First Western Financial Inc 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. See "Cautionary Statement Regarding Forward-Looking Statements." Also, see the risk factors and other cautionary statements described under the heading "Item 1A – Risk Factors" included in Item 1A of this Annual Report on Form 10-K. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law. Company Overview We are a financial holding company founded in 2002 and headquartered in Denver, Colorado. We provide a fully integrated suite of wealth management services to our clients including banking, trust, and investment management products and services. Our mission is to be the best private bank for the Western wealth management client. We target entrepreneurs, professionals, and high-net worth individuals, typically with $1.0 million-plus in liquid net worth, and their related philanthropic and business organizations, which we refer to as the "Western wealth management client." We believe that the Western wealth management client shares our entrepreneurial spirit and values our sophisticated, high-touch wealth management services that are tailored to meet their specific needs. We partner with our clients to solve their unique financial needs through our expert integrated services provided in a team approach. We offer our services through a branded network of boutique private trust bank offices, which we believe are strategically located in affluent and high-growth markets in locations across Colorado, Arizona, Wyoming, Montana, and California. Our profit centers, which are comprised of private bankers, lenders, wealth planners and portfolio managers, under the leadership of 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"). 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 As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the comparative levels and trends of the line items in our Consolidated Balance Sheets and Statements of Income as well as various financial ratios that are commonly used in our industry. The primary factors we use to evaluate our results of operations include net interest income, non-interest income and non-interest expense. 58 Table of Content s Net Interest Income Net interest income represents interest income less interest expense. We generate interest income on interest-earning assets, primarily loans and investment securities. We incur interest expense on interest-bearing liabilities, primarily interest-bearing deposits and borrowings. To evaluate net interest income, we measure and monitor: (i) yields on loans, investment securities, and other interest-earning assets; (ii) the costs of deposits and other funding sources; (iii) the rates incurred on borrowings and other interest-bearing liabilities; and (iv) the regulatory risk weighting associated with the assets. Interest income is primarily impacted by loan growth and loan repayments, along with changes in interest rates on the loans. Interest expense is primarily impacted by changes in deposit balances, changes in interest rates on deposits, along with the volume and type of interest-bearing liabilities. Net interest income is primarily impacted by changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities. Non-Interest Income Non-interest income primarily consists of the following: • Trust and investment management fees —fees and other sources of income charged to clients for managing their trust and investment assets, providing financial planning consulting services, 401(k) and retirement advisory consulting services, and other wealth management services. Trust and investment management fees are primarily impacted by rates charged and increases and decreases in AUM. AUM is primarily impacted by opening and closing of client advisory and trust accounts, contributions and withdrawals, and the fluctuation in market values. • Net gain on mortgage loans —gain on originating and selling mortgages and origination fees, less commissions to loan originators, document review, and other costs specific to originating and selling the loan. The market adjustments for interest rate lock commitments ("IRLC"), mortgage derivatives, and gains and losses incurred on the mandatory trading of loans are also included in this line item. Net gain on mortgage loans is primarily impacted by the amount of loans sold, the type of loans sold, and market conditions. • 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 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. • Income on company-owned life insurance —income earned on the growth of the cash surrender value of life insurance policies we hold on certain key associates. The income on the increase in the cash surrender value is non-taxable income. Non-Interest Expense Non-interest expense is comprised primarily of the following: • Salaries and employee benefits —all forms of compensation-related expenses including salary, incentive compensation, payroll-related taxes, stock-based compensation, benefit plans, health insurance, 401(k) plan match costs, and other benefit-related expenses. Salaries and employee benefit costs are primarily impacted by changes in headcount and fluctuations in benefits costs. 