First Western Financial Inc 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. See "Cautionary Statement Regarding Forward-Looking Statements." Also, see the risk factors and other cautionary statements described under the heading "Item 1A – Risk Factors" included in Item 1A of this Annual Report on Form 10-K. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law. Company Overview We are a financial holding company founded in 2002 and headquartered in Denver, Colorado. We provide a fully integrated suite of wealth management services to our clients including banking, trust, and investment management products and services. Our mission is to be the best private bank for the Western wealth management client. We target entrepreneurs, professionals, and high-net worth individuals, typically with $1.0 million-plus in liquid net worth, and their related philanthropic and business organizations, which we refer to as the "Western wealth management client." We believe that the Western wealth management client shares our entrepreneurial spirit and values our sophisticated, high-touch wealth management services that are tailored to meet their specific needs. We partner with our clients to solve their unique financial needs through our expert integrated services provided in a team approach. We offer our services through a branded network of boutique private trust bank offices, which we believe are strategically located in affluent and high-growth markets in locations across Colorado, Arizona, Wyoming, Montana, and California. Our profit centers, which are comprised of private bankers, lenders, wealth planners and portfolio managers, under the leadership of a local chairman and/or president, are also supported centrally by teams providing management services such as operations, risk management, credit administration, marketing, technology support, human capital, and accounting/finance services, which we refer to as support centers. From 2004, when we opened our first profit center, until December 31, 2024, we have expanded our footprint into fourteen full service profit centers, five loan production offices, and one trust office located across five states. As of and for the year ended December 31, 2024, we had $2.92 billion in total assets, $90.1 million in total revenues, and provided fiduciary and advisory services on $7.32 billion of assets under management ("AUM"). Recent Industry Developments During 2024, the banking industry largely rebounded from the disruption and volatility seen in 2023 stemming from the failure of multiple banks, which created industry wide concerns related to liquidity, deposit outflows, and unrealized securities losses. Valuations for bank stocks improved during the year, although there are still headwinds across the industry. The Bank remains stable with strong fundamentals including uninsured deposits at $902.6 million, or 35.9% of total deposits as of December 31, 2024. The Company has a low amount of held-to-maturity debt securities, which represent 2.6% of Total assets and carries unrecognized losses amounting to 3.0% of Total shareholders’ equity as of December 31, 2024. We have a conservative credit appetite as evidenced by our limited exposure to non-owner occupied office space commercial real estate (“CRE”), which has been negatively impacted by the shift to hybrid work environments. Our client base is well diversified with no single industry concentration. Primary Factors Used to Evaluate the Results of Operations As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the comparative levels and trends of the line items in our Consolidated Balance Sheets and Statements of Income as well as various financial ratios that are commonly used in our industry. The primary factors we use to evaluate our results of operations include net interest income, non-interest income and non-interest expense. 55 Table of Contents Net Interest Income Net interest income represents interest income less interest expense. We generate interest income on interest-earning assets, primarily loans and investment securities. We incur interest expense on interest-bearing liabilities, primarily interest-bearing deposits and borrowings. To evaluate Net interest income, we measure and monitor: (i) yields on loans, investment securities, and other interest-earning assets; (ii) the costs of deposits and other funding sources; (iii) the rates incurred on borrowings and other interest-bearing liabilities; and (iv) the regulatory risk weighting associated with the assets. Interest income is primarily impacted by loan growth and loan repayments, along with changes in interest rates on the loans. Interest expense is primarily impacted by changes in deposit balances, changes in interest rates on deposits, and the volume and type of interest-bearing liabilities. Net interest income is primarily impacted by changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities. Non-Interest