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 30, 2020~~March 31, 2021

☐ 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 ~~October 30, 2020~~May 3, 2021
Common Stock, no par value	~~7,951,749~~7,994,832

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FIRST WESTERN FINANCIAL, INC.

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		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	6

	Condensed Consolidated Balance Sheets as of ~~September 30, 2020~~March 31, 2021 (Unaudited) and December 31, ~~2019~~2020	6

	Condensed Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2021 and ~~Nine Months Ended September 30,~~March 31, 2020 ~~and September 30, 2019~~	7

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2021 and ~~Nine Months Ended September 30,~~March 31, 2020 ~~and September 30, 2019~~	8

	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Three Months Ended March 31, 2021 and ~~Nine Months Ended September 30,~~March 31, 2020 ~~and September 30, 2019~~	9

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~	10

	Notes to Condensed Consolidated Financial Statements (Unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4139

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7263

Item 4.	Controls and Procedures	7364

PART II. OTHER INFORMATION		7364

Item 1.	Legal Proceedings	7364

Item 1A.	Risk Factors	7464

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7664

Item 3.	Defaults upon Senior Securities	7665

Item 4.	Mine Safety Disclosures	7665

Item 5.	Other Information	7665

Item 6.	Exhibits	7766

SIGNATURES		7867

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”~~"we," "our," "us," "the Company" and ~~“First Western”~~"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”~~"the Bank" or ~~“our~~"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~~"may," "should," "could," "predict," "potential," "believe," "will likely result,~~” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would”~~" "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would" and ~~“outlook,”~~"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 and California;

●

changes in the economy affecting real estate values and liquidity;

●

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;

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●

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;

●

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~~"Item 1A - Risk ~~Factors”~~Factors" in our Annual Report on Form 10-K.

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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”~~("SEC") on March 12, 2020, in the section titled Risk Factors in Part II, Item 1A of our Form 10-Q filed with the SEC on April 30, 2020 and in the section titled Risk Factors in Part II, Item 1A of our Form 10-Q filed with the SEC on August 6, 2020.2021. 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,		March 31,		December 31,
	2020		2019		2021		2020
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	2,867	$	4,180	$	2,295	$	2,405
Interest-bearing deposits in other financial institutions		247,491		74,458		373,641		153,584
Total cash and cash equivalents		250,358		78,638		375,936		155,989

Available-for-sale securities, at fair value		40,654		58,903		30,843		36,666
Correspondent bank stock, at cost		1,295		585		2,576		2,552
Mortgage loans held for sale		89,872		48,312		176,644		161,843
Loans, net of allowance of $11,845 and $7,875		1,494,231		990,132
Loans, net of allowance of $12,539 and $12,539						1,531,387		1,520,294
Premises and equipment, net		5,116		5,218		5,778		5,320
Accrued interest receivable		6,730		3,048		6,852		6,618
Accounts receivable		4,821		5,238		10,175		4,865
Other receivables		1,497		1,006		3,254		1,422
Other real estate owned, net		558		658		—		194
Goodwill		24,191		19,686
Other intangible assets, net		72		28
Goodwill and other intangible assets, net						24,254		24,258
Deferred tax assets, net		6,405		5,047		6,073		6,056
Company-owned life insurance		15,359		15,086		15,537		15,449
Other assets		28,738		16,544		22,269		32,129
Assets held for sale		3,000		3,553
Total assets	$	1,972,897	$	1,251,682	$	2,211,578	$	1,973,655

LIABILITIES
Deposits:
Noninterest-bearing	$	472,963	$	240,068	$	593,388	$	481,457
Interest-bearing		1,090,709		846,716		1,214,437		1,138,453
Total deposits		1,563,672		1,086,784		1,807,825		1,619,910
Borrowings:
Federal Home Loan Bank Topeka and Federal Reserve borrowings		222,075		10,000
Federal Home Loan Bank and Federal Reserve borrowings						198,041		149,563
Subordinated notes		14,447		6,560		24,248		24,291
Accrued interest payable		347		299		612		453
Other liabilities		22,639		20,244		19,413		24,476
Liabilities held for sale		141		117
Total liabilities		1,823,321		1,124,004		2,050,139		1,818,693

SHAREHOLDERS’ EQUITY
Preferred stock - 0 par value; 10,000,000 shares authorized; 0 issued and outstanding		—		—		—		—
Convertible preferred stock - 0 par value; 150,000 shares authorized; 0 shares issued and outstanding		—		—
Common stock - 0 par value; 90,000,000 shares authorized; 7,951,749 and 7,940,168 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		—		—
Common stock - 0 par value; 90,000,000 shares authorized; 7,957,900 and 7,951,773 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively						—		—
Additional paid-in capital		144,048		142,797		145,282		144,703
Retained earnings (accumulated deficit)		4,705		(14,955)
Accumulated other comprehensive income (loss)		823		(164)
Retained earnings						15,578		9,579
Accumulated other comprehensive income						579		680
Total shareholders’ equity		149,576		127,678		161,439		154,962
Total liabilities and shareholders’ equity	$	1,972,897	$	1,251,682	$	2,211,578	$	1,973,655

See accompanying notes to condensed consolidated financial statements.

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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,				Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Interest and dividend income:
Loans, including fees	$	14,138	$	10,672	$	37,342	$	31,490	$	14,212	$	11,002
Investment securities		173		312		692		954		196		295
Federal funds sold and other		99		489		358		1,254		91		215
Total interest and dividend income		14,410		11,473		38,392		33,698		14,499		11,512

Interest expense:
Deposits		1,067		3,363		4,779		9,268		974		2,393
Other borrowed funds		425		170		968		559		472		188
Total interest expense		1,492		3,533		5,747		9,827		1,446		2,581
Net interest income		12,918		7,940		32,645		23,871		13,053		8,931
Less: provision for loan losses		1,496		100		3,987		216		—		367
Net interest income, after provision for loan losses		11,422		7,840		28,658		23,655		13,053		8,564

Non-interest income:
Trust and investment management fees		4,814		4,824		14,154		14,186		4,847		4,731
Net gain on mortgage loans		12,304		3,291		24,958		8,009		5,196		2,481
Bank fees		340		283		929		912		373		368
Risk management and insurance fees		483		176		912		838		51		96
Income on company-owned life insurance		91		95		273		284		88		91
Net gain on sale of securities		—		119		—		119
Other										60		—
Total non-interest income		18,032		8,788		41,226		24,348		10,615		7,767
Total income before non-interest expense		29,454		16,628		69,884		48,003		23,668		16,331

Non-interest expense:
Salaries and employee benefits		10,212		8,504		25,384		23,821		9,861		8,482
Occupancy and equipment		1,619		1,388		4,574		4,193		1,409		1,440
Professional services		1,288		745		3,542		2,557		1,279		1,023
Technology and information systems		1,032		961		2,994		3,046		942		969
Data processing		1,038		854		2,922		2,282		1,015		847
Marketing		395		272		1,063		991		321		415
Amortization of other intangible assets		4		52		44		366		4		2
Goodwill impairment		—		—		—		1,572
Net loss on assets held for sale		—		—		553		—		—		553
Provision for other real estate owned		100		—		100		—
Other		944		666		2,747		1,873		798		916
Total non-interest expense		16,632		13,442		43,923		40,701		15,629		14,647
Income before income taxes		12,822		3,186		25,961		7,302		8,039		1,684
Income tax expense		3,192		780		6,301		1,865		2,040		350
Net income available to common shareholders	$	9,630	$	2,406	$	19,660	$	5,437	$	5,999	$	1,334
Earnings per common share:
Basic	$	1.22	$	0.30	$	2.49	$	0.69	$	0.76	$	0.17
Diluted	$	1.20	$	0.30	$	2.47	$	0.69	$	0.74	$	0.17

See accompanying notes to condensed consolidated financial statements.

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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,				Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Net income	$	9,630	$	2,406	$	19,660	$	5,437	$	5,999	$	1,334
Other comprehensive income items:
Net change in unrealized gains on available-for-sale securities		(28)		321		1,305		2,364
Income tax effect		7		(83)		(318)		(611)
Total other comprehensive income (loss) items		(21)		238		987		1,753
Other comprehensive income items, net of tax effect:
Net change in unrealized losses on available-for-sale securities										(101)		(593)
Comprehensive income	$	9,609	$	2,644	$	20,647	$	7,190	$	5,898	$	741

See accompanying notes to condensed consolidated financial statements.

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share amounts)


	Shares				Retained	Accumulated							Retained		Accumulated
		Additional			Earnings	Other				Shares	Additional		Earnings		Other
	Common	Paid-In		(Accumulated		Comprehensive				Common	Paid-In		(Accumulated		Comprehensive
	Stock	Capital		Deficit)		Income (Loss)		Total		Stock	Capital		Deficit)		Income (Loss)		Total

Balance at July 1, 2019	7,983,866	$	142,095	$	(19,933)	$	(5)	$	122,157

Net income	—		—		2,406		—		2,406
Share repurchase	(582)		(8)		—		—		(8)
Other comprehensive income, net of tax	—		—		—		238		238
Stock-based compensation	—		939		—		—		939

Balance at September 30, 2019	7,983,284	$	143,026	$	(17,527)	$	233	$	125,732

Balance at July 1, 2020	7,939,024	$	143,498	$	(4,925)	$	844	$	139,417

Net income	—		—		9,630		—		9,630
Settlement of share awards	12,725		(88)		—		—		(88)
Other comprehensive loss, net of tax	—		—		—		(21)		(21)
Stock-based compensation	—		638		—		—		638

Balance at September 30, 2020	7,951,749	$	144,048	$	4,705	$	823	$	149,576

Balance at January 1, 2019	7,968,420	$	141,359	$	(23,199)	$	(1,285)	$	116,875

Net income	—		—		5,437		—		5,437
Settlement of share awards	15,446		(110)		—		—		(110)
Adoption of ASU 2018-02	—		—		235		(235)		—
Stock repurchase	(582)		(8)		—		—		(8)
Other comprehensive income, net of tax	—		—		—		1,753		1,753
Stock-based compensation	—		1,785		—		—		1,785

Balance at September 30, 2019	7,983,284	$	143,026	$	(17,527)	$	233	$	125,732

Balance at January 1, 2020	7,940,168	$	142,797	$	(14,955)	$	(164)	$	127,678	7,940,168	$	142,797	$	(14,955)	$	(164)	$	127,678

Net income	—		—		19,660		—		19,660	—		—		1,334		—		1,334
Other comprehensive income, net of tax	—		—		—		987		987
Other comprehensive loss, net of tax										—		—		—		(593)		(593)
Share repurchase										(22,679)		(370)		—		—		(370)
Stock-based compensation										—		654		—		—		654
Balance, March 31, 2020										7,917,489	$	143,081	$	(13,621)	$	(757)	$	128,703

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

Net income										—		—		5,999		—		5,999
Other comprehensive loss, net of tax										—		—		—		(101)		(101)
Settlement of share awards	34,260		(258)		—		—		(258)	6,127		(34)		—		—		(34)
Stock repurchases	(22,679)		(370)		—		—		(370)
Stock-based compensation	—		1,879		—		—		1,879	—		613		—		—		613

Balance at September 30, 2020	7,951,749	$	144,048	$	4,705	$	823	$	149,576
Balance, March 31, 2021										7,957,900	$	145,282	$	15,578	$	579	$	161,439

See accompanying notes to condensed consolidated financial statements.

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2021		2020
Cash flows from operating activities
Net income	$	19,660	$	5,437	$	5,999	$	1,334
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		826		1,363		271		276
Deferred income tax benefit		(1,699)		(727)
Deferred income tax (benefits)/expense, net of valuation allowance						30		347
Stock-based compensation		1,879		1,785		613		654
Provision for loan losses		3,987		216		—		367
Net amortization of investment securities		346		118		145		107
Stock dividends received on correspondent bank stock		(12)		(25)		(23)		(5)
Increase in cash surrender value of company-owned life insurance		(273)		(284)		(88)		(91)
Net gain on mortgage loans		(24,958)		(8,009)		(5,196)		(2,481)
Origination of mortgage loans held for sale		(917,524)		(442,790)		(490,783)		(196,873)
Proceeds from mortgage loans		889,208		393,886		482,058		179,207
Gain on sale of securities		—		(119)
Loss on assets held for sale		553		—		—		553
Loss on impairment of goodwill		—		1,572
Provision for other real estate owned		100		—
Net changes in operating assets and liabilities:
Recognition of capitalized subordinated notes issuance costs						(43)		(101)
Accounts receivable		492		(468)		172		646
Accrued interest receivable and other assets		(5,531)		(81)		(2,473)		(376)
Accrued interest payable and other liabilities		3,394		1,847		(1,829)		(2,065)
Net cash used in operating activities		(29,552)		(46,279)		(11,147)		(18,501)
Cash flows from investing activities
Activity in available-for-sale securities:
Maturities, prepayments, and calls		20,890		6,202		5,673		5,703
Sales		—		7,506
Purchases		(2,000)		(29,750)
Purchases of correspondent bank stock		(698)		(1,237)		(1)		(568)
Redemption of correspondent bank stock		—		3,168
Purchases of premises and equipment		(708)		(380)		(725)		(204)
Proceeds from sale of premises and equipment		10		—
Net cash paid on acquisitions (Note 2)		(61,316)		—
Proceeds from sale of other real estate owned						194		—
Loan and note receivable originations and principal collections, net		(388,048)		(32,439)		(10,406)		(45,850)
Net cash used in investing activities		(431,870)		(46,930)		(5,265)		(40,919)
Cash flows from financing activities
Net change in deposits		413,808		171,146		187,915		91,666
Proceeds from subordinated notes		8,000		—		—		8,000
Repurchase of common stock						—		(370)
Settlement of restricted stock		(258)		(110)		(34)		—
Recognition of capitalized subordinated notes issuance costs		(113)		—
Repurchase of common stock		(370)		(8)
Payments to Federal Reserve borrowings		(238)		—		(28,513)		—
Proceeds from Federal Reserve borrowings		204,313		—		76,991		—
Payments to Federal Home Loan Bank Topeka borrowings		(27,000)		(72,346)
Proceeds from Federal Home Loan Bank Topeka borrowings		35,000		67,346
Payments to Federal Home Loan Bank borrowings						—		(17,000)
Proceeds from Federal Home Loan Bank borrowings						—		17,000
Net cash provided by financing activities		633,142		166,028		236,359		99,296

Net change in cash and cash equivalents		171,720		72,819		219,947		39,876
Cash and cash equivalents, beginning of year		78,638		73,357		155,989		78,638
Cash and cash equivalents, end of period	$	250,358	$	146,176	$	375,936	$	118,514
Supplemental cash flow information:
Interest paid on deposits and borrowed funds	$	5,699	$	9,702	$	1,287	$	2,463
Income tax payment, net of refunds received		6,417		1,562
Cash paid for amounts included in the measurement of lease liabilities		4,267		4,091		1,300		1,475
Supplemental noncash disclosures:
Adoption of ASU 2018-02 - Reclassification of stranded tax effects		—		235
Change in unrealized gain		1,305		2,364
Lease right-of-use-asset obtained in exchange for lease liabilities		649		16,580
Reclass of held for sale assets, net of liabilities	$	10	$	3,442
Change in unrealized gain on available-for-sale securities						(148)		(597)

See accompanying notes to condensed consolidated financial statements.

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FIRST WESTERN FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Presentation: The condensed consolidated financial statements include the accounts of First Western Financial, Inc. ~~(“FWFI”~~("FWFI"), incorporated in Colorado on July 18, 2002, and its direct and indirect wholly-owned subsidiaries listed below (collectively referred to as the ~~“Company” or “we”~~"Company", ~~“us”~~"we", "us", or ~~“our”~~"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”~~"Bank")~~, First Western Capital Management Company (“FWCM”),~~ and Ryder, Stilwell Inc. ~~(“RSI”~~("RSI"). The Bank wholly owns the following subsidiaries, which are therefore indirectly wholly-owned by FWFI: First Western Merger Corporation (“("Merger ~~Corp.”~~Corp"), and RRI, LLC ~~(“RRI”~~("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, Los Angeles)~~City) and Wyoming (Jackson Hole and Laramie). 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 ~~selling~~ mortgage loans.

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ~~(“GAAP”~~("GAAP") for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ~~(“SEC”~~("SEC"). Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. The December 31, ~~2019~~2020 condensed consolidated balance sheet has been derived from the audited financial statements for the year ended December 31, ~~2019.~~2020.

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~~ months ended ~~September 30, 2020~~March 31, 2021 are not necessarily indicative of results that may be expected for the full year ending December 31, ~~2020.~~2021. 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, ~~2019~~2020 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.

Acquisitions: On May 15, 2020, the Company completed a branch purchase and assumption transaction (“("Branch ~~Acquisition”~~Acquisition") with Simmons Bank ~~(“Simmons”~~("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. ~~For additional information, see Note 2.~~

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 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 of the impact of the COVID-19 pandemic, and the resulting governmental actions to curtail its spread. It is at least reasonably possible that information which was available at the date of the financial statements will change in the near term due to the COVID-19 pandemic and that the effect of the change would be material to the financial statements. The extent to which the COVID-19 pandemic will impact our estimates and assumptions is highly uncertain.

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Concentration of Credit Risk: Most of the Company’s lending activity is to clients located in and around metro Denver, Colorado; Phoenix and Scottsdale, Arizona; and Jackson Hole and Laramie, Wyoming. The Company does not believe it has significant concentrations in any one industry or ~~client. At September 30, 2020~~customer. As of March 31, 2021 and December 31, ~~2019, 62.8%~~2020, 67.1%, and ~~71.7%~~66.9%, 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”~~("FASB"), Revenue ~~from~~ Contracts with Customers (“("Topic ~~606”~~606"), trust and investment management fees are earned by providing trust and investment services to ~~clients.~~customers. The Company’s performance obligation under these contracts is satisfied over time as the services are provided. Fees are recognized monthly based on the average monthly value of the assets under management and the corresponding fee rate based on the terms of the contract. There were 0 performance based incentive fees earned with respect to investment management contracts for the three months ended March 31, 2021. Performance based incentive fees earned with respect to investment management contracts for the ~~three and nine months ended September 30, 2020 and the~~ year ended December 31, ~~2019~~2020 were immaterial. Receivables are recorded on the ~~condensed consolidated balance sheet~~Condensed Consolidated Balance Sheets in the ~~accounts~~Accounts receivable line item. Income related to trust and investment management fees, bank fees, and risk management and insurance fees on the ~~condensed consolidated statement~~Condensed Consolidated Statements of ~~operations~~Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and September 30, 2019~~ 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”~~("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”~~("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.

Certain of the Company’s assets and liabilities are indexed to LIBOR, with exposure extending past 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 and operations, fallback language, and other aspects of planning. The Company has prepared a timeline to transition from LIBOR before the end of 2021.

The administrator of LIBOR has proposed to extend publication of the most commonly used U.S. Dollar LIBOR settings to June 30, 2023, and to cease publishing other LIBOR settings on December 31, 2021.

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”~~Act") into law on March 27, 2020. The objective of the CARES Act is to prevent a severe economic downturn

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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. However, the extent to which the COVID-19 pandemic will impact our operations and financial results is highly uncertain.

The CARES Act created the Paycheck Protection Program ~~(“PPP”~~("PPP"), which is administered by the Small Business Administration ~~(“SBA”~~("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 during all of the ~~nine months ended September 30, 2020.~~available funding windows. PPP loans are classified in the Cash, Securities and Other portion of the loan portfolio. See Note 43 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”~~("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”~~("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

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believe our loan modification program meets that definition and have not classified any of these modifications as a TDR ~~at September 30, 2020.~~as of March 31, 2021. See Note 43 for further discussion on our loan modification program.

The Company is a participant in the Federal Reserve’s Main Street Lending Program ~~(“MSLP”~~("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”~~("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 43 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, ~~2019.~~2020.

In ~~August 2018,~~January 2021, the FASB issued ASU ~~2018-13, Fair Value Measurement—Changes to the Disclosure Requirements for Fair Value Measurement~~2021-01, "Reference Rate Reform (Topic ~~820) (“~~848): Scope" ("ASU ~~2018-13”~~2021-01"). ASU ~~2018-13 modifies~~2021-01 clarifies the ~~disclosure requirements on fair value measurements~~scope of Topic 848, originally issued in 2020 (ASU 2020-04). ASU 2021-01 clarifies that derivatives affected by ~~requiring~~the related discounting transition are explicitly eligible for certain optional expedients and exceptions. ASU 2021-01 also clarifies that ~~Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs,~~a receive-variable-rate, pay-variable-rate cross-currency interest rate swap may be considered an ~~entity may disclose other quantitative information~~eligible hedging instrument in ~~lieu~~a net investment hedge if both legs of the ~~weighted average if~~swap do not have the ~~entity determines that other quantitative information would be~~same repricing intervals and dates as a ~~more reasonable and rational method to reflect the distribution~~result of ~~unobservable inputs used to develop Level 3 fair value measurements.~~reference rate reform. ASU ~~2018-13~~2021-01 was effective for the Company on January ~~1, 2020 and did not have a material impact on the Company’s financial statement disclosures.~~

~~In April 2020, the FASB~~ ~~issued ASU 2020-04, “~~~~Reference Rate Reform (Topic 848):~~ ~~Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ("~~ASU 2020-04"), ASU 2020-04 is intended to provide relief for companies preparing for discontinuation of interest rates based on LIBOR. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or other reference rates expected to be discontinued. ASU 2020-04 also provides for a one-time sale and/or transfer to AFS or trading to be made for HTM debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020. ASU 2020-04 was effective for all entities as of March 12, 2020 and through December 31, 2022. Companies can apply the ASU as of the beginning of the interim period that includes March 12, 2020 or any date thereafter. The guidance requires companies to apply the guidance prospectively to contract modifications and hedging relationships while the one-time election to sell and/or transfer debt securities classified as HTM may be made any time after March 12, 2020. ASU 2020-04 ~~was effective for the Company on March 12, 2020~~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, ~~2019.~~2020.

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

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During the three months ended ~~September 30, 2020,~~March 31, 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 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

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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.

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,~~However, ASU 2019-10 amended the mandatory effective date for ASU 2014-07 to January 1, 2023 for SRC’s, with earlier adoption permitted. This update is not expected to have a significant impact on the financial statements and disclosures.

~~NOTE 2 - ACQUISITIONS~~

On February 10, 2020, the Company entered into a branch purchase and assumption agreement with Simmons Bank, a subsidiary of Simmons First National Corporation, to acquire all of the Simmons’ Colorado locations, including 3 branches and 1 loan production office located in Denver, as well as certain deposits, loans and other assets. The transaction closed on May 15, 2020 with an aggregate purchase price of $61.6 million, including a deposit premium of 6.06%.

~~During the third quarter 2020, the Company closed 2 of the branches and the~~ ~~loan production office~~ ~~acquired in the Branch Acquisition completed in May 2020.~~k

~~Goodwill of $4.5 million was recognized in the transaction and represents expected synergies and cost savings resulting from combining the expanded footprint and expertise of the associates.~~

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the May 15, 2020 transaction with Simmons, and reflects all adjustments made to the fair value of the opening balance sheet through September 30, 2020 (in thousands):

May 15,
Fair value of consideration transferred

2020
Cash consideration

$
61,599
Total fair value of consideration transferred

61,599

Assets acquired

Cash and due from banks

283
Loans, net

119,552
Core deposit intangible⁽¹⁾

53
Accrued income and other assets

382
Total assets acquired

120,270

Liabilities assumed

Deposits

63,080
Accrued expenses and other liabilities

96
Total liabilities assumed

63,176
Net assets acquired

57,094
Goodwill recognized

$
4,505

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

The fair value of net assets acquired includes fair value adjustments to loans as of the acquisition date. The fair value adjustments were determined using discounted expected cash flows. Loans had a fair value of $119.6 million and a contractual balance of $120.6 million as of May 15, 2020. The discount on the loans acquired in this transaction due to

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anticipated credit loss, as well as considerations for market interest rates, totaled $1.1 million, representing 0.9% of their contractual balances. NaN allowance for loan losses related to acquired loans was brought over as a result of the Branch Acquisition. Loans acquired included short-term modifications made on a good faith basis by Simmons, in response to COVID-19. All of the modification were given additional review prior to the closing of the purchase and management determined that loans were performing prior to modification and were not considered impaired at purchase. There were no loans acquired that were considered to be purchased credit impaired (“PCI”) loans.

~~The composition of the acquired loan portfolio as of May 15, 2020 is detailed in the table below (in thousands):~~

May 15,

2020
Cash, Securities and Other

$
13,457
Construction and Development

40,407
1-4 Family Residential

7,252
Non-Owner Occupied Commercial Real Estate ("CRE")

545
Owner Occupied CRE

321
Commercial and Industrial

58,660
Total gross loans

$
120,642

The Company incurred $0.1 million in expenses related to the acquisition during the three months ended September 30, 2020. Acquisition expenses, including professional fees, are included in the total noninterest expense line item in the condensed consolidated statement of income.

NOTE 32 - INVESTMENT SECURITIES

The following presents the amortized cost and fair value of securities available-for-sale, with gross unrealized gains and losses recognized in accumulated other comprehensive income as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (in thousands):


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
September 30, 2020	Cost		Gains		Losses		Value
March 31, 2021									Cost		Gains		Losses		Value
Investment securities available-for-sale:
U.S. Treasury debt	$	250	$	6	$	—	$	256	$	250	$	3	$	—	$	253
Corporate bonds		2,000		48				2,048		6,000		126		(38)		6,088
Government National Mortgage Association ("GNMA") mortgage-backed securities – residential		28,844		944		—		29,788		19,402		581		(3)		19,980
Federal National Mortgage Association ("FNMA") mortgage-backed securities – residential		2,626		90		—		2,716		1,602		68		—		1,670
Corporate collateralized mortgage obligations ("CMO") and mortgage-backed securities ("MBS")		5,826		93		(73)		5,846
Corporate collateralized mortgage obligations ("CMO") and MBS										2,821		55		(24)		2,852
Total securities available-for-sale	$	39,546	$	1,181	$	(73)	$	40,654	$	30,075	$	833	$	(65)	$	30,843


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
December 31, 2019	Cost		Gains		Losses		Value
December 31, 2020									Cost		Gains		Losses		Value
Investment securities available-for-sale:
U.S. Treasury debt	$	250	$	4	$	—	$	254	$	250	$	4	$	—	$	254
Corporate bonds										6,000		55		(11)		6,044
GNMA mortgage-backed securities – residential		45,490		157		(335)		45,312		23,806		798		—		24,604
FNMA mortgage-backed securities – residential		2,935		11		(29)		2,917		1,616		61		—		1,677
Corporate CMO and MBS		10,425		40		(45)		10,420		4,078		62		(53)		4,087
Total securities available-for-sale	$	59,100	$	212	$	(409)	$	58,903	$	35,750	$	980	$	(64)	$	36,666

~~At September 30, 2020,~~As of March 31, 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.~~

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Amortized

Fair
September 30, 2020

Cost

Value
Due after one year through five years

$
250

$
256
Due after ten years

2,000

2,048
Securities (agency and CMO)

37,296

38,350
Total

$
39,546

$
40,654

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
March 31, 2021	Cost		Value
Due within one year	$	250	$	253
Due between one year and five years		1,250		1,245
Due between five years and ten years		4,792		4,843
Securities (agency, Corporate CMO, and MBS)		23,783		24,502
Total	$	30,075	$	30,843

In 2014, the Company began investing in a small business investment company ~~(“SBIC”~~("SBIC") fund administered by the Small Business Administration. During the ~~nine~~three months ended ~~September 30, 2020 and~~March 31, 2021, the Company did not make any contributions to the SBIC fund. During the year ended December 31, ~~2019,~~2020, the Company invested $0.5 million ~~and $0.4 million, respectively,~~ in SBIC. ~~At September 30,~~As of March 31, 2021 and December 31, 2020, the Company held a balance of $2.1 million with SBIC, which is included in ~~other~~Other assets in the accompanying ~~consolidated balance sheets.~~Condensed Consolidated Balance Sheets. The Company may be obligated to invest up to an additional $0.9 million in future SBIC investments.