59 Table of Content s • Occupancy and equipment —costs related to building and land maintenance, leasing our office space, depreciation charges for the buildings, building improvements, furniture, fixtures and equipment, amortization of leasehold improvements, utilities, and other occupancy-related expenses. Occupancy and equipment costs are primarily impacted by the number of locations we occupy. • Professional services —costs related to legal, accounting, tax, consulting, personnel recruiting, insurance and other outsourcing arrangements. Professional services costs are primarily impacted by corporate activities requiring specialized services. FDIC insurance expense is also included in this line and represents the assessments that we pay to the FDIC for deposit insurance. • Technology and information systems —costs related to software and information technology services to support office activities and internal networks. Technology and information system costs are primarily impacted by the number of locations we occupy, the number of associates we have, and the level of service we require from our third-party technology vendors. • Data processing —costs related to processing fees paid to our third-party data processing system providers relating to our core private trust banking platform. Data processing costs are primarily impacted by the number of loan, deposit and trust accounts we have and the level of transactions processed for our clients. • Marketing —costs related to promoting our business through advertising, promotions, charitable events, sponsorships, donations, and other marketing-related expenses. Marketing costs are primarily impacted by the levels of advertising programs and other marketing activities and events held throughout the year. • Amortization of other intangible assets —primarily represents the amortization of intangible assets including client lists, core deposit intangibles, and other similar items recognized in connection with acquisitions. • Other —includes costs related to operational expenses associated with office supplies, postage, travel expenses, meals and entertainment, dues and memberships, costs to maintain or prepare other real estate owned ("OREO") for sale, director compensation and travel, and other general corporate expenses that do not fit within one of the specific non-interest expense lines described above. Other operational expenses are generally impacted by our business activities and needs. Operating Segments The Company’s reportable segments consist of Wealth Management and Mortgage. We measure the overall profitability of operating segments based on income before income tax. We believe this is a more useful measurement as our wealth management products and services are fully integrated with our private trust bank. We allocate costs to our segments, which consist primarily of compensation and overhead expense directly attributable to the products and services within the Wealth Management and Mortgage segments. We measure the profitability of each segment based on a post-allocation basis, as we believe it better approximates the operating cash flows generated by our reportable operating segments. A description of each segment is provided in Note 18 – Segment Reporting of the accompanying Notes to the Consolidated Financial Statements. P rimary Factors Used to Evaluate our Balance Sheet The primary factors we use to evaluate our balance sheet include asset and liability levels, asset quality, capital, liquidity, and potential profit production from assets. We manage our asset levels to ensure our lending initiatives are efficiently and profitably supported and to ensure we have the necessary liquidity and capital to meet the required regulatory capital ratios. Funding needs are evaluated and forecasted by communicating with clients, reviewing loan maturity and draw expectations, and projecting new loan opportunities. We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity and trend of problem assets such as those determined to be classified, delinquent, non-accrual, non-performing or restructured; the adequacy of our allowance for credit losses; the diversification and quality of loan and investment portfolios; the extent of counterparty risks, credit risk concentrations, and other factors. 60 Table of Content s We manage our liquidity based upon factors that include the level and quality of capital and our overall financial condition, the trend and volume of problem assets, our balance sheet risk exposure, the level of deposits as a percentage of total loans, the amount of non-deposit funding used to fund assets, the availability of unused funding sources and off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold, and other factors. Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The Company has adopted the Basel III regulatory capital framework. As of December 31, 2023, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III. Results of Operations Overview The year ended December 31, 2023 compared with the year ended December 31, 2022 . 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, 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, 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 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 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. 61 Table of Content s 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, 2023 2022 (Dollars in thousands) Average Balance (1) Interest Earned / Paid Average Yield / Rate Average Balance (1) Interest Earned / Paid Average Yield / Rate Assets Interest-earning assets: Interest-bearing deposits in other financial institutions $ 117,562 $ 5,711 4.86 % $ 248,577 $ 2,235 0.90 % Federal funds sold — — — 652 10 1.53 Investment securities (2) 79,150 2,463 3.11 74,104 2,053 2.77 Correspondent bank stock 8,285 620 7.48 5,033 381 7.57 Loans (3) 2,479,175 134,708 5.43 2,138,712 94,448 4.42 Mortgage loans held for sale (4) 11,499 721 6.27 15,639 722 4.62 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 Total assets $ 2,818,082 $ 2,606,243 Liabilities and Shareholders’ Equity Interest-bearing liabilities: Interest-bearing deposits $ 1,854,017 65,460 3.53 $ 1,553,758 13,012 0.84 FHLB and Federal Reserve borrowings 132,667 6,065 4.57 96,963 2,649 2.73 Subordinated notes 52,216 2,928 5.61 34,104 1,609 4.72 Total interest-bearing liabilities 2,038,900 74,453 3.65 1,684,825 17,270 1.03 Noninterest-bearing liabilities: Noninterest-bearing deposits 510,506 670,299 Other liabilities 24,913 21,119 Total noninterest-bearing liabilities 535,419 691,418 Total shareholders’ equity 243,763 230,000 Total liabilities and shareholders’ equity $ 2,818,082 $ 2,606,243 Net interest rate spread (6) 1.71 3.02 Net interest income (7) $ 71,105 $ 83,926 Net interest margin (8) 2.62 3.36 _____________________________ (1) Average balance represents daily averages, unless otherwise noted. (2) Represents monthly averages. (3) Non-performing loans are included in the respective average loan balances. Income, if any, on such loans is recognized on a cash basis. (4) 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. (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. 