Income Non-interest income primarily consists of the following: • Trust and investment management fees —fees and other sources of income charged to clients for managing their trust and investment assets, providing financial planning consulting services, 401(k) and retirement advisory consulting services, and other wealth management services. Trust and investment management fees are primarily impacted by rates charged and increases and decreases in AUM. AUM is primarily impacted by opening and closing of client advisory and trust accounts, contributions and withdrawals, and the fluctuation in market values. • Net gain on mortgage loans —gain on originating and selling mortgages and origination fees, less commissions to loan originators, document review, and other costs specific to originating and selling the loan. The market adjustments for interest rate lock commitments ("IRLC"), mortgage derivatives, and gains and losses incurred on the mandatory trading of loans are also included in this line item. Net gain on mortgage loans is primarily impacted by the amount of loans sold, the type of loans sold, and market conditions. • Net gain on loans accounted for under the fair value option —unrealized gains or losses on the fair value adjustments to held for investment loans on which the Bank has elected the fair value option of accounting. This also includes realized gains or losses on charge-offs and recoveries. • Bank fees —income generated through bank-related service charges such as: electronic transfer fees, treasury management fees, bill pay fees, servicing fees for Main Street Lending Program (“MSLP”), loan prepayment penalty fees, loan interest rate swap fees, and other banking fees. Banking fees are primarily impacted by the level of business activities and cash movement activities of our clients. • Risk management and insurance fees —commissions earned on insurance policies we have placed for clients through our client risk management team who incorporate insurance services, primarily life insurance, to support our clients’ wealth planning needs. Our insurance revenues are primarily impacted by the type and volume of policies placed for our clients. • Income on company-owned life insurance —income earned on the growth of the cash surrender value of life insurance policies we hold on certain key associates. The income on the increase in the cash surrender value is non-taxable income. Non-Interest Expense Non-interest expense is comprised primarily of the following: • Salaries and employee benefits —all forms of compensation-related expenses including salary, incentive compensation, payroll-related taxes, stock-based compensation, benefit plans, health insurance, 401(k) plan match costs, and other benefit-related expenses. Salaries and employee benefit costs are primarily impacted by changes in headcount and fluctuations in benefits costs. • Occupancy and equipment —costs related to building and land maintenance, leasing our office space, depreciation charges for the buildings, building improvements, furniture, fixtures and equipment, amortization of leasehold improvements, utilities, and other occupancy-related expenses. Occupancy and equipment costs are primarily impacted by the number of locations we occupy. 56 Table of Contents • Professional services —costs related to legal, accounting, tax, consulting, personnel recruiting, insurance and other outsourcing arrangements. Professional services costs are primarily impacted by corporate activities requiring specialized services. FDIC insurance expense is also included in this line and represents the assessments that we pay to the FDIC for deposit insurance. • Technology and information systems —costs related to software and information technology services to support office activities and internal networks. Technology and information system costs are primarily impacted by the number of locations we occupy, the number of associates we have, and the level of service we require from our third-party technology vendors. • Data processing —costs related to processing fees paid to our third-party data processing system providers relating to our core private trust banking platform. Data processing costs are primarily impacted by the number of loan, deposit and trust accounts we have and the level of transactions processed for our clients. • Marketing —costs related to promoting our business through advertising, promotions, charitable events, sponsorships, donations, and other marketing-related expenses. Marketing costs are primarily impacted by the levels of advertising programs and other marketing activities and events held throughout the year. • Amortization of other intangible assets —primarily represents the amortization of intangible assets including client lists, core deposit intangibles, and other similar items recognized in connection with acquisitions. • Other —includes