~~At September 30, 2020~~As of March 31, 2021 and December 31, ~~2019,~~2020, securities with carrying values totaling ~~$4.2~~$3.2 million and ~~$5.5~~$3.7 million, respectively, were pledged to secure various public deposits and credit facilities of the Company.

~~At September 30, 2020~~As of March 31, 2021 and December 31, ~~2019,~~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.

~~At September 30, 2020~~As of March 31, 2021 and December 31, ~~2019,~~2020, 6 securities and 7 securities ~~and NaN securities, respectively,~~ were in an unrealized loss position, with unrealized losses totaling $0.1 million and ~~$0.4~~$0.1 million, respectively. NaN of the securities in an unrealized loss position ~~at September 30, 2020 have~~as of March 31, 2021 has been in a continuous unrealized loss position for more than twelve months, and the remaining ~~securities in a loss position~~ 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 ~~at September 30, 2020.~~as of March 31, 2021.

The following table summarizes securities with unrealized losses ~~at September 30, 2020~~as of March 31, 2021 and December 31, ~~2019,~~2020, aggregated by major security type and length of time in a continuous unrealized loss position (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, 2020	Value		Losses		Value		Losses		Value		Losses
March 31, 2021													Value		Losses		Value		Losses		Value		Losses
GNMA mortgage-backed securities – residential													$	881	$	(3)	$	—	$	—	$	881	$	(3)
Corporate bonds														3,962		(38)		—		—		3,962		(38)
Corporate CMO and MBS		1,553		(54)		590		(19)		2,143		(73)		56		—		659		(24)		715		(24)
Total	$	1,553	$	(54)	$	590	$	(19)	$	2,143	$	(73)	$	4,899	$	(41)	$	659	$	(24)	$	5,558	$	(65)


	Less than 12 Months				12 Months or Longer				Total				Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2019	Value		Losses		Value		Losses		Value		Losses
GNMA mortgage-backed securities - residential	$	28,203	$	(193)	$	4,450	$	(142)	$	32,653	$	(335)
FNMA mortgage-backed securities - residential		—		—		2,347		(29)		2,347		(29)
December 31, 2020													Value		Losses		Value		Losses		Value		Losses
Corporate bonds													$	3,489	$	(11)	$	—	$	—	$	3,489	$	(11)
Corporate CMO and MBS		7,780		(45)		—		—		7,780		(45)		880		(40)		566		(13)		1,446		(53)
Total	$	35,983	$	(238)	$	6,797	$	(171)	$	42,780	$	(409)	$	4,369	$	(51)	$	566	$	(13)	$	4,935	$	(64)

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The Company did not sell any securities during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 or during the year ended December 31, 2020. The Company sold $7.5 million of securities and realized $0.1 million of gains, from the sale of securities using the specific identification method for the three and nine months ended September 30, 2019.

~~Table of Contents~~

NOTE 43 - 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,		March 31,		December 31,
	2020		2019		2021		2020
Cash, Securities and Other⁽¹⁾	$	371,481	$	146,701
Cash, Securities, and Other⁽¹⁾					$	363,155	$	357,020
Construction and Development		105,717		28,120		110,024		131,111
1-4 Family Residential		446,959		400,134		452,591		455,038
Non-Owner Occupied CRE		243,564		165,179		317,457		281,943
Owner Occupied CRE		154,138		127,968		161,787		163,042
Commercial and Industrial(2)		185,625		128,457		141,770		146,031
Total loans held for investment		1,507,484		996,559		1,546,784		1,534,185
Deferred costs (fees) and unamortized premiums/(unaccreted discounts), net		(1,408)		1,448
Deferred fees and unamortized premiums/(unaccreted discounts), net						(2,858)		(1,352)
Allowance for loan losses		(11,845)		(7,875)		(12,539)		(12,539)
Loans, net	$	1,494,231	$	990,132	$	1,531,387	$	1,520,294

⁽¹⁾ Includes PPP loans of ~~$206.1~~$190.5 million and $142.9 million as of ~~September 30, 2020.~~March 31, 2021 and December 31, 2020, respectively.

⁽²⁾ Includes MSLP loans of $6.7 million and $6.6 million as of March 31, 2021 and December 31, 2020, respectively.

As of ~~September 30, 2020,~~March 31, 2021, total loans held for investment include ~~$124.7~~$120.8 million of performing loans purchased as part of the Branch Acquisition. ~~See Note 2 – Acquisitions for more information.~~

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 ~~at September 30,~~as of March 31, 2021, the Cash, Securities, and Other portion of the loan portfolio included $190.5 million of PPP loans, or 52.5% of the total category. As of December 31, 2020, the Cash, Securities, and Other portion of the loan portfolio included ~~$206.1~~$142.9 million of PPP loans, or ~~55.5%~~40.0% of the total ~~category.~~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 30, 2020,~~March 31, 2021, the Company’s Commercial and Industrial loans included 16 MSLP ~~loan~~loans with the net carrying amount of ~~$2.4~~$6.7 million.

Loan Modifications

As of ~~September 30, 2020,~~March 31, 2021, the Company’s loan portfolio included 81 loans ~~include~~which were modified under the loan modification program, totaling $148.5 million. NaN ~~modified~~of these loans ~~including acquired loans, across multiple industries~~were still in ~~the amount of $66.7 million.~~

~~The following presents loan modifications as a result of COVID-19~~their deferral period as of ~~September 30, 2020 (dollars in thousands):~~

Total Loans

# of Modified Loans

Outstanding Balance of Modified Loans

% of Total Loan Balance Modified

Cash, Securities and Other

$
371,481

1

$
1,496

0.40
%
Construction and Development

105,717

—

—

—

1-4 Family Residential

446,959

6

4,441

0.99

Non-Owner Occupied CRE

243,564

22

38,229

15.70

Owner Occupied CRE

154,138

10

17,524

11.37

Commercial and Industrial

185,625

5

5,048

2.72

Total Loans

$
1,507,484

44

$
66,738

4.43
%

March 31, 2021.

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

~~Table of Contents~~

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.

All loans modified in response to COVID-19 are classified as performing and pass rated as of ~~September 30, 2020.~~March 31, 2021. 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, 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. The portion of our credit exposure to the highest risk industries impacted by COVID-19, such as accommodations, transportation and restaurants, is less than 3.0% of our loan portfolio. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of September 30, 2020, 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 costs (fees) and unamortized premiums/ (unaccreted discounts) which are not material) in loans past due as of September 30, 2020 and December 31, 2019 (in thousands):

30-59

60-89

90 or

Total



Total

Days

Days

More Days

Loans

Recorded
September 30, 2020

Past Due

Past Due

Past Due

Past Due

Current

Investment
Cash, Securities and Other

$
30

$
—

$
66

$
96

$
371,385

$
371,481
Construction and Development

—

—

—

—

105,717

105,717
1-4 Family Residential

4,883

1,197

—

6,080

440,879

446,959
Non-Owner Occupied CRE

1,022

—

—

1,022

242,542

243,564
Owner Occupied CRE

—

—

—

—

154,138

154,138
Commercial and Industrial

522

—

3,679

4,201

181,424

185,625
Total

$
6,457

$
1,197

$
3,745

$
11,399

$
1,496,085

$
1,507,484

30-59

60-89

90 or

Total



Total

Days

Days

More Days

Loans

Recorded
December 31, 2019

Past Due

Past Due

Past Due

Past Due

Current

Investment
Cash, Securities and Other

$
525

$
—

$
—

$
525

$
146,176

$
146,701
Construction and Development

—

—

—

—

28,120

28,120
1-4 Family Residential

5,688

—

—

5,688

394,446

400,134
Non-Owner Occupied CRE

—

—

—

—

165,179

165,179
Owner Occupied CRE

—

—

—

—

127,968

127,968
Commercial and Industrial

—

3,110

907

4,017

124,440

128,457
Total

$
6,213

$
3,110

$
907

$
10,230

$
986,329

$
996,559

~~At September 30, 2020 and December 31, 2019, the Company did not have any loans which were more than 90 days delinquent and accruing interest.~~

~~Non-Accrual Loans and Troubled Debt Restructurings~~

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

September 30,

December 31,

2020

2019
Cash, Securities and Other

$
66

$
2,803
Commercial and Industrial

3,679

4,412
Total

$
3,745

$
7,215

Non-accrual loans classified as TDR accounted for $3.7 million of the recorded investment at September 30, 2020 and $7.2 million at December 31, 2019, respectively. Non-accrual loans are classified as impaired loans and individually evaluated for impairment.

~~Table of Contents~~

~~The following presents a summary of the unpaid principal balance of loans classified as TDRs by loan type and delinquency status as of the dates noted (in thousands):~~

September 30,

December 31,

2020

2019
Accruing

Commercial and Industrial

$
6,136

$
5,055
Non-accrual

Cash, Securities, and Other

64

2,803
Commercial and Industrial

3,679

4,412

Allowance for loan losses associated with TDR

(1,421)

(833)
Net recorded investment

$
8,458

$
11,437

The Company extended additional principal allowed under the commitment to a Commercial and Industrial borrower for operational needs, subsequent to the loan being classified as a TDR, in the amounts of $1.3 million and $0.2 million at September 30, 2020 and December 31, 2019, respectively. The majority owner for this borrower provided $1.5 million of pledged cash as collateral in 2019 which is still held by the Company, in exchange for this additional funding.

The Company did not modify any loans into TDR status during the three months ended September 30, 2020. The Company modified 1 loan into a TDR during the nine months ended September 30, 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 has paid off in full as of September 30, 2020.

The Company modified one borrower relationship with 2 loans into a TDR for the year ended December 31, 2019. The borrower, who has loans that are classified as Commercial and Industrial, was not making payments in accordance with the original contract terms. The modification included an extension of the maturity date that the Company would not have otherwise considered as a result of the Borrower’s difficulties. The extension of maturity was for a period of approximately nine months. These two loans are currently on non-accrual and the borrower was not making payments as agreed for the three and nine months ended September 30, 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.

1916

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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 3.0% of our loan portfolio. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of March 31, 2021, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

The following ~~table~~ presents, ~~impaired loans~~ by ~~portfolio and related valuation allowance as~~class, an aging analysis of the ~~periods presented (in thousands):~~

September 30, 2020

December 31, 2019




Unpaid

Allowance


Unpaid

Allowance

Total

Contractual

for

Total

Contractual

for

Recorded

Principal

Loan

Recorded

Principal

Loan

Investment

Balance

Losses

Investment

Balance

Losses
Impaired loans with a valuation allowance:

Cash, Securities, and Other

$
2

$
2

$
2

$
—

$
—

$
—
Commercial and Industrial

3,419

3,419

1,421

4,412

4,412

833
Total

$
3,421

$
3,421

$
1,423

$
4,412

$
4,412

$
833

Impaired loans with no related valuation allowance:

Cash, Securities, and Other

$
64

$
64

$
—

$
2,803

$
2,803

$
—
Commercial and Industrial

6,396

6,396

—

5,055

5,055

—
Total

$
6,460

$
6,460

$
—

$
7,858

$
7,858

$
—

Total impaired loans:

Cash, Securities, and Other

$
66

$
66

$
2

$
2,803

$
2,803

$
—
Commercial and Industrial

9,815

9,815

1,421

9,467

9,467

833
Total

$
9,881

$
9,881

$
1,423

$
12,270

$
12,270

$
833

~~The~~ recorded ~~investment in loans in the previous tables excludes~~investments (excluding accrued interest receivable, deferred (fees) costs, ~~(fees)~~ and unamortized premiums/ (unaccreted discounts) which are not ~~material. Interest income, if~~material) in loans past due as of March 31, 2021 and December 31, 2020 (in thousands):


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
March 31, 2021	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	—	$	—	$	21	$	21	$	363,134	$	363,155
Construction and Development		—		—		—		—		110,024		110,024
1-4 Family Residential		—		—		—		—		452,591		452,591
Non-Owner Occupied CRE		—		—		—		—		317,457		317,457
Owner Occupied CRE		—		—		479		479		161,308		161,787
Commercial and Industrial		200		47		3,519		3,766		138,004		141,770
Total	$	200	$	47	$	4,019	$	4,266	$	1,542,518	$	1,546,784


	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 March 31, 2021 and December 31, 2020, the Company did not have any ~~was recognized on the cash basis on non-accrual loans.~~loans which were more than 90 days delinquent and accruing interest.

Non-Accrual Loans and Troubled Debt Restructurings

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


	March 31,		December 31,
	2021		2020
Cash, Securities and Other	$	23	$	50
Owner Occupied CRE		479		479
Commercial and Industrial		3,519		3,529
Total	$	4,021	$	4,058

Non-accrual loans classified as TDR accounted for $3.5 million of the recorded investment as of March 31, 2021 and $3.6 million as of December 31, 2020. Non-accrual loans are classified as impaired loans and ~~interest income recognized on impaired loans during the three months ended September 30, 2020 and 2019 are included in the table below (in thousands):~~

Three Months Ended September 30,

2020

2019

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized
Impaired loans with a valuation allowance:

Cash, Securities, and Other

$
1

$
—

$
185

$
—
Commercial and Industrial

3,427

—

1,035

—
Total

$
3,428

$
—

$
1,220

$
—

Impaired loans with no related valuation allowance:

Cash, Securities, and Other

$
779

$
—

$
5,062

$
—
Commercial and Industrial

6,462

85

5,958

138
1-4 Family Residential

—

—

1,213

26
Total

$
7,241

$
85

$
12,233

$
164

Total impaired loans:

Cash, Securities, and Other

$
780

$
—

$
5,247

$
—
Commercial and Industrial

9,889

85

6,993

138
1-4 Family Residential

—
��

—

1,213

26
Total

$
10,669

$
85

$
13,453

$
164

individually evaluated for impairment.

2017

Table of Contents

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


	March 31,		December 31,
	2021		2020
Non-accrual
Cash, Securities, and Other	$	19	$	48
Commercial and Industrial		3,519		3,529
Total		3,538		3,577
Allowance for loan losses associated with TDR		(1,751)		(1,619)
Net recorded investment	$	1,787	$	1,958

As of March 31, 2021 and ~~interest income recognized on impaired~~December 31, 2020, the Company had 0t committed any additional funds to a borrower with a loan classified as a TDR.

The Company did not modify any loans resulting in TDR status during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2020. 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 ~~2019~~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.

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

Nine Months Ended September 30,

2020

2019

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized
Impaired loans with a valuation allowance:

Cash, Securities, and Other

$
1

$
—

$
185

$
—
Commercial and Industrial

3,462

—

1,310

—
Total

$
3,463

$
—

$
1,495

$
—

Impaired loans with no related valuation allowance:

Cash, Securities, and Other

$
1,463

$
—

S
8,088

S
—
Commercial and Industrial

6,088

250

5,463

326
1-4 Family Residential

—

—

1,213

77
Total

$
7,551

$
250

$
14,764

$
403

Total impaired loans:

Cash, Securities, and Other

$
1,464

$
—

$
8,273

$
—
Commercial and Industrial

9,550

250

6,773

326
1-4 Family Residential

—

—

1,213

77
Total

$
11,014

$
250

$
16,259

$
403

~~Allowance for Loan Losses~~


	March 31, 2021						December 31, 2020
			Unpaid		Allowance				Unpaid		Allowance
	Total		Contractual		for		Total		Contractual		for
	Recorded		Principal		Loan		Recorded		Principal		Loan
	Investment		Balance		Losses		Investment		Balance		Losses
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	4	$	4	$	4	$	2	$	2	$	2
Commercial and Industrial		3,419		3,419		1,751		3,419		3,419		1,619
Total	$	3,423	$	3,423	$	1,755	$	3,421	$	3,421	$	1,621

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	19	$	19	$	—	$	48	$	48	$	—
Owner Occupied CRE		479		479		—		479		479		—
Commercial and Industrial		100		100		—		110		110		—
Total	$	598	$	598	$	—	$	637	$	637	$	—

Total impaired loans:
Cash, Securities, and Other	$	23	$	23	$	4	$	50	$	50	$	2
Owner Occupied CRE		479		479		—		479		479		—
Commercial and Industrial		3,519		3,519		1,751		3,529		3,529		1,619
Total	$	4,021	$	4,021	$	1,755	$	4,058	$	4,058	$	1,621

The ~~provision for loan losses for~~recorded investment in loans in the ~~nine months ended September 30, 2020~~previous tables excludes accrued interest, deferred (fees) costs and unamortized premiums/ (unaccreted discounts) which are not material. Interest income, if any, was ~~$4.0 million compared to $0.2 million for the same period in 2019, primarily reflecting an increase based~~recognized on the ~~additional variability surrounding the COVID-19 loan modifications made during the prior quarter and increased economic uncertainty along with strong loan growth.~~cash basis on non-accrual loans.

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The average balance of impaired loans and interest income recognized on impaired loans during the three months ended March 31, 2021 and 2020 are included in the table below (in thousands):


	Three Months Ended March 31,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	3	$	—	$	—	$	—
Commercial and Industrial		3,419		—		4,275		—
Total	$	3,422	$	—	$	4,275	$	—

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	34	$	—	$	2,148	$	—
Owner Occupied CRE		479		—		—		—
Commercial and Industrial		105		—		4,937		81
Total	$	618	$	—	$	7,085	$	81

Total impaired loans:
Cash, Securities, and Other	$	37	$	—	$	2,148	$	—
Owner Occupied CRE		479		—		—		—
Commercial and Industrial		3,524		—		9,212		81
Total	$	4,040	$	—	$	11,360	$	81

Allowance for Loan Losses

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

											��
	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 March 31, 2021
Beginning balance	$	2,579	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539
(Recovery of) provision for loan losses		(6)		(166)		(81)		207		(36)		82		—
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—
Ending balance	$	2,573	$	766	$	3,152	$	2,211	$	1,123	$	2,714	$	12,539

Allowance for loan losses as of March 31, 2021 allocated to loans evaluated for impairment:
Individually	$	4	$	—	$	—	$	—	$	—	$	1,751	$	1,755
Collectively		2,569		766		3,152		2,211		1,123		963		10,784
Ending balance	$	2,573	$	766	$	3,152	$	2,211	$	1,123	$	2,714	$	12,539

Loans as of March 31, 2021, evaluated for impairment:
Individually	$	23	$	—	$	—	$	—	$	479	$	3,519	$	4,021
Collectively		363,132		110,024		452,591		317,457		161,308		138,251		1,542,763
Ending balance	$	363,155	$	110,024	$	452,591	$	317,457	$	161,787	$	141,770	$	1,546,784

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 at September 30, 2020 allocated to loans evaluated for impairment:














Individually

$
2

$
—

$
—

$
—

$
—

$
1,421

$
1,423
Collectively

2,610

733

3,100

1,690

1,069

1,220

10,422
Ending balance

$
2,612

$
733

$
3,100

$
1,690

$
1,069

$
2,641

$
11,845

Loans at September 30, 2020, evaluated for impairment:














Individually

$
66

$
—

$
—

$
—

$
—

$
9,815

$
9,881
Collectively

371,415

105,717

446,959

243,564

154,138

175,810

1,497,603
Ending balance

$
371,481

$
105,717

$
446,959

$
243,564

$
154,138

$
185,625

$
1,507,484

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, 2019

Beginning balance

$
1,049

$
290

$
2,650

$
1,086

$
800

$
1,700

$
7,575
Provision for (recovery of) loan losses

258

18

27

(68)

76

(211)

100
Charge-offs

—

—

—

—

—

—

—
Recoveries

—

—

—

—

—

—

—
Ending balance

$
1,307

$
308

$
2,677

$
1,018

$
876

$
1,489

$
7,675

Changes in allowance for loan losses for the nine months ended September 30, 2019

Beginning balance

$
764

$
232

$
2,552

$
1,264

$
789

$
1,850

$
7,451
Provision for (recovery of) loan losses

535

76

125

(246)

87

(361)

216
Charge-offs

—

—

—

—

—

—

—
Recoveries

8

—

—

—

—

—

8
Ending balance

$
1,307

$
308

$
2,677

$
1,018

$
876

$
1,489

$
7,675

Allowance for loan losses at December 31, 2019 allocated to loans evaluated for impairment:














Individually

$
—

$
—

$
—

$
—

$
—

$
833

$
833
Collectively

1,058

200

2,850

1,176

911

847

7,042
Ending balance

$
1,058

$
200

$
2,850

$
1,176

$
911

$
1,680

$
7,875

Loans at December 31, 2019, evaluated for impairment:














Individually

$
2,803

$
—

$
—

$
—

$
—

$
9,467

$
12,270
Collectively

143,898

28,120

400,134

165,179

127,968

118,990

984,289
Ending balance

$
146,701

$
28,120

$
400,134

$
165,179

$
127,968

$
128,457

$
996,559

~~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 March 31, 2020
Beginning balance	$	1,058	$	200	$	2,850	$	1,176	$	911	$	1,680	$	7,875
Provision for (recovery of) loan losses		34		(14)		158		227		(27)		(11)		367
Charge-offs		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—
Ending balance	$	1,092	$	186	$	3,008	$	1,403	$	884	$	1,669	$	8,242

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

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”~~"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~~Doubtful are considered ~~“classified”~~"classified" and have all the weaknesses inherent in those classified as ~~substandard~~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 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, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (in thousands):

Special

September 30, 2020

Pass

Mention

Substandard


Total
Cash, Securities and Other

$
371,415

$
—

$
66

$
371,481
Construction and Development

105,717

—

—

105,717
1-4 Family Residential

442,076

—

4,883

446,959
Non-Owner Occupied CRE

232,010

11,554

—

243,564
Owner Occupied CRE

153,656

482

—

154,138
Commercial and Industrial

173,061

—

12,564

185,625
Total

$
1,477,935

$
12,036

$
17,513

$
1,507,484


			Special								Special
December 31, 2019	Pass		Mention		Substandard			Total
March 31, 2021									Pass		Mention		Substandard			Total
Cash, Securities and Other	$	143,898	$	—	$	2,803	$	146,701	$	363,132	$	—	$	23	$	363,155
Construction and Development		28,120		—		—		28,120		110,024		—		—		110,024
1-4 Family Residential		395,224		—		4,910		400,134		449,483		—		3,108		452,591
Non-Owner Occupied CRE		164,021		1,158		—		165,179		312,098		5,359		—		317,457
Owner Occupied CRE		127,968		—		—		127,968		160,600		—		1,187		161,787
Commercial and Industrial		114,241		—		14,216		128,457		136,181		—		5,589		141,770
Total	$	973,472	$	1,158	$	21,929	$	996,559	$	1,531,518	$	5,359	$	9,907	$	1,546,784

~~The Company had 0 loans graded doubtful as of September 30, 2020 and December 31, 2019.~~

2320

Table of Contents


			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 March 31, 2021 and December 31, 2020.

NOTE 54 - GOODWILL

Changes in the carrying amount of goodwill were as follows (in thousands):

Wealth Management

Capital Management

Consolidated

Wealth Management

Capital Management

Consolidated

September 30, 2020

December 31, 2019

Beginning balance
$
15,994

$
3,692

$
19,686

$
15,994

$
8,817

$
24,811
Impairment

—

—

—

—

(1,572)

(1,572)
Reclass to held for sale

—

—

—

—

(3,553)

(3,553)
Acquisition activity

4,505

—

4,505

—

—

—
Ending balance
$
20,499

$
3,692

$
24,191

$
15,994

$
3,692

$
19,686


	March 31,		December 31,
	2021		2020
Beginning balance	$	24,191	$	19,686
Acquisition activity		—		4,505
Ending balance	$	24,191	$	24,191

During the ~~nine months~~year ended ~~September 30,~~December 31, 2020, the Company recorded $4.5 million of goodwill as a result of the Branch Acquisition on May 15, 2020. ~~For additional information on goodwill and other intangible related to the acquisition, see Note 2 – Acquisitions.~~

In 2019, an interim goodwill analysis resulted in the recognition of a goodwill impairment loss of $1.6 million in the Capital Management segment. Additionally, the Capital Management goodwill was allocated based on the relative fair value, and $3.6 million was reclassified to assets held for sale in 2019. As of September 30, 2020, the remaining value of goodwill in the Capital Management segment was $3.7 million. For changes related to the portion of goodwill reclassified to assets held for sale, see Note 15 – Assets and Other Liabilities Classified as Held for Sale.

Goodwill is tested annually for impairment on October 31 or earlier upon the occurrence of certain events. The Company performed a qualitative assessment of significant events and circumstances as of September 30, 2020 including reporting units historical and current results, assumptions regarding future performance, overall economic factors, including COVID-19, and macroeconomic developments, to determine the existence of potential indicators of impairment and assess if it is more likely than not that the fair value of reporting units are less than their carrying value. The qualitative assessment indicated that it was more likely than not that the carrying value of the reporting unit exceeded its fair value. Therefore, the Company proceeded to complete the two-step impairment test.

Step 1 of 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 carrying amount of a reporting unit exceeds its fair value, we are required to perform the second step to the impairment test.

As of March 31, 2021 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 not more likely than not that the carrying value of the reporting unit exceeded its fair value. Therefore, the Company did not complete the two-step impairment test.

