presents the sensitivity in net interest income and fair value of equity ~~over~~during the periods ~~indicated,~~presented, using a parallel ramp scenario.


	As of September 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	12.55	%	14.21	%	9.04	%	19.52	%		4.36	%		(3.28)	%		11.85	%		11.17	%
200	8.68		12.66		5.77		16.02			3.80			0.89			9.31			11.43
100	4.39		7.89		2.73		9.58			2.20			1.93			4.88			7.78
Base	—		—		—		—			—			—			—			—
−100	(2.88)	%	(29.54)	%	(2.83)	%	(27.89)	%		(3.99)			(8.80)			(2.58)			(26.39)

The model simulations as of ~~September~~June 30, ~~2021~~2022 imply that our balance sheet is ~~slightly more~~less 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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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 ~~Financial~~Operating 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 ~~September~~June 30, ~~2021~~2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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’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 2020~~Company’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
July 1, 2021 through July 31, 2021	644	$	26.15	—	399,574
August 1, 2021 through August 31, 2021	1,089		26.43	—	399,574
September 1, 2021 through September 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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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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Item 6.Exhibits


Exhibit No.		Description

~~2.1~~		Agreement and Plan of Merger, dated July 22, 2021, by and between First Western Financial, Inc. and Teton Financial Services, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on July 22, 2021, File No. 001-38595)

~~4.1~~		Form of 3.25% Fixed-to-Floating Rate Subordinated Note due 2031 (incorporated by reference to Exhibit A to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on August 31, 2021, File No. 001-38595)

~~10.1~~		Form of Subordinated Note Purchase Agreement, dated August 31, 2021, by and among First Western Financial, Inc. and the Purchaser named therein (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on August 31, 2021, File No. 001-38595)

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.

~~November~~August 5, ~~2021~~2022	By:	/s/ Scott C. Wylie
Date		Scott C. Wylie
		Chairman, Chief Executive Officer, and President

~~November~~August 5, ~~2021~~2022	By:	/s/ Julie A. Courkamp
Date		Julie A. Courkamp
		~~Director,~~Chief Operating Officer, Chief Financial Officer, and Treasurer

7482


	Three Months Ended September 30, 2021						Nine Months Ended September 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	$	35	$	(29)	$	6	$	167	$	(237)	$	(70)
Available-for-sale securities		(70)		77		7		(354)		207		(147)
Loans		1,294		429		1,723		9,334		(1,316)		8,018
Total increase (decrease) in interest income	$	1,259	$	477	$	1,736	$	9,147	$	(1,346)	$	7,801
Interest-bearing liabilities:
Interest-bearing deposits		82		(320)		(238)		522		(2,632)		(2,110)
FHLB and Federal Reserve borrowings		(142)		20		(122)		62		(115)		(53)
Subordinated notes		197		(29)		168		565		(78)		487
Total increase (decrease) in interest expense	$	137	$	(329)	$	(192)	$	1,149	$	(2,825)	$	(1,676)
Increase in net interest income	$	1,122	$	806	$	1,928	$	7,998	$	1,479	$	9,477