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, 2021~~March 31, 2022

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

For the transition period from ________ to ________

Commission File Number 001-38595

FIRST WESTERN FINANCIAL, INC.

(Exact name of registrant as specified in its charter)


Colorado		37-1442266
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1900 16th Street, Suite 1200 Denver, CO		80202
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 303.531.8100

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


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, no par value	MYFW	The Nasdaq Stock Market LLC

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

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

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


Large accelerated filer ◻	Accelerated filer ⌧

Non-accelerated filer ◻	Smaller reporting company ☒

	Emerging growth company ☒

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

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

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


	Shares outstanding as of ~~November 1, 2021~~May 2, 2022
Common Stock, no par value	~~8,032,457~~9,466,585

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FIRST WESTERN FINANCIAL, INC.

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~~September 30, 2021~~March 31, 2022
		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	6

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

	Condensed Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2022 and ~~Nine Months Ended September 30,~~March 31, 2021 ~~and September 30, 2020~~	7

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2022 and ~~Nine Months Ended September 30,~~March 31, 2021 ~~and September 30, 2020~~	8

	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Three Months Ended March 31, 2022 and ~~Nine Months Ended September 30,~~March 31, 2021 ~~and September 30, 2020~~	9

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2022 and March 31, 2021 ~~and September 30, 2020~~	10

	Notes to Condensed Consolidated Financial Statements (Unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4344

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7069

Item 4.	Controls and Procedures	7170

PART II. OTHER INFORMATION		71

Item 1.	Legal Proceedings	71

Item 1A.	Risk Factors	71

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 3.	Defaults upon Senior Securities	7271

Item 4.	Mine Safety Disclosures	7271

Item 5.	Other Information	7271

Item 6.	Exhibits	7372

SIGNATURES		7473

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Important Notice about Information in this Quarterly Report

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

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

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

●

The impact of the COVID-19 pandemic and actions taken by governmental authorities in response to the pandemic;

●

geographic concentration in Colorado, Arizona, Wyoming and California;

●

changes in the economy affecting real estate values and liquidity;

●

risks associated with higher inflation;

●

our ability to continue to originate residential real estate loans and sell such loans;

●

risks specific to commercial loans and borrowers;

●

claims and litigation pertaining to our fiduciary responsibilities;

●

competition for investment managers and professionals and our ability to retain our associates;

●

fluctuation in the value of our investment securities;

●

the terminable nature of our investment management contracts;

●

changes to the level or type of investment activity by our clients;

●

investment performance, in either relative or absolute terms;

●

changes in interest rates;

●

the adequacy of our allowance for loan losses;

●

weak economic conditions and global trade;

●

legislative changes or the adoption of tax reform policies;

●

external business disruptors in the financial services industry;

●

liquidity risks;

●

our ability to maintain a strong core deposit base or other low-cost funding sources;

●

continued positive interaction with and financial health of our referral sources;

●

retaining our largest trust clients;

●

our ability to achieve our strategic objectives;

●

competition from other banks, financial institutions and wealth and investment management firms;

●

our ability to implement our internal growth strategy and manage the risks associated with our anticipated growth;

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●

the acquisition of other banks and financial services companies and integration risks and other unknown risks associated with acquisitions;

●

the accuracy of estimates and assumptions;

●

our ability to protect against and manage fraudulent activity, breaches of our information security, and cybersecurity attacks;

●

our reliance on communications, information, operating and financial control systems technology and related services from third-party service providers;

●

technological change;

●

our ability to attract and retain clients;

●

unforeseen or catastrophic events, including pandemics, terrorist attacks, extreme weather events or other natural disasters;

●

new lines of business or new products and services;

●

regulation of the financial services industry;

●

legal and regulatory proceedings, investigations and inquiries, fines and sanctions;

●

limited trading volume and liquidity in the market for our common stock;

●

fluctuations in the market price of our common stock;

●

potential impairment of goodwill recorded on our balance sheet and possible requirements to recognize significant charges to earnings due to impairment of intangible assets;

●

actual or anticipated issuances or sales of our common stock or preferred stock in the future;

●

the initiation and continuation of securities analysts coverage of the Company;

●

future issuances of debt securities;

●

our ability to manage our existing and future indebtedness;

●

available cash flows from the Bank; and

●

other factors that are discussed in "Item 1A - Risk Factors" in our Annual Report on Form 10-K.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in the section titled Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission ("SEC") on March ~~12, 2021.~~15, 2022. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share amounts)

September 30,

December 31,


2021

2020
ASSETS


Cash and cash equivalents:




Cash and due from banks

$
2,829

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

307,406

153,584
Total cash and cash equivalents

310,235

155,989

Available-for-sale securities, at fair value

32,233

36,666
Correspondent bank stock, at cost

1,772

2,552
Mortgage loans held for sale

51,309

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

1,590,086

1,520,294
Premises and equipment, net

6,344

5,320
Accrued interest receivable

6,306

6,618
Accounts receivable

5,500

4,865
Other receivables

1,553

1,422
Other real estate owned, net

—

194
Goodwill and other intangible assets, net

24,246

24,258
Deferred tax assets, net

5,926

6,056
Company-owned life insurance

15,715

15,449
Other assets

25,047

32,129
Total assets

$
2,076,272

$
1,973,655

LIABILITIES




Deposits:




Noninterest-bearing

$
596,635

$
481,457
Interest-bearing

1,185,664

1,138,453
Total deposits

1,782,299

1,619,910
Borrowings:




Federal Home Loan Bank and Federal Reserve borrowings

58,564

149,563
Subordinated notes

39,010

24,291
Accrued interest payable

357

453
Other liabilities

20,913

24,476
Total liabilities

1,901,143

1,818,693

SHAREHOLDERS’ EQUITY




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

—

—
Common stock - 0 par value; 90,000,000 shares authorized; 8,002,874 and 7,951,773 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively

—

—
Additional paid-in capital

146,380

144,703
Retained earnings

28,272

9,579
Accumulated other comprehensive income

477

680
Total shareholders’ equity

175,129

154,962
Total liabilities and shareholders’ equity

$
2,076,272

$
1,973,655


	March 31,		December 31,
	2022		2021
Assets
Cash and cash equivalents:
Cash and due from banks	$	5,961	$	6,487
Federal funds sold		1,273		1,491
Interest-bearing deposits in other financial institutions		446,865		379,005
Total cash and cash equivalents		454,099		386,983

Available-for-sale securities, at fair value		58,727		55,562
Correspondent bank stock, at cost		1,617		2,584
Mortgage loans held for sale, at fair value		33,663		30,620
Loans (includes $6,380 and $0 measured at fair value, respectively)		1,923,825		1,949,137
Allowance for loan losses		(13,885)		(13,732)
Loans, net		1,909,940		1,935,405
Premises and equipment, net		23,539		23,976
Accrued interest receivable		6,969		7,151
Accounts receivable		6,445		5,267
Other receivables		2,841		1,949
Goodwill and other intangible assets, net		32,335		31,902
Deferred tax assets, net		7,540		6,845
Company-owned life insurance		15,889		15,803
Other assets		22,940		23,327
Assets held for sale		117		115
Total assets	$	2,576,661	$	2,527,489

Liabilities
Deposits:
Noninterest-bearing	$	654,401	$	636,304
Interest-bearing		1,617,711		1,569,399
Total deposits		2,272,112		2,205,703
Borrowings:
Federal Home Loan Bank and Federal Reserve borrowings		27,576		38,629
Subordinated notes		32,523		39,031
Accrued interest payable		312		355
Other liabilities		20,872		24,730
Total liabilities		2,353,395		2,308,448

Shareholders' Equity
Preferred stock - 0 par value; 10,000,000 shares authorized; 0 issued and outstanding		—		—
Common stock - 0 par value; 90,000,000 shares authorized; 9,430,007 and 9,419,271 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively		—		—
Additional paid-in capital		189,283		188,629
Retained earnings		35,713		30,189
Accumulated other comprehensive (loss)/income		(1,730)		223
Total shareholders’ equity		223,266		219,041
Total liabilities and shareholders’ equity	$	2,576,661	$	2,527,489

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

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2021		2020		2021		2020		2022		2021
Interest and dividend income:
Loans, including fees	$	15,861	$	14,138	$	45,360	$	37,342	$	19,096	$	14,212
Investment securities		180		173		545		692		337		196
Interest-bearing deposits in other financial institutions		105		99		288		358		232		91
Total interest and dividend income		16,146		14,410		46,193		38,392		19,665		14,499

Interest expense:
Deposits		829		1,067		2,669		4,779		943		974
Other borrowed funds		471		425		1,402		968		438		472
Total interest expense		1,300		1,492		4,071		5,747		1,381		1,446
Net interest income		14,846		12,918		42,122		32,645		18,284		13,053
Less: Provision for loan losses		406		1,496		418		3,987		210		—
Net interest income, after provision for loan losses		14,440		11,422		41,704		28,658		18,074		13,053

Non-interest income:
Trust and investment management fees		5,167		4,814		15,023		14,154		5,168		4,847
Net gain on mortgage loans		4,480		12,304		13,590		24,958		2,494		5,196
Bank fees		458		340		1,225		929		690		373
Risk management and insurance fees		301		483		444		912		109		51
Income on company-owned life insurance		89		91		266		273		86		88
Net gain on equity interests										1		—
Other		—		—		60		—		85		60
Total non-interest income		10,495		18,032		30,608		41,226		8,633		10,615
Total income before non-interest expense		24,935		29,454		72,312		69,884		26,707		23,668

Non-interest expense:
Salaries and employee benefits		10,229		10,212		29,733		25,384		12,058		9,861
Occupancy and equipment		1,550		1,619		4,402		4,574		1,882		1,409
Professional services		1,660		1,288		4,309		3,542		1,526		1,279
Technology and information systems		945		1,032		2,791		2,994		1,046		942
Data processing		912		1,038		3,020		2,922		1,187		1,015
Marketing		397		395		1,116		1,063		557		321
Amortization of other intangible assets		5		4		13		44		77		4
Net loss on assets held for sale		—		—		—		553
Provision for other real estate owned		—		100		—		100
Net (gain)/loss on assets held for sale										(1)		—
Other		771		944		2,235		2,747		1,059		798
Total non-interest expense		16,469		16,632		47,619		43,923		19,391		15,629
Income before income taxes		8,466		12,822		24,693		25,961		7,316		8,039
Income tax expense		2,049		3,192		6,000		6,301		1,792		2,040
Net income available to common shareholders	$	6,417	$	9,630	$	18,693	$	19,660	$	5,524	$	5,999
Earnings per common share:
Basic	$	0.80	$	1.22	$	2.35	$	2.49	$	0.59	$	0.76
Diluted	$	0.78	$	1.20	$	2.28	$	2.47		0.57		0.74

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

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2021		2020		2021		2020		2022		2021
Net income	$	6,417	$	9,630	$	18,693	$	19,660	$	5,524	$	5,999
Other comprehensive income items, net of tax effect:
Net change in unrealized (losses)/gains on available-for-sale securities		(32)		(21)		(203)		987
Net change in unrealized losses on available-for-sale securities										(1,953)		(101)
Comprehensive income	$	6,385	$	9,609	$	18,490	$	20,647	$	3,571	$	5,898

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

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share amounts)


				Retained		Accumulated									Accumulated
	Shares	Additional		Earnings		Other				Shares	Additional				Other
	Common	Paid-In		(Accumulated		Comprehensive				Common	Paid-In		Retained		Comprehensive
	Stock	Capital		Deficit)		Income (Loss)		Total		Stock	Capital		Earnings		Income (Loss)		Total
Balance at July 1, 2020	7,939,024	$	143,498	$	(4,925)	$	844	$	139,417
Balance at January 1, 2021										7,951,773	$	144,703	$	9,579	$	680	$	154,962

Net income	—		—		9,630		—		9,630	—		—		5,999		—		5,999
Other comprehensive loss, net of tax	—		—		—		(21)		(21)	—		—		—		(101)		(101)
Settlement of share awards	12,725		(88)		—		—		(88)	6,127		(34)		—		—		(34)
Stock-based compensation	—		638		—		—		638	—		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

Balance at July 1, 2021	7,994,832	$	145,622	$	21,855	$	509	$	167,986
Balance at January 1, 2022										9,419,271	$	188,629	$	30,189	$	223	$	219,041

Net income	—		—		6,417		—		6,417	—		—		5,524		—		5,524
Other comprehensive loss, net of tax	—		—		—		(32)		(32)	—		—		—		(1,953)		(1,953)
Settlement of share awards	4,292		(46)		—		—		(46)	8,225		(131)		—		—		(131)
Options exercised	3,750		79		—		—		79	2,511		58		—		—		58
Stock-based compensation	—		725		—		—		725	—		727		—		—		727
Balance at September 30, 2021	8,002,874	$	146,380	$	28,272	$	477	$	175,129

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

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

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

Net income	—		—		18,693		—		18,693
Other comprehensive loss, net of tax	—		—		—		(203)		(203)
Settlement of share awards	47,351		(452)		—		—		(452)
Options exercised	3,750		79		—		—		79
Stock-based compensation	—		2,050		—		—		2,050
Balance at September 30, 2021	8,002,874	$	146,380	$	28,272	$	477	$	175,129
Balance, March 31, 2022										9,430,007	$	189,283	$	35,713	$	(1,730)	$	223,266

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

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Nine Months Ended September 30,				Three Months Ended March 31,
	2021		2020		2022		2021
Cash flows from operating activities
Net income	$	18,693	$	19,660	$	5,524	$	5,999
Adjustments to reconcile net income to net cash used in operating activities:
Net amortization of investment securities		411		346		27		145
Stock dividends received on correspondent bank stock		(60)		(12)		(19)		(23)
Provision for loan losses		418		3,987		210		—
Net gain on mortgage loans		(13,590)		(24,958)		(2,494)		(5,196)
Origination of mortgage loans held for sale		(1,066,612)		(917,524)		(148,647)		(490,783)
Proceeds from mortgage loans		1,195,896		889,208		147,618		482,058
Depreciation and amortization		877		832		626		284
Provision for other real estate owned		—		100
Deferred income tax expense/(benefits), net of valuation allowance		210		(1,699)
Deferred income tax benefits, net of valuation allowance						14		30
Increase in cash surrender value of company-owned life insurance		(266)		(273)		(86)		(88)
Loss on assets held for sale		—		553
Stock-based compensation		2,050		1,879		727		613
Net changes in operating assets and liabilities:
Change in accounts receivable		(21)		492		288		172
Change in accrued interest receivable and other assets		(248)		(5,531)		(1,591)		(2,473)
Change in accrued interest payable and other liabilities		(1,311)		3,394		(3,183)		(1,829)
Net cash provided by/(used in) operating activities		136,447		(29,546)
Net cash used in operating activities						(986)		(11,091)
Cash flows from investing activities
Activity in available-for-sale securities:
Maturities, prepayments, and calls		6,370		20,890		3,218		5,673
Purchases		(2,250)		(2,000)		(9,000)		—
Purchases of correspondent bank stock		(1)		(698)		—		(1)
Redemption of correspondent bank stock		841		—		986		—
Contributions to low-income housing tax credit investments		(2,087)		—		(214)		—
Loan and note receivable originations and principal collections, net		(69,115)		(388,048)		30,800		(10,406)
Purchases of premises and equipment		(1,844)		(708)		(45)		(725)
Proceeds from sale of premises and equipment		—		10
Purchases of loans						(6,380)		—
Proceeds from sale of other real estate owned		194		—		—		194
Net cash paid on acquisitions		—		(61,316)
Net cash used in investing activities		(67,892)		(431,870)
Net cash provided by/(used in) investing activities						19,365		(5,265)
Cash flows from financing activities
Net change in deposits		162,389		413,808		66,438		187,915
Payments to Federal Home Loan Bank borrowings		—		(27,000)
Proceeds from Federal Home Loan Bank borrowings		—		35,000
Payments to Federal Reserve borrowings		(174,673)		(238)		(11,053)		(28,513)
Proceeds from Federal Reserve borrowings		83,674		204,313		—		76,991
Payments on subordinated notes						(6,575)		—
Proceeds from subordinated notes, net of issuance costs		14,674		7,881		—		(56)
Proceeds from the exercise of stock options		79		—		58		—
Repurchase of common stock		—		(370)
Settlement of restricted stock		(452)		(258)		(131)		(34)
Net cash provided by financing activities		85,691		633,136		48,737		236,303

Net change in cash and cash equivalents		154,246		171,720		67,116		219,947
Cash and cash equivalents, beginning of year		155,989		78,638		386,983		155,989
Cash and cash equivalents, end of period	$	310,235	$	250,358	$	454,099	$	375,936
Supplemental cash flow information:
Interest paid on deposits and borrowed funds	$	4,167	$	5,699	$	1,424	$	1,287
Income tax payment, net of refunds received		3,852		6,417
Cash paid for amounts included in the measurement of lease liabilities		3,874		4,267
Cash paid for lease liabilities						1,462		1,300
Supplemental noncash disclosures:
Reclass of held for sale assets, net of liabilities		—		10
Change in unrealized (loss)/gain on available-for-sale securities		(283)		1,305
Lease right-of-use-asset obtained in exchange for lease liabilities		2,262		649
Change in unrealized loss on available-for-sale securities						(2,591)		(148)

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

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

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FIRST WESTERN FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. The December 31, ~~2020~~2021 condensed consolidated balance sheet has been derived from the audited financial statements for the year ended December 31, ~~2020.~~2021.

In the opinion of management, all adjustments that were recurring in nature and considered necessary have been included for fair presentation of the Company’s financial position and results of operations. Operating results for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 are not necessarily indicative of results that may be expected for the full year ending December 31, ~~2021.~~2022. In preparing the condensed consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could be significantly different from those estimates.

The condensed consolidated financial statements and notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021 as filed with the SEC.

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

Business Combinations and Divestitures: On ~~May 15, 2020,~~December 31, 2021, the Company completed a branch purchase and assumption transaction ("Branch Acquisition") with Simmons Bank ("Simmons"). Management concluded that the acquisition represented a business combination, which is accounted for using the acquisition method, with the results of operations included in the Company’s consolidated financial statements as of the acquisition date.

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

~~On July 22, 2021, the Company entered into~~ an Agreement and Plan of Merger (the “Merger Agreement”) with Teton Financial Services, Inc. (“Teton”), parent company of Rocky Mountain Bank, a Wyoming-chartered bank headquartered in Jackson, Wyoming. ~~As of June 30, 2021, Teton had assets of $420.7 million, total deposits of $374.6 million, and total loans of $267.9 million. The Merger Agreement provides~~Management concluded that ~~subject to~~ the ~~terms and conditions set forth in~~merger represented a business combination, which is accounted for using the ~~Merger Agreement, Teton will be merged with into the Company (the “Merger”),~~acquisition method, with the Company continuing as the surviving corporation. The Merger Agreement also provides that following the Merger, Rocky Mountain Bank will be merged with and into the Bank, with the Bank surviving the bank merger. During the nine months ended September

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

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

acquisition date.

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

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

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

Concentration of Credit Risk: Most of the Company’s lending activity is to clients located in and around metro Denver, Aspen, Fort Collins, and Vail, Colorado; Phoenix and Scottsdale, Arizona; and Jackson Hole, ~~and Laramie,~~ Wyoming. The Company does not believe it has significant concentrations in any one industry or customer. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020, 72.4%~~2021, 74.3% and ~~66.9%~~76.1%, respectively, of the Company’s loan portfolio was secured by real estate collateral. Declines in real estate values in the primary markets the Company operates in could negatively impact the Company.

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

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

Revenue Recognition: In accordance with the Financial Accounting Standards Board ("FASB"), Revenue Contracts with Customers ("Topic 606"), trust and investment management fees are earned by providing trust and investment services to customers. The Company’s performance obligation under these contracts is satisfied over time as the services are provided. Fees are recognized monthly based on the average monthly value of the assets under management and the corresponding fee rate based on the terms of the contract. There were no performance based incentive fees earned with respect to investment management contracts for the three and nine months ended September 30, 2021. Performance based incentive fees earned with respect to investment management contracts for the year ended December 31, 2020 were immaterial. Receivables are recorded on the Condensed Consolidated Balance Sheets in the Accounts receivable line item. Income related to trust and investment management fees, bank fees, and risk management and insurance fees on the Condensed Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ are considered in scope of Topic 606.

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

~~Table of Contents~~

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

Certain of the Company’s assets and liabilities are indexed to LIBOR, with exposure extending beyond December 31, 2021. The Company is currently evaluating and planning for the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. In general, the transition away from LIBOR may result in increased market risk, credit risk, operational risk and business risk for the Company. The Company has developed a LIBOR transition plan, which addresses governance, risk management, legal, operational, systems, fallback language, and other aspects of planning. The ~~Company has prepared a timeline~~company no longer originates LIBOR indexed loans. Existing LIBOR indexed commercial loans are expected to ~~transition from LIBOR before the end of 2021.~~be transitioned to SOFR by June 30, 2022. Consumer indexed loans are being managed in accordance with Interagency Guidance.

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

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

The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as troubled debt restructurings ("TDR"). The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from Federal Reserve and the Federal Deposit Insurance Corporation ("FDIC") confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered a TDR. We believe our loan modification program meets that definition and have not classified any of these modifications as a TDR as of ~~September 30, 2021.~~March 31, 2022. See Note 34 – Loans and the Allowance for Loan Losses for further discussion on our loan modification program.

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

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

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

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

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

~~Table of Contents~~

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

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

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

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

Table of Contents

During the three months ended March 31, 2022, the CECL committee of the Company continued to work through its implementation plan. The Company has selected a champion quantitative model to approximate expected losses by call code segment using regional and other appropriate peers. The Company has selected qualitative factors and evaluated those factors for each loan segment for the quarter ended March, 31, 2022. The Company has begun to document policies and procedures, internal control structure, and process flows. Using this information, the Company successfully ran parallel models for the quarter in order for management to review and compare results between the initial CECL model and existing ALLL model. Currently, we are unable to estimate the impact the adoption of this update will have on the condensed consolidated financial statements and disclosures. However, the Company expects the impact of the adoption will be significantly influenced by the composition and characteristics of its loan portfolios along with economic conditions prevalent as of the date of adoption. The Company expects to ~~early adopt~~implement the new standard beginning January 1, ~~2022.~~2023.

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

NOTE 2 ~~- INVESTMENT SECURITIES~~– ACQUISITIONS

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

The ~~following presents~~Teton Acquisition was accounted for under the acquisition method of accounting and therefore all assets and liabilities have been measured and recorded at their provisional fair values as of the acquisition close date of December 31, 2021 with final measurement period adjustments made as of March 31, 2022. All non-equity acquisition related costs were expensed as incurred. Certain acquisition costs related to the issuance of equity were capitalized as of December 31, 2021. Market value adjustments for assets acquired and liabilities assumed are amortized ~~cost and~~or accreted on a level yield basis over the estimated life of the asset or liability. Loans acquired were recorded at their estimated fair value and therefore no allowance for loan and lease losses was recorded at the date of ~~securities available-for-sale, with unrealized gains and losses~~acquisition. Goodwill of $6.2 million, which is not tax deductible, was recognized in ~~accumulated other comprehensive income as~~the transaction and represents expected synergies and cost savings resulting from combining the expanded footprint and expertise of ~~September 30,~~the associates. Additionally, core deposit intangible assets were identified and recorded at their estimated fair values and are amortized over their estimated useful life. On August 31, 2021, the Company completed the issuance and ~~December 31, 2020 (in thousands):~~sale of subordinated notes, which provided partial funding of the transaction. See Note 8 – Borrowings for more information.