~~Our Step 1 goodwill impairment analysis as of September 30, 2020 indicated that the Step 2 analysis was unnecessary.~~

NOTE 65 - LEASES

A lease is defined as a contract that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company adopted ASC 842 on January 1, 2019 and recorded an initial right-of-use asset and related lease liability of $12.9 million and $16.6 million, respectively, on the adoption date. There was no cumulative effect upon adoption.

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 ~~2025.~~2032. Certain properties ~~contained~~contain portions that ~~were~~are subleased ~~these~~with terms that ended ~~during the third quarter~~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 sheet.~~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 sheet,~~Condensed Consolidated Balance Sheets, (in thousands).

September 30,

December 31,

2020

2019
Lease Right-of-Use Assets
Classification

Operating lease right-of-use assets
Other assets

$
9,000

$
10,308

Lease Liabilities
Classification

Operating lease liabilities
Other liabilities

$
11,731

$
13,480


		March 31,		December 31,
		2021		2020
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Other assets	$	10,699	$	11,341

Lease Liabilities	Classification
Operating lease liabilities	Other liabilities	$	13,241	$	13,970

~~Table of Contents~~

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

Table of Contents

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,		March 31,		December 31,
	2020		2019		2021		2020
Weighted-Average Remaining Lease Term
Operating leases	4.41	years	4.91	years	4.59	years	4.79	years

Weighted-Average Discount Rate
Operating leases	3.65	%	3.71	%	3.03	%	3.04	%

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 the Company’s net lease costs, (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019
Lease Costs

Operating lease cost
$
786

$
810

$
2,401

$
2,382
Variable lease cost

557

395

1,516

1,168
Sublease income

(33)

(99)

(232)

(298)
Lease costs, net
$
1,310

$
1,106

$
3,685

$
3,252


	Three Months Ended March 31,
	2021		2020
Lease Costs
Operating lease cost	$	752	$	801
Variable lease cost		412		461
Sublease income		—		(99)
Lease costs, net	$	1,164	$	1,163

The following table presents a maturity analysis of the Company’s operating lease liabilities on an annual basis for each of the ~~first~~next five years and total amounts thereafter as of ~~September 30, 2020:~~March 31, 2021 (in thousands):


Year Ending December 31,	Operating Leases
2021⁽¹⁾	$	2,487
2022		3,239
2023		2,937
2024		2,784
2025		1,783
Thereafter		876
Total future minimum lease payments		14,106
Less: imputed interest		(865)
Present value of net future minimum lease payments	$	13,241

________________________________________

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

Twelve months Ended

Operating Leases
September 30, 2021

$
3,082
September 30, 2022

2,804
September 30, 2023

2,586
September 30, 2024

2,369
September 30, 2025

1,835
Thereafter

26
Total future minimum lease payments

$
12,702
Less: Imputed interest

(971)
Present value of net future minimum lease payments

$
11,731

NOTE 76 - DEPOSITS

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


	September 30,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
Money market deposit accounts	$	805,634	$	615,575	$	918,940	$	847,430
Time deposits		177,391		134,913		157,072		172,682
Negotiable order of withdrawal accounts		101,708		91,921		130,540		113,052
Savings accounts		5,976		4,307		7,885		5,289
Total interest-bearing deposits	$	1,090,709	$	846,716	$	1,214,437	$	1,138,453
Aggregate time deposits of $250,000 or greater	$	67,496	$	61,596	$	72,490	$	73,401

Deposits acquired through acquisitions during the year ended 2020 totaled $63.1 million. ~~See Note 2 – Acquisitions for more information.~~

2522

Table of Contents

~~Overdraft balances classified as loans totaled an immaterial amount at September 30, 2020 and December 31, 2019.~~

Overdraft balances classified as loans totaled an immaterial amount and $0.1 million as of March 31, 2021 and December 31, 2020.

The following presents the scheduled maturities of all time deposits for the next five years ending March 31 (in thousands):


Year Ending December 31,		Time Deposits
2021⁽¹⁾	$	101,510
2022		29,461
2023		22,006
2024		2,455
2025		1,589
Thereafter		51
Total	$	157,072

________________________________________

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

NOTE 87 - BORROWINGS

The Bank has executed a blanket pledge and security agreement with the ~~Federal Home Loan Bank of Topeka (“FHLB”)~~FHLB that requires certain loans and securities be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 amounted to ~~$612.1~~$692.4 million and ~~$515.5~~$668.6 million, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional ~~$401.9~~$459.1 million ~~at September 30, 2020.~~as of March 31, 2021. Each advance is payable at its maturity date.

The Company had the following required maturities on FHLB borrowings ~~from FHLB Topeka at~~as of the dates noted (in thousands):


		September 30,		December 31,			March 31,		December 31,
Maturity Date	Rate %	2020		2019		Rate %	2021		2020
August 26, 2020	1.94		—		10,000
October 23, 2020⁽¹⁾	—		3,000		—
April 22, 2022	0.37		5,000		—	0.37	$	5,000	$	5,000
May 5, 2023	0.76		10,000		—	0.76		10,000		10,000
Total		$	18,000	$	10,000		$	15,000	$	15,000

⁽¹⁾~~FHLB COVID-19 Relief Advance~~

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”~~("PPPLF") extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face ~~value.~~value and bearing interest at 35bps. The terms of the loans are directly tied to the underlying PPP loans, which were originated at 2 or 5 years. As of ~~September 30, 2020~~March 31, 2021 the Company is utilizing ~~$204.1~~$183.0 million under the PPPLF program which is included in the ~~Federal Home Loan Bank Topeka~~FHLB and Federal Reserve borrowings line of the ~~condensed consolidated balance sheets.~~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 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, there were 0 amounts outstanding on any of the federal funds lines.

As of September 30, 2020 and 2019, subordinated notes (the "2016 Sub Notes") issued to various investors totaled $6.6 million. The 2016 Sub Notes accrue interest at a rate of 7.25% per annum until December 31, 2021, at which time the rate will adjust each quarter to the then current 90 day London Interbank Offered Rate ("LIBOR") plus 587 basis points, mature on December 31, 2026, are redeemable at the option of the Company after January 1, 2022, and pay interest quarterly.

On ~~March 17,~~October 28, 2020, the Company ~~completed the issuance~~entered into a Business Loan Agreement and ~~sale of subordinated notes~~associated Promissory Note (the ~~"2020 Sub Notes"~~"Note") ~~to one investor totaling $8.0 million in aggregate principal amount. The issuance included $0.1 million of issuance costs resulting in a net balance of $7.9 million as of September~~, dated June 30, 2020, ~~included in the Subordinated notes line~~with a correspondent lending partner. The Note is secured by stock of the ~~condensed consolidated balance sheets. The 2020 Sub Notes accrue~~Bank and bears interest at ~~a rate~~the one month ICE Benchmark Administration ("IBA") LIBOR plus 2.5%. As of ~~5.125% per annum until~~ March 31, ~~2025, at which time~~2021 and December 31, 2020, there were 0 amounts outstanding and the ~~rate will adjust each quarter to the then current three-month LIBOR, or an alternative rate determined in accordance~~borrowing capacity associated with ~~the terms of the 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.~~both facilities was $5.0 million.

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”~~"well capitalized" by federal banking agencies (see Note 1716 – Regulatory Capital Matters). As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company was in compliance with the covenant requirements.

The Company had a Restated Revolving Credit Note (the "Credit Note") with a correspondent lending partner which matured on June 30, 2020 and was renewed under a new Business Loan Agreement and associated Promissory Note (the “Note”) dated June 30, 2020. The Note is secured by stock of the Bank and bears interest at the one month ICE Benchmark Administration (ICE) LIBOR plus 2.5%. As of September 30, 2020 and December 31, 2019, there were 0 amounts outstanding and the borrowing capacity associated with each facility was $5.0 million.

~~Table of Contents~~

NOTE 98 - COMMITMENTS AND CONTINGENCIES

The ~~Bank~~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

Table of Contents

the ~~condensed consolidated balance sheets.~~Condensed Consolidated Balance Sheets. Commitments may expire without being utilized. The ~~Bank’s~~Company’s exposure to loan loss is represented by the contractual amount of these commitments, although material losses are not anticipated. The ~~Bank~~Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

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


	September 30, 2020				December 31, 2019				March 31, 2021				December 31, 2020
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	74,726	$	327,326	$	32,896	$	290,653	$	78,991	$	438,037	$	78,506	$	360,883
Standby letters of credit		1,754		17,324		1,759		24,197		413		17,200		1,933		17,524
Commitments to make loans to sell		419,035		—		47,354		—		192,355		—		370,512		—
Commitments to make loans	$	23,496	$	33,691	$	—	$	—	$	20,018	$	17,706	$	24,225	$	25,316

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 ~~Bank,~~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 ~~Bank~~Company is committed.

Standby letters of credit are conditional commitments issued by the ~~Bank~~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 ~~Bank~~Company holds collateral supporting those commitments if deemed necessary.

Commitments to make loans to sell are agreements to ~~sell~~lend to a ~~loan~~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, ~~after consulting with our~~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.

Without admitting or denying the SEC’s findings, FWCM agreed on July 16, 2020 to settle claims that FWCM failed reasonably to supervise its investment adviser representatives who purchased securities sold in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), for advisory clients when the clients were not qualified institutional buyers in a Rule 144A transaction, and to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 and the rules thereunder by the adviser and its supervised persons. FWCM paid a previously accrued fine of $0.2 million to the SEC, and replaced the FWCM President and FWCM compliance team in place at that time.

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NOTE 109 - 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, the Company announced that its ~~Board~~board of ~~Directors~~directors had authorized a share repurchase ~~program~~plan (the "2019 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 no objection to the Company’s ~~stock repurchase program.~~2019 Repurchase Plan. The ~~repurchase~~2019 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,

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corporate and regulatory requirements and market conditions. The 2019 Repurchase Plan expired in June of 2020. During the three months ended March 31, 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 ~~Company~~repurchase of up to ~~purchase its~~400,000 shares of the Company’s common stock, 0 par value, from time to time, within one year (the "2020 Repurchase Plan") and that the Board of Governors of the Federal Reserve System advised the Company that it has no objection to the Company’s 2020 Repurchase Plan. The Company may repurchase shares in privately negotiated transactions, in the open market, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 ~~plan~~ promulgated by the Securities and Exchange ~~Commissions,~~Commission, or otherwise in a manner that complies with applicable federal securities laws. ~~During the year ended December 31, 2019,~~The 2020 Repurchase Plan does not obligate the Company ~~repurchased 43,698~~to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at ~~an average price of $16.51.~~any time without notice. During the nine months ended September 30, 2020, the Company repurchased 22,679 shares at an average price of $16.50. The share repurchase program expired in June 2020 and therefore 0 shares were repurchased during the three months ended ~~September 30, 2020.~~March 31, 2021, the Company did not repurchase any shares under the 2020 Repurchase Plan.

During the three months ended March 31, 2021 and 2020, 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 ~~nine~~three months ended ~~September 30,~~March 31, 2020, the Company recognized compensation expense of ~~$0.1~~$0.2 million, representing ~~the remaining~~ 14,114 ~~shares, related to the performance based awards. During the year ended December 31, 2019, the Company recognized compensation expense of $0.6 million, representing 38,518~~ shares, related to the performance-based awards. The performance based awards fully vested in the second quarter ~~2020, 0 expenses were recognized in the three months ended September 30,~~of 2020.

As of ~~September 30, 2020,~~March 31, 2021, the Restricted Stock Awards have a weighted-average grant date fair value of $28.50 per share. The Company recognized compensation expense of $0.1 million and ~~$0.5~~$0.2 million for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~respectively, for the Restricted Stock Awards. ~~During the nine months ended September 30, 2020 and 2019, the Company has recognized compensation expense of $0.3 million and $0.7 million for the Restricted Stock Awards, respectively.~~ As of ~~September 30, 2020,~~March 31, 2021, the Company has $~~0.6~~0.4 million of unrecognized stock-based compensation expense related to the shares ~~issued. As of September 30, 2020, the unrecognized stock-based compensation expense~~issued, which is expected to be recognized over a weighted average period of ~~1.5 years. Performance based~~1.0 year. NaN Restricted Stock Awards ~~representing 30,088 shares~~ vested during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 or 2020.

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 30, 2020,~~March 31, 2021, there were a total of ~~504,397~~469,498 shares available for issuance under the First Western Financial, Inc. 2016 Omnibus Incentive Plan (“("the 2016 ~~Plan”~~Plan"). If the Awards outstanding under the ~~First Western~~ 2008 ~~Stock Incentive~~ Plan ~~(“the 2008 Plan”)~~ or the 2016 Plan are forfeited, cancelled or terminated with 0no 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 ~~not~~0t grant any stock options during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020.

During the three months ended ~~September 30,~~March 31, 2021, the Company recognized an immaterial amount of stock based compensation expense. During the three months ended March 31, 2020, ~~and 2019,~~ the Company recognized stock based compensation expense of $0.1 million and $0.1 million, respectively, associated with stock options. During the nine months ended September 30, 2020 and 2019, the Company recognized stock based compensation expense of $0.2 million and $0.2 million, respectively, associated with stock options.million. As of ~~September 30, 2020,~~March 31, 2021, the Company has ~~$0.1million~~an immaterial amount of unrecognized stock-based compensation expense related to stock options which are unvested. ~~As of September 30, 2020, the unrecognized~~That cost is expected to be recognized over a weighted-average period of less than one year.

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The following summarizes activity for nonqualified stock options for the ~~nine~~three months ended ~~September 30, 2020:~~March 31, 2021:

:
				Weighted
		Weighted		Average					Weighted
	Number	Average		Remaining	Aggregate		Weighted		Average
	of	Exercise		Contractual	Intrinsic	Number	Average		Remaining	Aggregate
	Options	Price		Term	Value	of	Exercise		Contractual	Intrinsic
Outstanding at December 31, 2019	419,197	$	29.02
						Options	Price		Term	Value
Outstanding as of December 31, 2020						419,197	$	29.02
Granted	-		-			—		—
Exercised	-		-			—		—
Forfeited or expired	-		-			(33,550)		36.57
Outstanding at September 30, 2020	419,197	$	29.02	2.9	(a)
Options fully vested / exercisable at September 30, 2020	396,916	$	29.20	2.7	(a)
Outstanding as of March 31, 2021						385,647		28.36	2.5	⁽¹⁾
Options fully vested / exercisable as of March 31, 2021						381,577	$	28.38	2.4	⁽¹⁾

~~(a)~~

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

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

As of ~~September 30, 2020 and December~~March 31, ~~2019,~~2021, there were ~~396,916 and 394,020~~381,577 options ~~respectively,~~ that were exercisable. Exercise prices are between $20.00 and $40.00 per share, and the options are exercisable for a period of ten-years from the original grant date and expire on various dates between 2022 and 2026.

Restricted Stock Units

Pursuant to the 2016 Plan, the Company can grant associates and non-associate ~~directors’~~directors long-term cash and stock-based compensation. ~~During~~Historically, the ~~nine months ended September 30, 2020, 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 the activity for the Time Vesting Units, the Financial Performance Units and the Market Performance Units for the ~~nine~~three months ended ~~September 30, 2020:~~March 31, 2021:


	Time	Financial	Market	Time	Financial	Market
	Vesting	Performance	Performance	Vesting	Performance	Performance
	Units	Units	Units	Units	Units	Units
Outstanding at December 31, 2019	209,444	69,426	14,862
Outstanding as of December 31, 2020				285,052	152,430	14,862
Granted	109,607	60,859	-	—	—	—
Vested	(54,112)	-	-	(8,951)	—	—
Forfeited	(1,888)	(854)	-	(5,683)	(2,044)	—
Outstanding at September 30, 2020	263,051	129,431	14,862
Outstanding as of March 31, 2021				270,418	150,386	14,862

During the three months ended ~~September 30, 2020,~~March 31, 2021, the Company issued ~~12,725~~6,127 shares of common stock upon the settlement of ~~Time Vesting~~Restricted Stock Units. The remaining ~~6,196~~2,824 shares that vested during the period were surrendered with a combined market value at the date of settlement of $0.1 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 Time Vesting Units. The remaining 19,852 shares that vested during the period were surrendered with a combined market value at the dates of settlement of $0.3 million to cover employee withholding taxes. During the three and nine months ended September 30, 2019 the Company issued 15,446 shares of common stock upon the settlement of Time Vesting Units. The remaining 7,835 shares that vested during the period were surrendered with a combined market value at the dates of settlement of $0.1 million to cover employee withholding taxes. During the three months ended March 31, 2020, 0 Restricted Stock Units vested. As a result, the Company did 0t issue shares of common stock upon the settlement of Restricted Stock Units.

Time Vesting Units

Time Vesting Units are granted to full-time associates and board members at the date approved by the Company’s ~~Board~~board of ~~Directors.~~directors. The Company ~~granted 109,607~~did 0t grant any Time Vesting Units ~~with a five-year service period~~ during the ~~nine~~three months ended September 30, 2020, that vest in equal installments of 20% on the anniversary of the grant date, assuming continuous employment through the scheduled vesting dates. Time Vesting Units granted in 2020 have a weighted-average grant-date fair value of $12.84 ~~per~~ ~~unit.~~March 31, 2021. During the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the Company recognized compensation expense of $0.4 million and $0.3 million, ~~respectively. During~~respectively, for the ~~nine months ended September 30, 2020 and 2019, the company recognized compensation expense of $1.0 million and $0.7 million, respectively, for~~

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Time Vesting Units. As of ~~September 30, 2020, the Company has $3.8~~March 31, 2021, there was $3.4 million of unrecognized ~~stock-based~~ compensation expense related to the Time Vesting Units, which is expected to be recognized over a weighted-average period of ~~approximately 2.0~~1.7 years.

Financial Performance Units ~~Granted Prior to May 1, 2019~~

Financial Performance Units ~~were~~are granted to certain key associates and are earned based on the Company achieving various financial performance ~~metrics beginning on the grant date and ending on December 31, 2019.~~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 ~~two-year service period~~ vesting ~~requirement ending on December 31, 2021.~~ period.

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The ~~end of~~following presents the ~~performance metrics period, December 31, 2019, resulted in accruing at 50% for half~~ ~~of the awards and at 100% for the remainder. The maximum shares that can be issued at the determined thresholds~~Company’s existing Financial Performance Units as of ~~September 30, 2020 are approximately 10,000 shares. During~~March 31, 2021 (dollars in thousands):

Grant Period

Threshold Accrual

Maximum Issuable Shares at Current Threshold

Unrecognized Compensation Expense

Weighted-Average ⁽¹⁾

Financial Metric End Date

Vesting Requirement End Date

Prior to May 1, 2019

50% on half; 100% on other half

10,035

0.8 years

December 31, 2019

December 31, 2021

May 1, 2019 through April 30, 2020

150%

84,531

475

2.8 years

December 31, 2021

December 31, 2023

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

150%

86,226

579

3.8 years

December 31, 2022

December 31, 2023

On November 18, 2020

150%

34,752

380

3.6 years

December 31, 2022

50% November 18, 2023 & 2025

⁽¹⁾Represents the three and nine months ended September 30, 2020 and 2019, the Company recognized an immaterial amount of compensation expense for the Financial Performance Units. As of September 30, 2020, there was $0.1 million of unrecognized compensation expense related to the Financial Performance Units. As of September 30, 2020, the Company hasexpected unrecognized stock-based compensation expense ~~that is expected to be recognized over a weighted-average period of 1.3 years.~~recognition period.

The following presents the Company’s Financial Performance Units ~~Granted from May 1, 2019 through April 30, 2020~~

The Company granted 1,866 Financial Performance Units during the nine months ended September 30, 2020. In 2019, the Company granted 62,569 Financial Performance Units to officers and other key associates. All Financial Performance Units granted Between May 1, 2019 and May 1, 2020, have a five-year term and are earned based on the Company achieving various financial metrics beginning on the grant date and ending on December 31, 2021, which include various thresholds from 0% to 150%, then the Financial Performance Units will have a subsequent two-year service period vesting requirement ending on December 31, 2023. As of September 30, 2020, the Company is accruing at the maximum thresholdactivity for the awards. The maximum number of shares that can be issued at 150% as of September 30, 2020 was approximately 86,200 shares. During the three months ended September 30, 2020 and 2019, the Company recognized $0.1 million of compensation expense, for Financial Performance Units. For the nine months ended September 30, 2020 and 2019, the Company recognized $0.2 million and $0.1 million, respectively. As of September 30, 2020, there was $0.6 million of unrecognized compensation expense related to the Financial Performance Units. As of September 30, 2020, the unrecognized stock-based compensation expense is expected to be recognized over a weighted-average period of 3.3 years.years noted March 31 (dollars in thousands, except share amounts


	Units Granted		Compensation Expense Recognized
Grant Period	2021	2020	2021		2020
Prior to May 1, 2019	—	—	$	15	$	*
May 1, 2019 through April 30, 2020	—	1,866		56		*
May 1, 2020 through December 31, 2020, excluding November 18, 2020	—	—		55		—
On November 18, 2020	—	—	$	34	$	—

~~Financial Performance Units Granted from May 1, 2020 through September 30, 2020~~^*Not meaningful

The Company granted 699 and 58,993 Financial Performance Units during the three and nine months ended September 30, 2020. All Financial Performance Units granted on or after May 1, 2020, have a five-year term and are earned based on the Company achieving various financial metrics beginning on the grant date and ending on December 31, 2022, which include various thresholds from 0% to 150%, then the Financial Performance Units will have a subsequent two-year service period vesting requirement ending on December 31, 2023. As of September 30, 2020, the Company is accruing at maximum threshold for the awards. The maximum number of shares that can be issued at 150% as of September 30, 2020 was approximately 87,900 shares. During the three and nine months ended September 30, 2020, the Company recognized $0.1 million of compensation expense for the Financial Performance Units. As of September 30, 2020, there was $0.7 million of unrecognized compensation expense related to the Financial Performance Units. As of September 30, 2020, the unrecognized stock-based compensation expense is expected to be recognized over a weighted-average period of 4.3 years.

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 months ended March 31, 2021 and 2020, the Company recognized an immaterial amount of compensation expense for the Market Performance Units. As of March 31, 2021, there was $0.4 million of unrecognized compensation expense related to the Market Performance Units which is expected to be recognized over a weighted-average period of 1.3 years.

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 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 eligible to be earned.

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 months ended

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September 30, 2020 and 2019, the Company recognized an immaterial amount of compensation expense for the Market Performance Units. As of September 30, 2020, there was $0.4 million of unrecognized compensation expense related to the Market Performance Units which is expected to be recognized over a weighted-average period of 1.8 years.

NOTE 1110 - EARNINGS PER COMMON SHARE

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


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Earnings per common share - Basic
Numerator:
Net income	$	9,630	$	2,406	$	19,660	$	5,437
Dividends on preferred stock		—		—		—		—
Net income available for common shareholders	$	9,630	$	2,406	$	19,660	$	5,437	$	5,999	$	1,334

Denominator:
Basic weighted average shares		7,911,871		7,890,794		7,888,675		7,882,221		7,935,664		7,863,564
Earnings per common share - basic	$	1.22	$	0.30	$	2.49	$	0.69	$	0.76	$	0.17

Earnings per common share - Diluted
Numerator:
Net income	$	9,630	$	2,406	$	19,660	$	5,437
Dividends on preferred stock		—		—		—		—
Net income available for common shareholders	$	9,630	$	2,406	$	19,660	$	5,437	$	5,999	$	1,334

Denominator:
Basic weighted average shares		7,911,871		7,890,794		7,888,675		7,882,221		7,935,664		7,863,564
Diluted effect of common stock equivalents:
Stock options		—		—		—		—		4,923		—
Time Vesting Units		85,897		10,702		44,310		4,942		102,530		28,632
Financial Performance Units		7,786		123		16,176		41		46,289		25,049
Market Performance Units		13,453		13,175		13,347		13,357		14,197		13,366
Restricted Stock Awards		—		—		—		—
Total diluted effect of common stock equivalents		107,136		24,000		73,833		18,340		167,939		67,047
Diluted weighted average shares		8,019,007		7,914,794		7,962,508		7,900,561		8,103,603		7,930,611
Earnings per common share - diluted	$	1.20	$	0.30	$	2.47	$	0.69	$	0.74	$	0.17

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

~~As of September 30, 2020 and 2019,~~The table below presents potentially dilutive securities excluded from the diluted earnings per share calculation ~~are as follows:~~for the periods indicated:

Three Months Ended September 30,

Nine Months Ended September 30,



2020


2019

2020


2019
Stock options

419,197

423,197

419,197

438,364
Time Vesting Units

82,600

130,821

87,304

163,141
Financial Performance Units

116,051

55,028

70,769

47,008
Restricted Stock Awards

21,054

61,668

41,517

83,713
Total potentially dilutive securities

638,902

670,714

618,787

732,226


	Three Months Ended March 31,
	2021	2020
Stock options	278,109	419,197
Time Vesting Units	3,982	86,923
Financial Performance Units	23,168	—
Restricted Stock Awards	21,054	61,668
Total potentially dilutive securities	326,313	567,788

NOTE 1211 - INCOME TAXES

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, the Company recorded an income tax provision of ~~$3.2~~$2.0 million and ~~$6.3~~$0.4 million, respectively, reflecting an effective tax rate of ~~24.9%~~25.4% and ~~24.3%, respectively. During the~~

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~~three and nine months ended September 30, 2019, the Company recorded an income tax provision of $0.8 million and $1.9 million, respectively, reflecting an effective tax rate of 24.5% and 25.5%~~20.8%, respectively.

NOTE 1312 - RELATED-PARTY TRANSACTIONS

The Bank extends credit ~~under Regulation O~~ to certain covered parties including Company directors, executive officers and their affiliates. ~~At September 30, 2020~~As of March 31, 2021 and December 31, ~~2019,~~2020, 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 ~~benefits~~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 thousands):

September 30, 2020

December 31, 2019
Balance, beginning of year

$
5,675

$
2,659
Funded loans

6,808

11,618
Payments collected

(7,161)

(8,602)
Balance, end of year

$
5,322

$
5,675

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	March 31, 2021		December 31, 2020
Balance, beginning of year	$	14,321	$	5,675
Funded loans		2,312		17,348
Payments collected		(5,150)		(8,702)
Balance, end of period	$	11,483	$	14,321

Deposits from related parties held by the Bank ~~at September 30, 2020~~as of March 31, 2021 and December 31, ~~2019~~2020 totaled ~~$21.8~~$24.1 million and ~~$28.5~~$26.2 million, respectively.

The Company leases office spaces from entities controlled by one of the Company’s board members. During the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the Company incurred $0.1 million and an immaterial amount, respectively, of expenses ~~of $0.1 million.~~related to these leases.

