What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-15 · 418 added, 246 removed, 701 unchanged (49% of the section changed)

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We offer our services through a branded network of boutique private trust bank offices, which we believe are strategically located in affluent and high-growth markets in locations across Colorado, Arizona, Wyoming, Montana, and California.

Our profit centers, which are comprised of private bankers, lenders, wealth planners and portfolio managers, under the leadership of a local chairman and/or president, are also supported centrally by teams providing management services such as operations, risk management, credit administration, marketing, technology support, human capital, and accounting/finance services, which we refer to as support centers.

From 2004, when we opened our first profit center, until December 31, 2022, we have expanded our footprint into thirteen full service profit centers, three loan production offices, and two trust offices located across five states.

Following the completion of the Teton Financial Services, Inc.

(“Teton”) acquisition in the fourth quarter of 2021, we added three full service profit centers in Jackson Hole, Pinedale, and Rock Springs, Wyoming.

Our profit centers, which are comprised of private bankers, lenders, wealth planners and portfolio managers, under the leadership of and/or president, are also supported centrally by teams providing management services such as operations, risk management, credit administration, marketing, technology support, human capital, and accounting/finance services, which we refer to as support centers.

From 2004, when we opened our first profit center, until December 31, 2023, we have expanded our footprint into fourteen full service profit centers, three loan production offices, and one trust office located across five states.

As of and for the year ended December 31, 2023, we had $2.98 billion in total assets, $82.7 million in total revenues and provided fiduciary and advisory services on $6.75 billion of assets under management ("AUM").

Response to COVID-19

The spread of COVID-19 caused significant disruptions in the U.S.

economy since it was declared a pandemic in March 2020 by the World Health Organization.

Disruptions include temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, and related emergency response legislation.

The changes have impacted our clients and their industries, as well as the financial services industry.

A provision in the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") created the Paycheck Protection Program ("PPP"), which is administered by the Small Business Administration ("SBA").

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

The loans could 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 was an approved SBA PPP lender and participated in all rounds of the program.

The last round of program funds were depleted in early May 2021.

With the originations closed, the SBA turned their attention to forgiveness, processing applications submitted by the Company.

Loans funded in 2021 became eligible for forgiveness after the covered period of 8 to 24 weeks, which began for some clients in early second quarter of 2021.

As of December 31, 2022, we have received forgiveness payments of $308.4 million from the SBA and have 26 PPP loans for a total of $7.1 million with an average loan size of $0.3 million remaining.

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

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

In 2021, the deferral period ended for all non-acquired loans previously modified and payments 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 Company also participated in the Federal Reserve’s Main Street Lending Program ("MSLP") to support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic.

As of December 31, 2022, the Company had five loans with a balance held by the Bank of $6.6 million.

Recent Industry Developments

During March and April of 2023, the banking industry experienced significant disruption and volatility with the failure of multiple banks creating industry wide concerns related to liquidity, deposit outflows, unrealized securities losses, and eroding consumer confidence in the banking industry.

Despite the market wide impact to bank stock prices, we believe the Bank remains stable with strong fundamentals including uninsured deposits lower than our peer average, at $852.8 million, or 33.7% of total deposits as of December 31, 2023.

The Company has a low amount of held-to-maturity securities, which represent 2.5% of Total assets, and carries unrecognized losses amounting to 3.1% of Total shareholders’ equity as of December 31, 2023.

We have limited exposure to commercial real estate (“CRE”) non-owner occupied office space which has been impacted by the shift to hybrid work environments.

Our client base is well diversified with no single industry concentration.

Primary Factors Used to Evaluate the Results of Operations

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The primary factors we use to evaluate our results of operations include net interest income, non-interest income and non-interest expense.

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Net Interest Income

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Net gain on mortgage loans is primarily impacted by the amount of loans sold, the type of loans sold, and market conditions.

• Net gain on loans accounted for under the fair value option —unrealized gains or losses on the fair value adjustments to held for investment loans on which the Bank has elected the fair value option of accounting.

This also includes realized gains or losses on charge-offs and recoveries.

• Bank fees —income generated through bank-related service charges such as:

electronic transfer fees, treasury management fees, bill pay fees, servicing fees for MSLP, and other banking fees.

electronic transfer fees, treasury management fees, bill pay fees, servicing fees for Main Street Lending Program (“MSLP”), loan prepayment penalty fees, loan interest rate swap fees, and other banking fees.

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

• Risk management and insurance fees —commissions earned on insurance policies we have placed for clients through our client risk management team who incorporate insurance services, primarily life insurance, to

support our clients’ wealth planning needs.

Our insurance revenues are primarily impacted by the type and volume of policies placed for our clients.

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Salaries and employee benefit costs are primarily impacted by changes in headcount and fluctuations in benefits costs.

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• Occupancy and equipment —costs related to building and land maintenance, leasing our office space, depreciation charges for the buildings, building improvements, furniture, fixtures and equipment, amortization of leasehold improvements, utilities, and other occupancy-related expenses.

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We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity and trend of problem assets such as those determined to be classified, delinquent, non-accrual, non-performing or restructured;

the adequacy of our allowance for loan losses;

the adequacy of our allowance for credit losses;

the diversification and quality of loan and investment portfolios;

the extent of counterparty risks, credit risk concentrations, and other factors.

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

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As of December 31, 2023, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III.

On December 31, 2021, the Company closed on our Agreement and Plan of Merger (the “Merger Agreement” or “Teton Acquisition”) with Teton, parent company of Rocky Mountain Bank, a Wyoming-chartered bank headquartered in Jackson, Wyoming.

The Merger Agreement provided that, subject to the terms and conditions set forth in the Merger Agreement, Teton would merge into the Company, with the Company continuing as the surviving corporation.

The Merger Agreement also provided that following the merger, Rocky Mountain Bank would merge with and into the Bank, with the Bank surviving the bank merger.

See Note 2 – Acquisitions of the accompanying Notes to the Consolidated Financial Statements for additional information.

Results of Operations

The year ended December 31, 2023 compared with the year ended December 31, 2022 .

For the year ended December 31, 2022, we reported net income available to common shareholders of $21.7 million, compared to net income available to common shareholders for December 31, 2021 of $20.6 million, a $1.1 million, or 5.3% increase.

For the year ended December 31, 2022, our income before income tax was $28.8 million, a $1.5 million, or 5.7%, increase from December 31, 2021.

The increase was primarily driven by a $24.2 million increase in net interest income, after provision for loan losses, partially offset by a $10.8 million decrease in net gain on mortgage loans and an $11.0 million increase in non-interest expense.

The increase in net interest income was due to an increase in average loan balances and an increase in average loan yields.

The decrease in net gain on mortgage loans was primarily driven by a slowdown in new lock volume associated with the decrease in refinance activity.

The increase in non-interest expense was primarily driven by an increase in personnel expense to support the growth in the balance sheet, and an increase in occupancy and equipment expense driven by building depreciation on the locations acquired with the Teton acquisition and an increase in office lease space related to new Bank locations.

For the year ended December 31, 2023, we reported net income available to common shareholders of $5.2 million, compared to net income available to common shareholders for December 31, 2022 of $21.7 million, a $16.5 million, or 75.9% decrease.

For the year ended December 31, 2023, our income before income tax was $7.1 million a $21.8 million, or 75.5%, decrease from December 31, 2022.

The decrease was primarily driven b y a $19.5 million decrease in net interest income, after provision for credit losses and a $5.7 million decrease in non-interest income, partially offset by a $3.5 million decrease in non-interest expense.

The decrea se in net interest income, after provision for credit losses, was primarily due to higher rates on deposits and borrowings resulting from increased market rates, an increase in the provision of credit losses due to $8.8 million of charge-offs, offset partially by an increase in interest and fees on loans resulting from loan growth and higher loan yields.

The decrease in non-interest income was due to a $1.8 million decrease in net gain on mortgage loans driven by a slowdown in new lock volume associated with the rising interest rate environment, $1.2 million of impairment to the carrying value of a contingent consideration asset, and a $1.1 million increase in losses on loans accounted for under the fair value option recorded during the year ended December 31, 2023.

The decrease in non-interest expense was primarily driven by lower salaries and benefits related to staffing reductions to better align with current revenue.

Net Interest Income

The year ended December 31, 2023 compared with the year ended December 31, 2022 .

For the year ended December 31, 2022, compared to the year ended December 31, 2021, net interest income, before the provision for loan losses, increased $26.6 million, or 47.0%, to $83.2 million.

This increase was driven by a $560.2 million increase in average loans outstanding and a 64 bps increase in the average yield on loans, partially offset by a $365.8 million increase

in average interest bearing deposit balances and a 54 bps increase in average rates paid on interest bearing deposits.

For the year ended December 31, 2023, compared to the year ended December 31, 2022, net interest income, before the provision for credit losses, decreased $12.8 million, or 15.3%, to $71.1 million.

This decrease was driven by a $300.3 million increase in average interest bearing deposit balances and a 269 bps increase in average rates paid on interest bearing deposits partially offset by a $340.5 million increase in average loans outstanding and a 102 bps increase in the average yield on loans.

For the year ended December 31, 2023, our net interest margin was 2.62% and our net interest spread was 1.71%.

For the year ended December 31, 2022, our net interest margin was 3.36% and our net interest spread was 3.02%.

The increase in average loans outstanding for the year ended December 31, 2022 compared to the same periods in 2021 was primarily due to organic growth and the Teton acquisition at the end of 2021.

