First Western Financial Inc 10-K

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements and accompanying notes, including the Report of Independent Registered Public Accounting Firm, are set forth on pages F-1 to F-61 of this Annual Report on Form 10-K. Audited Financial Statements Description Page Number Report s of Independent Registered Public Accounting Firm (PCAOB ID: 173 ) F- 1 Consolidated Balance Sheets as of December 31, 202 3 and 20 22 F- 4 Consolidated Statements of Income for the Years Ended December 31, 202 3 and 2022 F- 5 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 202 3 and 2022 F- 6 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 202 3 and 202 2 F- 7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 a nd 2022 F- 8 Notes to Consolidated Financial Statements F- 10 94 Table of Content s REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and the Board of Directors First Western Financial, Inc. Denver, Colorado Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of First Western Financial, Inc. (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2024 expressed an unqualified opinion. Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for allowance for credit losses effective January 1, 2023, due to the adoption of Financial Accounting Standards Board Accounting Standards Codification No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses (“ACL”) on Loans – Modeling Techniques and Qualitative Adjustments As disclosed in Notes 1 and 4 and the explanatory paragraph above, on January 1, 2023, the Company adopted ASC 326 which replaced the probable incurred loss methodology with a current expected credit loss (“CECL”) methodology. As of January 1, 2023, the Company recorded a reduction in retained earnings, net of tax of $5.3 million as a cumulative-effect adjustment using a modified retrospective approach. The cumulative effect adjustment for the ACL on loans was $3.5 F-1 Table of Content s million. As of December 31, 2023, the Company’s ACL on loans was $23.9 million and provision for credit losses on loans was $12.1 million for the year then ended. The Company primarily uses a discounted cash flow ("DCF") methodology using the amortized cost method (excluding interest) to calculate the ACL on loans, which the Company has applied to identified loan segments with similar risk characteristics. The methodology incorporates loan-level information with pool-level assumptions to produce individual expected cash flows for each loan within a segment. The forecasted pool-level assumptions are impacted by a mix of macroeconomic factors not limited to, but including gross domestic product, national unemployment rates, and housing price indices. The modeling technique selected requires management to use significant judgment and use subjective and complex measurements about matters that are inherently uncertain. Changes in the assumptions used in the estimate may not occur at the same rate, may not be consistent in across product types, and may have offsetting impacts to other changing variables and inputs, which could have a material effect on the Company’s financial results. The Company also utilizes qualitative adjustments to account for credit losses that are not inherently considered in the quantitative analyses. These adjustments are subjectively selected by management and are based on factors that are likely to cause estimated credit losses that differ from historical loss experience. The audit procedures performed over the modeling techniques used to develop the ACL model and qualitative adjustments have been identified as a critical audit matter due to the high degree of auditor judgment and significant audit effort including the use of internal credit and valuation specialists in evaluating the model due to its complexity. Our audit procedures to address this critical audit matter primarily included the following: • Tested the operating effectiveness of controls over the modeling techniques and qualitative adjustments used in the estimate for ACL on loans as of both adoption date of January 1, 2023 and as of December 31, 2023, including: • The Company's ACL committee's oversight and approval of management's application of accounting policies, selection and implementation of modeling techniques, and evaluation of qualitative adjustments determined by management. • The Company’s ACL committee’s review and approval of the qualitative adjustments used, and the relevance and reliability of the data used therein. • Management’s controls over the completeness and accuracy of the data and reasonableness of such data utilized in the determination of ACL on loans. • Management's controls over third-party model validation and testing of model performance including the conceptual soundness and viability of the modeling techniques selected. • Substantively tested management’s application of the selected modeling techniques and qualitative adjustments used in the estimate for ACL on loans as of both adoption date of January 1, 2023 and as of December 31, 2023, including: • Evaluated the appropriateness of the accounting policies, modeling techniques employed, including but not limited to evaluating their conceptual soundness and evaluated the reasonableness of significant assumptions and judgments used the evaluation of ACL on loans. • Evaluated the reasonableness of management’s assumptions and judgments used in the determination of the qualitative adjustments. • Evaluated the reliability and relevancy of data used as a basis for the qualitative adjustments. • Tested the completeness and accuracy of the data utilized in management’s ACL methodology to derive the ACL on loans. • Utilized internal valuation services as specialists to assist in evaluating the model performance, including conceptual soundness and viability of the modeling techniques deployed in the Company's ACL model. /s/ Crowe LLP We have served as the Company's auditor since 2013. Denver, Colorado March 15, 2024 F-2 Table of Content s REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and the Board of Directors First Western Financial, Inc. Denver, Colorado Opinion on Internal Control over Financial Reporting We have audited First Western Financial Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements") and our report dated March 15, 2024 expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Crowe LLP Denver, Colorado March 15, 2024 F-3 Table of Content s FIRST WESTERN FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) December 31, 2023 December 31, 2022 Assets Cash and cash equivalents: Cash and due from banks $ 7,284 $ 4,926 Interest-bearing deposits in other financial institutions 247,158 191,586 Total cash and cash equivalents 254,442 196,512 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 Correspondent bank stock, at cost 7,155 7,110 Mortgage loans held for sale, at fair value 7,254 8,839 Loans held for sale, at fair value — 1,965 Loans (includes $ 13,726 and $ 23,321 measured at fair value, respectively) 2,530,915 2,469,413 Allowance for credit losses (1) ( 23,931 ) ( 17,183 ) Loans, net 2,506,984 2,452,230 Premises and equipment, net 25,256 25,118 Accrued interest receivable 11,428 10,445 Accounts receivable 5,095 4,873 Other receivables 4,467 1,973 Goodwill and other intangible assets, net 31,854 32,104 Deferred tax assets, net 6,407 6,914 Company-owned life insurance 16,530 16,152 Other assets 24,488 21,457 Total assets $ 2,975,462 $ 2,866,748 Liabilities Deposits: Noninterest-bearing $ 482,579 $ 583,092 Interest-bearing 2,046,460 1,822,137 Total deposits 2,529,039 2,405,229 Borrowings: Federal Home Loan Bank and Federal Reserve borrowings 125,711 146,886 Subordinated notes 52,340 52,132 Accrued interest payable 3,793 1,125 Other liabilities 21,841 20,512 Total liabilities 2,732,724 2,625,884 Shareholders' Equity Preferred stock - no par value; 10,000,000 shares authorized; 0 issued and outstanding — — Common stock - no par value; 90,000,000 shares authorized; 9,581,183 and 9,495,440 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively — — Additional paid-in capital 192,894 190,494 Retained earnings 51,042 51,887 Accumulated other comprehensive loss ( 1,198 ) ( 1,517 ) Total shareholders’ equity 242,738 240,864 Total liabilities and shareholders’ equity $ 2,975,462 $ 2,866,748 (1) Allowance 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 . See accompanying notes to consolidated financial statements. F-4 Table of Content s FIRST WESTERN FINANCIAL, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) Years Ended December 31, 2023 2022 Interest and dividend income: Loans, including fees $ 135,429 $ 95,170 Loans accounted for under the fair value option 1,335 1,347 Investment securities 2,463 2,053 Interest-bearing deposits in other financial institutions 5,711 2,245 Dividends, restricted stock 620 381 Total interest and dividend income 145,558 101,196 Interest expense: Deposits 65,460 13,012 Other borrowed funds 8,993 4,258 Total interest expense 74,453 17,270 Net interest income 71,105 83,926 Less: Provision for credit losses (1) 10,355 3,682 Net interest income, after provision for credit losses 60,750 80,244 Non-interest income: Trust and investment management fees 18,788 18,943 Net gain on mortgage loans 2,826 4,584 Net loss on loans held for sale ( 178 ) ( 12 ) Bank fees 2,022 2,660 Risk management and insurance fees 919 1,231 Income on company-owned life insurance 378 349 Net gain on equity interests — 7 Net loss on loans accounted for under the fair value option ( 2,010 ) ( 891 ) Unrealized (loss)/gain recognized on equity securities ( 22 ) 342 Other ( 775 ) 477 Total non-interest income 21,948 27,690 Total income before non-interest expense 82,698 107,934 Non-interest expense: Salaries and employee benefits 45,202 48,248 Occupancy and equipment 7,597 7,520 Professional services 7,638 7,896 Technology and information systems 3,497 4,462 Data processing 4,539 4,285 Marketing 1,540 1,888 Amortization of other intangible assets 250 308 Net gain on assets held for sale — ( 4 ) Net gain on sale of other real estate owned — ( 44 ) Other 5,374 4,547 Total non-interest expense 75,637 79,106 Income before income taxes 7,061 28,828 Income tax expense 1,836 7,130 Net income available to common shareholders $ 5,225 $ 21,698 Earnings per common share: Basic 0.55 2.29 Diluted 0.54 2.23 (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. See accompanying notes to consolidated financial statements. F-5 Table of Content s FIRST WESTERN FINANCIAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Years Ended December 31, 2023 2022 Net income $ 5,225 $ 21,698 Other comprehensive (loss)/income: Unrealized losses on available-for-sale securities — ( 2,591 ) Income tax effect — 638 Amortization of net unrealized loss for the reclassification of available-for-sale securities transferred to held-to-maturity included in interest income 354 283 Income tax effect ( 93 ) ( 70 ) Unrealized gain on cash flow hedge 77 — Income tax effect ( 19 ) — Total other comprehensive income/(loss) 319 ( 1,740 ) Comprehensive income $ 5,544 $ 19,958 See accompanying notes to consolidated financial statements. F-6 Table of Content s FIRST WESTERN FINANCIAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands, except share amounts) Shares Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income/(Loss) Total Balance, January 1, 2022 9,419,271 $ 188,629 $ 30,189 $ 223 $ 219,041 Net income — — 21,698 — 21,698 Other comprehensive loss, net of tax and reclassifications — — — ( 1,740 ) ( 1,740 ) Settlement of share awards 67,860 ( 876 ) — — ( 876 ) Options exercised 8,309 179 — — 179 Stock-based compensation — 2,562 — — 2,562 Balance, December 31, 2022 9,495,440 $ 190,494 $ 51,887 $ ( 1,517 ) $ 240,864 Cumulative change in accounting principle (1) — — ( 5,319 ) — ( 5,319 ) Balance at January 1, 2023 (as adjusted for change in accounting principle) 9,495,440 190,494 46,568 ( 1,517 ) 235,545 Net income — — 5,225 — 5,225 Other comprehensive income, net of tax and reclassifications — — — 319 319 Dissolution of RSI entity — 751 ( 751 ) — — Settlement of share awards 73,483 ( 439 ) — — ( 439 ) Options exercised 12,260 245 — — 245 Stock-based compensation — 1,843 — — 1,843 Balance, December 31, 2023 9,581,183 $ 192,894 $ 51,042 $ ( 1,198 ) $ 242,738 (1) Refer to Note 1 – Organization and Summary of Significant Accounting Policies for further information See accompanying notes to consolidated financial statements. F-7 Table of Content s FIRST WESTERN FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years Ended December 31, 2023 2022 Cash flows from operating activities Net income $ 5,225 $ 21,698 Adjustments to reconcile net income to net cash used in operating activities: Net amortization of investment securities ( 14 ) 130 Stock dividends received on correspondent bank stock ( 620 ) ( 381 ) Provision for credit losses (1) 10,355 3,682 Loss on loans held for sale 178 12 Net gain on mortgage loans ( 2,826 ) ( 4,584 ) Origination of mortgage loans held for sale ( 276,045 ) ( 439,682 ) Proceeds from mortgage loans 280,462 466,988 Loss/(Gain) on disposal of fixed assets 8 ( 21 ) Depreciation and amortization 2,377 2,012 Net amortization of purchase accounting adjustments 457 55 Deferred income tax expense 2,057 557 Increase in cash surrender value of company-owned life insurance ( 378 ) ( 349 ) Stock-based compensation 1,843 2,562 Gain on assets held for sale — ( 4 ) Gain on sale of other real estate owned — ( 44 ) Change in fair value of equity securities 22 ( 342 ) Change in fair value of loans accounted for under the fair value option 2,010 891 Net changes in operating assets and liabilities: Change in accounts receivable ( 307 ) 426 Change in accrued interest receivable and other assets ( 4,513 ) ( 3,647 ) Change in accrued interest payable and other liabilities 1,589 ( 1,681 ) Net cash provided by operating activities 21,880 48,278 Cash flows from investing activities Activity in available-for-sale securities: Maturities, prepayments, and calls — 3,218 Purchases — ( 9,000 ) Activity in held-to-maturity securities: Maturities, prepayments, and calls 7,243 9,040 Purchases — ( 31,189 ) Purchases of correspondent bank stock ( 40,819 ) ( 13,999 ) Redemption of correspondent bank stock 41,394 9,854 Contributions to low-income housing tax credit investments ( 1,140 ) ( 214 ) Loan and note receivable originations and principal collections, net ( 110,151 ) ( 487,973 ) Purchases of premises and equipment ( 2,347 ) ( 2,967 ) Proceeds from loans held for sale previously classified as loans held for investment 40,602 — Purchase of loans ( 1,173 ) ( 36,115 ) Proceeds from sale of assets held for sale — 125 Proceeds from sale of other real estate owned — 422 Net cash used in investing activities ( 66,391 ) ( 558,798 ) Cash flows from financing activities Net change in deposits 123,810 199,555 Payments to Federal Home Loan Bank borrowings ( 1,572,743 ) ( 545,920 ) Proceeds from Federal Home Loan Bank borrowings 1,482,419 677,418 Payments to Federal Reserve borrowings ( 292,511 ) ( 23,241 ) Proceeds from Federal Reserve borrowings 361,660 — Payments on subordinated notes — ( 6,575 ) Proceeds from subordinated notes, net of issuance costs — 19,509 Proceeds from the exercise of stock options 245 179 Settlement of restricted stock ( 439 ) ( 876 ) Net cash provided by financing activities 102,441 320,049 Net change in cash and cash equivalents 57,930 ( 190,471 ) Cash and cash equivalents, beginning of year 196,512 386,983 Cash and cash equivalents, end of period $ 254,442 $ 196,512 F-8 Table of Content s FIRST WESTERN FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) Supplemental cash flow information: Interest paid on deposits and borrowed funds $ 71,785 $ 16,500 Income tax payment 2,907 5,242 Cash paid for lease liabilities 3,163 3,354 Supplemental noncash disclosures: Transfer of loans held for investment to loans held for sale 39,221 1,985 Adoption of ASU 2016-13, net of tax 5,319 — Dissolution of RSI entity 751 — Change in unrealized (loss)/gain on available-for-sale securities — ( 2,591 ) Lease right-of-use-asset obtained in exchange for lease liabilities 2,992 801 Transfer of securities from available-for-sale to held-to-maturity — 58,727 Transfer from loans to other real estate owned — 378 (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. See accompanying notes to consolidated financial statements. F-9 Table of Content s FIRST WESTERN FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Basis of Presentation : The consolidated financial statements include the accounts of First Western Financial, Inc. ("FWFI"), incorporated in Colorado on July 18, 2002, and its direct and indirect wholly-owned subsidiaries listed below (collectively referred to as the "Company," "we," "us," or "our"). FWFI is a bank holding company with financial holding company status registered with the Board of Governors of the Federal Reserve System. FWFI wholly owns the following subsidiary: First Western Trust Bank (the "Bank"). The Bank wholly owns First Western Merger Corporation ("Merger Corp."), which is therefore indirectly wholly-owned by FWFI. RRI, LLC ("RRI"), which was wholly owned by the Bank, was dissolved on February 3, 2023. Ryder, Stilwell Inc. ("RSI"), which was wholly owned by FWFI, was dissolved on March 21, 2023. The Company provides a fully-integrated suite of wealth management services including private banking, personal trust, investment management, mortgage loans, and institutional asset management services to individual and corporate clients principally in Colorado (metro Denver, Aspen, Boulder, Fort Collins and Vail Valley), Arizona (Phoenix and Scottsdale), California (Century City), Montana (Bozeman), and Wyoming (Jackson Hole, Pinedale, and Rock Springs). The Company’s revenues are generated from its full range of product offerings as noted above, but principally from net interest income (the interest income earned on the Bank’s assets net of funding costs), fee-based wealth advisory, investment management, asset management and personal trust services, and net gains earned on mortgage loans. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") for financial information, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"), and where applicable, reporting practices prescribed for the banking and investment advisory industries. Consolidation : The Company’s policy is to consolidate all majority-owned subsidiaries in which it has a controlling financial interest and variable-interest entities where the Company is deemed to be the primary beneficiary. All material intercompany accounts and transactions have been eliminated in consolidation. Business Combinations and Divestitures : Business combinations are accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total consideration transferred in connection with the acquisition is allocated to the tangible and intangible assets acquired, liabilities assumed, and any non-controlling interest in the acquired entity based on fair values. Goodwill acquired in connection with business combinations represents the excess of consideration transferred over the net tangible and identifiable intangible assets acquired. Certain assumptions and estimates are used in evaluating the fair value of assets acquired and liabilities assumed. These estimates may be affected by factors such as changing market conditions or changes in government regulations. Use of Estimates : To prepare financial statements in conformity with GAAP, manageme nt makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, and changes in the financial condition of borrowers. Material estimates that are particularly susceptible to significant change include: the determination of the allowance for credit losses, the evaluation of goodwill impairment, and the fair value of financial instruments. Concentration of Credit Risk : Most of the Company’s lending activity is to clients located in and around metro Denver, Aspen, Fort Collins, Boulder, and Vail, Colorado; Phoenix and Scottsdale, Arizona; Bozeman, Montana; and Jackson, Pinedale, and Rock Springs, Wyoming. The Company does not believe it h as significant concentrations in any one industry or customer. As of December 31, 2023 and December 31, 2022, 76.1 % a nd 77.9 %, respectively, of the Company’s loan portfolio was secured by real estate collateral. Declines in real estate values in the primary markets the Company operates in could negatively impact the Company. F-10 Table of Content s Cash and Cash Equivalents : Cash and cash equivalents include cash on hand, deposits at other financial institutions with original maturities fewer than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements. 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. Equity mutual funds are recorded at fair value within the Other assets line of the Consolidated Balance Sheets with changes recorded in the Unrealized gain/(loss) recognized on equity securities line of the Consolidated Statements of Income. The Company invests in projects to create affordable housing. These investments are classified as Other assets on the Consolidated Balance Sheets. Investments in affordable housing projects that qualify for low-income housing tax credits ("LIHTC") are accounted for using the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other benefits received and recognized as a component of applicable income tax expense in the Consolidated Statements of Income. Net purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities, without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Prior to the adoption of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) ("ASU 2016-13"), credit declines in the fair value of available-for-sale securities and held-to-maturity securities below their cost that are deemed to be other-than-temporary are recorded in earnings as realized losses in Non-interest income. 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 have elected the practical expedient to 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. 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 and MBS. 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. Correspondent Bank Stock : Correspondent bank stock includes stock in the Federal Home Loan Bank of Topeka ("FHLB"), Federal Reserve Bank ("FRB"), and Bankers’ Bank of the West ("BBW"), which are considered restricted securities because the Company may be required to hold the stock in order to maintain the correspondent banking relationship with these institutions. No ready market exists for the FHLB and FRB stock and therefore, no quoted market values exist. For financial reporting purposes, the FHLB and FRB stock is carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value. The BBW stock is carried at fair value. No impairment was recorded as of December 31, 2023 and 2022. Both cash and stock dividends are reported as income when received. F-11 Table of Content s Mortgage Loans Held for Sale : Mortgage loans originated and intended for sale in the secondary market are carried at fair value. Net unrealized losses, if any, are recorded and charged to earnings. Servicing rights are released when the associated mortgage loans are sold. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold. Loans : Loans the Company has the intent and ability to hold for the foreseeable future, until maturity, or until payoff are reported at their outstanding unpaid principal balances, adjusted for charge-offs and recoveries, net of deferred costs (fees) and unamortized premiums/(unaccreted discounts), and the allowance for credit losses. Interest income is accrued on unpaid principal balances. Fees received at origination, net of certain direct origination costs for providing loan commitments and letters of credit that result in loans, are deferred and amortized to interest income over the life of the related loan or until payoff, at which time the remaining unamortized fee is recorded as interest income. Fees, net of certain direct origination costs on commitments and letters of credit, are amortized to interest income over the commitment period. The Company assigns a Credit Risk Rating ("CRR") to each loan in the portfolio. The Company's risk grading system is consistent with the grades used by regulatory agencies. The CRR is assessed whenever new information impacting the loan is received and factors impacting the CRR are not always related to financial metrics, including; industry, economy, management, competition and business model changes. The Company's risk ratings are summarized into the following categories; pass, special mention, substandard, and doubtful. See Note 4 - Loans and the Allowance for Credit Losses for definitions of these risk ratings. The following summarizes our loan portfolio by type of loan and the associated risks. • 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. • 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. F-12 Table of Content s Past Due Loans : The accrual of interest on loans is discontinued at the time the loan becomes 90 days delinquent unless the loan is well secured and in the process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off if collection of interest or principal is considered doubtful. Interest accrued but not collected is charged off against interest income at the time a loan is placed on non-accrual status. The interest collected on non-accrual loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans can be returned to accrual status when there is a sustained period of repayment performance (usually six-months or longer) and the collectability of future payments is reasonably assured. COVID-19 Loan Modifications : 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 have a pass risk rating and have not been delinquent over 30 days on payments in the prior two years, primarily for a period of 180 days or less . Allowance for Credit Losses (“ACL”), subsequent to adoption of ASU 2016-13: On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) ("ASU 2016-13"). ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss ("CECL") model. 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. 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, expanded for certain call codes into separate segments based on risk characteristics. The 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 based on similar risk characteristics. 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. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications. Annually the Company performs a rate study which updates the prepayment and curtailment rates used in the DCF model. 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. Qualitative adjustments to historical loss data 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. F-13 Table of Content s 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 ACL 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. Allowance for Loan Losses , prior to the adoption of ASU-2016-13: The Company’s allowance for loan losses is an estimate of the probable incurred credit losses and is comprised of (i) the allowance for loan losses and (ii) the reserve for unfunded commitments. The reserve for unfunded commitments is included in Other liabilities in the accompanying Consolidated Balance Sheets and the loan balances in the accompanying Consolidated Balance Sheets are reported net of the allowance for loan losses. The allowance for loan losses is established through a provision for credit losses, which is a noncash charge to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. The allowance for loan losses is comprised of specific credit loss reserves and general credit loss reserves. The impairment of a specific loan is measured based either on (i) the present value of expected future cash flows discounted at the loan’s effective interest rate, or (ii) the fair value of the underlying collateral, less costs to sell, if the repayment is expected to be provided predominantly by the sale of the underlying collateral. Specific impairments are measured on a loan-by-loan basis if risk characteristics are unique to an individual borrower. The general credit loss reserve covers non-impaired loans and is established by evaluating the incurred loss on homogenous pools of loans, not specifically reviewed for impairment as noted above, that have common risk characteristics. The general credit loss reserve is based on historical loss experiences adjusted for nine qualitative factors on all loans in the portfolio not considered impaired. Certain factors are applied to each pool and certain factors are applied to all non-individually reviewed loans. The reserve for unfunded commitments represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include commercial and standby letters of credit, unused lines of credit, and unfunded loan commitments expected to be funded, unless the obligation is unconditionally cancellable by the Company. The process used to determine the reserve for unfunded commitments is consistent with the process for determining the allowance for credit losses, adjusted for estimated funding probabilities. Changes to the level of the reserve for unfunded commitments are recognized through the provision for credit losses for off-balance sheet credit exposures, included in the non-interest other expense line of the Consolidated Statements of Income. Transfers of Financial Assets : Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Premises and Equipment : Premises and equipment are carried at cost, net of accumulated depreciation, with the exception of artwork and land, which are carried at cost. The Company owns land and three buildings located in Wyoming. The buildings are depreciated over their useful life, ranging from 25 to 50 years. Leasehold improvements are depreciated using the straight-line method and recognized over the shorter of the lease term or estimated useful lives of the assets, ranging from 7 to 15 years. Furniture/equipment and software are depreciated using the straight-line method and recognized over the estimated useful lives of the assets, ranging from 3 to 7 years. F-14 Table of Content s Goodwill and Other Intangible Assets : Goodwill represents the excess of purchase price over the fair value of net identifiable tangible and intangible assets acquired in business combinations. The Company has acquired other identifiable intangible assets, primarily consisting of customer relationships, non-competition agreements, and recorded goodwill through its acquisition of financial services companies. Goodwill and other indefinite-lived intangible assets are not amortized, but are tested for impairment at the reporting unit level at least annually by applying a fair value-based test using discounted estimated future net cash flows. The Company has selected October 31 as the date to perform its annual impairment tests. Impairment exists when the carrying amount of the goodwill and other intangible assets exceeds their estimated fair values. Impairment losses, if any, are recognized as a charge to non-interest expense and an adjustment to the carrying value of the goodwill or other intangible assets. Subsequent reversals of impairment charges are prohibited. Goodwill is the only intangible asset with an indefinite life on the Company’s Consolidated Balance Sheets. Other definite-lived intangible assets, including customer relationship intangibles, are amortized on an accelerated basis over periods representing the estimated remaining lives of the assets of one to ten years and are evaluated for impairment when events or changes in circumstances indicate the carrying values of such assets may not be recoverable. After the company recorded the impact of a loan related subsequent event, Management updated the Goodwill impairment analysis as of December 31, 2023. As of December 31, 2023, the Company believes the carrying value of its goodwill not to be impaired and other intangible assets to be recoverable. Accounts Receivable : Accounts receivable primarily represents the billed but unpaid fees from trust and investment advisory services owed by clients, which are typically calculated as a percentage of average invested balances. The majority of the Company’s investment advisory clients are billed quarterly in arrears based on the daily average balance in the client’s trust or investment accounts for that quarter. Other Receivables : Other accounts receivables represents miscellaneous receivables that are not presented separately in the Consolidated Balance Sheets. Leases : Leases represent a contract that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company leases certain identified assets from third parties. Leases in which the Company is determined to be the lessee are primarily operating leases. Leases in which the Company is determined to be the lessor are considered operating leases and consist of the partial lease of Company owned buildings. Operating leases are included in the Other assets and Other liabilities line items of the Consolidated Balance Sheets and lease expense for lease payments is recognized on a straight-line basis over the lease term. Right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. An ROU asset represents the right to use the underlying asset for the lease term and also includes any direct costs and payments made prior to lease commencement and excludes lease incentives. When an implicit rate is not available, an incremental borrowing rate based on the information available at commencement date is used in determining the present value of the lease payments. A lease term may include an option to extend or terminate the lease when it is reasonably certain the option will be exercised. Short-term leases of 12 months or less are excluded from accounting guidance; as a result, the lease payments are recognized on a straight-line basis over the lease term and the leases are not reflected on the Company’s Consolidated Balance Sheets. Renewal and termination options are considered when determining short-term leases. Leases are accounted for on an individual lease level. Rent holidays and rent escalations are recognized on a straight-line basis to lease expense over the lease term. The landlord/tenant incentives are recorded as a reduction to the right of use asset and depreciated on a straight line basis over the remaining lease term once the assets are placed in service. Other Real Estate Owned : Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less selling costs, at the date of foreclosure, establishing a new cost basis in the asset. Physical possession of residential real estate property collateralizing a residential mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through similar legal agreement. Subsequent to foreclosure, valuations are periodically performed by management, with any subsequent declines in value recorded as a charge to expense through an impairment recorded directly against the other real estate owned assets. Changes in the valuation allowance are recorded as provision for losses on other real estate owned. Revenue and expenses from operations related to other real estate owned are included in the Provision on other real estate owned line of the Consolidated Statements of Income. Company-Owned Life Insurance : The Company has purchased life insurance policies on certain current and former officers and key employees. Company-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable a t settlement. F-15 Table of Content s Derivatives : At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness of a hedge. These three types are as follows: • Fair Value Hedge: a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment. For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings as fair values change. • Cash Flow Hedge: a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transactions affect earnings. • Stand-alone derivative: an instrument with no hedging designation. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income. Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement in the same line as the cash flows of the items being hedged. The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitments is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended. The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. All of the contracts to which the Company is a party settle monthly or quarterly. In addition, the Company obtains collateral above certain thresholds of the fair value of its derivatives for each dealer counterparty based upon their credit standing and the Company has netting agreements with the dealers with which it does business. Mort gage Banking Derivatives : Commitments to fund mortgage loans, interest rate lock commitments ("IRLC") and forward sale commitments ("FSC"), to be sold in the secondary market for the future delivery of these loans are accounted for as free standing derivatives. The fair value of the IRLC is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. The Company sells mortgage loans to third party investors at the best execution available which includes best efforts, mandatory, and bulk bids. Loans committed under mandatory or bulk bid are considered FSC and qualify as financial derivatives. Fair values of these mortgage derivatives are estimated based on the change in the loan pricing from the date of the commitment to the period end date for any unsettled commitments. Changes in the fair values of these derivatives are included in the Net gain on mortgage loans line of the Consolidated Statements of Income. In order to manage the interest rate risk on our uncommitted IRLC and mortgage loans held for sale pipeline, the Company enters into mortgage derivative financial instruments called To Be Announced ("TBA"), which we refer to as forward commitments. TBA agreements are forward contracts to purchase mortgage backed securities ("MBS") that will be issued by a US Government Sponsored Enterprise. The Bank purchases or sells these derivatives to offset the changes in value of our mortgage loans held for sale and IRLC adjusted pipeline where we have exposure to interest rate volatility. Changes in the fair values of these derivatives are included in the Net gain on mortgage loans line of the Consolidated Statements of Income. Stock-Based Compensation : The Company has stock-based compensation plans that provide for the granting of stock options, restricted stock awards, restricted stock units and performance stock units to associates and non-associate directors who perform services for the Company. The Company estimates the fair value of its stock option awards on the date of grant using the Black-Scholes option-pricing model. The Company determines the fair value of the restricted and performance stock units as well as restricted stock awards based on the estimated market value of the underlying shares at the date of grant. F-16 Table of Content s Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s policy is to recognize forfeitures as they occur. Income Taxes : Income tax expense is the total of the current year income tax due and the change in the deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Company recognizes tax benefits from uncertain tax positions when it is more-likely-than-not, based on the technical merits of the position, the tax position will be sustained upon examination, including the resolution of any appeals or litigation. Tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon resolution. The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments have historically been minimal and immaterial to financial results. The Company classifies interest and penalties, if any, as a component of income tax expense. Comprehensive Income : Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale, net of taxes, which subsequent to being transferred to held-to-maturity securities, are amortized with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. Other comprehensive income also includes unrealized gains and losses on cash flow hedges, net of taxes, which are also recognized as a separate component of equity. Earnings per Common Share : Earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during each period. See Note 12 – Earnings Per Common Share for the common share equivalents that have been included and excluded from the calculation of earnings per common share. Loan Commitments and Related Financial Instruments : Financial instruments include off-balance sheet credit instruments, such as unused lines of credit, commitments to make loans and commercial and standby letters of credit. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Loss Contingencies : Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the consolidated financial statements. Deposits : Deposit products include money market accounts, demand deposit accounts, time-deposit accounts (typically certificates of deposit), NOW accounts (interest checking accounts), and savings accounts. Our accounts are federally insured by the FDIC up to the legal maximum amount. Deposit Concentrations : Total deposits have some concentration through third party networks or sources. As of December 31, 2023 $ 1.00 billion or 39.6 % of Total deposits were made up of reciprocal deposits and $ 165.4 million or 6.5 % were sourced through deposit brokers. As of December 31, 2023, 23.9 % of our total deposits consisted of our 10 largest depositors. Borrowings : Short-term and long-term borrowing sources utilized to supplement deposits and meet liquidity needs. A blanket pledge and security agreement is in place with FHLB that requires certain loans and securities to be pledged as collateral for any outstanding borrowings under the agreement. Our borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies. Bank Term Funding Program : On March 12, 2023, in response to two large bank failures, 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. The additional funding has been made available through the creation of a new F-17 Table of Content s Bank Term Funding Program (“BTFP”), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets valued at par as collateral. The BTFP is meant to be an additional resource of liquidity against high-quality securities, eliminating an institutions need to quickly sell those securities in times of stress. See Note 9 – Borrowings for details on the Company’s borrowings. Fair Value of Financial Instruments : Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 16 – Fair Value. 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. Operating Segments : Operating segments are components of a Company where the chief operating decision maker regularly reviews separate financial information to evaluate performance and decide how to allocate resources. Management has determined that the Company's reportable segments consist of Wealth Management and Mortgage. The Company measures the overall profitability of operating segments based on income before income tax. See Note 18 – Segment Reporting for further discussion. Revenue Recognition : In accordance with the Financial Accounting Standards Board ("FASB"), Revenue Contracts with Customers ("Topic 606"), trust and investment management fees are earned by providing trust and investment services to customers. The Company’s performance obligation under these contracts is satisfied over time as the services are provided. Fees are recognized monthly based on the average monthly value of the assets under management and the corresponding fee rate based on the terms of the contract. No performance based incentive fees were earned with respect to investment management contracts for the years ended December 31, 2023 and 2022. Receivables are recorded on the Consolidated Balance Sheets in the Accounts receivable line item. Income related to trust and investment management fees, bank fees, and risk management and insurance fees on the Consolidated Statements of Income for the years ended December 31, 2023 and 2022 are considered in scope of Topic 606. Transition of LIBOR to an Alternative Reference Rate : In July 2017, the United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate ("LIBOR"), announced that after 2022 it will no longer persuade or compel banks to submit rates for the calculation of LIBOR. In response, the Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee and on February 27, 2023 the Federal Reserve Board adopted a final rule establishing the Secured Overnight Financing Rate ("SOFR") as the replacement rate index for LIBOR. SOFR is based on a broad segment of the overnight Treasury repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities. On December 21, 2022, the FASB issued Accounting Standards Update (ASU) 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. On June 30, 2023, LIBOR ceased to be a representative index rate. ASU 2022-06 extends the period of time financial statement preparers can utilize the reference rate reform relief guidance through December 31, 2024. F-18 Table of Content s Certain of the Company’s assets and liabilities are indexed to LIBOR, with exposure extending beyond December 31, 2023. In general, the transition away from LIBOR may result in increased market risk, credit risk, operational risk and business risk for the Company. The Company developed a LIBOR transition plan, which addressed governance, risk management, legal, operational, systems, fallback language, and other aspects of planning. The company no longer originates LIBOR indexed loans and has transitioned existing LIBOR loans to SOFR. As of December 31, 2023, all loans indexed to LIBOR have been converted to the new index. Consumer indexed loans are being managed in accordance with Interagency Guidance. Reclassifications : Certain items in prior year financial statements were reclassified to conform to the current presentation. Such reclassifications had no impact on net income available to common shareholders or total shareholders’ equity. Recently adopted accounting pronouncements : The following reflect recent accounting pronouncements that have been adopted by the Company during the Company’s fiscal year ended December 31, 2023. In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326); Troubled Debt Restructurings (“TDR”) and Vintage Disclosures. This ASU was effective for the Company on January 1, 2023. The amendments eliminate the TDR recognition and measurement guidance and instead require an entity to evaluate whether the modification represents a new loan or a co ntinuation of an existing loan (consistent with accounting for other modifications). The amendments also enhance existing disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The Company adopted ASU 2022-02 on January 1, 2023. Refer to Note 4 – Loans and the Allowance for Credit Losses for additional information on the required disclosures. On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326 - Measurement of Credit Losses on Financial Instruments, as amended) ("ASU 2016-13"). ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss ("CECL") methodology. The CECL methodology is applicable to the measurement of credit losses on the financial assets measured at amortized cost, including loan receivables, available for sale debt securities, and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. The Company adopted ASU 2016-13 on January 1, 2023 using the modified retrospective method with no adjustments to prior period comparative financial statements for all financial assets measured at amortized cost and off-balance sheet credit exposure as well as held to maturity securities. In accordance with the standard, management did not reassess whether modifications to individual acquired financial assets accounted for in pools were troubled debt restructurings as of the date of adoption. Upon adoption the Company recorded a decrease to retained earnings of $ 5.3 million, net of tax. The total transition adjustment prior to the tax impact included $ 3.5 million related to allowance for credit losses on loans, $ 3.5 million related to off-balance sheet commitments, and $ 0.1 million related to held-to-maturity securities. Results for reporting periods beginning on or after January 1, 2023 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The following table illustrates the day one adoption impact of ASU 2016-13: (dollars in thousands) Balance at January 1, 2023 (before adjustment) Cumulative effect adjustment amount Balance January 1, 2023 (after adjustment) Assets Allowance for credit losses: loans $ ( 17,183 ) $ ( 3,470 ) $ ( 20,653 ) Allowance for credit losses: held-to-maturity securities — ( 71 ) ( 71 ) Deferred tax assets, net 6,914 1,703 8,617 Liabilities Allowance for credit losses on off-balance sheet exposures 419 3,481 3,900 Shareholders’ equity Retained earnings, net of tax 51,887 ( 5,319 ) 46,568 F-19 Table of Content s Recently issued accounting pronouncements, not yet adopted : The following reflects recently issued accounting pronouncements and the impact thereof to the Company. On August 23, 2023 the FASB issued ASU 2023-05 Business Combinations - Joint Venture Formations (Subtopic 805-60) Recognition and Initial Measurement. This ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification Master Glossary. While joint ventures are defined in the Master Glossary, there has been no specific guidance in the Codification that applies to the formation accounting by a joint venture in its separate financial statements. The amendments in the ASU require that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance). The Company does not presently have any joint ventures that would be impacted but will evaluate as needed. On March 29, 2023 the FASB issued ASU 2023-02 Investments in Tax Structures which changes the accounting methodology to allow proportional amortization method to be expanded beyond investments in low income tax housing tax credits (“LIHTC”) structures. This guidance is effective January 1, 2024 and currently the Company does not have any investments that would be impacted but will evaluate as other investments are considered as early adoption is permitted. On November 27, 2023, the FASB issued ASU 2023-07 Segment Reporting - Improvements to Reportable Segment Disclosures, which provides additional transparency into a company's' reportable segments’ significant expenses on an interim and annual basis. This guidance is effective for companies with fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Companies must adopt the changes to the segment reporting guidance on a retrospective basis. Early adoption is permitted. The Company expects to adopt this standard beginning with its first quarter ending March 31, 2024. The Company is currently evaluating these new disclosure requirements and does not expect the adoption to have a material impact. On December 14, 2023, the FASB issued ASU 2023-09 Income Taxes - Improvements to Income Tax Disclosures, which enhances a company's income tax disclosures to include additional information related to rate reconciliations and income taxes paid. This guidance is effective for companies with fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company expects to adopt this standard beginning January 1, 2025. The Company is currently evaluating these new disclosure requirements and does not expect the adoption to have a material impact. NOTE 2 – INVESTMENT SECURITIES The following presents the amortized cost, fair value, and allowance for credit losses of securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses as of the date noted (dollars in thousands): December 31, 2023 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 ) GNMA mortgage-backed securities – residential 34,579 — ( 3,410 ) 31,169 — FNMA mortgage-backed securities – residential 6,035 — ( 509 ) 5,526 — Government CMO and MBS - commercial 5,836 9 ( 377 ) 5,468 — Corporate CMO and MBS (2) 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. (2) 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. F-20 Table of Content s December 31, 2022 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 Government CMO and MBS - commercial 6,786 13 ( 403 ) 6,396 Corporate CMO and MBS 4,074 — ( 180 ) 3,894 Total securities