NOTE 1413 - 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:

Investment Securities: The fair values for 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).

Guarantee ~~asset~~Asset and ~~liability~~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~~loan 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. 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. ~~The guarantee liability is the fair value of the guarantee assets less amortization (Level 3).~~

Mortgage Related Derivatives: Mortgage related derivatives include our Interest Rate Lock Commitments ~~(“IRLC”~~("IRLC") ~~and~~, Forward Sale Commitments ~~(“FSC”~~("FSC"): ~~Fair values of these mortgage derivatives are estimated based~~ and the forward commitments on ~~changes in mortgage interest rates from the date the commitment related to the loan is locked.~~our Loans Held for Sale ("LHFS") pipeline. The fair value estimate 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. IRLC fair value estimate is adjusted using unobservable~~date and pull through ~~rates~~assumptions (Level 3). The FSC fair value estimate ~~is adjusted for any pair-off fees from~~reflects the ~~individual~~potential pair off fee associated with mandatory trades by using a market differential and pair off penalty assessed by the investor (Level 3). The fair value estimate of the forward commitments is based on market prices of similar securities to the underlying MBS (Level 2).

~~Derivative instruments~~Our mortgage derivatives are carried at fair value in the Company’s financial ~~statements. Changes~~statements with changes in the fair value ~~of a derivative instrument are~~ accounted for within the ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~income.~~

~~Table of Contents~~

~~The following presents assets and liabilities measured on a recurring basis at September 30, 2020 and December 31, 2019 (in thousands):~~

Quoted






Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported
September 30, 2020

(Level 1)

(Level 2)

(Level 3)

Balance
Investment securities available-for-sale:








U.S. Treasury debt

$
256

$
—

$
—

$
256
Corporate bonds

—

2,048

—

2,048
GNMA mortgage-backed securities - residential

—

29,788

—

29,788
FNMA mortgage-backed securities - residential

—

2,716

—

2,716
Corporate CMO and MBS

—

5,846

—

5,846
Total securities available-for-sale

$
256

$
40,398

$
—

$
40,654
Equity securities

$
732

$
—

$
—

$
732
Guarantee asset

$
—

$
—

$
245

$
245
IRLC and FSC, net

$
—

$
—

$
11,622

$
11,622
Guarantee liability

$
—

$
—

$
153

$
153

Quoted






Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported
December 31, 2019

(Level 1)

(Level 2)

(Level 3)

Balance
Investment securities available-for-sale:








U.S. Treasury debt

$
254

$
—

$
—

$
254
GNMA mortgage-backed securities - residential

—

45,312

—

45,312
FNMA mortgage-backed securities - residential

—

2,917

—

2,917
Corporate CMO and MBS

—

10,420

—

10,420
Total securities available-for-sale

$
254

$
58,649

$
—

$
58,903
Equity securities

$
713

$
—

$
—

$
713
IRLC and FSC, net

$
—

$
—

$
1,184

$
1,184

Income.

~~The following presents a reconciliation~~Mortgage Loans Held for ~~level 3 instruments measured at fair value on a recurring basis (in thousands)~~Sale:

Three Months Ended September 30, 2020

Guarantee Asset

IRLC and FSC, Net

Guarantee Liability
Beginning balance

$
222

$
7,482

$
191
Gains (losses) in net income, net

39

1,066

(38)
Other settlements, net⁽¹⁾

(16)

3,074

—
Ending balance

$
245

$
11,622

$
153

⁽¹⁾ ~~Other settlements for IRLC and FSC includes the settlement of FSC and the transfer of the~~ The fair value of ~~loan purchase or IRLC at the time~~mortgage loans ~~are originated.~~

Nine Months Ended September 30, 2020

Guarantee Asset

IRLC and FSC, Net

Guarantee Liability
Beginning balance

$
—

$
1,184

$
—
Sales

245

—

244
Gains (losses) in net income, net

55

1,713

(91)
Other settlements, net⁽¹⁾

(55)

8,725

—
Ending balance

$
245

$
11,622

$
153

⁽¹⁾ ~~Other settlements~~held for ~~IRLC and FSC includes the settlement of FSC and the transfer of the fair value of loan purchase or IRLC at the time loans are originated.~~

~~Mutual funds and U.S. Treasury debt are reported at fair value utilizing Level 1 inputs. The remaining portfolio of securities are reported at fair value with~~sale is estimated based upon quotes from third party investors for similar assets resulting in a Level 2 ~~inputs provided by a pricing service. As of September 30, 2020 and~~

~~Table of Contents~~

December 31, 2019, 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.classification.

As of September 30, 2020, equity securities and guarantee assets have been recorded at fair value within the other assets line item and the guarantee liabilities have been recorded at fair value with the other liabilities line item in the condensed consolidated balance sheet. All changes are recorded in the other line item in the condensed consolidated statement of income.

Other Real Estate Owned: 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

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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 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 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 September 30, 2020 and December 31, 2019 (in thousands):~~

⁽¹⁾ ~~An immaterial Cash, Securities and Other loan was fully reserved for using a specific allowance at September 30, 2020.~~

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

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~~At September 30, 2020, other real estate owned decreased slightly from December 31, 2019~~The following presents assets and ~~had~~liabilities measured on a ~~carrying amount of $0.6 million, which is the cost~~recurring basis ~~of $2.4 million net of a valuation allowance of $1.8 million.~~

At September 30, 2020, total 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 $1.4 million and were classified as Level 3. As of December 31, 2019, impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had carrying values of $4.4 million with valuation allowances of $0.8 million and were classified as Level 3.

~~Impaired loans accounted for specific reserves of $1.4 million and $0.8 million~~ as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019. The Bank charged off an immaterial amount during the nine months ended September 30,~~ 2020 ~~from the specific reserve. The Bank charged off $0.2 million during the year ended December 31, 2019 from the specific reserve.~~

The following presents quantitative information about the significant unobservable inputs used in the fair value measurement of recurring and nonrecurring non-financial instruments categorized within Level 3 of the fair value hierarchy as of September 30, 2020 and December 31, 2019 (dollars in(in thousands):

~~Quantitative Information about Level 3 Fair Value Measurements at September 30, 2020~~

~~Valuation~~

~~Significant~~

~~Range~~

~~Fair Value~~

~~Technique~~

~~Unobservable Input~~

~~(Weighted Average)~~

~~Other real estate owned:~~

~~Commercial properties~~

~~558~~

~~Sales contract~~

~~Commission, cost to sell, closing costs~~

~~3% - 10% (7%)~~

~~Total impaired loans~~⁽¹⁾:

~~Commercial and Industrial~~

~~1,998~~

~~Sales comparison, Market approach - guideline transaction method~~

~~Management discount for asset/property type~~

~~17% - 20% (20%)~~

⁽¹⁾ ~~An immaterial Cash, Securities and Other loan was fully reserved for using a specific allowance at September 30, 2020.~~


	Quoted
	Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs		Reported
March 31, 2021	(Level 1)		(Level 2)		(Level 3)		Balance
Investment securities available-for-sale:
U.S. Treasury debt	$	253	$	—	$	—	$	253
Corporate bonds		—		6,088		—		6,088
GNMA mortgage-backed securities - residential		—		19,980		—		19,980
FNMA mortgage-backed securities - residential		—		1,670		—		1,670
Corporate CMO and MBS		—		2,852		—		2,852
Total securities available-for-sale	$	253	$	30,590	$	—	$	30,843
Equity securities	$	717	$	—	$	—	$	717
Guarantee asset	$	—	$	—	$	188	$	188
IRLC, net	$	—	$	—	$	2,105	$	2,105
Forward commitments	$	—	$	5,482	$	(173)	$	5,309
Mortgage loans held for sale	$	—	$	176,644	$	—	$	176,644


	Quantitative Information about Level 3 Fair Value Measurements at December 31, 2019								Quoted
			Valuation		Significant		Range		Prices in		Significant
	Fair Value		Technique		Unobservable Input		(Weighted Average)		Active Markets		Other		Significant
Other real estate owned:
Commercial properties	$	658		Appraisal value		Discount rate		50% (50%)
						Commission and cost to sell		1% - 10% (7%)	for Identical		Observable		Unobservable
Total impaired loans:
Commercial and Industrial	$	3,579		Sales comparison, Market approach - guideline transaction method		Management discount for asset/property type		0% - 50% (23%)
									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									$	—	$	(2,534)	$	(89)	$	(2,623)
Mortgage loans held for sale									$	—	$	161,843	$	—	$	161,843

The following presents ~~carrying amounts and estimated~~a reconciliation for level 3 instruments measured at fair ~~values for financial instruments as of September 30, 2020 and December 31, 2019~~value on a recurring basis (in thousands):

Carrying

Fair Value Measurements Using:
September 30, 2020

Amount

Level 1

Level 2

Level 3
Assets:

Cash and cash equivalents

$
250,358

$
250,358

$
—

$
—
Securities available-for-sale

40,654

256

40,398

—
Loans, net

1,494,231

—

—

1,493,863
Mortgage loans held for sale

89,872

—

89,872

—
Accrued interest receivable

6,730

—

6,730

—
Equity securities

732

732

—

—
IRLC and FSC, net

11,622

—

—

11,622
Guarantee asset

245

—

—

245
Liabilities:








Deposits

1,563,672

—

1,565,555

—
Borrowings:








FHLB Topeka Borrowings – fixed rate

18,000

—

18,070

—
Federal Reserve Borrowings – fixed rate

204,075

—

204,075

—
Subordinated notes – fixed-to-floating rate

14,447

—

—

14,997
Accrued interest payable

347

—

347

—


Three Months Ended March 31, 2021	Guarantee Asset		IRLC		Forward Commitments
Beginning balance	$	232	$	9,841	$	(89)
Acquisitions		—		2,684		—
Originations		—		(7,016)		—
Sales		—		—		—
Gains (losses) in net income, net		(44)		(3,404)		(84)
Other settlements		—		—		—
Ending balance	$	188	$	2,105	$	(173)

3531

Table of Contents

~~Guarantee liability~~

~~153~~

—

~~153~~


Three Months Ended March 31, 2020	Guarantee Asset		IRLC		Forward Commitments
Beginning balance	$	—	$	1,184	$	—
Acquisitions		—		7,722		—
Originations		—		(5,644)		—
Sales		229		—		—
Gains (losses) in net income, net		(33)		763		(16)
Other settlements		—		—		—
Ending balance	$	196	$	4,025	$	(16)

Carrying

Fair Value Measurements Using:
December 31, 2019

Amount

Level 1

Level 2

Level 3
Assets:












Cash and cash equivalents

$
78,638

$
78,638

$
—

$
—
Securities available-for-sale

58,903

254

58,649

—
Loans, net

990,132

—

—

974,142
Mortgage loans held for sale

48,312

—

48,312

—
Accrued interest receivable

3,048

—

3,048

—
Equity securities

713

713

—

—
IRLC and FSC, net

1,184

—

—

1,184
Liabilities:








Deposits

1,086,784

—

1,089,261

—
Borrowings:








FHLB Topeka Borrowings – fixed rate

10,000

—

10,003

—
Subordinated notes – fixed-to-floating rate

6,560

—

—

6,004
Accrued interest payable

$
299

$
—

$
299

$
—

Mutual funds and U.S. Treasury debt are 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 March 31, 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 March 31, 2021, equity securities, IRLC, and guarantee assets have been recorded at fair value within the Other assets line item and the FSC and guarantee liabilities have been recorded at fair value with the Other liabilities line item in the Condensed Consolidated Balance Sheets. All changes are recorded in the Other line item in the Condensed Consolidated Statements of Income.

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

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

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Guarantee asset

188

Discounted cash flow

Discount rate
Prepayment rate

3% (3%)
26% (26%)

IRLC, net

2,105

Best execution model

Pull through

74% to 100% (91%)

Forward commitments

(173)

Internal pricing model

Market Differential

-164bps to -18bps
(-49bps)

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%)

Forward commitments

(89)

Internal pricing model

Market Differential

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

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

Quoted

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Reported

March 31, 2021

(Level 1)

(Level 2)

(Level 3)

Balance

Total impaired loans⁽¹⁾:

Commercial and Industrial

—

1,668


	Quoted
	Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs		Reported
December 31, 2020	(Level 1)		(Level 2)		(Level 3)		Balance
Other real estate owned:
Commercial properties	$	—	$	—	$	194	$	194

Total impaired loans⁽¹⁾:
Commercial and Industrial	$	—	$	—	$	1,800	$	1,800

⁽¹⁾ An immaterial Cash, Securities, and Other loan was fully reserved for using a specific allowance as of March 31, 2021 and December 31, 2020.

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

As of March 31, 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 March 31, 2021, total 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 $1.8 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 March 31, 2021 and December 31, 2020. The Bank did not have any charge offs during the three months ended March 31, 2021 from the specific reserve. The Bank charged off an immaterial amount during the year ended December 31, 2020 from the specific reserve.

Table of Contents

The following presents quantitative information about the significant unobservable inputs used in the fair value measurement of recurring and nonrecurring non-financial instruments categorized within Level 3 of the fair value hierarchy as of March 31, 2021 and December 31, 2020 (dollars in thousands):

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

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Total impaired loans⁽¹⁾:

Commercial and Industrial

1,668

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 45% (31%)

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

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%)

Total 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⁾ Two immaterial Cash, Securities and Other loans were fully reserved for using a specific allowance as of March 31, 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 March 31, 2021 and December 31, 2020 (in thousands):


	Carrying		Fair Value Measurements Using:
March 31, 2021	Amount		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	375,936	$	375,936	$	—	$	—
Loans, net		1,531,387		—		—		1,526,059
Accrued interest receivable		6,852		—		6,852		—
Liabilities:
Deposits		1,807,825		—		1,809,274		—
Borrowings:
FHLB borrowings – fixed rate		15,000		—		15,083		—
Federal Reserve borrowings – fixed rate		183,041		—		183,041		—
Subordinated notes – fixed-to-floating rate		24,248		—		—		25,658
Accrued interest payable	$	612	$	—	$	612	$	—

Table of Contents


	Carrying		Fair Value Measurements Using:
December 31, 2020	Amount		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	155,989	$	155,989	$	—	$	—
Loans, net		1,520,294		—		—		1,512,699
Accrued interest receivable		6,618		—		6,618		—
Liabilities:
Deposits		1,619,910		—		1,621,648		—
Borrowings:
FHLB borrowings – fixed rate		15,000		—		15,099		—
Federal Reserve borrowings – fixed rate		134,563		—		134,563		—
Subordinated notes – fixed-to-floating rate		24,291		—		—		25,750
Accrued interest payable	$	453	$	—	$	453	$	—

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 effective January 1, 2018 on a prospective basis.~~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 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.

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 the loan type, maturity and a required return on capital.

~~Mortgage Loans Held for Sale~~~~: The fair value of mortgage loans held for sale is estimated based upon contracts and quotes from third party investors and quoted prices in the market resulting in a Level 2 classification.~~

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 ~~noninterest~~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.

~~Borrowings:~~

~~Variable Rate Borrowings~~: The carrying amounts of borrowings with variable rates approximate their fair values since the interest rates change to reflect current market borrowing rates for similar instruments and borrowers with similar credit ratings.

~~Table of Contents~~

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

Table of Contents

~~NOTE 15 – ASSETS AND OTHER LIABILITIES CLASSIFIED AS HELD FOR SALE~~

~~In 2019,~~Management segment no longer meet the Company committed to a plan to sell its Los Angeles-based fixed income portfolio management team and certain advisory and sub-advisory arrangements. Management is continuing to evaluate opportunities to divest the Los Angeles-based fixed income portfolio management team and, therefore, these assets and liabilities are classified as goodwill in a disposal group held for sale and are presented separately in the consolidated balance sheet.

~~On September 18, 2020, the Company entered into an agreement to sell the Company’s Los Angeles-based fixed income portfolio management team to Lido Advisors, LLC and Oakhurst Advisors, LLC. As~~thresholds of September 30, 2020, the sale was not yet completed. The Company performed a review of the fair value of assets held for sale as of the three months ended September 30, 2020 and determined that the value of the assets held for sale was reasonable and no adjustment was needed during the period.

The Company recorded a loss on the assets held for sale of $0.6 million during the period ending March 31, 2020, the loss has been applied to reduce the carrying amount of the goodwill within the disposal group.

~~Assets and other liabilities in disposal groups held for sale are as follows at the dates noted (in thousands):~~

September 30,

December 31,


2020

2019

Wealth

Capital

Wealth

Capital

Management

Management

Consolidated

Management

Management

Consolidated
ASSETS

Goodwill

$
—

$
3,000

$
3,000

$
—

$
3,553

$
3,553
Assets in disposal groups held for sale

$
—

$
3,000

$
3,000

$
—

$
3,553

$
3,553

LIABILITIES












Other liabilities

$
—

$
141

$
141

$
—

$
117

$
117
Liabilities in disposal groups held for sale

$
—

$
141

$
141

$
—

$
117

$
117

~~NOTE 16 - SEGMENT REPORTING~~

The Company’s reportable segments consist of Wealth Management, Capital 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.~~tax to be a reportable segment. The residual assets that remained in the Capital Management segment are now included in the Wealth Management segment.

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 Capital Management segment consists of operations relative to the Company’s institutional investment management services over proprietary fixed income, high yield, and equity strategies, including acting as the advisor of three owned, managed, and rated mutual funds. Capital Management products and services are financial in nature for which revenues are generally based on a percentage of assets under management or paid premiums.

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 the financial information for each segment that is specifically identifiable or based on allocations using internal methods as of and for the three months ended March 31, 2021 and 2020 (in thousands):


As of and for the three months ended March 31, 2021	Wealth Management		Mortgage		Consolidated
Income Statement
Total interest income	$	14,499	$	—	$	14,499
Total interest expense		1,446		—		1,446
Provision for loan losses		—		—		—
Net interest income, after provision for loan losses		13,053		—		13,053
Non-interest income		5,418		5,197		10,615
Total income		18,471		5,197		23,668
Depreciation and amortization expense		258		14		272
All other non-interest expense		12,296		3,061		15,357
Income before income tax	$	5,917	$	2,122	$	8,039

Goodwill	$	24,191	$	—	$	24,191
Total assets	$	2,025,720	$	185,858	$	2,211,578


As of and for the three months ended March 31, 2020	Wealth Management			Mortgage		Consolidated
Income Statement
Total interest income	$	11,512		$	—	$	11,512
Total interest expense		2,581			—		2,581
Provision for loan losses		367			—		367
Net interest income, after provision for loan losses		8,564			—		8,564
Non-interest income		5,263			2,504		7,767
Total income		13,827			2,504		16,331
Depreciation and amortization expense		256			20		276
All other non-interest expense		12,601	⁽¹⁾		1,770		14,371
Income before income tax	$	970		$	714	$	1,684

Goodwill	$	19,686		$	—	$	19,686
Assets held for sale		3,000			—		3,000
Total assets	$	1,289,762		$	64,101	$	1,353,863

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

NOTE 15 – LOW-INCOME HOUSING TAX CREDIT INVESTMENTS

On December 19, 2019, the Company invested in a low-income housing tax credit ("LIHTC") investment. As of March 31, 2021 and December 31, 2020, the balance of the investment for LIHTC was $1.0 million and $1.1 million, respectively. These balances are reflected in the Other assets line item of the Condensed Consolidated Balance Sheets. Total unfunded commitments related to the investment in the LIHTC total $2.1 million and $2.2 million as of March 31,

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2021 and December 31, 2020, respectively. The Company expects to fulfill these commitments during the year ending 2021.

The Company uses the proportional amortization method to account for this investment. During the three months ended March 31, 2021, the Company recognized amortization expense of $0.1 million, which was included within the Income tax expense line item of the Condensed Consolidated Statements of Income. The Company did not recognize any related amortization expense during the three months ended March 31, 2020.

Additionally, during the three months ended March 31, 2021, the Company recognized $0.1 million of tax credits and other benefits from this investment in the LIHTC. The Company did not recognize any related tax credits or other benefits during the three months ended March 31, 2020. During the three months ended March 31, 2021 and 2020, the Company did not incur any impairment losses.

NOTE 16 - 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 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 been fully phased in. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Management believes as of March 31, 2021, First Western and the Bank meet all capital adequacy requirements to which they are subject to.

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 March 31, 2021, 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 March 31, 2021 and December 31, 2020, 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 March 31, 2021, 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 March 31, 2021 and December 31, 2020.

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The tables below present the financial information for each segment that is specifically identifiable or based on allocations using internal methods for the three months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30, 2020

Wealth
Management

Capital
Management

Mortgage

Consolidated
Income Statement

Total interest income

$
14,410

$
—

$
—

$
14,410
Total interest expense

1,492

—

—

1,492
Provision for loan losses

1,496

—

—

1,496
Net interest income, after provision for loan losses

11,422

—

—

11,422
Non-interest income

4,810

899

12,323

18,032
Total income

16,232

899

12,323

29,454
Depreciation and amortization expense

252

8

14

274
All other non-interest expense

13,664

627

2,067

16,358
Income before income tax

$
2,316

$
264

$
10,242

$
12,822

Goodwill

$
20,499

$
3,692

$
—

$
24,191
Assets held for sale

—

3,000

—

3,000
Total assets

$
1,859,390

$
8,358

$
105,149

$
1,972,897

Three Months Ended September 30, 2019

Wealth
Management

Capital
Management

Mortgage

Consolidated
Income Statement

Total interest income

$
11,473

$
—

$
—

$
11,473
Total interest expense

3,533

—

—

3,533
Provision for loan losses

100

—

—

100
Net interest income, after provision for loan losses

7,840

—

—

7,840
Non-interest income

4,714

776

3,298

8,788
Total income

12,554

776

3,298

16,628
Depreciation and amortization expense

274

22

55

351
All other non-interest expense

10,434

701

1,956

13,091
Income before income tax

$
1,846

$
53

$
1,287

$
3,186

Goodwill

$
15,994

$
3,692

$
—

$
19,686
Assets held for sale

—

3,553

—

3,553
Total assets

$
1,195,340

$
8,528

$
68,057

$
1,271,925

Nine Months Ended September 30, 2020

Wealth
Management

Capital
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

13,710

2,492

25,024

41,226
Total income

42,368

2,492

25,024

69,884
Depreciation and amortization expense

718

52

56

826
All other non-interest expense

34,619

2,772
⁽¹⁾

5,706

43,097
Income (loss) before income tax

$
7,031

$
(332)

$
19,262

$
25,961

Goodwill

$
20,499

$
3,692

$
—

$
24,191
Assets held for sale

—

3,000

—

3,000
Total assets

$
1,859,390

$
8,358

$
105,149

$
1,972,897

~~(1) Includes loss on assets held for sale of $0.6 million and $0.2 million SEC penalty.~~

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Nine Months Ended September 30, 2019

Wealth
Management

Capital
Management

Mortgage

Consolidated
Income Statement

Total interest income

$
33,698

$
—

$
—

$
33,698
Total interest expense

9,827

—

—

9,827
Provision for loan losses

216

—

—

216
Net interest income, after provision for loan losses

23,655

—

—

23,655
Non-interest income

13,956

2,339

8,053

24,348
Total income

37,611

2,339

8,053

48,003
Depreciation and amortization expense

902

248

197

1,347
All other non-interest expense

30,935

3,709
⁽¹⁾

4,710

39,354
Income (loss) before income tax

$
5,774

$
(1,618)

$
3,146

$
7,302

Goodwill

$
15,994

$
3,692

$
—

$
19,686
Assets held for sale

—

3,553

—

3,553
Total assets

$
1,195,340

$
8,528

$
68,057

$
1,271,925

~~(1)~~

~~Includes goodwill impairment charge of $1.6 million.~~

~~(1)~~

~~NOTE 17 - REGULATORY CAPITAL MATTERS~~

The Bank is 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 consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The Bank’s capital amounts and classification is 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 been fully phased in. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. During the nine months ended September 30, 2020, the Company made a $10.0 million capital injection into the Bank. Management believes as of September 30, 2020, the Bank meets all capital adequacy requirements to which it is subject to.

Prompt corrective action regulations for 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 the Bank’s primary regulators to measure capital require the Bank to maintain minimum amounts and ratios, set forth in the following table. These ratios are common equity Tier 1 capital (“CET 1”), 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 the Bank, along with the applicable regulatory capital requirements as of September 30, 2020, 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 CET 1 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. At September 30, 2020, required ratios including the capital conservation buffer were (i) CET 1 of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%.

As of September 30, 2020 and December 31, 2019, the most recent filings with the FDIC categorized the Bank as well capitalized under the regulatory guidelines. To be categorized as well capitalized, an institution must maintain

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minimum CET 1 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 30, 2020, that have changed the categorization of the Bank as well capitalized. Management believes the Bank met all capital adequacy requirements to which it was subject as of September 30, 2020 and December 31, 2019.

The following presents the actual and required capital amounts and ratios as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019 (in~~2020 (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, 2020	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2021													Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 capital to risk-weighted assets
Bank	$	127,441	10.28	%	$	74,391	6.0	%	$	99,188	8.0	%	$	141,027	10.60	%	$	79,844	6.0	%	$	106,458	8.0	%
Consolidated		122,987	9.88			N/A	N/A			N/A	N/A			138,067	10.31			N/A	N/A			N/A	N/A
Common Equity Tier 1(CET1) to risk-weighted assets
CET1 to risk-weighted assets
Bank		127,441	10.28			55,793	4.5			80,591	6.5			141,027	10.60			59,883	4.5			86,497	6.5
Consolidated		122,987	9.88			N/A	N/A			N/A	N/A			138,067	10.31			N/A	N/A			N/A	N/A
Total capital to risk-weighted assets
Bank		139,647	11.26			99,188	8.0			123,985	10.0			153,929	11.57			106,458	8.0			133,073	10.0
Consolidated		149,753	12.03			N/A	N/A			N/A	N/A			175,528	13.11			N/A	N/A			N/A	N/A
Tier 1 capital to average assets
Bank		127,441	7.81			65,233	4.0			81,542	5.0			141,027	7.53			74,885	4.0			93,607	5.0
Consolidated	$	122,987	7.52	%	$	N/A	N/A	%	$	N/A	N/A	%	$	138,067	7.35	%	$	N/A	N/A	%	$	N/A	N/A	%

~~(1)~~

~~Does not include capital conservation buffer.~~


									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, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2020													Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 capital to risk-weighted assets
Bank	$	99,461	10.67	%	$	55,954	6.0	%	$	74,606	8.0	%	$	133,963	10.22	%	$	78,660	6.0	%	$	104,880	8.0	%
Consolidated		105,821	11.31			N/A	N/A			N/A	N/A			131,507	9.96			N/A	N/A			N/A	N/A
Common Equity Tier 1(CET1) to risk-weighted assets
CET1 to risk-weighted assets
Bank		99,461	10.67			41,966	4.5			60,617	6.5			133,963	10.22			58,995	4.5			85,215	6.5
Consolidated		105,821	11.31			N/A	N/A			N/A	N/A			131,507	9.96			N/A	N/A			N/A	N/A
Total capital to risk-weighted assets
Bank		107,509	11.53			74,606	8.0			93,257	10.0			146,853	11.20			104,880	8.0			131,100	10.0
Consolidated		120,429	12.87			N/A	N/A			N/A	N/A			168,957	12.80			N/A	N/A			N/A	N/A
Tier 1 capital to average assets
Bank		99,461	8.09			49,166	4.0			61,458	5.0			133,963	7.62			70,301	4.0			87,877	5.0
Consolidated	$	105,821	8.58	%	$	N/A	N/A	%	$	N/A	N/A	%	$	131,507	7.45	%	$	N/A	N/A	%	$	N/A	N/A	%

⁽¹⁾ Does not include capital conservation ~~buffer.~~buffer.