The increase in average loans outstanding for the year ended December 31, 2023 compared to the same periods in 2022 was due to an increase in construction and development, non-owner occupied CRE, and residential mortgage offset by a decrease in cash, securities, and other, consumer and other, commercial and industrial, and owner occupied CRE.

The growth in our construction and development portfolio was driven primarily by draws on existing commitments, partially offset by payoffs.

Average loan yield was 5.43% for the year ended December 31, 2023, compared to 4.42% for the year ended December 31, 2022.

The increase in loan yield during the period was primarily driven by the addition of higher yielding loans from the Teton acquisition, a beneficial mix shift in the loan portfolio due to PPP loan forgiveness, and the rising interest rate environment.

Interest income on our investment securities portfolio increased as a result of higher average investment balances for the year ended December 31, 2022 compared to the same period in 2021.

The increase in loan yield during the period was primarily driven by an increase in yields on the variable rate portfolio and an increase in yields on new loan production due to the rising interest rate environment.

Interest income on our investment securities portfolio increased as a result of higher average investment balances and higher average yield for the year ended December 31, 2023 compared to the same period in 2022.

Our average investment securities balance during the year ended December 31, 2023 was $79.2 million, an increase of $5.0 million from the year ended December 31, 2022.

Interest expense on deposits increased during the year ended December 31, 2023 compared to the same period in 2022.

Average rates on interest bearing deposits increased 54 basis points, consistent with the higher interest rate environment, while the growth in interest-bearing deposits was primarily attributable to organic growth through expanded client relationships.

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

As of and For the Year Ended December 31,

Average rates on interest bearing deposits increased 269 basis points, consistent with the higher interest rate environment, while the growth in interest-bearing deposits was primarily driven by new and expanded deposit relationships and a shift in clients moving out of non-interest bearing products into higher yielding products.

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

For the Year Ended December 31,

(Dollars in thousands) Average

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2,479,175 134,708 5.43 2,138,712 94,448 4.42

Interest-earning assets (4)

2,482,619 100,474 4.05 1,890,332 62,011 3.28

Mortgage loans held for sale (4)

11,499 721 6.27 15,639 722 4.62

Total interest-earning assets, plus mortgage loans held for sale 2,498,258 101,196 4.05 1,978,983 64,501 3.26

Allowance for loan losses (14,678) (12,763)

Loans held at fair value 18,478 1,335 7.22 15,541 1,347 8.67

Interest-earning assets (5)

2,714,149 145,558 5.36 2,498,258 101,196 4.05

Allowance for credit losses (21,468) (14,678)

Noninterest-earning assets 125,401 122,663

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Income, if any, on such loans is recognized on a cash basis.

(4) Mortgage loans held for sale are included in the interest-earning assets above, with interest income recognized in the Interest and dividend income on loans, including fees line in the Consolidated Statements of Income.

These balances are included in the margin calculations in these tables.

(5) Tax-equivalent yield adjustments are immaterial.

(5) Mortgage loans held for sale are separated from the interest-earning assets above, as these loans are held for a short period of time until sold in the secondary market and are not held for investment purposes, with interest income recognized in the net gain on mortgage loans line of the income statement.

These balances are excluded from the margin calculations in these tables.

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

(7) Net interest income is the difference between income earned on interest-earning assets (excluding interest on mortgage loans held for sale), and expense paid on interest-bearing liabilities.

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

The following presents the dollar amount of changes in interest income and interest expense for the periods presented, for each component of interest-earning assets and interest-bearing liabilities (excluding mortgage loans held for sale), and distinguishes between changes attributable to volume and interest rates.

Changes attributable to both rate and volume that cannot be separated have been allocated to volume (dollars in thousands):

(6) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

(7) Net interest income is the difference between income earned on interest-earning assets and expense paid on interest-bearing liabilities.

(8) Net interest margin is equal to net interest income divided by average interest-earning assets.

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The following table presents the dollar amount of changes in interest income and interest expense for the periods presented, for each component of interest-earning assets and interest-bearing liabilities, and distinguishes between changes attributable to volume and interest rates.

Changes attributable to both rate and volume that cannot be separated have been allocated to volume:

Year Ended December 31, 2023

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Loans 18,499 21,761 40,260

Mortgage loans held for sale (260) 259 (1)

Loans held at fair value 212 (224) (12)

Total increase in interest income $ 12,476 $ 31,886 $ 44,362

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Increase in net interest income $ (773) $ (12,048) $ (12,821)

Provision for Loan Losses

Provision for Credit Losses

We have a dedicated problem loan resolution team comprised of associates from our credit, senior leadership, risk, and accounting teams that meets frequently to ensure that watch list and problem credits are identified early and actively managed.

We work to identify potential losses in a timely manner and proactively manage the problem credits to minimize losses.

For the years ended December 31, 2022 and 2021, we recorded $3.7 million and $1.2 million, respectively, of provision for loan losses.

For the years ended December 31, 2023 and 2022, we recorded $10.4 million and $3.7 million, respectively, of provision for credit losses.

The provision recorded for the year ended December 31, 2023 includes $8.8 million of charge-offs, a $3.8 million allowance recorded on non-performing loans, as well as general provisioning consistent with our net growth of the originated loan portfolio, partially offset by a $1.7 million provision release related to off-balance sheet commitments, as well as changes in our portfolio mix and reduced model loss rates used in our quantitative model, largely driven by the economic outlook scenario assuming a soft landing as compared to a more severe and deep recession previously forecasted.

The Company has increased loan level reviews and portfolio monitoring to address the changing environment.

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For the year ended December 31, 2023 compared to the year ended December 31, 2022, non-interest income decreased $5.7 million, or 20.7%, to $21.9 million.

The decrease in non-interest income was primarily a result of a slowdown in new lock volume on held for sale loans associated with rising interest rates, reduced housing inventory, and origination volume more heavily weighted to portfolio loans held for investment.

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

The decrease in non-interest income was primarily due as a result of a $1.8 million decrease in Net gain on mortgage loans driven by a slowdown in new lock volume on held for sale loans associated with the rising interest rate environment, $1.2 million of impairment to the carrying value of a contingent consideration asset recorded during the second quarter of 2023, and a $1.1 million increase in net losses on loans accounted for under the fair value option.

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The following table presents the significant categories of our non-interest income during the periods presented:

December 31, Change

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Net gain on mortgage loans 2,826 4,584 (1,758) (38.4)

Net loss on loans held for sale (178) (12) (166) *

Bank fees 2,022 2,660 (638) (24.0)

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Net loss on loans accounted for under the fair value option (2,010) (891) (1,119) *

Unrealized gain recognized on equity securities 342 469 (127) (27.1)

Unrealized (loss)/gain recognized on equity securities (22) 342 (364) *

Other (775) 477 (1,252) *

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* Not meaningful

* Represents percentages that are not meaningful due to being insignificant or exceeding 100%

Trust and investment management fees — For the year ended December 31, 2023 compared to the same period in 2022, our trust and investment management fees decreased by $0.2 million, or 0.8%, to $18.8 million.

The decrease is due to client withdrawals and a decreased value of AUM balances caused by unfavorable market conditions during 2022.

The decrease was primarily attributable to account attrition within one profit center, partially offset by an increase in our fee structure.

Net gain on mortgage loans — For the year ended December 31, 2023 compared to the same period in 2022, our net gain on mortgage loans decreased by $1.8 million, or 38.4%, to $2.8 million.

The decrease in net gain on mortgage loans was primarily driven by a slowdown in new lock volume on held for sale loans associated with rising interest rates, reduced housing inventory, and origination volume more heavily weighted to portfolio loans held for investment.

Bank fees — For the year ended December 31, 2022 compared to the same period in 2021, our bank fees increased by $0.9 million or 49.4%.

The increase was driven by increased debit card, loan prepayment, and treasury management fees consistent with the Company's larger client base.

Risk management and insurance fees — For the year ended December 31, 2022 compared to the same period in 2021, our risk management and insurance fees increased by $0.1 million, or 9.9%, to $1.2 million.

Net gain/(loss) on loans accounted for under the fair value option — The Company elected the fair value option on certain new loans purchased in 2022.

During the year ended December 31, 2022, the Company recorded a net loss on loans accounted for under the fair value option of $0.9 million.

The losses were attributable to the decline in fair value as a result of the rising interest rates on comparable loans in the market.

There were no loans held for investment accounted for under the fair value option in the same period in 2021.

Unrealized gain/(loss) on Equity Securities — For the year ended December 31, 2022 compared to the same period in 2021, our unrealized gains on equity securities decreased by $0.1 million, or 27.1% .

The decrease in net gain on mortgage loans was primarily driven by a slowdown in new lock volume on held for sale loans associated with the rising interest rate environment.

Net loss on loans held for sale — During the year ended December 31, 2023, the Company transferred $39.2 million of non-relationship loans held for investment to loans held for sale.

Upon transfer of the loans, the Company recorded a net loss on loans held for sale of $0.2 million, primarily attributable to the slight decline in fair value as a result of the rising interest rates on comparable loans in the market.

Bank fees — For the year ended December 31, 2023 compared to the same period in 2022, our bank fees decreased by $0.6 million or 24.0%.

The decrease was primarily driven by decreased treasury management fees as a result of rising interest rates driving higher earnings credit on commercial operating balances, partially offset by higher loan fees as a result of prepayment and swap derivative activity.

Risk management and insurance fees — For the year ended December 31, 2023 compared to the same period in 2022, our risk management and insurance fees decreased by $0.3 million, or 25.3%, to $0.9 million.