costs related to operational expenses associated with office supplies, postage, travel expenses, meals and entertainment, dues and memberships, costs to maintain or prepare other real estate owned ("OREO") for sale, changes in OREO valuations subsequent to the initial acquisition when updated fair values are lower than the cost basis, director compensation and travel, and other general corporate expenses that do not fit within one of the specific non-interest expense lines described above. Other operational expenses are generally impacted by our business activities and needs. Operating Segments The Company’s reportable segments consist of Wealth Management and Mortgage. We measure the overall profitability of operating segments based on income before income tax. We believe this is a more useful measurement as our wealth management products and services are fully integrated with our private trust bank. We allocate costs to our segments, which consist primarily of compensation and overhead expense directly attributable to the products and services within the Wealth Management and Mortgage segments. We measure the profitability of each segment based on a post-allocation basis, as we believe it better approximates the operating cash flows generated by our reportable operating segments. A description of each segment is provided in Note 18 – Segment Reporting of the accompanying Notes to the Consolidated Financial Statements. P rimary Factors Used to Evaluate our Balance Sheet The primary factors we use to evaluate our balance sheet include asset and liability levels, asset quality, capital, liquidity, and potential profit production from assets. We manage our asset levels to ensure our lending initiatives are efficiently and profitably supported and to ensure we have the necessary liquidity and capital to meet the required regulatory capital ratios. Funding needs are evaluated and forecasted by communicating with clients, reviewing loan maturity and draw expectations, and projecting new loan opportunities. We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity, and trend of problem assets such as those determined to be classified, delinquent, non-accrual, non-performing or restructured; the adequacy of our allowance for credit losses; the diversification and quality of loan and investment portfolios; and the extent of counterparty risks, credit risk concentrations, and other factors. We manage our liquidity based upon factors that include the level and quality of capital and our overall financial condition, the trend and volume of problem assets, our balance sheet risk exposure, the level of deposits as a percentage of total loans, the amount of non-deposit funding used to fund assets, the availability of unused funding sources and off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold, and other factors. Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The Company has adopted the Basel III regulatory capital framework. As of December 31, 2024, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III. 57 Table of Contents Results of Operations Overview The year ended December 31, 2024 compared with the year ended December 31, 2023 . We reported Net income available to common shareholders of $8.5 million for the year ended December 31, 2024, compared to $5.2 million of Net income available to common shareholders for the year ended December 31, 2023, a $3.2 million, or 63.5% increase. For the year ended December 31, 2024, our Income before income taxes was $11.6 million, a $4.5 million, or 63.4%, increase from the year ended December 31, 2023. The increase was primarily driven b y a $1.6 million increase in Net interest income, after provision for credit losses and a $5.8 million increase in Non-interest income, partially offset by a $2.9 million increase in Non-interest expense. • The increase in Net interest income, after provision for credit losses was primarily driven by an increase in Total interest and dividend income due to an increase in total average interest-earning assets and average yield and a decrease in the Provision for credit losses predominately due to decreases in individually analyzed and pooled loan reserves, offset partially by an increase in Total interest expense due to an increase in total average interest-bearing liabilities and average rate. • The increase in Non-interest income was due to an increase in Net gain on mortgage loans driven by higher average gain on sale margins and origination volumes, increase in Risk management and insurance fees due to an increase in insurance client agreements, decrease in impairment to the carrying value of a contingent consideration asset, and decrease in Net loss on loans accounted for under the fair value option recorded. • The increase in Non-interest expense was primarily driven by increases in Other operational costs attributed to higher costs on non-performing asset