~~NOTE 18 – SUBSEQUENT EVENTS~~

On November 3, 2020, the Company announced that its Board of Directors had authorized a share repurchase program under which the Company may repurchase up to 400,000 shares of its common stock and that the Board of Governors of the Federal Reserve System advised the Company that it had no objection to the Company’s stock repurchase program. The repurchase program authorized the Company to purchase its common stock from time to time in privately negotiated transactions, in the open market, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 plan promulgated by the Securities and Exchange Commissions, or otherwise in a manner that complies with applicable federal securities laws.

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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~~ months ended ~~September 30, 2020~~March 31, 2021 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”~~"Form 10-Q") and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ~~(“SEC”~~("SEC") on March 12, ~~2020.~~2021. Unless we state otherwise or the context otherwise requires, references in this Form 10-Q to ~~“we,” “our,” “us,” “the Company”~~"we," "our," "us," "the Company," and ~~“First Western”~~"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”~~"the Bank" or ~~“our~~"our Bank.”"

The following discussion contains ~~“forward-looking statements”~~"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~~"Cautionary Note Regarding Forward-Looking Statements.”" Also, see the risk factors and other cautionary statements described under the heading ~~“Risk Factors”~~"Item 1A - Risk Factors" included in in our Annual Report Form 10-K filed with the SEC on March 12, ~~2020~~2021 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 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 30, 2020,~~March 31, 2021, we have expanded our footprint into ~~ten~~eleven full service profit centers, ~~three~~two loan production offices, and two trust offices ~~and one registered investment advisor~~ located across four states. Following the Branch Acquisition completed in the second quarter 2020, we added one full service profit center in Lone Tree, CO. During the third quarter 2020, we closed two branch locations which were acquired in the Branch Acquisition during the second quarter 2020. As of and for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, we had ~~$1.97~~$2.21 billion in total assets, ~~$69.9~~$23.7 million in total revenues and provided fiduciary and advisory services on ~~$6.13~~$6.49 billion of assets under management ~~(“AUM”~~("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, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. 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 Plan in early ~~February~~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. ~~Since March, a~~A majority of our associates have been working ~~remotely.~~remotely since early 2020. All of our offices are open, functioning, and continue to operate in an appointment only model for client service to limit the risk of potential exposure to COVID-19 for our associates and clients. 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

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complying with the terms of the program. The Bank is an approved SBA lender and has been accepting applications for the program. As of March 31, 2021, we held 666 PPP loans for a total of $190.5 million with an average loan size of $0.3 million. As of March 31, 2021, the Company had submitted loans with original loan amounts of $155.1 million to the SBA for forgiveness and had received forgiveness on 499 loans totaling $84.7 million.

In 2021, through April 11, we had received 743 applications for round 2 PPP loans from borrowers for $99.8 million; of the applications received, 535 applications for $82.5 million with an average loan size of $0.2 million have been approved and funded by the SBA.

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 March 31, 2021, the Company had six loans with a balance held by the Bank of $6.7 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 ~~consolidated balance sheet~~Condensed Consolidated Balance Sheets and ~~income statement~~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 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 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, origination fees, and borrower credits, less commissions to loan originators, lender credits, document review and other costs specific to originating and selling the loan. The market adjustments for interest rate lock commitments ~~(“IRLC”~~("IRLC") and gains and losses incurred on the mandatory trading of loans are also included in this line item. Net gain on mortgage loans ~~are~~is primarily impacted by the amount of loans sold, the type of loans sold and market

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conditions.

●

Bank fees—income generated through bank-related service charges such as: electronic transfer fees, treasury management fees, bill pay fees, servicing fees for Main Street Lending Program, and other banking fees. Banking fees are primarily impacted by the level of business activities and cash movement activities of our clients.

●

~~Net gain on sale of securities~~~~—proceeds from the sale of securities that exceed the Companies carrying value. Net gain on sale of securities are primarily impacted by the amount of securities sold and market conditions.~~

●

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.

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Non-Interest Expense

Non-interest expense is comprised primarily of the following:

●

Salaries and employee benefits—all forms of ~~compensation related~~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 leasing our office space, depreciation charges for the 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. ~~Federal Deposit Insurance Corporation (“FDIC”)~~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 and other similar items recognized in connection with acquisitions.

●

~~Goodwill impairment~~~~—represents the $1.6 million goodwill impairment charge in 2019 related to the Company’s Los Angeles-based fixed income team (a component of the Company’s Capital Management segment).~~

●

Net loss on assets held for sale—represents the fair value adjustment on disposal groups held for sale.

●

~~Provision for other real estate owned~~~~—represents the fair value adjustment for other real estate owned (“OREO”).~~

●

Other—includes costs related to operational expenses associated with office supplies, postage, travel

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expenses, meals and entertainment, dues and memberships, costs to maintain or prepare 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.

Operating Segments

We measure the overall profitability of operating segments based on income before income tax. We believe this is a more useful measurement as our wealth management products and services are fully integrated with our private trust bank. We allocate costs to our segments, which consist primarily of compensation and overhead expense directly attributable to the products and services within the Wealth ~~Management, Capital~~ 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

~~Table of Contents~~

cash flows generated by our reportable operating segments. A description of each segment is provided in Note 1614 - Segment Reporting of the accompanying Notes to the Condensed Consolidated Financial Statements.

Primary Factors Used to Evaluate our Balance Sheet

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

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

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

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

Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. ~~In 2015, we~~The Company has adopted the Basel III regulatory capital framework. ~~At September 30, 2020,~~As of March 31, 2021, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III.

~~Branch Acquisition~~

OnFebruary 10, 2020, the Company entered into a branch purchase and assumption agreement (“Branch Acquisition”) with Simmons Bank, pursuant to which the Company agreed to acquire all of Simmons’ Colorado locations, including three branches and one loan production office located in metro Denver, as well as certain deposits and loans and other assets. On May 15, 2020, the Branch Acquisition was successfully completed. See Note 2 - Acquisitions of the accompanying Notes to Condensed Consolidated Financial Statements for additional information.

~~Recent Events~~

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 began accepting applications for the program on April 3, 2020. As of September 30, 2020, we held 668 PPP loans for a total of $206.1 million with an average loan size of $0.3 million. As of October 16^th~~, the Company had submitted 236 loans with original loan amounts of $85.2 million to the SBA for forgiveness and had received forgiveness on 46 loans totaling $2.1 million.~~

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. As of September 30, 2020, the Company had entered into modification programs on one hundred loans across multiple industries in the amount of $179.0 million. Forty-four loans, in the amount of $66.7 million, were still in the modification period at September 30, 2020. The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as troubled debt restructuring (“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 the 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 satisfies the applicable requirements.

The Company will continue to closely monitor the performance of COVID-19 impacted clients. Additionally, the Company will continue to review and revise its provision for loan losses as more information becomes available including the resolution of certain uncertainties some of our impacted clients face related to the government mandated shutdowns

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and shelter-in-place orders and the resulting financial stress. The extent to which the COVID-19 pandemic and government actions taken in response to the pandemic will impact our operations and financial results is highly uncertain.

During the third quarter 2020, the Company began lending under 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. Further details of the MSLP are provided in Note 4 – Loans and the Allowance for Loan Losses of the accompanying Notes to the Condensed Consolidated Financial Statements.

On September 18, 2020, the Company entered into an agreement to sell its Los Angeles-based fixed income portfolio management team and certain related advisory and sub-advisory arrangements to Lido Advisors, LLC and Oakhurst Advisors, LLC. The sale of the Los Angeles-based fixed income team is expected to be earnings neutral to the Company, as the revenue decrease will be approximately in-line with the expected expense reduction. The sale is not expected to have an impact on First Western's bank clients, but will reduce the Company’s assets under management by approximately $300 million. The transaction is expected to close in the fourth quarter of 2020.

Results of Operations

Overview

The three months ended ~~September 30, 2020~~March 31, 2021 compared with the three months ended ~~September 30, 2019.~~March 31, 2020. We reported net income available to common shareholders of ~~$9.6~~$6.0 million for the three months ended ~~September 30, 2020,~~March 31, 2021, compared to ~~$2.4~~$1.3 million of net income available to common shareholders for the three months ended ~~September 30, 2019,~~March 31, 2020, a ~~$7.2~~$4.7 million, or ~~300.2%~~349.7%, increase. For the three months ended ~~September 30, 2020,~~March 31, 2021, our income before income tax was ~~$12.8~~$8.0 million, a ~~$9.6~~$6.4 million, or ~~302.4%~~377.4%, increase from the three months ended ~~September 30, 2019.~~March 31, 2020. The increase was primarily driven by a ~~$9.0~~$4.1 million increase in net interest income and a $2.7 million increase in net gain on mortgage loans, ~~and a $5.0 million increase in net interest income,~~ offset partially by a ~~$3.2~~$1.0 million increase in non-interest expense and a $1.4 million increase in provision for loan losses. The increase in net gain on mortgage loans was due to an increase in origination volume and a corresponding increase in IRLC volume and associated net gains on those IRLC, as of September 30, 2020.expense. The increase in net interest income was due to an increase in average loan balances and a reduction in our average cost of ~~funds~~funds. Mortgage originations in the three months ended March 31, 2021 were $490.8 million compared to $196.9 million in the three months ended March 31, 2020. This increase, along with the increase in net margins on the unrealized portfolio and an increase in ~~average loan balances.~~interest income, offset partially by an increase in variable expenses contributed to the increase in net gain on mortgage loans. The increase in non-interest expense was primarily due to an increase in salaries and employee benefits related to additional personnel expense to support the increase in mortgage volume, added personnel from the branch purchase and assumption transaction ("Branch ~~Acquisition~~Acquisition"), and an increase in incentive compensation accruals driven by the continued strong financial performance of the Company. ~~The increase~~These increases were partially offset by additional deferred compensation expense recorded in ~~provision for loan losses primarily resulted from an increase based on~~ the ~~additional variability surrounding the COVID-19 loan modifications, increased economic uncertainty and strong loan growth during the quarter.~~

~~The nine months ended September 30, 2020 compared with the nine months ended September 30, 2019.~~ We reported net income available to common shareholders of $19.7 million for the nine months ended September 30, 2020, compared to $5.4 million of net income available to common shareholders for the nine months ended September 30, 2019, a $14.2 million, or 261.6%, increase. For the nine months ended September 30, 2020, our income before income tax was $26.0 million, an $18.7 million, or 255.5%, increase from the nine months ended September 30, 2019. The increase was primarily driven by a $16.9 million increase in net gain on mortgage loans, an $8.8 million increase in net interest income, offset partially by a $3.2 million increase in non-interest expense and a $3.8 million increase in provision for loan losses. The increase in net gain on mortgage loans was due to an increase in origination volume and a corresponding increase in IRLC volume and associated net gains on those IRLC, as of September 30, 2020. The increase in net interest income was due to a reduction in our average cost of funds and an increase in average loan balances. The increase in non-interest expense was primarily due to an increase in salaries and employee benefitsquarter related to added personnel from the Branch Acquisition and an increase in incentive compensation accruals driven by the strong financial performance of the Company. The increase in provision for loan losses primarily resulted from an increase based on the additional variability surrounding the COVID-19 loan modifications, increased economic uncertainty and strong loan growth during the quarter.

~~Net Interest Income~~

~~The three months ended September 30, 2020 compared with the three months ended September 30, 2019.~~ For the three months ended September 30, 2020, net interest income, before the provision for loan losses, was $12.9 million, an increase of $5.0 million, or 62.7%, compared to the three months ended September 30, 2019. This increase was partially attributable to a $525.6 million increase in average outstanding loan balances compared to September 30, 2019, along with a decrease in our cost of funds to 0.35% from 1.33%. For the three months ended September 30, 2020, our net interest margin was 3.07% and our net interest spread was 2.96%. For the three months ended September 30, 2019, our net interest margin was 2.95% and our net interest spread was 2.58%.PPP.

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Net Interest Income

The ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 compared with the ~~nine~~three months ended ~~September 30, 2019.~~ March 31, 2020.For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, net interest income, before the provision for loan losses, was ~~$32.6~~$13.1 million, an increase of ~~$8.8~~$4.1 million, or ~~36.8%~~46.2%, compared to the ~~nine~~three months ended ~~September 30, 2019. This increase~~March 31, 2020. Net interest margin decreased 24 basis points to 2.90%, in the first quarter of 2021, from the 3.14% reported in the first quarter of 2020. The decrease in net interest margin was primarily a result of an 82 basis point decrease in the average yield on interest earning assets which was partially offset by a corresponding decrease of 78 basis points in the average rate paid on interest-bearing liabilities. These decreases are driven by a historically low interest rate environment as well as a shift in the balance sheet mix partially driven by the impact of the PPP program. Net interest income was also impacted by the growth in the balance sheet partially attributable to a ~~$321.9~~$538.8 million increase in average outstanding loan balances compared to ~~September 30, 2019, along with~~March 31, 2020, as well as a ~~decrease in our cost~~more liquid balance sheet mix resulting from continued strong deposit growth as a result of ~~funds~~inflows from large commercial depositors and higher deposit balances across the Company’s clientele due to ~~0.55% from 1.28%. For~~ the ~~nine months ended September 30, 2020, our net interest margin was 3.10%~~improving economic and ~~our net interest spread was 2.91%. For the nine months ended September 30, 2019, our net interest margin was 3.03% and our net interest spread was 2.63%.~~business environment.

The increase in average loans outstanding for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 compared to the same periods in ~~2019~~2020 was due to three primary factors: organic growth, PPP loan originations and the Branch Acquisition. PPP loan originations contributed ~~$0.7~~$0.8 million ~~and $1.3 million, respectively,~~ to net interest income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021. The program was not in place for the three months ended March 31, 2020. The increase in interest income on our loan portfolio due to an increase in average loans outstanding was partially offset by lower average loan yields. Loan yields were ~~3.87%~~3.66% for the three months ended ~~September 30, 2020,~~March 31, 2021, compared to ~~4.55%~~4.33% for the three months ended ~~September 30, 2019.~~March 31, 2020. The reduction in loan yields was driven by two primary factors: a lower interest rate environment and PPP ~~Loan~~loan originations. ~~Average loan yields were negatively impacted by 31 basis points as a result of PPP loan originations during the three months ended September 30, 2020.~~

Interest income on our available-for-sale securities portfolio decreased as a result of lower average ~~yield~~balances for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 compared to the same ~~periods~~period in ~~2019.~~2020. Our average yield on available-for-sale securities during the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 was ~~1.71% and 1.92%~~2.45%, a ~~72 and 55~~31 basis point ~~decrease,~~increase, compared to the same ~~periods~~period in ~~2019. Our~~2020. The impact of the reduction in average ~~available-for-sale~~balances was partially offset by a higher average yield on the securities balance during the three and nine months ended September 30, 2020 was $40.5 million and $48.1 million, a decrease of $10.8 million and $3.4 million, respectively, compared to the same periods in 2019.portfolio.

Interest expense on deposits decreased during the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 compared to the same ~~periods~~period in ~~2019.~~2020. The decrease was driven primarily by a ~~100 and 73~~65 basis point decline in cost of deposits for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 compared to the same ~~periods~~period in ~~2019.~~2020. The decrease in cost of deposits was driven by a reduction in deposit rates consistent with the lower interest rate environment. The reduction in cost of deposits was partially offset by an increase in average interest-bearing deposit accounts of ~~$218.8 million and $159.1~~$332.3 million, for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, compared to the same ~~periods~~period in ~~2019.~~2020.

~~Net interest income is also impacted by changes in the amount and type~~43

Table of interest earning assets and interest bearing liabilities. To evaluate net interest income, we measure and monitor the yields on our loans and other interest earning assets and the costs of our deposits and other funding sources. Contents

The following ~~tables present~~table presents an analysis of net interest income and net interest margin for the periods presented, using daily average balances for each major category of

~~Table of Contents~~

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,												As of and for the Three Months Ended March 31,
	2020						2019						2021						2020
			Interest		Average				Interest		Average				Interest		Average				Interest		Average
	Average		Earned /		Yield /		Average		Earned /		Yield /		Average		Earned /		Yield /		Average		Earned /		Yield /
(Dollars in thousands)	Balance⁽¹⁾		Paid		Rate		Balance⁽¹⁾		Paid		Rate		Balance⁽¹⁾		Paid		Rate		Balance⁽¹⁾		Paid		Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	178,756	$	99	0.22	%	$	88,782	$	489	2.20	%	$	213,577	$	91	0.17	%	$	68,035	$	215	1.26	%
Available-for-sale securities⁽²⁾		40,528		173	1.71			51,368		312	2.43			31,935		196	2.45			55,208		295	2.14
Loans⁽³⁾		1,462,872		14,138	3.87			937,260		10,672	4.55			1,554,990		14,212	3.66			1,016,148		11,002	4.33
Interest-earning assets⁽⁴⁾		1,682,156		14,410	3.43			1,077,410		11,473	4.26			1,800,502		14,499	3.22			1,139,391		11,512	4.04
Mortgage loans held for sale⁽⁵⁾		94,714		643	2.72			52,546		454	3.46			175,891		1,152	2.62			37,798		326	3.45
Total interest-earning assets, plus mortgage loans held for sale	$	1,776,870	$	15,053	3.39	%	$	1,129,956	$	11,927	4.22	%		1,976,393		15,651	3.17			1,177,189		11,838	4.02
Allowance for loan losses		(10,965)						(7,584)						(12,541)						(8,010)
Noninterest-earning assets		101,874						81,171						100,415						84,054
Total assets	$	1,867,779					$	1,203,543					$	2,064,267					$	1,253,233
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,045,321	$	1,067	0.41	%	$	826,490	$	3,363	1.63	%	$	1,163,010		974	0.33		$	830,736		2,393	1.15
Federal Home Loan Bank Topeka and Federal Reserve borrowings		222,225		204	0.37			10,567		51	1.93
FHLB and Federal Reserve borrowings														137,626		132	0.38			10,495		51	1.95
Subordinated notes		14,445		221	6.12			6,560		119	7.26			24,259		340	5.61			7,854		137	6.97
Total interest-bearing liabilities	$	1,281,991	$	1,492	0.47	%	$	843,617	$	3,533	1.68	%		1,324,895		1,446	0.44			849,085		2,581	1.22
Noninterest-bearing liabilities:
Noninterest-bearing deposits		417,502						215,721						557,707						253,813
Other liabilities		22,564						19,881						21,151						19,874
Total noninterest-bearing liabilities	$	440,066					$	235,602						578,858						273,687
Total shareholders’ equity		145,722						124,324						160,514						130,461
Total liabilities and shareholders’ equity	$	1,867,779					$	1,203,543					$	2,064,267					$	1,253,233
Net interest rate spread⁽⁶⁾					2.96	%					2.58	%					2.78						2.83
Net interest income⁽⁷⁾			$	12,918					$	7,940					$	13,053					$	8,931
Net interest margin⁽⁸⁾					3.07	%					2.95	%					2.90	%					3.14	%

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

~~Table~~⁽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 ~~Contents~~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.

As of and For the Nine Months Ended September 30,

2020

2019




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

$
108,010

$
358

0.44
%
$
71,799

$
1,254

2.33
%
Available-for-sale securities⁽²⁾

48,117

692

1.92

51,565

954

2.47

Loans⁽³⁾

1,250,052

37,342

3.98

928,112

31,490

4.52

Interest-earning assets⁽⁴⁾

1,406,179

38,392

3.64

1,051,476

33,698

4.27

Mortgage loans held for sale⁽⁵⁾

67,010

1,519

3.02

32,569

872

3.57

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

$
1,473,189

$
39,911

3.61
%
$
1,084,045

$
34,570

4.25
%
Allowance for loan losses

(9,230)



(7,599)



Noninterest-earning assets

91,924



86,047



Total assets

$
1,555,883



$
1,162,493



Liabilities and Shareholders’ Equity









Interest-bearing liabilities:









Interest-bearing deposits

$
935,689

$
4,779

0.68
%
$
776,575

$
9,268

1.59
%
Federal Home Loan Bank Topeka and Federal Reserve borrowings

99,379

384

0.52

12,964

202

2.08

Subordinated notes

12,256

584

6.35

6,560

357

7.26

Total interest-bearing liabilities

$
1,047,324

$
5,747

0.73
%
$
796,099

$
9,827

1.65
%
Noninterest-bearing liabilities:









Noninterest-bearing deposits

350,475



225,512



Other liabilities

20,426



19,376



Total noninterest-bearing liabilities

$
370,901



$
244,888



Shareholders’ equity

137,658



121,506



Total liabilities and shareholders’ equity

$
1,555,883



$
1,162,493



Net interest rate spread⁽⁶⁾





2.91
%





2.63
%
Net interest income⁽⁷⁾

$
32,645



$
23,871

Net interest margin⁽⁸⁾





3.10
%





3.03
%

⁽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.

~~(1)~~

~~Average balance represents daily averages, unless otherwise noted.~~

~~(2)~~

~~Available-for-sale securities 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).~~

⁽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).

The following ~~tables present~~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

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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, 2020						Nine Months Ended September 30, 2020						Three Months Ended March 31, 2021
	Compared to 2019						Compared to 2019						Compared to 2020
	Increase						Increase						Increase
	(Decrease) Due				Total		(Decrease) Due				Total		(Decrease) Due				Total
	to Change in:				Increase		to Change in:				Increase		to Change in:				Increase
(Dollars in thousands)	Volume		Rate		(Decrease)		Volume		Rate		(Decrease)		Volume		Rate		(Decrease)
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	50	$	(440)	$	(390)	$	120	$	(1,016)	$	(896)	$	62	$	(186)	$	(124)
Available-for-sale securities		(46)		(93)		(139)		(50)		(212)		(262)		(143)		44		(99)
Loans		5,080		(1,614)		3,466		9,617		(3,765)		5,852		4,925		(1,715)		3,210
Total increase (decrease) in interest income	$	5,084	$	(2,147)	$	2,937	$	9,687	$	(4,993)	$	4,694		4,844		(1,857)		2,987
Interest-bearing liabilities:
Interest-bearing deposits		223		(2,519)		(2,296)		813		(5,302)		(4,489)		278		(1,697)		(1,419)
Federal Home Loan Bank Topeka and Federal Reserve borrowings		194		(41)		153		333		(151)		182
FHLB and Federal Reserve borrowings														122		(41)		81
Subordinated notes		121		(19)		102		272		(45)		227		230		(27)		203
Total increase (decrease) in interest expense	$	538	$	(2,579)	$	(2,041)	$	1,418	$	(5,498)	$	(4,080)		630		(1,765)		(1,135)
Increase in net interest income	$	4,546	$	432	$	4,978	$	8,269	$	505	$	8,774
Increase (decrease) in net interest income													$	4,214	$	(92)	$	4,122

Non-Interest Income

The three months ended ~~September 30, 2020~~March 31, 2021 compared with the three months ended ~~September 30, 2019.~~March 31, 2020. For the three months ended ~~September 30, 2020~~March 31, 2021 compared with the three months ended ~~September 30, 2019,~~March 31, 2020, non-interest income increased ~~$9.2~~$2.8 million, or ~~105.2%~~36.7%, to ~~$18.0~~$10.6 million. The increase in non-interest income during the three months ended ~~September 30, 2020~~March 31, 2021 was primarily a result of a ~~$9.0~~$2.7 million increase in net gain on mortgage loans, compared to the same period in ~~2019.~~2020.

~~The nine months ended September 30, 2020 compared with the nine months ended September 30, 2019.~~ For the nine months ended September 30, 2020 compared with the nine months ended September 30, 2019, non-interest income increased $16.9 million, or 69.3%, to $41.2 million. The increase in non-interest income during the nine months ended September 30, 2020 was primarily a result of a $16.9 million increase in net gain on mortgage loans, compared to the same period in 2019.

~~Table of Contents~~

The table below presents the significant categories of our non-interest income for the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	Three Months Ended									Three Months Ended
	September 30,				Change					March 31,				Change
(Dollars in thousands)	2020		2019		$		%			2021		2020		$		%
Non-interest income:
Trust and investment management fees	$	4,814	$	4,824	$	(10)		(0.2)	%	$	4,847	$	4,731	$	116		2.5	%
Net gain on mortgage loans		12,304		3,291		9,013		273.9			5,196		2,481		2,715		109.4
Banking fees		340		283		57		20.1			373		368		5		1.4
Risk management and insurance fees		483		176		307		174.4			51		96		(45)		(46.9)
Net gain on sale of securities		—		119		(119)		*
Income on company-owned life insurance		91		95		(4)		(4.2)			88		91		(3)		(3.3)
Other											60		—		60		*
Total non-interest income	$	18,032	$	8,788	$	9,244	105.2		%	$	10,615	$	7,767	$	2,848		36.7	%

	Nine Months Ended
	September 30,				Change
(Dollars in thousands)	2020		2019		$		%
Non-interest income:							��
Trust and investment management fees	$	14,154	$	14,186	$	(32)		(0.2)	%
Net gain on mortgage loans		24,958		8,009		16,949		211.6
Bank fees		929		912		17		1.9
Risk management and insurance fees		912		838		74		8.8
Net gain on sale of securities		—		119		(119)		*
Income on company-owned life insurance		273		284		(11)		(3.9)
Total non-interest income	$	41,226	$	24,348	$	16,878	69.3		%

* Not meaningful

Trust and investment management fees—For the three ~~and nine~~ months ended ~~September 30, 2020~~March 31, 2021 compared to the same ~~periods~~period in ~~2019,~~2020, our trust and investment management fees ~~remained relatively unchanged.~~increased $0.1 million, or 2.5%, 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, 2020~~March 31, 2021 compared to the same period in ~~2019,~~2020, our net gain on mortgage loans increased by ~~$9.0~~$2.7 million, or ~~273.9%~~109.4%, to ~~$12.3~~$5.2 million. ~~For~~Mortgage originations in the three months ended ~~September 30, 2020 and 2019, our origination volume was $376.3~~March 31, 2021 were $490.8 million ~~and $214.5~~compared to $196.9 million ~~respectively, and a corresponding~~in the three months ended March 31, 2020. This increase, along with the increase in ~~IRLC volume~~net margins on the unrealized portfolio and ~~associated net gains on those IRLC, as of September 30, 2020. For the nine months ended September 30, 2020 compared~~an increase in interest income, offset partially by an increase in variable expenses contributed to the ~~same period~~increase in ~~2019, our~~ net gain on mortgage loans increased by $16.9 million, or 211.6%, to $25.0 million. For the nine months ended September 30, 2020 and 2019, our origination volume was $917.5 million and $442.8 million, respectively, and a corresponding increase in IRLC volume and associated net gains on those IRLC, as of September 30, 2020.loans. The net gain on mortgage loans will fluctuate with the amount and type of loans sold and market conditions. The increase in origination volume for the three ~~and nine~~ month period was primarily related to lower market rates driving an increase in refinance activity, a strong residential real estate market in our footprint and management’s commitment and ability to capitalize on the mortgage environment.