Gross

Gross

Amortized

Unrealized

Unrealized

Fair
September 30, 2021

Cost

Gains

Losses

Value
Investment securities available-for-sale:








U.S. Treasury debt

$
250

$
—

$
(1)

$
249
Corporate bonds

8,117

249

(10)

8,356
GNMA mortgage-backed securities – residential

20,488

351

(28)

20,811
FNMA mortgage-backed securities – residential

1,102

53

—

1,155
Corporate CMO and MBS

1,645

35

(18)

1,662
Total securities available-for-sale

$
31,602

$
688

$
(57)

$
32,233

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During the three months ended March 31, 2022, the Company finalized its application of purchase accounting. The following presents the final valuation of the assets acquired and liabilities assumed in the transaction with Teton as of December 31, 2021, including the measurement period adjustments to the provisional estimates (dollars in thousands):


	As of December 31, 2021
	Provisional		Measurement Period		Acquired
Fair value of consideration transferred	Estimates		Adjustments		Balances
Cash consideration	$	11,501	$	—	$	11,501
Common stock issued		39,818		—		39,818
Total fair value of consideration transferred		51,319		—		51,319

Assets acquired
Cash and cash equivalents		132,498		—		132,498
Available-for-sale securities, at fair value		18,058		—		18,058
Correspondent bank stock, at cost		928		—		928
Mortgage loans held for sale		840		—		840
Loans		252,275		(857)		251,418
Premises and equipment		17,758		—		17,758
Accrued interest receivable		923		—		923
Accounts receivable		95		—		95
Other receivable		520		—		520
Core deposit intangible⁽¹⁾		1,264		698		1,962
Other assets		226		242		468
Assets held for sale		115		5		120
Total assets acquired		425,500		88		425,588

Liabilities assumed
Deposits		379,227		(29)		379,198
Accrued interest payable		26		—		26
Other liabilities		1,283		—		1,283
Deferred tax liabilities/(assets), net		42		(71)		(29)
Total liabilities assumed		380,578		(100)		380,478
Net assets acquired		44,922		188		45,110
Goodwill recognized	$	6,397	$	(188)	$	6,209

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

The Company incurred $0.5 million in expenses related to the acquisition during the three months ended March 31, 2022. The following presents the acquisition expenses within Non-interest expense of the Condensed Consolidated Statements of Income as of the date noted (dollars in thousands):


	Three Months Ended
	March 31,
	2022
Mergers and acquisitions expense:
Salaries and employee benefits	$	229
Professional services		112
Marketing		70
Data processing		115
Other		1
Total mergers and acquisitions expense	$	527

Table of Contents

The following table presents pro forma information for the three months ended March 31, 2022 and 2021, as if the Teton Acquisition had occurred on January 1, 2021. This table has been prepared for comparative purposes only, and is not indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the periods presented, nor is it indicative of future results (in thousands, except per share data):



		Pro Forma
		Three Months Ended March 31,
		2022	2021
Net interest income after provision for loan losses	$	18,074	$	16,456
Noninterest income		8,633		11,320
Net income		5,524		3,656
Pro forma earnings per share:
Basic		0.59		0.39
Diluted		0.57		0.39

Gross

Gross


Amortized

Unrealized

Unrealized

Fair
December 31, 2020

Cost

Gains

Losses

Value
Investment securities available-for-sale:








U.S. Treasury debt

$
250

$
4

$
—

$
254
Corporate bonds

6,000

55

(11)

6,044
GNMA mortgage-backed securities – residential

23,806

798

—

24,604
FNMA mortgage-backed securities – residential

1,616

61

—

1,677
Corporate CMO and MBS

4,078

62

(53)

4,087
Total securities available-for-sale

$
35,750

$
980

$
(64)

$
36,666

NOTE 3 - INVESTMENT SECURITIES

The following presents the amortized cost and fair value of securities available-for-sale, with unrealized gains and losses recognized in accumulated other comprehensive income as of the dates noted (dollars in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2022	Cost		Gains		Losses		Value
Investment securities available-for-sale:
U.S. Treasury debt	$	250	$	—	$	(11)	$	239
U.S. Government Agency		2,959		—		(92)		2,867
Corporate bonds		17,110		142		(169)		17,083
GNMA mortgage-backed securities – residential		24,890		4		(1,352)		23,542
FNMA mortgage-backed securities – residential		13,779		3		(780)		13,002
Government CMO and MBS - commercial		672		—		(14)		658
Corporate CMO and MBS		1,362		—		(26)		1,336
Total securities available-for-sale	$	61,022	$	149	$	(2,444)	$	58,727


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2021	Cost		Gains		Losses		Value
Investment securities available-for-sale:
U.S. Treasury debt	$	250	$	—	$	(3)	$	247
U.S. Government Agency		3,522		—		—		3,522
Corporate bonds		8,113		227		(15)		8,325
GNMA mortgage-backed securities – residential		26,611		185		(146)		26,650
FNMA mortgage-backed securities – residential		14,400		43		—		14,443
Government CMO and MBS - commercial		878		—		—		878
Corporate CMO and MBS		1,492		23		(18)		1,497
Total securities available-for-sale	$	55,266	$	478	$	(182)	$	55,562

As of ~~September 30, 2021,~~March 31, 2022, the amortized cost and estimated fair value of available-for-sale securities have contractual maturity dates shown in the table below ~~(in~~(dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

Amortized

Fair
September 30, 2021

Cost

Value
Due within one year

$
—

$
—
Due between one year and five years

250

249
Due between five years and ten years

8,117

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

23,235

23,628
Total

$
31,602

$
32,233

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	Amortized		Fair
March 31, 2022	Cost		Value
Due within one year	$	254	$	252
Due between one year and five years		374		361
Due between five years and ten years		18,207		18,146
Due after ten years		1,484		1,430
Securities (CMO and MBS)		40,703		38,538
Total	$	61,022	$	58,727

In the first quarter of 2022, the Company committed $3.0 million in capital to a bank technology fund. During the three months ended March 31, 2022, the Company made $0.4 million in contributions to the partnership. As of March 31, 2022, the Company held a balance of $0.4 million, which is included in Other assets in the accompanying Condensed Consolidated Balance Sheets. The Company may be obligated to invest up to an additional $2.5 million in future contributions.

In 2014, the Company began investing in a small business investment company ("SBIC") fund administered by the Small Business Administration. ~~During the nine months ended September 30, 2021, the~~The Company did not make any contributions to the SBIC ~~fund. During~~fund during the three months ended March 31, 2022 or the year ended December 31, ~~2020, the Company invested $0.5~~2021 and received a $0.1 million ~~in SBIC.~~return of capital during each period. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the Company held a balance of ~~$2.1~~$2.0 million with SBIC, which is included in Other assets in the accompanying Condensed Consolidated Balance Sheets. The Company may be obligated to invest up to an additional ~~$0.9~~$1.0 million in future SBIC investments.

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, securities with carrying values totaling ~~$2.3~~$15.2 million and ~~$3.7~~$17.3 million, respectively, were pledged to secure various public deposits and credit facilities of the Company.

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities and agencies, in an amount greater than 10%of shareholders’ equity.

As of ~~both September 30, 2021~~March 31, 2022 and December 31, ~~2020, there~~2021, 90 securities and 10 securities were ~~7 securities~~ in an unrealized loss position, with unrealized losses totaling ~~$0.1 million.~~$2.4 million and $0.2 million, respectively. Of the securities in an unrealized loss position as of ~~September 30, 2021, 1 has~~March 31, 2022, 2 have been in a continuous unrealized loss position for more than twelve months and the remaining have been in a continuous unrealized loss position for less than twelve months. The unrealized loss positions were caused primarily by interest rate changes and market assumptions about prepayments of principal and interest on the underlying mortgages. Because the decline in market value is attributable to market conditions, not credit quality, and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be near or at maturity, the Company does not consider these investments to be other-than-temporarily impaired as of ~~September 30, 2021.~~

~~The following table summarizes securities with unrealized losses as of September 30, 2021 and December~~March 31, ~~2020, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands, before tax):~~2022.

Less than 12 Months

12 Months or Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
September 30, 2021

Value

Losses

Value

Losses

Value

Losses
U.S. Treasury debt

$
249

$
(1)

$
—

$
—

$
249

$
(1)
GNMA mortgage-backed securities – residential

7,555

(28)

—

—

7,555

(28)
Corporate bonds

490

(10)

—

—

490

(10)
Corporate CMO and MBS

—

—

556

(18)

556

(18)
Total

$
8,294

$
(39)

$
556

$
(18)

$
8,850

$
(57)

1517

Table of Contents

The following presents securities with unrealized losses aggregated by major security type and length of time in a continuous unrealized loss position as of the dates noted (dollars in thousands, before tax):


	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
March 31, 2022	Value		Losses		Value		Losses		Value		Losses
U.S. Treasury debt	$	239	$	(11)	$	—	$	—	$	239	$	(11)
U.S. Government Agency		2,867		(92)		—		—		2,867		(92)
Corporate bonds		7,112		(138)		469		(31)		7,581		(169)
GNMA mortgage-backed securities – residential		23,132		(1,352)		—		—		23,132		(1,352)
FNMA mortgage-backed securities – residential		12,802		(780)		—		—		12,802		(780)
Government CMO and MBS - commercial		658		(14)		—		—		658		(14)
Corporate CMO and MBS		647		(4)		485		(22)		1,132		(26)
Total	$	47,457	$	(2,391)	$	954	$	(53)	$	48,411	$	(2,444)


	Less than 12 Months				12 Months or Longer				Total				Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2020	Value		Losses		Value		Losses		Value		Losses
December 31, 2021													Value		Losses		Value		Losses		Value		Losses
U.S. Treasury debt													$	247	$	(3)	$	—	$	—	$	247	$	(3)
Corporate bonds	$	3,489	$	(11)	$	—	$	—	$	3,489	$	(11)		485		(15)		—		—		485		(15)
GNMA mortgage-backed securities – residential														17,205		(146)		—		—		17,205		(146)
Corporate CMO and MBS		880		(40)		566		(13)		1,446		(53)		—		—		521		(18)		521		(18)
Total	$	4,369	$	(51)	$	566	$	(13)	$	4,935	$	(64)	$	17,937	$	(164)	$	521	$	(18)	$	18,458	$	(182)

The Company did not sell any securities during the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 or during the year ended December 31, ~~2020.~~2021.

NOTE 34 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

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


	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
Cash, Securities and Other⁽¹⁾	$	293,837	$	357,020
Cash, Securities, and Other⁽¹⁾					$	271,811	$	295,948
Construction and Development		132,141		131,111		151,651		178,716
1-4 Family Residential		502,439		455,038		602,412		580,872
Non-Owner Occupied CRE		358,369		281,943		455,715		482,622
Owner Occupied CRE		167,638		163,042		212,401		212,426
Commercial and Industrial⁽²⁾		148,959		146,031		237,144		203,584
Total loans held for investment		1,603,383		1,534,185		1,931,134		1,954,168
Deferred fees and unamortized premiums/(unaccreted discounts), net		(333)		(1,352)		(7,309)		(5,031)
Allowance for loan losses		(12,964)		(12,539)		(13,885)		(13,732)
Loans, net	$	1,590,086	$	1,520,294	$	1,909,940	$	1,935,405

⁽¹⁾ Includes PPP loans of ~~$61.9~~$16.7 million and ~~$142.9~~$46.8 million as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. Includes $6.4 million of unsecured consumer loans held for investment measured at fair value as of March 31, 2022.

⁽²⁾ Includes MSLP loans of $6.8 million and ~~$6.6~~$6.8 million as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, total loans held for investment included ~~$117.4~~$323.6 million and ~~$127.2~~$356.7 million, respectively, of performing loans purchased ~~as part~~through mergers or acquisitions. As of ~~the Branch Acquisition.~~March 31, 2022 and December 31, 2021, Cash, Securities, and Other included $6.4 million and $0.0 million, respectively, of loans held for investment measured at fair value. See Note 14 – Fair Value Option.

The CARES Act created the PPP, which is administered by the SBA. The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA lender and as of ~~September 30,~~March 31, 2022, the Cash, Securities, and Other portion of the loan portfolio included $16.7 million of PPP loans, or 6.1% of the total category. As of December 31, 2021, the Cash, Securities, and Other portion of the loan portfolio included ~~$61.9~~$46.8 million of PPP loans, or ~~21.1%~~15.8% of the total category. As

Table of ~~December 31, 2020, the Cash, Securities, and Other portion of the loan portfolio included $142.9 million of PPP loans, or 40.0% of the total category.~~Contents

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, 2021,~~March 31, 2022, the Company’s Commercial and Industrial loans included 65 MSLP loans with the net carrying amount of $6.8 million, or ~~4.6%~~2.9% of the total category. As of December 31, ~~2020,~~2021, the Company’s Commercial and Industrial loans included 65 MSLP loans with the net carrying amount of ~~$6.6~~$6.8 million, or ~~4.5%~~3.3% of the total category.

Loan Modifications

~~As of September 30,~~In 2021, the deferral period ~~has~~ ended for all non-acquired loans previously modified and payments ~~have~~ resumed under the original terms. As of ~~September 30, 2021,~~March 31, 2022, the Company’s loan portfolio included 7269 non-acquired loans which were previously modified under the loan modification program, totaling ~~$135.0~~$109.8 million. Through the Teton Acquisition, the Company acquired 18 loans totaling $8.3 million as of March 31, 2022, which were previously modified and are still in their deferral period.

~~Table of Contents~~

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

All loans modified in response to COVID-19 are classified as performing and pass rated as of ~~September 30, 2021.~~March 31, 2022. These loans are included in the allowance for loan loss general reserve in accordance with ASC 450-20. Management has increased our loan level reviews and portfolio monitoring to address the changing environment. The Company continues to meet regularly with clients who could be more highly impacted by the recent COVID-19 pandemic. These are borrowers in accommodations, transportation and restaurant industries, which we believe may be more impacted by the pandemic, and those loans where there may be a greater than 50% probability of a downgrade, covenant violation or 20% reduction in collateral position. The portion of our credit exposure to the highest risk industries impacted by COVID-19, such as accommodations, transportation and restaurants, is less than 4.1% of our loan portfolio. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of ~~September 30, 2021,~~March 31, 2022, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

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


	30-59		60-89		90 or		Total				Total		30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded		Days		Days		More Days		Loans				Recorded
September 30, 2021	Past Due		Past Due		Past Due		Past Due		Current		Investment
March 31, 2022													Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	727	$	14	$	40	$	781	$	293,056	$	293,837	$	321	$	351	$	36	$	708	$	271,103	$	271,811
Construction and Development		—		2,522		—		2,522		129,619		132,141		2,069		—		—		2,069		149,582		151,651
1-4 Family Residential		483		—		83		566		501,873		502,439		3,575		—		—		3,575		598,837		602,412
Non-Owner Occupied CRE		—		—		—		—		358,369		358,369		—		509		—		509		455,206		455,715
Owner Occupied CRE		—		—		—		—		167,638		167,638		—		—		—		—		212,401		212,401
Commercial and Industrial		—		—		2,230		2,230		146,729		148,959		11,145		—		2,190		13,335		223,809		237,144
Total	$	1,210	$	2,536	$	2,353	$	6,099	$	1,597,284	$	1,603,383	$	17,110	$	860	$	2,226	$	20,196	$	1,910,938	$	1,931,134

30-59

60-89

90 or

Total



Total

Days

Days

More Days

Loans

Recorded
December 31, 2020

Past Due

Past Due

Past Due

Past Due

Current

Investment
Cash, Securities and Other

$
752

$
—

$
48

$
800

$
356,220

$
357,020
Construction and Development

—

—

—

—

131,111

131,111
1-4 Family Residential

1,283

—

—

1,283

453,755

455,038
Non-Owner Occupied CRE

—

—

—

—

281,943

281,943
Owner Occupied CRE

479

—

—

479

162,563

163,042
Commercial and Industrial

271

—

3,529

3,800

142,231

146,031
Total

$
2,785

$
—

$
3,577

$
6,362

$
1,527,823

$
1,534,185

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

1719

Table of Contents

	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
December 31, 2021	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	1,199	$	—	$	8	$	1,207	$	294,741	$	295,948
Construction and Development		2,758		—		—		2,758		175,958		178,716
1-4 Family Residential		1,449		—		—		1,449		579,423		580,872
Non-Owner Occupied CRE		—		2,548		—		2,548		480,074		482,622
Owner Occupied CRE		1,419		—		—		1,419		211,007		212,426
Commercial and Industrial		748		—		2,200		2,948		200,636		203,584
Total	$	7,573	$	2,548	$	2,208	$	12,329	$	1,941,839	$	1,954,168

As of March 31, 2022, the Company had 11 loans, totaling an immaterial amount, in the Cash, Securities and Other portfolio that were more than 90 days delinquent and accruing interest. As of December 31, 2021, the Company had 1 loan, totaling an immaterial amount, in the Commercial and Industrial portfolio that was more than 90 days delinquent and accruing interest.

Non-Accrual Loans and Troubled Debt Restructurings

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


	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
Cash, Securities and Other	$	41	$	50	$	6	$	8
1-4 Family Residential		83		—		72		75
Owner Occupied CRE		1,250		479		1,222		1,241
Commercial and Industrial		2,984		3,529		2,926		2,938
Total	$	4,358	$	4,058	$	4,226	$	4,262

Non-accrual loans classified as TDRs accounted for ~~$2.2~~$4.2 million of the recorded investment as of ~~September 30, 2021~~March 31, 2022 and ~~$3.6~~$4.3 million as of December 31, ~~2020.~~2021. Non-accrual loans are classified as impaired loans and individually evaluated for impairment.

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


	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
Accruing
Non-Owner Occupied CRE					$	51	$	55
Non-accrual
Cash, Securities, and Other	$	9	$	48		4		6
1-4 Family Residential						72		75
Owner Occupied CRE						1,222		1,241
Commercial and Industrial		2,230		3,529		2,926		2,938
Total		2,239		3,577		4,275		4,315
Allowance for loan losses associated with TDR		(1,751)		(1,619)		(1,751)		(1,751)
Net recorded investment	$	488	$	1,958	$	2,524	$	2,564

As of ~~September 30, 2021~~March 31, 2022 and December 31, 2020, the Company had 0t committed any additional funds to a borrower with a loan classified as a TDR.

The Company did not modify any loans resulting in TDR status during the nine months ended September 30, 2021. The Company modified 1 loan resulting in TDR status during the year ended December 31, 2020. The Borrower was having difficulty making payments in accordance with the original contract terms. The Company restructured the loan including receiving a large paydown and extended the maturity and lowered the interest rate as a result of the Borrower’s financial difficulties. The loan was paid off in full as of December 31, 2020.

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

1820

Table of Contents

The Company did not modify any loans resulting in TDR status during the three months ended March 31, 2022. The Company modified 3 loans resulting in TDR status during the year ended December 31, 2021. The first loan was a small mortgage with a remaining balance of $0.1 million where the borrower was unable to make payments or obtain additional financing to pay off the mortgage. As a result, we have modified the loan at the maturity date with a one-year renewal to allow the borrower time to seek a refinance. As of December 31, 2021, this loan remains current under the terms of the modification. The second and third loans modified are in relation to one borrower who has two loans, one Commercial Real Estate Loan in the amount of $1.2 million, which is the space where the related business operates, and a Commercial loan with a balance of $0.7 million. The borrower has experienced a reduction in cash flow through ongoing impact from the pandemic and related shut downs and hiring shortages. As a result, the Company modified both loans allowing for a six month interest only period to provide cash flow relief. The Company obtained a reduced term on the business loan as well as additional collateral from the Borrower. All three of the loans modified during 2021 were sufficiently collateralized and therefore did not require any specific reserve.

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


	September 30, 2021						December 31, 2020						March 31, 2022						December 31, 2021
			Unpaid		Allowance				Unpaid		Allowance				Unpaid		Allowance				Unpaid		Allowance
	Total		Contractual		for		Total		Contractual		for		Total		Contractual		for		Total		Contractual		for
	Recorded		Principal		Loan		Recorded		Principal		Loan		Recorded		Principal		Loan		Recorded		Principal		Loan
	Investment		Balance		Losses		Investment		Balance		Losses		Investment		Balance		Losses		Investment		Balance		Losses
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	32	$	32	$	32	$	2	$	2	$	2	$	2	$	2	$	2	$	2	$	2	$	2
Commercial and Industrial		2,230		2,230		1,751		3,419		3,419		1,619		2,190		2,190		1,751		2,190		2,190		1,751
Total	$	2,262	$	2,262	$	1,783	$	3,421	$	3,421	$	1,621	$	2,192	$	2,192	$	1,753	$	2,192	$	2,192	$	1,753

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	9	$	9	$	—	$	48	$	48	$	—	$	4	$	4	$	—	$	6	$	6	$	—
1-4 Family Residential		83		83		—		—		—		—		72		72		—		75		75		—
Owner Occupied CRE		1,250		1,250		—		479		479		—		1,222		1,222		—		1,241		1,241		—
Commercial and Industrial		754		754		—		110		110		—		736		736		—		748		748		—
Total	$	2,096	$	2,096	$	—	$	637	$	637	$	—	$	2,034	$	2,034	$	—	$	2,070	$	2,070	$	—

Total impaired loans:
Cash, Securities, and Other	$	41	$	41	$	32	$	50	$	50	$	2	$	6	$	6	$	2	$	8	$	8	$	2
1-4 Family Residential		83		83		—		—		—		—		72		72		—		75		75		—
Owner Occupied CRE		1,250		1,250		—		479		479		—		1,222		1,222		—		1,241		1,241		—
Commercial and Industrial		2,984		2,984		1,751		3,529		3,529		1,619		2,926		2,926		1,751		2,938		2,938		1,751
Total	$	4,358	$	4,358	$	1,783	$	4,058	$	4,058	$	1,621	$	4,226	$	4,226	$	1,753	$	4,262	$	4,262	$	1,753

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

1921

Table of Contents

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

Three Months Ended September 30,

2021

2020

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized
Impaired loans with a valuation allowance:

Cash, Securities, and Other

$
18

$
—

$
1

$
—
Commercial and Industrial

2,635

—

3,427

—
Total

$
2,653

$
—

$
3,428

$
—

Impaired loans with no related valuation allowance:

Cash, Securities, and Other

$
10

$
—

$
779

$
—
Owner Occupied CRE

625

—

—

—
Commercial and Industrial

410

220

6,462

85
1-4 Family Residential

41

—

—

—
Total

$
1,086

$
220

$
7,241

$
85

Total impaired loans:

Cash, Securities, and Other

$
28

$
—

$
780

$
—
Owner Occupied CRE

625

—

—

—
Commercial and Industrial

3,045

220

9,889

85
1-4 Family Residential

41

—

—

—
Total

$
3,739

$
220

$
10,669

$
85

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

Nine Months Ended September 30,

2021

2020

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

Investment

Recognized

Investment

Recognized
Impaired loans with a valuation allowance:

Cash, Securities, and Other

$
10

$
—

$
1

$
—
Commercial and Industrial

3,027

21

3,462

—
Total

$
3,037

$
21

$
3,463

$
—

Impaired loans with no related valuation allowance:

Cash, Securities, and Other

$
22

$
—

$
1,463

$
—
Owner Occupied CRE

313

51

—

—
Commercial and Industrial

257

220

6,088

250
1-4 Family Residential

21

—

—

—
Total

$
613

$
271

$
7,551

$
250

Total impaired loans:

Cash, Securities, and Other

$
32

$
—

$
1,464

$
—
Owner Occupied CRE

313

51

—

—
Commercial and Industrial

3,284

241

9,550

250
1-4 Family Residential

21

—

—

—
Total

$
3,650
��
$
292

$
11,014

$
250

~~Table of Contents~~

The following presents the average balance of impaired loans and interest income recognized on impaired loans during the periods presented (dollars in thousands):


	Three Months Ended March 31,
	2022				2021
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	2	$	—	$	3	$	—
Commercial and Industrial		2,190		—		3,419		—
Total	$	2,192	$	—	$	3,422	$	—

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	5	$	—	$	34	$	—
Owner Occupied CRE		1,231		—		479		—
Commercial and Industrial		742		—		105		—
1-4 Family Residential		74		—		—		—
Total	$	2,052	$	—	$	618	$	—

Total impaired loans:
Cash, Securities, and Other	$	7	$	—	$	37	$	—
Owner Occupied CRE		1,231		—		479		—
Commercial and Industrial		2,932		—		3,524		—
1-4 Family Residential		74		—		—		—
Total	$	4,244	$	—	$	4,040	$	—

Allowance for Loan Losses

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


	Cash,		Construction		1-4		Non-Owner		Owner		Commercial				Cash,		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		Family		Occupied		Occupied		and				Securities		and		Family		Occupied		Occupied		and
	and Other		Development		Residential		CRE		CRE		Industrial		Total		and Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the three months ended September 30, 2021
Changes in allowance for loan losses for the three months ended March 31, 2022
Beginning balance	$	2,039	$	871	$	3,399	$	2,223	$	1,225	$	2,795	$	12,552	$	1,864	$	1,092	$	3,553	$	2,952	$	1,292	$	2,979	$	13,732
(Recovery of)/provision for loan losses		85		48		97		271		(67)		(28)		406
(Release)/provision for loan losses																(84)		(138)		236		(85)		36		245		210
Charge-offs		—		—		—		—		—		—		—		(97)		—		—		—		—		—		(97)
Recoveries		6		—		—		—		—		—		6		40		—		—		—		—		—		40
Ending balance	$	2,130	$	919	$	3,496	$	2,494	$	1,158	$	2,767	$	12,964	$	1,723	$	954	$	3,789	$	2,867	$	1,328	$	3,224	$	13,885

