What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-15 compared with 2022-03-15 · 732 added, 533 removed, 1115 unchanged (53% of the section changed)

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Audited Financial Statements

Description Page Number

Report of Independent Registered Public Accounting Firm (PCAOB ID:

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We have audited the accompanying consolidated balance sheets of First Western Financial, Inc.

(the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the years ended December 31, 2021 and 2020, and the related notes (collectively referred to as the "financial statements").

(the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

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Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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(in thousands, except share amounts)

2022 December 31,

Cash and cash equivalents:

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Available-for-sale securities, at fair value — 55,562

Held-to-maturity securities, at amortized cost (fair value of $ 74,718 as of December 31, 2022)

Correspondent bank stock, at cost 7,110 2,584

Mortgage loans held for sale

Loans, net of allowance of $ 13,732 and $ 12,539

Mortgage loans held for sale, at fair value 8,839 30,620

Loans held for sale, at fair value 1,965 —

Loans (includes $ 23,321 and $ 0 measured at fair value, respectively)

2,469,413 1,949,137

Allowance for loan losses ( 17,183 ) ( 13,732 )

Loans, net 2,452,230 1,935,405

Premises and equipment, net 25,118 23,976

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Other receivables 1,973 1,949

Other real estate owned, net

Goodwill and other intangible assets, net 32,104 31,902

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Company-owned life insurance 16,152 15,803

Other assets 21,457 23,327

Assets held for sale — 115

Total assets $ 2,866,748 $ 2,527,489

Noninterest-bearing $ 583,092 $ 636,304

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Retained earnings 51,887 30,189

Accumulated other comprehensive income

Accumulated other comprehensive (loss)/income ( 1,517 ) 223

Total shareholders’ equity 240,864 219,041

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Loans, including fees $ 94,448 $ 60,758

Loans accounted for under the fair value option 1,347 —

Investment securities 2,053 770

Interest-bearing deposits in other financial institutions 2,245 397

Dividends, restricted stock 381 86

Total interest and dividend income 100,474 62,011

Interest expense:

Deposits 13,012 3,482

Other borrowed funds 4,258 1,934

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Net gain on mortgage loans 5,306 16,060

Bank fees 2,660 1,780

Risk management and insurance fees 1,231 1,120

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Net gain on equity interests 7 —

Net loss on loans accounted for under the fair value option ( 891 ) —

Unrealized gain recognized on equity securities 342 469

Total non-interest income 28,412 40,043

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Data processing 4,285 6,327

Marketing 1,888 1,613

Amortization of other intangible assets 308 17

Net loss on assets held for sale

Provision for other real estate owned

Net gain on assets held for sale ( 4 ) —

Net gain on sale of other real estate owned ( 44 ) —

Other 4,547 3,255

Total non-interest expense 79,106 68,128

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Earnings per common share:

Basic $ 2.29 $ 2.58

Diluted 2.23 2.50

See accompanying notes to consolidated financial statements.

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Year Ended December 31,

Other comprehensive (loss)/income items, net of tax effect:

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

Net income $ 21,698 $ 20,610

Other comprehensive (loss)/income:

Unrealized losses on available-for-sale securities ( 2,591 ) ( 620 )

Income tax effect 638 163

Amortization of net unrealized loss for the reclassification of available-for-sale securities transferred to held-to-maturity included in interest income 283 —

Income tax effect ( 70 ) —

Total other comprehensive loss ( 1,740 ) ( 457 )

Comprehensive income $ 19,958 $ 20,153

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(in thousands, except share amounts)

Comprehensive

Income (Loss)

Stock Additional

Capital Retained

ComprehensiveLoss Total

Balance, December 31, 2020 7,951,773 $ 144,703 $ 9,579 $ 680 $ 154,962

Other comprehensive income, net of tax

Net income — — 20,610 — 20,610

Other comprehensive loss, net of tax — — — ( 457 ) ( 457 )

Settlement of share awards 58,884 ( 501 ) — — ( 501 )

Share repurchase

Issuance of common stock for Teton Acquisition 1,337,791 39,818 — — 39,818

Options exercised 70,823 1,706 — — 1,706

Stock-based compensation — 2,903 — — 2,903

Balance, December 31, 2021 9,419,271 $ 188,629 $ 30,189 $ 223 $ 219,041

Net income — — 21,698 — 21,698

Other comprehensive loss, net of tax — — — ( 1,740 ) ( 1,740 )

Settlement of share awards 67,860 ( 876 ) — — ( 876 )

Issuance of common stock for Teton Acquisition

Options exercised 8,309 179 — — 179

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Cash flows from operating activities

Net income $ 21,698 $ 20,610

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

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Net gain on mortgage loans ( 5,306 ) ( 16,060 )

Origination of mortgage loans held for sale

( 1,263,346 )

( 1,331,989 )

Origination of mortgage loans ( 439,682 ) ( 1,425,713 )

Proceeds from mortgage loans 465,819 1,564,466

Gain on disposal of fixed assets and intangibles ( 21 ) —

Depreciation and amortization 2,012 1,256

Provision for other real estate owned

Deferred income tax benefits, net of valuation allowance

Net amortization of purchase accounting adjustments 55 187

Deferred income tax expense (benefit), net of valuation allowance 557 ( 668 )

Increase in cash surrender value of company-owned life insurance ( 349 ) ( 354 )

Loss on assets held for sale

Stock-based compensation 2,562 2,903

Gain on equity interests

Loss/(Gain) on sale of assets

Gain on sale of other real estate owned ( 44 ) —

Change in fair value of equity securities ( 342 ) ( 469 )

Change in fair value of loans accounted for under the fair value option 891 —

Change in fair value of mortgage loans and mortgage banking derivatives 1,903 12,244

(Gain)/loss on assets held for sale ( 4 ) 27

Net changes in operating assets and liabilities:

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Change in accrued interest payable and other liabilities ( 1,681 ) 1,852

Net cash provided by/(used in) operating activities

Net cash provided by operating activities 48,278 162,515

Cash flows from investing activities

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Maturities, prepayments, and calls 3,218 16,241

Purchases ( 9,000 ) ( 17,667 )

Activity in held-to-maturity securities:

Maturities, prepayments, and calls 9,040 —

Purchases ( 31,189 ) —

Purchases of correspondent bank stock ( 13,999 ) ( 1 )

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Purchases of premises and equipment ( 2,967 ) ( 2,108 )

Proceeds from sale of premises and equipment

Purchase of loans ( 36,115 ) —

Proceeds from sale of assets held for sale 125 —

Proceeds from sale of other real estate owned 422 194

Net cash received/(paid) on acquisitions

Net cash received on acquisitions — 120,997

Net cash used in investing activities ( 558,798 ) ( 43,025 )

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Proceeds from Federal Reserve borrowings — 83,674

Payments on subordinated notes ( 6,575 ) —

Proceeds from subordinated notes, net of issuance costs 19,509 14,667

Proceeds from the exercise of stock options 179 1,706

Repurchase of common stock

Settlement of restricted stock ( 876 ) ( 501 )

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Supplemental noncash disclosures:

Common stock issued for Teton acquisition

Reclass of held for sale assets, net of liabilities

Contingent asset resulting from sale of held for sale assets

Change in unrealized (loss)/gain on available-for-sale securities ( 2,591 ) ( 620 )

Lease right-of-use-asset obtained in exchange for lease liabilities 801 2,262

Transfer of securities from available-for-sale to held-to-maturity 58,727 —

Transfer from loans to other real estate owned 378 —

Transfer of loans held for investment to loans held for sale 1,985 —

Common stock issued for Teton acquisition — 39,818

See accompanying notes to consolidated financial statements.

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The 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"), 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").

First Western Trust Bank (the "Bank") and Ryder, Stilwell Inc.

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 Rock Springs).

The Company provides a fully-integrated suite of wealth management services including private banking, personal trust, investment management, mortgage loans, and institutional asset management services to individual and corporate clients principally in Colorado (metro Denver, Aspen, Boulder, Fort Collins and Vail Valley), Arizona (Phoenix and Scottsdale), California (Century City), Montana (Bozeman), and Wyoming (Jackson Hole, Laramie, Pinedale and 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 consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") for financial information, pursuant to the rules and regulations of the U.S.

Securities and Exchange Commission ("SEC"), and where applicable, reporting practices prescribed for the banking and investment advisory industries.

Consolidation :

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Business Combinations and Divestitures :

On December 31, 2021, the Company completed an Agreement and Plan of Merger (the “Merger Agreement” or “Teton Acquisition”) with Teton Financial Services, Inc.

On December 31, 2021, the Company completed its merger pursuant to 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.

Management concluded that the merger 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 Los Angeles fixed income team and certain related advisory and sub-advisory arrangements to Lido Advisors, LLC and Oakhurst Advisors, LLC.

As a result of this transaction, the Company recorded a contingent consideration asset with an initial fair value estimated at $ 3.1 million to be received in quarterly payments over three years and a portion will be received in perpetuity.

The asset is carried at its net present value in our Other assets line item of the Consolidated Balance Sheets.

On May 15, 2020, 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.

Use of Estimates :

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the determination of the allowance for loan losses, the evaluation of goodwill impairment, and the fair value of financial instruments.

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

It is at least reasonably possible that information which was available at the date of the financial statements will change in the near term due to the COVID-19 pandemic and that the effect of the change would be material to the financial statements.

The extent to which the COVID-19 pandemic will impact our estimates and assumptions is highly uncertain.

Concentration of Credit Risk :

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Phoenix and Scottsdale, Arizona;

Bozeman, Montana;

and Jackson Hole, Wyoming.

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Investment Securities :

Investments we intend to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale and are recorded at fair value using current market information from a pricing service, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax.

As of December 31, 2021 and 2020, all investment securities were classified as available-for-sale.

As of December 31, 2021, equity mutual funds have been recorded at fair value within the Other assets line of the Consolidated Balance Sheets with changes recorded in the Other line of the Consolidated Statements of Income.

The carrying values of our investment securities classified as available-for-sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders' equity.

Investments for which we have the intent and ability to hold to their maturity are classified as held-to-maturity securities and are recorded at amortized cost.

Securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity.

As of December 31, 2022, equity mutual funds have been recorded at fair value within the Other assets line of the Consolidated Balance Sheets with changes recorded in the Unrealized gain/(loss) recognized on equity securities line of the Consolidated Statements of Income.

The Company invests in projects to create affordable housing.

These investments are classified as Other assets on the Consolidated Balance Sheets.

Investments in affordable housing projects that qualify for low-income housing tax credits ("LIHTC") are accounted for using the proportional amortization method.

Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other benefits received and recognized as a component of applicable income tax expense in the Consolidated Statements of Income.

Net purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities, without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated.

Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are recorded in earnings as realized losses in Non-interest income.

Management evaluates securities for other-than-temporary impairment ("OTTI") on a quarterly basis, or more frequently when economic or market conditions warrant such an evaluation.

Declines in the fair value of available-for-sale securities and held-to-maturity securities below their cost that are deemed to be other-than-temporary are recorded in earnings as realized losses in Non-interest income.

Management evaluates securities for other-than-temporary impairment ("OTTI") on a quarterly basis, or more frequently when economic or market conditions warrant such an evaluation.

For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.

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Correspondent Bank Stock :

Correspondent bank stock includes stock in the Federal Home Loan Bank of Topeka ("FHLB"), Federal Reserve Bank ("FRB"), and Bankers’ Bank of the West ("BBW"), which are considered restricted securities because the Company may be required to hold the stock in order to maintain the correspondent banking relationship with these institutions.

No ready market exists for the FHLB and FRB stock and therefore, no quoted market values exist.

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Interest income is accrued on unpaid principal balances.

Fees received at origination, net of certain direct origination costs for providing loan commitments and letters of credit that result in loans, are deferred and amortized to interest income over the life of the related loan or until payoff, at which time the remaining unamortized fee is recorded as interest income.

Fees received at origination, net of certain direct origination costs for providing loan

commitments and letters of credit that result in loans, are deferred and amortized to interest income over the life of the related loan or until payoff, at which time the remaining unamortized fee is recorded as interest income.

Fees, net of certain direct origination costs on commitments and letters of credit, are amortized to interest income over the commitment period.