workouts, fraud losses, and an OREO write-down, Technology and information system costs related to enhancements of our information technology infrastructure, and Occupancy and equipment costs related to additional rent expense on the extension of a lease in 2024. Net Interest Income The year ended December 31, 2024 compared with the year ended December 31, 2023 . For the year ended December 31, 2024, Net interest income, before Provision for credit losses, was $64.3 million, a decrease of $6.8 million, or 9.6%, compared to the year ended December 31, 2023. This decrease was driven by a $174.2 million increase in average interest-bearing deposit balances and a 54 basis point increase in average rates paid on Interest-bearing deposits, offset partially by a 27 basis point increase in the average yield on loans and a $53.7 million increase in Interest-bearing deposits in other financial institutions. For the year ended December 31, 2024, our net interest margin was 2.37% and our net interest spread was 1.50%. For the year ended December 31, 2023, our net interest margin was 2.62% and our net interest spread was 1.71%. The decrease in average loans outstanding for the year ended December 31, 2024 compared to the same periods in 2023 was primarily due to net declines in the Cash, Securities and Other, Construction and Development, and Commercial and Industrial portfolios, offset by net growth in the 1-4 Family Residential and Non-Owner Occupied Commercial Real Estate portfolios. Contributing factors to the decline in the Commercial and Industrial portfolio was the resolution of a problem credit relationship, which decreased non-performing loans by $42.2 million and increased Other real estate owned ("OREO") by $35.9 million, as well as net pay downs. Average loan yield was 5.70% for the year ended December 31, 2024, compared to 5.43% for the year ended December 31, 2023. The increase in loan yield during the period was primarily driven by an increase in yields on new loan production due to the continued elevated interest rate environment. Interest income on our Debt securities portfolio increased as a result of an increase in average yield of 3.47% for the year ended December 31, 2024, compared to 3.11% for the year ended December 31, 2023. Our average Debt securities balance during the year ended December 31, 2024 was $76.7 million, a decrease of $2.5 million from the year ended December 31, 2023. Interest expense on Deposits increased during the year ended December 31, 2024. Average interest-bearing deposit rates were 4.07% and 3.53% for the years ended December 31, 2024 and 2023. The increase in Interest-bearing deposit rates was primarily attributable to the continued elevated interest rate environment and highly competitive deposit market. 58 Table of Contents The following table presents an analysis of Net interest income and Net interest margin for the periods presented, using daily average balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid, and the average rate earned or paid on those assets or liabilities: For the Year Ended December 31, 2024 2023 (dollars in thousands) Average Balance (1) Interest Income / Expense Average Yield / Rate Average Balance (1) Interest Income / Expense Average Yield / Rate Assets Interest-earning assets: Interest-bearing deposits in other financial institutions $ 171,290 $ 8,840 5.16 % $ 117,562 $ 5,711 4.86 % Debt securities (2) 76,650 2,658 3.47 79,150 2,463 3.11 Correspondent bank stock 5,322 463 8.70 8,285 620 7.48 Loans (3) 2,437,398 138,922 5.70 2,479,175 134,708 5.43 Mortgage loans held for sale (4) 18,037 1,132 6.28 11,499 721 6.27 Loans held at fair value 10,560 636 6.02 18,478 1,335 7.22 Total interest-earning assets (5) 2,719,257 152,651 5.61 2,714,149 145,558 5.36 Allowance for credit losses (23,718) (21,468) Noninterest-earning assets 152,588 125,401 Total assets $ 2,848,127 $ 2,818,082 Liabilities and Shareholders’ Equity Interest-bearing liabilities: Interest-bearing deposits $ 2,028,228 82,541 4.07 $ 1,854,017 65,460 3.53 FHLB and Federal Reserve borrowings 69,044 2,836 4.11 132,667 6,065 4.57 Subordinated notes 52,444 2,950 5.63 52,216 2,928 5.61 Total interest-bearing liabilities 2,149,716 88,327 4.11 2,038,900 74,453 3.65 Noninterest-bearing liabilities: Noninterest-bearing deposits 414,514 510,506 Other liabilities 35,610 24,913 Total noninterest-bearing liabilities 450,124 535,419 Total shareholders’ equity 248,287 243,763 Total liabilities and shareholders’ equity $ 2,848,127 $ 2,818,082 Net interest rate spread (6) 1.50 1.71 Net interest income (7) $ 64,324 $ 71,105 Net interest margin (8) 2.37 2.62 _____________________________ (1) Average balance represents daily averages, unless otherwise noted. (2) Represents monthly averages. (3) Non-accrual loans are included in the respective average loan balances. Income, if any, is not recognized until all principal has been repaid. (4) Mortgage loans held for sale are included in the interest-earning assets above, with interest income recognized in the Interest and dividend income on loans, including fees line in the Consolidated Statements of Income. These balances are included in the margin calculations in these tables. (5) Tax-equivalent yield adjustments are immaterial. (6) Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities. (7) Net interest income is the difference between income earned on interest-earning assets and expense paid on interest-bearing liabilities. (8) Net interest margin is equal to net interest income divided by average interest-earning assets. 