Changes in allowance for loan losses for the nine months ended September 30, 2021
Beginning balance	$	2,579	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539
(Recovery of)/provision for loan losses		(456)		(13)		263		490		(1)		135		418
Charge-offs		—		—		—		—		—		—		—
Recoveries		7		—		—		—		—		—		7
Ending balance	$	2,130	$	919	$	3,496	$	2,494	$	1,158	$	2,767	$	12,964

Allowance for loan losses as of September 30, 2021 allocated to loans evaluated for impairment:
Allowance for loan losses as of March 31, 2022 allocated to loans evaluated for impairment:
Individually	$	32	$	—	$	—	$	—	$	—	$	1,751	$	1,783	$	2	$	—	$	—	$	—	$	—	$	1,751	$	1,753
Collectively		2,098		919		3,496		2,494		1,158		1,016		11,181		1,721		954		3,789		2,867		1,328		1,473		12,132
Ending balance	$	2,130	$	919	$	3,496	$	2,494	$	1,158	$	2,767	$	12,964	$	1,723	$	954	$	3,789	$	2,867	$	1,328	$	3,224	$	13,885

Loans as of September 30, 2021, evaluated for impairment:
Individually	$	41	$	—	$	83	$	—	$	1,250	$	2,984	$	4,358
Collectively		293,796		132,141		502,356		358,369		166,388		145,975		1,599,025
Loans as of March 31, 2022:
Individually evaluated for impairment															$	6	$	—	$	72	$	—	$	1,222	$	2,926	$	4,226
Collectively evaluated for impairment																265,425		151,651		602,340		455,715		211,179		234,218		1,920,528
Measured at fair value																6,380		—		—		—		—		—		6,380
Ending balance	$	293,837	$	132,141	$	502,439	$	358,369	$	167,638	$	148,959	$	1,603,383	$	271,811	$	151,651	$	602,412	$	455,715	$	212,401	$	237,144	$	1,931,134

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	Cash,		Construction		1-4		Non-Owner			Owner		Commercial				Cash,		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		Family		Occupied			Occupied		and				Securities		and		Family		Occupied		Occupied		and
	and Other		Development		Residential		CRE			CRE		Industrial		Total		and Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the three months ended September 30, 2020
Changes in allowance for loan losses for the three months ended March 31, 2021
Beginning balance	$	2,425	$	484	$	2,708	$	1,483		$	760	$	2,494	$	10,354	$	2,579	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539
Provision for/(recovery of) loan losses		192		249		392		207			309		147		1,496
(Release)/provision for loan losses																	(6)		(166)		(81)		207		(36)		82		—
Charge-offs		(6)		—		—		—			—		—		(6)		—		—		—		—		—		—		—
Recoveries		1		—		—		—			—		—		1		—		—		—		—		—		—		—
Ending balance	$	2,612	$	733	$	3,100	$	1,690		$	1,069	$	2,641	$	11,845	$	2,573	$	766	$	3,152	$	2,211	$	1,123	$	2,714	$	12,539

Changes in allowance for loan losses for the nine months ended September 30, 2020
Beginning balance	$	1,058	$	200	$	2,850	$	1,176		$	911	$	1,680	$	7,875
Provision for/(recovery of) loan losses		1,571		533		250		514	��		158		961		3,987
Charge-offs		(30)		—		—		—			—		—		(30)
Recoveries		13		—		—		—			—		—		13
Ending balance	$	2,612	$	733	$	3,100	$	1,690		$	1,069	$	2,641	$	11,845

Allowance for loan losses as of December 31, 2020 allocated to loans evaluated for impairment:
Allowance for loan losses as of December 31, 2021 allocated to loans evaluated for impairment:
Individually	$	2	$	—	$	—	$	—		$	—	$	1,619	$	1,621	$	2	$	—	$	—	$	—	$	—	$	1,751	$	1,753
Collectively		2,577		932		3,233		2,004			1,159		1,013		10,918		1,862		1,092		3,553		2,952		1,292		1,228		11,979
Ending balance	$	2,579	$	932	$	3,233	$	2,004		$	1,159	$	2,632	$	12,539	$	1,864	$	1,092	$	3,553	$	2,952	$	1,292	$	2,979	$	13,732

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
Loans as of December 31, 2021:
Individually evaluated for impairment																$	8	$	—	$	75	$	—	$	1,241	$	2,938	$	4,262
Collectively evaluated for impairment																	295,940		178,716		580,797		482,622		211,185		200,646		1,949,906
Ending balance	$	357,020	$	131,111	$	455,038	$	281,943		$	163,042	$	146,031	$	1,534,185	$	295,948	$	178,716	$	580,872	$	482,622	$	212,426	$	203,584	$	1,954,168

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

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

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

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

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

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, 2021 and December 31, 2020 (in~~the dates noted (dollars in thousands):

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Special

September 30, 2021

Pass

Mention

Substandard


Total
Cash, Securities and Other

$
293,796

$
—

$
41

$
293,837
Construction and Development

129,618

2,523

—

132,141
1-4 Family Residential

502,356

—

83

502,439
Non-Owner Occupied CRE

352,429

5,940

—

358,369
Owner Occupied CRE

165,690

—

1,948

167,638
Commercial and Industrial

144,093

—

4,866

148,959
Total

$
1,587,982

$
8,463

$
6,938

$
1,603,383


			Special
March 31, 2022	Pass		Mention		Substandard		Not Rated			Total
Cash, Securities and Other	$	265,425	$	—	$	6	$	6,380	$	271,811
Construction and Development		151,651		—		—		—		151,651
1-4 Family Residential		602,340		—		72		—		602,412
Non-Owner Occupied CRE		449,811		5,904		—		—		455,715
Owner Occupied CRE		210,492		—		1,909		—		212,401
Commercial and Industrial		231,938		393		4,813		—		237,144
Total	$	1,911,657	$	6,297	$	6,800	$	6,380	$	1,931,134


			Special								Special
December 31, 2020	Pass		Mention		Substandard			Total
December 31, 2021									Pass		Mention		Substandard		Not Rated			Total
Cash, Securities and Other	$	356,970	$	—	$	50	$	357,020	$	295,940	$	—	$	8	$	—	$	295,948
Construction and Development		131,111		—		—		131,111		176,194		2,522		—		—		178,716
1-4 Family Residential		451,918		—		3,120		455,038		580,797		—		75		—		580,872
Non-Owner Occupied CRE		275,627		6,316		—		281,943		476,670		5,952		—		—		482,622
Owner Occupied CRE		161,850		—		1,192		163,042		210,493		—		1,933		—		212,426
Commercial and Industrial		140,432		—		5,599		146,031		198,368		401		4,815		—		203,584
Total	$	1,517,908	$	6,316	$	9,961	$	1,534,185	$	1,938,462	$	8,875	$	6,831	$	—	$	1,954,168

The Company had 0 loans graded doubtful as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

NOTE 45 - GOODWILL

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


	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
Beginning balance	$	24,191	$	19,686	$	30,588	$	24,191
Acquisition activity		—		4,505		(188)		6,397
Ending balance	$	24,191	$	24,191	$	30,400	$	30,588

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

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

~~Step 1 of the~~The goodwill impairment analysis includes the determination of the carrying value of the reporting unit, including the existing goodwill, and estimating the fair value of the reporting unit. If the implied fair value of goodwill is lower than its carrying amount, ~~of a reporting unit exceeds~~goodwill impairment is indicated and goodwill is written down to its implied fair ~~value, we are required to perform the second step to the impairment test.~~

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

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NOTE 56 - LEASES

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

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


		September 30,		December 31,			March 31,		December 31,
		2021		2020			2022		2021
Lease Right-of-Use Assets	Classification					Classification
Operating lease right-of-use assets	Other assets	$	11,450	$	11,341	Other assets	$	10,071	$	10,720

Lease Liabilities	Classification					Classification
Operating lease liabilities	Other liabilities	$	14,608	$	13,970	Other liabilities	$	13,090	$	13,863

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


	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
Weighted-Average Remaining Lease Term
Operating leases	5.42	years	4.79	years	5.12	years	5.26	years

Weighted-Average Discount Rate
Operating leases	2.69	%	3.04	%	2.63	%	2.67	%

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


	Three Months Ended March 31,
	2022		2021
Lease Costs
Operating lease cost	$	795	$	752
Variable lease cost		558		412
Lease costs, net	$	1,353	$	1,164

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Three Months Ended September 30,

Nine Months Ended September 30,

2021

2020

2021

2020
Lease Costs

Operating lease cost
$
781

$
786

$
2,264

$
2,401
Variable lease cost

488

557

1,316

1,516
Sublease income

—

(33)

—

(232)
Lease costs, net
$
1,269

$
1,310

$
3,580

$
3,685

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


Year Ending December 31,	Operating Leases		Operating Leases
2021⁽¹⁾	$	850
2022		3,450
2022⁽¹⁾			$	2,601
2023		3,210		3,210
2024		3,064		3,064
2025		2,073		2,073
2026				703
Thereafter		2,871		2,168
Total future minimum lease payments		15,518		13,819
Less: imputed interest		(910)		(729)
Present value of net future minimum lease payments	$	14,608	$	13,090

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

Leases in which the Company is determined to be the lessor are considered operating leases and consist of the partial lease of Company owned buildings. In accordance with ASC 842, these leases have been accounted for as operating leases. During the three months ended March 31, 2022, the Company recognized $0.1 million of lease income.

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


Year Ending December 31,	Undiscounted Operating Lease Income
2022⁽¹⁾	$	205
2023		221
2024		199
2025		—
2026		—
Thereafter		—
Total undiscounted operating lease income	$	625

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

NOTE 67 - DEPOSITS

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


	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
Money market deposit accounts	$	905,196	$	847,430	$	1,108,315	$	1,056,669
Time deposits		137,015		172,682		156,678		170,491
Negotiable order of withdrawal accounts		137,833		113,052		319,648		309,940
Savings accounts		5,620		5,289		33,070		32,299
Total interest-bearing deposits	$	1,185,664	$	1,138,453	$	1,617,711	$	1,569,399
Aggregate time deposits of $250,000 or greater	$	64,902	$	73,401
Aggregate time deposits of $250 or greater					$	73,602	$	75,747

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

Overdraft balances classified as loans totaled ~~$0.1 million~~an immaterial amount as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

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The following presents the scheduled maturities of all time deposits for the next five years ending ~~September 30 (in~~March 31 (dollars in thousands):


Year Ending December 31,		Time Deposits
2021⁽¹⁾	$	39,977
2022		63,709
				Time Deposits
2022⁽¹⁾			$	89,023
2023		24,819		36,661
2024		2,635		6,382
2025		1,541		2,590
2026				17,137
Thereafter		4,334		4,885
Total	$	137,015	$	156,678

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

NOTE 78 - BORROWINGS

The Bank has executed a blanket pledge and security agreement with the FHLB that requires certain loans and securities be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of

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~~September 30, 2021~~ March 31, 2022 and December 31, ~~2020~~2021 amounted to ~~$767.8~~$815.5 million and ~~$668.6~~$771.4 million, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional ~~$504.7~~$541.2 million as of ~~September 30, 2021.~~March 31, 2022. Each advance is payable at its maturity date.

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


		September 30,		December 31,			March 31,		December 31,
Maturity Date	Rate %	2021		2020		Rate %	2022		2021
April 22, 2022	0.37	$	5,000	$	5,000	0.37	$	5,000	$	5,000
May 5, 2023	0.76		10,000		10,000	0.76		10,000		10,000
Total		$	15,000	$	15,000		$	15,000	$	15,000

To bolster the effectiveness of the SBA’s PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing collateralized by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility ("PPPLF") extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value and bearing interest at 35 bps. The terms of the loans are directly tied to the underlying PPP loans, which were originated at 2 or 5 years. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the Company utilized ~~$43.6~~$12.6 million and ~~$134.6~~$23.6 million, respectively, under the PPPLF program which is included in the FHLB and Federal Reserve borrowings line of the Condensed Consolidated Balance Sheets.

The Bank has borrowing capacity associated with 3 unsecured federal funds lines of credit up to $10.0 million, $19.0 million, and $25.0 million. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, there were 0 amounts outstanding on any of the federal funds lines.

On ~~October 28, 2020,~~January 1, 2022, the Company ~~entered into a Business Loan Agreement and associated Promissory Note (the "Note"), dated June 30, 2020, with a correspondent lending partner.~~redeemed the subordinated notes due December 31, 2026 in the amount of $6.6 million, which were redeemable on or after January 1, 2022. The ~~Note~~redemption price is ~~secured by stock~~equal to 100% of the ~~Bank~~principal amount being redeemed, plus accrued and ~~bears~~unpaid interest atup to, but excluding the ~~one month ICE Benchmark Administration ("IBA") LIBOR plus 2.5%. As~~date of December 31, 2020, there were 0 amounts outstanding and the borrowing capacity associated with this facility was $5.0 million. The Business Loan Agreement expired on June 30, 2021, in accordance with its terms, and was not renewed.redemption.

On August 31, 2021, the Company completed the issuance and sale of subordinated notes (the "Notes") totaling $15.0 million in aggregate principal amount. The issuance included $0.3 million of issuance costs ~~resulting in~~and as of March 31, 2022, a net balance of ~~$14.7~~$14.8 million ~~as of September 30, 2021~~is included in the Subordinated notes line of the Condensed Consolidated Balance Sheets. The Notes accrue interest at a rate of 3.25% per annum until September 1, 2026, at which time the rate will adjust each quarter to the then current three-month SOFR, or an alternative rate determined in accordance with the terms of the Notes, plus 258 basis points; mature on September 1, 2031; are redeemable at the option of the Company on or after September 1, 2026; and pay interest quarterly.

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On November 25, 2020, the Company completed the issuance and sale of subordinated notes (the "November 2020 Sub Notes") totaling $10.0 million in aggregate principal amount. The issuance included $0.2 million of issuance costs and as of March 31, 2022, a net balance of $9.8 million is included in the Subordinated notes line of the Condensed Consolidated Balance Sheets. The November 2020 Sub Notes accrue interest at a rate of 4.25% per annum until December 1, 2025, at which time the rate will adjust each quarter to the then current three-month term SOFR, or an alternative rate determined in accordance with the terms of the November 2020 Sub Notes, plus 402 basis points; mature on December 1, 2030; are redeemable at the option of the Company on or after December 1, 2025; and pay interest semi-annually prior to December 1, 2025 and quarterly after December 1, 2025.

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

The Company’s borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking ~~agencies (see~~agencies. See Note 1617 – Regulatory Capital ~~Matters).~~Matters for additional information. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the Company was in compliance with the covenant requirements.

NOTE 89 - COMMITMENTS AND CONTINGENCIES

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

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


	September 30, 2021				December 31, 2020				March 31, 2022				December 31, 2021
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	73,975	$	418,045	$	78,506	$	360,883	$	118,953	$	509,677	$	136,289	$	442,035
Standby letters of credit		3,540		20,940		1,933		17,524		5,696		22,035		2,420		20,940
Commitments to make loans to sell		113,746		—		370,512		—		79,178		—		60,529		—
Commitments to make loans		40,804		15,236		24,225		25,316		46,354		12,626		16,256		14,920

Unused lines of credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Several of the commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the client.

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

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

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

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

Litigation, Claims and Settlements

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

NOTE 910 - SHAREHOLDERS’ EQUITY

Common Stock

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

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

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

On November 3, 2020, the Company announced that its board of directors authorized the repurchase of up to 400,000 shares of the Company’s common stock, 0 par value, from time to time, within one year (the "2020 Repurchase

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Plan") and that the Board of Governors of the Federal Reserve System advised the Company that it has no objection to the Company’s 2020 Repurchase Plan. The Company may repurchase shares in privately negotiated transactions, in the open market, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 promulgated by the SEC, or otherwise in a manner that complies with applicable federal securities laws. The 2020 Repurchase Plan does not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice. During the three and nine months ended September 30,December 31, 2021, the Company did not repurchase any shares under the 2020 Repurchase Plan.

During the ~~the nine~~three months ended ~~September 30,~~March 31, 2022 and 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 the nine months ended September 30, 2020, the Company recognized compensation expense of $0.1 million, representing 14,114 shares, related to the performance-based awards.~~ The performance based awards fully vested in the second quarter of 2020.

As of ~~September 30, 2021,~~March 31, 2022, the Restricted Stock Awards have a weighted-average grant date fair value of $28.50 per share. ~~The~~During the three months ended March 31, 2022 and 2021, the Company recognized compensation expense of $0.1 million for the three months ended September 30, 2021 and 2020, for the Restricted Stock Awards. During the the nine months ended September 30, 2021 and 2020, the Company recognized compensation expense of $0.2 million and $0.3 million, respectively, for the Restricted Stock Awards. As of ~~September 30, 2021,~~March 31, 2022, the Company has $~~0.3~~0.1 million of unrecognized stock-based compensation expense related to the shares issued, which is expected to be recognized over a weighted average period of less than one year. ~~During~~NaN restricted Stock Awards vested during the ~~nine~~three months ended September 30, 2021, 10,526 shares of the Restricted Stock Awards vested. During the nine months ended September 30, 2020, 10,527 of the Restricted Stock Awards and 30,088 shares of the Performance based Restricted Stock Awards vested.March 31, 2022 or 2021.

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, 2021,~~March 31, 2022, there were a total of ~~398,934~~338,950 shares available for issuance under the First Western Financial, Inc. 2016 Omnibus Incentive Plan ("the 2016 Plan"). If the Awards outstanding under the 2008 Plan or the 2016 Plan are forfeited, cancelled or terminated with no consideration paid to the Company, those amounts will increase the number of shares eligible to be granted under the 2016 Plan.

~~Stock Options~~

~~The Company did 0t grant any stock options during the nine months ended September 30, 2021 and 2020.~~

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

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Stock Options

The Company did 0t grant any stock options during the three months ended March 31, 2022 and 2021.

During the three months ended March 31, 2022, the Company recognized 0 stock based compensation expense associated with stock options. During the three months ended March 31, 2021, the Company recognized an immaterial amount of stock based compensation expense. As of March 31, 2022, the Company has 0 unrecognized stock-based compensation expense related to stock options.

The following ~~summarizes~~presents activity for nonqualified stock options ~~for~~during the ~~nine~~three months ended ~~September 30, 2021:~~March 31, 2022:


				Weighted					Weighted
		Weighted		Average			Weighted		Average
	Number	Average		Remaining	Aggregate	Number	Average		Remaining	Aggregate
	of	Exercise		Contractual	Intrinsic	of	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value	Options	Price		Term	Value
Outstanding as of December 31, 2020	419,197	$	29.02
Outstanding as of December 31, 2021						308,574	$	29.21
Granted	—		—			—		—
Exercised	(3,750)		21.00			(2,511)		23.01
Forfeited or expired	(36,050)		35.91			(116,100)		40.00
Outstanding as of September 30, 2021	379,397		28.44	1.9	⁽¹⁾
Options fully vested / exercisable as of September 30, 2021	375,827		28.46	1.8	⁽¹⁾
Outstanding as of March 31, 2022						189,963		22.70	2.8	⁽¹⁾
Options fully vested / exercisable as of March 31, 2022						189,963		22.70	2.8	⁽¹⁾

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

As of ~~September 30, 2021,~~March 31, 2022, there were ~~375,827~~189,963 options that were exercisable. Exercise prices are between $20.00 and ~~$40.00~~$27.00 per share, and the options are exercisable for a period of ~~ten-years~~ten years from the original grant date and expire on various dates between 2022 and 2026.

Restricted Stock Units

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

The following ~~summarizes~~presents the activity for the Time Vesting Units, the Financial Performance Units, and the Market Performance Units ~~for~~during the ~~nine~~three months ended ~~September 30, 2021:~~March 31, 2022:


	Time	Financial	Market	Time	Financial	Market
	Vesting	Performance	Performance	Vesting	Performance	Performance
	Units	Units	Units	Units	Units	Units
Outstanding as of December 31, 2020	285,052	152,430	14,862
Outstanding as of December 31, 2021				249,821	183,483	13,746
Granted	59,194	41,743	—	—	—	—
Vested	(66,453)	—	—	(414)	(12,100)	—
Forfeited	(14,307)	(10,149)	(1,116)	(1,967)	(671)	—
Outstanding as of September 30, 2021	263,486	184,024	13,746
Outstanding as of March 31, 2022				247,440	170,712	13,746

During the three months ended ~~September 30, 2021,~~March 31, 2022, the Company issued ~~4,292~~8,225 shares of common stock upon the settlement of Restricted Stock Units. The remaining ~~1,733~~4,289 shares were surrendered with a combined market value at the dates of settlement of ~~an immaterial amount~~$0.1 million to cover employee withholding taxes. During the ~~nine~~three months ended ~~September 30,~~March 31, 2021, the Company issued ~~47,351~~6,127 shares of common stock upon the settlement of Restricted Stock Units. The remaining ~~19,102~~2,824 shares were surrendered with a combined market value at the dates of settlement of $0.5 million to cover employee withholding taxes. During the nine months ended September 30, 2020, the Company issued 34,260 shares of common stock upon the settlement of Restricted Stock Units. The remaining 19,852 shares were surrendered with a combined market value at the dates of settlement of $0.3$0.1 million to cover employee withholding taxes.

Time Vesting Units

Time Vesting Units are granted to full-time associates and board members at the date approved by the Company’s board of directors. The Company ~~granted 59,194~~did not grant any Time Vesting Units ~~with a five-year service period~~ during the ~~the nine~~three months ended ~~September 30, 2021, that vest in equal installments of 20% on the anniversary of the grant date, assuming continuous employment through the scheduled vesting dates.~~March 31, 2022. During the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company recognized compensation expense of $0.4 million and $0.4 million, respectively, for the Time Vesting Units. During the nine months ended September 30, 2021 and 2020, the Company recognized compensation expense of $1.2 million and $1.0 million, respectively, for the Time Vesting Units. As of ~~September 30, 2021,~~March 31, 2022, there was ~~$3.9~~$3.0 million of unrecognized compensation expense related to the Time Vesting Units, which is expected to be recognized over a weighted-average period of ~~1.8~~1.4 years.

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Financial Performance Units

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

The following presents the Company’s existing Financial Performance Units as of ~~September 30, 2021~~March 31, 2022 (dollars in thousands, except share amounts):

Grant Period

Threshold Accrual

Maximum Issuable Shares at Current Threshold

Unrecognized Compensation Expense

Weighted-Average ⁽¹⁾

Financial Metric End Date

Vesting Requirement End Date

Threshold Accrual

Maximum Issuable Shares at Current Threshold

Unrecognized Compensation Expense

Weighted-Average ⁽¹⁾

Financial Metric End Date

Vesting Requirement End Date

Prior to May 1, 2019

50% on half; 100% on other half

9,198

0.3 years

December 31, 2019

December 31, 2021

May 1, 2019 through April 30, 2020

150%

80,255

372

2.3 years

December 31, 2021

December 31, 2023

150%

80,255

292

1.8 years

December 31, 2021

December 31, 2023

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

150%

81,516

474

3.3 years

December 31, 2022

December 31, 2023

150%

81,099

400

2.8 years

December 31, 2022

December 31, 2023

On November 18, 2020

150%

34,752

346

3.1 years

December 31, 2022

50% November 18, 2023 & 2025

150%

34,752

313

2.6 years

December 31, 2022

50% November 18, 2023 & 2025

May 3, 2021 through August 11, 2021

150%

61,118

970

4.3 years

December 31, 2023

December 31, 2025

150%

59,963

840

3.8 years

December 31, 2023

December 31, 2025

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

The following presents the Company’s Financial Performance Units activity for the ~~nine~~three months ended ~~September 30 of the years noted~~March 31 (dollars in thousands, except share amounts):


	Units Granted		Compensation Expense Recognized				Units Granted		Compensation Expense Recognized
Grant Period	2021	2020	2021		2020		2022	2021	2022		2021
Prior to May 1, 2019	—	—	$	23	$	49	—	—	$	—	$	15
May 1, 2019 through April 30, 2020	—	1,866		154		246	—	—		61		56
May 1, 2020 through December 31, 2020, excluding November 18, 2020	—	58,993		153		97	—	—		53		55
On November 18, 2020		—		94		—		—		30		34
May 3, 2021 through August 11, 2021	41,743	—		140		—	—	—		81		—

Market Performance Units

Market Performance Units were granted to certain key associates and are earned based on growth in the value of the Company’s common stock, and were dependent on the Company completing an initial public offering of stock during a defined period of time. On July 23, 2018, the Company completed its initial public offering and the Market Performance Units performance condition was met. Subsequent to the performance condition there is also a market condition as a vesting requirement for the Market Performance Units which affects the determination of the grant date fair value. The Company estimated the grant date fair value using various valuation assumptions. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company recognized an immaterial amount of compensation expense for the Market Performance Units. As of ~~September 30, 2021,~~March 31, 2022, there was ~~$0.4 million~~an immaterial amount of unrecognized compensation expense related to the Market Performance Units which is expected to be recognized over a weighted-average period of less than one year.