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Troubled Debt Restructurings :

A troubled debt restructuring ("TDR") is a loan the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower the Company would not otherwise consider.

The loan terms which have been modified or restructured due to a borrower’s financial difficulty, include but are not limited to (i) a reduction in the stated interest rate of the loan, (ii) an extension of the maturity date of the loan at an interest rate below market, or (iii) a reduction of the accrued interest.

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As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic.

The Company was offering loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years, primarily for a period of 180 days or less.

During 2021, the Company’s loan portfolio included 69 loans totaling $ 130.4 million, which participated in the Company’s COVID-19 loan modification program.

As of December 31, 2021, the deferral period has ended for all loans previously modified and payments have resumed under the original terms.

The Company offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the prior two years, primarily for a period of 180 days or less.

COVID-19 and CARES Act :

On March 11, 2020 the World Health Organization declared the outbreak of COVID-19 a global pandemic, which continues to spread throughout the United States and the around the world.

In response to the COVID-19 pandemic, the President signed the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") into law on March 27, 2020.

The objective of the CARES Act is to prevent a severe economic downturn using various measures, including economic stimulus to significantly impacted industry sectors.

We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act and other government actions.

The CARES Act created the paycheck protection program ("PPP"), which is administered by the Small Business Administration ("SBA").

The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities.

The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.

The Bank is an approved SBA lender and supported the community and clients by originating PPP loans since the program was created.

PPP loans are classified in the Cash, Securities and Other portion of the loan portfolio.

See Note 5 - 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 TDRs.

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 December 31, 2021 and 2020.

In accordance with that guidance, the Company is recognizing interest income on all loans modified for temporary payment moratoriums.

See Note 5 - Loans and the Allowance for Loan Losses for further discussion on our loan modification program.

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Management has increased our loan level reviews and portfolio monitoring to address the changing environment.

The Company continues to meet regularly with clients who could be more highly impacted by the recent COVID-19 pandemic.

These are borrowers in industries we believe may be more impacted by the pandemic, for instance those loans where there may be a greater than 50 % probability of a downgrade, covenant violation, or 20 % reduction in collateral position.

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

Interest accrued during the modification term on modified loans is deferred to the end of the loan term.

As of December 31, 2021 and 2020, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

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 sold a 95% participation in new MSLP loans 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.

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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 the uncollectibility of a loan balance is confirmed.

losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

Subsequent recoveries, if any, are credited to the allowance for loan losses.

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This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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.

Excluding loans acquired through the Teton Acquisition, the portion of our credit exposure to the highest risk industries impacted by COVID-19, such as accommodations, transportation and restaurants, is less than 4.3 % of our loan portfolio.

We are actively reviewing our acquired loans for any exposure to high risk industries.

The Company has increased our loan level reviews and portfolio monitoring to address the changing environment and continues to engage in more frequent communication with these borrowers to better understand the impact on our borrower’s cash flows and respond proactively.

During the year ended December 31, 2020, the Company increased its allowance to account for the additional variability surrounding the loan modifications and increased economic uncertainty related to the COVID-19 pandemic.

We are closely monitoring the changing dynamics in the economy and related impacts to our clients.

Management will continue to closely monitor the loan portfolio and analyze the economic data to assess the impact on the allowance for loan losses.

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• Cash, Securities and Other—consists of consumer and commercial purpose loans that 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.

addition, loans in this portfolio are collateralized with other sources of collateral.

This segment of our portfolio is affected by a variety of local and national economic factors affecting borrowers’ employment prospects, income levels, and overall economic sentiment.

PPP loans that are fully guaranteed by the SBA are classified within this line item as of December 31, 2022 and 2021.

• Consumer and Other—consists of unsecured consumer loans.

Loans held for investment accounted for under the fair value option are also classified within this line item.

• Construction and Development—consists of loans to finance the construction of residential and non-residential properties.

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Loans in this segment are dependent on the industries tied to these loans as well as the national and local economies, and local residential and commercial real estate markets.

● Commercial Real Estate ("

CRE ") , Owner Occupied and Non-Owner Occupied—consists of commercial loans collateralized by real estate.

• Commercial Real Estate ("CRE"), 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.

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The Company has selected October 31 as the date to perform its annual impairment tests.

Impairment exists when the carrying amount of the goodwill and other intangible assets exceeds their implied fair values.

Impairment exists when the carrying amount of the goodwill and other intangible assets exceeds their estimated fair values.

Impairment losses, if any, are recognized as a charge to non-interest expense and an adjustment to the carrying value of the goodwill or other intangible assets.

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Other Receivables :

Other accounts receivable represents compensation paid to employees that is contingent on future employment and recognized in the Consolidated Statements of Income over the estimated service period, sales of investments and assets in which the Company has obtained a firm commitment as of the balance sheet dates, and fees due from the SBA related to PPP.

Other accounts receivable represents compensation paid to employees that is contingent on future employment and recognized in the Consolidated Statements of Income over the estimated service period and sales of investments and assets in which the Company has obtained a firm commitment as of the balance sheet dates.

Leases represent a contract that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.

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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.

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Changes in the fair values of these derivatives are included in the Net gain on mortgage loans line of the 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.

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A blanket pledge and security agreement is in place with FHLB that requires certain loans and securities to be pledged as collateral for any outstanding borrowings under the agreement.

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.

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.

Fair Value of Financial Instruments :

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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.

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Transition of LIBOR to an Alternative Reference Rate :

In July 2017, the United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate ("LIBOR") announced that after 2021 it will no longer persuade or compel banks to submit rates for the calculation of LIBOR.

In response, the Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee to identify a set of alternative reference interest rates for possible use as market benchmarks.

This committee has proposed the Secured Overnight Financing Rate ("SOFR") as its recommended alternative to U.S.

dollar LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in the second quarter of 2018.

SOFR is based on a broad segment of the overnight Treasury repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities.

The administrator of LIBOR has proposed to extend publication of the most commonly used U.S.

Dollar LIBOR settings to June 30, 2023, and to cease publishing other LIBOR settings on December 31, 2021.

In March 2020, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU’) No.

2020-04 “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the LIBOR or another reference rate expected to be discontinued.

It is intended to help stakeholders during the global market-wide reference rate transition period.

The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.

Subsequently, in January 2021, the FASB issued ASU No.

2021-01 “Reference Rate Reform (Topic 848):

Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

An entity may elect to apply ASU No.

2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued.

An entity may elect to apply ASU No.

2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.

On December 21, 2022, the FASB issued Accounting Standards Update (ASU) 2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848.

ASU 2022-06 extends the period of time financial statement preparers can utilize the reference rate reform relief guidance through December 31, 2024.

Certain of the Company’s assets and liabilities are indexed to LIBOR, with exposure extending past December 31, 2022.

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The Company has developed a LIBOR transition plan, which addresses governance, risk management, legal, operational, systems and operations, fallback language, and other aspects of planning.

The company no longer originates LIBOR indexed loans.

Existing LIBOR indexed commercial loans are expected to be transitioned to SOFR by June 30, 2022.

The company no longer originates LIBOR indexed loans and is working on transitioning existing LIBOR loans to SOFR.

Consumer indexed loans are being managed in accordance with Interagency Guidance.

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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.

Such reclassifications had no impact on net income available to common shareholders or total shareholders’ equity.

Recently adopted accounting pronouncements :

The following reflect recent accounting pronouncements that have been adopted by the Company during the Company’s fiscal year ended December 31, 2022.

In January 2021, the FASB issued ASU 2021-01, "

Reference Rate Reform (Topic 848) :

("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.

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, 2022.

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.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.

This was issued to clarify the guidance in Topic 820, Fair Value Measurement, when measuring fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820.

The Company is currently assessing the impact of this guidance on our existing equity securities.

This guidance is effective for the Company in fiscal years after December 15, 2023.

In February 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) ("ASU 2016-13").

ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss ("CECL") model.

The CECL model is applicable to the measurement of credit losses on the financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and reinsurance receivables.

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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 year ended December 31, 2021, the CECL committee of the Company continued to work through its implementation plan.

The Company has integrated historical and current loan level data as required by CECL and is working with its third-party vendor solution to begin evaluating the methodologies available under the CECL model on its loan portfolios.

The Company also continues to evaluate documentation requirements, internal control structure, relevant data sources, and system configurations.

The Company has completed a successful integration of the required fields and historical data for key loan, client and collateral data within the third-party solution and has been able to run parallels of our current 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.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350):

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.

The Company expects to early adopt beginning January 1, 2022.

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 year ended December 31, 2022, the Company’s CECL project team continued to work through its implementation plan.

The Company selected a champion quantitative model to approximate expected losses by call code segment using regional and other appropriate peers.

The Company selected qualitative factors and evaluated those factors for each loan segment for the quarter ended December 31, 2022.

The Company has completed a model validation and worked to finalize policies and procedures, internal control structure, and process flows.

Using this information, the Company successfully ran parallel models for each completed quarter of 2022 in order for management to review and compare results between the initial CECL model and existing ALLL model.

Based on preliminary results, the Company expects its allowance for credit losses ("ACL") coverage ratio to be within a range of approximately 75-90 bps of total loans and 30-45 bps coverage on off-balance sheet commitments.

The Company will implement the new standard beginning January 1, 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 – 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 provides 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 provides that following the merger, Rocky Mountain Bank would merge with and into the Bank, with the Bank surviving the bank merger.

As provided by the Merger Agreement, Teton merged into the Company, as subject to the terms and conditions set forth in the Merger Agreement, with the Company continuing as the surviving corporation.

As provided by the Merger Agreement, Rocky Mountain Bank merged 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.

Total acquisition costs incurred through December 31, 2021 for the transaction were approximately $ 4.1 million and are primarily reflected in the Data processing, Professional services, and Salaries and employee benefits lines of the Consolidated Statements of Income, with a remaining immaterial amount in the Other line of the Consolidated Statements of Income.

As part of its long-term growth strategy, the Teton Acquisition expands First Western’s presence in Wyoming and allows the Bank to deliver its unique approach to private and commercial banking to more clients in the region.

The Teton Acquisition was accounted for under the acquisition method of accounting and therefore all assets and liabilities have been measured and recorded at their fair values as of the acquisition close date of December 31, 2021.

All non-equity acquisition related costs were expensed as incurred and are included in noninterest expense in the Consolidated Statements of Income.

The Teton Acquisition was accounted for under the acquisition method of accounting and therefore all assets and liabilities were measured and recorded at their 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 or accreted on a level yield basis over the estimated life of the asset or liability.

Loans acquired are recorded at their estimated fair value and therefore no allowance for loan and lease losses was recorded at the date of acquisition.

Market value adjustments for assets acquired and liabilities assumed were amortized or accreted on a level yield basis over the estimated life of the asset or liability.

Loans acquired were recorded at their estimated fair value and therefore no allowance for loan and lease losses was recorded at the date of acquisition.

Goodwill of $ 6.2 million, which is not tax deductible, was recognized in the transaction and represents expected synergies and cost savings resulting from combining the expanded footprint and expertise of the associates.

Additionally, core deposit intangible assets have been identified and recorded at their estimated fair values and are amortized over their estimated useful life.

Additionally, core deposit intangible assets were identified and recorded at their estimated fair values and are amortized over their estimated useful life.

On August 31, 2021, the Company completed the issuance and sale of subordinated notes, which provided partial funding of the transaction.

See Note 10 – Borrowings.

As of December 31, 2021, loans, deposits, core deposit intangible, and equity warrants fair values are considered provisional.

These items contain estimates of the accounting for the acquisition which are subject to revision in future periods when the application of purchase accounting is finalized.

The Company utilized preliminary balance sheet values to estimate the fair values and then applied those values to the acquired balances as of December 31, 2021.

The final valuation will be determined based on the actual December 31, 2021 balances which is in process at the time of this filing.

The following presents the estimated fair values of the assets acquired and liabilities assumed in the December 31, 2021 transaction with Teton, and reflects all adjustments made to the fair value of the opening balance sheet on December 31, 2021 (in thousands):

Fair value of consideration transferred

December 31, 2021

See Note 10 – Borrowings for more information.

The following presents the final, recorded fair values of the assets acquired and liabilities assumed in the transaction with Teton as of December 31, 2021, including all measurement period adjustments to the provisional estimates.