Net loss on loans accounted for under the fair value option — The Company elected the fair value option on certain loans purchased in 2022.

For the year ended December 31, 2023 compared to the same period in 2022, loans accounted for under the fair value option had an additional $1.1 million in net losses recorded.

The increase was primarily attributable to net charge-offs during the period and, partially offset by improvement in fair value.

Unrealized (loss)/gain on Equity Securities — For the year ended December 31, 2023 compared to the same period in 2022, our unrealized gains on equity securities decreased by $0.4 million to an immaterial unrealized loss position as of December 31, 2023.

The decrease was primarily driven by fair value adjustments on equity warrants.

There were no equity warrants in equity securities during the same period in 2021.

Net gain on equity interests — For the year ended December 31, 2022, the Company recognized an immaterial net gain on equity interests.

No such net gain on equity interest was recognized in the year ended December 31, 2021.

Other — For the year ended December 31, 2022 compared to the same period in 2021, our other income increased by $0.4 million.

The increase was primarily driven by lease income from buildings acquired with the Teton acquisition.

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Other — For the year ended December 31, 2023 compared to the same period in 2022, our other income decreased by $1.3 million.

The decrease was primarily attributable to $1.2 million of impairment to the carrying value of a contingent consideration asset recorded during the second quarter of 2023, related to the sale of First Western Capital Management in 2020.

The value was established using asset growth assumptions provided by the buyer, which had not materialized.

Non-Interest Expense

The year ended December 31, 2023 compared with the year ended December 31, 2022 .

The increase in non-interest expense of 16.1% to $79.1 million for the year ended December 31, 2022, was primarily driven by the addition of Teton's operations and additional headcount to support the growth of the Company.

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

The decrease in non-interest expense of 4.4% to $75.6 million for the year ended December 31, 2023, was primarily driven by lower Salaries and employee benefits related to staffing reductions to better align with current revenue and lower Technology and information system costs.

The following presents the significant categories of our non-interest expense for the periods presented:

December 31, Change

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Total non-interest expense $ 75,637 $ 79,106 $ (3,469) (4.4)

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* Not meaningful

Salaries and employee benefits— The increase in salaries and employee benefits of $7.5 million, or 18.4%, was primarily related to the additional associates added through the Teton acquisition and additional headcount to support the growth of the Company.

Occupancy and equipment— The increase in occupancy and equipment of $1.5 million, or 25.5%, was primarily driven by the addition of depreciation expense relating to buildings acquired with the Teton acquisition and an increase in office lease space related to new Bank locations.

Professional Services— The increase in professional services of $1.4 million, or 22.0%, was driven by additional expenses related to the addition of Teton's operations, increased audit fees related to the implementation of CECL, and nonrecurring system conversion costs and internal process improvement costs.

Technology and information systems— The increase in technology and information systems of $0.8 million, or 20.4%, was primarily driven by increased expenses to support the balance sheet growth.

Data processing— The decrease in data processing costs of $2.0 million, or 32.3%, was primarily driven by $2.4 million in non-recurring system conversion and termination fees incurred during the fourth quarter of 2021 as a result of the Teton acquisition, which closed in the fourth quarter of 2021.

Marketing— The increase in marketing of $0.3 million, or 17.0%, was primarily driven by marketing expenses associated with the onboarding of clients from the Teton acquisition and event sponsorships to support client acquisition efforts.

Amortization of other intangible assets— The increase in amortization of other intangible assets of $0.3 million was driven by amortization of intangibles acquired through the Teton acquisition.

Other— The increase in other of $1.3 million, or 39.7%, was driven by increased subscription costs related to system and process improvements, increased travel for client meetings, and higher costs related to associate training and development programs in 2022 compared to 2021.

During the year ended December 31, 2022, the Company recorded an income tax provision of $7.1 million, reflecting an effective tax rate 24.7%.

During the year ended December 31, 2021, the Company recorded an income tax provision of $6.7 million, reflecting an effective tax rate of 24.5%.

Salaries and employee benefits— The decrease in salaries and employee benefits of $3.0 million, or 6.3%, was primarily related to lower wages and employee benefits related to staffing reductions to better align with current revenue, partially offset by lower deferred compensation due to fewer loan originations.

Occupancy and equipment— The increase in occupancy and equipment of $0.1 million, or 1.0%, was primarily driven by an increase in leasehold improvement depreciation, partially offset by decreases in lease expense and variable lease costs.

Professional Services— The decrease in professional services of $0.3 million, or 3.3%, was driven by lower consulting and other professional fees, as the same period a year ago had additional expenses related to the acquisition of Teton and corporate activity to support the growth of the Company.

The decrease was partially offset by higher FDIC insurance costs due to the increase in the assessment rate and growth in the balance sheet.

Technology and information systems— The decrease in technology and information systems of $1.0 million, or 21.6%, was primarily driven by reduced software costs related to the trust and investment management system enhancement completed in 2022 and lower infrastructure costs due to the Company bringing certain outsourced information technology support in-house.

Marketing— The decrease in marketing of $0.3 million, or 18.4%, was primarily driven by lower advertising costs as well as reduced client onboarding costs related to the Teton acquisition compared to the same period last year.

Other— The increase in other of $0.8 million, or 18.2%, was driven by increased subscription costs related to system and process improvements, and increased fees related to reciprocal deposit balance growth.

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During the year ended December 31, 2023, the Company recorded an income tax provision of $1.8 million, reflecting an effective tax rate 26.0% During the year ended December 31, 2022, the Company recorded an income tax provision of $7.1 million, reflecting an effective tax rate of 24.7%.

Segment Reporting

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Mortgage loans originated and held for investment purposes are recorded in the Wealth Management segment, as this segment provides ongoing services to our clients.

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

The following presents key metrics related to our segments during the periods presented:

Year Ended December 31, 2023

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

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The following presents selected financial metrics of each segment as of and for the periods presented:

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Total interest expense 74,453 17,270 57,183 *

Provision for loan losses 3,682 1,230 2,452 199.3

Net interest income, after provision for loan losses 79,522 55,365 24,157 43.6

Provision for credit losses 10,355 3,682 6,673 *

Net interest income, after provision for credit losses (1)

60,029 79,522 (19,493) (24.5)

Non-interest income 19,053 22,760 (3,707) (16.3)

5 unchanged sentences

Total assets 2,966,612 2,856,708 109,904 3.8

(1) Provision for credit loss amounts for periods prior to the ASC 326 adoption date of January 1, 2023 are reported in accordance with previously applicable GAAP.

(*) Represents percentages that are not meaningful due to being insignificant or exceeding 100%.

The Wealth Management segment reported income before income tax of $9.6 million for the year ended December 31, 2023, compared to $31.3 million, for the same period in 2022.

The increase in net interest income, after provision for loan losses is primarily driven by an increase in average loans outstanding and an increase in average loan yields.

Non-interest income primarily decreased due to decreasing assets under management due to client withdrawals, which were also negatively impacted by lower equity and fixed income market valuations, resulting in decreased trust and investment management fees.

Non-interest expense increased due to the addition of Teton's operations and additional headcount to support the growth of the Company, and due to increased occupancy and equipment costs primarily driven by building depreciation on the locations acquired with the Teton acquisition and an increase in office lease space related to new Bank locations.

The majority of our assets and liabilities are on the Wealth Management segment balance sheet and the decrease in income before taxes is primarily attributable to a decrease in net interest income, after provision for credit losses.

The decrease in net interest income, after provision for credit loss was primarily driven by an increase in average interest-bearing deposits and rates, partially offset by an increase in interest income.

The provision for credit losses for the year ended December 31, 2023 increased $6.7 million to $10.4 million compared to $3.7 million for the same period in 2022, primarily due an increase in an allowance on individually analyzed loans.

As of December 31, 2023, the Company had an allowance of $3.8 million on non-performing loans.

As of and for the Year Ended December 31,

2 unchanged sentences

Total interest expense — — — —

Provision for loan losses — — — —

Net interest income, after provision for loan losses — — — —

Provision for credit losses — — — —

Net interest income, after provision for credit losses (1)

721 722 (1) (0.1)

Non-interest income 2,895 4,930 (2,035) (41.3)

2 unchanged sentences

All other non-interest expense 6,113 8,050 (1,937) (24.1)

(Loss)/income before income tax $ (2,311) $ 5,902 $ (8,213) (139.2)

Loss before income tax $ (2,530) $ (2,440) $ (90) 3.7

Total assets $ 8,850 $ 10,040 $ (1,190) (11.9)

The Mortgage segment reported a loss before income tax of $2.3 million for the year ended December 31, 2022, compared to income before income tax of $5.9 million for the same period in 2021.

The overall decrease in non-interest income was primarily driven by a slowdown in new lock volume on held for sale loans associated with rising interest rates, reduced housing inventory, and origination volume more heavily weighted to portfolio loans held for investment.

(1) Provision for credit loss amounts for periods prior to the ASC 326 adoption date of January 1, 2023 are reported in accordance with previously applicable GAAP.

Table of Content s

The Mortgage segment reported a loss before income tax of $2.5 million for the year ended December 31, 2023, compared to a loss before income tax of $2.4 million for the same period in 2022.

The overall decrease in non-interest income was primarily driven by a slowdown in new lock volume on held for sale loans associated with rising interest rates, which continue to impact loan demand.

The decrease in non-interest expense was driven by a reduction in headcount to better align the operations functions with the slowdown in volume.