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.

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NOTE 1011 - EARNINGS PER COMMON SHARE

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


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2021		2020		2021		2020		2022		2021
Earnings per common share - Basic
Numerator:
Net income available for common shareholders	$	6,417	$	9,630	$	18,693	$	19,660	$	5,524	$	5,999

Denominator:
Basic weighted average shares		7,979,869		7,911,871		7,959,268		7,888,675		9,418,318		7,935,664
Earnings per common share - basic	$	0.80	$	1.22	$	2.35	$	2.49	$	0.59	$	0.76

Earnings per common share - Diluted
Numerator:
Net income available for common shareholders	$	6,417	$	9,630	$	18,693	$	19,660	$	5,524	$	5,999

Denominator:
Basic weighted average shares		7,979,869		7,911,871		7,959,268		7,888,675		9,418,318		7,935,664
Diluted effect of common stock equivalents:
Stock options		35,428		—		25,400		—		57,139		4,923
Time Vesting Units		144,479		85,897		126,231		44,310		189,538		102,530
Financial Performance Units		73,135		7,786		64,542		16,176		83,954		46,289
Market Performance Units		13,442		13,453		13,825		13,347		13,653		14,197
Total diluted effect of common stock equivalents		266,484		107,136		229,998		73,833		344,284		167,939
Diluted weighted average shares		8,246,353		8,019,007		8,189,266		7,962,508		9,762,602		8,103,603
Earnings per common share - diluted	$	0.78	$	1.20	$	2.28	$	2.47	$	0.57	$	0.74

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

The ~~table below~~following presents potentially dilutive securities excluded from the diluted earnings per share calculation ~~for~~during the periods ~~indicated:~~presented:


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended March 31,
	2021	2020	2021	2020	2022	2021
Stock options	139,639	419,197	186,462	419,197	—	278,109
Time Vesting Units	—	82,600	1,327	87,304	—	3,982
Financial Performance Units	40,745	116,051	30,216	70,769	—	23,168
Restricted Stock Awards	10,527	21,054	10,527	41,517	—	21,054
Total potentially dilutive securities	190,911	638,902	228,532	618,787	—	326,313

NOTE 1112 - INCOME TAXES

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, the Company recorded an income tax provision of ~~$2.0~~$1.8 million and ~~$6.0~~$2.0 million, respectively, reflecting an effective tax rate of ~~24.2%~~24.5% and 24.3%, respectively. During the three and nine months ended September 30, 2020, the Company recorded an income tax provision of $3.2 million and $6.3 million, respectively, reflecting an effective tax rate of 24.9% and 24.3%25.4%, respectively.

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NOTE 1213 - RELATED-PARTY TRANSACTIONS

The Bank extends credit to certain covered parties including Company directors, executive officers and their affiliates. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, there were no delinquent or non-performing loans to any executive officer or director of the Company. These covered parties, along with principal owners, management, immediate family of management or principal owners, a parent company and its subsidiaries, trusts for the benefit of employees, and other parties, may be considered related parties. The following presents a summary of related-party loan activity as of the dates noted ~~(in~~(dollars in thousands):


	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
Balance, beginning of year	$	14,321	$	5,675	$	12,833	$	14,321
Funded loans		6,172		17,348		2,284		11,294
Payments collected		(7,381)		(8,702)		(3,063)		(12,782)
Balance, end of period	$	13,112	$	14,321	$	12,054	$	12,833

Deposits from related parties held by the Bank as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 totaled ~~$39.9~~$46.5 million and ~~$26.2~~$51.0 million, respectively.

The Company leases office spaces from entities controlled by one of the Company’s board members. During the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company incurred ~~$0.2 million~~an immaterial amount and $0.1 million, respectively, of expenses related to these leases.

NOTE 1314 - FAIR VALUE

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


Level 1:	Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2:	Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3:	Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

Investment Securities: 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).

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

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

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

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

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

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

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

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


	Quoted
	Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs		Reported
March 31, 2022	(Level 1)		(Level 2)		(Level 3)		Balance
Investment securities available-for-sale:
U.S. Treasury debt	$	239	$	—	$	—	$	239
U.S. Government Agency		—		2,867		—		2,867
Corporate bonds		—		10,868		6,215		17,083
GNMA mortgage-backed securities - residential		—		23,542		—		23,542
FNMA mortgage-backed securities - residential		—		13,002		—		13,002
Government CMO and MBS		—		658		—		658
Corporate CMO and MBS		—		1,336		—		1,336
Total securities available-for-sale	$	239	$	52,273	$	6,215	$	58,727
Mortgage loans held for sale	$	—	$	33,663	$	—	$	33,663
Loans held at fair value	$	—	$	—	$	6,380	$	6,380
Forward commitments and FSC	$	—	$	1,478	$	—	$	1,478
Equity securities	$	676	$	122	$	—	$	798
Guarantee asset	$	—	$	—	$	206	$	206
IRLC, net	$	—	$	—	$	990	$	990
Equity warrants	$	—	$	—	$	402	$	402

Table of Contents


	Quoted
	Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs		Reported
December 31, 2021	(Level 1)		(Level 2)		(Level 3)		Balance
Investment securities available-for-sale:
U.S. Treasury debt	$	247	$	—	$	—	$	247
U.S. Government Agency		—		3,522		—		3,522
Corporate bonds		—		6,212		2,113		8,325
GNMA mortgage-backed securities - residential		—		26,650		—		26,650
FNMA mortgage-backed securities - residential		—		14,443		—		14,443
Government CMO and MBS		—		878		—		878
Corporate CMO and MBS		—		1,497		—		1,497
Total securities available-for-sale	$	247	$	53,202	$	2,113	$	55,562
Mortgage loans held for sale	$	—	$	30,620	$	—	$	30,620
Forward commitments and FSC	$	—	$	(65)	$	(9)	$	(74)
Equity securities	$	709	$	489	$	—	$	1,198
Guarantee asset	$	—	$	—	$	237	$	237
IRLC, net	$	—	$	—	$	1,473	$	1,473
Equity warrants	$	—	$	—	$	160	$	160

There were no transfers between levels during the three months ended March 31, 2022 or year ended December 31, 2021.

U.S. Treasury debt is reported at fair value utilizing Level 1 inputs. Three Corporate bonds are reported at fair value utilizing Level 3 inputs. The remaining portfolio of securities are reported at fair value with Level 2 inputs provided by a pricing service. As of March 31, 2022 and December 31, 2021, 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, 2022, equity securities, equity warrants, IRLC, and guarantee assets have been recorded at fair value within the Other assets line item in the Condensed Consolidated Balance Sheets. All changes are recorded in the Other line item in the Condensed Consolidated Statements of Income.

Fair Value Option

The Company has elected to account for certain purchased whole loans held for investment under the fair value option in order to align the accounting presentation with the Company’s viewpoint of the economics of the loans. Interest income on loans held for investment accounted for under the fair value option is recognized within Interest and dividend income in the accompanying Condensed Consolidated Statements of Income. Not electing fair value generally results in a larger discount being recorded on the date of the loan purchase. The discount is subsequently accreted into interest income over the underlying loan’s remaining term using the effective interest method. Additionally, management has elected the fair value option for mortgage loans originated and held for sale.

There were 0 loans accounted for under the fair value option that were 90 days or more past due and still accruing interest as of March 31, 2022 or December 31, 2021. Additionally, there were 0 loans accounted for under the fair value option that were on nonaccrual as of March 31, 2022 or December 31, 2021.

Table of Contents

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


	March 31, 2022
	Total Loans						Non Accruals						90 Days or More Past Due
	Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference
Loans held for sale	$	33,663	$	33,713	$	(50)	$	—	$	—	$	—	$	—	$	—	$	—
Loans held for investment		6,380		6,368		12		—		—		—		—		—		—
	$	40,043	$	40,081	$	(38)	$	—	$	—	$	—	$	—	$	—	$	—


	December 31, 2021
	Total Loans						Non Accruals						90 Days or More Past Due
	Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference		Fair Value Carrying Amount		Unpaid Principal Balance		Difference
Loans held for sale	$	30,620	$	29,857	$	763	$	—	$	—	$	—	$	—	$	—	$	—
Loans held for investment		—		—		—		—		—		—		—		—		—
	$	30,620	$	29,857	$	763	$	—	$	—	$	—	$	—	$	—	$	—

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


	Three Months Ended
	March 31,
		2022		2021
Loans held for sale	$	(1,911)	$	125
Loans held for investment		—		—
	$	(1,911)	$	125

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


	Three Months Ended
	March 31,
Loans held for sale		2022		2021
Balance at beginning of period	$	30,620	$	161,843
Loans originated		191,081		525,814
Loans acquired		—		—
Fair value changes		667		5,969
Sales		(188,666)		(514,556)
Settlements		(39)		(2,426)
Balance at end of period	$	33,663	$	176,644


	Three Months Ended
	March 31,
Loans held for investment		2022		2021
Balance at beginning of period	$	—	$	—
Loans originated		—		—
Loans acquired		6,380		—
Fair value changes		—		—
Sales		—		—
Settlements		—		—
Balance at end of period	$	6,380	$	—

Table of Contents

Nonrecurring Fair Value

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 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 the dates noted (dollars in thousands):

Quoted

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Reported

March 31, 2022

(Level 1)

(Level 2)

(Level 3)

Balance

Impaired loans⁽¹⁾:

Commercial and Industrial

—

439

Quoted

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Reported

December 31, 2021

(Level 1)

(Level 2)

(Level 3)

Balance

Impaired loans⁽¹⁾:

Commercial and Industrial

—

439

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

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

As of March 31, 2022 and December 31, 2021, the Company did not own any OREO properties.

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

Impaired loans accounted for specific reserves of $1.8 million as of March 31, 2022 and December 31, 2021. The Company did not have any charge offs during the three months ended March 31, 2022 from the specific reserve. The Company charged off an immaterial amount during the year ended December 31, 2021 from the specific reserve.

3337

Table of Contents

~~The following presents assets and liabilities measured on a recurring basis as of September 30, 2021 and December 31, 2020 (in thousands):~~

Quoted






Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported
September 30, 2021

(Level 1)

(Level 2)

(Level 3)

Balance
Investment securities available-for-sale:








U.S. Treasury debt

$
249

$
—

$
—

$
249
Corporate bonds

—

8,356

—

8,356
GNMA mortgage-backed securities - residential

—

20,811

—

20,811
FNMA mortgage-backed securities - residential

—

1,155

—

1,155
Corporate CMO and MBS

—

1,662

—

1,662
Total securities available-for-sale

$
249

$
31,984

$
—

$
32,233
Equity securities

$
716

$
—

$
—

$
716
Guarantee asset

$
—

$
—

$
231

$
231
IRLC, net

$
—

$
—

$
2,185

$
2,185
Forward commitments and FSC

$
—

$
498

$
(17)

$
481
Mortgage loans held for sale

$
—

$
51,309

$
—

$
51,309

Quoted






Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

Reported
December 31, 2020

(Level 1)

(Level 2)

(Level 3)

Balance
Investment securities available-for-sale:








U.S. Treasury debt

$
254

$
—

$
—

$
254
Corporate bonds

—

6,044

—

6,044
GNMA mortgage-backed securities - residential

—

24,604

—

24,604
FNMA mortgage-backed securities - residential

—

1,677

—

1,677
Corporate CMO and MBS

—

4,087

—

4,087
Total securities available-for-sale

$
254

$
36,412

$
—

$
36,666
Equity securities

$
730

$
—

$
—

$
730
Guarantee asset

$
—

$
—

$
232

$
232
IRLC, net

$
—

$
—

$
9,841

$
9,841
Forward commitments and FSC

$
—

$
(2,534)

$
(89)

$
(2,623)
Mortgage loans held for sale

$
—

$
161,843

$
—

$
161,843

Level 3 Analysis

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

Three Months Ended September 30, 2021

Guarantee Asset

IRLC

FSC
Beginning balance

$
196

$
2,809

$
—
Acquisitions

—

6,617

(17)
Originations

—

(7,705)

—
Gains (losses) in net income, net

35

464

—
Ending balance

$
231

$
2,185

$
(17)


Three Months Ended September 30, 2020	Guarantee Asset		IRLC		FSC
Three Months Ended March 31, 2022							Corporate Bonds		Loans Held at Fair Value		FSC		Guarantee Asset		IRLC		Equity Warrants
Beginning balance	$	222	$	7,566	$	(84)	$	2,113	$	6,380	$	(9)	$	237	$	1,473	$	160
Acquisitions		—		9,546		(89)		4,000		—		9		—		1,614		242
Originations		—		(6,466)		—		—		—		—		—		(1,354)		—
Gains (losses) in net income, net		23		1,065		84
Losses in net income, net								—		—		—		(31)		(743)		—
Unrealized gains, net								102		—		—		—		—		—
Ending balance	$	245	$	11,711	$	(89)	$	6,215	$	6,380	$	—	$	206	$	990	$	402

~~Table of Contents~~


Three Months Ended March 31, 2021	Corporate Bonds		Loans Held at Fair Value		FSC		Guarantee Asset		IRLC		Equity Warrants
Beginning balance	$	—	$	—	$	(89)	$	232	$	9,841	$	—
Acquisitions		—		—		—		—		2,684		—
Originations		—		—		—		—		(7,016)		—
Losses in net income, net		—		—		(84)		(44)		(3,404)		—
Unrealized gains/(losses), net		—		—		—		—		—		—
Ending balance	$	—	$	—	$	(173)	$	188	$	2,105	$	—

Nine Months Ended September 30, 2021

Guarantee Asset

IRLC

FSC
Beginning balance

$
232

$
9,841

$
(89)
Acquisitions

—

15,123

(190)
Originations

2

(20,702)

—
Gains (losses) in net income, net

(3)

(2,077)

262
Ending balance

$
231

$
2,185

$
(17)

Nine Months Ended September 30, 2020

Guarantee Asset

IRLC

FSC
Beginning balance

$
—

$
1,184

$
—
Acquisitions

—

26,264

(189)
Originations

—

(17,449)

—
Sales

245

—

—
Gains (losses) in net income, net

—

1,712

100
Ending balance

$
245

$
11,711

$
(89)

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

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

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

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

Quantitative Information about Level 3 Fair Value Measurements as of March 31, 2022

Valuation

Significant

Range

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Recurring fair value

��

Corporate Bonds

6,215

Discounted cash flow

Discount rate

5% (5%)

Loans held at fair value

6,380

Discounted cash flow

Discount rate

19 bps (19 bps)

Fair Value

Technique

Unobservable Input

(Weighted Average)

Guarantee asset

231

Discounted cash flow

Discount rate
Prepayment rate

3% (3%)

19% (19%)

206

Discounted cash flow

Discount rate
Prepayment rate

3% (3%)
11% (11%)

IRLC, net

2,185

Best execution model

Pull through

72% to 100% (90%)

990

Best execution model

Pull through

67% to 100% (93%)

FSC

(17)

Internal pricing model

Market Differential

-84bps to

-50bps

(-75bps)

Equity warrants

402

Black-Scholes option pricing model

Volatility
Risk-free interest rate
Remaining life

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

Nonrecurring fair value

Impaired loans⁽¹⁾:

Commercial and Industrial

439

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

7% - 45% (38%)

3538

Table of Contents

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

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

Valuation

Significant

Range

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Recurring fair value

Corporate Bonds

2,113

Discounted cash flow

Discount rate

7% (7%)

FSC

(9)

Internal pricing model

Market Differential

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

Fair Value

Technique

Unobservable Input

(Weighted Average)

Guarantee asset

232

Discounted cash flow

Discount rate
Prepayment rate

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

237

Discounted cash flow

Discount rate
Prepayment rate

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

IRLC, net

9,841

Best execution model

Pull through

55% to 100% (86%)

1,473

Best execution model

Pull through

71% to 100% (88%)

FSC

(89)

Internal pricing model

Market Differential

-59bps to

-17bps

(-31bps)

Equity warrants

160

Black-Scholes option pricing model

Volatility
Risk-free interest rate
Remaining life

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

Nonrecurring fair value

Impaired loans⁽¹⁾:

Commercial and Industrial

439

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 45% (39%)

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

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

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

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

As of September 30, 2021, total impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had carrying values of $2.3 million with valuation allowances of $1.8 million and were classified as Level 3. As of December 31, 2020, impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had carrying values of $3.4 million with valuation allowances of $1.6 million and were classified as Level 3.

~~Impaired loans accounted for specific reserves of $1.8 million and $1.6 million as of September 30, 2021~~2022 and December 31, ~~2020.~~ 2021.

Estimated Fair Value of Other Financial Instruments

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


	Carrying		Fair Value Measurements Using:
March 31, 2022	Amount		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	454,099	$	454,099	$	—	$	—
Loans, net		1,909,940		—		—		1,902,433
Accrued interest receivable		6,969		2		299		6,668
Liabilities:
Deposits		2,272,112		—		2,273,766		—
Borrowings:
FHLB borrowings – fixed rate		15,000		—		14,817		—
Federal Reserve borrowings – fixed rate		12,576		—		12,576		—
Subordinated notes – fixed-to-floating rate		32,523		—		—		35,573
Accrued interest payable		312		—		130		182

3639

Table of Contents

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

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

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)
Impaired loans⁽¹⁾:

Commercial and Industrial

$
479

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 45% (39%)

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

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)
Other real estate owned:








Commercial properties

$
194

Sales contract

Commission, cost to sell, closing costs

5% (5%)

Impaired loans⁽¹⁾:

Commercial and Industrial

1,800

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 35% (26%)

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

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

Carrying

Fair Value Measurements Using:
September 30, 2021

Amount

Level 1

Level 2

Level 3
Assets:

Cash and cash equivalents

$
310,235

$
310,235

$
—

$
—
Loans, net

1,590,086

—

—

1,577,103
Accrued interest receivable

6,306

—

20

6,286
Liabilities:








Deposits

1,782,299

—

1,783,610

—
Borrowings:








FHLB borrowings – fixed rate

15,000

—

15,056

—
Federal Reserve borrowings – fixed rate

43,564

—

43,564

—
Subordinated notes – fixed-to-floating rate

39,010

—

—

40,313
Accrued interest payable

357

—

173

184

~~Table of Contents~~


	Carrying		Fair Value Measurements Using:						Carrying		Fair Value Measurements Using:
December 31, 2020	Amount		Level 1		Level 2		Level 3
December 31, 2021									Amount		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	155,989	$	155,989	$	—	$	—	$	386,983	$	386,983	$	—	$	—
Loans, net		1,520,294		—		—		1,512,699		1,935,405		—		—		1,919,625
Accrued interest receivable		6,618		—		90		6,528		7,151		2		203		6,946
Liabilities:
Deposits		1,619,910		—		1,621,648		—		2,205,703		—		2,207,452		—
Borrowings:
FHLB borrowings – fixed rate		15,000		—		15,099		—		15,000		—		14,990		—
Federal Reserve borrowings – fixed rate		134,563		—		134,563		—		23,629		—		23,629		—
Subordinated notes – fixed-to-floating rate		24,291		—		—		25,750		39,031		—		—		40,325
Accrued interest payable		453		—		124		329		355		—		156		199

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

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

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

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.

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

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

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

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

NOTE 1415 - SEGMENT REPORTING

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

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

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Management segment no longer meet the thresholds of income before income tax to be a reportable segment. The residual assets that remained in the Capital Management segment are now included in the Wealth Management segment.

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

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

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

The tables below present the financial information for each segment that is specifically identifiable or based on allocations using internal methods as of or for the three and nine months ended September 30, 2021 and 2020 (in thousands):

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

Wealth
Management

Mortgage

Consolidated
Income Statement

Total interest income

$
16,146

$
—

$
16,146
Total interest expense

1,300

—

1,300
Provision for loan losses

406

—

406
Net interest income, after provision for loan losses

14,440

—

14,440
Non-interest income

5,998

4,497

10,495
Total income before non-interest expense

20,438

4,497

24,935
Depreciation and amortization expense

272

13

285
All other non-interest expense

13,967

2,217

16,184
Income before income taxes

$
6,199

$
2,267

$
8,466

Goodwill

$
24,191

$
—

$
24,191
Total assets

2,020,896

55,376

2,076,272

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

Wealth
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

5,709

12,323

18,032
Total income before non-interest expense

17,131

12,323

29,454
Depreciation and amortization expense

260

14

274
All other non-interest expense

14,291

2,067

16,358
Income before income taxes

$
2,580

$
10,242

$
12,822

Goodwill

$
24,191

$
—

$
24,191
Assets held for sale

3,000

—

3,000
Total assets

1,867,748

105,149

1,972,897

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As of and for the nine months ended September 30, 2021

Wealth
Management

Mortgage

Consolidated
Income Statement

Total interest income

$
46,193

$
—

$
46,193
Total interest expense

4,071

—

4,071
Provision for loan losses

418

—

418
Net interest income, after provision for loan losses

41,704

—

41,704
Non-interest income

16,987

13,621

30,608
Total income before non-interest expense

58,691

13,621

72,312
Depreciation and amortization expense

792

40

832
All other non-interest expense

38,800

7,987

46,787
Income before income taxes

$
19,099

$
5,594

$
24,693

Goodwill

$
24,191

$
—

$
24,191
Total assets

2,020,896

55,376

2,076,272

The following presents the financial information for each segment that is specifically identifiable or based on allocations using internal methods as of or for the three months ended March 31, 2022 and 2021 (dollars in thousands):


As of or for the three months ended March 31, 2022	Wealth Management		Mortgage		Consolidated
Income Statement
Total interest income	$	19,665	$	—	$	19,665
Total interest expense		1,381		—		1,381
Provision for loan losses		210		—		210
Net interest income, after provision for loan losses		18,074		—		18,074
Non-interest income		6,115		2,518		8,633
Total income before non-interest expense		24,189		2,518		26,707
Depreciation and amortization expense		548		12		560
Net (gain)/loss on assets held for sale		(1)		—		(1)
All other non-interest expense		16,631		2,201		18,832
Income before income taxes	$	7,011	$	305	$	7,316

Goodwill	$	30,400	$	—	$	30,400
Total assets		2,539,473		37,188		2,576,661

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

Wealth
Management

Mortgage

Consolidated
Income Statement

Total interest income

$
38,392

$
—

$
38,392
Total interest expense

5,747

—

5,747
Provision for loan losses

3,987

—

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

28,658

—

28,658
Non-interest income

16,202

25,024

41,226
Total income before non-interest expense

44,860

25,024

69,884
Depreciation and amortization expense

770

56

826
All other non-interest expense
��

37,391
⁽¹⁾

5,706

43,097
Income before income taxes

$
6,699

$
19,262

$
25,961

Goodwill

$
24,191

$
—

$
24,191
Assets held for sale

3,000

—

3,000
Total assets

1,867,748

105,149

1,972,897


As of or for the 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 before non-interest expense		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 taxes	$	5,917	$	2,122	$	8,039

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

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

NOTE 1516 – LOW-INCOME HOUSING TAX CREDIT INVESTMENTS

On December 19, 2019, the Company invested in a low-income housing tax credit ("LIHTC") investment. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the balance of the investment for LIHTC was ~~$2.8~~$2.7 million and ~~$1.1~~$2.6 million, respectively. These balances are reflected in the Other assets line item of the Condensed Consolidated Balance Sheets. ~~Total~~

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There were 0 unfunded commitments related to the investment in the LIHTC ~~total $0.2 million and $2.2 million~~ as of ~~September 30, 2021 and~~March 31, 2022. As of December 31, ~~2020, respectively. The Company expects to fulfill these~~2021, total unfunded commitments ~~during the year ending 2021.~~were $0.2 million.

The Company uses the proportional amortization method to account for this investment. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, the Company recognized amortization expense of $0.1 million ~~and $0.3 million, respectively,~~ 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 and nine months ended September 30, 2020.~~

Additionally, during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, the Company recognized $0.1 ~~million and $0.3~~ million of tax credits and other benefits from this investment in the LIHTC. ~~The Company did not recognize any related tax credits or other benefits during the three and nine months ended September 30, 2020.~~ During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ the Company did not incur any impairment losses.