The measurement period has closed, with no further adjustments expected (dollars in thousands):

Fair value of consideration transferred Provisional Estimates Measurement Period Adjustments December 31,

Cash consideration $ 11,501 $ — $ 11,501

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Mortgage loans held for sale 840 — 840

Loans, net 252,275 ( 857 ) 251,418

Premises and equipment 17,758 — 17,758

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Core deposit intangible (1)

1,264 698 1,962

Other assets 226 242 468

Assets held for sale 115 5 120

1 unchanged sentence

Liabilities assumed

Deposits 379,227 ( 29 ) 379,198

Accrued interest payable 26 — 26

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The discount on the loans acquired in this transaction due to anticipated credit loss, as well as considerations for market interest rates, totaled $ 4.0 million, representing 1.6 % of their contractual balance.

There were no loans acquired that were considered to be purchased credit impaired ("PCI") loans.

The composition of the contractual balance of acquired loans as of December 31, 2021 is detailed in the table below (in thousands):

There were no loans acquired that were considered to be purchased credit impaired ("PCI") loans.

The composition of the contractual balance of acquired loans as of December 31, 2021 is detailed in the table below (dollars in thousands):

Cash, Securities and Other (1)

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Commercial and Industrial 55,690

Total loans 256,257

Acquisition fair value adjustments ( 3,982 )

Loans, net $ 252,275

_____________________________

(1) Includes $ 6.7 million in PPP loans.

The Company incurred $ 4.1 million in expenses related to the acquisition during the year ended December 31, 2021.

The following presents the acquisition expenses within Non-interest expense of the Consolidated Statements of Income (in thousands):

The Company incurred $ 1.2 million and $ 4.1 million in expenses related to the acquisition during the years ended December 31, 2022 and December 31, 2021, respectively.

The following presents the acquisition expenses within Non-interest expense of the Consolidated Statements of Income as of the dates noted (dollars in thousands):

December 31, Year Ended

Mergers and acquisitions expense:

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Professional services 563 1,118

Technology and information systems 7 —

Data processing ( 73 ) 2,428

Marketing 81 —

Total mergers and acquisitions expense $ 1,223 $ 4,101

On February 10, 2020, the Company entered into a branch purchase and assumption agreement with Simmons Bank, a subsidiary of Simmons First National Corporation, to acquire all of the Simmons’ Colorado locations, including three branches and one loan production office located in Denver, as well as certain deposits, loans and other assets and liabilities.

The transaction closed on May 15, 2020 with an aggregate purchase price of $ 61.6 million, including a deposit premium of 6.06 %.

During the third quarter of 2020, the Company closed two of the branches and the loan production office acquired in the Branch Acquisition.

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

The following presents the estimated fair values of the assets acquired and liabilities assumed in the May 15, 2020 transaction with Simmons, and reflects all adjustments made to the fair value of the opening balance sheet through December 31, 2020 (in thousands):

Fair value of consideration transferred

Cash consideration

Total fair value of consideration transferred

Assets acquired

Cash and due from banks

Core deposit intangible (1)

Accrued income and other assets

Total assets acquired

Liabilities assumed

Accrued expenses and other liabilities

Total liabilities assumed

Net assets acquired

Goodwill recognized

_____________________________________

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

The fair value of net assets acquired includes fair value adjustments to loans as of the acquisition date.

The fair value adjustments were determined using discounted expected cash flows.

Loans had a fair value of $ 119.6 million and a contractual balance of $ 120.6 million as of May 15, 2020.

The discount on the loans acquired in this transaction due to anticipated credit loss, as well as considerations for market interest rates, totaled $ 1.1 million, representing 0.9 % of their contractual balances.

No allowance for loan losses related to acquired loans was recorded as a result of the Branch Acquisition.

Loans acquired included short-term modifications made on a good faith basis by Simmons, in response to COVID-19.

All of the modification were given additional review prior to the closing of the purchase and management determined that loans were performing prior to modification and were not considered impaired at purchase.

There were no loans acquired that were considered to be PCI loans.

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

Cash, Securities and Other (1)

Construction and Development

1-4 Family Residential

Non-Owner Occupied CRE

Owner Occupied CRE

Commercial and Industrial

_____________________________________

(1) Includes $ 12.9 million in PPP loans.

The Company incurred $ 0.7 million in expenses related to the acquisition during the year ended December 31, 2020.

Acquisition expenses, including Data processing, Professional fees, Salaries and employee benefit, Technology and information systems, and occupancy and equipment lines are included in the Total non-interest expense line of the Consolidated Statements of Income.

The following table presents pro forma information for the years ended December 31, 2021 and 2020, as if the Teton Acquisition and Branch Acquisition had occurred on January 1, 2020.

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):

The following table presents pro forma information for the years ended December 31, 2022 and 2021, as if the Teton Acquisition had occurred on January 1, 2021.

The information for the year ended December 31, 2022 reflects actual results presented in our Consolidated Statements of Income.

Information for the year ended December 31, 2021 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 period presented, nor is it indicative of future results (in thousands, except per share data):

Twelve Months Ended December 31,

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Noninterest income 28,412 41,206

Net income 21,698 23,234

Pro forma earnings per share:

Basic 2.29 2.49

Diluted 2.23 2.43

NOTE 3 - INVESTMENT SECURITIES

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

December 31, 2021

Investment securities available-for-sale:

The following presents the amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses as of the date noted (dollars in thousands):

December 31, 2022 Amortized

Investment securities held-to-maturity:

Treasury debt $ 243 $ — $ ( 9 ) $ 234

Government Agency

Corporate bonds 23,819 — ( 2,453 ) 21,366

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Corporate CMO and MBS 4,074 — ( 180 ) 3,894

Total securities available-for-sale

December 31, 2020

Total securities held-to-maturity $ 81,056 $ 13 $ ( 6,351 ) $ 74,718

The following presents the amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss as of the date noted (dollars in thousands):

December 31, 2021 Amortized

Investment securities available-for-sale:

Treasury debt $ 250 $ — $ ( 3 ) $ 247

Government Agency 3,522 — — 3,522

Corporate bonds 8,113 227 ( 15 ) 8,325

1 unchanged sentence

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

Net amortization of premiums and discounts related to mortgage securities during each of the years ended December 31, 2021 and 2020 was $ 0.1 million and $ 0.4 million, respectively, and is included in Net interest income in the Consolidated Statements of Income.

As of December 31, 2021, the amortized cost and estimated fair value of available-for-sale securities have contractual maturity dates shown in the table below (in thousands).

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Net amortization of premiums and discounts related to mortgage securities during each of the years ended December 31, 2022 and 2021 was $ 0.1 million and is included in Net interest income in the Consolidated Statements of Income.

The Company reassessed classification of investment securities and, effective April 1, 2022, elected to transfer all securities, fair valued at $ 58.7 million, from available-for-sale to held-to-maturity.

The related unrealized loss of $ 2.3 million included in other comprehensive income on April 1, 2022 remained in other comprehensive income and is being amortized out with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities.

No gain or loss was recorded at the time of transfer.

As of December 31, 2022, the amortized cost and estimated fair value of held-to-maturity securities have contractual maturity dates shown in the table below (dollars in thousands).

Expected maturities will differ from contractual

maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities not due at a single maturity date are shown separately.

December 31, 2021

December 31, 2022 Amortized

Due within one year $ — $ —

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Securities (CMO and MBS) 56,994 53,118

In 2014, the Company began investing in a small business investment company ("SBIC") fund administered by the Small Business Administration.

During the year ended December 31, 2021, the Company did not make any contributions to the SBIC fund and received a $ 0.1 million return of capital.

During the year ended December 31, 2020, the Company invested $ 0.5 million in SBIC.

As of December 31, 2021 and 2020, the Company held a balance of $ 2.0 million and $ 2.1 million, respectively, with SBIC, which is included in Other assets in the accompanying Consolidated Balance Sheets.

Total $ 81,056 $ 74,718

For the year ended December 31, 2022, the Company committed $ 6.0 million in total to two bank technology funds.

During the year ended December 31, 2022, the Company made $ 1.3 million in contributions to both partnerships and received a $ 0.1 million return on investment.

As of December 31, 2022, the Company held a balance of $ 1.3 million, which is included in Other assets in the accompanying Consolidated Balance Sheets.

The Company may be obligated to invest up to an additional $ 4.7 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 years ended December 31, 2022 and 2021, the Company did not make any contributions to the SBIC fund and received a $ 0.1 million return of capital.

As of December 31, 2022 and 2021, the Company held a balance of $ 2.0 million in the SBIC fund, which is included in Other assets in the accompanying Consolidated Balance Sheets.

The Company may be obligated to invest up to an additional $ 1.0 million in future SBIC investments.

As of December 31, 2021, securities with carrying values totaling $ 17.3 million, which includes $ 14.9 million acquired from the Teton Acquisition, were pledged to secure various public deposits and credit facilities of the Company.

As of December 31, 2020, securities with carrying values totaling $ 3.7 million were pledged.

As of December 31, 2022 and December 31, 2021, securities with carrying values totaling $ 22.6 million and $ 17.3 million, respectively, were pledged to secure various public deposits and credit facilities of the Company.

As of December 31, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S.

Government sponsored entities and agencies, in an amount greater than 10 % of shareholders’ equity.

As of December 31, 2021 and December 31, 2020, ten securities and seven securities were in an unrealized loss position, with unrealized losses totaling $ 0.2 million and $ 0.1 million, respectively.

One of the securities in an unrealized loss position as of December 31, 2021 has been in a continuous unrealized loss position for more than twelve months, and the remaining have been in a continuous unrealized loss position for less than twelve months.

The unrealized loss positions were caused primarily by interest rate changes and market assumptions about prepayments of principal and interest on the underlying mortgages.

As of December 31, 2022, 98 securities were in an unrecognized loss position, with unrecognized losses totaling $ 6.4 million.

As of December 31, 2021, 10 securities were in an unrealized loss position with unrealized losses totaling $ 0.2 million.

Of the securities in an unrecognized loss position as of December 31, 2022, 14 have been in a continuous unrecognized loss position for more than twelve months, and the remaining have been in a continuous unrecognized loss position for less than twelve months.

The unrecognized 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 December 31, 2022.

The following presents securities with unrealized losses as of December 31, 2021 and December 31, 2020, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands, before tax):

Less than 12 Months

12 Months or Longer

December 31, 2021

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

Less than 12 Months 12 Months or Longer Total

December 31, 2022 Fair

Value Unrecognized

Investment securities held-to-maturity:

Treasury debt $ — $ — $ 234 $ ( 9 ) $ 234 $ ( 9 )

1 unchanged sentence

GNMA mortgage-backed securities – residential 22,371 ( 1,051 ) 14,255 ( 1,749 ) 36,626 ( 2,800 )

FNMA mortgage-backed securities – residential 6,202 ( 506 ) — — 6,202 ( 506 )

Government CMO and MBS - commercial 5,591 ( 403 ) — — 5,591 ( 403 )

Corporate CMO and MBS 3,499 ( 147 ) 395 ( 33 ) 3,894 ( 180 )

Less than 12 Months

12 Months or Longer

December 31, 2020

Total $ 58,574 $ ( 4,543 ) $ 15,339 $ ( 1,808 ) $ 73,913 $ ( 6,351 )

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 date noted (dollars in thousands, before tax):

Less than 12 Months 12 Months or Longer Total

December 31, 2021 Fair

Value Unrealized

Investment securities available-for-sale:

Treasury Debt $ 247 $ ( 3 ) $ — $ — $ 247 $ ( 3 )

Corporate bonds 485 ( 15 ) — — 485 ( 15 )

GNMA mortgage-backed securities - residential 17,205 ( 146 ) — — 17,205 $ ( 146 )

Corporate CMO and MBS — — 521 ( 18 ) 521 ( 18 )

Total $ 17,937 $ ( 164 ) $ 521 $ ( 18 ) $ 18,458 $ ( 182 )

The Company did not sell any securities during the years ended December 31, 2022 or 2021.