held-to-maturity $ 81,056 $ 13 $ ( 6,351 ) $ 74,718 Net amortization of premiums and discounts related to mortgage securities during each of the years ended December 31, 2023 and 2022 totaled an immaterial amount and $ 0.1 million, respectively, and is included in Net interest income in the Consolidated Statements of Income. The following presents securities with unrecognized losses aggregated by major security type and length of time in a continuous unrecognized loss position as of the date noted (dollars in thousands, before tax): Less than 12 Months 12 Months or Longer Total December 31, 2022 Fair Value Unrecognized Losses Fair Value Unrecognized Losses Fair Value Unrecognized Losses Investment securities held-to-maturity: U.S. Treasury debt $ — $ — $ 234 $ ( 9 ) $ 234 $ ( 9 ) Corporate bonds 20,911 ( 2,436 ) 455 ( 17 ) 21,366 ( 2,453 ) GNMA mortgage-backed securities – residential 22,371 ( 1,051 ) 14,255 ( 1,749 ) 36,626 ( 2,800 ) FNMA mortgage-backed securities – residential 6,202 ( 506 ) — — 6,202 ( 506 ) Government CMO and MBS - commercial 5,591 ( 403 ) — — 5,591 ( 403 ) Corporate CMO and MBS 3,499 ( 147 ) 395 ( 33 ) 3,894 ( 180 ) Total $ 58,574 $ ( 4,543 ) $ 15,339 $ ( 1,808 ) $ 73,913 $ ( 6,351 ) The Company reassessed classification of investment securities and, effective April 1, 2022, elected to transfer all securities, fair valued at $ 58.7 million, from available-for-sale to held-to-maturity. The related unrealized loss of $ 2.3 million included in other comprehensive income on April 1, 2022 remained in other comprehensive income and is being amortized out with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. No gain or loss was recorded at the time of transfer. As of December 31, 2023, the amortized cost and estimated fair value of held-to-maturity securities have contractual maturity dates shown in the table below (dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. December 31, 2023 Amortized Cost Fair Value Due within one year $ 253 $ 242 Due between one year and five years 4,078 3,844 Due between five years and ten years 19,395 16,630 Due after ten years 214 193 Securities (CMO and MBS) 50,233 45,708 Total $ 74,173 $ 66,617 F-21 Table of Content s During year ended December 31, 2022, the Company committed $ 6.0 million in total to two bank technology funds. During the year ended December 31, 2023, the Company made $ 0.8 million in contributions to both partnerships and received a $ 0.1 million return on investment. During the year ended December 31, 2022, the Company made $ 1.3 million in contributions to both partnerships and received a $ 0.1 million return on investment. As of December 31, 2023, the Company held a balance of $ 2.0 million which is included in Other assets in the accompanying Consolidated Balance Sheets. The Company may be obligated to invest up to an additional $ 4.0 million in future contributions. In 2014, the Company began investing in a small business investment company ("SBIC") fund administered by the Small Business Administration. The Company made $ 0.2 million in contributions to the SBIC fund during the year ended December 31, 2023. During the year ended December 31, 2022, the Company did not make any contributions to the SBIC fund and received a $ 0.1 million return of capital. As of December 31, 2023 and 2022, the Company held a balance of $ 2.2 million and $ 2.0 million, respectively, in the SBIC fund, which is included in Other assets in the accompanying Consolidated Balance Sheets. The Company may be obligated to invest up to an additional $ 0.8 million in future SBIC investments. As of December 31, 2023, securities with market values totaling $ 45.1 million were pledged to secure various public deposits and credit facilities of the Company, including $ 39.3 million pledged under the BTFP program (refer to Note 1 – Organization and Summary of Significant Accounting Policies for more information on the BTFP program). As of December 31, 2022, securities with carrying values of $ 22.6 million were pledged to secure various public deposits and credit facilities of the Company. As of December 31, 2023, there were no holdings of securities of any one issuer in an amount greater than 10 % of shareholders’ equity. As of December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities and agencies, in an amount greater than 10 % of shareholders’ equity. The Company did not sell any securities during the years ended December 31, 2023 or 2022. Allowance for Credit Losses for HTM Securities 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 and bank subordinated debt. The Company's non-government backed securities are paying within the agreed upon terms and there are no securities on non-accrual status. 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. Refer to Note 1 – Organization and Summary of Significant Accounting Policies for additional information on the Company’s methodology on estimating 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 The Company monitors the credit quality of held-to-maturity securities on a quarterly basis. As of December 31, 2023, there were no held-to-maturity securities past due or on non-accrual . F-22 Table of Content s NOTE 3 – CORRESPONDENT BANK STOCK The following table presents the Company’s investments in correspondent bank stock, as of the dates noted: December 31, (Dollars in thousands) 2023 2022 FHLB $ 7,123 $ 7,078 BBW 32 32 Total $ 7,155 $ 7,110 NOTE 4 – LOANS AND THE ALLOWANCE FOR CREDIT LOSSES The following table presents a summary of the Company’s loans at amortized cost as of the dates noted: (Dollars in thousands) December 31, 2023 December 31, 2022 Cash, Securities and Other $ 139,947 $ 165,559 Consumer and Other 27,028 26,070 Construction and Development 345,516 285,627 1-4 Family Residential 927,965 899,722 Non-Owner Occupied CRE 543,692 493,134 Owner Occupied CRE 195,861 214,189 Commercial and Industrial 337,180 361,791 Total 2,517,189 2,446,092 Allowance for credit losses (1) ( 23,931 ) ( 17,183 ) Total, net 2,493,258 2,428,909 Loans accounted for under the fair value option (2) 13,726 23,321 Loans, net $ 2,506,984 $ 2,452,230 _____________________________ (1) Allowance 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. (2) Includes $ 14.1 million and $ 23.4 million of unpaid principal balance of loans held for investment measured at fair value as of December 31, 2023 and December 31, 2022 respectively. Includes fair value adjustments on loans held for investment accounted for under the fair value option. See Note 16 – Fair Value. As of December 31, 2023 and 2022, total loans held for investment included $ 208.2 million and $ 230.4 million, respectively, of performing loans purchased through mergers or acquisitions. As of December 31, 2023 the Cash, Securities, and Other portion of the loan portfolio included $ 4.2 million of SBA Paycheck Protection Program (“PPP”) loans, or 3.0 % of the total category. As of December 31, 2022, the Cash, Securities, and Other portion of the loan portfolio included $ 6.9 million of PPP loans, or 4.2 % of the total category. As of December 31, 2023, the Company’s Commercial and Industrial loans included three Main Street Lending Program (“MSLP”) loans with the net carrying amount of $ 5.1 million, or 1.5 % of the total category. Two of these loans are risk rated Substandard with one of those on non-accrual after a modification was completed during the fourth quarter of 2023. The remaining MSLP loan is risk rated Pass. As of December 31, 2022, the Company’s Commercial and Industrial loans included five MSLP loans with the net carrying amount of $ 5.9 million, or 1.6 % of the total category. F-23 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 have a pass risk rating and have not been delinquent over 30 days on payments in the last 2 years prior to the loan modification. In 2021, the deferral period ended for all non-acquired loans previously modified and payments have resumed under the original terms. As of December 31, 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. These loans are included in the allowance for credit loss general reserve in accordance with ASU 2016-13. Management continues to focus on 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. Accrued interest receivable is excluded from the estimate of credit losses. The following presents, by class, an aging analysis of the amortized cost basis in loans past due as of the date noted (dollars in thousands): December 31, 2023 30-59 Days Past Due 60-89 Days Past Due 90 or More Days Past Due Total Loans Past Due Current Total Amortized Cost Loans Accounted for Under the Fair Value Option (1) Total Loans Cash, Securities and Other $ — $ 76 $ 1,704 $ 1,780 $ 138,167 $ 139,947 $ — $ 139,947 Consumer and Other 676 11 7,504 8,191 18,837 27,028 13,726 40,754 Construction and Development — 1,500 — 1,500 344,016 345,516 — 345,516 1-4 Family Residential 1,093 — 2,722 3,815 924,150 927,965 — 927,965 Non-Owner Occupied CRE — — — — 543,692 543,692 — 543,692 Owner Occupied CRE — — 3,980 3,980 191,881 195,861 — 195,861 Commercial and Industrial 19,305 1,085 29,180 49,570 287,610 337,180 — 337,180 Total $ 21,074 $ 2,672 $ 45,090 $ 68,836 $ 2,448,353 $ 2,517,189 $ 13,726 $ 2,530,915 F-24 Table of Content s December 31, 2022 30-59 Days Past Due 60-89 Days Past Due 90 or More Days Past Due Total Loans Past Due Current Total Amortized Cost Loans Accounted for Under the Fair Value Option (1) Total Loans Cash, Securities and Other $ 1,735 $ 539 $ 4 $ 2,278 $ 163,281 $ 165,559 $ — $ 165,559 Consumer and Other 657 5 5 667 25,403 26,070 23,321 49,391 Construction and Development — — 201 201 285,426 285,627 — 285,627 1-4 Family Residential 1,752 — 5 1,757 897,965 899,722 — 899,722 Non-Owner Occupied CRE 1,071 — — 1,071 492,063 493,134 — 493,134 Owner Occupied CRE 1,165 — — 1,165 213,024 214,189 — 214,189 Commercial and Industrial 4,858 10,648 1,319 16,825 344,966 361,791 — 361,791 Total $ 11,238 $ 11,192 $ 1,534 $ 23,964 $ 2,422,128 $ 2,446,092 $ 23,321 $ 2,469,413 (1) Refer to Note 16 – Fair Value for additional information on the measurement of loans accounted for under the fair value option. As of December 31, 2023 , the Company had one loan, totaling $ 0.3 million, in the 1-4 Family Residential portfolio that was more than 90 days delinquent and accruing interest. As of December 31, 2022, the Company had one loan, totaling an immaterial amount, in the Commercial and Industrial portfolio that was more than 90 days delinquent and accruing interest. The following table presents the amortized cost basis as of December 31, 2023 of the loans modified to borrowers experiencing financial difficulty disaggregated by class of financing receivable and type of concession granted during the year ended December 31, 2023. 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 $ — F-25 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: 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 For all loans that have been modified during the period, the borrowers continue to pay as agreed. Non-Accrual Loans The accrual of interest on loans is discontinued at the time the loan becomes 90 days or more 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. The following presents the amortized cost basis of loans on non-accrual status and loans past due over 89 days still accruing by class as of the date noted (dollars in thousands). December 31, 2023 (dollars in thousands) Non-accrual loans with no ACL Total non-accrual loans (1) Loans past due over 89 days still accruing Cash, Securities, and Other $ 1,704 $ 1,704 $ — Consumer and Other 4 7,504 — Construction and Development 2,719 2,719 — 1-4 Family Residential 578 3,016 285 Owner Occupied CRE — 3,980 — Commercial and Industrial 2,355 31,893 — Total $ 7,360 $ 50,816 $ 285 (1) As of December 31, 2023, the Company had an allowance of $ 3.8 million on non-performing loans. The following presents the recorded investment in non-accrual loans by class as of the date noted (dollars in thousands): December 31, 2022 Cash, Securities and Other $ 4 Consumer and Other 146 Construction and Development 201 Owner Occupied CRE 1,165 Commercial and Industrial 10,833 Total $ 12,349 F-26 Table of Content s The following presents impaired loans by portfolio and related valuation allowance as of the periods presented (in thousands): December 31, 2022 Total Recorded Investment Unpaid Contractual Principal Balance Allowance for Loan Losses Impaired loans with no related valuation allowance: Cash, Securities, and Other $ 4 $ 4 $ — Construction and Development 201 201 — 1-4 Family Residential — — — Owner Occupied CRE 1,165 1,165 — Commercial and Industrial 10,833 10,833 — Total $ 12,203 $ 12,203 $ — Total impaired loans: Cash, Securities, and Other $ 4 $ 4 $ — Consumer and Other — — — Construction and Development 201 201 — Commercial and Industrial 10,833 10,833 — 1-4 Family Residential — — — Owner Occupied CRE 1,165 1,165 — Total $ 12,203 $ 12,203 $ — The Company recognized $ 0.2 million of interest income on non-accrual loans during the year ended December 31, 2023. The Company recognized an immaterial amount of interest income on non-accrual loans during the year ended December 31, 2022. Non-accrual loans, excluding loans held for investment measured at fair value, are classified as collateral dependent loans and are individually evaluated. The following presents the amortized cost basis of collateral-dependent loans, which are individually evaluated to determine expected credit losses, by class of loans as of the date noted (dollars in thousands): As of December 31, 2023 Collateral Dependent Loans (dollars in thousands) Secured by Real Estate Secured by Cash and Securities Secured by Other Total Cash, Securities, and Other $ — $ 1,704 $ — $ 1,704 Consumer and Other — — 7,500 7,500 Construction and Development 2,719 — — 2,719 1-4 Family Residential 3,016 — — 3,016 Owner Occupied CRE 3,980 — — 3,980 Commercial and Industrial — — 31,893 31,893 Total $ 9,715 $ 1,704 $ 39,393 $ 50,812 Charge-offs 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. F-27 Table of Content s Allowance for Credit Losses 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, presented in Accrued interest receivable on the Consolidated Balance Sheets. Refer to Note 1 – Organization and Summary of Significant Accounting Policies for additional information related to the Company’s methodology on estimated credit losses. The Allowance for credit losses on loans (“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. 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. The following table presents the gross loan activity in the allowance for credit losses by portfolio segment during the periods presented (dollars in thousands): Cash, Securities and Other Consumer and Other Construction and Development 1-4 Family Residential Non-Owner Occupied CRE Owner Occupied CRE Commercial and Industrial Total Changes in allowance for credit losses for the year ended December 31, 2023: Beginning balance, prior to the adoption of ASU 2016-13 $ 1,198 $ 191 $ 2,025 $ 6,309 $ 3,490 $ 1,510 $ 2,460 $ 17,183 Impact of adopting ASU 2016-13 193 106 4,681 ( 2,808 ) ( 689 ) ( 104 ) 2,091 3,470 Provision (release) for credit losses ( 430 ) ( 94 ) 1,239 856 ( 476 ) ( 372 ) 11,354 12,077 Charge-offs — ( 101 ) — — — — ( 8,737 ) ( 8,838 ) Recoveries — 22 — 13 — — 4 39 Ending balance $ 961 $ 124 $ 7,945 $ 4,370 $ 2,325 $ 1,034 $ 7,172 $ 23,931 F-28 Table of Content s Cash, Securities and Other Consumer and Other Construction and Development 1-4 Family Residential Non-Owner Occupied CRE Owner Occupied CRE Commercial and Industrial Total Changes in allowance for loan losses for the year ended December 31, 2022 (1) : Beginning balance $ 1,598 $ 266 $ 1,092 $ 3,553 $ 2,952 $ 1,292 $ 2,979 $ 13,732 (Recovery of)/provision for loan losses ( 399 ) 84 933 2,756 538 218 ( 448 ) 3,682 Charge-offs ( 1 ) ( 262 ) — — — — ( 71 ) ( 334 ) Recoveries — 103 — — — — — 103 Ending balance $ 1,198 $ 191 $ 2,025 $ 6,309 $ 3,490 $ 1,510 $ 2,460 $ 17,183 Allowance for loan losses as of December 31, 2022 allocated to loans evaluated for impairment (1) : Individually $ — $ — $ — $ — $ — $ — $ — $ — Collectively 1,198 191 2,025 6,309 3,490 1,510 2,460 17,183 Ending balance $ 1,198 $ 191 $ 2,025 $ 6,309 $ 3,490 $ 1,510 $ 2,460 $ 17,183 Loans as of December 31, 2022, evaluated for impairment (1) : Individually $ 4 $ — $ 201 $ — $ — $ 1,165 $ 10,833 $ 12,203 Collectively 165,666 26,539 288,296 898,154 496,776 214,891 350,195 2,440,517 Measured at fair value — 23,415 — — — — — 23,415 Ending balance $ 165,670 $ — $ 49,954 $ — $ 288,497 $ — $ 898,154 $ — $ 496,776 $ — $ 216,056 $ — $ 361,028 $ — $ 2,476,135 (1) The allowance for credit losses for periods prior to the ASU 2016-13 adoption date of January 1, 2023 are reported in accordance with previously applicable GAAP which presented loan balances gross rather than amortized cost. F-29 Table of Content s Credit Quality Indicators The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans by credit risk on a quarterly basis. The Company uses the following definitions for risk ratings: Special Mention—Loans classified as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified. Substandard—Substandard loans are considered "classified" and are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrual status and may individually be evaluated. Doubtful—Loans graded Doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. However, the