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NOTE 1617 - REGULATORY CAPITAL MATTERS

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

First Western and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings, and other factors. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks ("Basel III rules") has been fully phased in. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. During the year ended December 31, 2021, First Western made a capital injection of $2.9 million into the Bank. Management believes as of ~~September 30, 2021,~~March 31, 2022, 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 ~~September 30, 2021,~~March 31, 2022, were calculated in accordance with the requirements of Basel III. The final rules of Basel III also established a “capital conservation buffer” of 2.5% above new regulatory minimum capital ratios, which are fully effective following minimum ratios: (i) a CET1 ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. Banks are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that can be utilized for such activities.

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

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


									To be Well Capitalized												To be Well Capitalized
									Under Prompt												Under Prompt
					Required for Capital				Corrective Action								Required for Capital				Corrective Action
	Actual				Adequacy Purposes⁽¹⁾				Regulations				Actual				Adequacy Purposes⁽¹⁾				Regulations
September 30, 2021	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2022													Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 capital to risk-weighted assets
Bank	$	156,136	11.02	%	$	85,019	6.0	%	$	113,359	8.0	%	$	209,428	12.01	%	$	104,663	6.0	%	$	139,551	8.0	%
Consolidated		151,950	10.66			N/A	N/A			N/A	N/A			194,605	11.11			N/A	N/A			N/A	N/A
CET1 to risk-weighted assets
Bank		156,136	11.02			63,764	4.5			92,104	6.5			209,428	12.01			78,497	4.5			113,385	6.5
Consolidated		151,950	10.66			N/A	N/A			N/A	N/A			194,605	11.11			N/A	N/A			N/A	N/A
Total capital to risk-weighted assets
Bank		169,435	11.96			113,359	8.0			141,699	10.0			223,664	12.82			139,551	8.0			174,439	10.0
Consolidated		204,809	14.37			N/A	N/A			N/A	N/A			241,841	13.81			N/A	N/A			N/A	N/A
Tier 1 capital to average assets
Bank		156,136	8.11			77,047	4.0			96,308	5.0			209,428	8.27			101,264	4.0			126,581	5.0
Consolidated		151,950	7.86			N/A	N/A			N/A	N/A			194,605	7.67			N/A	N/A			N/A	N/A


									To be Well Capitalized												To be Well Capitalized
									Under Prompt												Under Prompt
					Required for Capital				Corrective Action								Required for Capital				Corrective Action
	Actual				Adequacy Purposes⁽¹⁾				Regulations				Actual				Adequacy Purposes⁽¹⁾				Regulations
December 31, 2020	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2021													Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 capital to risk-weighted assets
Bank	$	133,963	10.22	%	$	78,660	6.0	%	$	104,880	8.0	%	$	203,164	11.40	%	$	106,945	6.0	%	$	142,594	8.0	%
Consolidated		131,507	9.96			N/A	N/A			N/A	N/A			188,777	10.54			N/A	N/A			N/A	N/A
CET1 to risk-weighted assets
Bank		133,963	10.22			58,995	4.5			85,215	6.5			203,164	11.40			80,209	4.5			115,858	6.5
Consolidated		131,507	9.96			N/A	N/A			N/A	N/A			188,777	10.54			N/A	N/A			N/A	N/A
Total capital to risk-weighted assets
Bank		146,853	11.20			104,880	8.0			131,100	10.0			217,215	12.19			142,594	8.0			178,242	10.0
Consolidated		168,957	12.80			N/A	N/A			N/A	N/A			242,388	13.54			N/A	N/A			N/A	N/A
Tier 1 capital to average assets
Bank		133,963	7.62			70,301	4.0			87,877	5.0			203,164	10.05			80,887	4.0			101,108	5.0
Consolidated		131,507	7.45			N/A	N/A			N/A	N/A			188,777	9.31			N/A	N/A			N/A	N/A

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

NOTE 18 – SUBSEQUENT EVENTS

On April 1, 2022, the Company elected to transfer all securities classified as available for sale to held to maturity. The Company determined, based on strong liquidity and history of not selling securities, that the held to maturity classification more appropriately reflects management’s intent for the securities.

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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, 2021~~March 31, 2022 and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included in this Quarterly Report on Form 10-Q (this "Form 10-Q") and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March ~~12, 2021.~~15, 2022. Unless we state otherwise or the context otherwise requires, references in this Form 10-Q to "we," "our," "us," "the Company," and "First Western" refer to First Western Financial, Inc. and its consolidated subsidiaries, including First Western Trust Bank, which we sometimes refer to as "the Bank" or "our Bank."

The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. See "Cautionary Note Regarding Forward-Looking Statements." Also, see the risk factors and other cautionary statements described under the heading "Item 1A - Risk Factors" included in our Annual Report Form 10-K filed with the SEC on March ~~12, 2021~~15, 2022 and in Part II–Item 1A of this Form 10-Q. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Company Overview

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

We offer our services through a branded network of boutique private trust bank offices, which we believe are strategically located in affluent and high-growth markets in locations across Colorado, Arizona, Wyoming, 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, 2021,~~March 31, 2022, we have expanded our footprint into ~~twelve~~fifteen full service profit centers, two loan production offices, and two trust offices located across four states. As of and for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, we had ~~$2.08~~$2.58 billion in total assets, ~~$72.3~~$26.7 million in total revenues, and provided fiduciary and advisory services on ~~$6.91~~$7.20 billion of assets under management ("AUM").

Response to COVID-19

The spread of COVID-19 has caused significant disruptions in the U.S. economy since it was declared a pandemic in March of 2020 by the World Health Organization. Disruptions include temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, 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 Management Plan in early 2020 in response to the emergence of COVID-19 and has continued to adjust as the crisis continues to impact our markets, clients, and business. A majority of our associates have been working remotely since early 2020. All of our offices are open, functioning, and continue to operate as usual. We are taking additional precautions within our profit centers, including enhanced cleaning procedures and physical distancing measures, to ensure the safety of our clients and our associates.

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

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program. As of September 30, 2021, we held 240 PPP loans for a total of $61.9 million with an average loan size of $0.3 million. As of September 30, 2021, the Company had submitted loans with original loan amounts of $241.5 million to the SBA for forgiveness and had received forgiveness on 988 loans totaling $214.8 million.

The last round of program funds were depleted in early May 2021. With the originations closed, the SBA turned their attention to forgiveness, processing applications submitted by the Company. Loans funded in 2021 became eligible for forgiveness after the covered period of 8 to 24 weeks, which began for some clients in the early second quarter of 2021. As of March 31, 2022, we have received forgiveness payments of $301.1 million from the SBA and have 72 PPP loans for a total of $16.7 million with an average loan rate size of $0.2 million remaining.

As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company has offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years. ~~The Company had seventy-two~~In 2021, the deferral period ended for all non-acquired loans ~~across multiple industries in~~previously modified and payments resumed under the ~~amount~~original terms. As of ~~$135.0 million of loans that participated in~~March 31, 2022, the Company’s ~~COVID~~ loan ~~modification program. All~~portfolio included 69 non-acquired loans inwhich were previously modified under the loan modification program, ~~were performing according to Bank policy~~totaling $109.8 million. Through the Teton Acquisition, the Company acquired 18 loans totaling $8.3 million as of ~~September 30, 2021.~~March 31, 2022, which were previously modified and are still in their deferral period.

The Company also participated in the Federal Reserve’s Main Street Lending Program ("MSLP") to support lending to small and medium-sized for-profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. As of ~~September 30, 2021,~~March 31, 2022, the Company had ~~six~~five loans with a balance held by the Bank of $6.8 million.

Primary Factors Used to Evaluate the Results of Operations

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

Net Interest Income

Net interest income represents interest income less interest expense. We generate interest income on interest-earning assets, primarily loans and available-for-sale 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 and origination fees, less commissions to loan originators, document review, and other costs specific to originating and selling the loan. The market adjustments for interest rate lock commitments ("IRLC"), mortgage derivatives, and gains and losses incurred on the mandatory trading of loans are also included in this line item. Net gain on mortgage loans is primarily impacted by the amount of loans sold, the type of loans sold, and market conditions.

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●

Bank fees—income generated through bank-related service charges such as: electronic transfer fees, treasury

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management fees, bill pay fees, servicing fees for ~~Main Street Lending Program,~~MSLP, and other banking fees. Banking fees are primarily impacted by the level of business activities and cash movement activities of our clients.

●

Risk management and insurance fees—commissions earned on insurance policies we have placed for clients through our client risk management team who incorporate insurance services, primarily life insurance, to support our clients’ wealth planning needs. Our insurance revenues are primarily impacted by the type and volume of policies placed for our clients.

●

Income on company-owned life insurance—income earned on the growth of the cash surrender value of life insurance policies we hold on certain key associates. The income on the increase in the cash surrender value is non-taxable income.

●

~~Other~~~~—non-operating income generated through a transition services agreement with the buyer of the LA fixed income team.~~

Non-Interest Expense

Non-interest expense is comprised primarily of the following:

●

Salaries and employee benefits—all forms of compensation-related expenses including salary, incentive compensation, payroll-related taxes, stock-based compensation, benefit plans, health insurance, 401(k) plan match costs, and other benefit-related expenses. Salaries and employee benefit costs are primarily impacted by changes in headcount and fluctuations in benefits costs.

●

Occupancy and equipment—costs related to building and land maintenance, leasing our office space, depreciation charges for the buildings, building improvements, furniture, fixtures and equipment, amortization of leasehold improvements, utilities, and other occupancy-related expenses. Occupancy and equipment costs are primarily impacted by the number of locations we occupy.

●

Professional services—costs related to legal, accounting, tax, consulting, personnel recruiting, insurance, and other outsourcing arrangements. Professional services costs are primarily impacted by corporate activities requiring specialized services. FDIC insurance expense is also included in this line and represents the assessments that we pay to the FDIC for deposit insurance.

●

Technology and information systems—costs related to software and information technology services to support office activities and internal networks. Technology and information system costs are primarily impacted by the number of locations we occupy, the number of associates we have, and the level of service we require from our third-party technology vendors.

●

Data processing—costs related to processing fees paid to our third-party data processing system providers relating to our core private trust banking platform. Data processing costs are primarily impacted by the number of loan, deposit, and trust accounts we have and the level of transactions processed for our clients.

●

Marketing—costs related to promoting our business through advertising, promotions, charitable events, sponsorships, donations, and other marketing-related expenses. Marketing costs are primarily impacted by the levels of advertising programs and other marketing activities and events held throughout the year.

●

Amortization of other intangible assets—primarily represents the amortization of intangible assets including client lists, core deposit intangibles, and other similar items recognized in connection with acquisitions.

●

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

●

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

4546

Table of Contents

~~Operating Segments~~Non-Interest Income

~~We measure~~Non-interest income primarily consists of the ~~overall profitability~~following:

●

Table of ~~operating segments based on income before income tax. We believe this~~Contents

●

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

●

Non-Interest Expense

Non-interest expense 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~~comprised primarily of ~~compensation and overhead expense directly attributable to~~ the products and services within the Wealth Management and Mortgage segments. We measure the profitability of each segment based on a post-allocation basis as we believe it better approximates the operating cash flows generated by our reportable operating segments. A description of each segment is provided in Note 14 - Segment Reporting of the accompanying Notes to the Condensed Consolidated Financial Statements.following:

~~Primary Factors Used to Evaluate our Balance Sheet~~

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

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

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

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

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

~~Results of Operations~~

~~Overview~~

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

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

●

Table of Contents

compensation, and a $2.4 million increase in personnel expense to support the growth in the balance sheet, and added personnel from the Branch Acquisition. The increase in net interest income was due to an increase in average loan balances and a reduction in our average cost of funds.

~~Net Interest Income~~

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

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

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

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

Interest expense on deposits decreased during the three and nine months ended September 30, 2021 compared to the same period in 2020. The decrease was driven primarily by a 10 and 29 basis point decline in cost of deposits for the three and nine months ended September 30, 2021 compared to the same period in 2020. The decrease in cost of deposits was driven by a reduction in deposit rates consistent with the lower interest rate environment as well as the intentional reduction in higher rate non-relationship deposit balances. The reduction in cost of deposits was partially offset by an increase in average interest-bearing deposit accounts of $115.1 million and $227.4 million, for the three and nine months ended September 30, 2021, compared to the same period in 2020.

~~Table of Contents~~

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

As of and for the Three Months Ended September 30,

2021

2020




Interest

Average



Interest

Average

Average

Earned /

Yield /

Average

Earned /

Yield /

(Dollars in thousands)

Balance⁽¹⁾

Paid

Rate

Balance⁽¹⁾

Paid

Rate

Assets













Interest-earning assets:











Interest-bearing deposits in other financial institutions

$
266,614

$
105

0.16
%

$
178,756

$
99

0.22
%
Available-for-sale securities⁽²⁾

29,130

180

2.47

40,528

173

1.71

Loans⁽³⁾

1,592,800

15,861

3.98

1,462,872

14,138

3.87

Interest-earning assets⁽⁴⁾

1,888,544

16,146

3.42

1,682,156

14,410

3.43

Mortgage loans held for sale⁽⁵⁾

54,717

406

2.97

94,714

643

2.72

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

1,943,261

16,552

3.41

1,776,870

15,053

3.39

Allowance for loan losses

(12,740)



(10,965)



Noninterest-earning assets

92,901



101,874



Total assets

$
2,023,422



$
1,867,779



Liabilities and Shareholders’ Equity









Interest-bearing liabilities:









Interest-bearing deposits

$
1,160,433

829

0.29

$
1,045,321

1,067

0.41

FHLB and Federal Reserve borrowings

81,307

82

0.40

222,225

204

0.37

Subordinated notes

29,236

389

5.32

14,445

221

6.12

Total interest-bearing liabilities

1,270,976

1,300

0.41

1,281,991

1,492

0.47

Noninterest-bearing liabilities:









Noninterest-bearing deposits

562,569



417,502



Other liabilities

17,359



22,564



Total noninterest-bearing liabilities

579,928



440,066



Total shareholders’ equity

172,518



145,722



Total liabilities and shareholders’ equity

$
2,023,422



$
1,867,779



Net interest rate spread⁽⁶⁾





3.01





2.96

Net interest income⁽⁷⁾



$
14,846



$
12,918

Net interest margin⁽⁸⁾





3.14
%





3.07
%

~~Table of Contents~~

As of and For the Nine Months Ended September 30,

2021

2020




Interest

Average



Interest

Average

Average

Earned /

Yield /

Average

Earned /

Yield /

(Dollars in thousands)

Balance⁽¹⁾

Paid

Rate

Balance ⁽¹⁾

Paid

Rate

Assets













Interest-earning assets:











Interest-bearing deposits in other financial institutions

$
257,796

$
288

0.15
%

$
108,010

$
358

0.44
%
Available-for-sale securities⁽²⁾

29,180

545

2.49

48,117

692

1.92

Loans⁽³⁾

1,573,919

45,360

3.84

1,250,052

37,342

3.98

Interest-earning assets⁽⁴⁾

1,860,895

46,193

3.31

1,406,179

38,392

3.64

Mortgage loans held for sale⁽⁵⁾

105,345

2,183

2.76

67,010

1,519

3.02

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

1,966,240

48,376

3.28

1,473,189

39,911

3.61

Allowance for loan losses

(12,608)



(9,230)



Noninterest-earning assets

95,612



91,924



Total assets

$
2,049,244



$
1,555,883



Liabilities and Shareholders’ Equity









Interest-bearing liabilities:









Interest-bearing deposits

$
1,163,050

2,669

0.31

$
935,689

4,779

0.68

FHLB and Federal Reserve borrowings

122,395

331

0.36

99,379

384

0.52

Subordinated notes

25,934

1,071

5.51

12,256

584

6.35

Total interest-bearing liabilities

1,311,379

4,071

0.41

1,047,324

5,747

0.73

Noninterest-bearing liabilities:









Noninterest-bearing deposits

553,314



350,475



Other liabilities

18,342



20,426



Total noninterest-bearing liabilities

571,656



370,901



Shareholders’ equity

166,209



137,658



Total liabilities and shareholders’ equity

$
2,049,244



$
1,555,883



Net interest rate spread⁽⁶⁾





2.90





2.91

Net interest income⁽⁷⁾

$
42,122



$
32,645

Net interest margin⁽⁸⁾





3.02
%





3.10
%

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

⁽²⁾ ~~Represents monthly averages.~~

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

⁽⁴⁾ ~~Tax-equivalent yield adjustments are immaterial.~~

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

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

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

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

~~Table of Contents~~

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

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021

Compared to 2020

Compared to 2020

Increase

Increase

(Decrease) Due

Total

(Decrease) Due

Total

to Change in:

Increase

to Change in:

Increase
(Dollars in thousands)

Volume

Rate

(Decrease)

Volume

Rate

(Decrease)
Interest-earning assets:












Interest-bearing deposits in other financial institutions

$
35

$
(29)

$
6

$
167

$
(237)

$
(70)
Available-for-sale securities

(70)

77

7

(354)

207

(147)
Loans

1,294

429

1,723

9,334

(1,316)

8,018
Total increase (decrease) in interest income

$
1,259

$
477

$
1,736

$
9,147

$
(1,346)

$
7,801
Interest-bearing liabilities:












Interest-bearing deposits

82

(320)

(238)

522

(2,632)

(2,110)
FHLB and Federal Reserve borrowings

(142)

20

(122)

62

(115)

(53)
Subordinated notes

197

(29)

168

565

(78)

487
Total increase (decrease) in interest expense

$
137

$
(329)

$
(192)

$
1,149

$
(2,825)

$
(1,676)
Increase in net interest income

$
1,122

$
806

$
1,928

$
7,998

$
1,479

$
9,477

~~Provision for Loan Losses~~

We have a dedicated problem loan resolution team comprised of associates from our credit, senior leadership, risk and accounting teams that meets frequently to ensure that watch list and problem credits are identified early and actively managed. We work to identify potential losses in a timely manner and proactively manage the problem credits to minimize losses. For the nine months ended September 30, 2021, we recorded a $0.4 million provision for credit losses.

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

Non-Interest Income

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

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

●

5045

Table of Contents

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

Three Months Ended

September 30,

Change

(Dollars in thousands)

2021

2020

$

%

Non-interest income:









Trust and investment management fees

$
5,167

$
4,814

$
353

7.3
%
Net gain on mortgage loans

4,480

12,304

(7,824)

(63.6)

Bank fees

458

340

118

34.7

Risk management and insurance fees

301

483

(182)

(37.7)

Income on company-owned life insurance

89

91

(2)

(2.2)

Total non-interest income

$
10,495

$
18,032

$
(7,537)

(41.8)
%

Nine Months Ended

September 30,

Change

(Dollars in thousands)

2021

2020

$

%

Non-interest income:









Trust and investment management fees

$
15,023

$
14,154

$
869

6.1
%
Net gain on mortgage loans

13,590

24,958

(11,368)

(45.5)

Bank fees

1,225

929

296

31.9

Risk management and insurance fees

444

912

(468)

(51.3)

Income on company-owned life insurance

266

273

(7)

(2.6)

Other

60

—

60

*

Total non-interest income

$
30,608

$
41,226

$
(10,618)

(25.8)
%

* Not meaningful

~~Trust and investment management fees~~—For the three months ended September 30, 2021 compared to the same period in 2020, our trust and investment management fees increased $0.4 million, or 7.3%. For the nine months ended September 30, 2021 compared to the same period in 2020, our trust and investment management fees increased $0.9 million, or 6.1%. The increase is driven by asset growth, partially offset by a reduction in trust and investment management fees generated by the LA Fixed Income team that was sold in November 2020.

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

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

●

Non-Interest Expense

Non-interest expense is comprised primarily of the following:

●

Table of Contents

Operating Segments

The Company’s reportable segments consist of Wealth Management and Mortgage. We measure the overall profitability of operating segments based on income before income tax. We believe this is a more useful measurement as our wealth management products and services are fully integrated with our private trust bank. We allocate costs to our segments, which consist primarily of compensation and overhead expense directly attributable to the products and services within the Wealth Management and Mortgage segments. We measure the profitability of each segment based on a post-allocation basis, as we believe it better approximates the operating cash flows generated by our reportable operating segments. A description of each segment is provided in Note 15 - Segment Reporting of the accompanying Notes to the Condensed Consolidated Financial Statements.

Primary Factors Used to Evaluate our Balance Sheet

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

Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The Company has adopted the Basel III regulatory capital framework. As of March 31, 2022, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III.

Acquisitions and Divestitures

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

Table of Contents

Results of Operations

Overview

The three months ended March 31, 2022 compared with the three months ended March 31, 2021. We reported net income available to common shareholders of $5.5 million for the three months ended March 31, 2022, compared to $6.0 million of net income available to common shareholders for the three months ended March 31, 2021, a $0.5 million, or 7.9% decrease. For the three months ended March 31, 2022, our income before income tax was $7.3 million, a $0.7 million, or 9.0% decrease from the three months ended March 31, 2021. The decrease was primarily driven by a $2.7 million decrease in net gain on mortgage loans and a $3.8 million increase in non-interest expense, partially offset by a $5.0 million increase in net interest income, after provision for loan losses. The decrease in net gain on mortgage loans was primarily driven by a slowdown in new lock volume associated with rising interest rates and reduced housing inventory. The increase in net interest income, after provision for loan losses was primarily due to an increase in average loan balances and an increase in average loan yields. The increase in non-interest expense was primarily driven by the addition of Teton’s operations at the end of 2021.

Net Interest Income

The three months ended March 31, 2022 compared with the three months ended March 31, 2021. For the three months ended March 31, 2022, net interest income, before the provision for loan losses, was $18.3 million, an increase of $5.2 million, or 40.1%, compared to the three months ended March 31, 2021. The increase in net interest income was driven by a $367.8 million increase in average loans outstanding, a 31 basis point increase in the average yield on loans, and a 7 basis point decrease in the average cost of funds, partially offset by a $111.0 million increase in average non-interest bearing deposit balances. Net interest margin increased 8 basis points to 2.98% in the first quarter of 2022 from 2.90% reported in the first quarter of 2021. The increase in net interest margin was primarily a result of a 31 basis point increase in average yield on loans and a 7 basis point decrease in the average cost of funds.

The increase in average loans outstanding for the three months ended March 31, 2022 compared to the same period in 2021 was due to the Teton acquisition at the end of 2021. Average loan yields were 3.97% for the three months ended March 31, 2022, compared to 3.66% and for the three months ended March 31, 2021. The increase in loan yields during the three-month period was primarily driven by the addition of higher yielding loans from the Teton acquisition and a beneficial mix shift in the loan portfolio due to PPP loan forgiveness.

Interest income on our available-for-sale securities portfolio increased as a result of higher average investment balance for the three months ended March 31, 2022 compared to the same period in 2021. Our average available-for-sale securities balance during the three months ended March 31, 2022 was $55.7 million, an increase of $23.8 million from the three months ended March 31, 2021, primarily due to the Teton acquisition. The impact on the increase in average balances was partially offset by a lower average yield on the securities portfolio.

Interest expense on deposits decreased during the three months ended March 31, 2022 compared to the same period in 2021. The decrease was driven primarily by a 6 basis point decline in cost of deposits for the three months ended March 31, 2022 compared to the same period in 2021. The decrease in cost of deposits was driven by the intentional reduction in higher rate non-relationship deposit balances and the repricing of term deposits. The reduction in cost of deposits was partially offset by an increase in average interest-bearing deposit accounts of $442.3 million, for the three months ended March 31, 2022, compared to the same period in 2021.

Table of Contents

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


	As of or for the Three Months Ended March 31,
	2022						2021
			Interest		Average				Interest		Average
	Average		Earned /		Yield /		Average		Earned /		Yield /
(Dollars in thousands)	Balance⁽¹⁾		Paid		Rate		Balance⁽¹⁾		Paid		Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	474,593	$	232	0.20	%	$	213,577	$	91	0.17	%
Federal funds sold		1,349		—	—			—		—	—
Available-for-sale securities⁽²⁾		55,739		337	2.42			31,935		196	2.45
Loans⁽³⁾		1,922,770		19,096	3.97			1,554,990		14,212	3.66
Interest-earning assets⁽⁴⁾		2,454,451		19,665	3.20			1,800,502		14,499	3.22
Mortgage loans held for sale⁽⁵⁾		22,699		191	3.37			175,891		1,152	2.62
Total interest-earning assets, plus mortgage loans held for sale		2,477,150		19,856	3.21			1,976,393		15,651	3.17
Allowance for loan losses		(13,715)						(12,541)
Noninterest-earning assets		121,650						100,415
Total assets	$	2,585,085					$	2,064,267
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,605,314		943	0.23		$	1,163,010		974	0.33
FHLB and Federal Reserve borrowings		33,104		39	0.47			137,626		132	0.38
Subordinated notes		32,939		399	4.85			24,259		340	5.61
Total interest-bearing liabilities		1,671,357		1,381	0.33			1,324,895		1,446	0.44
Noninterest-bearing liabilities:
Noninterest-bearing deposits		668,705						557,707
Other liabilities		23,555						21,151
Total noninterest-bearing liabilities		692,260						578,858
Total shareholders’ equity		221,468						160,514
Total liabilities and shareholders’ equity	$	2,585,085					$	2,064,267
Net interest rate spread⁽⁶⁾					2.87						2.78
Net interest income⁽⁷⁾			$	18,284					$	13,053
Net interest margin⁽⁸⁾					2.98						2.90

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

⁽²⁾ Represents monthly averages.