NOTE 4 – CORRESPONDENT BANK STOCK

The following presents the Company’s investments in correspondent bank stock, as of the dates noted (in thousands):

The following presents the Company’s investments in correspondent bank stock, as of the dates noted (dollars in thousands):

FHLB $ 7,078 $ 1,625

Total $ 7,110 $ 2,584

NOTE 5 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

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

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

2022 December 31,

Cash, Securities and Other (1)

$ 165,670 $ 261,190

Consumer and Other (2)

49,954 34,758

Construction and Development 288,497 178,716

3 unchanged sentences

Commercial and Industrial (3)

361,028 203,584

Total loans held for investment 2,476,135 1,954,168

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

( 6,722 ) ( 5,031 )

Allowance for loan losses ( 17,183 ) ( 13,732 )

Loans, net $ 2,452,230 $ 1,935,405

_____________________________

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

(1) Includes Paycheck Protection Program ("PPP") loans of $ 7.1 million and $ 46.8 million as of December 31, 2022 and 2021, respectively.

(2) Includes $ 23.4 million of unpaid principal balance of loans held for investment measured at fair value as of December 31, 2022.

(3) Includes MSLP loans of $ 6.6 million and $ 6.8 million as of December 31, 2022 and 2021, respectively.

As of December 31, 2021, total loans held for investment included $ 356.7 million and $ 127.2 million, respectively, of performing loans purchased through mergers or acquisitions.

The CARES Act created the PPP, which is administered by the SBA.

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

As of December 31, 2022 and 2021, total loans held for investment included $ 234.7 million and $ 356.7 million, respectively, of performing loans purchased through mergers or acquisitions.

As of December 31, 2022, Consumer and Other included $ 23.4 million of unpaid principal balance of loans held for investment measured at fair value.

See Note 17 – Fair Value Option.

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.

4 unchanged sentences

As of December 31, 2022, the Company’s Commercial and Industrial loans included five MSLP loans with the net carrying amount of $ 6.6 million, or 1.8 % of the total category.

As of December 31, 2020, the Company’s Commercial and Industrial loans included six MSLP loans with the net carrying amount of $ 6.6 million, or 4.5 % of the total category.

As of December 31, 2021, the Company’s Commercial and Industrial loans included five MSLP loans with the net carrying amount of $ 6.8 million, or 3.3 % of the total category.

Loan Modifications

1 unchanged sentence

As of December 31, 2021, the deferral period has ended for all loans previously modified and payments have resumed under the original terms.

As of December 31, 2021, the Company’s loan portfolio included 69 loans which were previously modified under the loan modification program, totaling $ 130.4 million.

In 2021, the deferral period ended for all non-acquired loans previously modified and payments have resumed under the original terms.

As of December 31, 2022, the Company’s loan portfolio included 49 non-acquired loans which were previously modified under the loan modification program, totaling $ 78.4 million.

Through the Teton Acquisition, the Company acquired loans which were previously modified and are still in their deferral period.

As of December 31, 2022, there were 14 of these loans, totaling $ 3.3 million.

The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as a TDR.

1 unchanged sentence

Interagency guidance from Federal Reserve and the FDIC confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs.

We believe our loan modification program meets that definition.

In accordance with that guidance, the Company is recognizing interest income on all loans modified for temporary payment moratoriums, primarily for a period of 180 days or less.

All loans modified in response to COVID-19 are classified as performing and pass rated as of December 31, 2021 and 2020.

We believe our loan modification program meets that definition and have not classified any of these modifications as a TDR as of December 31, 2022 and 2021.

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 December 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.

Excluding loans acquired through the Teton Acquisition, the portion of our credit exposure to the highest risk industries impacted by COVID-19, such as accommodations, transportation, and restaurants, is less than 4.3 % 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 December 31, 2021 and 2020, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

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

As of December 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, and unamortized premiums/(unaccreted discounts) which are not material) in loans past due as of the dates noted (dollars in thousands):

December 31, 2022 30-59

Past Due 60-89

Past Due 90 or

Past Due Total

Past Due Current Total

Cash, Securities and Other $ 1,735 $ 539 $ 4 $ 2,278 $ 163,392 $ 165,670

Consumer and Other 996 167 145 1,308 48,646 49,954

Construction and Development — — 201 201 288,296 288,497

3 unchanged sentences

Commercial and Industrial 5,051 10,724 1,318 17,093 343,935 361,028

Total $ 11,767 $ 11,430 $ 1,668 $ 24,865 $ 2,451,270 $ 2,476,135

December 31, 2021 30-59

Past Due 60-89

Past Due 90 or

Past Due Total

Past Due Current Total

Cash, Securities and Other $ 745 $ — $ 6 $ 751 $ 260,439 $ 261,190

Consumer and Other 454 — 2 456 34,302 34,758

Construction and Development 2,758 — — 2,758 175,958 178,716

3 unchanged sentences

Commercial and Industrial 748 — 2,200 2,948 200,636 203,584

As of December 31, 2021 the Company had one loan, totaling an immaterial amount, in the Commercial and Industrial portfolio that was more than 90 days delinquent and accruing interest.

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

Total $ 7,573 $ 2,548 $ 2,208 $ 12,329 $ 1,941,839 $ 1,954,168

As of December 31, 2022 and 2021, the Company had one 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 thousands):

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

2022 December 31,

Cash, Securities and Other $ 4 $ 6

Consumer and Other 146 2

Construction and Development 201 —

1-4 Family Residential — 75

1 unchanged sentence

Commercial and Industrial 10,833 2,938

Total $ 12,349 $ 4,262

Non-accrual loans classified as TDR accounted for $ 3.1 million of the recorded investment as of December 31, 2022 and $ 4.3 million as of December 31, 2021.

Non-accrual loans are classified as impaired loans and individually evaluated for impairment.

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

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

2022 December 31,

Non-Owner Occupied CRE $ — $ 55

3 unchanged sentences

Commercial and Industrial 1,951 2,938

Total 3,120 4,315

Allowance for loan losses associated with TDR — ( 1,751 )

1 unchanged sentence

As of December 31, 2022 and December 31, 2021, the Company had no t committed any additional funds to a borrower with a loan classified as a TDR.

The Company did no t modify any loans resulting in TDR status during the year ended December 31, 2022.

The Company modified three 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.

As a result, we modified the loan at the maturity date with a one-year renewal to allow the borrower time to seek a refinance.

As of December 31, 2022, the loan has been paid in full as agreed in the loan 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.

The borrower had experienced a reduction in cash flow through ongoing impact from the pandemic and related shut downs and hiring shortages.

As a result, the Company modified both loans allowing for a six month interest only period to provide cash flow relief.

1 unchanged sentence

All three of the loans modified during 2021 were sufficiently collateralized and therefore did not require any specific reserve.

The Company modified one loan into a TDR 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 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.

1 unchanged sentence

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

December 31, 2021

December 31, 2020

December 31, 2022 December 31, 2021

Investment Unpaid

Balance Allowance

Investment Unpaid

Balance Allowance

Impaired loans with a valuation allowance:

Cash, Securities, and Other

Consumer and Other $ — $ — $ — $ 2 $ 2 $ 2

Commercial and Industrial — — — 2,190 2,190 1,751

Total $ — $ — $ — $ 2,192 $ 2,192 $ 1,753

Impaired loans with no related valuation allowance:

Cash, Securities, and Other $ 4 $ 4 $ — $ 6 $ 6 $ —

Construction and Development 201 201 — — — —

1-4 Family Residential — — — 75 75 —

1 unchanged sentence

Commercial and Industrial 10,833 10,833 — 748 748 —

Total $ 12,203 $ 12,203 $ — $ 2,070 $ 2,070 $ —

Total impaired loans:

Cash, Securities, and Other $ 4 $ 4 $ — $ 6 $ 6 $ —

Consumer and Other — — — 2 2 2

Construction and Development 201 201 — — — —

Commercial and Industrial 10,833 10,833 — 2,938 2,938 1,751

1-4 Family Residential — — — 75 75 —

Owner Occupied CRE 1,165 1,165 — 1,241 1,241 —

Commercial and Industrial

The recorded investment in loans in the previous tables excludes accrued interest, deferred costs (fees), and unamortized premiums/(unaccreted discounts), which are not material.

Total $ 12,203 $ 12,203 $ — $ 4,262 $ 4,262 $ 1,753

The recorded investment in loans in the previous tables excludes accrued interest, deferred fees, and unamortized premiums/(unaccreted discounts), which are not material.

Interest income, if any, was recognized on the cash basis on non-accrual loans.

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

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

Investment Interest

Recognized Average

Investment Interest

Impaired loans with a valuation allowance:

Cash, Securities, and Other $ — $ — $ 2 $ —

Consumer and Other 1 — — —

Commercial and Industrial — — 2,413 21

Total $ 1 $ — $ 2,415 $ 21

Impaired loans with no related valuation allowance:

Cash, Securities, and Other $ 4 $ — $ 17 $ —

Construction and Development 81 — — —

Owner Occupied CRE 1,201 — 248 51

1 unchanged sentence

1-4 Family Residential 57 — 15 —

Total $ 5,640 $ — $ 485 $ 313

Total impaired loans:

Cash, Securities, and Other $ 4 $ — $ 19 $ —

Consumer and Other 1 — — —

Construction and Development 81 — — —

Owner Occupied CRE 1,201 — 248 51

1 unchanged sentence

1-4 Family Residential 57 — 15 —

Total $ 5,641 $ — $ 2,900 $ 334

_____________________________

(•) The Company recognized an immaterial amount of interest income during the period.

Allowance for Loan Losses

1 unchanged sentence

The following presents the activity in the Company’s allowance for loan losses by portfolio class for the periods presented (in thousands):

and Other Consumer and Other Construction

Development 1-4

Residential Non-Owner

CRE Commercial

Industrial Total

Changes in allowance for loan losses for the year ended December 31, 2022

1 unchanged sentence

(Recovery of)/provision for loan losses ( 399 ) 84 933 2,756 538 218 ( 448 ) 3,682

Charge-offs ( 1 ) ( 262 ) — — — — ( 71 ) ( 334 )

Recoveries — 103 — — — — — 103

Ending balance $ 1,198 $ 191 $ 2,025 $ 6,309 $ 3,490 $ 1,510 $ 2,460 $ 17,183

Allowance for loan losses as of December 31, 2022 allocated to loans evaluated for impairment:

Individually $ — $ — $ — $ — $ — $ — $ — $ —

Collectively 1,198 191 2,025 6,309 3,490 1,510 2,460 17,183

Ending balance $ 1,198 $ 191 $ 2,025 $ 6,309 $ 3,490 $ 1,510 $ 2,460 $ 17,183

Loans as of December 31, 2022, evaluated for impairment:

Individually $ 4 $ — $ 201 $ — $ — $ 1,165 $ 10,833 $ 12,203

Collectively 165,666 26,539 288,296 898,154 496,776 214,891 350,195 2,440,517

Measured at fair value — 23,415 — — — — — 23,415

Ending balance $ 165,670 $ 49,954 $ 288,497 $ 898,154 $ 496,776 $ 216,056 $ 361,028 $ 2,476,135

and Other Consumer and Other Construction

Development 1-4

Residential Non-Owner

CRE Commercial

Industrial Total

Changes in allowance for loan losses for the year ended December 31, 2021

1 unchanged sentence

Provision for/(recovery of) loan losses ( 841 ) 163 160 320 948 133 347 1,230

Charge-offs — ( 44 ) — — — — — ( 44 )

Recoveries — 7 — — — — — 7

Ending balance $ 1,598 $ 266 $ 1,092 $ 3,553 $ 2,952 $ 1,292 $ 2,979 $ 13,732

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

Individually $ — $ 2 $ — $ — $ — $ — $ 1,751 $ 1,753

Collectively 1,598 264 1,092 3,553 2,952 1,292 1,228 11,979

Ending balance $ 1,598 $ 266 $ 1,092 $ 3,553 $ 2,952 $ 1,292 $ 2,979 $ 13,732

Loans as of December 31, 2021, evaluated for impairment:

Individually $ 6 $ 2 $ — $ 75 $ — $ 1,241 $ 2,938 $ 4,262

Collectively 261,184 34,756 178,716 580,797 482,622 211,185 200,646 1,949,906

Ending balance $ 261,190 $ 34,758 $ 178,716 $ 580,872 $ 482,622 $ 212,426 $ 203,584 $ 1,954,168

8 unchanged sentences

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.