~~Bank fees~~~~— For the three and nine months ended September 30, 2020 compared to the same periods in 2019, our bank fees remained relatively unchanged.~~

~~Risk management and insurance fees~~—Risk management fees include fees earned by our risk management product group as a result of assisting clients with obtaining life insurance policies and fees from the trailing annuity revenue streams. During the three months ended September 30, 2020 and 2019, the Company recognized $0.5 million and $0.2 million of risk management fees. For the nine months ended September 30, 2020, we recognized $0.9 million of risk management fees as compared to $0.8 million for the same period in 2019. The change in revenue is primarily attributable to the average size of client policies placed and will fluctuate from period to period.

~~Net gain on sale of securities~~—For the three and nine months ended September 30, 2020 the Company did not sell securities. For the three and nine months ended September 30, 2019 the Company recognized a net gain on sale of securities of $0.1 million.

5045

Table of Contents

Provision for Loan Losses

~~For the three months ended September 30, 2020, we recorded $1.5 million of provision for loan losses,~~ ~~primarily based on the additional variability surrounding the loan modifications in place during the quarter and increased economic uncertainty related to the impact of the COVID-19 pandemic.~~ 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~~three months ended ~~September 30, 2020,~~March 31, 2021, we ~~recorded $4.0 million of~~did not record a provision for ~~loan losses,~~ primarily resulting from an increase based on the additional variability surrounding the loan modifications made during the second quarter along with increased economic uncertainty related to the impact of the COVID-19 pandemic and overall loan growth.credit losses.

The Company has increased loan level reviews and portfolio monitoring to address the changing environment. We identified clients who could be more highly impacted by the recent COVID-19 pandemic and economic disruption and are meeting regularly with them. The analysis reviewed the borrowers in industries we believe may be more impacted including those the lenders believed would have one or more of the following characteristics: greater than 50% probability of a downgrade, a covenant violation or 20% reduction in collateral position. The Company receives and reviews current financial data and cash flow forecasts from borrowers ~~with~~who participated in the loan modification ~~agreements.~~

program. Management believes the financial strength of the ~~Bank’s~~Company’s clientele and the diversity of the portfolio continues to mitigate the credit risk within the portfolio.

~~Table of Contents~~

Non-Interest Expense

The three months ended March 31, 2021 compared with the three months ended March 31, 2020. The increase in non-interest expense of 6.7% to $15.6 million for the three months ended March 31, 2021, was primarily due to higher salaries and employee benefits expense, higher professional services expense, and data processing expenses, offset partially by a reduction in net loss on assets held for sale.

The table below presents the significant categories of our non-interest expense for the periods noted:


	Three Months Ended								Three Months Ended
	September 30,				Change				March 31,				Change
(Dollars in thousands)	2020		2019		$		%		2021		2020		$		%
Non-interest expense:
Salaries and employee benefits	$	10,212	$	8,504	$	1,708	20.1	%	$	9,861	$	8,482	$	1,379	16.3	%
Occupancy and equipment		1,619		1,388		231	16.6			1,409		1,440		(31)	(2.2)
Professional services		1,288		745		543	72.9			1,279		1,023		256	25.0
Technology and information systems		1,032		961		71	7.4			942		969		(27)	(2.8)
Data processing		1,038		854		184	21.5			1,015		847		168	19.8
Marketing		395		272		123	45.2			321		415		(94)	(22.7)
Amortization of other intangible assets		4		52		(48)	(92.3)			4		2		2	100.0
Provision for other real estate owned		100		—		100	*
Net loss on assets held for sale										—		553		(553)	*
Other		944		666		278	41.7			798		916		(118)	(12.9)
Total non-interest expense	$	16,632	$	13,442	$	3,190	23.7	%	$	15,629	$	14,647	$	982	6.7	%

	Nine Months Ended
	September 30,				Change
(Dollars in thousands)	2020		2019		$		%
Non-interest expense:
Salaries and employee benefits	$	25,384	$	23,821	$	1,563	6.6	%
Occupancy and equipment		4,574		4,193		381	9.1
Professional services		3,542		2,557		985	38.5
Technology and information systems		2,994		3,046		(52)	(1.7)
Data processing		2,922		2,282		640	28.0
Marketing		1,063		991		72	7.3
Amortization of other intangible assets		44		366		(322)	(88.0)
Goodwill impairment		—		1,572		(1,572)	(100.0)
Net loss on assets held for sale		553		—		553	*
Provision for other real estate owned		100		—		100	*
Other		2,747		1,873		874	46.7
Total non-interest expense	$	43,923	$	40,701	$	3,222	7.9	%

* Not meaningful

~~The increase in non-interest expense of 23.7% to $16.6 million for the three months ended September 30, 2020 was primarily due to a $1.7 million increase in salaries~~Salaries and employee ~~benefits.~~ benefits—The increase in salaries and employee benefits of $1.4 million, or 16.3%, was primarily ~~due to an increase in salaries and employee benefits~~ related to added personnel from the Branch Acquisition and to support the growth in our Mortgage segment, increased contract labor, overtime and related compensation costs to support the mortgage production in the quarter, and an increase in incentive compensation accruals driven by the continued strong financial performance of the Company. The increase in non-interest expense of 7.9% to $43.9 million for the nine months ended September 30, 2020 was primarily due to an increase in salaries and employee benefits, professional services and data processing. The increase in salaries and employee benefits was primarily due to added personnel from the Branch Acquisition and an increase in incentive compensation accruals drivenThese increases were partially offset by ~~the strong financial performance of the Company, offset partially by an increase in~~additional deferred compensation expense recorded in the quarter related to ~~PPP loan originations.~~ PPP.

Professional services—The increase in professional services of $0.3 million, or 25.0%, was primarily driven by additional FDIC insurance expense related to our balance sheet growth and expenses related to the PPP program.

Data processing—The increase in data processing costs of $0.2 million, or 19.8%, was primarily driven by an increase in core systems cost as a result of an increase in accounts and transactions related to the balance sheet growth and growth in our Mortgage segment.

Net loss on assets held for sale—The decrease in net loss on assets held for sale of $0.6 million was driven by the ~~Branch Acquisition and organic growth~~completion of the sale of held for sale assets in ~~our business. The increase in salaries and employee benefits, professional services and data processing was partially offset by a reduction due to the impact~~2020.

Table of ~~a $1.6 million goodwill impairment charge related to Capital Management in the nine months ended September 30, 2019.~~Contents

Income Tax

The Company recorded an income tax provision of ~~$3.2~~$2.0 million and ~~$0.8~~$0.4 million, respectively, for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ reflecting an effective tax rate of ~~24.9%~~25.4% and ~~24.5%~~20.8%, respectively. The increase in effective tax rate ~~was~~is primarily attributable to ~~adjustments related~~an increase in pre-tax income as of March 31, 2021 as compared to ~~the vesting of restricted stock awards.~~ For the nine months ended September 30, 2020 and 2019, the Company recorded an income tax provision of $6.3 million and $1.9 million reflecting an effective tax rate of 24.3% and 25.5%, respectively. The decline in effective tax rate was primarily attributable to tax-planning strategies driven by the impact of research and development tax credits and deferred tax adjustments related to the vesting of Restricted Stock Units during 2019.March 31, 2020.

~~Table of Contents~~

Segment Reporting

We have ~~three~~two reportable operating segments: Wealth ~~Management, Capital~~ 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 Capital Management segment consists of operations relating to the Company’s institutional investment management services over proprietary fixed income, high yield and equity strategies, including acting as the advisor of three owned, managed and rated proprietary mutual funds. Capital Management products and services are financial in nature, with revenues generally based on a percentage of assets under management or paid premiums. 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 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.

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

The following table presents key metrics related to our segments:


	Three Months Ended September 30, 2020												Nine Months Ended September 30, 2020												Three Months Ended March 31, 2021
	Wealth			Capital									Wealth			Capital									Wealth
(Dollars in thousands)	Management			Management			Mortgage			Consolidated			Management			Management			Mortgage			Consolidated			Management			Mortgage			Consolidated
Income⁽¹⁾	$	16,232		$	899		$	12,323		$	29,454		$	42,368		$	2,492		$	25,024		$	69,884		$	18,471		$	5,197		$	23,668
Income (loss) before taxes	$	2,316		$	264		$	10,242		$	12,822		$	7,031		$	(332)		$	19,262		$	25,961
Income before taxes																									$	5,917		$	2,122		$	8,039
Profit margin		14.3	%		29.4	%		83.1	%		43.5	%		16.6	%		(13.3)	%		77.0	%		37.1	%		32.0	%		40.8	%		34.0	%


	Three Months Ended September 30, 2019												Nine Months Ended September 30, 2019												Three Months Ended March 31, 2020
	Wealth			Capital									Wealth			Capital									Wealth
(Dollars in thousands)	Management			Management			Mortgage			Consolidated			Management			Management			Mortgage			Consolidated			Management			Mortgage			Consolidated
Income⁽¹⁾	$	12,554		$	776		$	3,298		$	16,628		$	37,611		$	2,339		$	8,053		$	48,003		$	13,827		$	2,504		$	16,331
Income (loss) before taxes	$	1,846		$	53		$	1,287		$	3,186		$	5,774		$	(1,618)		$	3,146		$	7,302
Income before taxes																									$	970		$	714		$	1,684
Profit margin		14.7	%		6.8	%		39.0	%		19.2	%		15.4	%		(69.2)	%		39.1	%		15.2	%		7.0	%		28.5	%		10.3	%

~~(1)~~

~~Net interest income after provision plus non-interest income.~~

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

5347

Table of Contents

The tables below present selected financial metrics of each segment as of and for the periods presented:

Wealth Management


	As of and For the Three Months Ended September 30,								As of and for the Three Months Ended March 31,
(Dollars in thousands)	2020		2019		$ Change		% Change		2021		2020⁽¹⁾			$ Change		% Change
Total interest income	$	14,410	$	11,473	$	2,937	25.6	%	$	14,499	$	11,512		$	2,987	25.9	%
Total interest expense		1,492		3,533		(2,041)	(57.8)			1,446		2,581			(1,135)	(44.0)
Provision for loan losses		1,496		100		1,396	1,396.0			—		367			(367)	*
Net interest income, after provision for loan losses		11,422		7,840		3,582	45.7			13,053		8,564			4,489	52.4
Non-interest income		4,810		4,714		96	2.0			5,418		5,263			155	2.9
Total income		16,232		12,554		3,678	29.3			18,471		13,827			4,644	33.6
Depreciation and amortization expense		252		274		(22)	(8.0)			258		256			2	0.8
All other non-interest expense		13,664		10,434		3,230	31.0			12,296		12,601			(305)	(2.4)
Income before income tax	$	2,316	$	1,846	$	470	25.5	%	$	5,917	$	970	⁽²⁾	$	4,947	510.0
Goodwill	$	20,499	$	15,994	$	4,505	28.2	%	$	24,191	$	19,686		$	4,505	22.9
Assets held for sale										—		3,000			(3,000)	*
Total assets	$	1,859,390	$	1,195,340	$	664,050	55.6	%	$	2,025,720	$	1,289,762		$	735,958	57.1	%

	As of and For the Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		$ Change		% Change
Total interest income	$	38,392	$	33,698	$	4,694	13.9	%
Total interest expense		5,747		9,827		(4,080)	(41.5)
Provision for loan losses		3,987		216		3,771	1,745.8
Net interest income, after provision for loan losses		28,658		23,655		5,003	21.1
Non-interest income		13,710		13,956		(246)	(1.8)
Total income		42,368		37,611		4,757	12.6
Depreciation and amortization expense		718		902		(184)	(20.4)
All other non-interest expense		34,619		30,935		3,684	11.9
Income before income tax	$	7,031	$	5,774	$	1,257	21.8	%
Goodwill	$	20,499	$	15,994	$	4,505	28.2	%
Total assets	$	1,859,390	$	1,195,340	$	664,050	55.6	%

* Not meaningful

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

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

The Wealth Management segment reported income before income tax of ~~$2.3 million and $7.0~~$5.9 million for the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, compared to ~~$1.8 million and $5.8~~$1.0 million for the same period in ~~2019.~~2020. The majority of our assets and liabilities are on the Wealth Management segment balance sheet and the increase ~~for the three and nine month period~~in income before taxes is primarily driven by an increase in ~~average outstanding loan balances and a decrease in the cost of funds, offset partially by increasing~~net interest income, after provision for loan ~~losses and~~losses. As the revenues have increased corresponding with the growth in the balance sheet, all other non-interest expense. During three and nine months ended September 30, 2020 average loans increased $525.6 million and $321.9 million and the cost of funds decreased to 0.35% from 1.33% and to 0.55% from 1.28% compared to the same periods in 2019.expense has declined.

~~Table of Contents~~

~~Capital Management~~

As of and For the Three Months Ended September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Total interest income

$
—

$
—

$
—

—
%
Total interest expense

—

—

—

—

Provision for loan losses

—

—

—

—

Net interest income, after provision for loan losses

—

—

—

—

Non-interest income

899

776

123

15.9

Total income

899

776

123

15.9

Depreciation and amortization expense

8

22

(14)

(63.9)

All other non-interest expense

627

701

(74)

(10.5)

Income before income tax

$
264

$
53

$
211

398.1
%
Goodwill

$
3,692

$
3,692

$
—

—
%
Assets held for sale

3,000

3,553

(553)

(15.6)

Total assets

$
8,358

$
8,528

$
(170)

(2.0)
%

As of and For the Nine Months Ended September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Total interest income

$
—

$
—

$
—

—
%
Total interest expense

—

—

—

—

Provision for loan losses

—

—

—

—

Net interest income, after provision for loan losses

—

—

—

—

Non-interest income

2,492

2,339

153

6.5

Total income

2,492

2,339

153

6.5

Depreciation and amortization expense

52

248

(196)

(79.0)

All other non-interest expense

2,772
⁽¹⁾

3,709
⁽²⁾

(937)

(25.3)

Loss before income tax

$
(332)

$
(1,618)

$
1,286

(79.5)
%
Goodwill

$
3,692

$
3,692

$
—

—
%
Assets held for sale

3,000

3,553

(553)

(15.6)

Total assets

$
8,358

$
8,528

$
(170)

(2.0)
%

~~(1) Includes loss on assets held for sale of $0.6 million and $0.2 million SEC penalty.~~

~~(2) Includes goodwill impairment charge of $1.6 million.~~

The Capital Management segment reported income before income tax of $0.3 million and a loss of $0.3 million for three and nine months ended September 30, 2020, compared to income of $0.1 million and a loss $1.6 million for the same periods in 2019. Income before income tax for the nine months ended September 30, 2020 was negatively impacted by a $0.6 million loss on assets held for sale and a $0.2 million SEC penalty. Income before income tax for the nine months ended September 30, 2019 was negatively impacted by a $1.6 million goodwill impairment charge.

~~Table of Contents~~

Mortgage


	As of and For the Three Months Ended September 30,								As of and for the Three Months Ended March 31,
(Dollars in thousands)	2020		2019		$ Change		% Change		2021		2020		$ Change		% Change
Total interest income	$	—	$	—	$	—	—	%	$	—	$	—	$	—	—	%
Total interest expense		—		—		—	—			—		—		—	—
Provision for loan losses		—		—		—	—			—		—		—	—
Net interest income, after provision for loan losses		—		—		—	—			—		—		—	—
Non-interest income		12,323		3,298		9,025	273.7			5,197		2,504		2,693	107.5
Total income		12,323		3,298		9,025	273.7			5,197		2,504		2,693	107.5
Depreciation and amortization expense		14		55		(41)	(74.5)			14		20		(6)	(30.0)
All other non-interest expense		2,067		1,956		111	5.7			3,061		1,770		1,291	72.9
Income before income tax	$	10,242	$	1,287	$	8,955	695.8	%	$	2,122	$	714	$	1,408	197.2
Total assets	$	105,149	$	68,057	$	37,092	54.5	%	$	185,858	$	64,101	$	121,757	189.9	%

	As of and For the Nine Months Ended September 30,
(Dollars in thousands)	2020		2019		$ Change		% Change
Total interest income	$	—	$	—	$	—	—	%
Total interest expense		—		—		—	—
Provision for loan losses		—		—		—	—
Net interest income, after provision for loan losses		—		—		—	—
Non-interest income		25,024		8,053		16,971	210.7
Total income		25,024		8,053		16,971	210.7
Depreciation and amortization expense		56		197		(141)	(71.6)
All other non-interest expense		5,706		4,710		996	21.1
Income before income tax	$	19,262	$	3,146	$	16,116	512.3	%
Total assets	$	105,149	$	68,057	$	37,092	54.5	%

The Mortgage segment reported income before income tax of ~~$10.2 million and $19.3~~$2.1 million for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, compared to ~~$1.3 million and $3.1~~$0.7 million for the same ~~periods~~period in ~~2019.~~2020. The overall increase in non-interest income was primarily related to an increase in net margins on the unrealized portfolio and an increase in interest income, offset partially by an increase in variable expenses. For the three months ended March 31, 2021 and 2020, our origination volume was $490.8 million and $196.9 million, respectively. The increase in origination volume was due to lower market rates driving an increase in refinance activity, a strong residential real estate market in our footprint, and management’s commitment and ability to capitalize on the mortgage environment. For the three months ended September 30, 2020 and 2019, our origination volume was $376.3 million and $214.5 million, respectively. For the nine months ended September 30, 2020 and 2019, our origination volume was $917.5 million and $442.8 million, respectively, and a corresponding increase in IRLC volume and associated net gains on those IRLC, as of September 30, 2020.

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Financial Condition

The table below presents our ~~condensed consolidated balance sheets~~Condensed Consolidated Balance Sheets as of the dates presented:


	September 30,		December 31,						March 31,		December 31,
(Dollars in thousands)	2020		2019		$ Change		% Change		2021		2020		$ Change		% Change
Balance Sheet Data:
Cash and cash equivalents	$	250,358	$	78,638	$	171,720	218.4	%	$	375,936	$	155,989	$	219,947	141.0	%
Investments		40,654		58,903		(18,249)	(31.0)			30,843		36,666		(5,823)	(15.9)
Loans		1,506,076		998,007		508,069	50.9
Gross loans										1,543,926		1,532,833		11,093	0.7
Allowance for loan losses		(11,845)		(7,875)		(3,970)	50.4			(12,539)		(12,539)		—	*
Loans, net of allowance		1,494,231		990,132		504,099	50.9			1,531,387		1,520,294		11,093	0.7
Mortgage loans held for sale		89,872		48,312		41,560	86.0			176,644		161,843		14,801	9.1
Goodwill & other intangible assets, net		24,263		19,714		4,549	23.1			24,254		24,258		(4)	(0.0)
Company-owned life insurance		15,359		15,086		273	1.8			15,537		15,449		88	0.6
Other assets		55,160		37,344		17,816	47.7			56,977		59,156		(2,179)	(3.7)
Assets held for sale		3,000		3,553		(553)	(15.6)
Total assets	$	1,972,897	$	1,251,682	$	721,215	57.6	%	$	2,211,578	$	1,973,655	$	237,923	12.1

Deposits	$	1,563,672	$	1,086,784	$	476,888	43.9	%	$	1,807,825	$	1,619,910	$	187,915	11.6
Borrowings		236,522		16,560		219,962	1,328.3			222,289		173,854		48,435	27.9
Other liabilities		22,986		20,543		2,443	11.9			20,025		24,929		(4,904)	(19.7)
Liabilities held for sale		141		117		24	20.5
Total liabilities		1,823,321		1,124,004		699,317	62.2			2,050,139		1,818,693		231,446	12.7
Total shareholders’ equity		149,576		127,678		21,898	17.2			161,439		154,962		6,477	4.2
Total liabilities and shareholders’ equity	$	1,972,897	$	1,251,682	$	721,215	57.6	%	$	2,211,578	$	1,973,655	$	237,923	12.1	%

* Not meaningful

Cash and cash equivalents increased by ~~$171.7~~$219.9 million, or ~~218.4%~~141.0%, to ~~$250.4~~$375.9 million ~~at September 30, 2020~~as of March 31, 2021 compared to December 31, ~~2019.~~2020. The increase in liquidity was driven by organic growth in deposits related to new client relationships, in addition to increases in existing client accounts, and corporate initiatives to support current and future balance sheet growth. During the same period, investments decreased by ~~$18.2~~$5.8 million, or ~~31.0%~~15.9%, to ~~$40.7~~$30.8 million ~~at September 30, 2020.~~as of March 31, 2021 due to payoffs.

~~Total loans~~Loans, net of allowance increased by ~~$508.1~~$11.1 million, or ~~50.9%~~0.7%, to ~~$1.51~~$1.53 billion ~~at September 30, 2020~~as of March 31, 2021 compared to December 31, ~~2019.~~2020. The increase was driven by ~~three primary factors:~~ organic growth and PPP loan originations, ~~and the Branch Acquisition.~~net of PPP forgiveness. We experienced growth ~~in our all major loan categories with the largest growth coming~~ in the Cash, Securities and Other category that includes ~~$206.1~~$190.5 million in PPP loans as well as an increase in non-owner occupied CRE, offset by reductions in construction and development loans.

Mortgage loans held for sale increased ~~$41.6~~$14.8 million, or ~~86.0%~~9.1%, to ~~$89.9~~$176.6 million ~~at September 30, 2020~~as of March 31, 2021 compared to December 31, ~~2019.~~2020. This increase corresponds to the increase in mortgage origination volume as noted in the Mortgage segment activity.

~~Goodwill and other intangible~~Other assets ~~net, increased~~decreased by ~~$4.5~~$2.2 million, or ~~23.1% to $24.3 million at September 30, 2020 compared to~~ ~~December 31, 2019. The increase was driven by the recording of $4.5 million in goodwill and $0.1 million of core deposit intangibles related to the Branch Acquisition.~~

~~Other assets increased by $17.8 million, or 47.7%~~3.7%, to ~~$55.2~~$57.0 million ~~at September 30, 2020~~as of March 31, 2021 compared to December 31, ~~2019.~~2020. This was primarily related to a ~~$10.5~~$7.7 million ~~increase~~decrease in balances related to unfunded mortgage IRLC, which was offset by a ~~$3.7~~$5.5 million increase in accrued interest receivable as a result of payment moratoriums related to loan modifications, a $1.7 million increase in mortgage hedge collateral and a $1.4 million increase in deferred tax assets. Unfunded mortgage IRLC volume directly corresponds to the ~~increase in mortgage origination volume.~~forward commitments gain receivable.

~~Total deposits~~Deposits increased ~~$476.9~~$187.9 million, or ~~43.9%~~11.6%, to ~~$1.56~~$1.81 billion ~~at September 30, 2020~~as of March 31, 2021 compared to December 31, ~~2019.~~2020. The increase ~~in total deposits from December 31, 2019~~ was primarily attributable to ~~organic growth and the Branch Acquisition. We experienced growth~~an increase in ~~our all major deposit categories with the largest increases coming from~~ non-interest bearing ~~accounts~~ and money market deposits resulting from inflows from large commercial depositors and higher deposit ~~accounts.~~balances across the Company’s clientele due to the improving economic and business environment.

~~Total interest-bearing deposits increased $244.0 million, or 28.8%, to $1.09 billion and noninterest-bearing deposits increased $232.9 million, or 97.0%, to $473.0 million during this period.~~ Money market deposit accounts increased ~~$190.1~~$71.5 million, or ~~30.9%~~8.4%, to ~~$805.6~~$918.9 million ~~at September 30, 2020~~as of March 31, 2021 compared to December 31, ~~2019.~~2020. Time deposit accounts ~~increased $42.5~~decreased $15.6 million, or ~~31.5%~~9.0%, from December 31, ~~2019~~2020 to ~~$177.4~~$157.1 million ~~at September 30, 2020.~~as of March 31, 2021. Negotiable order of withdrawal, or NOW accounts, increased ~~$9.8~~$17.5 million, or ~~10.6%~~15.5%, to ~~$101.7~~$130.5 million from December 31, ~~2019~~2020 to ~~September 30, 2020.~~March 31, 2021.

~~Table of Contents~~

~~Total borrowings~~Borrowings increased ~~$220.0~~$48.4 million, or ~~1,328.3%~~27.9%, to ~~$236.5~~$222.3 million ~~at September 30, 2020~~as of March 31, 2021 compared to December 31, ~~2019.~~2020. The increase is primarily attributed to participation in the Paycheck Protection Program Loan Facility from the Federal Reserve in the amount of ~~$204.3~~$183.0 million. Borrowing from this facility is expected to match fund the balances of PPP loans.

Table of Contents

Other liabilities decreased $4.9 million, or 19.7%, to $20.0 million as of March 31, 2021 compared to December 31, 2020. The decrease is primarily attributed to decreases in salaries payable and the forward commitments loss payable.

Total shareholders’ equity increased ~~$21.9~~$6.5 million, or ~~17.2%~~4.2%, from December 31, ~~2019~~2020 to ~~$149.6~~$161.4 million ~~at September 30, 2020.~~as of March 31, 2021. The increase is primarily due to an increase in net income.