amount of certainty of eventual loss is not known because of specific pending factors. Loans accounted for under the fair value option are not rated. The following table presents the amortized cost basis of loans by credit quality indicator, by class of financing receivable, and year of origination for term loans as of December 31, 2023. For revolving lines of credit that converted to term loans, if the conversion involved a credit decision, such loans are included in the origination year in which the credit decision was made. If revolving lines of credit converted to term loans without a credit decision, such lines of credit are included in the “Revolving lines of credit converted to term” column in the following table. Term Loans Amortized Cost by Origination Year December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Cash, Securities, and Other Pass $ 8,091 $ 17,878 $ 17,181 $ 5,966 $ 6,337 $ 13,188 $ 69,602 $ 138,243 Special mention — — — — — — — — Substandard — — — — — — 1,704 1,704 Doubtful — — — — — — — — Not rated — — — — — — — — Total Cash, Securities, and Other $ 8,091 $ 17,878 $ 17,181 $ 5,966 $ 6,337 $ 13,188 $ 71,306 $ 139,947 Current year-to-date gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer and Other Pass $ 614 $ 2,013 $ 647 $ 633 $ 797 $ 24 $ 14,800 $ 19,528 Special mention — — — — — — — — Substandard — — — — — — 7,500 7,500 Doubtful — — — — — — — — Not rated(1) — 10,469 2,544 614 99 — — 13,726 Total Consumer and Other $ 614 $ 12,482 $ 3,191 $ 1,247 $ 896 $ 24 $ 22,300 $ 40,754 Current year-to-date gross write-offs $ — $ — $ — $ 8 $ 91 $ 2 $ — $ 101 Construction and Development F-30 Table of Content s Pass $ 32,509 $ 231,103 $ 42,796 $ 21,615 $ — $ — $ 431 $ 328,454 Special mention — 14,343 — — — — — 14,343 Substandard 2,719 — — — — — — 2,719 Doubtful — — — — — — — — Not rated — — — — — — — — Total Construction and Development $ 35,228 $ 245,446 $ 42,796 $ 21,615 $ — $ — $ 431 $ 345,516 Current year-to-date gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — 1-4 Family Residential Pass $ 97,901 $ 373,525 $ 143,694 $ 108,815 $ 37,756 $ 31,452 $ 131,806 $ 924,949 Special mention — — — — — — — — Substandard 578 2,438 — — — — — 3,016 Doubtful — — — — — — — — Not rated — — — — — — — — Total 1-4 Family Residential $ 98,479 $ 375,963 $ 143,694 $ 108,815 $ 37,756 $ 31,452 $ 131,806 $ 927,965 Current year-to-date gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — Non-Owner Occupied CRE Pass $ 42,799 $ 197,122 $ 125,726 $ 75,026 $ 24,411 $ 53,056 $ 20,553 $ 538,693 Special mention — — — 4,999 — — — 4,999 Substandard — — — — — — — — Doubtful — — — — — — — — Not rated — — — — — — — — Total Non-Owner Occupied CRE $ 42,799 $ 197,122 $ 125,726 $ 80,025 $ 24,411 $ 53,056 $ 20,553 $ 543,692 Current year-to-date gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — Owner Occupied CRE Pass $ 3,229 $ 46,751 $ 44,805 $ 37,957 $ 5,555 $ 51,259 $ 2,325 $ 191,881 Special mention — — — — — — — — Substandard — — 3,980 — — — — 3,980 Doubtful — — — — — — — — Not rated — — — — — — — — Total Owner Occupied CRE $ 3,229 $ 46,751 $ 48,785 $ 37,957 $ 5,555 $ 51,259 $ 2,325 $ 195,861 Current year-to-date gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — Commercial and Industrial Pass $ 38,497 $ 59,612 $ 15,430 $ 13,457 $ 6,430 $ 16,068 $ 152,782 $ 302,276 Special mention — — — — — — 649 649 Substandard 1,618 — 29,355 1,674 — 920 688 34,255 Doubtful — — — — — — — — Not rated — — — — — — — — Total Commercial and Industrial $ 40,115 $ 59,612 $ 44,785 $ 15,131 $ 6,430 $ 16,988 $ 154,119 $ 337,180 Current year-to-date gross write-offs $ — $ 8,737 $ — $ — $ — $ — $ — $ 8,737 Total pass $ 223,640 $ 928,004 $ 390,279 $ 263,469 $ 81,286 $ 165,047 $ 392,299 $ 2,444,024 Total special mention — 14,343 — 4,999 — — 649 19,991 Total substandard 4,915 2,438 33,335 1,674 — 920 9,892 53,174 Total doubtful — — — — — — — — Total not rated — 10,469 2,544 614 99 — — 13,726 Total $ 228,555 $ 955,254 $ 426,158 $ 270,756 $ 81,385 $ 165,967 $ 402,840 $ 2,530,915 (1) Includes loans held for investment measured at fair value as of December 31, 2023. Includes fair value adjustments on loans held for investment F-31 Table of Content s accounted for under the fair value option. The following presents, by class and by credit quality indicator, the recorded investment in the Company’s loans as of the date noted (dollars in thousands): December 31, 2022 Pass Special Mention Substandard Not Rated Total Cash, Securities, and Other $ 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 loans held for investment measured at fair value as of December 31, 2022. Includes fair value adjustments on loans held for investment accounted for under the fair value option. In accordance with ASC 855, Subsequent Events, the Company has determined that there was a subsequent event that provided additional evidence about conditions that existed at the date of the balance sheet. The effects of the subsequent event have been fully recognized in this Form 10-K. NOTE 5 – PREMISES AND EQUIPMENT, NET The following presents a summary of the cost and accumulated depreciation of premises and equipment as of the dates noted: December 31, (Dollars in thousands) 2023 2022 Building and building improvements $ 12,190 $ 12,190 Leasehold improvements, including artwork 14,336 12,879 Land 4,980 4,980 Equipment and software 6,619 5,815 Gross premise and equipment 38,125 35,864 Less: accumulated depreciation ( 12,869 ) ( 10,746 ) Premises and equipment, net $ 25,256 $ 25,118 During the year ended December 31, 2023 and 2022, the Company retired an immaterial amount of equipment and software for an immaterial loss. Depreciation expense for premises and equipment for the years ended December 31, 2023 and 2022 totaled $ 2.2 million and $ 1.8 million, respectively. NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS The following presents changes in the carrying amount of goodwill as of the dates noted: (Dollars in thousands) December 31, 2023 December 31, 2022 Beginning balance $ 30,400 $ 30,588 Acquisition activity — ( 188 ) Ending balance $ 30,400 $ 30,400 F-32 Table of Content s The Company initially recorded $ 6.4 million of goodwill as a result of the Teton Acquisition on December 31, 2021. In the first quarter of 2022, goodwill was adjusted by $( 0.2 ) million as a result of the measurement period adjustments. The goodwill impairment analysis includes the determination of the carrying value of the reporting unit, including the existing goodwill, and estimating the fair value of the reporting unit. If the fair value is less than its carrying amount, goodwill impairment is recognized equal to the difference between the fair value and its carrying amount, not to exceed its carrying amount. Goodwill is tested annually for impairment on October 31 or earlier upon the occurrence of certain events. A significant amount of judgement is involved in determining if an indicator of goodwill impairment occurred. Such indicators may include, among others; a significant decline in expected future cash flows; a sustained significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition. The impact to bank stocks triggered by the closure of two well-known regional banks caused a significant decline in bank stock prices in March of 2023, including our stock price. As a result, the Company 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. As of December 31, 2023, there has not been any impairment of goodwill identified or recorded. Goodwill totaled $ 30.4 million as of December 31, 2023 and 2022. The following presents the Company’s intangible assets and related accumulated amortization as of the dates noted: December 31, (Dollars in thousands) 2023 2022 Other intangibles $ 5,926 $ 5,926 Less: accumulated amortization on other intangibles ( 4,472 ) ( 4,222 ) Other intangible assets, net $ 1,454 $ 1,704 Amortization expense on definite-lived customer relationship and non-compete intangible assets was $ 0.3 million for the years ended December 31, 2023 and 2022. The following presents the expected amortization expense on definite-lived intangible assets existing as of December 31, 2023 (dollars in thousands): Year Expense 2024 $ 226 2025 206 2026 193 2027 183 2028 175 Thereafter 471 Total $ 1,454 F-33 Table of Content s NOTE 7 – LEASES Leases in which the Company is determined to be the lessee are primarily operating leases comprised of real estate property and office space for our corporate headquarters and profit centers with terms that extend to 2032. In accordance with ASC 842, operating leases are required to be recognized as a right-of-use asset with a corresponding lease liability. The Company elected to not include short-term leases with initial terms of twelve months or less, on the Consolidated Balance Sheets. The following table presents the classification of the right-of-use assets and corresponding liabilities within the Consolidated Balance Sheets, as of the dates noted (dollars in thousands): December 31, 2023 December 31, 2022 Lease Right-of-Use Assets Classification Operating lease right-of-use assets Other assets $ 8,929 $ 8,602 Lease Liabilities Classification Operating lease liabilities Other liabilities $ 10,900 $ 11,163 The Company’s operating lease agreements typically include an option to renew the lease at the Company’s discretion. To the extent the Company is reasonably certain it will exercise the renewal option at the inception of the lease, the Company will include the extended term in the calculation of the right-of-use asset and lease liability. ASC 842 requires the use of the rate implicit in the lease when it is readily determinable. As this rate is typically not readily determinable, at the inception of the lease, the Company uses its collateralized incremental borrowing rate over a similar term. The amount of the right-of-use asset and lease liability are impacted by the discount rate used to calculate the present value of the minimum lease payments over the term of the lease. December 31, 2023 December 31, 2022 Weighted-Average Remaining Lease Term Operating leases 4.67 years 4.85 years Weighted-Average Discount Rate Operating leases 2.78 % 2.63 % The Company’s operating leases contain fixed and variable lease components and it has elected to account for all classes of underlying assets as a single lease component. Variable lease costs primarily represent common area maintenance and parking. The Company recognized lease costs in Occupancy and equipment expense in the accompanying Consolidated Statements of Income. The following table represents the Company’s net lease costs during the periods presented (dollars in thousands): Year Ended December 31, 2023 2022 Lease Costs Operating lease cost $ 2,964 $ 3,151 Variable lease cost 1,953 2,104 Lease costs, net $ 4,917 $ 5,255 F-34 Table of Content s The following table presents a maturity analysis of the Company’s operating lease liabilities on an annual basis for each of the next five years and total amounts thereafter (dollars in thousands): Year Ending December 31, Operating Leases 2024 $ 3,506 2025 2,740 2026 1,425 2027 1,366 2028 1,063 Thereafter 1,436 Total future minimum lease payments 11,536 Less: imputed interest ( 636 ) Present value of net future minimum lease payments $ 10,900 Leases in which the Company is determined to be the lessor are considered operating leases and consist of the partial lease of Company owned buildings. In accordance with ASC 842, these leases have been accounted for as operating leases. During the year ended December 31, 2023 and 2022, the Company recognized $ 0.3 million of lease income. The following table presents a maturity analysis of the Company’s lease payments to be received on an annual basis for each of the next five years and total amounts thereafter (dollars in thousands): Year Ending December 31, Undiscounted Operating Lease Income 2024 $ 290 2025 67 2026 20 2027 4 2028 — Thereafter — Total undiscounted operating lease income $ 381 NOTE 8 – DEPOSITS The following table presents the Company’s interest-bearing deposits as of the dates noted: (Dollars in thousands) December 31, 2023 December 31, 2022 Money market deposit accounts $ 1,386,149 $ 1,336,092 Time deposits 496,452 224,090 Negotiable order of withdrawal accounts 147,488 234,778 Savings accounts 16,371 27,177 Total interest-bearing deposits $ 2,046,460 $ 1,822,137 Estimated aggregate time deposits of $250 or greater $ 91,038 $ 77,972 Overdraft balances classified as loans totaled $ 0.1 million and $ 0.2 million as of December 31, 2023 and 2022, respectively. F-35 Table of Content s The following table presents the scheduled maturities of all time deposits for the next five years ending December 31 (dollars in thousands): Year Ending December 31, Time Deposits 2024 $ 414,613 2025 43,764 2026 906 2027 2,436 2028 34,733 Total $ 496,452 NOTE 9 – BORROWINGS The Bank has executed a blanket pledge and security agreement with the FHLB that requires certain loans and securities be pledged as collateral for any outstanding b orrowings 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. Each advance is payable at its maturity date. On March 12, 2023, the FRB 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 institutions 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 Company had the following required maturities on FHLB and FRB borrowings as of the dates noted (dollars in thousands): Maturity Date Rate % December 31, 2023 December 31, 2022 May 5, 2023 0.76 % $ — $ 10,000 January 1, 2024 (1) 5.55 41,175 131,498 March 27, 2024 4.78 30,997 — March 29, 2024 5.60 50,000 — Total $ 122,172 $ 141,498 (1) The borrowing has a one day, automatic daily renewal maturity date, subject to FHLB discretion not to renew. To bolster the effectiveness of the SBA’s PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing collateralized by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility ("PPPLF") extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value and bearing interest at 35 bps. The terms of the loans are directly tied to the underlying PPP loans, which were originated at 2 or 5 years. For the years ended December 31, 2023 and 2022, the Company had outstanding $ 3.5 million and $ 5.4 million, respectively, under the PPPLF program which is included in the FHLB and Federal Reserve borrowings line of the Consolidated Balance Sheets. The Bank has borrowing capacity associated with two unsecured federal funds lines of credit up to $ 10.0 million and $ 19.0 million. As of December 31, 2023 and 2022, there were no amounts outstanding on any of the federal funds lines. F-36 Table of Content s On January 1, 2022, the Company redeemed the subordinated notes due December 31, 2026 in the amount of $ 6.6 million, which were redeemable on or after January 1, 2022. The redemption price was equal to 100 % of the principal amount being redeemed, plus accrued and unpaid interest up to, but excluding the date of redemption. The following presents the Company's subordinated notes included in the Subordinated notes line of the Consolidated Balance Sheets as of the periods noted (dollars in thousands): Issuance Date Stated Rate Interest Paid Maturity Carrying Value Initial Debt Issuance Costs Remaining Net Balance (1) March 2020 5.125 % per annum until 3/31/2025, then alternative rate plus 450 basis points until maturity Quarterly 3/31/2030 $ 8,000 $ 120 $ 7,970 November 2020 4.25 % per annum until 12/1/2025, then SOFR plus 402 basis points until maturity Semi-annual (Quarterly beginning 12/01/25) 12/1/2030 10,000 162 9,908 August 2021 3.25 % per annum until 9/1/2026, then SOFR plus 258 basis points until maturity Semi-annual (Quarterly beginning 09/01/26) 9/1/2031 15,000 242 14,853 December 2022 7.00 % per annum until 12/15/2027, then SOFR plus 328 basis points until maturity Semi-annual (Quarterly beginning 12/15/27) 12/15/2032 20,000 506 19,609 ______________________________________ (1) Remaining net balance includes amortization of debt issuance costs. For the years ended December 31, 2023 and 2022, the Company recorded $ 2.7 million and $ 1.4 million, respectively, of interest expense related to the collective subordinated notes. The subordinated notes are included in Tier 2 capital under current regulatory guidelines and interpretations, subject to limitations. The Company’s borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies. See Note 22 – Regulatory Capital Matters for additional information. As of December 31, 2023 and 2022, the Company was in compliance with the covenant requirements. NOTE 10 – COMMITMENTS AND CONTINGENCIES The Company is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. Commitments may expire without being utilized. The Company’s exposure to credit loss is represented by the contractual amount of these commitments, although material losses are not anticipated. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments. The following table presents the Company’s financial instruments whose contract amounts represent credit risk, as of the dates noted: December 31, 2023 December 31, 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 F-37 Table of Content s Unused lines of credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Several of the commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the client. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client’s obligation to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Substantially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The Company holds collateral supporting those commitments if deemed necessary. Commitments to make loans to sell are agreements to lend to a client which would then be sold to an investor in the secondary market for which the interest rate has been locked with the client, provided there is no violation of any condition within the contract with either party. Commitments to make loans to sell have fixed interest rates. Since commitments may expire without being extended, total commitment amounts may not necessarily represent cash requirements. Commitments to make loans are agreements to lend to a client, provided there is no violation of any condition within the contract. Commitments to make loans generally have fixed expiration dates or other termination clauses. Since commitments may expire without being extended, total commitment amounts may not necessarily represent cash requirements. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures To estimate the ACL on unfunded loan commitments, the Company determines the probability of funding based on historical utilization statistics for unfunded loan commitments. Loss rates are calculated using the same assumptions as the associated funded balance. Refer to Note 4 – Loans and the Allowance for Credit Losses 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 Beginning balance $ 419 Impact of adopting ASU 2016-13 3,481 (Release) provision for credit losses ( 1,722 ) Ending balance $ 2,178 Litigation, Claims and Settlements The Company is, from time to time, involved in various legal actions arising in the normal course of business. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is the opinion of management, based on advice from legal counsel, that no proceedings exist, either individually or in the aggregate, which, if determined adversely to the Company, would have a material effect on the Company’s consolidated financial statements. NOTE 11 – SHAREHOLDERS’ EQUITY Common Stock The Company’s common stock has no par value and each holder of common stock is entitled to one vote for each share (though certain voting restrictions may exist on non-vested restricted stock) held. On January 6, 2022, the Company filed a Form S-3 Registration Statement with the SEC providing that the Company may offer and sell from time to time, separately or together, in multiple series or in one or more offering, any combination of common stock, preferred stock, debt securities, warrants, depository shares and units, up to a maximum aggregate offer price of $ 100 million. During the year ended December 31, 2023, the Company sold no shares of common stock. F-38 Table of Content s Restricted Stock Awards In 2017, the Company issued 105,264 shares of common stock ("Restricted Stock Awards") with a value of $ 3.0 million to the sole member of EMC Holdings, LLC ("EMC"), subject to forfeiture based on his continued employment with the Company. Half of the Restricted Stock Awards ($ 1.5 million or 52,632 shares) vested ratably over five years . These awards fully vested during the year ended December 31, 2022. The remaining $ 1.5 million, or 52,632 shares, were eligible to be earned based on performance of the mortgage division of the Company. As of December 31, 2023, all restricted stock awards were fully vested and no unrecognized compensation expense remained. During the year ended December 31, 2022, the Company recognized compensation expense of $ 0.2 million for the Restricted Stock Awards. During the year ended December 31, 2022, 10,527 shares of the restricted stock awards vested. As of December 31, 2022, all restricted stock awards were fully vested and no unrecognized compensation expense remains. Stock-Based Compensation Plans The 2008 Stock Incentive Plan (“the 2008 Plan”) was frozen in connection with the adoption of First Western Financial, I nc. 2016 Omnibus Incentive Plan ("the 2016 Plan") and no new awards may be granted under the 2008 Plan. Remaining shares not issued under the 2008 Plan poured into the 2016 Plan. As of December 31, 2023, there were a total of 350,145 sh ares available for issuance under the 2016 Plan. If the Awards outstanding under the 2008 Plan or the 2016 Plan are forfeited, cancelled or terminated with no consideration paid to the Company, those amounts will increase the number of shares eligible to be granted under the 2016 Plan. Stock Options The Company did not grant any stock options during the years ended December 31, 2023 and 2022. During the years ended December 31, 2023 and 2022, the Company recognized no stock based compensation expense associated with stock options. As of December 31, 2023, the Company has no unrecognized stock-based compensation expense related to stock options. The following table presents activity for nonqualified stock options for the year ended December 31, 2023: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding as of December 31, 2022 184,165 $ 22.76 Exercised ( 12,260 ) 20.00 Forfeited or expired ( 40,969 ) 20.31 Outstanding as of December 31, 2023 130,936 23.79 1.5 (1) Options fully vested/exercisable as of December 31, 2023 130,936 23.79 1.5 (1) _____________________________ (1) Nonqualified stock options outstanding at the end of the period and those fully vested/exercisable had immaterial aggregate intrinsic values. As of December 31, 2023 and December 31, 2022, there were 130,936 and 184,165 options, respectively, that were exercisable. Exercise prices are between $ 20.00 and $ 27.00 per share, and the options are exercisable for a period of ten years from the original grant date and expire on various dates between 2024 and 2026. F-39 Table of Content s Restricted Stock Units Pursuant to the 2016 Plan, the Company can grant associates and non-associate directors long-term cash and stock-based compensation. Historically, the Company has granted certain associates restricted stock units which are earned over time or based on various performance measures and convert to common stock upon vesting, which are summarized here and expanded further below. The following table presents the activity for the Time Vesting Units, the Financial Performance Units and the Market Performance Units during the year ended December 31, 2023: Time Vesting Units Financial Performance Units Market Performance Units Outstanding as of December 31, 2022 285,995 235,512 — Granted 77,871 102,188 — Vested ( 85,448 ) ( 11,575 ) — Forfeited ( 35,894 ) ( 34,709 ) — Outstanding as of December 31, 2023 242,524 291,416 — During the year ended December 31, 2023, the Company issued 71,895 net shares of common stock upon the settlement of Restricted Stock Units. The remaining 25,128 shares, with a combined market value at the dates of settlement of $ 0.4 million, were withheld to cover employee withholding taxes and were subsequently added back to the Company’s pool of shares available for issuance. During the year ended December 31, 2022, the Company issued 67,860 net shares of common stock upon the settlement of Restricted Stock Units. The remaining 28,158 shares, with a combined market value at the dates of settlement of $ 0.9 million, were withheld to cover employee withholding taxes and were subsequently added back to the Company’s pool of shares available for issuance. Time Vesting Units Time Vesting Units are granted to full-time associates and board members at the date approved by the Company’s board of directors. The Company granted 77,871 Time Vesting Units with a five-year service period during the year ended December 31, 2023, that vest in equal installments of 20 % on the anniversary of the grant date, assuming continuous employment through the scheduled vesting dates. During the years ended December 31, 2023 and 2022, the Company recognized compensation expense of $ 1.6 million and $ 1.7 million, respectively, for the Time Vesting Units. As of December 31, 2023, there was $ 4.6 million of unrecognized compensation expense related to the Time Vesting Units, which is expected to be recognized over a weighted-average period of 3.3 years. Financial Performance Units Financial Performance Units are granted to certain key associates and are earned based on the Company achieving various financial performance metrics. If the Company achieves the financial metrics, which include various thresholds from 0 % up to 150 %, then the Financial Performance Units will have a subsequent vesting period. F-40 Table of Content s The following table presents the Company’s existing Financial Performance Units as of December 31, 2023 (dollars in thousands, except share amounts): Grant Period Threshold Accrual Maximum Issuable Shares at Current Threshold Unrecognized Compensation Expense Weighted-Average Life (1) Financial Metric End Date Vesting Requirement End Date May 1, 2019 through April 30, 2020 150 % 59,449 $ — 0.0 years December 31, 2021 December 31, 2023 May 1, 2020 through December 31, 2020, excluding November 18, 2020 150 % 67,905 183 1.0 year December 31, 2022 December 31, 2023 On November 18, 2020 114 % 23,150 74 1.9 years December 31, 2022 50 % November 18, 2023 and 2025 May 3, 2021 through August 11, 2021 74 % 24,504 270 2.0 years December 31, 2023 December 31, 2025 May 2, 2022 through November 2, 2022, excluding August 4, 2022 (2) — % — — 3.0 years December 31, 2024 December 31, 2026 On August 4, 2022 (3) 33 % 9,090 170 3.0 years December 31, 2024 December 31, 2026 On May 1, 2023 (2) — % — — 4.0 years December 31, 2025 December 31, 2027 _____________________________ (1) Represents the expected unrecognized stock-based compensation expense recognition period. (2) As the performance threshold is not expected to be met in future performance periods, there is no related unrecognized compensation as of December 31, 2023. (3) Performance threshold was not met for the year ended December 31, 2023. The 100% threshold is expected to be met for the year ended December 31, 2024. The following table presents the Company’s Financial Performance Units activity for the years noted December 31 (dollars in thousands): Units Granted Compensation Expense Recognized Grant Period 2023 2022 2023 2022 May 1, 2019 through April 30, 2020 (1) 22,577 — $ 68 $ 122 May 1, 2020 through December 31, 2020, excluding November 18, 2020 (1) 24,230 — 136 168 On November 18, 2020 2,942 — 147 41 May 3, 2021 through August 11, 2021 (2) — — ( 135 ) 273 May 2, 2022 through November 2, 2022, excluding August 4, 2022 (2) 322 65,425 — — On August 4, 2022 (3) — 27,272 33 47 On May 1, 2023 (4) 52,117 — — — _____________________________ (1) Granted shares represent the final performance period payout percentage above the 100% threshold initially granted. (2) Performance threshold was not met for the years ended December 31, 2023 and December 31, 2022 and, therefore, no compensation expense was recognized for the years ended December 31, 2023 and December 31, 2022. (3) Performance threshold was not met for the years ended December 31, 2023 and December 31, 2022. The 100 % threshold is expected to be met for the year ended December 31, 2024. (4) Performance threshold was not met for the year ended December 31, 2023, therefore, no compensation expense was recognized for the year ended December 31, 2023. F-41 Table of Content s Market Performance Units Market Performance Units were granted to certain key associates and are earned based on growth in the value of the Company’s common stock, and were dependent on the Company completing an initial public offering of stock during a defined period of time. On July 23, 2018, the Company completed its initial public offering and the Market Performance Units performance condition was met. Subsequent to the performance condition there was also a market condition as a vesting requirement for the Market Performance Units. If the Company's common stock was trading at or above certain prices, over a performance period which ended on June 30, 2020, the Market Performance Units would have been determined to be earned and vest following the completion of a subsequent service period, which ended on June 30, 2022. The Company's common stock did not trade at or above the required prices over the performance period and as a result, no Market Performance Units were eligible to be earned. As of the end of the subsequent service period, or June 30, 2022, the Company had no remaining unrecognized compensation expense related to the Market Performance Units. NOTE 12 – EARNINGS PER COMMON SHARE The following table presents the calculation of basic and diluted earnings per common share for the periods indicated: Year Ended December 31, (Dollars in thousands, except share and per share amounts) 2023 2022 Earnings per common share - Basic Numerator: Net income available for common shareholders $ 5,225 $ 21,698 Denominator: Basic weighted average shares 9,541,050 9,461,349 Earnings per common share - basic $ 0.55 $ 2.29 Earnings per common share - Diluted Numerator: Net income available for common shareholders $ 5,225 $ 21,698 Denominator: Basic weighted average shares 9,541,050 9,461,349 Diluted effect of common stock equivalents: Stock options 4,006 42,944 Time Vesting Units 67,740 117,774 Financial Performance Units 113,114 88,143 Market Performance Units — 3,413 Total diluted effect of common stock equivalents 184,860 252,274 Diluted weighted average shares 9,725,910 9,713,623 Earnings per common share - diluted $ 0.54 $ 2.23 Diluted earnings per share was computed without consideration to potentially dilutive instruments as their inclusion would have been anti-dilutive. F-42 Table of Content s The following table presents potentially dilutive securities excluded from the diluted earnings per share calculation during the periods presented: Year Ended December 31, 2023 2022 Stock options 133,464 — Time Vesting Units 120,653 86,145 Financial Performance Units 6,818 23,553 Total potentially dilutive securities 260,935 109,698 NOTE 13 – INCOME TAXES The following table presents the components of the Company’s income tax expense as of December 31 (dollars in thousands): 2023 2022 Current: Federal $ 60 $ 5,637 State and local ( 281 ) 936 Total current tax (benefit)/expense ( 221 ) 6,573 Deferred: Federal 1,844 536 State and local 213 ( 55 ) Valuation allowance — 76 Total deferred tax expense 2,057 557 Income tax expense $ 1,836 $ 7,130 The following is a reconciliation of income taxes reflected on the Consolidated Statements of Income for the years ended December 31, 2023 and 2022, with income tax expense computed by applying the United States federal income tax rate of 21 % to income before income taxes (dollars in thousands): 2023 2022 Income tax expense computed at 21 % statutory rate $ 1,483 $ 6,054 Differences: Permanent differences ( 106 ) 101 State taxes, net of federal expense 224 1,005 LIHTC investment tax credit ( 441 ) ( 404 ) LIHTC investment proportional amortization 484 378 Valuation allowance — 76 Other, net 192 ( 80 ) Income tax expense $ 1,836 $ 7,130 F-43 Table of Content s The following table presents the principal components of the Company’s deferred tax items as of December 31 (dollars in thousands): 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 472 $ 472 Allowance for credit losses (1) 6,194 4,165 Acquired loans fair market value adjustments 607 826 Loans accounted for under the fair value option 216 146 Deferred Rent - Liability 2,579 2,706 Stock-based compensation 1,423 1,705 Other intangible assets 186 254 Unrealized losses on securities 383 495 Accrued bonuses 376 — Loan fees 74 459 Accrued expenses 77 — Other 184 1,574 Total deferred tax assets 12,771 12,802 Deferred tax liabilities: Goodwill ( 1,263 ) ( 1,087 ) Depreciation ( 2,311 ) ( 1,864 ) Deferred Rent - Asset ( 2,113 ) ( 2,085 ) Acquired loans fair market value adjustments ( 196 ) ( 215 ) FHLB Redemption ( 33 ) ( 189 ) Total deferred tax liabilities ( 5,916 ) ( 5,440 ) Net operating loss valuation allowance ( 448 ) ( 448 ) Net deferred tax asset $ 6,407 $ 6,914 (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. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the total deferred tax assets. The net operating loss ("NOL") carryforwards expire in tax years 2028 through 2032. As of December 31, 2023 and December 31, 2022, the Company had $ 5.5 million of California NOLs available for utilization. As of December 31, 2023, $ 5.2 million is recorded as a valuation allowance, resulting in a tax effected valuation allowance of $ 0.4 million. The Company identified no other material uncertain tax positions for which it is reasonably possible the total amount of unrecognized tax benefits will significantly increase or decrease within 12 months. The Company and its subsidiaries file tax returns for the United States and for multiple states and localities. The United States federal income tax returns of the Company are eligible to be examined for the years 2020 and forward and for the years 2019 and forward for major state taxing jurisdictions. There are no federal or state tax examinations currently in progress. F-44 Table of Content s NOTE 14 – EMPLOYEE BENEFIT PLANS The Company sponsors a 401(k) Plan, which is a defined contribution plan, in which substantially all associates are eligible to participate in and associates may contribute up to 100 % of their compensation subject to certain limits based on federal tax laws. The Company may elect to make matching contributions as defined by the plan. For the years ended December 31, 2023 and 2022, the Company expensed matching contributions to the plan totaling $ 0.8 million and $ 1.0 million, respectively. For the years ended December 31, 2023 and 2022, the Company incurred $ 0.1 million of administrative fees attributable to the plan. NOTE 15 – RELATED-PARTY TRANSACTIONS The Bank extends credit to certain covered parties including Company directors, executive officers, and their affiliates. As of December 31, 2023 and December 31, 2022, there were no delinquent or non-performing loans to any executive officer or director of the Company. These covered parties, along with principal owners, management, immediate family of management or principal owners, a parent company and its subsidiaries, trusts for the benefit of employees, and other parties, may be considered related parties. The following table presents a summary of related-party loan activity as of the dates noted (dollars in thousands): December 31, 2023 December 31, 2022 Balance, beginning of year $ 16,859 $ 12,833 Funded loans 13,427 15,079 Payments collected ( 5,212 ) ( 11,053 ) Changes in related parties 284 — Balance, end of period $ 25,358 $ 16,859 Deposits from related parties held by the Bank as of December 31, 2023 and December 31, 2022 totaled $ 16.3 million and $ 36.9 million, respectively. The Company leases office spaces from entities controlled by one of the Company’s board members. During each of the years ended December 31, 2023 and 2022, the Company incurred $ 0.2 million of expense related to these leases. The Company earned trust and investment management fees of $ 0.1 million from related parties during each of the years ended December 31, 2023 and 2022. Assets under management for those related parties totaled $ 111.6 million and $ 123.5 million as of December 31, 2023 and 2022, respectively. NOTE 16 – FAIR VALUE Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. F-45 Table of Content s Recurring Fair Value Equity Securities : Fair value of equity securities represents the market value of mutual funds based on quoted market prices (Level 1) and the value of stock held in other companies, which is based on recent market transactions or quoted rates that are not actively traded (Level 2). Equity Warrants : Fair value of equity warrants of private companies are priced using a Black-Scholes option pricing model to estimate the fair value by using strike prices, option expiration dates, risk-free interest rates, and option volatility assumptions (Level 3). Guarantee Asset and Liability : The guarantee asset represents the fair value of the consideration received in exchange for the credit enhancement fee. The guarantee liability represents a financial guarantee to cover the second layer of any losses on loans sold to FHLB under the MPF 125 loan sales agreement. The guarantee liability value on day one is equivalent to the guarantee asset fair value, which is the consideration for the credit enhancement fee paid over the life of the loans. The liability is then carried at amortized cost. Significant inputs in the valuation analysis for the asset are Level 3, due to the nature of this asset and the lack of market quotes. The fair value of the guarantee asset is determined using a discounted cash flow model, for which significant unobservable inputs include assumed future prepayment rates (“CPR”) and market discount rate (Level 3). An increase in prepayment rates or discount rate would generally reduce the estimated fair value of the guarantee asset. Derivatives: Derivatives include our swap derivatives, which are compromised of cash flow hedges and derivatives not designated as hedges. The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. Mortgage Related Derivatives : Mortgage related derivatives include our IRLC, FSC, and the forward commitments on our loans held for sale pipeline. The fair value estimate of our IRLC is based on valuation models using market data from secondary market loan sales and direct contacts with third party investors as of the measurement date and pull through assumptions (Level 3). The FSC fair value estimate reflects the potential pair off fee associated with mandatory trades and is estimated by using a market differential and pair off penalty assessed by the investor (Level 3). The fair value estimate of the forward commitments is based on market prices of similar securities to the underlying MBS (Level 2). Loans Held at Fair Value: The fair value of loans held for investment are typically determined based on discounted cash flow analysis using market-based interest rate spreads. Discounted cash flow analysis are adjusted, as appropriate, to reflect current market conditions and borrower specific credit risk. Due to the nature of the valuation inputs, loans held for investment are classified within Level 3 of the valuation hierarchy. Mortgage Loans Held for Sale : The fair value of mortgage loans held for sale is estimated based upon quotes from third party investors for similar assets resulting in a Level 2 classification. Loans Held for Sale : The fair value of loans held for sale is determined using actual quoted commitments from third party investors resulting in a Level 1 classification. F-46 Table of Content s The following tables present assets and liabilities measured on a recurring basis as of the dates noted (dollars in thousands): December 31, 2023 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Reported Balance Financial Assets Mortgage loans held for sale $ — $ 7,254 $ — $ 7,254 Loans held at fair value $ — $ — $ 13,726 $ 13,726 Equity securities $ 636 $ 122 $ — $ 758 Guarantee asset $ — $ — $ 189 $ 189 IRLC, net $ — $ — $ 345 $ 345 Equity warrants $ — $ — $ 795 $ 795 Swap derivative asset $ — $ 763 $ — $ 763 Financial Liabilities Forward commitments and FSC $ — $ 351 $ — $ 351 Swap derivative liabilities $ — $ 740 $ — $ 740 December 31, 2022 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Reported Balance Financial Assets Mortgage loans held for sale $ — $ 8,839 $ — $ 8,839 Loans held for sale $ 1,965 $ — $ — $ 1,965 Loans held at fair value $ — $ — $ 23,321 $ 23,321 Forward commitments and FSC $ — $ 46 $ — $ 46 Equity securities $ 627 $ 122 $ — $ 749 Guarantee asset $ — $ — $ 143 $ 143 IRLC, net $ — $ — $ 229 $ 229 Equity warrants $ — $ — $ 825 $ 825 There were no transfers between levels during the year ended December 31, 2023 or 2022. On April 1, 2022, the Company elected to transfer all securities classified as available-for-sale to held-to-maturity and are now carried at amortized cost. See Note 2 – Investment Securities for more information. As of December 31, 2023, and December 31, 2022, equity securities, equity warrants, IRLC, and guarantee assets have been recorded at fair value within the Other assets line item in the Consolidated Balance Sheets. All changes are recorded in Non-interest income in the Consolidated Statements of Income. F-47 Table of Content s Fair Value Option The Company has elected to account for certain purchased whole loans held for investment under the fair value option in order to align the accounting presentation with the Company's viewpoint of the economics of the loans. Interest income on loans held for investment accounted for under the fair value option is recognized within Interest and dividend income in the accompanying Consolidated Statements of Income. Not electing fair value generally results in a larger discount being recorded on the date of the loan purchase. The discount is subsequently accreted into interest income over the underlying loan's remaining term using the effective interest method. Additionally, management has elected the fair value option for mortgage loans originated and held for sale and loans held for sale. As of December 31, 2022, the Company reclassified $ 2.0 million of loans held for investment to loans held for sale. The transfer occurred at the point in time the Company decided to sell the loan and received a commitment from third party investors to purchase the loan. During the year ended December 31, 2023, the Company reclassified $ 39.2 million of loans held for investment to loans held for sale. The transfers occurred at the point in time the Company decided to sell the loans and received a commitment from third party investors to purchase the loans. As of December 31, 2023, a total of $ 40.8 million reclassified loans held for sale have been sold. As of December 31, 2023, there were no loans reclassified from held for investment to held for sale. There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest as of December 31, 2023 or December 31, 2022. As of December 31, 2023, there were 98 loans, totaling $ 0.2 million accounted for under the fair value option that were on nonaccrual. As of December 31, 2022, there were 145 loans, totaling $ 0.1 million accounted for under the fair value option that were on nonaccrual. During the year ended December 31, 2023, the Company recorded net charge-offs of $ 1.7 million on loans accounted for under the fair value option to Net loss on loans accounted for under the fair value option on the Consolidated Statements of Income. During the year ended December 31, 2022, the Company recorded an immaterial amount of charge-offs on loans accounted for under the fair value option. The following tables provide more information about the fair value carrying amount and unpaid principal outstanding of loans accounted for under the fair value option as of the dates noted: December 31, 2023 Total Loans Non Accruals 90 Days or More Past Due (Dollars in thousands) Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Mortgage loans held for sale $ 7,254 $ 7,106 $ 148 $ — $ — $ — $ — $ — $ — Loans held for investment, fair value option 13,726 14,129 ( 403 ) 210 220 ( 10 ) 210 220 ( 10 ) $ 20,980 $ 21,235 $ ( 255 ) $ 210 $ 220 $ ( 10 ) $ 210 $ 220 $ ( 10 ) December 31, 2022 Total Loans Non Accruals 90 Days or More Past Due (Dollars in thousands) Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Fair Value Carrying Amount Unpaid Principal Balance Difference Mortgage loans held for sale $ 8,839 $ 8,750 $ 89 $ — $ — $ — $ — $ — $ — Loans held for sale 1,965 1,984 ( 19 ) — — — — — — Loans held for investment, fair value option 23,321 23,415 ( 94 ) 139 140 ( 1 ) 139 140 ( 1 ) $ 34,125 $ 34,149 $ ( 24 ) $ 139 $ 140 $ ( 1 ) $ 139 $ 140 $ ( 1 ) F-48 Table of Content s The following table presents the changes in fair value of loans accounted for under the fair value option as of the dates noted (dollars in thousands): Year Ended December 31, Changes in Fair Value 2023 2022 Mortgage loans held for sale $ 59 $ ( 673 ) Loans held for sale ( 20 ) ( 20 ) Loans held for investment ( 309 ) ( 94 ) $ ( 270 ) $ ( 787 ) The following summarizes the activity pertaining to loans accounted for under the fair value option as of the dates noted (dollars in thousands): Year Ended December 31, Mortgage loans held for sale 2023 2022 Balance at beginning of period $ 8,839 $ 30,620 Loans originated 276,045 439,682 Fair value changes 59 ( 673 ) Sales ( 277,683 ) ( 460,514 ) Settlements ( 6 ) ( 276 ) Balance at end of period $ 7,254 $ 8,839 Year Ended December 31, Loans held for sale 2023 2022 Balance at beginning of period $ 1,965 $ — Loans transferred from held for investment 39,221 1,985 Fair value changes ( 20 ) ( 20 ) Sales ( 40,761 ) — Settlements ( 405 ) — Balance at end of period $ — $ 1,965 Year Ended December 31, Loans held for investment, fair value option 2023 2022 Balance at beginning of period $ 23,321 $ — Loans acquired 1,173 35,616 Fair value changes ( 309 ) ( 94 ) Net charge-offs ( 1,700 ) — Settlements ( 8,759 ) ( 12,201 ) Balance at end of period $ 13,726 $ 23,321 F-49 Table of Content s Nonrecurring Fair Value Other Real Estate Owned ("OREO") : Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. They are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than on an annual basis. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. OREO is evaluated annually for additional impairment and adjusted accordingly. Collateral Dependent Loans : The fair value of collateral dependent loans individually analyzed and not included in the pooled loan analysis under the ACL is generally based on recent appraisals and the value of any credit enhancements associated with the loan. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. Collateral dependent loans are evaluated monthly and adjusted accordingly if needed. Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. The following table presents assets measured at fair value on a nonrecurring basis as of the dates noted (dollars in thousands): December 31, 2023 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Reported Balance Collateral dependent loans Consumer and Other $ — $ — $ 7,500 $ 7,500 1-4 Family Residential — — 2,438 2,438 Commercial and Industrial — — 25,738 25,738 Owner Occupied CRE — — 3,980 3,980 Total $ — $ — $ 39,656 $ 39,656 The credit enhancement - guarantee asset value approach was utilized for estimating the fair value of non-recurring assets. There were no assets measured on a nonrecurring basis for the year ended December 31, 2022. During the year ended December 31, 2022, the Company recorded $ 0.4 million of OREO as a result of obtaining physical possession of a foreclosed property as partial consideration for amounts owed on a collateral dependent loan. The Company sold the property during the year ended December 31, 2022, resulting in an immaterial gain. As of December 31, 2023 and December 31, 2022, the Company did not own any OREO properties. F-50 Table of Content s As of December 31, 2023, total collateral dependent loans measured using fair value had amortized cost of $ 43.5 million and were classified as Level 3. Collateral dependent loans accounted for $ 3.8 million of the allowance on non-performing loans as of December 31, 2023 and no specific reserves as of December 31, 2022. The Company recorded $ 8.8 million of charge-offs during the year ended December 31, 2023 and no charge-offs during the year ended December 31, 2022. Level 3 Analysis The following presents a reconciliation for Level 3 instruments measured at fair value on a recurring basis as of the dates noted (dollars in thousands): Year Ended December 31, 2023 Corporate Bonds Loans Held at Fair Value FSC Guarantee Asset IRLC Equity Warrants Beginning balance $ — $ 23,321 $ — $ 143 $ 229 $ 825 Acquisitions — 1,173 — — 1,997 — Originations — — — 32 ( 3,272 ) — Gains (losses) in net income, net — ( 309 ) — 38 1,391 ( 30 ) Transfer to held-to-maturity — — — — — — Net charge-offs — ( 1,700 ) — — — — Settlements — ( 8,759 ) — ( 24 ) — — Ending balance $ — $ 13,726 $ — $ 189 $ 345 $ 795 Year Ended December 31, 2022 Corporate Bonds Loans Held at Fair Value FSC Guarantee Asset IRLC Equity Warrants Beginning balance $ 2,113 $ — $ ( 9 ) $ 237 $ 1,473 $ 160 Acquisitions 4,000 35,616 9 — 3,213 344 Originations — — — 1 ( 5,048 ) — Gains (losses) in net income, net — ( 94 ) — ( 75 ) 591 321 Unrealized gains, net 102 — — — — — Transfer to held-to-maturity ( 6,215 ) — — — — — Other settlements — ( 12,201 ) — ( 20 ) — — Ending balance $ — $ 23,321 $ — $ 143 $ 229 $ 825 F-51 Table of Content s The following presents quantitative information about Level 3 assets measured on a recurring and nonrecurring basis as of the dates noted: Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2023 (Dollars in thousands) Fair Value Valuation Technique Significant Unobservable Input Range (Weighted Average) Recurring fair value Loans held for investment at fair value $ 13,726 Discounted cash flow Discount rate 7 % to 8 % ( 8 %) Guarantee asset 189 Discounted cash flow Discount rate Prepayment rate 5 % ( 5 %) 5 % ( 5 %) IRLC, net 345 Best execution model Pull through 48 % to 100 % ( 86 %) Equity Warrants 795 Black-Scholes option pricing model Volatility Risk-free interest rate Remaining life 20.1 % to 23.0 % ( 22.4 %) 4.62 % ( 4.62 %) 2.00 to 2.03 years Nonrecurring fair value Collateral dependent loans: Consumer and Other $ 7,500 Credit enhancement - guarantee asset value Market rate adjustments 46 % ( 8 %) 1-4 Family Residential 2,438 Credit enhancement - guarantee asset value Market rate adjustments 46 % ( 8 %) Commercial and Industrial 24,792 Credit enhancement - guarantee asset value Market rate adjustments 46 % ( 8 %) Commercial and Industrial 148 Sales comparison, Market approach - guideline transaction method Loss given default 14 % to 62 % ( 20 %) Commercial and Industrial 799 Credit enhancement - guarantee asset value Market rate adjustments 21 % ( 11 %) Owner Occupied CRE 3,980 Credit enhancement - guarantee asset value Market rate adjustments 46 % ( 8 %) Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2022 (Dollars in thousands) Fair Value Valuation Technique Significant Unobservable Input Range (Weighted Average) Recurring fair value Loans held for investment at fair value $ 23,321 Discounted cash flow Discount rate 4 % to 18 % ( 8 %) Guarantee asset 143 Discounted cash flow Discount rate Prepayment rate 5 % ( 5 %) 4 % ( 4 %) IRLC, net 229 Best execution model Pull through 73 % to 100 % ( 91 %) Equity warrants 825 Black-Scholes option pricing model Volatility Risk-free interest rate Remaining life 32.7 % to 88.9 % ( 34.8 )% 4.04 % to 4.14 % ( 4.05 )% 0 to 4 years F-52 Table of Content s Estimated Fair Value of Other Financial Instruments The following presents carrying amounts and