62 Table of Content s 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 Compared to 2022 Increase (Decrease) Due to Change in: Total Increase (Decrease) (Dollars in thousands) Volume Rate Interest-earning assets: Interest-bearing deposits in other financial institutions $ (6,365) $ 9,841 $ 3,476 Federal funds sold (10) — (10) Investment securities 157 253 410 Correspondent bank stock 243 (4) 239 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 Interest-bearing liabilities: Interest-bearing deposits 10,601 41,847 52,448 FHLB and Federal Reserve borrowings 1,632 1,784 3,416 Subordinated notes 1,016 303 1,319 Total increase in interest expense $ 13,249 $ 43,934 $ 57,183 Increase in net interest income $ (773) $ (12,048) $ (12,821) 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, 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. Management believes the financial strength of the Bank’s clientele and the diversity of the portfolio continues to mitigate the credit risk within the portfolio. Non-Interest Income The year ended December 31, 2023 compared with the year ended December 31, 2022 . 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 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. 63 Table of Content s The following table presents the significant categories of our non-interest income during the periods presented: Year Ended December 31, Change (Dollars in thousands) 2023 2022 $ % Non-interest income: Trust and investment management fees $ 18,788 $ 18,943 $ (155) (0.8) % 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) Risk management and insurance fees 919 1,231 (312) (25.3) Income on company-owned life insurance 378 349 29 8.3 Net gain on equity interests — 7 (7) (100.0) Net loss on loans accounted for under the fair value option (2,010) (891) (1,119) * Unrealized (loss)/gain recognized on equity securities (22) 342 (364) * Other (775) 477 (1,252) * Total non-interest income $ 21,948 $ 27,690 $ (5,742) (20.7) _____________________________ * 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 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 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. 64 Table of Content s 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 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: Year Ended December 31, Change (Dollars in thousands) 2023 2022 $ % Non-interest expense: Salaries and employee benefits $ 45,202 $ 48,248 $ (3,046) (6.3) % Occupancy and equipment 7,597 7,520 77 1.0 Professional services 7,638 7,896 (258) (3.3) Technology and information systems 3,497 4,462 (965) (21.6) Data processing 4,539 4,285 254 5.9 Marketing 1,540 1,888 (348) (18.4) Amortization of other intangible assets 250 308 (58) (18.8) Net gain on assets held for sale — (4) 4 (100.0) Net gain on sale of other real estate owned — (44) 44 (100.0) Other 5,374 4,547 827 18.2 Total non-interest expense $ 75,637 $ 79,106 $ (3,469) (4.4) 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. 65 Table of Content s Income Tax 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 We have two reportable operating segments: Wealth Management and Mortgage. Our Wealth Management segment consists of operations relating to the Company’s fully integrated wealth management products and services. Services provided include deposit, loan, insurance, and trust and investment management advisory products and services for which fee revenue is recognized. Our Mortgage segment consists of operations relating to the Company’s residential mortgage service offerings. Services provided by our mortgage segment include soliciting, originating, and selling mortgage loans into the secondary market. Mortgage products are financial in nature for which origination fees are recognized net of origination expenses, upon the funding of the mortgage loans. Mortgage loans held for sale are accounted for under the fair value option with changes in fair value reported through earnings at inception when loans are locked to the borrower and until the loan is sold to third parties, at which time additional gains or losses on the sale are recorded. 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: Year Ended December 31, 2023 (Dollars in thousands) Wealth Management Mortgage Consolidated Income (1) $ 79,082 $ 3,616 $ 82,698 Income before taxes 9,591 (2,530) 7,061 Profit margin 12.1 % (70.0) % 8.5 % Year Ended December 31, 2022 (Dollars in thousands) Wealth Management Mortgage Consolidated Income (1) $ 102,282 $ 5,652 $ 107,934 Income before taxes 31,268 (2,440) 28,828 Profit margin 30.6 % (43.2) % 26.7 % _____________________________ (1) Net interest income after provision plus non-interest income. 66 Table of Content s The following presents selected financial metrics of each segment as of and for the periods presented: Wealth Management As of and for the Year Ended December 31, (Dollars in thousands) 2023 2022 $ Change % Change Total interest and dividend income $ 144,837 $ 100,474 $ 44,363 44.2 % Total interest expense 74,453 17,270 57,183 * 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) Total income before non-interest expense 79,082 102,282 (23,200) (22.7) Depreciation and amortization expense 2,370 2,193 177 8.1 All other non-interest expense 67,121 68,821 (1,700) (2.5) Income before income taxes $ 9,591 $ 31,268 $ (21,677) (69.3) Goodwill $ 30,400 $ 30,400 $ — — 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 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. Mortgage As of and for the Year Ended December 31, (Dollars in thousands) 2023 2022 $ Change % Change Total interest and dividend income $ 721 $ 722 $ (1) (0.1) % Total interest expense — — — — 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) Total income before non-interest expense 3,616 5,652 (2,036) (36.0) Depreciation and amortization expense 33 42 (9) (21.4) All other non-interest expense 6,113 8,050 (1,937) (24.1) Loss before income tax $ (2,530) $ (2,440) $ (90) 3.7 Total assets $ 8,850 $ 10,040 $ (1,190) (11.9) (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. 