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

⁽⁴⁾ Tax-equivalent yield adjustments are immaterial.

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

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

Table of Contents

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


	Three Months Ended March 31, 2022
	Compared to 2021
	Increase
	(Decrease) Due				Total
	to Change in:				Increase
	Volume		Rate		(Decrease)
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	128	$	13	$	141
Available-for-sale securities		144		(3)		141
Loans		3,653		1,231		4,884
Total increase (decrease) in interest income		3,925		1,241		5,166
Interest-bearing liabilities:
Interest-bearing deposits		260		(291)		(31)
FHLB and Federal Reserve borrowings		(123)		30		(93)
Subordinated notes		105		(46)		59
Total increase (decrease) in interest expense		242		(307)		(65)
Increase in net interest income	$	3,683	$	1,548	$	5,231

Provision for Loan Losses

We have a dedicated problem loan resolution team comprised of associates from our credit, senior leadership, risk, and accounting teams that meets frequently to ensure that watch list and problem credits are identified early and actively managed. We work to identify potential losses in a timely manner and proactively manage the problem credits to minimize losses. For the three months ended March 31, 2022, we recorded a $0.2 million provision for credit losses.

Non-Interest Income

The three months ended March 31, 2022 compared with the three months ended March 31, 2021. For the three months ended March 31, 2022 compared with the three months ended March 31, 2021, non-interest income decreased $2.0 million, or 18.7%, to $8.6 million. The decrease in non-interest income during the three months ended March 31, 2022 was primarily a result of a $2.7 million decrease in net gain on mortgage loans, compared to the same period in 2021.

Table of Contents

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




	Three Months Ended
	March 31,				Change
(Dollars in thousands)	2022		2021		$		%
Non-interest income:
Trust and investment management fees	$	5,168	$	4,847	$	321		6.6	%
Net gain on mortgage loans		2,494		5,196		(2,702)		(52.0)
Bank fees		690		373		317		85.0
Risk management and insurance fees		109		51		58		113.7
Net gain on equity interests		1		—		1		*
Income on company-owned life insurance		86		88		(2)		(2.3)
Other		85		60		25		41.7
Total non-interest income	$	8,633	$	10,615	$	(1,982)		(18.7)

* Not meaningful

Trust and investment management fees—For the three months ended March 31, 2022 compared to the same period in 2021, our trust and investment management fees increased $0.3 million, or 6.6%. The increase is driven by asset growth.

Net gain on mortgage loans—For the three months ended March 31, 2022 compared to the same period in 2021, our net gain on mortgage loans decreased by $2.7 million, or 52.0%, to $2.5 million. The decrease in net gain on mortgage loans was primarily driven by a slowdown in new interest rate locks with customers associated with rising interest rates and reduced housing inventory.

Bank fees— For the three months ended March 31, 2022 compared to the same period in 2021, our bank fees increased by $0.3 million or 85.0%. The increase during the three-month period was primarily driven by increased activity consistent with the growth of the balance sheet.

Non-Interest Expense

The three months ended ~~September 30, 2021~~March 31, 2022 compared with the three months ended ~~September 30, 2020~~~~. The decrease in non-interest expense of 1.0% to $16.5 million for the three months ended September 30,~~March 31, 2021 ~~was primarily due to lower data processing, provision for other real estate owned, and other expenses, partially offset by an increase in professional services expense.~~

~~The nine months ended September 30, 2021 compared with the nine months ended September 30, 2020~~. The increase in non-interest expense of ~~8.4%~~24.1% to ~~$47.6~~$19.4 million for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, was primarily ~~due to higher salaries and employee benefits, and professional services expenses, offset partially~~driven by ~~a reduction in net loss on assets held for sale and other non-interest expense.~~the addition of Teton’s operations.

Table of Contents

The ~~tables below present~~following presents the significant categories of our non-interest expense ~~for~~during the periods ~~noted:~~presented (dollars in thousands):




	Three Months Ended								Three Months Ended
	September 30,				Change				March 31,				Change
(Dollars in thousands)	2021		2020		$		%		2022		2021		$		%
Non-interest expense:
Salaries and employee benefits	$	10,229	$	10,212	$	17	0.2	%	$	12,058	$	9,861	$	2,197	22.3	%
Occupancy and equipment		1,550		1,619		(69)	(4.3)			1,882		1,409		473	33.6
Professional services		1,660		1,288		372	28.9			1,526		1,279		247	19.3
Technology and information systems		945		1,032		(87)	(8.4)			1,046		942		104	11.0
Data processing		912		1,038		(126)	(12.1)			1,187		1,015		172	16.9
Marketing		397		395		2	0.5			557		321		236	73.5
Amortization of other intangible assets		5		4		1	25.0			77		4		73	1,825.0
Provision on other real estate owned		—		100		(100)	*
Net gain on assets held for sale										(1)		—		(1)	*
Other		771		944		(173)	(18.3)			1,059		798		261	32.7
Total non-interest expense	$	16,469	$	16,632	$	(163)	(1.0)	%	$	19,391	$	15,629	$	3,762	24.1

	Nine Months Ended
	September 30,				Change
(Dollars in thousands)	2021		2020		$		%
Non-interest expense:
Salaries and employee benefits	$	29,733	$	25,384	$	4,349	17.1	%
Occupancy and equipment		4,402		4,574		(172)	(3.8)
Professional services		4,309		3,542		767	21.7
Technology and information systems		2,791		2,994		(203)	(6.8)
Data processing		3,020		2,922		98	3.4
Marketing		1,116		1,063		53	5.0
Amortization of other intangible assets		13		44		(31)	(70.5)
Net loss on assets held for sale		—		553		(553)	*
Provision on other real estate owned		—		100		(100)	*
Other		2,235		2,747		(512)	(18.6)
Total non-interest expense	$	47,619	$	43,923	$	3,696	8.4	%

* Not meaningful

Salaries and employee benefits—~~Salaries~~The increase in salaries and employee benefits ~~increased an immaterial amount, or 0.2%, and $4.3~~of $2.2 million, or ~~17.1%~~22.3%, ~~for~~was primarily related to the ~~three~~additional associates added through the Teton acquisition.

Occupancy and ~~nine months ended September 30, 2021, respectively.~~ equipment—The increase ~~during the nine-month period~~in occupancy and equipment of $0.5 million, or 33.6%, was primarily driven by ~~a $2.1 million decrease related to deferred compensation~~building depreciation on the locations acquired with the Teton acquisition and an increase in ~~personnel expense to support the growth in the balance sheet, and added personnel from the Branch Acquisition.~~ office lease space.

Professional services—~~Professional~~The increase in professional services ~~increased by $0.4~~of $0.2 million, or ~~28.9%~~19.3%, ~~and $0.8 million, or 21.7%, for the three and nine months ended September 30, 2021, respectively. The increase during the three month period~~ was primarily driven by ~~additional~~acquisition related expenses ~~related to M&A due diligence~~of $0.1 million and ~~the PPP program. The increase during the nine month period was primarily driven by additional expenses related to M&A due diligence,~~ additional expenses related to the ~~PPP program and additional FDIC insurance expense related to our balance sheet growth.~~addition of Teton’s operations.

~~Technology and information systems—~~Technology and information systems ~~decreased~~—The increase in technology and information systems of $0.1 million, or ~~8.4%~~11.0%, was primarily driven by the addition of Teton’s operations and increased expenses to support the organic balance sheet growth.

Data processing—The increase in data processing of $0.2 million, or ~~6.8% for~~16.9%, was primarily driven by acquisition related expenses of $0.1 million, additional expenses related to the ~~three~~addition of Teton’s operations, and ~~nine months ended September 30, 2021.~~ increased expenses to support the organic balance sheet growth.

Marketing— The ~~decrease during~~increase in marketing of $0.2 million, or 73.5%, was primarily driven by marketing expenses associated with the ~~three~~onboarding of new clients from the Teton acquisition and ~~nine-month periods~~event sponsorships.

Amortization of other intangible assets—The increase in amortization of other intangible assets of $0.1 million was primarily driven by amortization of intangibles acquired through the Teton acquisition.

Other—The increase in other of $0.3 million, or 32.7%, was driven by the ~~sale~~addition of ~~the LA fixed income team.~~Teton’s operations.

~~Data processing—~~Data processing decreased by $0.1 million, or 12.1%, and increased by $0.1 million, or 3.4%, for the three and nine months ended September 30, 2021, respectively. The decrease during the three-month period was primarily driven by a decrease in core systems cost as a result of renegotiated contracts. The increase during the nine-month period was primarily driven by an increase in our Mortgage segment.

~~Net loss on assets held for sale—The decrease in net loss on assets held for sale of $0.6 million for the nine months ended September 30, 2021 was driven by the completion of the sale of held for sale assets in 2020.~~

~~Table of Contents~~

~~Other—~~The decrease in other of $0.2 million, or 18.3%, and $0.5 million, or 18.6% for the three and nine months ended September 30, 2021, respectively, was primarily driven by an SEC penalty of $0.2 million, and other fraud losses in 2020.

Income Tax

The Company recorded an income tax provision of ~~$2.0~~$1.8 million and ~~$3.2~~$2.0 million, respectively, for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ reflecting an effective tax rate of ~~24.2%~~24.5% and ~~24.9%~~25.4%, respectively. ~~The Company recorded an income tax provision~~

Table of ~~$6.0 million and $6.3 million, respectively, for the nine months ended September 30, 2021 and 2020, reflecting an effective tax rate of 24.3% for both periods.~~Contents

Segment Reporting

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

The Company completed the sale 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 ~~tables present~~presents key metrics related to our ~~segments:~~segments during the periods presented (dollars in thousands):


	Three Months Ended September 30, 2021									Nine Months Ended September 30, 2021									Three Months Ended March 31, 2022
	Wealth									Wealth									Wealth
(Dollars in thousands)	Management			Mortgage			Consolidated			Management			Mortgage			Consolidated
																			Management			Mortgage			Consolidated
Income⁽¹⁾	$	20,438		$	4,497		$	24,935		$	58,691		$	13,621		$	72,312		$	24,189		$	2,518		$	26,707
Income before taxes	$	6,199		$	2,267		$	8,466		$	19,099		$	5,594		$	24,693			7,011			305			7,316
Profit margin		30.3	%		50.4	%		34.0	%		32.5	%		41.1	%		34.1	%		29.0	%		12.1	%		27.4	%


	Three Months Ended September 30, 2020									Nine Months Ended September 30, 2020									Three Months Ended March 31, 2021
	Wealth									Wealth									Wealth
(Dollars in thousands)	Management			Mortgage			Consolidated			Management			Mortgage			Consolidated
																			Management			Mortgage			Consolidated
Income⁽¹⁾	$	17,131		$	12,323		$	29,454		$	44,860		$	25,024		$	69,884		$	18,471		$	5,197		$	23,668
Income before taxes	$	2,580		$	10,242		$	12,822		$	6,699		$	19,262		$	25,961			5,917			2,122			8,039
Profit margin		15.1	%		83.1	%		43.5	%		14.9	%		77.0	%		37.1	%		32.0	%		40.8	%		34.0	%

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

~~Table of Contents~~

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

Wealth Management


	As of and for the Three Months Ended September 30,									As of or for the Three Months Ended March 31,
(Dollars in thousands)	2021		2020⁽¹⁾			$ Change		% Change
										2022		2021		$ Change		% Change
Total interest income	$	16,146	$	14,410		$	1,736	12.0	%	$	19,665	$	14,499	$	5,166	35.6	%
Total interest expense		1,300		1,492			(192)	(12.9)			1,381		1,446		(65)	(4.5)
Provision for loan losses		406		1,496			(1,090)	(72.9)			210		—		210	*
Net interest income, after provision for loan losses		14,440		11,422			3,018	26.4			18,074		13,053		5,021	38.5
Non-interest income		5,998		5,709			289	5.1			6,115		5,418		697	12.9
Total income		20,438		17,131			3,307	19.3			24,189		18,471		5,718	31.0
Depreciation and amortization expense		272		260			12	4.6			548		258		290	112.4
Net loss on assets held for sale											(1)		—		(1)	*
All other non-interest expense		13,967		14,291			(324)	(2.3)			16,631		12,296		4,335	35.3
Income before income tax	$	6,199	$	2,580		$	3,619	140.3	%	$	7,011	$	5,917	$	1,094	18.5
Goodwill	$	24,191	$	24,191		$	—	—		$	30,400	$	24,191	$	6,209	25.7
Assets held for sale		—		3,000			(3,000)	*
Total assets	$	2,020,896	$	1,867,748		$	153,148	8.2	%		2,539,473		2,025,720		513,753	25.4

	As of and for the Nine Months Ended September 30,
(Dollars in thousands)	2021		2020⁽¹⁾			$ Change		% Change
Total interest income	$	46,193	$	38,392		$	7,801	20.3	%
Total interest expense		4,071		5,747			(1,676)	(29.2)
Provision for loan losses		418		3,987			(3,569)	(89.5)
Net interest income, after provision for loan losses		41,704		28,658			13,046	45.5
Non-interest income		16,987		16,202			785	4.8
Total income		58,691		44,860			13,831	30.8
Depreciation and amortization expense		792		770			22	2.9
All other non-interest expense		38,800		37,391	⁽²⁾		1,409	3.8
Income before income tax	$	19,099	$	6,699		$	12,400	185.1	%
Goodwill	$	24,191	$	24,191		$	—	—	%
Assets held for sale		—		3,000			(3,000)	*
Total assets	$	2,020,896	$	1,867,748		$	153,148	8.2	%

* 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 and $0.2 million SEC penalty previously reported under the Capital Management segment.~~

The Wealth Management segment reported income before income tax of ~~$6.2 million and $19.1~~$7.0 million for the three ~~and nine~~ months ended ~~September 30, 2021, respectively,~~March 31, 2022 compared to ~~$2.6 million and $6.7~~$5.9 million for the same ~~periods~~period in ~~2020.~~2021. The majority of our assets and liabilities are on the Wealth Management segment balance sheet and the increase in income before taxes is primarily driven by an increase in net interest income, after provision for loan losses, offset partially by an increase in non-interest expense. The increase in net interest income, after provision for loan losses, was primarily driven by an increase in average loans outstanding and ~~a decrease~~an increase in ~~the~~ average ~~cost of funds. Provision for~~ loan ~~losses decreased as a result of additional provision recorded in 2020 due to additional variability surrounding the COVID-19 loan modifications and increased economic uncertainty.~~yields. The ~~growth in revenues have outpaced the growth~~increase in non-interest expense inwas primarily driven by the ~~Wealth Management segment.~~addition of Teton’s operations.

5453

Table of Contents

Mortgage


	As of and for the Three Months Ended September 30,								As of or for the Three Months Ended March 31,
(Dollars in thousands)	2021		2020		$ Change		% Change
									2022		2021		$ Change		% Change
Total interest income	$	—	$	—	$	—	—	%	$	—	$	—	$	—	—	%
Total interest expense		—		—		—	—			—		—		—	—
Provision for loan losses		—		—		—	—			—		—		—	—
Net interest income, after provision for loan losses		—		—		—	—			—		—		—	—
Non-interest income		4,497		12,323		(7,826)	(63.5)			2,518		5,197		(2,679)	(51.5)
Total income		4,497		12,323		(7,826)	(63.5)			2,518		5,197		(2,679)	(51.5)
Depreciation and amortization expense		13		14		(1)	(7.1)			12		14		(2)	(14.3)
All other non-interest expense		2,217		2,067		150	7.3			2,201		3,061		(860)	(28.1)
Income before income tax	$	2,267	$	10,242	$	(7,975)	(77.9)		$	305	$	2,122	$	(1,817)	(85.6)
Total assets	$	55,376	$	105,149	$	(49,773)	(47.3)	%	$	37,188	$	185,858	$	(148,670)	(80.0)

	As of and for the Nine Months Ended September 30,
(Dollars in thousands)	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		13,621		25,024		(11,403)	(45.6)
Total income		13,621		25,024		(11,403)	(45.6)
Depreciation and amortization expense		40		56		(16)	(28.6)
All other non-interest expense		7,987		5,706		2,281	40.0
Income before income tax	$	5,594	$	19,262	$	(13,668)	(71.0)	%
Total assets	$	55,376	$	105,149	$	(49,773)	(47.3)	%

The Mortgage segment reported income before income tax of ~~$2.3 million and $5.6~~$0.3 million for the three ~~and nine~~ months ended ~~September 30, 2021, respectively,~~March 31, 2022, compared to ~~$10.2 million and $19.3~~$2.1 million for the same ~~periods~~period in ~~2020.~~2021. The overall decrease in non-interest income was primarily driven by a slowdown in new lock volume associated with ~~the~~rising interest rates and reduced housing inventory. The decrease ~~in refinance activity. The overall increase~~ in non-interest expense was ~~primarily~~ driven by ~~variable costs associated~~a reduction in headcount to better align the operations functions with the ~~increase~~slowdown in ~~mortgage originations during the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020.~~volume.

Financial Condition

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

~~Table of Contents~~


	September 30,		December 31,						March 31,		December 31,
(Dollars in thousands)	2021		2020		$ Change		% Change		2022		2021		$ Change		% Change
Balance Sheet Data:
Cash and cash equivalents	$	310,235	$	155,989	$	154,246	98.9	%	$	454,099	$	386,983	$	67,116	17.3	%
Investments		32,233		36,666		(4,433)	(12.1)			58,727		55,562		3,165	5.7
Gross loans		1,603,050		1,532,833		70,217	4.6
Loans (includes $6,380 and $0 measured at fair value, respectively)										1,923,825		1,949,137		(25,312)	(1.3)
Allowance for loan losses		(12,964)		(12,539)		(425)	3.4			(13,885)		(13,732)		(153)	1.1
Loans, net of allowance		1,590,086		1,520,294		69,792	4.6			1,909,940		1,935,405		(25,465)	(1.3)
Mortgage loans held for sale		51,309		161,843		(110,534)	(68.3)
Goodwill & other intangible assets, net		24,246		24,258		(12)	(0.0)
Mortgage loans held for sale, at fair value										33,663		30,620		3,043	9.9
Goodwill and other intangible assets, net										32,335		31,902		433	1.4
Company-owned life insurance		15,715		15,449		266	1.7			15,889		15,803		86	0.5
Other assets		52,448		59,156		(6,708)	(11.3)			71,891		71,099		792	1.1
Assets held for sale										117		115		2	1.7
Total assets	$	2,076,272	$	1,973,655	$	102,617	5.2		$	2,576,661	$	2,527,489	$	49,172	1.9

Deposits	$	1,782,299	$	1,619,910	$	162,389	10.0		$	2,272,112	$	2,205,703	$	66,409	3.0
Borrowings		97,574		173,854		(76,280)	(43.9)			60,099		77,660		(17,561)	(22.6)
Other liabilities		21,270		24,929		(3,659)	(14.7)			21,184		25,085		(3,901)	(15.6)
Total liabilities		1,901,143		1,818,693		82,450	4.5			2,353,395		2,308,448		44,947	1.9
Total shareholders’ equity		175,129		154,962		20,167	13.0			223,266		219,041		4,225	1.9
Total liabilities and shareholders’ equity	$	2,076,272	$	1,973,655	$	102,617	5.2	%	$	2,576,661	$	2,527,489	$	49,172	1.9

* Not meaningful

Cash and cash equivalents increased by ~~$154.2~~$67.1 million, or ~~98.9%~~17.3%, to ~~$310.2~~$454.1 million as of ~~September 30, 2021~~March 31, 2022 compared to December 31, ~~2020.~~2021. The increase in liquidity was driven by ~~organic~~ growth in ~~deposits~~deposit balances and a ~~reduction~~higher level of loan payoffs influenced by our high net worth and entrepreneurial clients selling businesses and properties to take advantage of significant appreciation in mortgage loans held for sale. Deposit growth was driven by new client relationships, in addition to increases in existing client accounts, and corporate initiatives to support current and future balance sheet growth. The decrease in mortgage loans held for sale balances was due to the ~~increase in loan sale volume.~~value of those assets. During the same period, investments ~~decreased~~increased by ~~$4.4~~$3.2 million, or ~~12.1%~~5.7%, to ~~$32.2~~$58.7 million as of ~~September 30, 2021.~~March 31, 2022. The increase is due to available-for-sale securities purchased during the quarter, offset partially by a decrease in valuation due to the rising interest rate environment.

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Loans ~~net of allowance increased~~decreased by ~~$69.8~~$25.3 million, or ~~4.6%~~1.3%, to ~~$1.59~~$1.92 billion as of ~~September 30, 2021~~March 31, 2022 compared to December 31, ~~2020.~~2021. The ~~increase~~decrease was primarily driven by ~~organic growth net of PPP loan forgiveness. We experienced growth~~a decrease in ~~all categories excluding~~ PPP loans ~~that are included~~of $30.1 million, offset partially by the Company’s purchase of $6.4 million of whole loans accounted for under the fair value option. See Note 14 – Fair Value in the ~~Cash, Securities and Other category.~~Notes to Condensed Consolidated Financial Statements.

Mortgage loans held for sale ~~decreased $110.5~~increased $3.0 million, or ~~68.3%~~9.9%, to ~~$51.3~~$33.7 million as of ~~September 30, 2021~~March 31, 2022 compared to December 31, ~~2020.~~2021. The ~~decrease~~increase was driven by ~~an increase in~~the timing of loan sale ~~volume.~~settlements at the end of the quarter.

~~Other~~Goodwill and other intangible assets, ~~decreased~~net increased by ~~$6.7~~$0.4 million, or ~~11.3%~~1.4%, to ~~$52.4~~$32.3 million as of ~~September 30, 2021~~March 31, 2022 compared to December 31, ~~2020. This~~2021. The increase was ~~primarily related~~driven by measurement period adjustments of $0.7 million to ~~a $7.7~~core deposit intangibles and ($0.2) million ~~decrease in balances related~~ to ~~unfunded mortgage IRLC.~~goodwill during the three months ended March 31, 2022.

~~Deposits~~Other assets increased ~~$162.4~~by $0.8 million, or ~~10.0%~~1.1%, to ~~$1.78 billion~~$71.9 million as of ~~September 30, 2021~~March 31, 2022 compared to December 31, ~~2020.~~2021. This was related to an increase in receivables related to the mortgage hedge position and by net purchase accounting adjustments of $0.2 million to equity warrants.

Deposits increased $66.4 million, or 3.0%, to $2.27 billion as of March 31, 2022 compared to December 31, 2021. The increase was primarily attributable to ~~an increase in non-interest bearing~~continued inflows of both noninterest-bearing and ~~money market~~interest-bearing deposits ~~resulting~~ from ~~inflows from commercial depositors and higher deposit balances across the Company’s clientele due to the improving economic and~~new business ~~environment.~~development efforts.

Money market deposit accounts increased ~~$57.8~~$51.6 million, or ~~6.8%~~4.9%, to ~~$905.2~~$1.11 million as of ~~September 30, 2021~~March 31, 2022 compared to December 31, ~~2020.~~2021. Time deposit accounts decreased ~~$35.7~~$13.8 million, or ~~20.7%~~8.1%, from December 31, ~~2020~~2021 to ~~$137.0~~$156.7 million as of ~~September 30, 2021.~~March 31, 2022. Negotiable order of withdrawal, or NOW accounts, increased ~~$24.8~~$9.7 million, or ~~21.9%~~3.1%, to ~~$137.8~~$319.6 million from December 31, ~~2020~~2021 to ~~September 30, 2021.~~March 31, 2022.

Borrowings decreased ~~$76.3~~$17.6 million, or ~~43.9%~~22.6%, to ~~$97.6~~$60.1 million as of ~~September 30, 2021~~March 31, 2022 compared to December 31, ~~2020.~~2021. The decrease is attributed to the redemption of subordinated notes on January 1, 2022 in the amount of $6.6 million and a reduction in outstanding advances on the Federal Reserve’s Paycheck Protection Program Loan Facility. Borrowing from this facility is expected to trend in the same direction as the PPP loan balances.