estimated fair values for financial instruments not carried at fair value as of the dates noted (dollars in thousands): Carrying Amount Fair Value Measurements Using: December 31, 2023 Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 254,442 $ 254,442 $ — $ — Held-to-maturity securities, net of ACL 74,102 243 58,229 8,144 Loans, net (1) 2,493,258 — — 2,395,468 Accrued interest receivable 11,428 11,428 — — Liabilities: Term deposits (2) 496,452 414,613 — 82,564 Non-term deposits 2,032,587 2,032,587 — — Borrowings: FHLB borrowings – fixed rate 41,175 — 41,372 — FHLB borrowings – floating rate 50,000 — 49,986 — Federal Reserve borrowings – fixed rate 34,536 3,539 30,936 — Subordinated notes – fixed-to-floating rate 52,340 — — 48,228 Accrued interest payable 3,793 3,793 — — Carrying Amount Fair Value Measurements Using: December 31, 2022 Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 196,512 $ 196,512 $ — $ — Held-to-maturity securities 81,056 234 67,433 7,051 Loans, net (1) 2,428,909 — — 2,356,085 Accrued interest receivable 10,445 10,445 — — Liabilities: Term deposits (2) 224,090 181,036 43,586 Non-term deposits 2,181,139 2,181,139 — — Borrowings: FHLB borrowings – fixed rate 141,498 — 141,867 — Federal Reserve borrowings – fixed rate 5,388 5,388 — Subordinated notes – fixed-to-floating rate 52,132 — — 60,384 Accrued interest payable 1,125 1,125 — — (1) Excludes loans accounted for under the fair value option of $ 13.7 million and $ 23.3 million as of December 31, 2023 and December 31, 2022, respectively, as these are carried at fair value. (2) Term deposits due within one year totaling $ 414.6 million and $ 181.0 million as of December 31, 2023 and December 31, 2022, respectively, are classified under Level 1 fair value measurement. The fair value estimates presented and discussed above are based on pertinent information available to management as of the dates specified. The estimated fair value amounts are based on the exit price notion set forth by ASU 2016-01. Although management is not aware of any factors that would significantly affect the estimated fair values, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since the balance sheet dates. Therefore, current estimates of fair value may differ significantly from the amounts presented herein. F-53 Table of Content s The methods and assumptions, not previously presented, used to estimate fair values are described as follows. Cash and Cash Equivalents and Restricted Cash : The carrying amounts of cash and cash equivalents and restricted cash approximate fair values as maturities are less than 90 days and balances are generally in accounts bearing current market interest rates. Held-to-maturity securities : The fair values for held-to-maturity investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities is not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Loans, net : The fair values for all fixed-rate and variable-rate performing loans were estimated using the income approach and by discounting the projected cash flows of such loans. Principal and interest cash flows were projected based on the contractual terms of the loans, including maturity, contractual amortization and adjustments for prepayments and expected losses, where appropriate. A discount rate was developed based on the relative risk of the cash flows, considering the loan type, maturity and a required return on capital. Accrued Interest Receivable and Payable : The carrying amounts of accrued interest approximate fair value due to their short-term nature. Deposits : The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting dates. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Fixed Rate Borrowings : Borrowings with fixed rates are valued using inputs such as discounted cash flows and current interest rates for similar instruments and borrowers with similar credit ratings. Fixed-to-Floating Rate Borrowings : Borrowings with fixed-to-floating rates are valued using inputs such as discounted cash flows and current interest rates for similar instruments and assume the Company will redeem the instrument prior to the first interest rate reset date. NOTE 17 – DERIVATIVES During the first quarter of 2023, the Company entered into interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. 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. 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 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. As of December 31, 2023, this hedge was determined to be effective, and the Company expects the hedge to remain effective during the remaining terms of the swap. 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. F-54 Table of Content s The Company presents derivative position gross on the balance sheet. The following table reflects the fair value of derivatives recorded on the Consolidated Balance Sheets as of December 31, 2023: December 31, 2023 (Dollars in thousands) Notional Amount Fair Value Included in other assets: Derivatives designated as hedges: Interest rate swaps - cash flow hedge $ 50,000 $ 77 Derivatives not designated as hedging instruments: Interest rate swaps related to customer loans 30,325 686 Total included in other assets $ 763 Included in other liabilities: Derivatives designated as hedges: Interest rate swaps - cash flow hedge $ — $ — Derivatives not designated as hedging instruments: Interest rate swaps related to customer loans 30,325 740 Total included in other liabilities $ 740 The effect of cash flow hedge accounting on accumulated other comprehensive income for the year ended December 31, 2023 is as follows (dollars in thousands): Year Ended December 31, 2023 Unrealized Gain (Loss) Recorded in OCI on Derivative Location of Gain (Loss) Reclassified from OCI into Income Amount of Gain (Loss) Reclassified from OCI into Income Interest rate contracts $ ( 58 ) $ — $ — For the year ended December 31, 2023, the Company recorded $ 0.5 million of interest income related to the swap to Other borrowed funds interest expense on the Consolidated Statements of Income. The effect of derivatives not designated as hedging instruments recorded in Other non-interest income on the Consolidated Statements of Income for the year ended December 31, 2023 was $ 0.1 million . NOTE 18 – SEGMENT REPORTING The Company’s reportable segments consist of Wealth Management and Mortgage. The chief operating decision maker ("CODM") is the Chief Executive Officer. The measure of profit or loss used by the CODM to identify and measure the Company’s reportable segments is income before income tax. The Wealth Management segment consists of operations relative to the Company’s fully integrated wealth management products and services. Services provided include deposit, loan, insurance, and trust and investment management advisory products and services. The Mortgage segment consists of operations relative to the Company’s residential mortgage service offerings. Mortgage products and services are financial in nature for which premiums are recognized, net of expenses, upon the sale of mortgage loans to third parties. F-55 Table of Content s The following presents the financial information for each segment that is specifically identifiable or based on allocations using internal methods for the years ended December 31, 2023 and 2022 (dollars in thousands): As of and for the year ended December 31, 2023 Wealth Management Mortgage Consolidated Income Statement Total interest and dividend income $ 144,837 $ 721 $ 145,558 Total interest expense 74,453 — 74,453 Provision for credit losses 10,355 — 10,355 Net interest income, after provision for credit losses 60,029 721 60,750 Non-interest income 19,053 2,895 21,948 Total income before non-interest expense 79,082 3,616 82,698 Depreciation and amortization expense 2,370 33 2,403 All other non-interest expense 67,121 6,113 73,234 Income before income taxes $ 9,591 $ ( 2,530 ) $ 7,061 Goodwill $ 30,400 $ — $ 30,400 Total assets 2,966,612 8,850 2,975,462 As of and for the year ended December 31, 2022 Wealth Management Mortgage Consolidated Income Statement Total interest and dividend income $ 100,474 $ 722 $ 101,196 Total interest expense 17,270 — 17,270 Provision for loan losses 3,682 — 3,682 Net interest income, after provision for loan losses 79,522 722 80,244 Non-interest income 22,760 4,930 27,690 Total income before non-interest expense 102,282 5,652 107,934 Depreciation and amortization expense 2,193 42 2,235 All other non-interest expense 68,821 8,050 76,871 Income before income taxes $ 31,268 $ ( 2,440 ) $ 28,828 Goodwill $ 30,400 $ — $ 30,400 Total assets 2,856,708 10,040 2,866,748 NOTE 19 – LOW-INCOME HOUSING TAX CREDIT INVESTMENTS On December 19, 2019, the Company invested in a low-income housing tax credit ("LIHTC") investment. On June 26, 2023, the Company entered into two additional LIHTC investments for $ 3.0 million per investment. As of December 31, 2023, total unfunded commitments related to LIHTC investments totaled $ 4.9 million. As of December 31, 2022, there were no unfunded commitments related to LIHTC investments. As of December 31, 2023 and December 31, 2022, the total balance of all LIHTC investments was $ 3.1 million and $ 2.4 million, respectively. These balances are reflected in the Other assets line item of the Consolidated Balance Sheets. The Company uses the proportional amortization method to account for this investment. Amortization expense is included within the Income tax expense line item of the Consolidated Statements of Income. During the years ended December 31, 2023 and 2022, the Company recognized amortization expense of $ 0.5 million and $ 0.4 million, respectively. F-56 Table of Content s Additionally, during the years ended December 31, 2023 and 2022, the Company recognized $ 0.4 million of tax credits and other benefits from the LIHTC investment. During the years ending December 31, 2023 and 2022, the Company did not incur any impairment losses. NOTE 20 – CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY The following presents condensed financial statements pertaining only to FWFI (dollars in thousands). Investments in subsidiaries are stated using the equity method of accounting. December 31, December 31, Condensed Balance Sheets 2023 2022 Assets Cash and cash equivalents $ 20,983 $ 26,372 Investment in subsidiaries 268,966 263,362 Loans, net — — Other assets 5,530 3,723 Total assets $ 295,479 $ 293,457 Liabilities Subordinated notes $ 52,340 $ 52,132 Other liabilities 401 461 Total liabilities 52,741 52,593 Shareholders' Equity Total shareholders’ equity 242,738 240,864 Total liabilities and shareholders’ equity $ 295,479 $ 293,457 Year Ended December 31, Condensed Statements of Income 2023 2022 Income Interest income $ — $ 46 Non-interest (loss)/income ( 1,280 ) 7 Total (loss)/income ( 1,280 ) 53 Expense Interest expense 2,928 1,609 Non-interest expense 328 272 Total expense 3,256 1,881 Loss before income tax and equity in undistributed income of subsidiaries ( 4,536 ) ( 1,828 ) Income tax benefit 999 412 Loss before equity in undistributed income of subsidiaries ( 3,537 ) ( 1,416 ) Equity in undistributed income to subsidiaries 8,762 23,114 Net income $ 5,225 $ 21,698 F-57 Table of Content s Year Ended December 31, Condensed Statements of Cash Flows 2023 2022 Cash flows from operating activities Net income $ 5,225 $ 21,698 Adjustments: Depreciation and amortization 225 167 Deferred income tax expense ( 3,856 ) 941 Undistributed equity in subsidiaries ( 8,762 ) ( 23,114 ) Change in other assets 2,050 235 Change in other liabilities ( 77 ) 115 Net cash provided by/(used in) operating activities ( 5,195 ) 42 Cash flows from investing activities Investment in subsidiaries — ( 6,009 ) Loan and note receivable originations and principal collections — 1,978 Net cash used in investing activities — ( 4,031 ) Cash flows from financing activities Proceeds from subordinated notes, net of issuance costs — 19,509 Payment on subordinated notes — ( 6,575 ) Settlement of restricted stock ( 439 ) ( 876 ) Proceeds from the exercise of stock options 245 179 Net cash provided by/(used in) financing activities ( 194 ) 12,237 Net change in cash and cash equivalents ( 5,389 ) 8,248 Cash and cash equivalents, beginning of year 26,372 18,124 Cash and cash equivalents, end of year $ 20,983 $ 26,372 Supplemental cash flow information: Interest paid on borrowed funds $ 2,928 $ 1,609 Supplemental noncash disclosures: Stock-based compensation $ 1,843 $ 2,562 NOTE 21 – OTHER NON-INTEREST EXPENSE Other non-interest expense as shown in the Consolidated Statements of Income is detailed in the following schedule to the extent the components exceed one percent of total interest income and other income (dollars in thousands): Year Ended December 31, Other non-interest expense 2023 2022 Corporate development and related $ 2,685 $ 2,440 Loan and deposit related 2,124 1,420 Other 565 687 Total other non-interest expense $ 5,374 $ 4,547 F-58 Table of Content s NOTE 22 – REGULATORY CAPITAL MATTERS First Western and the Bank are subject to various regulatory capital adequacy requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, First Western and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. First Western and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks ("Basel III rules") has been fully phased in. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. During the years ended December 31, 2023, First Western made no capital injections into the Bank and made $ 6.0 million of capital injections into the Bank during the year ended December 31, 2022. Management believes as of December 31, 2023, First Western and the Bank meet all capital adequacy requirements to which they are subject to. Prompt corrective action regulations for First Western and the Bank provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. The standard ratios established by First Western and the Bank’s primary regulators to measure capital require First Western and the Bank to maintain minimum amounts and ratios, set forth in the following table. These ratios are common equity Tier 1 capital ("CET1"), Tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). The actual capital ratios of First Western and the Bank, along with the applicable regulatory capital requirements as of December 31, 2023, were calculated in accordance with the requirements of Basel III. The final rules of Basel III also established a "capital conservation buffer" of 2.5 % above new regulatory minimum capital ratios. The minimum capital ratios inclusive of the capital conservation buffer are as follows: (i) a CET1 ratio of 7.0 %; (ii) a Tier 1 capital ratio of 8.5 %; and (iii) a total capital ratio of 10.5 %. Banks are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if their capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that can be utilized for such activities. As of December 31, 2023, the most recent filings with the FDIC categorized First Western and the Bank as well capitalized under the regulatory guidelines. To be categorized as well capitalized, an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as set forth in the following table. Management believes there are no conditions or events since December 31, 2023 that have changed the categorization of First Western and the Bank as well capitalized. Management believes First Western and the Bank met all capital adequacy requirements to which they are subject to as of December 31, 2023 and December 31, 2022. F-59 Table of Content s The following presents the actual and required capital amounts and ratios as of the dates noted (dollars in thousands): Actual Required for Capital Adequacy Purposes(1) To be Well Capitalized Under Prompt Corrective Action Regulations December 31, 2023 Amount Ratio Amount Ratio Amount Ratio Tier 1 capital to risk-weighted assets Bank $ 244,390 10.54 % $ 139,126 6.0 % $ 185,502 8.0 % Consolidated 218,150 9.40 N/A N/A N/A N/A CET1 to risk-weighted assets Bank 244,390 10.54 104,345 4.5 150,720 6.5 Consolidated 218,150 9.40 N/A N/A N/A N/A Total capital to risk-weighted assets Bank 265,391 11.45 185,502 8.0 231,877 10.0 Consolidated 292,151 12.59 N/A N/A N/A N/A Tier 1 capital to average assets Bank 244,390 8.71 112,244 4.0 140,306 5.0 Consolidated 218,150 7.77 N/A N/A N/A N/A Actual Required for Capital Adequacy Purposes (1) To be Well Capitalized Under Prompt Corrective Action Regulations December 31, 2022 Amount Ratio Amount Ratio Amount Ratio Tier 1 capital to risk-weighted assets Bank $ 234,738 10.29 % $ 136,928 6.0 % $ 182,571 8.0 % Consolidated 212,229 9.28 N/A N/A N/A N/A CET1 to risk-weighted assets Bank 234,738 10.29 102,696 4.5 148,339 6.5 Consolidated 212,229 9.28 N/A N/A N/A N/A Total capital to risk-weighted assets Bank 252,398 11.06 182,571 8.0 228,213 10.0 Consolidated 282,889 12.37 N/A N/A N/A N/A Tier 1 capital to average assets Bank 234,738 8.65 108,506 4.0 135,633 5.0 Consolidated 212,229 7.81 N/A N/A N/A N/A _____________________________ (1) Does not include capital conservation buffer . The Company's principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of December 31, 2023, $ 102.2 million of retained earnings is available to pay dividends from the Bank. As of December 31, 2023 and December 31, 2022 no dividends were declared and paid by the Bank. F-60 Table of Content s NOTE 23 - SUBSEQUENT EVENTS None. ***** F-61 Table of Content s Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.