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Assets Under Management


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(Dollars in millions)	2020			2019			2020			2019			2021			2020
Managed Trust Balance at Beginning of Period	$	1,520		$	1,670		$	1,750		$	1,380		$	1,890		$	1,750
New relationships		—			2			13			43			15			10
Closed relationships		(1)			(1)			(12)			(2)			—			(10)
Contributions		11			4			75			14			18			54
Withdrawals		(10)			(12)			(110)			(100)			(120)			(89)
Market change, net		140			119			(56)			447			18			(244)
Ending Balance	$	1,660		$	1,782		$	1,660		$	1,782		$	1,821		$	1,471
Yield*		0.19	%		0.17	%		0.19	%		0.16	%		0.19	%		0.22	%

Directed Trust Balance at Beginning of Period	$	883		$	931		$	989		$	789		$	951	��	$	989
New relationships		9			4			14			132			76			—
Closed relationships		—			—			(5)			—			—			(5)
Contributions		9			2			33			31			5			1
Withdrawals		(21)			(4)			(91)			(45)			(5)			(68)
Market change, net		28			13			(32)			39			4			(36)
Ending Balance	$	908		$	946		$	908		$	946		$	1,031		$	881
Yield*		0.08	%		0.07	%		0.08	%		0.07	%		0.09	%		0.08	%

Investment Agency Balance at Beginning of Period	$	1,956		$	1,911		$	2,009		$	1,846		$	1,840		$	2,009
New relationships		18			13			97			44			41			39
Closed relationships		(2)			—			(11)			(56)			(14)			(6)
Contributions		71			37			178			110			95			54
Withdrawals		(45)			(64)			(174)			(210)			(75)			(79)
Market change, net		41			23			(60)			186			46			(221)
Ending Balance	$	2,039		$	1,920		$	2,039		$	1,920		$	1,933		$	1,796
Yield*		0.67	%		0.69	%		0.65	%		0.68	%		0.68	%		0.73	%

Custody Balance at Beginning of Period	$	474		$	460		$	452		$	356		$	518		$	452
New relationships		7			1			7			11			—			—
Closed relationships		—			—			(2)			(2)			(1)			—
Contributions		2			3			78			80			70			76
Withdrawals		(57)			(5)			(72)			(51)			(2)			(1)
Market change, net		36			12			(1)			77			10			(69)
Ending Balance	$	462		$	471		$	462		$	471		$	595		$	458
Yield*		0.03	%		0.03	%		0.03	%		0.03	%		0.03	%		0.03	%

401(k)/Retirement Balance at Beginning of Period	$	919		$	997		$	988		$	864		$	1,056		$	988
New relationships		8			—			12			6			7			1
Closed relationships		(2)			(6)			(46)			(26)			(52)			(6)
Contributions		41			—			101			60			27			31
Withdrawals		(20)			2			(61)			(44)			(28)			(21)
Market change, net		116			3			68			136			96			37
Ending Balance⁽¹⁾	$	1,062		$	996		$	1,062		$	996		$	1,106		$	1,030
Yield*		0.14	%		0.21	%		0.15	%		0.22	%		0.15	%		0.17	%

Total Assets Under Management at Beginning of Period	$	5,752		$	5,969		$	6,188		$	5,235		$	6,255		$	6,188
New relationships		42			20			143			236			139			50
Closed relationships		(5)			(7)			(76)			(86)			(67)			(27)
Contributions		134			46			465			295			215			216
Withdrawals		(153)			(83)			(508)			(450)			(230)			(258)
Market change, net		361			170			(81)			885			174			(533)
Total Assets Under Management	$	6,131		$	6,115		$	6,131		$	6,115		$	6,486		$	5,636
Yield*		0.31	%		0.32	%		0.31	%		0.31	%		0.30	%		0.34	%

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

⁽¹⁾ AUM ~~shown is one period in arrears~~

~~The three months ended September 30, 2020 compared with the three months ended September 30, 2019.~~ ~~Assets under management increased $379.0 million and $146.0 million, or 6.6% and 2.4%,~~reported for the three months ended September 30, 2020 and 2019, respectively. The increase during the three months ended September 30, 2020 was primarily related to market gains. Yield on the overall portfolio for the three months ended September 30, 2020 compared to September 30, 2019 remained relatively flat.current period are one quarter in arrears.

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~~The nine months ended September 30, 2020 compared with the nine months ended September 30, 2019.~~ Assets under management ~~decreased $57.0 million and~~ increased ~~$880.0~~$231.0 million, or ~~a decrease of 0.9% and an increase of 16.8%~~3.7%, for the ~~nine~~three months ended ~~September 30, 2020 and 2019, respectively.~~March 31, 2021. The increase ~~during the nine months ended September 30, 2019~~ was primarily ~~related~~attributable to new accounts, as well as improving market conditions resulting in an increase in ~~market valuations and net new relationships. Yield on~~ the ~~overall portfolio for the nine months ended September 30, 2020 compared to September 30, 2019 remained relatively flat.~~value of assets under management balances.

Available-for-sale 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 (loss), 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.

The following table summarizes the amortized cost and estimated fair value of our investment securities as of ~~September 30, 2020:~~

September 30, 2020




Gross

Gross


Amortized

Unrealized

Unrealized

Fair
(Dollars in thousands)

Cost

Gains

Losses

Value
Investment securities available-for-sale:








U.S. Treasury debt

$
250

$
6

$
—

$
256
Corporate bonds

2,000

48

—

2,048
Government National Mortgage Association ("GNMA") mortgage -backed securities—residential

28,844

944

—

29,788
Federal National Mortgage Association ("FNMA") mortgage-backed securities—residential

2,626

90

—

2,716
Corporate collateralized mortgage obligations ("CMO") and mortgage-backed securities ("MBS")

5,826

93

(73)

5,846
Total securities available-for-sale

$
39,546

$
1,181

$
(73)

$
40,654

~~The following table summarizes~~ the ~~amortized cost and estimated fair value of our investment securities as of December 31, 2019:~~dates presented:


	December 31, 2019								March 31, 2021
			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
Investment securities available-for-sale:
U.S. Treasury debt	$	250	$	4	$	—	$	254	$	250	$	3	$	—	$	253
GNMA mortgage -backed securities—residential		45,490		157		(335)		45,312
FNMA mortgage-backed securities—residential		2,935		11		(29)		2,917
Corporate CMO and MBS		10,425		40		(45)		10,420
Corporate bonds										6,000		126		(38)		6,088
Government National Mortgage Association ("GNMA") mortgage -backed securities—residential										19,402		581		(3)		19,980
Federal National Mortgage Association ("FNMA") mortgage-backed securities—residential										1,602		68		—		1,670
Corporate collateralized mortgage obligations ("CMO") and mortgage-backed securities ("MBS")										2,821		55		(24)		2,852
Total securities available-for-sale	$	59,100	$	212	$	(409)	$	58,903	$	30,075	$	833	$	(65)	$	30,843


	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

The following tables represent 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. 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, 2020																Maturity as of March 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	0.02	%	$	—	—	%	$	—	—	%	$	—	—	%
Corporate Bonds		—	—			—	—			—	—			2,000	0.25
Corporate bonds																		—	—			1,250	0.20			4,750	0.72			—	—
GNMA mortgage-backed securities - residential		—	—			—	—			—	—			28,844	1.73			—	—			—	—			—	—			19,402	1.56
FNMA mortgage-backed securities - residential		—	—			—	—			—	—			2,626	0.18			—	—			—	—			—	—			1,602	0.14
Corporate CMO and MBS		—	—			—	—			45	—			5,781	0.44			—	—			—	—			42	*			2,779	0.25
Total available-for-sale	$	—	—	%	$	250	0.02	%	$	45	—	%	$	39,251	2.60	%	$	250	0.02	%	$	1,250	0.20	%	$	4,792	0.72	%	$	23,783	1.95	%


	Maturity as of December 31, 2019																Maturity as of December 31, 2020
	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	0.01	%	$	—	—	%	$	—	—	%	$	250	0.02	%	$	—	—	%	$	—	—	%	$	—	—	%
Corporate bonds																		—	—			1,250	0.17			—	—			4,750	0.60
GNMA mortgage-backed securities - residential		—	—			—	—			—	—			45,490	2.28			—	—			—	—			—	—			23,806	1.59
FNMA mortgage-backed securities - residential		—	—			—	—			—	—			2,935	0.14			—	—			—	—			—	—			1,616	0.10
Corporate CMO and MBS		—	—			—	—			52	—			10,373	0.66			—	—			—	—			43	*			4,035	0.31
Total available-for-sale	$	—	—	%	$	250	0.01	%	$	52	—	%	$	58,798	3.08	%	$	250	0.02	%	$	1,250	0.17	%	$	43	—	%	$	34,207	2.60	%

~~At September 30, 2020~~

* Not meaningful

As of March 31, 2021 and December 31, ~~2019,~~2020, 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.

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 ~~sales~~sale activities are primarily directed at originating single family mortgages that are priced and underwritten to conform to previously ~~agreed~~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 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, we had mortgage loans held for sale of ~~$89.9~~$176.6 million and ~~$48.3~~$161.8 million, respectively, in residential mortgage loans we originated.

As Loan balances include the impacts of ~~September 30, 2020, loans, net of deferred costs (fees)~~PPP and unamortized premiums/ (unaccreted discounts) includes period end balances of $193.2 million added through PPP loans originated internally along with $124.7 million, including PPP loans acquired, related to performing loans acquired in the Branch Acquisition. ~~See Note 2 - Acquisitions of the accompanying Notes to Condensed Consolidated Financial Statements for additional information.~~

As of ~~September 30, 2020,~~March 31, 2021, the Company has ~~$2.1~~$190.5 million in PPP loans outstanding with $3.1 million in remaining fees to be ~~recognized related to PPP. This is~~recognized. The remaining fees represent the net amount of the fees from the SBA for participation in the PPP less the loan origination ~~fees~~costs on these loans. The current amortization of this income is being recognized over a ~~two-year period, however we expect much of that income to be recognized in the second half of 2020 as the borrowers are granted forgiveness.~~ two or~~As of October 16, 2020, the Company had submitted to the SBA for forgiveness on 236 loans with original loan amounts of $85.2 million and had received forgiveness on 46 loans totaling $2.1 million.~~

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five year period, based on the PPP loan terms. If the loan receives partial forgiveness, the income related to the unforgiven balance is amortized over a five year period, regardless of original loan terms. 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 March 31, 2021, the Company had submitted loans with original loan amounts of $155.1 million to the SBA for forgiveness and had received forgiveness on 499 loans totaling $84.7 million.

The following table summarizes our loan portfolio by type of loan as of the dates ~~indicated, in thousands:~~indicated:


	September 30,				December 31,				March 31,				December 31,
	2020				2019				2021				2020
(Dollars in thousands)	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Cash, Securities and Other	$	371,481	24.6	%	$	146,701	14.7	%	$	363,155	23.5	%	$	357,020	23.3	%
Construction and Development		105,717	7.0			28,120	2.8			110,024	7.1			131,111	8.5
1-4 Family Residential		446,959	29.7			400,134	40.2			452,591	29.3			455,038	29.7
Non-Owner Occupied Commercial Real Estate ("CRE")		243,564	16.2			165,179	16.6
Non-Owner Occupied CRE										317,457	20.5			281,943	18.4
Owner Occupied CRE		154,138	10.2			127,968	12.8			161,787	10.4			163,042	10.6
Commercial and Industrial		185,625	12.3			128,457	12.9			141,770	9.2			146,031	9.5
Total loans held for investment⁽¹⁾	$	1,507,484	100.0	%	$	996,559	100.0	%	$	1,546,784	100.0	%	$	1,534,185	100.0	%
Mortgage loans held for sale	$	89,872			$	48,312			$	176,644			$	161,843

~~(1)~~

Loans held for investment exclude deferred costs (fees) and unamortized premiums/ (unaccreted discounts), net of $ (1.4) million and $1.4 million as of September 30, 2020 and December 31, 2019, respectively.

⁽¹⁾Loans held for investment exclude deferred (fees) costs and unamortized premiums/ (unaccreted discounts), net of $(2.9) million and $(1.4) million as of March 31, 2021 and December 31, 2020, 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. 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 as of September 30, 2020.~~item.

●

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, ~~and industrial loans not secured by real estate,~~ 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. ~~Also, this category includes~~ MSLP loans ~~as of September 30, 2020.~~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 are summarized in the following tables:


	As of September 30, 2020								As of March 31, 2021
	One Year		One Through		After				One Year		One Through			After
(Dollars in thousands)	or Less		Five Years		Five Years		Total		or Less		Five Years			Five Years		Total
Cash, Securities and Other	$	54,451	$	304,824	$	12,206	$	371,481	$	39,756	$	315,885	⁽¹⁾	$	7,514	$	363,155
Construction and Development		71,688		32,511		1,518		105,717		61,984		46,516			1,524		110,024
1-4 Family Residential		44,560		85,738		316,661		446,959		36,735		71,210			344,646		452,591
Non-Owner Occupied CRE		6,852		156,920		79,792		243,564		45,270		186,783			85,404		317,457
Owner Occupied CRE		8,252		43,226		102,660		154,138		4,835		56,780			100,172		161,787
Commercial and Industrial		55,160		103,191		27,274		185,625		61,762		49,335			30,673		141,770
Total loans	$	240,963	$	726,410	$	540,111	$	1,507,484	$	250,342	$	726,509		$	569,933	$	1,546,784
Amounts with fixed rates	$	79,503	$	504,454	$	222,934	$	806,891	$	71,188	$	522,976		$	212,939	$	807,103
Amounts with floating rates		161,460		221,956		317,177		700,593		179,154		203,533			356,994		739,681
Total loans	$	240,963	$	726,410	$	540,111	$	1,507,484	$	250,342	$	726,509		$	569,933	$	1,546,784

⁽¹⁾Includes PPP loans.


	As of December 31, 2019								As of December 31, 2020
	One Year		One Through		After				One Year		One Through			After
(Dollars in thousands)	or Less		Five Years		Five Years		Total		or Less		Five Years			Five Years		Total
Cash, Securities and Other	$	66,634	$	68,326	$	11,741	$	146,701	$	90,053	$	259,611	⁽¹⁾	$	7,356	$	357,020
Construction and Development		9,126		16,953		2,041		28,120		78,900		50,703			1,508		131,111
1-4 Family Residential		32,300		96,886		270,948		400,134		41,212		78,359			335,467		455,038
Non-Owner Occupied CRE		13,286		113,457		38,436		165,179		25,801		175,476			80,666		281,943
Owner Occupied CRE		9,540		32,861		85,567		127,968		8,355		54,403			100,284		163,042
Commercial and Industrial		37,341		78,022		13,094		128,457		47,397		68,607			30,027		146,031
Total loans	$	168,227	$	406,505	$	421,827	$	996,559	$	291,718	$	687,159		$	555,308	$	1,534,185
Amounts with fixed rates	$	58,289	$	251,378	$	128,452	$	438,119	$	76,131	$	469,155		$	205,548	$	750,834
Amounts with floating rates		109,938		155,127		293,375		558,440		215,587		218,004			349,760		783,351
Total loans	$	168,227	$	406,505	$	421,827	$	996,559	$	291,718	$	687,159		$	555,308	$	1,534,185

⁽¹⁾Includes PPP loans.

Loan Modifications

As of ~~September 30, 2020,~~March 31, 2021, the Company’s loans include ~~forty-four~~eighty-one modified loans, including acquired loans, across multiple industries in the amount of ~~$66.7~~$148.5 million, representing ~~4.43%~~9.7% of total loans.

~~The following presents loans modifications as a result of COVID-19 as of September 30, 2020 (dollars in thousands):~~

Total Loans

# of Loans Modified

Outstanding Balance of Modified Loans

% of Total Loan Balance Modified

Cash, Securities and Other

$
371,481

1

$
1,496

0.40
%
Construction and Development

105,717

—

—

—

1-4 Family Residential

446,959

6

4,441

0.99

Non-Owner Occupied CRE

243,564

22

38,229

15.70

Owner Occupied CRE

154,138

10

17,524

11.37

Commercial and Industrial

185,625

5

5,048

2.72

Total Loans

$
1,507,484

44

$
66,738

4.43
%

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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.

No loans which participated in the loan modification program were delinquent according to Bank policy as of March 31, 2021. No loans which participated in the loan modification program, were still in their deferral period as of March 31, 2021.

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All loans modified in response to COVID-19 are classified as performing ~~and pass rated~~ as of ~~September 30, 2020.~~March 31, 2021. 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 industries we believe may be more impacted by the pandemic, for instance those loans where there may be a greater than 50% probability of a downgrade, covenant violation or 20% reduction in collateral position. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of ~~September 30, 2020,~~March 31, 2021, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

Non-Performing Assets

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

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. ~~As of September 30, 2020, we incurred $0.1 million in losses as a result of sales contracts in place which were lower than the carrying value.~~

The amount of lost interest for non-accrual loans was ~~an immaterial amount for the three months ended September 30, 2020~~$0.1 million and $0.1 million for the three months ended ~~September 30, 2019. For the nine months ended September 30,~~March 31, 2021 and 2020, ~~and 2019, the amount of lost interest for non-accrual loans was $0.2 million and $0.3 million,~~ respectively.

We had ~~$10.4~~$4.0 million in non-performing assets as of ~~September 30, 2020~~March 31, 2021 compared to ~~$12.9~~$4.3 million as of December 31, ~~2019.~~2020. The ~~$2.5 million~~ decrease in our non-performing assets was primarily related to ~~principal paydowns received on~~the sale of the final OREO, resulting in a ~~Cash, Securities, and Other loan for $2.7~~decrease of $0.2 million, and ~~$0.7 million~~other immaterial paydowns on ~~a Commercial and Industrial loan. This was slightly offset by draws of $1.1 million on a Commercial and Industrial loan.~~non-accrual loans.

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The following table presents information regarding non-performing loans as of the dates indicated:


		September 30,			December 31,		March 31,			December 31,
(Dollars in thousands)	2020			2019			2021			2020
Non-accrual loans by category⁽¹⁾
Cash, Securities and Other	$	66		$	2,803		$	23		$	50
Construction and Development		—			—			—			—
1-4 Family Residential		—			—			—			—
Non-Owner Occupied CRE		—			—			—			—
Owner Occupied CRE		—			—			479			479
Commercial and Industrial		3,679			4,412			3,519			3,529
Total non-accrual loans		3,745			7,215			4,021			4,058
TDRs still accruing		6,136			5,055			—			—
Accruing loans 90 or more days past due		—			—			—			—
Total non-performing loans		9,881			12,270			4,021			4,058
OREO		558			658			—			194
Total non-performing assets	$	10,439		$	12,928		$	4,021		$	4,252
Ratio of non-performing loans to total loans⁽²⁾		0.66	%		1.23	%
Ratio of non-performing assets to total assets		0.53			1.03
Allowance as a percentage of non-performing loans		119.88	%		64.18	%
Non-performing loans to total loans⁽²⁾								0.26	%		0.26	%
Non-performing assets to total assets								0.18			0.22
Allowance for loan losses to non-performing loans								311.84	%		308.99	%

~~(1)~~

As of September 30, 2020 one immaterial non-accrual loan was not also classified as a TDR. As of December 30, 2019 all non-accrual loans were also classified as TDRs. See Note 4 – Loans and the Allowance for Loan Losses to the consolidated financial statements.

~~(2)~~

~~Excludes mortgage loans held for sale of $89.9 million and $48.3 million as of September 30, 2020 and December 31, 2019, respectively.~~

⁽¹⁾ As of March 31, 2021, three non-accrual loans, totaling $0.5 million, were not classified as TDRs. As of December 31, 2020, two non-accrual loans were not classified as TDRs. See Note 3 – Loans and the Allowance for Loan Losses to the condensed consolidated financial statements.

⁽²⁾ Excludes mortgage loans held for sale of $176.6 million and $161.8 million as of March 31, 2021 and December 31, 2020, respectively.

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Potential Problem Loans

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

Special Mention—Loans ~~classified~~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.

Doubtful—Loans graded doubtful are considered ~~“classified”~~"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 not meeting any of the three criteria above are considered to be pass-rated loans.

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As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 non-performing loans of ~~$9.9~~$4.0 million and ~~$12.3~~$4.1 million, respectively, were included in the substandard category in the table below. The following tables present, by class and by credit quality indicator, the recorded investment in our loans as of the dates indicated:


	As of September 30, 2020								As of December 31, 2019								As of March 31, 2021								As of December 31, 2020
			Special								Special								Special								Special
(Dollars in thousands)	Pass		Mention		Substandard		Total		Pass		Mention		Substandard		Total		Pass		Mention		Substandard		Total		Pass		Mention		Substandard		Total
Cash, Securities and Other	$	371,415	$	—	$	66	$	371,481	$	143,898	$	—	$	2,803	$	146,701	$	363,132	$	—	$	23	$	363,155	$	356,970	$	—	$	50	$	357,020
Construction and Development		105,717		—		—		105,717		28,120		—		—		28,120		110,024		—		—		110,024		131,111		—		—		131,111
1-4 Family Residential		442,076		—		4,883		446,959		395,224		—		4,910		400,134		449,483		—		3,108		452,591		451,918		—		3,120		455,038
Non-Owner Occupied CRE		232,010		11,554		—		243,564		164,021		1,158		—		165,179		312,098		5,359		—		317,457		275,627		6,316		—		281,943
Owner Occupied CRE		153,656		482		—		154,138		127,968		—		—		127,968		160,600		—		1,187		161,787		161,850		—		1,192		163,042
Commercial and Industrial		173,061		—		12,564		185,625		114,241		—		14,216		128,457		136,181		—		5,589		141,770		140,432		—		5,599		146,031
Total	$	1,477,935	$	12,036	$	17,513	$	1,507,484	$	973,472	$	1,158	$	21,929	$	996,559	$	1,531,518	$	5,359	$	9,907	$	1,546,784	$	1,517,908	$	6,316	$	9,961	$	1,534,185

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. Our clientele is generally comprised of high net-worth individuals and commercial borrowers with strong credit profiles and multiple sources of repayment. The portion of our credit exposure to the highest risk industries impacted by COVID-19, such as accommodations, transportation and restaurants, is less than 3.0% of our loan portfolio. The Company has increased our loan level reviews and portfolio monitoring to address the changing environment and continues to engage in more frequent communication with these borrowers to better understand the impact on our borrower’s cash flows and respond proactively. While the length of time some of these businesses are unable to operate or operate at full capacity is unknown, it could have a significant impact on many factors that impact our borrowers and our reserve

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requirement. During the ~~third~~first quarter of ~~2020,~~2021, the Company ~~continued to~~did not increase its allowance ~~to account~~ for ~~the~~ ~~additional variability surrounding the~~ loan ~~modifications made during the quarter and increased economic uncertainty related to the COVID-19 pandemic.~~losses. 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 30, 2020.~~March 31, 2021.

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The following table presents summary information regarding our allowance for loan losses for the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(Dollars in thousands)	2020			2019			2020			2019			2021			2020
Average loans outstanding⁽¹⁾⁽²⁾	$	1,462,872		$	937,260		$	1,250,052		$	928,112		$	1,554,990		$	1,016,148
Gross loans outstanding at end of period⁽³⁾	$	1,506,076		$	926,586		$	1,506,076		$	926,586		$	1,543,926		$	1,043,951
Allowance for loan losses at beginning of period	$	10,354		$	7,575		$	7,875		$	7,451		$	12,539		$	7,875
Provision for loan losses		1,496			100			3,987			216			—			367
Charge-offs:
Cash, Securities and Other		6			—			30			—			—			—
Construction and Development		—			—			—			—			—			—
1-4 Family Residential		—			—			—			—			—			—
Non-Owner Occupied CRE		—			—			—			—			—			—
Owner Occupied CRE		—			—			—			—			—			—
Commercial and Industrial		—			—			—			—			—			—
Total charge-offs		6			—			30			—			—			—
Recoveries:
Cash, Securities and Other		1			—			13			8			—			—
Construction and Development		—			—			—			—			—			—
1-4 Family Residential		—			—			—			—			—			—
Non-Owner Occupied CRE		—			—			—			—			—			—
Owner Occupied CRE		—			—			—			—			—			—
Commercial and Industrial		—			—			—			—			—			—
Total recoveries		1			—			13			8			—			—
Net charge-offs (recoveries)		5			—			17			(8)			—			—
Allowance for loan losses at end of period	$	11,845		$	7,675		$	11,845		$	7,675		$	12,539		$	8,242
Ratio of allowance to end of period loans⁽⁴⁾		0.79	%		0.83	%		0.79	%		0.83	%
Ratio of net charge-offs to average loans⁽¹⁾		—	%		—	%		—	%		—	%
Allowance for loan losses to total loans⁽⁴⁾														0.81	%		0.79	%
Net charge-offs to average loans⁽⁵⁾														—	%		—	%

~~(1)~~

~~Average balances are average daily balances.~~

~~(2)~~

Excludes average outstanding balances of mortgage loans held for sale of $94.7 million and $52.5 million for the three months ended September 30, 2020 and 2019 and $67.0 million and $32.6 million for the nine months ended September 30, 2020 and 2019, respectively.

~~(3)~~

Excludes mortgage loans held for sale of $89.9 million and $69.2 million as of September 30, 2020 and 2019, respectively, and includes deferred costs (fees) and unamortized premiums/ (unaccreted discounts).

~~(4)~~

End of period loans at September 30, 2020 include $124.7 million in acquired loans and $193.2 million in bank originated PPP loans, excluding these loans would result in an increase of the ratio for the three months ended September 30, 2020.

⁽¹⁾ Average balances are average daily balances.

⁽²⁾ Excludes average outstanding balances of mortgage loans held for sale of $175.9 million and $37.8 million for the three months ended March 31, 2021 and 2020, respectively.

⁽³⁾ Excludes mortgage loans held for sale of $176.6 million and $64.1 million as of March 31, 2021 and 2020, respectively.

⁽⁴⁾ End of period loans as of March 31, 2021 include $120.8 million in acquired loans, $183.0 million in bank originated PPP loans, and $7.5 million of acquired PPP loans. No reserve is allocated for those loans. Excluding these loans would result in an increase of the ratio for the three months ended March 31, 2021.

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

The following table represents 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.