59 Table of Contents The following table presents the dollar amount of changes in interest income and interest expense for the periods presented, for each component of interest-earning assets and interest-bearing liabilities, and distinguishes between changes attributable to volume and interest rates. Changes attributable to both rate and volume that cannot be separated have been allocated to volume: Year Ended December 31, 2024 Compared to Year Ended December 31, 2023 Increase (Decrease) Due to Change in: Total Increase (Decrease) (dollars in thousands) Volume Rate Interest-earning assets: Interest-bearing deposits in other financial institutions $ 2,773 $ 356 $ 3,129 Debt securities (87) 282 195 Correspondent bank stock (258) 101 (157) Loans (2,381) 6,595 4,214 Mortgage loans held for sale 410 1 411 Loans held at fair value (477) (222) (699) Total (decrease) increase in interest income $ (20) $ 7,113 $ 7,093 Interest-bearing liabilities: Interest-bearing deposits 7,090 9,991 17,081 FHLB and Federal Reserve borrowings (2,613) (616) (3,229) Subordinated notes 13 9 22 Total increase in interest expense $ 4,490 $ 9,384 $ 13,874 Decrease in net interest income $ (4,510) $ (2,271) $ (6,781) Provision for Credit Losses We have a dedicated problem loan resolution team comprised of associates from our credit, senior leadership, risk, and accounting teams that meets frequently to ensure that watch list and problem credits are identified early and actively managed. We work to identify potential losses in a timely manner and proactively manage the problem credits to minimize losses. For the years ended December 31, 2024 and 2023, we recorded $1.9 million and $10.4 million Provision for credit losses, respectively. The provision recorded for the year ended December 31, 2024 was due to related provisioning on $9.0 million of net charge-offs, $3.5 million decrease in provisions on individually analyzed loans, $2.1 million release of provisions on pooled loans, and $1.5 million provision releases related to off-balance sheet commitments. The release of provision related to individually analyzed loans was predominately due to the migration of one loan relationship out of non-performing loans and into OREO, pay downs on non-performing loans, and charge-offs. The release of provision related to pooled loans was predominately due to net pay downs, changes in our portfolio mix, as well as modest macroeconomic forecast improvements. The release of provision related to off-balance sheet commitments for the year ended December 31, 2024 was predominately due to decreases in non-cancellable commitments.. The Company maintains a credit management program which includes internal and external loan review along with recurring portfolio monitoring activities to address the changing environment. Management believes the financial strength of the Bank’s clientele and the diversity of the portfolio continues to mitigate the credit risk within the portfolio. Non-Interest Income The year ended December 31, 2024 compared with the year ended December 31, 2023 . For the year ended December 31, 2024 compared to the year ended December 31, 2023, Non-interest income increased $5.7 million, or 26.1%, to $27.7 million. The increase in non-interest income was primarily due to a $2.1 million increase in Net gain on mortgage loans driven by higher average gain on sale margins and origination volumes, $0.7 million increase in Risk management and insurance fees due to an increase in insurance client agreements, $0.9 million decrease in impairment to the carrying value of a contingent consideration asset, and $1.0 million decrease in Net losses on loans accounted for under the fair value option. 