67 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 table presents our condensed Consolidated Balance Sheets as of the dates noted: December 31, (Dollars in thousands) 2023 2022 $ Change % Change Balance Sheet Data: Cash and cash equivalents $ 254,442 $ 196,512 $ 57,930 29.5 % 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 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 Loans held for sale at fair value — 1,965 (1,965) (100.0) Mortgage loans held for sale, at fair value 7,254 8,839 (1,585) (17.9) Goodwill and other intangible assets, net 31,854 32,104 (250) (0.8) Company-owned life insurance 16,530 16,152 378 2.3 Other assets 84,296 77,890 6,406 8.2 Total assets $ 2,975,462 $ 2,866,748 $ 108,714 3.8 Deposits $ 2,529,039 $ 2,405,229 $ 123,810 5.1 Borrowings 178,051 199,018 (20,967) (10.5) Other liabilities 25,634 21,637 3,997 18.5 Total liabilities 2,732,724 2,625,884 106,840 4.1 Total shareholders’ equity 242,738 240,864 1,874 0.8 Total liabilities and shareholders’ equity $ 2,975,462 $ 2,866,748 $ 108,714 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. 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 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. 68 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 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. 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 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. Time deposit accounts increased $272.4 million, or 121.5%, to $496.5 million as of December 31, 2023. Negotiable order of withdrawal ("NOW") accounts decreased $87.3 million, or 37.2%, to $147.5 million compared to December 31, 2022. 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 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"). 69 Table of Content s Assets Under Management Year Ended December 31, (Dollars in millions) 2023 2022 Managed Trust Balance as of Beginning of Period $ 1,802 $ 2,204 New relationships 10 41 Closed relationships (11) (24) Contributions 51 12 Withdrawals (277) (292) Market change, net 338 (139) Ending Balance $ 1,913 $ 1,802 Yield* 0.18 % 0.19 % Directed Trust Balance as of Beginning of Period $ 1,285 $ 1,309 New relationships — 7 Closed relationships (5) (4) Contributions 214 122 Withdrawals (40) (22) Market change, net 168 (127) Ending Balance $ 1,622 $ 1,285 Yield* 0.07 % 0.90 % Investment Agency Balance as of Beginning of Period $ 1,618 $ 2,063 New relationships 56 61 Closed relationships (82) (61) Contributions 78 120 Withdrawals (240) (294) Market change, net 177 (271) Ending Balance $ 1,607 $ 1,618 Yield* 0.77 % 0.77 % Custody Balance as of Beginning of Period $ 493 $ 633 New relationships 9 16 Closed relationships (20) (1) Contributions 90 80 Withdrawals (109) (192) Market change, net 82 (43) Ending Balance $ 545 $ 493 Yield* 0.04 % 0.04 % 401(k)/Retirement Balance as of Beginning of Period $ 909 $ 1,143 New relationships 3 14 Closed relationships (4) (45) Contributions 124 112 Withdrawals (101) (96) Market change, net 135 (219) Ending Balance (1) $ 1,066 $ 909 Yield* 0.15 % 0.18 % Total Assets Under Management as of Beginning of Period $ 6,107 $ 7,352 New relationships 78 139 Closed relationships (122) (135) Contributions 557 446 Withdrawals (767) (896) Market change, net 900 (799) Total Assets Under Management $ 6,753 $ 6,107 Yield* 0.28 % 0.31 % _____________________________ * Trust and investment management fees divided by period-end balance. (1) AUM reported for the current period are one quarter in arrears. 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. 70 Table of Content s Investment securities Investments we intend to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale and are recorded at fair value using current market information from a pricing service, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax. The carrying values of our investment securities classified as available-for-sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. Investments for which we have the intent and ability to hold to their maturity are classified as held-to-maturity securities and are recorded at amortized cost. Securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity. 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 over the remaining term of the securities. No gain or loss was recorded at the time of transfer. 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 Cost Gross Unrecognized Gains Gross Unrecognized Losses Fair Value Allowance for Credit Losses (1) Investment securities held-to-maturity: U.S. Treasury debt $ 253 $ — $ (11) $ 242 $ — Corporate bonds 23,687 — (3,020) 20,667 (71) 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 Cost Gross Unrecognized Gains Gross Unrecognized Losses Fair Value Investment securities held-to-maturity: U.S. Treasury debt $ 243 $ — $ (9) $ 234 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 held-to-maturity $ 81,056 $ 13 $ (6,351) $ 74,718 71 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. Contractual maturities may differ from expected maturities because issuers can have the right to call or prepay obligations without penalties. Our investments are taxable securities. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security as of December 31, 2023. Weighted average yields are not presented on a taxable equivalent basis. Maturity as of December 31, 2023 One Year or Less One to Five Years Five to Ten Years After Ten Years (Dollars in thousands) Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Held-to-maturity: U.S. Treasury debt $ 253 * % $ — — % $ — — % $ — — % Corporate bonds — — 4,078 0.30 19,395 1.23 214 0.01 GNMA mortgage-backed securities – residential — — 66 * — — 34,513 1.14 FNMA mortgage-backed securities – residential — — — — 1,116 0.02 4,919 0.13 Government CMO and MBS – commercial — — 178 0.01 1,579 0.07 4,079 0.13 Corporate CMO and MBS — — — — 415 0.03 3,368 0.18 Total held-to-maturity $ 253 — % $ 4,322 0.31 % $ 22,505 1.35 % $ 47,093 1.59 % Maturity as of December 31, 2022 One Year or Less One to Five Years Five to Ten Years After Ten Years (Dollars in thousands) Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Held-to-maturity U.S. Treasury debt $ — — % $ 243 * % $ — — % $ — — % 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 held-to-maturity $ — — % $ 2,384 0.11 % $ 24,108 1.26 % $ 54,564 1.68 % _____________________________ * 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. 72 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) 71 — 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 Our primary source of interest income is derived through interest earned on loans to high net worth individuals and their related commercial interests. Our senior lending and credit team consists of seasoned, experienced personnel and we believe that our officers are well versed in the types of lending in which we are engaged. Underwriting policies and decisions are managed centrally and the approval process is tiered based on loan size, making the process consistent, efficient, and effective. The management team and credit culture demands prudent, practical, and conservative approaches to all credit requests in compliance with the loan policy guidelines to ensure strong credit underwriting practices. In addition to originating loans for our own portfolio, we conduct mortgage banking activities in which we originate and sell, servicing-released, whole loans in the secondary market. Our mortgage banking loan sales activities are primarily directed at originating single family mortgages that are priced and underwritten to conform to previously agreed-upon criteria before loan funding and are delivered to the investor shortly after funding. The level of future loan originations, loan sales and loan repayments depends on overall credit availability, the interest rate environment, the strength of the general economy, local real estate markets and the housing industry, and conditions in the secondary loan sale market. The amount of gain or loss on the sale of loans is primarily driven by market conditions and changes in interest rates, as well as our pricing and asset liability management strategies. As of December 31, 2023 and December 31, 2022, we had mortgage loans held for sale of $7.3 million and $8.8 million, respectively, in residential mortgage loans we originated. Beginning in the first quarter of 2022, the Company entered into whole loan purchase agreements to acquire third party originated and serviced unsecured consumer loans to hold for investment and elected the fair value option to account for these loans. 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. 73 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. The remaining fees represent the net amount of the fees from the SBA for participation in the PPP less the loan origination costs on these loans. The current amortization of this income is being recognized over a 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: As of December 31, 2023 2022 (Dollars in thousands) Amount % of Total Amount % of Total Cash, Securities, and Other (1) $ 139,947 5.6 % $ 165,559 6.7 % Consumer and Other 27,028 1.1 26,070 1.0 Construction and Development 345,516 13.7 285,627 11.7 1-4 Family Residential 927,965 36.9 899,722 36.8 Non-Owner Occupied CRE 543,692 21.6 493,134 20.2 Owner Occupied CRE 195,861 7.8 214,189 8.8 Commercial and Industrial 337,180 13.3 361,791 14.8 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 $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. In addition, loans in this portfolio are collateralized with other sources of collateral. This segment of our portfolio is affected by a variety of local and national economic factors affecting borrowers’ employment prospects, income levels, and overall economic sentiment. PPP loans that are fully guaranteed by the SBA are classified within this line item and had balances of $4.2 million and $6.9 million as of December 31, 2023 and 2022, respectively. • Consumer and Other— consists of unsecured consumer loans. 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. These loans are dependent on the strength of the industries of the related borrowers and the risks consistent with construction projects. • 1-4 Family Residential— consists of loans and home equity lines of credit secured by 1-4 family residential properties. These loans typically enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the owner. In addition, some borrowers secure a commercial purpose loan with owner occupied or non-owner occupied 1-4 family residential properties. Loans in this segment are dependent on the industries tied to these loans as well as the national and local economies, and local residential and commercial real estate markets. • Commercial Real Estate, Owner Occupied and Non-Owner Occupied —consists of commercial loans collateralized by real estate. These loans may be collateralized by owner occupied or non-owner occupied real estate, as well as multi-family residential real estate. These loans are dependent on the strength of the industries of the related borrowers and the success of their businesses. 