As of September 30,

As of December 31,

2020

2019

(Dollars in thousands)

Amount

%⁽¹⁾

Amount

%⁽¹⁾

Cash, Securities and Other

$
2,612

24.6
%
$
1,058

14.7
%
Construction and development

733

7.0

200

2.8

1-4 Family Residential

3,100

29.7

2,850

40.2

Non-Owner Occupied CRE

1,690

16.2

1,176

16.6

Owner Occupied CRE

1,069

10.2

911

12.8

Commercial and Industrial

2,641

12.3

1,680

12.9

Total allowance for loan losses

$
11,845

100.0
%
$
7,875

100.0
%

~~(1)~~

~~Represents the percentage of loans to total loans in the respective category.~~

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	As of March 31,				As of December 31,
	2021				2020
(Dollars in thousands)	Amount		%⁽¹⁾		Amount		%⁽¹⁾
Cash, Securities and Other	$	2,573	23.5	%	$	2,579	23.3	%
Construction and Development		766	7.1			932	8.5
1-4 Family Residential		3,152	29.3			3,233	29.7
Non-Owner Occupied CRE		2,211	20.5			2,004	18.4
Owner Occupied CRE		1,123	10.4			1,159	10.6
Commercial and Industrial		2,714	9.2			2,632	9.5
Total allowance for loan losses	$	12,539	100.0	%	$	12,539	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 ~~as opposed to~~and when they are recognized for tax purposes, as well as our net operating losses. ~~As a result of the Tax Cuts and Jobs Act of 2017, our~~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. ~~As a result of book and tax basis differences, our~~Our deferred tax assets, net ~~at September 30, 2020 increased $1.4 million~~as of March 31, 2021 remained relatively unchanged from December 31, ~~2019 primarily attributable to increased deferred loan origination fees primarily driven by loan growth and $4.0 million of provision expense during the nine months ended September 30,~~ 2020.

Deposits

Our deposit products include money market accounts, demand deposit accounts, ~~time-deposit~~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 by ~~$476.9~~$187.9 million, or ~~43.9%~~11.6%, to ~~$1.56~~$1.81 billion ~~at September 30, 2020~~as of March 31, 2021 from December 31, ~~2019.~~2020. Total average deposits for the three months ended ~~September 30, 2020~~March 31, 2021 were ~~$1.46~~$1.72 billion, an increase of ~~$420.6~~$636.2 million, or ~~40.4%~~58.7%, compared to ~~$1.04~~$1.08 billion as of ~~September 30, 2019.~~March 31, 2020. The increase in total deposits from December 31, ~~2019~~2020 was attributable to continued organic growth ~~and~~with new client accounts as well as increased deposit balances within the ~~Branch Acquisition~~. ~~See Note 2 - Acquisitions of the accompanying Notes to Condensed Consolidated Financial Statements for additional information.~~existing deposit accounts.

The following table presents the average balances and average rates paid on deposits for the periods below:


	As of and For the Three Month Period Ending September 30,								For the Three Month Period Ending March 31,
	2020				2019				2021				2020
	Average		Average		Average		Average		Average		Average		Average		Average
(Dollars in thousands)	Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate
Deposits
Money market deposit accounts	$	774,615	0.28	%	$	562,155	1.67	%	$	878,004	0.25	%	$	606,286	1.05	%
Demand deposit accounts		95,000	0.23			87,434	0.43			115,555	0.18			86,000	0.31
Certificates and other time deposits > $250k		69,821	1.66			70,797	2.12			80,561	1.23			65,213	2.15
Certificates and other time deposits < $250k		99,481	0.73			103,255	2.13			82,620	0.61			68,976	2.17
Total time deposits		169,302	1.11			174,052	2.13			163,181	0.91			134,189	2.16
Savings accounts		6,404	0.04			2,849	0.28			6,270	0.03			4,261	0.23
Total interest-bearing deposits		1,045,321	0.41			826,490	1.63			1,163,010	0.33			830,736	1.15
Noninterest-bearing accounts		417,502				215,721				557,707				253,813
Total deposits	$	1,462,823	0.29	%	$	1,042,211	1.29	%	$	1,720,717	0.23	%	$	1,084,549	0.88	%

	As of and For the Nine Month Period Ending September 30,
	2020				2019
	Average		Average		Average		Average
(Dollars in thousands)	Balance		Rate		Balance		Rate
Deposits
Money market deposit accounts	$	689,911	0.53	%	$	526,103	1.66	%
Negotiable order of withdrawal accounts		88,852	0.27			72,734	0.33
Certificates and other time deposits > $250k		58,839	1.92			72,632	1.98
Certificates and other time deposits < $250k		92,661	1.43			102,439	1.89
Total time deposits		151,500	1.62			175,071	1.93
Savings accounts		5,426	0.09			2,667	0.15
Total interest-bearing deposits		935,689	0.68			776,575	1.59
Noninterest-bearing accounts		350,475				225,512
Total deposits	$	1,286,164	0.50	%	$	1,002,087	1.23	%

Average noninterest-bearing deposits to average total deposits was ~~28.5%~~32.4% and ~~20.7%~~23.4% for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, and 27.3% and 22.5% for the nine months ended September 30, 2020 and 2019,~~ respectively.

Our average cost of funds was ~~0.35%~~0.31% and ~~1.33% during~~0.94% for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively, and 0.55% and 1.28% during the nine months ended September 30, 2020 and 2019,~~ respectively. The decrease in cost of funds was driven by a reduction in deposit rates consistent with the lower interest rate environment.

Total money market accounts as of March 31, 2021 were $918.9 million, an increase of $71.5 million, or 8.4%, compared to $847.4 million as of December 31, 2020. NOW accounts increased $17.5 million, or 15.5%, to $130.5 million compared to December 31, 2020.

Total time deposits as of March 31, 2021 were $157.1 million, a decrease of $15.6 million, or 9.0%, from December 31, 2020.

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Money market deposit accounts as of September 30, 2020 were $805.6 million, an increase of $190.1 million, or 30.9%, compared to $615.6 million as of December 31, 2019. Total time deposits as of September 30, 2020 were $177.4 million, an increase of $42.5 million, or 31.5%, from December 31, 2019. Negotiable order of withdrawal, or NOW accounts, increased $9.8 million, or 10.6%, to $101.7 million from December 31, 2019 to September 30, 2020.

The following table represents the amount of certificates of deposit by time remaining until maturity as of ~~September 30, 2020:~~March 31, 2021:


	As of September 30, 2020										As of March 31, 2021
	Maturity Within:										Maturity Within:
(Dollars in thousands)	Three Months or Less		Three to Six Months		Six to 12 Months		After 12 Months			Total	Three Months or Less		Three to Six Months		Six to 12 Months		After 12 Months		Total
Time, $250,000 and over	$	11,038	$	6,649	$	14,882	$	34,926	$	67,495	$	8,147	$	7,086	$	33,114	$	24,143	$	72,490
Other		31,520		19,118		40,981		18,277		109,896		20,475		21,076		24,642		18,389		84,582
Total	$	42,558	$	25,767	$	55,863	$	53,203	$	177,391	$	28,622	$	28,162	$	57,756	$	42,532	$	157,072

Borrowings

We have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, borrowings totaled ~~$236.5~~$222.3 million and ~~$16.6~~$173.9 million, respectively.

~~During the nine months ended September 30, 2020, the Company completed the issuance and sale of subordinated notes totaling $8.0 million.~~ The increase in other borrowings is primarily attributed to participation in the Paycheck Protection Program Loan Facility from the Federal Reserve with a period end balance of ~~$204.1~~$183.0 million. Borrowing from this facility is expected to match fund the balances of PPP loans. The table below presents balances of each of the borrowing facilities as of the dates indicated:


	September 30,		December 31,		March 31,		December 31,
(Dollars in thousands)	2020		2019		2021		2020
Borrowings
FHLB Topeka borrowings	$	18,000	$	10,000
FHLB borrowings					$	15,000	$	15,000
Federal Reserve borrowings		204,075		—		183,041		134,563
Subordinated notes		14,447		6,560		24,248		24,291
	$	236,522	$	16,560
Total					$	222,289	$	173,854

FHLB

We have a blanket pledge and security agreement with ~~the~~ FHLB ~~Topeka~~ that requires certain loans and securities to be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 amounted to ~~$612.1~~$692.4 million and ~~$515.5~~$668.6 million, respectively. Based on this collateral and the Company’s holdings of FHLB ~~Topeka~~ stock, the Company was eligible to borrow an additional ~~$401.9~~$459.1 million ~~at September 30, 2020.~~

As of and for the

Nine Months Ended

September 30,

(Dollars in thousands)

2020

Short-term borrowings:

Maximum outstanding at any month-end during the period

$
28,000

Balance outstanding at end of period

18,000

Average outstanding during the period

$
15,923

Average interest rate during the period

0.90
%
Average interest rate at the end of the period

0.18
%

Asas of ~~September 30, 2020 and December~~March 31, ~~2019, we had~~2021.


	As of and for the
	Three Months Ended
	March 31,
(Dollars in thousands)	2021
Short-term borrowings:
Maximum outstanding at any month-end during the period	$	15,000
Balance outstanding at end of period		15,000
Average outstanding during the period	$	15,000
Average interest rate during the period		0.32	%
Average interest rate at the end of the period		0.32	%

The Bank has borrowing capacity associated with three unsecured federal funds lines of credit ~~with~~ up to $10.0 million, $19.0 million, and $25.0 ~~million, respectively, available to us under such~~million. As of March 31, 2021 and December 31, 2020, there were no amounts outstanding on any of the federal funds lines.

As of March 31, 2021 and December 31, ~~2019,~~2020, we had a ~~Restated Revolving Credit~~Promissory Note with a correspondent lending partner and the borrowing capacity associated with this facility was $5.0 million. As of June 30, 2020, the Restated Revolving Credit Note was renewed under a new Business Loan Agreement and associated Promissory Note. As of September 30, 2020, the Promissory Note had a borrowing capacity under this facility of $5.0 million.million with no balance outstanding.

Our borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed ~~“well capitalized”~~"well capitalized" by federal banking agencies. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company was in compliance with the covenant requirements.

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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, ~~Topeka~~other correspondent banks, and ~~from correspondent banks.~~the use of brokered deposits.

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


	Average Percentage for the Three Month Period Ended		Average Percentage for the Nine Month Period Ending		Average Percentage for the Three Months Ended
	September 30,		September 30,		March 31,
	2020		2020		2021		2020
Sources of Funds:
Deposits:
Noninterest-bearing	22.35	%	22.52	%	27.02	%	20.25	%
Interest-bearing	55.97		60.14		56.34		66.29
FHLB and Federal Reserve borrowings	11.90		6.39		6.67		0.84
Subordinated notes	0.77		0.79		1.18		0.63
Other liabilities	1.21		1.31		1.02		1.58
Shareholders’ equity	7.80		8.85		7.77		10.41
Total	100	%	100	%	100.00	%	100.00	%
Uses of Funds:
Total loans	77.74	%	79.75	%	74.72	%	80.44	%
Available-for-sale securities	2.17		3.09		1.55		4.40
Mortgage loans held for sale	5.07		4.31		8.52		3.02
Interest-bearing deposits in other financial institutions	9.57		6.94		10.35		5.43
Noninterest-earning assets	5.45		5.91		4.86		6.71
Total	100	%	100	%	100.00	%	100.00	%
Average noninterest-bearing deposits to total average deposits	28.54	%	27.25	%	32.41	%	23.40	%
Average loans to total average deposits	100.00		97.19		90.37		93.69
Average interest-bearing deposits to total average deposits	71.46	%	72.75	%	67.59	%	76.60	%

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 ~~June 14, 2019,~~November 3, 2020, the Company announced that its ~~Board~~board of ~~Directors had~~directors authorized ~~a share~~the repurchase ~~program under which the Company may repurchase~~of up to ~~300,000~~400,000 shares of ~~its~~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 ~~had~~has no objection to the Company’s ~~stock~~2020 Repurchase Plan. The Company may repurchase ~~program. The repurchase program authorized the Company to purchase its common stock from time to time~~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 ~~plan~~ promulgated by the Securities and Exchange ~~Commissions,~~Commission, or otherwise in a manner that complies with applicable federal securities laws. ~~During the year ended December 31, 2019,~~The 2020 Repurchase Plan does not obligate the Company ~~repurchased 43,698~~to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at ~~an average price of $16.51.~~any time without notice. During ~~the nine months ended September 30, 2020, the Company repurchased 22,679 shares at an average price of $16.50. No shares were repurchased during~~ the three months ended ~~September 30,~~March 31, 2021, the Company did not repurchase any shares under the authorization of the 2020 ~~as the repurchase program expired in June 2020. Management is currently evaluating various capital planning strategies which may include implementing a share repurchase program.~~Repurchase Plan.

We are subject to various regulatory capital adequacy requirements at a consolidated level and the ~~bank~~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

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direct material effect on our 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

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relative to the amount and types of assets they hold. As of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, our holding company and Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as ~~“well~~"well capitalized,”" for purposes of the prompt corrective action regulations. As we continue to grow our operations and maintain capital requirements, our regulatory capital levels may decrease depending on our level of earnings. ~~During the nine months ended September 30, 2020 the Company made a $10.0 million capital injection into the Bank as a result of the growth due to the acquisition.~~ 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 the dates noted.


	September 30, 2020				December 31, 2019				March 31, 2021				December 31, 2020
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 capital to risk-weighted assets
Bank	$	127,441	10.28	%	$	99,461	10.67	%	$	141,027	10.60	%	$	133,963	10.22	%
Consolidated Company		122,987	9.88			105,821	11.31			138,067	10.31			131,507	9.96
Common Equity Tier 1(CET1) to risk-weighted assets
Bank		127,441	10.28			99,461	10.67			141,027	10.60			133,963	10.22
Consolidated Company		122,987	9.88			105,821	11.31			138,067	10.31			131,507	9.96
Total capital to risk-weighted assets
Bank		139,647	11.26			107,509	11.53			153,929	11.57			146,853	11.20
Consolidated Company		149,753	12.03			120,429	12.87			175,528	13.11			168,957	12.80
Tier 1 capital to average assets
Bank		127,441	7.81			99,461	8.09			141,027	7.53			133,963	7.62
Consolidated Company	$	122,987	7.52	%	$	105,821	8.58	%	$	138,067	7.35	%	$	131,507	7.45	%

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 ~~consolidated balance sheets.~~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.

The following table presents future contractual obligations to make future payments ~~with respect to borrowings~~ for the periods ~~indicated (amounts in thousands):~~indicated:


	As of September 30, 2020											As of March 31, 2021
			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
	or Less		than 3 Years		than 5 Years		or More			Total
FHLB Topeka and Federal Reserve	$	3,000	$	219,075	$	—	$	—		$	222,075
(Dollars in thousands)												or Less		than 3 Years		than 5 Years		or More			Total
FHLB and Federal Reserve												$	—	$	121,050	$	76,991	$	—		$	198,041
Subordinated notes		—		—		—		14,447	⁽¹⁾		14,447		—		—		—		24,560	⁽¹⁾		24,560
Time deposits		42,324		114,748		18,627		1,692			177,391		101,510		51,467		4,044		51			157,072
Minimum lease payments		3,082		5,390		4,204		26			12,702		3,303		6,070		3,974		759			14,106
Total	$	48,406	$	339,213	$	22,831	$	16,165		$	426,615	$	104,813	$	178,587	$	85,009	$	25,370		$	393,779

~~(1)~~

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

~~Table~~ of ~~Contents~~December 31, 2026, March 31, 2030, and December 1, 2030.

The following table presents financial instruments whose contract amounts represent credit risk, as of the periods indicated.


	September 30,				December 31,				March 31,				December 31,
	2020				2019				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	$	74,726	$	327,326	$	32,896	$	290,653	$	78,991	$	438,037	$	78,506	$	360,883
Standby letters of credit		1,754		17,324		1,759		24,197		413		17,200		1,933		17,524
Commitments to make loans to sell		419,035		—		47,354		—		192,355		—		370,512		—
Commitments to make loans	$	23,496	$	33,691	$	—	$	—	$	20,018	$	17,706	$	24,225	$	25,316

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

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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.

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, ~~2019~~2020 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~~board of ~~Directors~~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~~board of ~~Directors.~~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~~board of ~~Directors,~~directors, the ~~Board~~board of ~~Directors~~directors may direct management to adjust the asset and liability mix to bring interest rate risk within board-approved limits.

The following tables summarize the sensitivity in net interest income and fair value of equity over the periods indicated, using a parallel ramp scenario.


	As of September 30, 2020				As of December 31, 2019				As of March 31, 2021				As of December 31, 2020
	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	8.59	%	22.79	%	(5.76)	%	(9.33)	%	18.45	%	14.17	%	9.04	%	19.52	%
200	5.26		18.45		(2.97)		(3.45)		12.46		12.06		5.77		16.02
100	2.40		11.16		(1.18)		(0.13)		6.25		7.34		2.73		9.58
Base	—		—		—		—		—		—		—		—
−100	(2.45)	%	(27.69)	%	(0.16)	%	(9.99)	%	(4.31)	%	(24.78)	%	(2.83)	%	(27.89)	%

The model simulations as of ~~September 30, 2020~~March 31, 2021 imply that our balance sheet is slightly more asset sensitive compared to our balance sheet as of December 31, ~~2019.~~2020.

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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.

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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 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 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 Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules ~~13a~~‑~~15(e)~~13a-15(e) and ~~15d~~‑~~15(e)~~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 30, 2020~~March 31, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 consolidated financial statements. See Note 98 - Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements.

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Item 1A. Risk Factors

There has been no material change in the risk factors previously disclosed under Item 1A of the Company in its ~~2019~~2020 Annual Report on Form 10-K filed with the SEC, on March 12, ~~2020 with the exception of the risk factor identified in the first quarter of 2020, which is set forth below:~~

The COVID-19 pandemic has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, customer demand, funding, operations, interest rate risk, and human capital, as described in more detail below.

●

~~Credit Risk~~. Our risks of timely loan repayment and the value of collateral supporting the loans are affected by the strength of our borrower’s financial condition and business. Concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, suspensions on evictions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause our customers to be unable to make scheduled loan payments. If the effects of COVID-19 result in widespread and sustained repayment shortfalls on loans in our portfolio or defaults by counterparties, we could incur significant delinquencies, foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. The future effects of COVID-19 on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our residential and commercial real estate loans, our ability to maintain loan origination volume and to obtain additional financing, the future demand for or profitability of our lending and services, and the financial condition and credit risk of our customers. Further, in the event of delinquencies, regulatory changes and policies designed to protect borrowers may slow or prevent us from or, in some cases, our business decisions may result in, a delay in our taking certain remediation actions, such as foreclosure. In addition, we have unfunded commitments to extend credit to customers, which are generally not drawn upon. During a challenging economic environment, such as the ongoing pandemic, our customers are more dependent on our credit commitments and increased borrowings under these commitments could adversely impact our liquidity. Furthermore, in an effort to support our communities during the pandemic, we participated in the PPP under the CARES Act whereby loans to small businesses were made and those loans are subject to the regulatory requirements that would require forbearance of loan payments for a specified time or that would limit our ability to pursue all available remedies in the event of a loan default. If the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to customers that we would have otherwise extended credit.

●

~~Strategic Risk~~. Our success may be affected by a variety of external factors that may affect the price or marketability of our products and services, including disruptions in the capital markets, changes in interest rates that may increase our funding costs, reduced demand for our financial products due to economic conditions and the variousresponse of governmental and nongovernmental authorities. In recent weeks, the COVID-19 pandemic has significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets, which increases the cost of capital and adversely impacts access to capital. Furthermore, many of the governmental actions have been directed toward curtailing household and business activity to contain COVID-19. These actions have been rapidly expanding in scope and intensity. For example, in many of our markets, local governments have acted to temporarily close or restrict the operations of most businesses. In particular, we have recently experienced a decline in our origination of loans. The future effects of

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~~COVID-19 on economic activity could negatively affect the future banking products we provide including the ability to sell mortgage loan that we originate with the intent to sell.~~

●

~~Operational Risk~~. Current and future restrictions on our workforce’s access to our facilities could limit our ability to meet customer servicing expectations and have a material adverse effect on our operations. We rely on business processes and profit center activity that largely depend on people, technology, and the use of complex systems and models to manage our business, including access to information technology systems and models as well as information, applications, payment systems and other services provided by third parties. In response to COVID-19, we have modified our business practices with a majority of our employees working remotely from their homes to have our operations uninterrupted as much as possible. Further, technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices, the continuation of these work-from-home measures introduces additional operational risk, especially including increased cybersecurity risk. These cyber risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, great risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of our ability to perform critical functions, including wiring funds, all of which could expose us to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted customers.

Moreover, we rely on many third parties in our business operations, including appraisers of real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities have limited the availability and access of their services. For example, loan origination could be delayed due to the limited availability of real estate appraisers for the collateral. Loan closings could be delayed related to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, mortgage and UCC filings in those counties. If the third party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our operations.

●

~~Interest Rate Risk~~. Our net interest income, lending activities, deposits, hedging activities, and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short-term to maturity, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

●

~~Trust and Investment Management Risk.~~ Recent market volatility associated with the pandemic and the decline in oil and gas prices has adversely impacted the value of our assets under management. We derive a significant amount of our revenues primarily from investment management fees based on assets under management. As such, fluctuations in the equity and debt markets can have a direct impact upon our net earnings. A sustained decline in the value of the assets that we manage or otherwise administer or service for others, could have an adverse effect on related fee income and demand for our services.

Because there have been no comparable recent global pandemics that resulted in similar global impact, we do not yet know the full extent of COVID-19’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements and third party providers’ ability to support our operation, any actions taken by governmental authorities and other third parties in response to the pandemic. The uncertain future development

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~~of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.~~

2021.

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

~~Not applicable.~~(c) Issuer Purchases of Equity Securities


					Maximum number (or
				Total number of	approximate dollar
				shares purchased	value) of shares
	Total number		Average	as part of publically	that may yet be
	of shares		price paid	announced plans	purchased under the
	purchased ⁽¹⁾		per share	or programs	plans or programs
January 1, 2021 through January 31, 2021	1,440	$	19.57	—	399,574
February 1, 2021 through February 28, 2021	1,384		18.07	—	399,574
March 1, 2021 through March 31, 2021	—	$	—	—	399,574

________________________________________

⁽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. 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


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.~~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.~~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.~~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.~~2002

101.INS*		Inline XBRL Instance ~~Document.~~Document

101.SCH*		Inline XBRL Taxonomy Extension Schema ~~Document.~~Document

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase ~~Document.~~Document

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase ~~Document.~~Document

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase ~~Document.~~Document

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase ~~Document.~~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 5, 2020~~May 6, 2021	By:	/s/ Scott C. Wylie
Date		Scott C. Wylie
		Chairman, Chief Executive Officer and President

~~November 5, 2020~~May 6, 2021	By:	/s/ Julie A. Courkamp
Date		Julie A. Courkamp
		Director, Chief Financial Officer and Treasurer

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	May 15,
Fair value of consideration transferred	2020
Cash consideration	$	61,599
Total fair value of consideration transferred		61,599

Assets acquired
Cash and due from banks		283
Loans, net		119,552
Core deposit intangible⁽¹⁾		53
Accrued income and other assets		382
Total assets acquired		120,270

Liabilities assumed
Deposits		63,080
Accrued expenses and other liabilities		96
Total liabilities assumed		63,176
Net assets acquired		57,094
Goodwill recognized	$	4,505


	Total Loans		# of Modified Loans		Outstanding Balance of Modified Loans		% of Total Loan Balance Modified
Cash, Securities and Other	$	371,481		1	$	1,496		0.40	%
Construction and Development		105,717		—		—		—
1-4 Family Residential		446,959		6		4,441		0.99
Non-Owner Occupied CRE		243,564		22		38,229		15.70
Owner Occupied CRE		154,138		10		17,524		11.37
Commercial and Industrial		185,625		5		5,048		2.72
Total Loans	$	1,507,484		44	$	66,738		4.43	%


		Wealth Management		Capital Management		Consolidated		Wealth Management		Capital Management		Consolidated
				September 30, 2020						December 31, 2019
Beginning balance	$	15,994	$	3,692	$	19,686	$	15,994	$	8,817	$	24,811
Impairment		—		—		—		—		(1,572)		(1,572)
Reclass to held for sale		—		—		—		—		(3,553)		(3,553)
Acquisition activity		4,505		—		4,505		—		—		—
Ending balance	$	20,499	$	3,692	$	24,191	$	15,994	$	3,692	$	19,686


Twelve months Ended	Operating Leases
September 30, 2021	$	3,082
September 30, 2022		2,804
September 30, 2023		2,586
September 30, 2024		2,369
September 30, 2025		1,835
Thereafter		26
Total future minimum lease payments	$	12,702
Less: Imputed interest		(971)
Present value of net future minimum lease payments	$	11,731


Three Months Ended September 30, 2020	Guarantee Asset		IRLC and FSC, Net		Guarantee Liability
Beginning balance	$	222	$	7,482	$	191
Gains (losses) in net income, net		39		1,066		(38)
Other settlements, net⁽¹⁾		(16)		3,074		—
Ending balance	$	245	$	11,622	$	153


Three Months Ended September 30, 2020	Wealth Management		Capital Management		Mortgage		Consolidated
Income Statement
Total interest income	$	14,410	$	—	$	—	$	14,410
Total interest expense		1,492		—		—		1,492
Provision for loan losses		1,496		—		—		1,496
Net interest income, after provision for loan losses		11,422		—		—		11,422
Non-interest income		4,810		899		12,323		18,032
Total income		16,232		899		12,323		29,454
Depreciation and amortization expense		252		8		14		274
All other non-interest expense		13,664		627		2,067		16,358
Income before income tax	$	2,316	$	264	$	10,242	$	12,822

Goodwill	$	20,499	$	3,692	$	—	$	24,191
Assets held for sale		—		3,000		—		3,000
Total assets	$	1,859,390	$	8,358	$	105,149	$	1,972,897


	Total Loans		# of Loans Modified		Outstanding Balance of Modified Loans		% of Total Loan Balance Modified
Cash, Securities and Other	$	371,481		1	$	1,496		0.40	%
Construction and Development		105,717		—		—		—
1-4 Family Residential		446,959		6		4,441		0.99
Non-Owner Occupied CRE		243,564		22		38,229		15.70
Owner Occupied CRE		154,138		10		17,524		11.37
Commercial and Industrial		185,625		5		5,048		2.72
Total Loans	$	1,507,484		44	$	66,738		4.43	%


	As of September 30,				As of December 31,
	2020				2019
(Dollars in thousands)	Amount		%⁽¹⁾		Amount		%⁽¹⁾
Cash, Securities and Other	$	2,612	24.6	%	$	1,058	14.7	%
Construction and development		733	7.0			200	2.8
1-4 Family Residential		3,100	29.7			2,850	40.2
Non-Owner Occupied CRE		1,690	16.2			1,176	16.6
Owner Occupied CRE		1,069	10.2			911	12.8
Commercial and Industrial		2,641	12.3			1,680	12.9
Total allowance for loan losses	$	11,845	100.0	%	$	7,875	100.0	%