60 Table of Contents The following table presents the significant categories of our non-interest income during the periods presented: Year Ended December 31, Change (dollars in thousands) 2024 2023 $ % Non-interest income: Trust and investment management fees $ 19,193 $ 18,788 $ 405 2.2 % Net gain on mortgage loans 4,912 2,826 2,086 73.8 Net loss on loans held for sale (105) (178) 73 41.0 Bank fees 2,036 2,022 14 0.7 Risk management and insurance fees 1,664 919 745 81.1 Income on company-owned life insurance 431 378 53 14.0 Net loss on loans accounted for under the fair value option (999) (2,010) 1,011 50.3 Unrealized loss recognized on equity securities (33) (22) (11) (50.0) Other 581 (775) 1,356 175.0 Total non-interest income $ 27,680 $ 21,948 $ 5,732 26.1 Trust and investment management fees —For the year ended December 31, 2024 compared to the same period in 2023, our Trust and investment management fees increased by $0.4 million, or 2.2%, to $19.2 million. The increase was primarily attributable to an increase in assets under management due to an increase in market values. Net gain on mortgage loans —For the year ended December 31, 2024 compared to the same period in 2023, our Net gain on mortgage loans increased by $2.1 million, or 73.8%, to $4.9 million. The increase in Net gain on mortgage loans was driven by higher average gain on sale margins and origination volumes. Net loss on loans held for sale —During the year ended December 31, 2024, the Company reclassified $5.8 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. During the year ended December 31, 2024, a total of $5.4 million reclassified loans held for investment were sold resulting in a gain of $0.1 million and a $0.2 million write-down on Loans held for sale still held by the Company at year-end was recognized, resulting in a Net loss on loans held for sale of $0.1 million. Risk management and insurance fees —The increase in Risk management and insurance fees of $0.7 million, or 81.1%, to $1.7 million was primarily driven by an increase in insurance client agreements. Net loss on loans accounted for under the fair value option —The Company elected the fair value option on certain loans purchased in 2022. The decrease in Net loss on loans accounted for under the fair value option of $1.0 million, or 50.3% was primarily attributable to overall improved performance of the portfolio. Other —The increase in Other income of $1.4 million, or 175.0% was primarily attributable to a $0.9 million year-over-year decrease in impairment recorded to the carrying value of a contingent consideration asset recorded related to the sale of First Western Capital Management in 2020. The initial contingent asset value was established using asset growth assumptions provided by the buyer, which have not materialized. Non-Interest Expense The year ended December 31, 2024 compared with the year ended December 31, 2023 . The increase in Non-interest expense of 3.8% to $78.5 million was driven by Other operational costs attributed to an OREO write-down driven by updated appraisals, higher costs on non-performing asset workouts, and fraud losses. Technology and information system costs related to enhancements of our information technology infrastructure, and Occupancy and equipment costs related to additional rent expense on the extension of a lease in 2024. 61 Table of Contents The following presents the significant categories of our non-interest expense for the periods presented: Year Ended December 31, Change (dollars in thousands) 2024 2023 $ % Non-interest expense: Salaries and employee benefits $ 45,040 $ 45,202 $ (162) (0.4) % Occupancy and equipment 8,282 7,597 685 9.0 Professional services 7,951 7,638 313 4.1 Technology and information systems 4,170 3,497 673 19.2 Data processing 4,179 4,539 (360) (7.9) Marketing 1,208 1,540 (332) (21.6) Amortization of other intangible assets 226 250 (24) (9.6) Other 7,436 5,374 2,062 38.4 Total non-interest expense $ 78,492 $ 75,637 $ 2,855 3.8 Occupancy and equipment— The increase in Occupancy and equipment of $0.7 million, or 9.0%, was driven by additional rent expense related to the extension of a lease in 2024. Professional services— The increase in Professional services of $0.3 million, or 4.1%, was driven by increased legal fees, audit fees, and FDIC insurance costs due to an increase in our assessment rate. Technology and information systems— The increase in Technology and information systems of $0.7 million, or 19.2%, was primarily driven by increased costs related to enhancements of our information technology infrastructure. Data processing —The decrease in Data processing of $0.4 million, or 7.9% was driven by lower system costs related to our trust and investment management system. Marketing— The decrease in Marketing of $0.3 million, or 21.6%, was driven by lower advertising costs and decreased events and sponsorships. Other— The increase in Other of $2.1 million, or 38.4%, was primarily driven by a $1.1 million OREO write-down driven by updated appraisals, increased costs related to non-performing asset workouts, and fraud losses. Income Tax The Company recorded an income tax provision of $3.1 million and $1.8 million for the years ended December 31, 2024 and 2023, respectively, reflecting an effective tax rate 26.8% and 26.0%, respectively. Segment Reporting We have two reportable operating segments: Wealth Management and Mortgage. Our Wealth Management segment consists of operations relating to the Company’s