Other liabilities decreased ~~$3.7~~$3.9 million, or ~~14.7%~~15.6%, to ~~$21.3~~$21.2 million as of ~~September 30, 2021~~March 31, 2022 compared to December 31, ~~2020.~~2021. The decrease is primarily attributed to ~~decreases in salaries payable and payables related to~~ the ~~mortgage hedge position.~~payment of 2021 incentive compensation.

Total shareholders’ equity increased ~~$20.2~~$4.2 million, or ~~13.0%~~1.9%, from December 31, ~~2020~~2021 to ~~$175.1~~$223.3 million as of ~~September 30, 2021.~~March 31, 2022. 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)	2021			2020			2021			2020			2022			2021
Managed Trust Balance at Beginning of Period	$	1,892		$	1,520		$	1,890		$	1,750
Managed Trust Balance as of Beginning of Period													$	2,204		$	1,890
New relationships		9			-			25			13			24			15
Closed relationships		(1)			(1)			(2)			(12)			(1)			—
Contributions		13			11			41			75			2			18
Withdrawals		(25)			(10)			(179)			(110)			(101)			(120)
Market change, net		74			140			187			(56)			(33)			18
Ending Balance	$	1,962		$	1,660		$	1,962		$	1,660		$	2,095		$	1,821
Yield*		0.17	%		0.19	%		0.17	%		0.19	%		0.17	%		0.19	%

Directed Trust Balance at Beginning of Period	$	1,069		$	883		$	951		$	989
Directed Trust Balance as of Beginning of Period													$	1,309		$	951
New relationships		9			9			91			14			—			76
Closed relationships		—			—		��	(7)			(5)			—			—
Contributions		7			9			25			33			7			5
Withdrawals		(3)			(21)			(17)			(91)			(3)			(5)
Market change, net		17			28			56			(32)			(16)			4
Ending Balance	$	1,099		$	908		$	1,099		$	908		$	1,297		$	1,031
Yield*		0.09	%		0.08	%		0.08	%		0.08	%		0.09	%		0.09	%

Investment Agency Balance at Beginning of Period	$	2,044		$	1,956		$	1,840		$	2,009
Investment Agency Balance as of Beginning of Period													$	2,063		$	1,840
New relationships		12			18			73			97			11			41
Closed relationships		(35)			(2)			(58)			(11)			(16)			(14)
Contributions		73			71			241			178			53			95
Withdrawals		(45)			(45)			(173)			(174)			(50)			(75)
Market change, net		(30)			41			96			(60)			(118)			46
Ending Balance	$	2,019		$	2,039		$	2,019		$	2,039		$	1,943		$	1,933
Yield*		0.72	%		0.67	%		0.69	%		0.65	%		0.73	%		0.68	%

Custody Balance at Beginning of Period	$	614		$	474		$	518		$	452
Custody Balance as of Beginning of Period													$	633		$	518
New relationships		-			7			—			7			—			—
Closed relationships		-			—			(1)			(2)			—			(1)
Contributions		3			2			74			78			78			70
Withdrawals		(11)			(57)			(21)			(72)			(9)			(2)
Market change, net		7			36			43			(1)			2			10
Ending Balance	$	613		$	462		$	613		$	462		$	704		$	595
Yield*		0.03	%		0.03	%		0.03	%		0.03	%		0.03	%		0.03	%

401(k)/Retirement Balance at Beginning of Period	$	1,143		$	919		$	1,056		$	988
401(k)/Retirement Balance as of Beginning of Period													$	1,143		$	1,056
New relationships		-			8			8			12			13			7
Closed relationships		(4)			(2)			(56)			(46)			(38)			(52)
Contributions		30			41			85			101			23			27
Withdrawals		(23)			(20)			(81)			(61)			(33)			(28)
Market change, net		67			116			201			68			52			96
Ending Balance⁽¹⁾	$	1,213		$	1,062		$	1,213		$	1,062		$	1,160		$	1,106
Yield*		0.14	%		0.14	%		0.14	%		0.15	%		0.14	%		0.15	%

Total Assets Under Management at Beginning of Period	$	6,762		$	5,752		$	6,255		$	6,188
Total Assets Under Management as of Beginning of Period													$	7,352		$	6,255
New relationships		30			42			197			143			48			139
Closed relationships		(40)			(5)			(124)			(76)			(55)			(67)
Contributions		126			134			466			465			163			215
Withdrawals		(107)			(153)			(471)			(508)			(196)			(230)
Market change, net		135			361			583			(81)			(113)			174
Total Assets Under Management	$	6,906		$	6,131		$	6,906		$	6,131		$	7,199		$	6,486
Yield*		0.30	%		0.31	%		0.29	%		0.31	%		0.29	%		0.30	%

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

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

Assets under management decreased $152.5 million, or 2.1%, for the three months ended March 31, 2022. The decrease was primarily attributable to unfavorable market conditions resulting in a decrease in the value of AUM balances.

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Assets under management increased $143.8 million, or 2.1%, for the three months ended September 30, 2021 and increased $650.6 million, or 10.4%, for the nine months ended September 30, 2021. The increase was primarily attributable to improving market conditions resulting in an increase in the 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, net of tax. All our investments in securities were classified as available-for-sale ~~for~~during 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 ~~tables summarize~~presents the amortized cost and estimated fair value of our investment securities as of ~~September 30, 2021 and December 31, 2020:~~the dates noted (dollars in thousands):


	September 30, 2021								March 31, 2022
			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	$	—	$	(1)	$	249	$	250	$	—	$	(11)	$	239
U.S Government Agency										2,959		—		(92)		2,867
Corporate bonds		8,117		249		(10)		8,356		17,110		142		(169)		17,083
Government National Mortgage Association ("GNMA") mortgage -backed securities—residential		20,488		351		(28)		20,811		24,890		4		(1,352)		23,542
Federal National Mortgage Association ("FNMA") mortgage-backed securities—residential		1,102		53		—		1,155		13,779		3		(780)		13,002
Government collateralized mortgage obligations ("GMO") and mortgage-backed securities ("MBS") - commercial										672		—		(14)		658
Corporate collateralized mortgage obligations ("CMO") and mortgage-backed securities ("MBS")		1,645		35		(18)		1,662		1,362		—		(26)		1,336
Total securities available-for-sale	$	31,602	$	688	$	(57)	$	32,233	$	61,022	$	149	$	(2,444)	$	58,727


	December 31, 2020								December 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)	$	247
U.S. Government Agency										3,522		—		—		3,522
Corporate bonds		6,000		55		(11)		6,044		8,113		227		(15)		8,325
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
Government National Mortgage Association ("GNMA") mortgage -backed securities—residential										26,611		185		(146)		26,650
Federal National Mortgage Association ("FNMA") mortgage-backed securities—residential										14,400		43		—		14,443
Government collateralized mortgage obligations ("GMO") and mortgage-backed securities ("MBS") - commercial										878		—		—		878
Corporate collateralized mortgage obligations ("CMO") and mortgage-backed securities ("MBS")										1,492		23		(18)		1,497
Total securities available-for-sale	$	35,750	$	980	$	(64)	$	36,666	$	55,266	$	478	$	(182)	$	55,562

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The following ~~tables represent~~presents the book value of our contractual maturities and weighted average yield for our investment securities as of the dates presented. Contractual maturities may differ from expected maturities because issuers can have the right to call or prepay obligations without penalties. Our investments are taxable securities. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security as of March 31, 2022. Weighted average

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


	Maturity as of September 30, 2021																Maturity as of March 31, 2022
	One Year or Less				One to Five Years				Five to Ten Years				After Ten Years				One Year or Less				One to Five Years				Five to Ten Years				After Ten Years
			Weighted				Weighted				Weighted				Weighted				Weighted				Weighted				Weighted				Weighted
	Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average
(Dollars in thousands)	Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield
Available-for-sale:
U.S. Treasury debt	$	—	—	%	$	250	*	%	$	—	—	%	$	—	—	%	$	—	—	%	$	250	*	%	$	—	—	%	$	—	—	%
U.S. Government agency																		254	0.01			124	*			1,097	0.03			1,484	0.06
Corporate bonds		—	—			—	—			8,117	1.24			—	—			—	—			—	—			17,110	1.30			—	—
GNMA mortgage-backed securities - residential		—	—			—	—			—	—			20,488	1.30			—	—			—	—			—	—			24,890	0.77
FNMA mortgage-backed securities - residential		—	—			—	—			—	—			1,102	0.08			—	—			161	0.01			2,063	0.08			11,555	0.31
Government CMO and MBS - commercial																		130	0.01			52	*			—	—			490	0.02
Corporate CMO and MBS		—	—			—	—			34	*			1,611	0.15			—	—			—	—			28	*			1,334	0.06
Total available-for-sale	$	—	—	%	$	250	*	%	$	8,151	1.24	%	$	23,201	1.53	%	$	384	0.02	%	$	587	0.01	%	$	20,298	1.41	%	$	39,753	1.22	%


	Maturity as of December 31, 2020																Maturity as of December 31, 2021
	One Year or Less				One to Five Years				Five to Ten Years				After Ten Years				One Year or Less				One to Five Years				Five to Ten Years				After Ten Years
			Weighted				Weighted				Weighted				Weighted				Weighted				Weighted				Weighted				Weighted
	Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average
(Dollars in thousands)	Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield
Available-for-sale:
U.S. Treasury debt	$	250	0.02	%	$	—	—	%	$	—	—	%	$	—	—	%	$	—	—	%	$	250	*	%	$	—	—	%	$	—	—	%
U.S. Government agency																		506	0.02			164	*			1,190	0.04			1,662	0.07
Corporate bonds		—	—			1,250	0.17			—	—			4,750	0.60			—	—			—	—			8,113	0.71			—	—
GNMA mortgage-backed securities - residential		—	—			—	—			—	—			23,806	1.59			—	—			—	—			—	—			26,611	0.92
FNMA mortgage-backed securities - residential		—	—			—	—			—	—			1,616	0.10			—	—			176	0.01			2,183	0.10			12,041	0.36
Government CMO and MBS - commercial																		—	—			202	0.01			—	—			676	0.04
Corporate CMO and MBS		—	—			—	—			43	*			4,035	0.31			—	—			—	—			33	*			1,459	0.07
Total available-for-sale	$	250	0.02	%	$	1,250	0.17	%	$	43	*	%	$	34,207	2.60	%	$	506	0.02	%	$	792	0.02	%	$	11,519	0.85	%	$	42,449	1.46	%

* Not meaningful

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

Loan Portfolio

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

In addition to originating loans for our own portfolio, we conduct mortgage banking activities in which we originate and sell servicing-released, whole loans in the secondary market. Our mortgage banking loan sale activities are primarily directed at originating single family mortgages that are priced and underwritten to conform to previously agreed-upon criteria before loan funding and are delivered to the investor shortly after funding. The level of future loan originations, loan sales, and loan repayments depends on overall credit availability, the interest rate environment, the

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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, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, we had mortgage loans held for sale of ~~$51.3~~$33.7 million and ~~$161.8~~$30.6 million, respectively, in residential mortgage loans we originated.

Beginning in the first quarter, the Company entered into whole loan purchase agreements to acquire third party originated and serviced unsecured consumer loans to hold for investment. As of ~~September 30, 2021,~~March 31, 2022, the Company had purchased $6.3 million in loan balances which were accounted for under the fair value option and had a carrying value of $6.4 million. See Note 14 – Fair Value in the Notes to Condensed Consolidated Financial Statements.

As of March 31, 2022, the Company has ~~$61.9~~$16.7 million in PPP loans outstanding with ~~$1.2~~$0.3 million in

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remaining fees to be recognized. The remaining fees represent the net amount of the fees from the SBA for participation in the PPP less the loan origination costs on these loans. The current amortization of this income is being recognized over a ~~two or five-year~~two-year period, based on the PPP loan terms. If a loan receives partial forgiveness, the income related to the unforgiven balance is amortized over the remaining life of the loan based on the term in the note, which is five years for most PPP loans. Ifhowever, if a loan receives full forgiveness from the SBA, the remaining income will be recognized upon receipt of the funds from the SBA. ~~As of September 30, 2021,~~For PPP balances not forgiven, the ~~Company had submitted loans with original loan amounts of $241.5 million to the SBA for forgiveness~~remaining net fee is extended and ~~had received forgiveness totaling $214.8 million.~~amortized over a five-year payback period.

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


	September 30,				December 31,				March 31,				December 31,
	2021				2020				2022				2021
(Dollars in thousands)	Amount		% of Total		Amount		% of Total
									Amount		% of Total		Amount		% of Total
Cash, Securities and Other(1)	$	293,837	18.3	%	$	357,020	23.3	%	$	271,811	14.1	%	$	295,948	15.2	%
Construction and Development		132,141	8.2			131,111	8.5			151,651	7.8			178,716	9.1
1-4 Family Residential		502,439	31.3			455,038	29.7			602,412	31.2			580,872	29.7
Non-Owner Occupied CRE		358,369	22.4			281,943	18.4			455,715	23.6			482,622	24.7
Owner Occupied CRE		167,638	10.5			163,042	10.6			212,401	11.0			212,426	10.9
Commercial and Industrial		148,959	9.3			146,031	9.5			237,144	12.3			203,584	10.4
Total loans held for investment⁽¹⁾⁽²⁾	$	1,603,383	100.0	%	$	1,534,185	100.0	%	$	1,931,134	100.0	%	$	1,954,168	100.0	%
Mortgage loans held for sale	$	51,309			$	161,843
Mortgage loans held for sale, at fair value									$	33,663			$	30,620

⁽¹⁾ Includes PPP loans of $16.7 million and $46.8 million as of March 31, 2022 and December 31, 2021, respectively. Also, includes loans held for investment accounted for under fair value option of $6.4 million as of March 31, 2022.

⁽²⁾Loans held for investment exclude deferred ~~(fees) costs~~fees and unamortized premiums/(unaccreted discounts), net of ~~$(0.3)~~($7.3) million and ~~$(1.4)~~($5.0) million as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

●

Cash, Securities and Other—consists of consumer and commercial purpose loans, which are primarily secured by securities managed and under custody with us, cash on deposit with us, or life insurance policies. In addition, loans in this portfolio are collateralized with other sources of consumer collateral and an immaterial amount of each loan may be unsecured. This segment of our portfolio is affected by a variety of local and national economic factors affecting borrowers’ employment prospects, income levels, and overall economic sentiment. PPP loans that are fully guaranteed by the SBA are classified within this line ~~item.~~item and had balances of $16.7 million and $46.8 million as of March 31, 2022 and December 31, 2021, respectively. Unsecured consumer loans accounted for under the fair value option are also classified within this line item and had a balance of $6.4 million as of March 31, 2022. There were no unsecured consumer loans accounted for at fair value as of December 31, 2021.

●

Construction and Development—consists of loans to finance the construction of residential and non-residential properties. These loans are dependent on the strength of the industries of the related borrowers and the risks consistent with construction projects.

●

1-4 Family Residential—consists of loans and home equity lines of credit secured by 1-4 family residential properties. These loans typically enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the owner. In addition, some borrowers secure a commercial purpose loan with owner occupied or non-owner occupied 1-4 family residential properties. Loans in this segment are dependent on the industries tied to these loans as well as the national and local economies, and local residential and commercial real estate markets.

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●

Commercial Real Estate, Owner Occupied, and Non-Owner Occupied—consists of commercial loans collateralized by real estate. These loans may be collateralized by owner occupied or non-owner occupied real estate, as well as multi-family residential real estate. These loans are dependent on the strength of the industries of the related borrowers and the success of their businesses.

●

Commercial and Industrial—consists of commercial and industrial loans, including working capital lines of credit, permanent working capital term loans, business asset loans, acquisition, expansion and development loans, and other loan products, primarily in our target markets. This portfolio primarily consists of term loans and lines of credit which are dependent on the strength of the industries of the related borrowers and the success of their businesses. MSLP loans of $6.8 million as of March 31, 2022 and December 31, 2021 are classified within this line item.

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


	As of September 30, 2021										As of March 31, 2022
	One Year			One Through			After				One Year			One Through			Five Through		After
(Dollars in thousands)	or Less			Five Years			Five Years		Total		or Less			Five Years			Fifteen Years		Fifteen Years		Total
Cash, Securities and Other(2)	$	92,277	⁽¹⁾	$	195,500	⁽¹⁾	$	6,060	$	293,837	$	112,848	⁽¹⁾	$	149,915	⁽¹⁾	$	3,807	$	5,241	$	271,811
Construction and Development		54,187			72,132			5,822		132,141		77,657			68,187			5,807		—		151,651
1-4 Family Residential		35,447			87,384			379,608		502,439		29,601			126,264			41,782		404,765		602,412
Non-Owner Occupied CRE		46,750			213,542			98,077		358,369		36,884			287,384			115,373		16,074		455,715
Owner Occupied CRE		5,404			50,447			111,787		167,638		7,439			67,219			127,199		10,544		212,401
Commercial and Industrial		67,861			43,410			37,688		148,959		41,623			144,256			51,265		—		237,144
Total loans	$	301,926		$	662,415		$	639,042	$	1,603,383	$	306,052		$	843,225		$	345,233	$	436,624	$	1,931,134
Amounts with fixed rates	$	78,586		$	423,108		$	236,481	$	738,175	$	78,476		$	548,557		$	242,124	$	28,755	$	897,912
Amounts with floating rates		223,340			239,307			402,561		865,208		227,576			294,668			103,109		407,869		1,033,222
Total loans	$	301,926		$	662,415		$	639,042	$	1,603,383	$	306,052		$	843,225		$	345,233	$	436,624	$	1,931,134


	As of December 31, 2020									As of December 31, 2021
	One Year		One Through			After				One Year			One Through			Five Through		After
(Dollars in thousands)	or Less		Five Years			Five Years		Total		or Less			Five Years			Fifteen Years		Fifteen Years		Total
Cash, Securities and Other	$	90,053	$	259,611	⁽¹⁾	$	7,356	$	357,020	$	136,298	⁽¹⁾	$	148,889	⁽¹⁾	$	5,561	$	5,200	$	295,948
Construction and Development		78,900		50,703			1,508		131,111		74,111			96,817			7,788		—		178,716
1-4 Family Residential		41,212		78,359			335,467		455,038		24,824			126,681			33,085		396,282		580,872
Non-Owner Occupied CRE		25,801		175,476			80,666		281,943		66,036			275,057			125,330		16,199		482,622
Owner Occupied CRE		8,355		54,403			100,284		163,042		5,255			66,656			129,890		10,625		212,426
Commercial and Industrial		47,397		68,607			30,027		146,031		46,742			107,596			49,246		—		203,584
Total loans	$	291,718	$	687,159		$	555,308	$	1,534,185	$	353,266		$	821,696		$	350,900	$	428,306	$	1,954,168
Amounts with fixed rates	$	76,131	$	469,155		$	205,548	$	750,834	$	120,549		$	506,040		$	253,223	$	26,682	$	906,494
Amounts with floating rates		215,587		218,004			349,760		783,351		232,717			315,656			97,677		401,624		1,047,674
Total loans	$	291,718	$	687,159		$	555,308	$	1,534,185	$	353,266		$	821,696		$	350,900	$	428,306	$	1,954,168

⁽¹⁾Includes PPP loans.

⁽²⁾ Includes loans held for investment accounted for under fair value option of $6.4 million.

Loan Modifications

The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as a TDR. The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from Federal Reserve and the FDIC confirmed with the FASB that

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short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program meets that definition. In accordance with that guidance, the Company is recognizing interest income on all loans modified for temporary payment moratoriums, primarily for a period of 180 days or less.

In 2021, the deferral period ended for all non-acquired loans previously modified and payments resumed under the original terms. As of ~~September 30, 2021,~~March 31, 2022, the Company’s ~~loans include seventy-two modified loans, including acquired loans, across multiple industries in the amount of $135.0 million, representing 8.4% of total loans. No~~loan portfolio included 69 non-acquired loans which ~~participated in~~were previously modified under the loan modification program, ~~were delinquent according to Bank policy~~totaling $109.8 million. Through the Teton Acquisition, the Company acquired 18 loans totaling $8.3 million as of ~~September 30, 2021. No loans~~March 31, 2022, which ~~participated in the loan modification program~~ were previously modified and are still in their deferral ~~period as of September 30, 2021.~~period.

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industries we believe may be more impacted by the pandemic, for instance those loans where there may be a greater than 50% probability of a downgrade, covenant violation or 20% reduction in collateral position. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Non-Performing Assets

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

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.

The amount of lost interest for non-accrual loans was ~~an an~~ immaterial ~~amount~~and $0.1 million for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020~~respectively. ~~For each of the nine months ended September 30, 2021 and 2020, the amount of lost interest was $0.2 million.~~

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

Table of ~~one remaining OREO property.~~Contents

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


	September 30,			December 31,			March 31,			December 31,
(Dollars in thousands)	2021			2020
							2022			2021
Non-accrual loans by category⁽¹⁾
Cash, Securities and Other	$	41		$	50		$	6		$	8
Construction and Development		—			—
1-4 Family Residential		83			—			72			75
Non-Owner Occupied CRE		—			—
Owner Occupied CRE		1,250			479			1,222			1,241
Commercial and Industrial		2,984			3,529			2,926			2,938
Total non-accrual loans		4,358			4,058			4,226			4,262
TDRs still accruing		—			—			51			55
Accruing loans 90 or more days past due		—			—			32			10
Total non-performing loans		4,358			4,058			4,309			4,327
OREO		—			194
Total non-performing assets	$	4,358		$	4,252		$	4,309		$	4,327
Non-accrual loans to total loans⁽²⁾								0.22	%		0.22	%
Non-performing loans to total loans⁽²⁾		0.27	%		0.26	%		0.22			0.22
Non-performing assets to total assets		0.21			0.22			0.17			0.17
Allowance for loan losses to non-accrual loans								328.56			322.20
Allowance for loan losses to non-performing loans		297.48	%		308.99	%		322.23			317.36

⁽¹⁾ As of ~~September 30, 2021, seven non-accrual loans, totaling $2.1 million, were not classified as TDRs. As of~~March 31, 2022 and December 31, ~~2020, two~~2021, all but one non-accrual ~~loans~~loan, totaling an immaterial amount, were ~~not~~also classified as TDRs. See Note 34 – Loans and the Allowance for Loan Losses to the condensed consolidated financial statements.

⁽²⁾ Excludes mortgage loans held for sale of ~~$51.3~~$33.7 million and ~~$161.8~~$30.6 million as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

Potential Problem Loans

We categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information,

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and current economic trends, among other factors. We analyze loans individually by classifying the loans by credit risk on a quarterly basis, which are segregated into the following definitions for risk ratings:

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

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

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

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

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As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021, non-performing loans of ~~$4.4~~$4.3 million ~~and $4.1 million, respectively,~~ were included in the substandard category in the table below. The following ~~tables present,~~presents, by class and by credit quality indicator, the recorded investment in our loans as of the dates ~~indicated:~~noted (dollars in thousands):


	As of September 30, 2021								As of December 31, 2020								As of March 31, 2022
			Special								Special								Special
(Dollars in thousands)	Pass		Mention		Substandard		Total		Pass		Mention		Substandard		Total
																	Pass		Mention		Substandard		Not Rated		Total
Cash, Securities and Other(1)	$	293,796	$	—	$	41	$	293,837	$	356,970	$	—	$	50	$	357,020	$	265,425	$	—	$	6		6,380	$	271,811
Construction and Development		129,618		2,523		—		132,141		131,111		—		—		131,111		151,651		—		—		—		151,651
1-4 Family Residential		502,356		—		83		502,439		451,918		—		3,120		455,038		602,340		—		72		—		602,412
Non-Owner Occupied CRE		352,429		5,940		—		358,369		275,627		6,316		—		281,943		449,811		5,904		—		—		455,715
Owner Occupied CRE		165,690		—		1,948		167,638		161,850		—		1,192		163,042		210,492		—		1,909		—		212,401
Commercial and Industrial		144,093		—		4,866		148,959		140,432		—		5,599		146,031		231,938		393		4,813		—		237,144
Total	$	1,587,982	$	8,463	$	6,938	$	1,603,383	$	1,517,908	$	6,316	$	9,961	$	1,534,185	$	1,911,657	$	6,297	$	6,800	$	6,380	$	1,931,134


	As of December 31, 2021
			Special
	Pass		Mention		Substandard		Not Rated		Total
Cash, Securities and Other⁽¹⁾	$	295,940	$	—	$	8		—	$	295,948
Construction and Development		176,194		2,522		—		—		178,716
1-4 Family Residential		580,797		—		75		—		580,872
Non-Owner Occupied CRE		476,670		5,952		—		—		482,622
Owner Occupied CRE		210,493		—		1,933		—		212,426
Commercial and Industrial		198,368		401		4,815		—		203,584
Total	$	1,938,462	$	8,875	$	6,831	$	—	$	1,954,168

⁽¹⁾Includes PPP loans of $16.7 million and $46.8 million as of March 31, 2022 and December 31, 2021, respectively. Also includes loans held for investment accounted for under fair value option of $6.4 million as of March 31, 2022.