Financial Condition

The following presents our condensed Consolidated Balance Sheets as of the dates noted (dollars in thousands):

December 31, December 31,

The following table presents our condensed Consolidated Balance Sheets as of the dates noted:

(Dollars in thousands) 2023 2022 $ Change % Change

1 unchanged sentence

Cash and cash equivalents $ 254,442 $ 196,512 $ 57,930 29.5 %

Investment securities 81,056 55,562 25,494 45.9

Held-to-maturity securities, at amortized cost, net of allowance for credit losses of $71 and $0 (fair value of $66,617 and $74,718), respectively

74,102 81,056 (6,954) (8.6)

Loans (includes $13,726 and $23,321 measured at fair value, respectively) 2,530,915 2,469,413 61,502 2.5

Allowance for loan losses (17,183) (13,732) (3,451) 25.1

Allowance for credit losses (1)

(23,931) (17,183) (6,748) 39.3

Loans, net of allowance 2,506,984 2,452,230 54,754 2.2

4 unchanged sentences

Other assets 84,296 77,890 6,406 8.2

Assets held for sale — 115 (115) *

Total assets $ 2,975,462 $ 2,866,748 $ 108,714 3.8

6 unchanged sentences

_____________________________

* Not meaningful

Cash and cash equivalents decreased by $190.5 million, or 49.2%, to $196.5 million as of December 31, 2022 compared to December 31, 2021.

The decrease in liquidity was driven by record loan production in the second quarter of 2022 with continued strong production in the third and fourth quarters of 2022.

Investments increased by $25.5 million, or 45.9%, to $81.1 million as of December 31, 2022 compared to December 31, 2021.

The increase is due to held-to-maturity securities purchased throughout 2022.

(1) Provision for credit loss amounts for periods prior to the ASC 326 adoption date of January 1, 2023 are reported in accordance with previously applicable GAAP.

Cash and cash equivalents increased by $57.9 million, or 29.5%, to $254.4 million as of December 31, 2023 compared to December 31, 2022.

The increase in liquidity was driven primarily by deposit growth, offset partially by loan growth.

Investments decreased by $7.0 million, or 8.6%, to $74.1 million as of December 31, 2023 compared to December 31, 2022.

The decrease is due to held-to-maturity securities payments received throughout 2023.

Loans, net of allowance increased by $54.8 million, or 2.2%, to $2.51 billion as of December 31, 2023 compared to December 31, 2022.

The increase was driven by record loan production in the second quarter of 2022 with continued strong production in the third and fourth quarters of 2022.

The Company experienced loan growth in all loan categories except Cash, Securities, and Other.

The increase was driven by net portfolio growth, primarily in the construction and development, non-owner occupied commercial real estate, and residential mortgage portfolios.

The growth in our construction and development portfolio was driven primarily by draws on existing commitments, partially offset by payoffs.

Table of Content s

Mortgage loans held for sale decreased $1.6 million, or 17.9%, to $7.3 million as of December 31, 2023 compared to December 31, 2022.

The decrease was driven by a reduction in loan origination volume primarily driven by a slowdown in new mortgage loan origination volume associated with the decrease in refinance activity.

Goodwill and other intangible assets, net increased by $0.2 million, or 0.6%, to $32.1 million as of December 31, 2022 compared to December 31, 2021.

The increase was driven by measurement period adjustments to the provisional estimates of fair values of assets acquired and liabilities assumed in the Teton acquisition.

During the first quarter of 2022, goodwill was reduced by $0.2 million as a result of a $0.1 million decrease in fair value adjustment to deferred tax liabilities, net and a $0.1 million increase in fair value adjustment to net assets acquired.

The decrease was driven by a reduction in loan origination volume primarily driven by a slowdown in new lock volume associated with the rising interest rate environment.

Goodwill and other intangible assets, net decreased by $0.3 million, or 0.8%, to $31.9 million as of December 31, 2023 compared to December 31, 2022.

The decrease was driven by amortization on intangible assets.

Other assets increased by $6.4 million, or 8.2%, to $84.3 million as of December 31, 2023 compared to December 31, 2022.

This was primarily driven by the purchase of correspondent bank stock during the year, which increased, net of redemptions, by $4.5 million.

The increase was primarily driven by an increase in tax receivable of $3.7 million related to estimated tax payments made during the year, the addition of hedge swap collateral of $0.8 million and swap derivative assets of $0.8 million, and contributions to the Company's low-income housing tax credit ("LIHTC) investments of $1.1 million and bank technology fund investments of $0.8 million, partially offset by a decrease of $1.5 million of a contingent consideration asset, primarily driven by the $1.2 million impairment to the carrying value of the contingent consideration asset recorded during the second quarter of 2023.

Deposits increased $123.8 million, or 5.1%, to $2.53 billion as of December 31, 2023 compared to December 31, 2022.

The increase was attributable to organic growth through expanded client relationships and increased brokered deposits.

The increase was primarily attributable to new and expanded deposit relationships.

Money market deposit accounts increased $50.1 million, or 3.7%, to $1.39 billion as of December 31, 2023 compared to December 31, 2022.

1 unchanged sentence

Negotiable order of withdrawal ("NOW") accounts decreased $87.3 million, or 37.2%, to $147.5 million compared to December 31, 2022.

Borrowings increased $121.4 million, or 156.3%, to $199.0 million as of December 31, 2022 compared to December 31, 2021.

The increase is primarily attributed to additional FHLB borrowings to support the strong loan growth in 2022, partially offset by the redemption of subordinated notes on January 1, 2022 in the amount of $6.6 million and a reduction in outstanding advances on the Federal Reserve's Paycheck Protection Program Loan Facility.

Borrowings from this facility are expected to trend in the same direction as the PPP loan balances.

The increase is also attributed to the Company's issuance of subordinated notes on December 5, 2022 (the "December 2022 Sub Notes") totaling $20.0 million in aggregate principal amount.

The decrease in NOW accounts was primarily attributable to a mix shift from lower yielding deposit products into higher yielding products as clients seek higher rates for excess liquidity.

Borrowings decreased $21.0 million, or 10.5%, to $178.1 million as of December 31, 2023 compared to December 31, 2022.

The decrease is primarily driven by a decline in FHLB borrowing reliance as a result of increased deposits.

Total shareholders’ equity increased $1.9 million, or 0.8%, to $242.7 million as of December 31, 2023.

The increase is primarily due to net income.

The increase is primarily due to Net income for the year and a $2.4 million increase in Additional paid-in capital driven by stock-based compensation expense, partially offset by a $5.3 million net reduction to Retained earnings as a result of the adoption of ASU 2016-13 for Current Expected Credit Losses ("CECL").

Table of Content s

Assets Under Management

(Dollars in millions) 2023 2022

Managed Trust Balance at Beginning of Period $ 2,204 $ 1,890

Managed Trust Balance as of Beginning of Period $ 1,802 $ 2,204

New relationships 10 41

2 unchanged sentences

Withdrawals (277) (292)

Acquisitions — 184

Market change, net 338 (139)

1 unchanged sentence

Yield* 0.18 % 0.19 %

Directed Trust Balance at Beginning of Period 1,309 951

Directed Trust Balance as of Beginning of Period $ 1,285 $ 1,309

New relationships — 7

2 unchanged sentences

Withdrawals (40) (22)

Acquisitions — 133

Market change, net 168 (127)

1 unchanged sentence

Yield* 0.07 % 0.90 %

Investment Agency Balance at Beginning of Period 2,063 1,840

Investment Agency Balance as of Beginning of Period $ 1,618 $ 2,063

New relationships 56 61

5 unchanged sentences

Yield* 0.77 % 0.77 %

Custody Balance at Beginning of Period 633 518

Custody Balance as of Beginning of Period $ 493 $ 633

New relationships 9 16

5 unchanged sentences

Yield* 0.04 % 0.04 %

401(k)/Retirement Balance at Beginning of Period $ 1,143 $ 1,056

401(k)/Retirement Balance as of Beginning of Period $ 909 $ 1,143

New relationships 3 14

6 unchanged sentences

Yield* 0.15 % 0.18 %

Total Assets Under Management at Beginning of Period $ 7,352 $ 6,255

Total Assets Under Management as of Beginning of Period $ 6,107 $ 7,352

New relationships 78 139

2 unchanged sentences

Withdrawals (767) (896)

Acquisitions — 317

Market change, net 900 (799)

4 unchanged sentences

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

Assets under management decreased $1.24 billion, or 16.9%, to $6.11 billion for the year ended December 31, 2022.

The decrease was primarily attributable to client withdrawals and unfavorable market conditions resulting in a decrease in the value of assets under management balances.

Assets under management increased $646.0 million, or 10.6%, to $6.75 billion for the year ended December 31, 2023.

The increase was primarily attributable to improving market conditions year-over-year resulting in an increase in the value of assets under management balances.

Table of Content s

Investment securities

3 unchanged sentences

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

As of December 31, 2021, all our investments in securities were classified as available-for-sale.

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

The related unrealized loss of $2.3 million included in other comprehensive income 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.

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 over the remaining term of the securities.

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

As of December 31, 2022.

all of our investment securities were classified as held-to-maturity.

The following presents the amortized cost and estimated fair value of our investment securities as of the dates noted (dollars in thousands):

As of December 31, 2023, all of our investment securities were classified as held-to-maturity.