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.

1 unchanged sentence

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.

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

December 31, 2021

The following presents, by class and by credit quality indicator, the recorded investment in the Company’s loans as of the dates noted (dollars in thousands):

December 31, 2022 Pass Special

Mention Substandard Not Rated Total

Cash, Securities and Other $ 165,666 $ — $ 4 $ — $ 165,670

Consumer and Other 26,539 — — 23,415 49,954

Construction and Development 288,296 — 201 — 288,497

3 unchanged sentences

Commercial and Industrial 347,803 2,392 10,833 — 361,028

December 31, 2020

Total $ 2,438,125 $ 2,392 $ 12,203 $ 23,415 $ 2,476,135

December 31, 2021 Pass Special

Mention Substandard Not Rated Total

Cash, Securities and Other $ 261,184 $ — $ 6 $ — $ 261,190

Consumer and Other 34,756 — 2 — 34,758

Construction and Development 176,194 2,522 — — 178,716

3 unchanged sentences

Commercial and Industrial 198,368 401 4,815 — 203,584

Total $ 1,938,462 $ 8,875 $ 6,831 $ — $ 1,954,168

The Company had no loans graded doubtful as of the years ended December 31, 2022 and 2021.

NOTE 6 – PREMISES AND EQUIPMENT, NET

The following presents a summary of the cost and accumulated depreciation of premises and equipment as of December 31 (in thousands):

The following presents a summary of the cost and accumulated depreciation of premises and equipment as December 31 (dollars in thousands):

Building and building improvements $ 12,190 $ 12,190

Leasehold improvements, including artwork 12,879 11,464

Land 4,980 4,980

Equipment and software 5,815 6,144

2 unchanged sentences

Premises and equipment, net $ 25,118 $ 23,976

During the year ended December 31, 2022, the Company retired an immaterial amount of equipment and software for an immaterial loss.

During the year ended December 31, 2021, the Company acquired buildings and land associated with the Teton Acquisition.

These assets were recorded at their fair value on December 31, 2021 and the buildings will be depreciated over their remaining useful lives.

During the year ended December 31, 2020, the Company retired leasehold improvements, equipment, and software in the amount of $ 1.1 million for an immaterial loss.

Depreciation expense for premises and equipment for the years ended December 31, 2022 and 2021 totaled $ 1.8 million and $ 1.2 million, respectively.

NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill were as follows as of December 31 (in thousands):

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

2022 December 31,

Beginning balance $ 30,588 $ 24,191

2 unchanged sentences

During the year ended December 31, 2021, the Company recorded $ 6.4 million of goodwill as a result of the Teton Acquisition on December 31, 2021.

During the year ended December 31, 2020, the Company recorded $ 4.5 million of goodwill as a result of the Simmons Branch Acquisition on May 15, 2020.

For additional information on goodwill and other intangible related to the Teton and Simmons Branch Acquisitions, see Note 2 – Acquisitions.

In the first quarter of 2022, goodwill was adjusted by ($ 0.2 ) million as a result of the measurement period adjustments.

See Note 2 – Acquisitions for more information.

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

Step 1 of the goodwill impairment analysis includes the determination of the carrying value of the reporting unit, including the existing goodwill, and estimating the fair value of the reporting unit.

If the carrying amount of a reporting unit exceeds its fair value, we are not required to perform the second step to the impairment test.

As of December 31, 2021, 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 its carrying value.

Therefore, the Company did not complete the two-step impairment test.

The following presents the Company’s intangible assets and related accumulated amortization as of December 31 (in thousands):

The goodwill impairment analysis includes the determination of the carrying value of the reporting unit, including the existing goodwill, and estimating the fair value of the reporting unit.

If the fair value is less than its carrying amount, goodwill impairment is recognized equal to the difference between the fair value and its carrying amount, not to exceed its carrying amount.

As of December 31, 2022, there has not been any impairment of goodwill identified or recorded.

Goodwill totaled $ 30.4 million and $ 30.6 million as of December 31, 2022 and 2021, respectively.

The following presents the Company’s intangible assets and related accumulated amortization as of the dates noted (dollars in thousands):

Other intangibles $ 5,926 $ 5,857

1 unchanged sentence

Other intangible assets, net $ 1,704 $ 1,314

Amortization expense on definite-lived customer relationship and non-compete intangible assets was immaterial for the years ended December 31, 2021 and 2020.

The following presents the expected amortization expense on definite-lived intangible assets existing as of December 31, 2021 (in thousands):

Amortization expense on definite-lived customer relationship and non-compete intangible assets was $ 0.3 million and an immaterial amount for the years ended December 31, 2022 and 2021, respectively.

The following presents the expected amortization expense on definite-lived intangible assets existing as of December 31, 2022 (dollars in thousands):

Thereafter 646

Total $ 1,704

NOTE 8 - 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 assets and corresponding liabilities within the Consolidated Balance Sheets.

The Company elected to not include short-term leases with initial terms of twelve months or less, on the Consolidated Balance Sheets (in thousands):

Lease Right-of-Use Assets

Classification

Operating lease right-of-use assets

Lease Liabilities

Classification

Operating lease liabilities

Other liabilities

The Company elected to not include short-term leases with initial terms of twelve months or less, on the Consolidated Balance Sheets.

The following table presents the classification of the right-of-use assets and corresponding liabilities within the Consolidated Balance Sheets, as of the dates noted (dollars in thousands):

2022 December 31,

Lease Right-of-Use Assets Classification

Operating lease right-of-use assets Other assets $ 8,602 $ 10,720

Lease Liabilities Classification

Operating lease liabilities Other liabilities $ 11,163 $ 13,863

The Company’s operating lease agreements typically include an option to renew the lease at the Company’s discretion.

3 unchanged sentences

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.

2022 December 31,

Weighted-Average Remaining Lease Term

Operating leases

Operating leases 4.85 years 5.26 years

Weighted-Average Discount Rate

3 unchanged sentences

The Company recognized lease costs in Occupancy and equipment expense in the accompanying Consolidated Statements of Income.

The following table represents the Company’s net lease costs (in thousands):

The following represents the Company’s net lease costs during the periods presented (dollars in thousands):

Year Ended December 31,

1 unchanged sentence

Variable lease cost 2,104 1,756

Sublease income

Lease costs, net $ 5,255 $ 4,796

The following 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 December 31, 2021.

Year Ending December 31,

Operating Leases

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

Year Ending December 31, Operating Leases

Thereafter 1,752

Total future minimum lease payments 11,748

3 unchanged sentences

In accordance with ASC 842, these leases have been accounted for as operating leases.

These leases were acquired as part of the Teton Acquisition and as such, no rental income is reflected as of December 31, 2021.

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 December 31, 2021:

Year Ending December 31,

Undiscounted Operating Lease Income

During the year ended December 31, 2022, the Company recognized $ 0.3 million of lease income .

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

Year Ending December 31, Undiscounted Operating Lease Income

Total undiscounted operating lease income $ 441

NOTE 9 - DEPOSITS

The following presents the Company’s interest bearing deposits as of December 31, 2021 and 2020 (in thousands):

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

2022 December 31,

Money market deposit accounts $ 1,336,092 $ 1,056,669

3 unchanged sentences

Total interest-bearing deposits $ 1,822,137 $ 1,569,399

Aggregate time deposits of $250 or greater

Deposits acquired through acquisitions on December 31, 2021 and May 15, 2020 totaled $ 379.2 million and $ 63.1 million, respectively.

See Note 2 – Acquisitions.

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

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

Year Ending December 31,

Time Deposits

Estimated aggregate time deposits of $250 or greater $ 77,972 $ 75,747

Deposits acquired through the Teton acquisition closed on December 31, 2021 totaled $ 379.2 million.

See Note 2 – Acquisitions for additional information.

Overdraft balances classified as loans totaled $ 0.2 million and an immaterial amount as of December 31, 2022 and 2021, respectively.

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

Year Ending December 31, Time Deposits

2023 $ 181,036

Total $ 224,090

NOTE 10 - 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 December 31, 2021 and December 31, 2020 amounted to $ 771.4 million and $ 668.6 million, respectively.

The collateral pledged as of December 31, 2022 and December 31, 2021 amounted to $ 1.26 billion and $ 771.4 million, respectively.

Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $ 751.2 million as of December 31, 2022.

Each advance is payable at its maturity date.

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

Maturity Date

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

Maturity Date Rate % December 31,

2022 December 31,

April 22, 2022 0.37 $ — $ 5,000

January 1, 2023 (1)

4.48 131,498 —

May 5, 2023 0.76 10,000 10,000

Total $ 141,498 $ 15,000

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

To bolster the effectiveness of the SBA’s PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing collateralized by PPP loans to small businesses.

The Paycheck Protection Program Liquidity Facility ("PPPLF") extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value and bearing interest at 35 bps.

The terms of the loans are directly tied to the underlying PPP loans, which were originated at 2 or 5 years.

For the years ended December 31, 2021 and 2020, the Company is utilizing $ 23.6 million and $ 134.6 million, respectively, under the PPPLF program which is included in the FHLB and Federal Reserve borrowings line of the Consolidated Balance Sheets.

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.

For the years ended December 31, 2022 and 2021, the Company had outstanding $ 5.4 million and $ 23.6 million, respectively, under the PPPLF program which is included in the FHLB and Federal Reserve borrowings line of the Consolidated Balance Sheets.

The Bank has borrowing capacity associated with two unsecured federal funds lines of credit up to $ 10.0 million and $ 19.0 million.

As of December 31, 2022 and 2021, there were no amounts outstanding on any of the federal funds lines.

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 resulting in a net balance of $ 7.9 million as of December 31, 2021 included in the Subordinated notes line of the 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.

On October 28, 2020, the Company entered into a Business Loan Agreement and associated Promissory Note (the “Note”), dated June 30, 2020, with a corresponding lending partner.

The Note is secured by stock of the Bank and bears interest at the one month ICE Benchmark Administration (“IBA”) LIBOR plus 2.5 %.

As of December 31, 2020, there were no 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.

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.

On December 5, 2022, the Company completed the issuance and sale of subordinated notes (the "December 2022 Sub Notes") totaling $ 20.0 million in aggregate principal amount.

The issuance included $ 0.5 million of issuance costs resulting in a net balance of $ 19.5 million as of December 31, 2022 included in the Subordinated notes line of the 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;

The December 2022 Sub Notes accrue interest at a rate of 7.00 % per annum until December 15, 2027, at which time the rate will reset quarterly to an interest rate per annum equal to three-month term SOFR, or an alternative rate determined in accordance with the terms of the December 2022 Sub Notes, plus 328 basis points, payable quarterly in arrears;

mature on December 15, 2032;

are redeemable at the option of the Company on or after December 15, 2027.

and pay interest semi-annually prior to December 1, 2025 and quarterly after December 1, 2025.

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 a net balance of $ 14.7 million as of December 31, 2021 included in the Subordinated notes line of the Consolidated Balance Sheets.

On January 1, 2022, the Company redeemed the subordinated notes due December 31, 2026 in the amount of $ 6.6 million, which were redeemable on or after January 1, 2022.

The redemption price was equal to 100 % of the principal amount being redeemed, plus accrued and unpaid interest up to, but excluding the date of redemption.

On August 31, 2021, the Company completed the issuance and sale of subordinated notes (the Notes”) totaling $ 15.0 million in aggregate principal amount and including $ 0.3 million of issuance costs.

As of December 31, 2022, $ 14.8 million was included in the Subordinated notes line of the 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;

2 unchanged sentences

and pay interest quarterly.

The Company has outstanding subordinated notes due December 31, 2026, totaling $ 6.6 million in aggregate principal amount, which become redeemable on or after January 1, 2022.

On December 22, 2021, the Company elected to redeem the notes and notified debt holders.

The redemption price is equal to 100 % of the principal amount being redeemed, plus accrued and unpaid interest up to, but excluding the date of redemption.

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 and including $ 0.2 million of issuance costs.

As of December 31, 2022, $ 9.9 million was included in the Subordinated notes line of the Consolidated Balance Sheets.

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 and including $ 0.1 million of issuance costs.