74 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. This portfolio primarily consists of term loans and lines of credit which are dependent on the strength of the industries of the related borrowers and the success of their businesses. MSLP loans of $5.1 million and $5.9 million as of December 31, 2023 and 2022, respectively, are included in this category. The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range, excluding deferred fees, and unamortized premiums/(unaccreted discounts), as of the dates noted, are summarized in the following tables: As of December 31, 2023 (Dollars in thousands) One Year or Less One Through Five Years Five Through Fifteen Years After Fifteen Years Total Cash, Securities, and Other $ 70,558 (1) $ 67,101 (1) $ 1,611 $ 677 $ 139,947 Consumer and Other 18,425 6,175 1,206 1,222 27,028 Construction and Development 106,993 180,210 51,253 7,060 345,516 1-4 Family Residential 43,275 172,349 34,053 678,288 927,965 Non-Owner Occupied CRE 34,328 334,516 161,669 13,179 543,692 Owner Occupied CRE 13,491 93,844 79,610 8,916 195,861 Commercial and Industrial 120,061 187,240 29,879 — 337,180 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 Amounts with floating rates 265,751 355,020 124,607 685,439 1,430,817 Total loans $ 407,236 $ 1,054,598 $ 359,739 $ 709,342 $ 2,530,915 _____________________________ (1) Includes PPP loans. As of December 31, 2022 (Dollars in thousands) One Year or Less One Through Five Years Five Through Fifteen Years After Fifteen Years Total Cash, Securities, and Other $ 58,461 (1) $ 104,848 (1) $ 1,565 $ 685 $ 165,559 Consumer and Other 16,955 6,570 1,495 1,050 26,070 Construction and Development 71,046 199,632 14,694 255 285,627 1-4 Family Residential 25,862 179,207 34,205 660,448 899,722 Non-Owner Occupied CRE 34,341 258,327 185,297 15,169 493,134 Owner Occupied CRE 6,427 81,499 114,734 11,529 214,189 Commercial and Industrial 94,513 218,043 49,235 — 361,791 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 Amounts with floating rates 181,324 565,605 199,904 602,264 1,549,097 Total loans $ 307,622 $ 1,070,689 $ 401,966 $ 689,136 $ 2,469,413 _____________________________ (1) Includes PPP loans. 75 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. 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 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. In 2021, the deferral period ended for all non-acquired loans previously modified and payments resumed under the original terms. As of December 31, 2023, the Company's loan portfolio included 41 non-acquired loans which were previously modified under the loan modification program, totaling $71.3 million. Through the Teton acquisition, the Company acquired loans which were previously modified and are still in their deferral period. As of December 31, 2023, there were 14 of these loans, totaling $2.9 million. 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 credit losses. Management has increased our loan level reviews and portfolio monitoring to address the changing environment. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank. Interest accrued during the modification term on modified loans is deferred to the end of the loan term. 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 $ — 76 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 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. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged off if collection of interest or principal is considered doubtful. OREO represents assets acquired through, or in lieu of, foreclosure. The amounts reported as OREO are supported by recent appraisals, with the appraised values adjusted, where applicable, for expected transaction fees likely to be incurred upon sale of the property. We incur recurring expenses relating to OREO in the form of maintenance, taxes, insurance and legal fees, among others, until the OREO parcel is disposed. While disposition efforts with respect to our OREO are generally ongoing, if these properties are appraised at lower-than-expected values or if we are unable to sell the properties at the prices for which we expect to be able to sell them, we may incur additional losses. 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. 77 Table of Content s The following presents the amortized cost basis of non-performing loans as of the dates indicated: As of December 31, (Dollars in thousands) 2023 2022 Non-accrual loans by category Cash, Securities, and Other $ 1,704 $ 4 Consumer and Other 7,504 5 Construction and Development 2,719 201 1-4 Family Residential 3,016 — Owner Occupied CRE 3,980 1,165 Commercial and Industrial 31,893 10,762 Total non-accrual loans 50,816 12,137 Total non-performing assets $ 50,816 $ 12,137 Non-accrual loans to total loans (1) 2.02 % 0.50 % Non-performing assets to total assets 1.71 % 0.43 % Allowance for credit losses to non-accrual loans (2) 47.09 % 139.14 % Accruing loans 90 or more days past due $ 285 $ 25 _____________________________ (1) Excludes mortgage loans held for sale of $7.3 million and $8.8 million 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. (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: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans by credit risk on a quarterly basis, which are segregated into the following definitions for risk ratings: Special Mention — Loans categorized as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies, or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified. Substandard— Substandard loans are considered "classified" and are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrual status and may individually be evaluated. Doubtful —Loans graded doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. However, the amount or certainty of eventual loss is not known because of specific pending factors. Loans accounted for under the fair value option are not rated. Loans not meeting any of the three criteria above are considered to be pass-rated loans. 