The following tables present the amortized cost and estimated fair value of our investment securities as of the dates noted:

December 31, 2023

(Dollars in thousands) Amortized

Value Allowance for Credit Losses (1)

Investment securities held-to-maturity:

2 unchanged sentences

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

34,579 — (3,410) 31,169 —

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

6,035 — (509) 5,526 —

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

5,836 9 (377) 5,468 —

Corporate collateralized mortgage obligations ("CMO") and mortgage-backed securities ("MBS") 3,783 — (238) 3,545 —

Total securities held-to-maturity $ 74,173 $ 9 $ (7,565) $ 66,617 $ (71)

___________________________

(1) Refer to Note 1 – Organization and Summary of Significant Accounting Policies for further information on our credit loss methodology.

December 31, 2022

(Dollars in thousands) Amortized

Investment securities available-for-sale:

Investment securities held-to-maturity:

Treasury debt $ 243 $ — $ (9) $ 234

Government Agency 3,522 — — 3,522

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

GNMA mortgage-backed securities – residential

39,426 — (2,800) 36,626

FNMA mortgage-backed securities – residential

6,708 — (506) 6,202

GMO and MBS – commercial

6,786 13 (403) 6,396

CMO and MBS 4,074 — (180) 3,894

Total securities available-for-sale $ 55,266 $ 478 $ (182) $ 55,562

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

Table of Content s

The following presents the book value of our contractual maturities and weighted average yield for our investment securities as of the dates presented.

14 unchanged sentences

Treasury debt $ 253 * % $ — — % $ — — % $ — — %

Government agency — — — — — — — —

Corporate bonds — — 4,078 0.30 19,395 1.23 214 0.01

13 unchanged sentences

Cost Weighted

Available-for-sale:

Held-to-maturity

Treasury debt $ — — % $ 243 * % $ — — % $ — — %

Government agency 506 0.02 164 * 1,190 0.04 1,662 0.07

Corporate bonds — — 1,991 0.11 21,548 1.20 280 0.01

GNMA mortgage-backed securities – residential

— — 103 * — — 39,323 1.22

FNMA mortgage-backed securities – residential

— — — — 1,334 0.02 5,374 0.12

Government CMO and MBS – commercial

— — 47 * 1,200 0.04 5,539 0.14

Corporate CMO and MBS — — — — 26 * 4,048 0.19

Total available-for-sale $ 506 0.02 % $ 792 0.02 % $ 11,519 0.85 % $ 42,449 1.46 %

Total held-to-maturity $ — — % $ 2,384 0.11 % $ 24,108 1.26 % $ 54,564 1.68 %

_____________________________

* Not meaningful

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

* Represents percentages that are not meaningful due to being insignificant or exceeding 100%

As of December 31, 2023 and December 31, 2022, there were no holdings of s ecurities of any one issuer, other than the U.S.

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

Table of Content s

Allowance for Credit Losses for HTM Securities

On January 1, 2023, the Company adopted the new CECL standard, ASU 2016-13, using the modified retrospective method for all financial assets measured at amortized cost.

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type.

The majority of our held-to-maturity investment portfolio consists of securities issues by U.S.

government entities and agencies and we consider the risk of credit loss to be zero and, therefore, we do not record an ACL.

The Company's non-government backed securities include private label CMO and MBS as well as bank subordinated debt.

Accrued interest receivable on held-to-maturity debt securities totaled $0.4 million at December 31, 2023 and is excluded from the estimate of credit losses.

The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity by major security type for the year ended December 31, 2023:

December 31, 2023 Corporate Bonds Corporate CMO (1)

Allowance for credit losses:

Beginning balance $ — $ —

Impact of ASU 2016-13 adoption (2)

Provision for credit losses — —

Securities charged-off (recoveries) — —

Total ending allowance balance $ 71 $ —

(1) Management reviewed the collectability of corporate CMO and MBS securities taking into consideration such factors as the asset quality of the corporate bond issuers and credit support and delinquencies associated with the corporate CMO and MBS.

(2) Refer to Note 1 – Organization and Summary of Significant Accounting Policies for further information on our credit loss methodology.

Loan Portfolio

9 unchanged sentences

Beginning in the first quarter of 2022, the Company entered into whole loan purchase agreements to acquire third party originated and serviced unsecured consumer loans to hold for investment and elected the fair value option to account for these loans.

As of December 31, 2022, the Company has $23.3 million in loans accounted for under the fair value option with an unpaid principal balance of $23.4 million.

See Note 17 - Fair Value in the Notes to Condensed Consolidated Financial Statements.

As of December 31, 2023, the Compan y has $13.7 million in loans accounted for under the fair value option with an unpaid principal balance of $14.1 million.

As of December 31, 2022, the Company had $23.3 million in loans accounted for under the fair value option with an unpaid principal balance $23.4 million.

See Note 16 – Fair Value in the Notes to Consolidated Financial Statements.

Table of Content s

As of December 31, 2023 , the Company has $4.2 million in PPP loans outstanding with $0.1 million in remaining fees to be recognized.

1 unchanged sentence

The current amortization of this income is being recognized over a five-year period from the time of origination, however, if a loan receives full forgiveness from the SBA or if the borrower repays the loan, the remaining income will be recognized upon payoff.

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

The following presents our loan portfolio by type of loan as of the dates noted:

As of December 31,

3 unchanged sentences

Consumer and Other 27,028 1.1 26,070 1.0

49,954 2.0 34,758 1.8

Construction and Development 345,516 13.7 285,627 11.7

3 unchanged sentences

Commercial and Industrial 337,180 13.3 361,791 14.8

Total loans held for investment (3)

Total loans held for investment at amortized cost $ 2,517,189 100.0 % $ 2,446,092 100.0 %

Loans accounted for under the fair value option (2)

13,726 23,321

Total loans held for investment $ 2,530,915 $ 2,469,413

Mortgage loans held for sale, at fair value (3)

$ 7,254 $ 8,839

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

_____________________________

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

(2) Includes loans held for investment accounted for under fair value option of $23.4 million as of December 31, 2022.

(3) Loans held for investment exclude deferred fees, unamortized premiums/(unaccreted discounts), net, and fair value adjustments on loans held for investment accounted for under fair value option, which collectively totaled ($6.7) million and ($5.0) million as of December 31, 2022 and 2021, respectively.

(1) Includes PPP loans of $4.2 million an d $6.9 million as of December 31, 2023 and 2022, respectively.

(2) Includes $14.1 million and $23.4 million of unpaid principal balance of loans held for investment accounted for under the fair value option loans as o f December 31, 2023 and 2022, respectively.

(3) Includes $7.1 million and $8.8 million of unpaid principal balance of mortgage loans held for sale as of December 31, 2023 and 2022, respectively.

• 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.

3 unchanged sentences

• Consumer and Other— consists of unsecured consumer loans.

Loans held for investment accounted for under the fair value option are also classified within this line item and had a balance of $23.4 million as of December 31, 2022.

There were no loans held for investment accounted for under the fair value option as of December 31, 2021.

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.

Loans held for investment accounted for under the fair value option are also classified within this line item and had an unpaid principal balance of $14.1 million and $23.4 million as of December 31, 2023 and December 31, 2022, respectively.

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

7 unchanged sentences

These loans are dependent on the strength of the industries of the related borrowers and the success of their businesses.

Table of Content s

• Commercial and Industrial —consists of commercial and industrial loans, including working capital lines of credit, permanent working capital term loans, business asset loans, acquisition, expansion and development loans, and other loan products, primarily in our target markets.

10 unchanged sentences

$ 1,611 $ 677 $ 139,947

$ 1,555 $ 832 $ 165,670

Consumer and Other 18,425 6,175 1,206 1,222 27,028

17,552 29,127 2,241 1,034 49,954

Construction and Development 106,993 180,210 51,253 7,060 345,516

4 unchanged sentences

Total loans $ 407,131 $ 1,041,435 $ 359,281 $ 709,342 $ 2,517,189

Loans accounted for under the fair value option 105 13,163 458 — 13,726

Total loans $ 407,236 $ 1,054,598 $ 359,739 $ 709,342 $ 2,530,915

Amounts with fixed rates 141,485 699,578 235,132 23,903 1,100,098

3 unchanged sentences

(1) Includes PPP loans.

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

As of December 31, 2022

14 unchanged sentences

Total loans $ 307,605 $ 1,048,126 $ 401,225 $ 689,136 $ 2,446,092

Loans accounted for under the fair value option 17 22,563 741 — 23,321

Total loans $ 307,622 $ 1,070,689 $ 401,966 $ 689,136 $ 2,469,413

Amounts with fixed rates 126,298 505,084 202,062 86,872 920,316

3 unchanged sentences

(1) Includes PPP loans.

Table of Content s

Loan Modifications

On January 1, 2023 the Company adopted ASU 2022-02, which introduces new reporting requirements for modifications of loans to borrowers experiencing financial difficulty.

GAAP requires that certain types of modifications of loans in response to a borrower’s financial difficulty be reported and include the following;

(i) principal forgiveness, (ii) interest rate reduction, (iii) other than insignificant payment delay, (iv) term extension, or (v) any combination of the foregoing.

ASU 2022-02 eliminates the recognition measurement guidance for troubled debt restructured ("TDR") loans, and instead requires an entity to evaluate whether a modification represents a new loan or a continuation of an existing loan in accordance with ASC Topic 310-20, Receivables - Nonrefundable Fees and Other Costs.

If a modification results in a new loan under the guidance, the Company will recognize any unearned deferred net revenue and measure the ACL on the loan on a collective basis rather than individually analyzed.

The Company offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who had a pass risk rating and had not been delinquent over 30 days on payments in the last two years.