As of December 31, 2022, $ 7.9 million was included in the Subordinated notes line of the Consolidated Balance Sheets.

mature on March 31, 2030;

are redeemable at the option of the Company on or after March 31, 2025;

and pay interest quarterly.

For the years ended December 31, 2022 and 2021, the Company recorded $ 1.4 million and $ 1.5 million, respectively, of interest expense related to the collective subordinated notes.

The subordinated notes are included in Tier 2 capital under current regulatory guidelines and interpretations, subject to limitations.

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 Note 22 – Regulatory Capital Matters for more information.

See Note 22 – Regulatory Capital Matters for additional information.

As of December 31, 2022 and 2021, the Company was in compliance with the covenant requirements.

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The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

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

December 31, 2021

December 31, 2020

Variable Rate

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

December 31, 2022 December 31, 2021

Fixed Rate Variable Rate Fixed Rate Variable Rate

Unused lines of credit $ 211,285 $ 601,202 $ 136,289 $ 442,035

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The Company holds collateral supporting those commitments if deemed necessary.

Commitments to make loans to sell are agreements to sell a loan 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 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.

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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 consolidated financial statements.

Without admitting or denying the SEC’s findings, First Western Capital Management (“FWCM”), a previously owned subsidiary of First Western, agreed on July 16, 2020 to settle claims that FWCM failed reasonably to supervise its investment adviser representatives who purchased securities sold in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), for advisory clients when the clients were not qualified institutional buyers in a Rule 144A transaction, and to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 and the rules thereunder by the adviser and its supervised persons.

The Company had since replaced the FWCM President and FWCM compliance team which were in place during that time.

FWCM recognized and paid a fine of $ 0.2 million to the SEC in 2020.

NOTE 12 – SHAREHOLDERS’ EQUITY

The Company’s common stock has no par value and each holder of common stock is entitled to one vote for each share (though certain voting restrictions may exist on non-vested restricted stock) held.

On June 14, 2019, the Company announced that its board of directors had authorized a share repurchase plan (the "2019 Repurchase Plan") under which the Company may repurchase up to 300,000 shares of its common stock and that the Board of Governors of the Federal Reserve System advised the Company that it had no objection to the Company’s 2019 Repurchase Plan.

The 2019 Repurchase Plan was in effect for a one-year period, with the timing of purchases and the number of shares repurchased under the program dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements and market conditions.

The 2019 Repurchase Plan expired in June 2020.

During the year ended December 31, 2020, the Company repurchased 22,679 shares at an average price of $ 16.50 .

On November 3, 2020, the Company announced that its board of directors authorized the 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 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.

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

During the year ended December 31, 2022, the Company sold no shares of common stock.

The Company may have repurchased shares in privately negotiated transactions, in the open market, including pursuant to any trading plan that might 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 did not obligate the Company to acquire a specific dollar amount or number of shares and it may have extended, modified or discontinued at any time without notice.

The 2020 Repurchase Plan expired in November 2021.

During the year ended December 31, 2021, the Company did not repurchase any shares under the 2020 Repurchase plan.

During the year ended December 31, 2020, the Company repurchased 426 shares at an average price of $ 17.30 under the authorization of the 2020 Repurchase Plan.

On December 31, 2021, the Company closed on the Merger Agreement with Teton.

As part of the Merger Agreement, the Company issued 1,337,791 shares of common stock to Teton shareholders.

For additional information, see Note 2 – Acquisitions.

During the years ended December 31, 2021 and 2020, the Company sold no shares of common stock.

For additional information, see Note 2 – Acquisitions for additional information.

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 .

The remaining $ 1.5 million, or 52,632 shares, may be earned based on performance of the mortgage division of the Company.

During the year ended December 31, 2020, the Company recognized compensation expense of $ 0.1 million, representing the remaining 14,114 shares, related to the performance based awards.

The performance based awards fully vested in the second quarter of 2020.

Half of the Restricted Stock Awards ($ 1.5 million or 52,632 shares) vested ratably over five years .

These awards fully vested during the year ended Decembere 31, 2022.

The remaining $ 1.5 million, or 52,632 shares, were able to be earned based on performance of the mortgage division of the Company.

The performance based awards fully vested during the year ended December 31, 2020.

As of December 31, 2022 and 2021, the Restricted Stock Awards have a weighted-average grant date fair value of $ 28.50 per share.

During the years ended December 31, 2021 and 2020, the Company recognized compensation expense of $ 0.3 million and $ 0.4 million, respectively, for all the Restricted Stock Awards.

As of December 31, 2021, the Company has $ 0.2 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 the year ended December 31, 2021, 10,526 shares of the Restricted Stock Awards vested.

During the year ended December 31, 2020, 10,527 of the Restricted Stock Awards and 30,088 shares of the performance based Restricted Stock Awards vested.

During the years ended December 31, 2022 and 2021, the Company recognized compensation expense of $ 0.2 million and $ 0.3 million, respectively, for the Restricted Stock Awards.

During the years ended December 31, 2022 and 2021, 10,527 and 10,526 shares, respectively, of the restricted stock awards vested.

As of December 31, 2022, all restricted stock awards were fully vested and no unrecognized compensation expense remains.

Stock-Based Compensation Plans

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As of December 31, 2022, there were a total of 329,035 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.

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The Company did not grant any stock options during the years ended December 31, 2022 and 2021.

During the years ended December 31, 2021 and 2020, the Company recognized an immaterial amount and $ 0.2 million, respectively, of stock based compensation expense associated with stock options.

During the year ended December 31, 2022, the Company recognized no stock based compensation expense associated with stock options.

During the year ended December 31, 2021, the Company recognized an immaterial amount of stock based compensation expense associated with stock options.

As of December 31, 2022, the Company has no unrecognized stock-based compensation expense related to stock options.

The following presents activity for nonqualified stock options for the year ended December 31, 2022:

Options Weighted

Price Weighted

Term Aggregate

Outstanding as of December 31, 2021 308,574 $ 29.21

Exercised ( 8,309 ) 21.50

Forfeited or expired ( 116,100 ) 40.00

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Options fully vested/exercisable as of December 31, 2022 184,165 22.76 2.1 (1)

_____________________________

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

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Pursuant to the 2016 Plan, the Company can grant associates and non-associate directors long-term cash and stock-based compensation.

During the year ended December 31, 2021, the Company granted certain associates restricted stock units which are earned over time or based on various performance measures and convert to common stock upon vesting, which are summarized here and expanded further below:

The following presents the activity for the Time Vesting Units, the Financial Performance Units and the Market Performance Units for the year ended December 31, 2021:

Historically, the Company has granted certain associates restricted stock units which are earned

over time or based on various performance measures and convert to common stock upon vesting, which are summarized here and expanded further below:

The following presents the activity for the Time Vesting Units, the Financial Performance Units and the Market Performance Units during the year ended December 31, 2022:

Units Financial

Outstanding as of December 31, 2021 249,821 183,483 13,746

Granted 157,682 92,697 —

Vested ( 83,918 ) ( 12,100 ) —

Forfeited ( 37,590 ) ( 28,568 ) ( 13,746 )

Outstanding as of December 31, 2022 285,995 235,512 —

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Time Vesting Units

The Time Vesting Units are granted to full-time associates and board members at the date approved by the Company’s board of directors.

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 157,682 Time Vesting Units with a five-year service period during the year ended December 31, 2022, that vest in equal installments of 20 % on the anniversary of the grant date, assuming continuous employment through the scheduled vesting dates.

During the years ended December 31, 2021 and 2020, the Company recognized compensation expense of $ 1.7 million and $ 1.4 million, respectively, for the Time Vesting Units.

During both the years ended December 31, 2022 and 2021, the Company recognized compensation expense of $ 1.7 million for the Time Vesting Units.

As of December 31, 2022, there was $ 5.8 million of unrecognized compensation expense related to the Time Vesting Units, which is expected to be recognized over a weighted-average period of 1.9 years.

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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 December 31, 2021 (dollars in thousands):

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

63 % on half;

135 % on other half

December 31, 2019

December 31, 2021

May 1, 2019 through April 30, 2020

December 31, 2021

December 31, 2023

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

December 31, 2022

December 31, 2023

On November 18, 2020

December 31, 2022

50 % November 18, 2023 and 2025

May 3, 2021 through August 11, 2021

December 31, 2023

December 31, 2025

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

Grant Period Threshold Accrual Maximum

Issuable Shares at

Current Threshold Unrecognized Compensation Expense Weighted-Average Life (1)

Financial Metric End Date Vesting Requirement End Date

May 1, 2019 through April 30, 2020 150 % 69,306 $ 145 1.0 years December 31, 2021 December 31, 2023

May 1, 2020 through December 31, 2020, excluding November 18, 2020 150 % 74,364 267 2.0 years December 31, 2022 December 31, 2023

On November 18, 2020 115 % 24,161 238 1.9 years December 31, 2022 50 % November 18, 2023 and 2025

May 3, 2021 through August 11, 2021 150 % 53,882 604 3.0 years December 31, 2023 December 31, 2025

May 2, 2022 through November 2, 2022, excluding August 4, 2022 (2)

— % — — 4.0 years December 31, 2024 December 31, 2026

On August 4, 2022 (3)

100 % 18,181 680 4.0 years December 31, 2024 December 31, 2026

_____________________________

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

(2) As the performance threshold is not expected to be met in future performance periods, there is no related unrecognized compensation as of December 31, 2022.

(3) Performance threshold was not met for the year ended December 31, 2022.

The 100% threshold is expected to be met for the years ended December 31, 2023 and 2024.

The following presents the Company’s Financial Performance Units activity for the years noted December 31 (dollars in thousands):

Units Granted

Compensation Expense Recognized

Units Granted Compensation Expense Recognized

Grant Period 2022 2021 2022 2021

Prior to May 1, 2019 — — $ — $ 110

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May 3, 2021 through August 11, 2021 — 41,743 273 221

May 2, 2022 through November 2, 2022, excluding August 4, 2022 (1)

On August 4, 2022 (2)

27,272 — 47 —

_____________________________

(1) Performance threshold was not met for the year ended December 31, 2022;

therefore, no compensation expense was recognized as of the year ended December 31, 2022.

(2) Performance threshold was not met for the year ended December 31, 2022.

The 100% threshold is expected to be met for the years ended December 31, 2023 & 2024.

Market Performance Units

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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 years ended December 31, 2021 and 2020, the Company recognized an immaterial amount of compensation expense for the Market Performance Units.

As of December 31, 2021, there was 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.

Subsequent to the performance condition there was also a market condition as a vesting requirement for the Market Performance Units.

If the Company's common stock was 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, which ended on June 30, 2022.

The Company's common stock did not trade at or above the required prices over the performance period and as a result, no Market Performance Units were eligible to be earned.

During the year ended December 31, 2022, the Company recognized an immaterial amount of compensation expense for the Market Performance Units.

During the year ended December 31, 2021, the Company recognized an immaterial amount of compensation expense for the Market Performance Units.

As of the end of the subsequent service period, or June 30, 2022, the Company had no remaining unrecognized compensation expense related to the Market Performance Units.