78 Table of Content s 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 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 Doubtful Not Rated Total Cash, Securities, and Other (1) $ 138,243 $ — $ 1,704 $ — $ — $ 139,947 Consumer and Other (2) 19,528 — 7,500 — 13,726 40,754 Construction and Development 328,454 14,343 2,719 — — 345,516 1-4 Family Residential 924,949 — 3,016 — — 927,965 Non-Owner Occupied CRE 538,693 4,999 — — — 543,692 Owner Occupied CRE 191,881 — 3,980 — — 195,861 Commercial and Industrial 302,276 649 34,255 — — 337,180 Total $ 2,444,024 $ 19,991 $ 53,174 $ — $ 13,726 $ 2,530,915 As of December 31, 2022 (Dollars in thousands) Pass Special Mention Substandard Doubtful Not Rated Total Cash, Securities and Other (1) $ 165,555 $ — $ 4 $ — $ — $ 165,559 Consumer and Other (2) 26,065 — 5 — 23,321 49,391 Construction and Development 285,426 — 201 — — 285,627 1-4 Family Residential 899,722 — — — — 899,722 Non-Owner Occupied CRE 493,134 — — — — 493,134 Owner Occupied CRE 213,024 — 1,165 — — 214,189 Commercial and Industrial 348,844 2,185 10,762 — — 361,791 Total $ 2,431,770 $ 2,185 $ 12,137 $ — $ 23,321 $ 2,469,413 _____________________________ (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. 79 Table of Content s 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. 80 Table of Content s 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. 81 Table of Content s The following presents summary information regarding our allowance for credit losses for the periods presented: Year Ended December 31, (Dollars in thousands) 2023 2022 Average loans outstanding (1)(2) $ 2,479,175 $ 2,138,712 Total loans outstanding at end of period (3) $ 2,517,189 $ 2,446,092 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) 12,077 3,682 Charge-offs: Cash, Securities, and Other — (1) Consumer and Other (101) (262) Construction and Development — — 1-4 Family Residential — — Non-Owner Occupied CRE — — Owner Occupied CRE — — Commercial and Industrial (8,737) (71) Total charge-offs (8,838) (334) Recoveries: Cash, Securities, and Other — — Consumer and Other 22 103 Construction and Development — — 1-4 Family Residential 13 — Non-Owner Occupied CRE — — Owner Occupied CRE — — Commercial and Industrial 4 — Total recoveries 39 103 Net (charge-offs) recoveries (8,799) (231) Allowance for credit losses at end of period $ 23,931 $ 17,183 Allowance for credit losses to total loans (4) 0.95 % 0.70 % Net charge-offs to average loans 0.35 — _____________________________ (1) Average balances are average daily balances. (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. 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. 82 Table of Content s 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, 2023 2022 (Dollars in thousands) Amount % (2) Amount (1) % (2) Cash, Securities and Other $ 961 5.6 % $ 1,198 6.7 % Consumer and Other 124 1.1 191 1.0 Construction and Development 7,945 13.7 2,025 11.7 1-4 Family Residential 4,370 36.9 6,309 36.8 Non-Owner Occupied CRE 2,325 21.6 3,490 20.2 Owner Occupied CRE 1,034 7.8 1,510 8.8 Commercial and Industrial 7,172 13.3 2,460 14.8 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 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 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: December 31, 2023 Amount % 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 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. 83 Table of Content s Deposits Our deposit products include money market accounts, demand deposit accounts, time-deposit accounts (typically certificates of deposit), NOW accounts (interest checking accounts), and saving accounts. Our accounts are federally insured by the FDIC up to the legal maximum amount. Total deposits increased by $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 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 table presents the average balances and average rates paid on deposits during the periods presented: For the Year Ended December 31, 2023 2022 (Dollars in thousands) Average Balance Average Rate Average Balance Average Rate Deposits Money market deposit accounts $ 1,296,139 3.86 % $ 1,060,258 1.00 % NOW accounts 177,522 0.38 297,134 0.18 Uninsured time deposits 63,813 3.68 52,457 1.26 Other time deposits 297,286 4.16 112,967 1.12 Total time deposits 361,099 4.08 165,424 1.16 Savings accounts 19,257 0.06 30,942 0.04 Total interest-bearing deposits 1,854,017 3.53 1,553,758 0.84 Noninterest-bearing accounts 510,506 670,299 Total deposits $ 2,364,523 2.77 % $ 2,224,057 0.59 % 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. NOW accounts decreased $87.3 million, or 37.2%, to $147.5 million compared to December 31, 2022. 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 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 Months Total Uninsured Time Deposits $ 37,774 $ 26,227 $ 26,085 $ 3,770 $ 93,856 Other 133,218 107,907 83,402 78,069 402,596 Total $ 170,992 $ 134,134 $ 109,487 $ 81,839 $ 496,452 84 Table of Content s Borrowings We have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs. As of December 31, 2023 and December 31, 2022, borrowings totaled $178.1 million and $199.0 million, respectively. On January 1, 2022, the Company redeemed subordinated notes due December 31, 2026 in the amount of $6.6 million, which were redeemable on or after January 1, 2022. On December 5, 2022, the Company completed the issuance and sale of subordinated notes totaling $20.0 million in aggregate principal amount. The issuance included $0.5 million of issuance costs resulting in a net balance of $19.5 million as of December 31, 2022. 