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

The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief.

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

We believe our loan modification program meets that definition.

In accordance with

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

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

3 unchanged sentences

All loans modified in response to COVID-19 are classified as performing and pass rated as of December 31, 2023.

Non-acquired COVID modified loans are included in the allowance for loan loss general reserve in accordance with ASC 450-20.

Non-acquired COVID modified loans are included in the allowance for credit losses.

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

1 unchanged sentence

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

As of December 31, 2022, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

Interest receivable is excluded from the estimate of credit losses.

The following table presents the amortized cost basis as of December 31, 2023 of the loans modified to borrowers experiencing financial difficulty during the year ended December 31, 2023, disaggregated by class of financing receivable and type of concession granted during the period.

The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.

(Dollars in thousands) Principal forgiveness Interest rate reduction Term extension Combination:

term extension and principal forgiveness Combination:

term extension and interest rate reduction Total class of financing receivable

Commercial and Industrial $ — $ — $ 2,123 $ 183 $ — 0.7 %

Total $ — $ — $ 2,123 $ 183 $ —

Table of Content s

The following table presents the financial effect by type of modification made to borrowers experiencing financial difficulty for the period ended December 31, 2023:

(Dollars in thousands) Principal forgiveness Interest rate reduction Term extension

Commercial and Industrial Reduced the amortized cost basis of the loan by $185 thousand — Added a weighted-average 2.8 years to the life of the loan, which reduced monthly payment amounts for the borrower

Commercial and Industrial — — Six months of interest payments were deferred to the maturity of the loan.

Principal payment of $988 thousand was deferred 0.6 years

Commercial and Industrial — — Added a weighted-average 0.5 years to the life of the loan

Non-Performing Assets

Non-performing assets include non-accrual loans, TDRs, and OREO.

Non-performing assets include non-accrual loans and OREO.

The accrual of interest on loans is discontinued at the time the loan becomes 90 or more days delinquent unless the loan is well secured and in the process of collection or renewal due to maturity.

5 unchanged sentences

While disposition efforts with respect to our OREO are generally ongoing, if these properties are appraised at lower-than-expected values or if we are unable to sell the properties at the prices for which we expect to be able to sell them, we may incur additional losses.

During the year ended December 31, 2022, we recognized an immaterial amount of gains on the sale of OREO.

The amount of lost interest for non-accrual loans was $0.2 million for each of the years ended December 31, 2022 and 2021.

We had $12.3 million and $4.3 million in non-performing assets as of December 31, 2022 and December 31, 2021, respectively.

The increase in non-performing assets is related to the addition of $8.9 million for two related problem loan credits at the end of the fourth quarter.

The Company did not add a specific reserve to these new problem credits due to adequate collateral coverage as of December 31, 2022.

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

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

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

As of December 31, 2023 and December 31, 2022, we did not own any OREO properties.

The amount of lost interest for non-accrual loans was $6.4 million and $0.2 million for each of the years ended December 31, 2023 and 2022, respectively.

The Company recorded $8.8 million and $0.2 million of charge-offs, net of recoveries, during the year ended December 31, 2023 and December 31, 2022, respectively.

We had amortized cost of $50.8 million and $12.1 million in non-performing assets as of December 31, 2023 and December 31, 2022, respectively.

The increase in non-performing assets is primarily related to the addition o f $42.2 million in loans, under one relationship, during the third quarter of 2023.

Table of Content s

The following presents the amortized cost basis of non-performing loans as of the dates indicated:

As of December 31,

8 unchanged sentences

Total non-accrual loans 50,816 12,137

TDRs still accruing — 55

Total non-performing loans 12,349 4,317

Total non-performing assets $ 50,816 $ 12,137

1 unchanged sentence

2.02 % 0.50 %

Non-performing loans to total loans (2)

Non-performing assets to total assets 1.71 % 0.43 %

Allowance for loan losses to non-accrual loans 139.14 322.20

Allowance for loan losses to non-performing loans 139.14 317.36

Allowance for credit losses to non-accrual loans (2)

47.09 % 139.14 %

Accruing loans 90 or more days past due $ 285 $ 25

_____________________________

(1) As of December 31, 2022, all but three non-accrual loans, totaling $9.1 million, were also classified as TDRs.

As of December 31, 2021, all but one non-accrual loan, totaling an immaterial amount, was also classified as a TDR.

See Note 5 – Loans and the Allowance for Loan Losses to the Consolidated Financial Statements.

(1) Excludes mortgage loans held for sale of $7.3 million and $8.8 million as of December 31, 2023 and 2022, respectively.

Excludes loans held for sale, at fair value of $2.0 million as of December 31, 2022.

Potential Problem Loans

Excludes $14.1 million and $23.4 million of unpaid principal balance of loans held for investment accounted for under the fair value option as of December 31, 2023 and 2022, respectively.

(2) Provision for credit loss amounts for periods prior to the ASC 326 adoption date of January 1, 2023 are reported in accordance with previously applicable GAAP.

Credit Quality Indicators

We categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as:

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They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Loans in this category may be placed on non-accrual status and may individually be evaluated for impairment if indicators of impairment exist.

Loans in this category may be placed on non-accrual status and may individually be evaluated.

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.

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

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As of December 31, 2023 and December 31, 2022, non-performing loans of $50.8 million and $12.1 million, respectively, were included in the substandard category in the table below.

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

The following presents the amortized cost basis of loans by credit quality indicator, by class of financing receivable, as of the dates noted:

As of December 31, 2023

(Dollars in thousands) Pass Special

Mention Substandard Not Rated Total

Mention Substandard Doubtful Not Rated Total

Cash, Securities, and Other (1)

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(Dollars in thousands) Pass Special

Mention Substandard Not Rated Total

Mention Substandard Doubtful Not Rated Total

Cash, Securities and Other (1)

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Consumer and Other (2)

26,065 — 5 — 23,321 49,391

Construction and Development 285,426 — 201 — — 285,627

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_____________________________

(1) Includes 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 accounted for under fair value option as of December 31, 2022.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses, which is a noncash charge to earnings.

Loan losses are charged against the allowance when management believes that a loan balance is confirmed uncollectible.

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

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

Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off.

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

Our clientele is generally comprised of high net-worth individuals and commercial borrowers with strong credit profiles and multiple sources of repayment.

During the year ended December 31, 2022, the Company recorded a provision of $3.7 million.

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

We believe the allowance for loan losses is adequate as of December 31, 2022.

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

(1) Includes PPP loans of $4.2 million an d $6.9 million as of December 31, 2023 and 2022, respectively.

(2) Includes $13.7 million and $23.3 million of loans held for investment accounted for under fair value option as of December 31, 2023 and 2022, respectively.

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Allowance for Credit Losses on Loans

On January 1, 2023, the Company adopted the new CECL standard, ASU 2016-13, using the modified retrospective method for all financial assets measured at amortized cost.

Reporting periods beginning after January 1, 2023 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

Beginning January 1, 2023, the allowance for credit losses for loans is measured on the loan’s amortized cost basis, excluding interest receivable.

Interest receivable excluded at December 31, 2023 and December 31, 2022 was $10.8 million and $9.8 million, respectively.

The allowance for credit losses (“ACL”) is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

The ACL excludes loans held for sale and loans accounted for under the fair value option.

The Company elected to not measure an ACL for accrued interest receivables, as we write off applicable accrued interest receivable balances in a timely manner when a loan is placed on non-accrual status, in which any accrued but uncollected interest is reversed from current income.

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

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts.

Actual Company and regional peer historical credit loss experience provides the basis for the estimation of expected credit losses.

The Company identified and grouped portfolio segments based on risk characteristics and underlying collateral.

The call code for each financial asset type was assessed and, where appropriate, expanded for certain call codes into separate segments based on risk characteristics.

CECL requires an allowance for credit losses on all portfolio loans including purchased loans without credit deterioration.

As of December 31, 2023, the Company held $208.2 million in acquired loans with $2.0 million in allowance for credit losses as well as $3.9 million in unamortized discounts.

ACL for pooled loans are estimated using a discounted cash flow (“DCF”) methodology using the amortized cost basis (excluding interest) for all loans modeled within a performing pool of loans.

The DCF analysis pairs loan-level term information, for example, maturity date, payment amount, interest rate, with top-down pool assumptions such as default rates, prepayment speeds, to produce individual expected cash flows for every instrument in the segment.

The results are then aggregated to produce segment level results and reserve requirements for each segment.

The quantitative DCF model also incorporates forward-looking macroeconomic information over a reasonable and supportable period of four quarters.

Subsequent to the four quarter period, the Company reverts to its historical loss rate and historical prepayment and curtailment speeds on a straight-line basis over a four quarter reversion period.

The Company applies qualitative factors to capture losses that are expected but may not be adequately reflected in the quantitative model described above.

Qualitative adjustments are made based on management’s assessment of the risks that may lead to a future credit loss or differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, changes in environmental and economic conditions, or other relevant factors.

Loans that do not share risk characteristics are evaluated on an individual basis.

Loans evaluated individually are not included in the pooled loan evaluation.

When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

ACL - held-to-maturity securities:

Held-to maturity securities are carried at amortized cost when management has the positive intent and ability to hold them to maturity.

The majority of our held-to-maturity investment portfolio consists of securities issues by U.S.

government entities and agencies.

These securities are either explicitly or implicitly guaranteed by the U.S.

government, are highly rated by major rating agencies, and have a long history of no credit losses.

With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we do not record an ACL for these securities.