NOTE 13 - EARNINGS PER COMMON SHARE

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

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

Year Ended December 31,

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

For the years ended December 31, 2021 and 2020, potentially dilutive securities excluded from the diluted earnings per share calculation are as follows:

The following presents potentially dilutive securities excluded from the diluted earnings per share calculation during the periods presented:

Year Ended December 31,

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NOTE 14 - INCOME TAXES

The following presents the components of the Company’s income tax expense as of December 31 (in thousands):

The following presents the components of the Company’s income tax expense as of December 31 (dollars in thousands):

Federal $ 5,637 $ 6,228

State and local 936 1,110

Total current tax expense 6,573 7,338

Federal 536 ( 734 )

State and local ( 55 ) 66

Valuation allowance 76 —

Total deferred tax benefit

Total deferred tax expense (benefit) 557 ( 668 )

Income tax expense $ 7,130 $ 6,670

The following is a reconciliation of income taxes reflected on the Consolidated Statements of Income for the years ended December 31, 2021 and 2020, with income tax expense computed by applying the United States federal income tax rate of 21 % to income before income taxes (in thousands):

The following is a reconciliation of income taxes reflected on the Consolidated Statements of Income for the years ended December 31, 2022 and 2021, with income tax expense computed by applying the United States federal income tax rate of 21 % to income before income taxes (dollars in thousands):

Income tax expense computed at 21 % statutory rate

$ 6,054 $ 5,729

Permanent differences 101 169

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Valuation allowance 76 —

Other, net ( 80 ) ( 399 )

Income tax expense $ 7,130 $ 6,670

The following presents the principal components of the Company’s deferred tax items as of December 31 (in thousands):

The following presents the principal components of the Company’s deferred tax items as of December 31 (dollars in thousands):

Deferred tax assets:

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Acquired loans fair market value adjustments 826 976

Acquisition related basis adjustment

Assets acquired at fair value — 226

Loans accounted for under the fair value option 146 —

Deferred rent 621 753

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Other intangible assets 254 279

Unrealized losses on securities 495 —

Accrued bonuses — 868

Loan fees 459 —

Accrued expenses — 821

Other 1,574 382

Total deferred tax assets 10,717 10,348

Deferred tax liabilities:

Goodwill ( 1,087 ) ( 1,137 )

Depreciation ( 1,864 ) ( 1,636 )

Unrealized gain on securities — ( 73 )

Loan fees — ( 155 )

Acquired loans fair market value adjustments ( 215 ) —

Other ( 189 ) ( 130 )

Total deferred tax liabilities ( 3,355 ) ( 3,131 )

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Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the total deferred tax assets.

The net operating loss ("NOL") carryforwards expire in tax years 2028 through 2032.

As of December 31, 2021, the Company has $ 5.5 million of California NOLs available for utilization, compared to $ 6.5 million as of December 31, 2020.

The net operating loss ("NOL") carryforwards expire in tax years 2028 through 2032.

As of December 31, 2022 and December 31, 2021, the Company had $ 5.5 million of California NOLs available for utilization.

For taxable years 2020, 2021, and 2022, California has suspended the NOL carryover deduction.

On February 9, 2022, Senate Bill 113 was signed to reinstate the NOL deduction for businesses and individuals that have $1 million or more of net income subject to tax in California for tax years beginning January 1, 2022.

Both corporations and individual tax payers may continue to compute and carryover an NOL during the suspension period.

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During 2020, as a result of this tax legislation and certain divestitures in California, the Company was uncertain as to the probability of realizing the full NOL.

As such, the Company recorded a $ 4.3 million valuation allowance related to the California NOLs, resulting in a tax effected valuation allowance of $ 0.4 million.

As such, the Company recorded a valuation allowance related to the California NOLs.

As of December 31, 2022, $ 5.2 million is recorded as a valuation allowance, resulting in a tax effected valuation allowance of $ 0.4 million.

The Company identified no other material uncertain tax positions for which it is reasonably possible the total amount of unrecognized tax benefits will significantly increase or decrease within 12 months.

For the tax year ended December 31, 2020, the Company’s apportioned California income was just under $1 million and therefore was able to utilize the same amount in NOLs.

The Company and its subsidiaries file tax returns for the United States and for multiple states and localities.

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The Company may elect to make matching contributions as defined by the plan.

For the years ended December 31, 2021 and 2020, the Company expensed matching contributions to the plan totaling $ 1.0 million and $ 0.9 million, respectively.

For the years ended December 31, 2021 and 2020, the Company incurred $ 0.1 million and an immaterial amount, respectively, of administrative fees attributable to the plan.

For the years ended December 31, 2022 and 2021, the Company expensed matching contributions to the plan totaling $ 1.0 million.

For the years ended December 31, 2022 and 2021, the Company incurred $ 0.1 million of administrative fees attributable to the plan.

NOTE 16 – RELATED-PARTY TRANSACTIONS

The Bank extends credit to certain covered parties including Company directors, executive officers, and their affiliates.

As of December 31, 2021 and December 31, 2020, there were no delinquent or no n-performing loans to any executive officer or director of the Company.

As of December 31, 2022 and December 31, 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 thousands):

December 31, 2021

December 31, 2020

The following presents a summary of related-party loan activity as of the dates noted (dollars in thousands):

December 31, 2022 December 31, 2021

Balance, beginning of year $ 12,833 $ 14,321

Funded loans 15,079 11,294

Payments collected ( 11,053 ) ( 12,782 )

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During each of the years ended December 31, 2022 and 2021, the Company incurred $ 0.2 million of expense related to these leases.

The Company earned trust and investment management fees of $ 0.1 million and $ 0.2 million from related parties during the years ended December 31, 2021 and 2020, respectively.

The Company earned trust and investment management fees of $ 0.1 million from related parties during each of the years ended December 31, 2022 and 2021.

Assets under management for those related parties totaled $ 123.5 million and $ 103.1 million as of December 31, 2022 and 2021, respectively.

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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).

Available-for-sale securities :

The fair values for available-for-sale investment securities are determined by quoted market prices, if available (Level 1).

For securities where quoted prices are not available, fair values are calculated based

on market prices of similar securities (Level 2).

For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Equity Securities :

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

Equity Warrants :

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

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 loan sold to FHLB under the MPF 125 loan sales agreement.

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.

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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).

Loans Held for Investment :

The fair value of 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 nature of the valuation inputs, loans held for investment are classified within Level 3 of the 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 December 31, 2021 and December 31, 2020 (in thousands):

Loans Held for Sale :

The fair value of loans held for sale is determined using actual quoted commitments from third party investors resulting in a Level 1 classification.

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

December 31, 2022 Quoted

Active Markets

for Identical

December 31, 2021

Investment securities available-for-sale:

Treasury debt

Government Agency

Corporate bonds

GNMA mortgage-backed securities - residential

FNMA mortgage-backed securities - residential

Government CMO and MBS

Corporate CMO and MBS

Total securities available-for-sale

(Level 1) Significant

(Level 2) Significant

(Level 3) Reported

Mortgage loans held for sale $ — $ 8,839 $ — $ 8,839

Loans held for sale $ 1,965 $ — $ — $ 1,965

Loans held at fair value $ — $ — $ 23,321 $ 23,321

Forward commitments and FSC $ — $ 46 $ — $ 46

Equity securities $ 627 $ 122 $ — $ 749

Guarantee asset $ — $ — $ 143 $ 143

Forward commitments and FSC

Mortgage loans held for sale

IRLC, net $ — $ — $ 229 $ 229

Equity warrants $ — $ — $ 825 $ 825

December 31, 2021 Quoted

Active Markets

for Identical

December 31, 2020

(Level 1) Significant

(Level 2) Significant

(Level 3) Reported

Investment securities available-for-sale:

Treasury debt $ 247 $ — $ — $ 247

Government Agency — 3,522 — 3,522

Corporate bonds — 6,212 2,113 8,325

1 unchanged sentence

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

Forward commitments and FSC

Mortgage loans held for sale

There were no transfers between levels during 2021 or 2020.

Treasury debt is reported at fair value utilizing Level 1 inputs.

One Corporate bond is 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 December 31, 2021 and December 31, 2020, the majority of the securities had credit support provided by the Federal Home Loan Mortgage Corporation, GNMA, and FNMA.

IRLC, net $ — $ — $ 1,473 $ 1,473

Equity warrants $ — $ — $ 160 $ 160

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

On April 1, 2022, the Company elected to transfer all securities classified as available-for-sale to held-to-maturity and are now carried at amortized cost.

See Note 3 - Investment Securities for more information.

As of December 31, 2021, U.S.

Treasury debt was reported at fair value utilizing Level 1 inputs.

Three Corporate bonds were reported at fair value utilizing Level 3 inputs.

The remaining portfolio of securities were reported at fair value with Level 2 inputs provided by a pricing service.

The majority of the securities had credit support provided by the Federal Home Loan Mortgage Corporation, GNMA, and FNMA.

Factors used to value the securities by the pricing service include:

benchmark yields, reported trades, interest spreads, prepayments, and other market research.

In addition, ratings and collateral quality are considered.

As of December 31, 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 Consolidated Balance Sheets.

All changes are recorded in the Other line item in the Consolidated Statements of Income.

In addition, ratings and collateral quality were considered.

As of December 31, 2022, equity securities, equity warrants, IRLC, and guarantee assets have been recorded at fair value within the Other assets line item in the Consolidated Balance Sheets.

All changes are recorded in Non-interest income in the 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 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 and loans held for sale.

As of December 31, 2022, the Company reclassified $ 2.0 million of loans held for investment to loans held for sale.

The transfer occurred at the point in time the Company decided to sell the loan and received a commitment from third party investors to purchase the loan.

There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest as of December 31, 2022 or December 31, 2021.

As of December 31, 2022, there were 145 loans, totaling $ 0.1 million, accounted for under the fair value option that were on nonaccrual.

As of December 31, 2021, there were no loans accounted for under the fair value option that were on nonaccrual.

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):

December 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

Mortgage loans held for sale $ 8,839 $ 8,750 $ 89 $ — $ — $ — $ — $ — $ —

Loans held for sale 1,965 1,984 ( 19 ) — — $ — — — —

Loans held for investment 23,321 23,415 ( 94 ) 139 140 ( 1 ) 139 140 ( 1 )

$ 34,125 $ 34,149 $ ( 24 ) $ 139 $ 140 $ ( 1 ) $ 139 $ 140 $ ( 1 )

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

Mortgage loans held for sale $ 30,620 $ 29,857 $ 763 $ — $ — $ — $ — $ — $ —

Loans held for investment — — — — — — — — —

$ 30,620 $ 29,857 $ 763 $ — $ — $ — $ — $ — $ —

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

Year Ended December 31,

Mortgage loans held for sale $ ( 673 ) $ 4,712

Loans held for sale ( 20 ) —

Loans held for investment ( 94 ) —

$ ( 787 ) $ 4,712

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

Mortgage loans held for sale 2022 2021

Balance at beginning of period $ 30,620 $ 161,843

Loans originated 439,682 1,425,713

Loans acquired — 840

Fair value changes ( 673 ) ( 4,712 )

Sales ( 460,514 ) ( 1,548,405 )

Settlements ( 276 ) ( 4,659 )

Balance at end of period $ 8,839 $ 30,620

Loans held for sale 2022 2021

Balance at beginning of period $ — $ —

Loans transferred from held for investment 1,985 —

Fair value changes ( 20 ) —

Balance at end of period $ 1,965 $ —

Loans held for investment 2022 2021

Balance at beginning of period — $ —

Loans acquired 35,616 —

Fair value changes ( 94 ) —

Settlements ( 12,201 ) —

Balance at end of period $ 23,321 $ —

Nonrecurring Fair Value

Other Real Estate Owned :

Other Real Estate Owned ("OREO") :

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.

4 unchanged sentences

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.

OREO is evaluated annually for additional impairment and adjusted accordingly.

Impaired Loans :

4 unchanged sentences

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.

Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company.

Once received, the Company reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

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

Active Markets

for Identical

December 31, 2021

Impaired loans (1) :

Commercial and Industrial

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

December 31, 2021 Quoted

Active Markets

for Identical

December 31, 2020

Other real estate owned:

Commercial properties

(Level 1) Significant

(Level 2) Significant

(Level 3) Reported

Impaired loans (1) :

1 unchanged sentence

_____________________________

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

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

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

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

As of December 31, 2020, OREO had a carrying amount of $ 0.2 million, which is the cost basis of $ 2.1 million net of a valuation allowance of $ 1.9 million.

As of 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.

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 for the year ended December 31, 2021 and 2020.

The Bank charged off an immaterial amount during the years ended December 31, 2021 and December 31, 2020 from the specific reserve.

There were no assets measured on a nonrecurring basis for the year ended December 31, 2022.

During the year ended December 31, 2022, the Company recorded $ 0.4 million of OREO as a result of obtaining physical possession of foreclosed property as partial consideration for amounts owed on an impaired loan.

The Company sold the property during the year ended December 31, 2022, resulting in an immaterial gain.

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

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

Impaired loans accounted for no specific reserves as of December 31, 2022 and $ 1.8 million as of December 31, 2021.

The Company did not have any charge offs during the year ended December 31, 2022 from the specific reserve.

The Company charged off an immaterial amount during the year ended December 31, 2021 from the specific reserve.