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 table presents balances of each of the borrowing facilities as of the dates noted: December 31, (Dollars in thousands) 2023 2022 Borrowings FHLB borrowings $ 91,175 $ 141,498 Federal Reserve borrowings 34,536 5,388 Subordinated notes 52,340 52,132 Total $ 178,051 $ 199,018 FHLB We have a blanket pledge and security agreement with FHLB that requires certain loans and securities to be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of 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. As of and for the Year Ended December 31, (Dollars in thousands) 2023 Short-term borrowings Maximum outstanding at any month-end during the period $ 343,100 Balance outstanding at end of period 91,175 Average outstanding during the period 102,184 Average interest rate during the period 5.08 % Average interest rate at the end of the period 5.58 The Bank has borrowing capacity associated with two unsecured federal funds lines of credit up to $10 million and $19 million. As of December 31, 2023 and 2022, there were no amounts outstanding on any of the federal funds lines. 85 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. Derivatives 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 Liquidity resources primarily include interest-bearing and noninterest-bearing deposits which primarily contribute to our ability to raise funds to support asset growth, acquisitions, and meet deposit withdrawals and other payment obligations. Access to purchased funds primarily include the ability to borrow from FHLB, other correspondent banks and the use of brokered deposits. 86 Table of Content s 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, 2023 2022 Sources of Funds: Deposits: Noninterest-bearing 18.12 % 25.72 % Interest-bearing 65.79 59.62 FHLB and Federal Reserve borrowings 4.71 3.72 Subordinated notes 1.85 1.31 Other liabilities 0.88 0.81 Shareholders’ equity 8.65 8.82 Total 100.00 % 100.00 % Uses of Funds: Total loans 87.21 % 81.49 % Investment securities 2.81 2.84 Correspondent bank stock 0.29 0.19 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 Federal funds sold — 0.03 Noninterest-earning assets 4.45 4.71 Total 100.00 % 100.00 % Average noninterest-bearing deposits to total average deposits 21.59 % 30.14 % Average loans to total average deposits 104.85 96.16 Average interest-bearing deposits to total average deposits 78.41 69.86 Our primary source of funds is interest-bearing and noninterest-bearing deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Capital Resources Total shareholders’ equity increased $1.9 million, or 0.8%, to $242.7 million as of December 31, 2023 compared to December 31, 2022. The increase is primarily due to net income. On January 6, 2022, the Company filed a Form S-3 Registration Statement with the SEC providing that the Company may offer and sell from time to time, separately or together, in multiple series or in one or more offerings, any combination of common stock, preferred stock, debt securities, warrants, depository shares and units, up to a maximum aggregate offer price of $100 million. We are subject to various regulatory capital adequacy requirements at a consolidated level and the bank level. These requirements are administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. 87 Table of Content s 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, 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. We continue to monitor growth and control our capital activities in order to remain in compliance with all applicable regulatory capital standards. The following table presents our regulatory capital ratios for the dates noted: December 31, 2023 December 31, 2022 (Dollars in thousands) Amount Ratio Amount Ratio Tier 1 capital to risk-weighted assets Bank $ 244,390 10.54 % $ 234,738 10.29 % Consolidated 218,150 9.40 212,229 9.28 CET1 to risk-weighted assets Bank 244,390 10.54 234,738 10.29 Consolidated 218,150 9.40 212,229 9.28 Total capital to risk-weighted assets Bank 265,391 11.45 252,398 11.06 Consolidated 292,151 12.59 282,889 12.37 Tier 1 capital to average assets Bank 244,390 8.71 234,738 8.65 Consolidated 218,150 7.77 212,229 7.81 Contractual Obligations and Off-Balance Sheet Arrangements We enter into credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our clients. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. Commitments may expire without being utilized. 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: As of December 31, 2023 (Dollars in thousands) 1 Year or Less More than 1 Year but Less than 3 Years More than 3 Years but Less than 5 Years 5 Years or More Total FHLB and Federal Reserve $ 122,172 $ — $ 3,539 $ — $ 125,711 Subordinated notes — — — 52,340 (1) 52,340 Time deposits 414,613 44,670 37,169 — 496,452 Minimum lease payments 3,506 4,165 2,429 1,436 11,536 Total $ 540,291 $ 48,835 $ 43,137 $ 53,776 $ 686,039 _____________________________ (1) Reflects contractual maturity dates of March 31, 2030, December 1, 2030, September 1, 2031, and December 15, 2032. 88 Table of Content s The following presents financial instruments whose contract amounts represent credit risk, as of the periods presented: December 31, December 31, 2023 2022 (Dollars in thousands) Fixed Rate Variable Rate Fixed Rate Variable Rate Unused lines of credit $ 86,398 $ 540,255 $ 211,285 $ 601,202 Standby letters of credit 13,922 12,094 8,571 16,737 Commitments to make loans to sell 18,917 — 13,553 — Commitments to make loans 5,275 7,115 20,895 81,663 We may enter into contracts for services in the conduct of ordinary business operations, which may require payment for services to be provided in the future and may contain penalty clauses for early termination of the contracts. We do not believe these off-balance sheet arrangements have or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. However, there can be no assurance that such arrangements will not have an effect on future operations. 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. ACL: 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. ACL - loans: 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. 89 Table of Content s 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: 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. 90 Table of Content s 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. 91 Table of Content s