The Company's non-government backed securities include private label CMO and MBS and bank subordinated debt.

Private label refers to private institutions such as brokerage firms, banks, and home builders, that also securitize mortgages.

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Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type.

Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses.

The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

Management classifies the held-to-maturity portfolio into the following major security types:

Corporate bonds and Corporate CMO.

ACL - off-balance sheet credit exposures:

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.

The allowance for credit losses on off-balance sheet credit exposures is adjusted through the Provision for credit losses and is recorded in Other liabilities.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

The probability of funding is based on historical utilization statistics for unfunded loan commitments.

The loss rates used are calculated using the same assumptions as the associated funded balance.

The ACL represents Management’s best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectibility over the loans’ contractual terms, adjusted for expected prepayments when appropriate.

Our quantitative discounted cash flow models use economic forecasts including;

housing price index (“HPI”), gross domestic product (“GDP”), and national unemployment.

The HPI, GDP, and unemployment twelve month forecasts used in our model as of December 31, 2023 is based on a slightly improved macro-economic forecast assuming a soft landing as compared to assumptions previously used as of January 1, 2023 projecting the likelihood of a deeper recession.

As a result, we forecasted decreased probability of default rates and loss given default rates which in turn reduced our model loss rates, partially offset by loan growth and changes in our segment mix, resulting in a $0.5 million release of provision on pooled loans for the year ended December 31, 2023.

The allowance on credit losses on non-performing loans was $3.8 million as of December 31, 2023.

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The following presents summary information regarding our allowance for credit losses for the periods presented:

Year Ended December 31,

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$ 2,517,189 $ 2,446,092

Allowance for loan losses at beginning of period $ 13,732 $ 12,539

Provision for loan losses 3,682 1,230

Allowance for credit losses at beginning of period $ 17,183 $ 13,732

Impact of adopting ASU 2016-13 3,470

Provision for credit losses (4)

Cash, Securities, and Other — (1)

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Net (charge-offs) recoveries (8,799) (231)

Allowance for loan losses at end of period $ 17,183 $ 13,732

Allowance for loan losses to total loans (4)

Allowance for credit losses at end of period $ 23,931 $ 17,183

Allowance for credit losses to total loans (4)

0.95 % 0.70 %

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(2) Excludes average outstanding balances of mortgage loans held for sale of $11.5 million and $15.6 million for the years ended December 31, 2023 and 2022, respectively.

Excludes average outstanding balances of loans held for investment accounted for under the fair value option of $18.5 million and $15.5 million for the years ended December 31, 2023 and 2022, respectively.

(3) Excludes mortgage loans held for sale of $7.3 million and $8.8 million as of December 31, 2023 and 2022, respectively.

Excludes loans held for sale, at fair value of $2.0 million as of December 31, 2022.

(4) End of period loans as of December 31, 2022 includes $234.7 million in acquired loans and $7.1 million in PPP loans, of which $0.7 million are acquired PPP loans.

No reserve is allocated for these loans.

Excluding these loans would result in an increase of the ratio for the year ended December 31, 2022.

(*) Immaterial

The following represents the allocation of the allowance for loan losses among loan categories and other summary information.

The allocation for loan losses by category should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated

The allocation of a portion of the allowance for loan losses to one category of loans does not preclude its availability to absorb losses in other categories.

Includes $4.0 million and $7.1 million in bank originated PPP loans as of December 31, 2023 and 2022, respectively, and $0.3 million and $0.7 million of acquired PPP loans as of December 31, 2023 and 2022, respectively.

Excludes $14.1 million and $23.4 million of unpaid principal balance of loans held for investment accounted for under the fair value option as of December 31, 2023 and 2022, respectively.

(4) Allowance for credit loss amounts for periods prior to the ASU 2016-13 adoption date of January 1, 2023 are reported in accordance with previously applicable GAAP.

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The following represents the allocation of the allowance for credit losses among loan categories and other summary information.

The allocation for credit losses by category should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions.

The allocation of a portion of the allowance for credit losses to one category of loans does not preclude its availability to absorb losses in other categories.

As of December 31,

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Commercial and Industrial 7,172 13.3 2,460 14.8

Total allowance for loan losses $ 17,183 100.0 % $ 13,732 100.0 %

Total allowance for credit losses $ 23,931 100.0 % $ 17,183 100.0 %

_____________________________

(1) Allowance for credit loss amounts for periods prior to the ASU 2016-13 adoption date of January 1, 2023 are reported in accordance with previously applicable GAAP.

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

Allowance for credit losses - off-balance sheet credit exposure

The allowance for credit losses on off-balance sheet credit exposures is adjusted through Provision for credit losses and is recorded in Other liabilities.

The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

The probability of funding is based on historical utilization statistics for unfunded loan commitments.

The loss rates used are calculated using the same assumptions as the associated funded balance.

Refer above for changes in the factors that influenced the current estimate of ACL and reasons for the changes.

The following table presents the changes in the ACL on unfunded loan commitments:

Beginning balance $ 419 19.2 %

Impact of adopting ASU 2016-13 3,481 159.8

(Release) provision for credit losses (1,722) (79.1)

Ending balance $ 2,178 100.0 %

Deferred Tax Assets, Net

Deferred tax assets, net represent the differences in timing of when items are recognized for GAAP purposes and when they are recognized for tax purposes, as well as our net operating losses.

Deferred tax assets, net of our valuation allowance, represent the differences in timing of when items are recognized for GAAP purposes and when they are recognized for tax purposes, as well as our net operating losses.

Our deferred tax assets, net, are valued based on the amounts that are expected to be recovered in the future utilizing the tax rates in effect at the time recognized.

Our deferred tax assets, net for the year ended December 31, 2023, increased $0.5 million from December 31, 2022.

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Our deposit products include money market accounts, demand deposit accounts, time-deposit accounts (typically certificates of deposit), NOW accounts (interest checking accounts), and saving accounts.

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Total deposits increased by $123.8 million, or 5.1%, to $2.53 billion as of December 31, 2023 from December 31, 2022.

The increase was driven primarily by organic growth through expanded client relationships.

The increase was driven primarily by new and expanded relationships.

Total average deposits for the year ended December 31, 2023 were $2.36 billion, an increase of $140.5 million, or 6.3%, compared to $2.22 billion as of December 31, 2022.

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

As of and For the Year Ended December 31,

The following table presents the average balances and average rates paid on deposits during the periods presented:

For the Year Ended December 31,

(Dollars in thousands) Average

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Total deposits $ 2,364,523 2.77 % $ 2,224,057 0.59 %

Average noninterest-bearing deposits to average total deposits was 30.1% and 31.7% for the year ended December 31, 2022 and 2021, respectively.

Our average cost of funds was 0.73% and 0.29% during the year ended December 31, 2022 and 2021, respectively.

The increase was driven by a 54 basis point increase in interest bearing deposit costs consistent with the higher interest rate environment.

Average noninterest-bearing deposits to average total deposits was 21.6% and 30.1% for the years ended December 31, 2023 and 2022, respectively.

Our average cost of funds was 2.92% and 0.73% during the years ended December 31, 2023 and 2022, respectively.

The increase in cost of funds was primarily driven by increased rates on interest-bearing deposit accounts and borrowings due to the rising rate environment, a highly competitive deposit market, and an increase in short-term borrowings which provided additional liquidity for funding the growth in the balance sheet.

Total money market accounts as of December 31, 2023 were $1.39 billion, an increase of $50.1 million, or 3.7%, compared to $1.34 billion as of December 31, 2022.

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Total time deposits as of December 31, 2023 were $496.5 million, an increase of $272.4 million, or 121.5%, compared to December 31, 2022.

The following presents the amount of certificates of deposit by time remaining until maturity as of December 31, 2022 (dollars in thousands):

(Dollars in thousands) Three Months or Less Three to Six Months Six to 12 Months After 12 Months Total

The following table presents the amount of certificates of deposit by time remaining until maturity as of December 31, 2023:

(Dollars in thousands) Three Months or Less Three to Six Months Six to 12 Months After 12

Uninsured Time Deposits $ 37,774 $ 26,227 $ 26,085 $ 3,770 $ 93,856

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Total $ 170,992 $ 134,134 $ 109,487 $ 81,839 $ 496,452

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We have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs.

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The issuance included $0.5 million of issuance costs resulting in a net balance of $19.5 million as of December 31, 2022.

The increase in other borrowings is primarily attributed to additional FHLB borrowings to support the strong loan growth in 2022, partially offset by the paydown of loans in the Paycheck Protection Program Loan Facility ("PPPLF") from the Federal Reserve with a period end balance of $5.4 million and the redemption of $6.6 million in subordinated notes .

On March 12, 2023 the Federal Reserve Board announced it would make additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of depositors made available through the creation of a new Bank Term Funding Program (“BTFP”).

The BTFP is meant to be an additional resource of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.

As of December 31, 2023, the Company has pledged a par value of $44.3 million in securities under the BTFP and borrowed $31.0 million w ith a maturity date of March 27, 2024.

The rate for the borrowings is based on the one year overnight swap rate plus 10 b asis points but no lower than the interest rate on reserve balances in effect on the day the loan is made and is fixed over the term of the advance based on the date of the advance.

The decrease in other borrowings is primarily attributed to a decline in FHLB borrowing reliance as a result of increased deposits.

Additionally, attributable to the paydown of loans in the Paycheck Protection Program Loan Facility ("PPPLF") from the Federal Reserve with a year end balance of $3.5 million .