Level 3 Analysis

The following presents a reconciliation for Level 3 instruments measured at fair value on a recurring basis (in thousands):

Year Ended December 31, 2021

Corporate Bonds

Guarantee Asset

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

Year Ended December 31, 2022 Corporate Bonds Loans Held at Fair Value FSC Guarantee Asset IRLC Equity Warrants

Beginning balance $ 2,113 $ — $ ( 9 ) $ 237 $ 1,473 $ 160

Acquisitions 4,000 35,616 9 — 3,213 344

Originations — — — 1 ( 5,048 ) —

Gains (losses) in net income, net — ( 94 ) — ( 75 ) 591 321

Unrealized gains, net 102 — — — — —

Transfer to held-to-maturity ( 6,215 ) — — — — —

Settlements — ( 12,201 ) — ( 20 ) — —

Ending balance $ — $ 23,321 $ — $ 143 $ 229 $ 825

Year Ended December 31, 2020

Corporate Bonds

Guarantee Asset

Year Ended December 31, 2021 Corporate Bonds Loans Held at Fair Value FSC Guarantee Asset IRLC Equity Warrants

Beginning balance $ — $ — $ ( 89 ) $ 232 $ 9,841 $ —

Acquisitions 2,113 — ( 182 ) — 19,526 160

Originations — — — 2 ( 25,804 ) —

Gains (losses) in net income, net — — 262 32 ( 2,090 ) —

1 unchanged sentence

Ending balance $ 2,113 $ — $ ( 9 ) $ 237 $ 1,473 $ 160

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

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

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

Unobservable Input

Fair Value Valuation

Technique Significant

Unobservable Input Range

(Weighted Average)

Recurring fair value

Corporate Bonds

Discounted cash flow

Discount rate

Guarantee asset

Discounted cash flow

Discount rate

Loans held for investment at fair value $ 23,321 Discounted cash flow Discount rate 4 % to 18 % ( 8 )%

Guarantee asset 143 Discounted cash flow Discount rate

Prepayment rate 5 % ( 5 %)

Best execution model

IRLC, net 229 Best execution model Pull through 73 % to 100 % ( 91 )%

Equity Warrants 825 Black-Scholes option pricing model Volatility

Risk-free interest rate

Remaining life 31.2 % to 44.7 % ( 34.8 )%

4.04 % to 4.14 % ( 4.05 )%

Internal pricing model

Market Differential

- 14 bps to - 2 bps

Nonrecurring fair value

Impaired loans (1) :

Commercial and Industrial

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, 2021

Unobservable Input

Fair Value Valuation

Technique Significant

Unobservable Input Range

(Weighted Average)

Recurring fair value

Guarantee asset

Discounted cash flow

Discount rate

Corporate Bonds $ 2,113 Discounted cash flow Discount rate 7 % ( 7 )%

FSC ( 9 ) Internal pricing model Market Differential ( 14 ) bps to

Guarantee asset 237 Discounted cash flow Discount rate

Prepayment rate 3 % ( 3 %)

Best execution model

IRLC, net 1,473 Best execution model Pull through 71 % to 100 % ( 88 )%

Equity warrants 160 Black-Scholes option pricing model Volatility

Risk-free interest rate

Remaining life 24 % to 37 % ( 32 )%

0.30 % to 1.10 % ( 0.97 )%

Internal pricing model

Market Differential

Nonrecurring fair value

Other real estate owned:

Commercial properties

Sales contract

Commission, cost to sell, closing costs

Impaired loans (1) :

Commercial and Industrial

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17 % - 35 % ( 26 %)

Commercial and Industrial 439 Sales comparison, Market approach - guideline transaction method Management discount for asset/property type 17 % - 45 % ( 39 %)

_____________________________

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

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

Estimated Fair Value of Other Financial Instruments

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

Fair Value Measurements Using:

December 31, 2021

The following presents carrying amounts and estimated fair values for financial instruments not carried at fair value as of the dates noted (dollars in thousands):

Amount Fair Value Measurements Using:

December 31, 2022 Level 1 Level 2 Level 3

Cash and cash equivalents $ 196,512 $ 196,512 $ — $ —

Held-to-maturity securities 81,056 234 67,433 7,051

Loans, net 2,452,230 — — 2,379,406

Accrued interest receivable 10,445 5 362 10,078

Deposits 2,405,229 2,181,139 — 228,868

FHLB borrowings – fixed rate 141,498 — 141,867 —

2 unchanged sentences

Accrued interest payable 1,125 — 587 538

Fair Value Measurements Using:

December 31, 2020

Amount Fair Value Measurements Using:

December 31, 2021 Level 1 Level 2 Level 3

Cash and cash equivalents $ 386,983 $ 386,983 $ — $ —

Loans, net 1,935,405 — — 1,919,625

Accrued interest receivable 7,151 2 203 6,946

Deposits 2,205,703 2,035,212 — 172,240

FHLB borrowings – fixed rate 15,000 — 14,990 —

9 unchanged sentences

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

Held-to-maturity securities :

The fair values for held-to-maturity investment securities are determined by quoted market prices, if available (Level 1).

For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

For securities where quoted prices or market prices of similar securities is not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

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.

A discount rate was developed based on the relative risk of the cash flows, considering the loan type, maturity and a required return on capital.

Accrued Interest Receivable and Payable :

9 unchanged sentences

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.

3 unchanged sentences

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.

The following presents the financial information for each segment that is specifically identifiable or based on allocations using internal methods for the years ended December 31, 2021 and 2020 (in thousands):

As of and for the year ended December 31, 2021

As of and for the year ended December 31, 2022 Wealth

Management Mortgage Consolidated

Income Statement

Total interest income

Total interest and dividend income $ 100,474 $ — $ 100,474

Total interest expense 17,270 — 17,270

6 unchanged sentences

Income before income taxes $ 31,139 $ ( 2,311 ) $ 28,828

As of and for the year ended December 31, 2020

Goodwill $ 30,400 $ — $ 30,400

Total assets 2,856,653 10,095 2,866,748

As of and for the year ended December 31, 2021 Wealth

Management Mortgage Consolidated

Income Statement

Total interest income

Total interest and dividend income $ 62,011 $ — $ 62,011

Total interest expense 5,416 — 5,416

6 unchanged sentences

Income before income taxes $ 21,378 $ 5,902 $ 27,280

Goodwill $ 30,588 $ — $ 30,588

Total assets 2,494,207 33,282 2,527,489

NOTE 19 – LOW-INCOME HOUSING TAX CREDIT INVESTMENTS

On December 19, 2019, the Company invested in a low-income housing tax credit ("LIHTC") investment.

As of December 31, 2022 and 2021, the balance of the investment for LIHTC was $ 2.4 million and $ 2.6 million, respectively.

These balances are reflected in the Other assets line item of the Consolidated Balance Sheets.

Total unfunded commitments related to the investment in the LIHTC total $ 0.2 million and $ 2.2 million as of December 31, 2021 and 2020.

The Company expects to fulfill these commitments during the year ending 2022.

There were no unfunded commitments related to the LIHTC investment as of December 31, 2022.

As of December 31, 2021, total unfunded commitments were $ 0.2 million.

The Company uses the proportional amortization method to account for this investment.

Amortization expense is included within the Income tax expense line item of the Consolidated Statements of Income.

During the year ended December 31, 2022, the Company recognized amortization expense of $ 0.4 million, which was included within the Income tax expense line item of the Consolidated Statements of Income.

4 unchanged sentences

NOTE 20 – CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

The following presents condensed financial statements pertaining only to FWFI (in thousands).

The following presents condensed financial statements pertaining only to FWFI (dollars in thousands).

Investments in subsidiaries are stated using the equity method of accounting.

December 31, December 31,

Condensed Balance Sheets 2022 2021

1 unchanged sentence

Investment in subsidiaries 263,362 233,417

Loans, net — 1,978

Other assets 3,723 3,611

Total assets $ 293,457 $ 257,130

Subordinated notes $ 52,132 $ 39,031

5 unchanged sentences

_____________________________

(1) As of December 31, 2021 and December 31, 2020, taxes payable was in a receivable position as a result of timing of tax payments.

(1) As of December 31, 2021, taxes payable was in a receivable position as a result of timing of tax payments.

Year Ended December 31,

2 unchanged sentences

Non-interest income 7 —

Total income 53 60

Interest expense 1,609 1,549

5 unchanged sentences

Equity in undistributed income to subsidiaries 23,114 22,265

Net income $ 21,698 $ 20,610

Year Ended December 31,

1 unchanged sentence

Cash flows from operating activities

Net income $ 21,698 $ 20,610

Depreciation and amortization 167 73

Current and deferred income tax expense/(benefit)

Deferred income tax expense 941 301

Stock-based compensation 2,562 2,903

9 unchanged sentences

Cash flows from financing activities

Proceeds from subordinated notes

Repurchase of common stock

Proceeds from subordinated notes, net of issuance costs 19,509 14,667

Payment on subordinated notes ( 6,575 ) —

Settlement of restricted stock ( 876 ) ( 501 )

8 unchanged sentences

Common stock issued for Teton acquisition — 39,818

Segment collapse impact to investment in subsidiary

Segment collapse impact to deferred income tax (benefit)/expense

Segment collapse impact to other assets

Segment collapse impact to other liabilities

NOTE 21 – OTHER NON-INTEREST EXPENSE

Other non-interest expense as shown in the Consolidated Statements of Income is detailed in the following schedule to the extent the components exceed one percent of total interest income and other income (in thousands):

Year Ended December 31,

2 unchanged sentences

Loan and deposit related 1,420 1,016

Other 687 470

Total other non-interest expense $ 4,547 $ 3,255

5 unchanged sentences

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.

6 unchanged sentences

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 December 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:

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 %;

7 unchanged sentences

Management believes First Western and the Bank met all capital adequacy requirements to which they are subject to as of December 31, 2022 and December 31, 2021.

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

The following presents the actual and required capital amounts and ratios as of the dates noted (dollars in thousands):

Actual Required for Capital Adequacy Purposes (1)

To be Well Capitalized

Required for Capital

Corrective Action

Adequacy Purposes (1)

December 31, 2021

December 31, 2022 Amount Ratio Amount Ratio Amount Ratio

Tier 1 capital to risk-weighted assets

Bank $ 234,738 10.29 % $ 136,928 6.0 % $ 182,571 8.0 %

Consolidated 212,229 9.28 N/A N/A N/A N/A

CET1 to risk-weighted assets

Bank 234,738 10.29 102,696 4.5 148,339 6.5

Consolidated 212,229 9.28 N/A N/A N/A N/A

Total capital to risk-weighted assets

Bank 252,398 11.06 182,571 8.0 228,213 10.0

Consolidated 282,889 12.37 N/A N/A N/A N/A

Tier 1 capital to average assets

Bank 234,738 8.65 108,506 4.0 135,633 5.0

Consolidated 212,229 7.81 N/A N/A N/A N/A

Actual Required for Capital Adequacy Purposes (1)

To be Well Capitalized

Required for Capital

Corrective Action

Adequacy Purposes (1)

December 31, 2020

December 31, 2021 Amount Ratio Amount Ratio Amount Ratio

Tier 1 capital to risk-weighted assets

Bank $ 203,164 11.40 % $ 106,945 6.0 % $ 142,594 8.0 %

Consolidated 188,777 10.54 N/A N/A N/A N/A

CET1 to risk-weighted assets

Bank 203,164 11.40 80,209 4.5 115,858 6.5

Consolidated 188,777 10.54 N/A N/A N/A N/A

Total capital to risk-weighted assets

Bank 217,215 12.19 142,594 8.0 178,242 10.0

Consolidated 242,388 13.54 N/A N/A N/A N/A

Tier 1 capital to average assets

Bank 203,164 10.05 80,887 4.0 101,108 5.0

Consolidated 188,777 9.31 N/A N/A N/A N/A

_____________________________

(1) Does not include capital conservation buffer .

NOTE 23 – SUBSEQUENT EVENTS (Unaudited)

The Company elected to redeem the subordinated notes due December 31, 2026 in the amount of $ 6.6 million, which were redeemable on or after January 1, 2022.

The redemption price is equal to 100 % of the principal amount being redeemed, plus accrued and unpaid interest up to, but excluding the date of redemption.

As of this filing, the December 31, 2026 subordinated debt has been fully redeemed.

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

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data