Allowance for Loan Losses

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

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

We are closely monitoring the changing dynamics in the economy and the ~~client impact driven by the COVID-19 pandemic. We have intensified our portfolio management, focusing on higher impacted industries and commercial property types.~~related client. Our clientele is generally comprised of high net-worth individuals and commercial borrowers with strong credit profiles and multiple sources of repayment. There was a ~~$0.4~~$0.2 million provision expense taken during the ~~third~~first quarter of ~~2021.~~2022. 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, 2021.~~March 31, 2022.

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(Dollars in thousands)	2021			2020			2021			2020
													2022			2021
Average loans outstanding⁽¹⁾⁽²⁾	$	1,592,800		$	1,462,872		$	1,573,919		$	1,250,052		$	1,922,770		$	1,554,990
Gross loans outstanding at end of period⁽³⁾	$	1,603,050		$	1,506,076		$	1,603,050		$	1,506,076
Total loans outstanding at end of period⁽³⁾													$	1,923,825		$	1,543,926
Allowance for loan losses at beginning of period	$	12,552		$	10,354		$	12,539		$	7,875		$	13,732		$	12,539
Provision for loan losses		406			1,496			418			3,987			210			—
Charge-offs:
Cash, Securities and Other		—			6			—			30			97			—
Construction and Development		—			—			—			—			—			—
1-4 Family Residential		—			—			—			—			—			—
Non-Owner Occupied CRE		—			—			—			—			—			—
Owner Occupied CRE		—			—			—			—			—			—
Commercial and Industrial		—			—			—			—			—			—
Total charge-offs		—			6			—			30			97			—
Recoveries:
Cash, Securities and Other		6			1			7			13			40			—
Construction and Development		—			—			—			—			—			—
1-4 Family Residential		—			—			—			—			—			—
Non-Owner Occupied CRE		—			—			—			—			—			—
Owner Occupied CRE		—			—			—			—			—			—
Commercial and Industrial		—			—			—			—			—			—
Total recoveries		6			1			7			13			40			—
Net charge-offs (recoveries)		(6)			5			(7)			17			57			—
Allowance for loan losses at end of period	$	12,964		$	11,845		$	12,964		$	11,845		$	13,885		$	12,539
Allowance for loan losses to total loans⁽⁴⁾		0.81	%		0.79	%		0.81	%		0.79	%		0.72	%		0.81	%
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 ~~$54.7~~$22.7 million and ~~$94.7~~$175.9 million for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, respectively and $105.3 million and $67.0 million for the nine months ended September 30, 2021 and 2020,~~ respectively.

⁽³⁾ Excludes mortgage loans held for sale of ~~$51.3~~$33.7 million and ~~$89.9~~$176.6 million as of ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively.

⁽⁴⁾ End of period loans as of ~~September 30, 2021~~March 31, 2022 include ~~$117.4~~$323.6 million in acquired loans, ~~$61.8~~$13.1 million in bank originated PPP loans, ~~and $0.1~~$3.6 million of acquired PPP ~~loans.~~loans, and $6.4 million of loans held for investment accounted for under the fair value option. No reserve is allocated for those loans. Excluding these loans would result in an increase of the ratio for the three months ended ~~September 30, 2021.~~March 31, 2022.

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

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

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	As of September 30,				As of December 31,				As of March 31,				As of December 31,
	2021				2020				2022				2021
(Dollars in thousands)	Amount		%⁽¹⁾		Amount		%⁽¹⁾		Amount		%⁽¹⁾		Amount		%⁽¹⁾
Cash, Securities and Other	$	2,130	18.3	%	$	2,579	23.3	%	$	1,723	14.1	%	$	1,864	15.2	%
Construction and Development		919	8.2			932	8.5			954	7.8			1,092	9.1
1-4 Family Residential		3,496	31.3			3,233	29.7			3,789	31.2			3,553	29.7
Non-Owner Occupied CRE		2,494	22.4			2,004	18.4			2,867	23.6			2,952	24.7
Owner Occupied CRE		1,158	10.5			1,159	10.6			1,328	11.0			1,292	10.9
Commercial and Industrial		2,767	9.3			2,632	9.5			3,224	12.3			2,979	10.4
Total allowance for loan losses	$	12,964	100.0	%	$	12,539	100.0	%	$	13,885	100.0	%	$	13,732	100.0	%

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

Deferred Tax Assets, Net

Deferred tax assets, net represent the differences in timing of when items are recognized for GAAP purposes and when they are recognized for tax purposes, as well as our net operating losses. Our deferred tax assets, net are valued based on the amounts that are expected to be recovered in the future utilizing the tax rates in effect at the time recognized. Our deferred tax assets, net as of ~~September 30, 2021, decreased $0.1~~March 31, 2022, increased $0.7 million, or ~~2.1%~~10.2%, from December 31, ~~2020.~~2021.

Deposits

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

Total deposits increased by ~~$162.4~~$66.4 million, or ~~10.0%~~3.0%, to ~~$1.78~~$2.27 billion as of ~~September 30, 2021~~March 31, 2022 from December 31, ~~2020.~~2021. Total average deposits for the three months ended ~~September 30, 2021~~March 31, 2022 were ~~$1.72~~$2.27 billion, an increase of ~~$260.2~~$553.3 million, or ~~17.8%~~32.2%, compared to ~~$1.46~~$1.72 billion as of ~~September 30, 2020.~~March 31, 2021. The increase in total deposits from December 31, ~~2020~~2021 was attributable to continued ~~organic growth with~~inflows of both noninterest-bearing and interest-bearing deposits from new ~~client accounts as well as increased deposit balances within the existing deposit accounts, offset partially by intentional runoff of higher rate non-relationship deposits.~~business development efforts.

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


	For the Three Month Period Ending March 31,
	2022				2021
	Average		Average		Average		Average
	Balance		Rate		Balance		Rate
Deposits
Money market deposit accounts	$	1,095,317	0.20	%	$	878,004	0.25	%
Demand deposit accounts		308,579	0.16			115,555	0.18
Uninsured time deposits		53,632	1.01			80,561	1.23
Other time deposits		114,943	0.46			82,620	0.61
Total time deposits		168,575	0.64			163,181	0.91
Savings accounts		32,843	0.05			6,270	0.03
Total interest-bearing deposits		1,605,314	0.23			1,163,010	0.33
Noninterest-bearing accounts		668,705				557,707
Total deposits	$	2,274,019	0.17		$	1,720,717	0.23

Average noninterest-bearing deposits to average total deposits was 29.4% and 32.4% for the ~~periods below:~~three months ended March 31, 2022 and 2021, respectively.

For the Three Month Period Ending September 30,

2021

2020


Average

Average

Average

Average

(Dollars in thousands)

Balance

Rate

Balance

Rate

Deposits









Money market deposit accounts

$
881,853

0.22
%
$
774,615

0.28
%
Demand deposit accounts

133,681

0.16

95,000

0.23

Certificates and other time deposits > $250k

64,971

1.19

69,821

1.66

Certificates and other time deposits < $250k

74,298

0.49

99,481

0.73

Total time deposits

139,269

0.82

169,302

1.11

Savings accounts

5,630

0.03

6,404

0.04

Total interest-bearing deposits

1,160,433

0.29

1,045,321

0.41

Noninterest-bearing accounts

562,569



417,502



Total deposits

$
1,723,002

0.19
%
$
1,462,823

0.29
%

Our average cost of funds was 0.24% and 0.31% for the three months ended March 31, 2022 and 2021, respectively. The decrease in cost of funds was driven by a 10 basis point reduction in interest bearing deposit costs due to the intentional reduction in higher rate non-relationship deposit balances and repricing of term deposits.

Total money market accounts as of March 31, 2022 were $1.11 billion, an increase of $51.6 million, or 4.9%, compared to December 31, 2021. NOW accounts increased $9.7 million, or 3.1%, to $319.6 million compared to December 31, 2021.

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For the Nine Month Period Ending September 30,

2021

2020


Average

Average

Average

Average

(Dollars in thousands)

Balance

Rate

Balance

Rate

Deposits









Money market deposit accounts

$
879,413

0.23
%
$
689,911

0.53
%
NOW accounts

126,544

0.17

88,852

0.27

Certificates and other time deposits > $250k

61,356

1.28

58,839

1.92

Certificates and other time deposits < $250k

89,539

0.58

92,661

1.43

Total time deposits

150,895

0.87

151,500

1.62

Savings accounts

6,198

0.03

5,426

0.09

Total interest-bearing deposits

1,163,050

0.31

935,689

0.68

Noninterest-bearing accounts

553,314



350,475



Total deposits

$
1,716,364

0.21
%
$
1,286,164

0.50
%

Average noninterest-bearing deposits to average total deposits was 32.7% and 28.5% for the three months ended September 30, 2021 and 2020, respectively, and 32.2% and 27.3% for the nine months ended September 30, 2021 and 2020, respectively.

Our average cost of funds was 0.28% and 0.35% for the three months ended September 30, 2021 and 2020, respectively, and 0.29% and 0.55% for the nine months ended September 30, 2021 and 2020, respectively. The decrease in cost of funds was driven by a reduction in deposit rates consistent with the lower interest rate environment, and increase in noninterest-bearing deposits and the intentional reduction in higher rate non-relationship deposit balances.

Total money market accounts as of September 30, 2021 were $905.2 million, an increase of $57.8 million, or 6.8%, compared to $847.4 million as of December 31, 2020. NOW accounts increased $24.8 million, or 21.9%, to $137.8 million compared to December 31, 2020.

Total time deposits as of ~~September 30, 2021~~March 31, 2022 were ~~$137.0~~$156.7 million, a decrease of ~~$35.7~~$13.8 million, or ~~20.7%~~8.1%, from December 31, ~~2020.~~2021.

The following ~~table represents~~presents the amount of certificates of deposit by time remaining until maturity as of ~~September 30, 2021:~~March 31, 2022 (dollars in thousands):


	As of September 30, 2021										Three Months or Less		Three to Six Months		Six to 12 Months		After 12 Months		Total
	Maturity Within:
(Dollars in thousands)	Three Months or Less		Three to Six Months		Six to 12 Months		After 12 Months		Total
Time, $250,000 and over	$	18,001	$	6,514	$	19,404	$	20,983	$	64,902
Uninsured Time Deposits											$	6,221	$	28,589	$	3,461	$	14,624	$	52,895
Other		21,976		18,751		12,675		18,711		72,113		18,164		24,775		28,710		32,134		103,783
Total	$	39,977	$	25,265	$	32,079	$	39,694	$	137,015	$	24,385	$	53,364	$	32,171	$	46,758	$	156,678

Borrowings

We have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, borrowings totaled ~~$97.6~~$60.1 million and ~~$173.9~~$77.7 million, respectively. On ~~August 31, 2021,~~January 1, 2022, the Company ~~completed the issuance and sale of~~redeemed subordinated notes ~~totaling $15.0 million.~~due December 31, 2026 in the amount of $6.6 million, which were redeemable on or after January 1, 2022.

The decrease in other borrowings is ~~primarily~~ attributed to the paydown of loans in the Paycheck Protection Program Loan Facility (“PPPLF”) from the Federal Reserve with a period end balance of ~~$43.6 million.~~$12.6 million and the redemption of $6.6 million in subordinated notes. Borrowing from ~~this facility~~the PPPLF is expected to trend in the same direction as the PPP loan balances. The ~~table below~~following presents balances of each of the borrowing facilities as of the dates ~~indicated:~~noted (dollars in thousands):

September 30,

December 31,
(Dollars in thousands)

2021

2020
Borrowings




FHLB borrowings

$
15,000

$
15,000
Federal Reserve borrowings

43,564

134,563
Subordinated notes

39,010

24,291
Total

$
97,574

$
173,854

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	March 31,		December 31,
	2022		2021
Borrowings
FHLB borrowings	$	15,000	$	15,000
Federal Reserve borrowings		12,576		23,629
Subordinated notes		32,523		39,031
Total	$	60,099	$	77,660

FHLB

We have a blanket pledge and security agreement with FHLB that requires certain loans and securities to be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 amounted to ~~$767.8~~$815.5 million and ~~$668.6~~$771.4 million, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional ~~$504.7~~$541.2 million as of ~~September 30, 2021.~~March 31, 2022.


	As of and for the			As of or for the
	Nine Months Ended			Three Months Ended
	September 30,			March 31,
(Dollars in thousands)	2021
				2022
Short-term borrowings:
Maximum outstanding at any month-end during the period	$	15,000		$	15,000
Balance outstanding at end of period		15,000			15,000
Average outstanding during the period	$	15,000			15,000
Average interest rate during the period		0.32	%		0.32	%
Average interest rate at the end of the period		0.32	%		0.32

The Bank has borrowing capacity associated with three unsecured federal funds lines of credit up to $10.0 million, $19.0 million, and $25.0 million. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, there were no amounts outstanding on any of the federal funds lines.

As of December 31, 2020, we had a Promissory Note with a correspondent lending partner and the borrowing capacity associated with this facility was $5.0 million with no balance outstanding. The Promissory Note expired on June 30, 2021 and was not renewed.

Our borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, 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, other correspondent banks, and the use of brokered deposits.

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


	Average Percentage for the Three Months Ended		Average Percentage for the Nine Months Ended		Average Percentage for the Three Months Ended
	September 30,		September 30,		March 31,
	2021		2021		2022		2021
Sources of Funds:
Deposits:
Noninterest-bearing	27.80	%	27.00	%	25.87	%	27.02	%
Interest-bearing	57.35		56.76		62.10		56.34
FHLB and Federal Reserve borrowings	4.02		5.97		1.28		6.67
Subordinated notes	1.44		1.27		1.27		1.18
Other liabilities	0.86		0.89		0.91		1.02
Shareholders’ equity	8.53		8.11		8.57		7.77
Total	100.00	%	100.00	%	100.00	%	100.00	%
Uses of Funds:
Total loans	78.09	%	76.19	%	73.84	%	74.72	%
Available-for-sale securities	1.44		1.42		2.16		1.55
Mortgage loans held for sale	2.70		5.14		0.88		8.52
Interest-bearing deposits in other financial institutions	13.18		12.58		18.36		10.35
Federal funds sold					0.05		—
Noninterest-earning assets	4.59		4.67		4.71		4.86
Total	100.00	%	100.00	%	100.00	%	100.00	%
Average noninterest-bearing deposits to total average deposits	32.65	%	32.24	%	29.41	%	32.41	%
Average loans to total average deposits	92.44		91.70		84.55		90.37
Average interest-bearing deposits to total average deposits	67.35	%	67.76	%	70.59		67.59

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

Capital Resources

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

On November 3, 2020, the Company announced that its board of directors authorized the repurchase of up to 400,000 shares of the Company’s common stock, no par value ~~from time to time, within one year~~ (the "2020 Repurchase Plan") and that the Board of Governors of the Federal Reserve System advised the Company that it has no objection to the Company’s 2020 Repurchase Plan. The ~~Company may repurchase~~2020 Repurchase Plan was in effect for a one-year period, with the timing of purchases and the number of shares ~~in privately negotiated transactions, in~~repurchased under the ~~open~~program dependent upon a variety of factors including price, trading volume, corporate and

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regulatory requirements, and market ~~including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 promulgated by the SEC, or otherwise in a manner that complies with applicable federal securities laws.~~conditions. The 2020 Repurchase Plan ~~does not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice.~~expired in November 2021. During the ~~three and nine months~~year ended ~~September 30,~~December 31, 2021, the Company did not repurchase any shares under ~~the authorization of~~ the 2020 Repurchase Plan.

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

Capital levels are viewed as important indicators of an institution’s financial soundness by banking regulators. Generally, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, our holding company and Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized," for purposes of the prompt corrective action regulations. As we continue to grow our operations and

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

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


	September 30, 2021				December 31, 2020				March 31, 2022				December 31, 2021
(Dollars in thousands)	Amount		Ratio		Amount		Ratio
									Amount		Ratio		Amount		Ratio
Tier 1 capital to risk-weighted assets
Bank	$	156,136	11.02	%	$	133,963	10.22	%	$	209,428	12.01	%	$	203,164	11.40	%
Consolidated Company		151,950	10.66			131,507	9.96			194,605	11.11			188,777	10.54
Common Equity Tier 1(CET1) to risk-weighted assets
Bank		156,136	11.02			133,963	10.22			209,428	12.01			203,164	11.40
Consolidated Company		151,950	10.66			131,507	9.96			194,605	11.11			188,777	10.54
Total capital to risk-weighted assets
Bank		169,435	11.96			146,853	11.20			223,664	12.82			217,215	12.19
Consolidated Company		204,809	14.37			168,957	12.80			241,841	13.81			242,388	13.54
Tier 1 capital to average assets
Bank		156,136	8.11			133,963	7.62			209,428	8.27			203,164	10.05
Consolidated Company	$	151,950	7.86	%	$	131,507	7.45	%		194,605	7.67			188,777	9.31

Contractual Obligations and Off-Balance Sheet Arrangements

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

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


	As of September 30, 2021											As of March 31, 2022
			More than		More than									More than		More than
	1 Year		1 Year but Less		3 Years but Less		5 Years					1 Year		1 Year but Less		3 Years but Less		5 Years
(Dollars in thousands)	or Less		than 3 Years		than 5 Years		or More			Total
												or Less		than 3 Years		than 5 Years		or More			Total
FHLB and Federal Reserve	$	10,437	$	10,000	$	38,127	$	—		$	58,564	$	5,779	$	10,000	$	11,797	$	—		$	27,576
Subordinated notes		—		—		—		39,010	⁽¹⁾		39,010		—		—		—		32,523	⁽¹⁾		32,523
Time deposits		39,977		88,528		4,176		4,334			137,015		89,023		43,043		19,726		4,886			156,678
Minimum lease payments		3,422		6,419		3,356		2,321			15,518		3,480		6,129		2,197		2,013			13,819
Total	$	53,836	$	104,947	$	45,659	$	45,665		$	250,107	$	98,282	$	59,172	$	33,720	$	39,422		$	230,596

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

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


	September 30,				December 31,				March 31,				December 31,
	2021				2020				2022				2021
(Dollars in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
									Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	73,975	$	418,045	$	78,506	$	360,883	$	118,953	$	509,677	$	136,289	$	442,035
Standby letters of credit		3,540		20,940		1,933		17,524		5,696		22,035		2,420		20,940
Commitments to make loans to sell		113,746		—		370,512		—		79,178		—		60,529		—
Commitments to make loans	$	40,804	$	15,236	$	24,225	$	25,316		46,354		12,626		16,256		14,920

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

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Critical Accounting Policies

Our accounting policies and procedures are described in Note 1 - Organization and Summary of Significant Accounting Policies in the accompanying Notes to the Condensed Consolidated Financial Statements as well as the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 as filed with the SEC.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity and Market Risk

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

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

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

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

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The following ~~table summarizes~~presents the sensitivity in net interest income and fair value of equity ~~over~~during the periods ~~indicated,~~presented, using a parallel ramp scenario.


	As of September 30, 2021				As of December 31, 2020				As of March 31, 2022				As of December 31, 2021
	Percent Change		Percent Change		Percent Change		Percent Change		Percent Change		Percent Change		Percent Change		Percent Change
	in Net Interest		in Fair Value of		in Net Interest		in Fair Value of		in Net Interest		in Fair Value of		in Net Interest		in Fair Value of
Change in Interest Rates (Basis Points)	Income		Equity		Income		Equity		Income		Equity		Income		Equity
300	12.55	%	14.21	%	9.04	%	19.52	%	11.48	%	3.60	%	11.85	%	11.17	%
200	8.68		12.66		5.77		16.02		9.05		5.54		9.31		11.43
100	4.39		7.89		2.73		9.58		4.62		4.36		4.88		7.78
Base	—		—		—		—		—		—		—		—
−100	(2.88)	%	(29.54)	%	(2.83)	%	(27.89)	%	(3.67)		(16.69)		(2.58)		(26.39)

The model simulations as of ~~September 30, 2021~~March 31, 2022 imply that our balance sheet is slightly ~~more~~less asset sensitive compared to our balance sheet as of December 31, ~~2020.~~2021.

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

Impact of Inflation

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

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

~~Table of Contents~~

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

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended ~~September 30, 2021~~March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

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

Item 1A. Risk Factors

There has been no material change in the risk factors previously disclosed under Item 1A of the ~~Company in its 2020~~Company’s 2021 Annual Report on Form 10-K filed with the SEC on March ~~12, 2021.~~15, 2022.

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

(c) Issuer Purchases of Equity Securities


					Maximum number (or					Maximum number (or
				Total number of	approximate dollar				Total number of	approximate dollar
				shares purchased	value) of shares				shares purchased	value) of shares
	Total number		Average	as part of publically	that may yet be	Total number	Average		as part of publically	that may yet be
	of shares		price paid	announced plans	purchased under the	of shares	price paid		announced plans	purchased under the
	purchased ⁽¹⁾		per share	or programs	plans or programs	purchased ⁽¹⁾	per share		or programs	plans or programs
July 1, 2021 through July 31, 2021	644	$	26.15	—	399,574
August 1, 2021 through August 31, 2021	1,089		26.43	—	399,574
September 1, 2021 through September 30, 2021	—	$	—	—	399,574
January 1, 2022 through January 31, 2022						4,146	$	30.36	—	—
February 1, 2022 through February 28, 2022						143		32.62	—	—
March 1, 2022 through March 31, 2022						—		—	—	—

~~________________________________________~~

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

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Item 3.Defaults upon Senior Securities

Not applicable.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

Not applicable.

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Item 6.Exhibits


Exhibit No.		Description

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

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

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

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

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

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

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

101.INS*		Inline XBRL Instance Document

101.SCH*		Inline XBRL Taxonomy Extension Schema Document

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

* Filed herewith.

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

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SIGNATURES

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


	First Western Financial, Inc.

~~November 5, 2021~~May 6, 2022	By:	/s/ Scott C. Wylie
Date		Scott C. Wylie
		Chairman, Chief Executive Officer, and President

~~November 5, 2021~~May 6, 2022	By:	/s/ Julie A. Courkamp
Date		Julie A. Courkamp
		~~Director,~~Chief Operating Officer, Chief Financial Officer, and Treasurer

7473


As of and for the three months ended September 30, 2021	Wealth Management		Mortgage		Consolidated
Income Statement
Total interest income	$	16,146	$	—	$	16,146
Total interest expense		1,300		—		1,300
Provision for loan losses		406		—		406
Net interest income, after provision for loan losses		14,440		—		14,440
Non-interest income		5,998		4,497		10,495
Total income before non-interest expense		20,438		4,497		24,935
Depreciation and amortization expense		272		13		285
All other non-interest expense		13,967		2,217		16,184
Income before income taxes	$	6,199	$	2,267	$	8,466

Goodwill	$	24,191	$	—	$	24,191
Total assets		2,020,896		55,376		2,076,272


	Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021
	Compared to 2020						Compared to 2020
	Increase						Increase
	(Decrease) Due				Total		(Decrease) Due				Total
	to Change in:				Increase		to Change in:				Increase
(Dollars in thousands)	Volume		Rate		(Decrease)		Volume		Rate		(Decrease)
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	35	$	(29)	$	6	$	167	$	(237)	$	(70)
Available-for-sale securities		(70)		77		7		(354)		207		(147)
Loans		1,294		429		1,723		9,334		(1,316)		8,018
Total increase (decrease) in interest income	$	1,259	$	477	$	1,736	$	9,147	$	(1,346)	$	7,801
Interest-bearing liabilities:
Interest-bearing deposits		82		(320)		(238)		522		(2,632)		(2,110)
FHLB and Federal Reserve borrowings		(142)		20		(122)		62		(115)		(53)
Subordinated notes		197		(29)		168		565		(78)		487
Total increase (decrease) in interest expense	$	137	$	(329)	$	(192)	$	1,149	$	(2,825)	$	(1,676)
Increase in net interest income	$	1,122	$	806	$	1,928	$	7,998	$	1,479	$	9,477