Borrowing from the PPPLF facility is expected to trend in the same direction as the PPP loan balances.

The following presents balances of each of the borrowing facilities as of the dates noted (dollars in thousands):

December 31, December 31,

The following table presents balances of each of the borrowing facilities as of the dates noted:

(Dollars in thousands) 2023 2022

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We have a blanket pledge and security agreement with FHLB that requires certain loans and securities to be pledged as collateral for any outstanding borrowings under the agreement.

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

The collateral pledged as of December 31, 2023 and December 31, 2022 amounted to $1.31 billion and $1.26 billion, respectively.

Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $656.6 million as of December 31, 2023.

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As of December 31, 2023 and 2022, there were no amounts outstanding on any of the federal funds lines.

Table of Content s

Our borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies.

As of December 31, 2023 and December 31, 2022, the Company was in compliance with the covenant requirements.

Cash Flow Hedges :

On March 21, 2023, the Company executed an interest rate swap with a notional amount that was designated as a cash flow hedge of certain Federal Home Loan Bank borrowings.

The notional amount of the interest rate swaps does not represent amounts exchanged by the parties.

The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

The swap hedges the benchmark index (SOFR) with a receive float/pay fixed swap for the period March 21, 2023 through April 1, 2026.

The notional amount of the interest rate swap as of December 31, 2023 was $50.0 million .

Derivatives Not Designated as Hedges :

During the year ended December 31, 2023, the Company entered into interest rate swaps to offset interest rate exposure with its commercial and residential variable rate loan clients.

Clients with variable rate loans may choose to enter into an interest rate swap to hedge the interest rate risk on the loan and effectively pay a fixed rate payment.

The Company will simultaneously enter into an interest rate swap on the same underlying loan and notional amount to hedge risk on the fixed rate loan.

The notional amount of interest rate swaps with its loan customers as of December 31, 2023 was $30.3 million .

While these derivatives represent economic hedges, they do not qualify as hedges for accounting purposes.

Liquidity and Capital Resources

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Access to purchased funds primarily include the ability to borrow from FHLB, other correspondent banks and the use of brokered deposits.

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

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

Average Percentage for the Year Ended

December 31, Average Percentage for the Year Ended

Sources of Funds:

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Mortgage loans held for sale 0.41 0.60

Loans held at fair value 0.66 0.60

Interest-bearing deposits in other financial institutions 4.17 9.54

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Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

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Capital levels are viewed as important indicators of an institution’s financial soundness by banking regulators.

Generally, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold.

As of December 31, 2022 and December 31, 2021, respectively, our

holding company and Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized," for purposes of the prompt corrective action regulations.

As of December 31, 2023 and December 31, 2022, our holding company and Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized," for purposes of the prompt corrective action regulations.

As we continue to grow our operations and maintain capital requirements, our regulatory capital levels may decrease depending on our level of earnings.

During the years ended December 31, 2022 and 2021, First Western made capital injections of $6.0 million and $2.9 million, respectively, into the Bank.

We continue to monitor growth and control our capital activities in order to remain in compliance with all applicable regulatory capital standards.

The following presents our regulatory capital ratios for the dates noted.

The following table presents our regulatory capital ratios for the dates noted:

December 31, 2023 December 31, 2022

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Commitments may expire without being utilized.

Our exposure to loan loss is represented by the contractual amount of these commitments, although material losses are not anticipated.

Our exposure to credit loss is represented by the contractual amount of these commitments, although material losses are not anticipated.

We follow the same credit policies in making commitments as we do for on-balance sheet instruments.

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

The following presents future contractual obligations to make future payments for the periods presented:

As of December 31, 2023

(Dollars in thousands) 1 Year

or Less More than

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(1) Reflects contractual maturity dates of March 31, 2030, December 1, 2030, September 1, 2031, and December 15, 2032.

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

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The following presents financial instruments whose contract amounts represent credit risk, as of the periods presented:

December 31, December 31,

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However, there can be no assurance that such arrangements will not have an effect on future operations.

Critical Accounting Policies

Our accounting policies and procedures are described in Note 1 - Organization and Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect reported amounts of assets, liabilities, income, and expenses.

We base estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources.

Estimates are evaluated on an ongoing basis.

Actual results may differ from these estimates under different assumptions or conditions.

We have identified our Allowance for Credit Losses ("ACL"), Goodwill, and Fair Value Measurement as being critical because our policies require management to use significant judgement and use subjective and complex measurements about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

Our accounting policies and procedures, including those identified as being critical, are described in further detail in Note 1 – Organization and Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements.

Our ACL policies govern the processes and procedures used to estimate potential for credit losses in our loan receivables and held-to-maturity debt securities.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor.

The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

We perform periodic and systematic detailed reviews of our loan portfolio to assess overall collectability.

The level of the ACL on loans reflects our estimate of the losses expected in the loan portfolio over the assets’ contractual term.

As of December 31, 2023, the ACL had an ending balance of $23.9 million compared to the prior year ending balance of $17.2 million, which is prior to the adoption of ASU 2016-13.

The ACL is an estimate that is subject to uncertainty due to the various assumptions and judgments used in the estimation process.

The estimate is based on our quantitative discounted cash flow models using economic forecasts including;

HPI, GDP, and national unemployment.

Potential changes in any one economic variable may or may not affect the overall allowance because a variety of economic variables and inputs are considered in estimating the allowance, and changes in those variables and inputs may not occur at the same rate, may not be consistent across product types and may have offsetting impacts to other changing variables and inputs.

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Additionally, our ACL model adjusts for qualitative factors in addition to historical information and our economic forecast.

Management considered factors that are likely to cause estimated credit losses and differ from historical loss experience.

The factors management reviews include acquired loan underwriting, residential mortgage debt-to-income, macroeconomic factors, concentration of our loan portfolio, negative probability of default, classified loan trends, non-core loans, loan to value ratios, and CRE exposure.

See Note 4 – Loans and the Allowance For Credit Losses for further details of the factors considered by us in estimating the necessary level of the ACL for loans .

Goodwill represents the excess of purchase price over the fair value of net identifiable tangible and intangible assets acquired in business combinations.

We have acquired other identifiable intangible assets, primarily consisting of customer relationships, non-competition agreements, and recorded goodwill through its acquisition of financial services companies.

We are required to assess our goodwill for impairment on an annual basis, or more frequently if deemed necessary.

We have selected October 31 as the date to perform our annual impairment test.

The test is performed at the reporting unit level by applying a fair value-based test using discounted estimated future net cash flows.

Impairment exists when the carrying amount of the goodwill exceeds estimated fair values.

The estimate is considered to have a low level of uncertainty unless a triggering event occurs.

Events that may trigger goodwill impairment include deterioration in economic conditions, increased competitive environment, negative trends in overall financial performance, legal or regulatory proceedings, loss of key personnel, and change in strategy or sustained decreases in share value.

We performed a quantitative goodwill impairment test as of October 31, 2023 with the assistance of an independent third-party firm specializing in goodwill impairment valuations for financial institutions.

The quantitative impairment testing involves management judgment, using widely accepted valuation techniques, such as the market approach (earnings multiples and/or transaction multiples) and the income approach (discounted cash flow ("DCF") method).

In applying these methodologies, the Company utilizes several factors, including actual operating results, future business plans, economic projections and market data.

The Company provided a five year forecast for the analysis based on the historical growth we have experienced, in addition, we provided a stressed scenario which forecasted growth using assumptions similar to the economic environment in 2023.

Both scenarios produced an estimated fair value that exceeded the carrying value of goodwill.

After the company recorded the impact of a loan related subsequent event, Management updated the Goodwill impairment analysis as of December 31, 2023.

Significant negative industry or economic trends, including declines in the market price of our stock, reduced estimates of future cash flows or business disruptions could result in impairments to goodwill in the future, which would result in recording an impairment loss.

Any resulting impairment loss could have a material impact on our financial condition and results of operation.

Management will continue evaluating the economic conditions at future reporting periods for triggering events.

Goodwill totaled $30.4 million as of December 31, 2023 and 2022.

As of December 31, 2023 and 2022, there has not been any impairment of goodwill identified or recorded.

See Note 6 – Goodwill and Other Intangible Assets for further information on Goodwill.

Fair Value Measurements :

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The amount of management judgement and uncertainty involved when determining the fair value of a financial instrument is dependent on the availability of quoted market prices or other observable inputs.

Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.

Changes in assumptions or in market conditions could significantly affect these estimates.

Items measured at fair value are classified as Level 1, Level 2, or Level 3 of the fair value hierarchy dependent on the amount of information available.

Financial assets and liabilities that we record at fair value on a reoccurring basis include equity securities, equity warrants, financial guarantee asset and liability, derivatives, mortgage related derivatives, loans held for investment accounted for under fair value, mortgage loans held for sale, and loans held for sale.

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As of December 31, 2023, $23.8 million or 0.80% of our total assets and $1.1 million or 0.04%, of our total liabilities were recorded at fair value on a recurring basis.

As of December 31, 2022, $36.1 million or 1.26% of our total assets and none of our total liabilities were recorded at fair value on a recurring basis.

Additionally, other assets and liabilities may be recorded at fair value on a nonrecurring basis including Other Real Estate Owned ("OREO") or Collateral Dependent Loans.

These typically result in Level 3 classification of the inputs for determining fair value.

See Note 16 – Fair Value for further details on the estimates and assumptions used and assets and liabilities valued at fair measurements.

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What changed 10-K

Item 7. Management’s Discussion and Analysis