fully integrated wealth management products and services. Services provided include deposit, loan, insurance, and trust and investment management advisory products and services for which fee revenue is recognized. Parent company activity primarily consists of subordinated debt interest expense and is included within Wealth Management as management evaluates and makes business decisions for Wealth Management, including the parent company, collectively as one segment. Our Mortgage segment consists of operations relating to the Company’s residential mortgage service offerings. Services provided by our mortgage segment include soliciting, originating, and selling mortgage loans into the secondary market. Mortgage products are financial in nature for which origination fees are recognized net of origination expenses, upon the funding of the mortgage loans. Mortgage loans held for sale are accounted for under the fair value option with changes in fair value reported through earnings at inception when loans are locked to the borrower and until the loan is sold to third parties, at which time additional gains or losses on the sale are recorded. Mortgage loans originated and held for investment purposes are recorded in the Wealth Management segment, as this segment provides ongoing services to our clients. 62 Table of Contents The following presents key metrics related to our segments during the periods presented: Year Ended December 31, 2024 (dollars in thousands) Wealth Management Mortgage Consolidated Income (1) $ 84,027 $ 6,044 $ 90,071 Income before taxes 10,629 950 11,579 Profit margin 12.6 % 15.7 % 12.9 % Year Ended December 31, 2023 (dollars in thousands) Wealth Management Mortgage Consolidated Income (1) $ 79,151 $ 3,547 $ 82,698 Income (loss) before taxes 9,660 (2,599) 7,061 Profit margin 12.2 % (73.3) % 8.5 % _____________________________ (1) Net interest income after provision for credit losses plus non-interest income. The following presents selected financial metrics of each segment as of and for the periods presented: Wealth Management As of and for the Year Ended December 31, (dollars in thousands) 2024 2023 $ Change % Change Total interest and dividend income $ 151,519 $ 144,837 $ 6,682 4.6 % Total interest expense 88,327 74,453 13,874 18.6 Provision for credit losses 1,933 10,355 (8,422) (81.3) Net interest income, after provision for credit losses 61,259 60,029 1,230 2.0 Total non-interest income (1) 22,768 19,122 3,646 19.1 Total income before non-interest expense 84,027 79,151 4,876 6.2 Salaries and employee benefits expense 41,442 40,656 786 1.9 Depreciation and amortization expense 2,535 2,344 191 8.1 All other non-interest expense (2) 29,421 26,491 2,930 11.1 Income before income taxes $ 10,629 $ 9,660 $ 969 10.0 Goodwill $ 30,400 $ 30,400 $ — — % Total assets 2,891,615 2,966,612 (74,997) (2.5) _____________________________ (1) All other non-interest income primarily includes Trust and investment management fees, Bank fees, Risk management and insurance fees, Net loss on loans accounted for under the fair value option, and Other. (2) All other non-interest expense primarily includes Occupancy and equipment, Professional services, Technology and information systems, Data processing, Marketing, and Other. The Wealth Management segment reported Income before income taxes of $10.6 million for the year ended December 31, 2024, compared to $9.7 million for the same period in 2023. The majority of our assets and liabilities are on the Wealth Management segment balance sheet and the increase in Income before taxes is primarily attributable to an increases in Net interest income, after provision for credit losses and Non-interest income, partially offset by increases in Non-interest expense. The increase in Net interest income, after provision for credit losses was driven by a decrease in Provision for credit losses primarily due to a decrease in provisions related to individually analyzed loans and an increase in Total interest and dividend income due to an increase in total average interest-earning assets and average yield, offset partially by an increase in Total interest expense due to an increase in total average interest-bearing liabilities and average rate. The increase in Non-interest income was primarily driven by increases in Risk management and insurance fees and a decrease in Net loss on loans accounted for under the fair value option recorded. The increase in Non-interest expense was driven by increases in Technology and information systems expenses, Occupancy and equipment costs, and Other expenses. 63 Table of Contents Mortgage As of and for the Year Ended December 31, (dollars in thousands) 2024 2023 $ Change % Change Total interest and dividend income $ 1,132 $ 721 $ 411 57.0 % Total interest expense — — — — Provision for credit losses — — — — Net interest income, after provision for credit losses 1,132 721 411 57.0 Net gain on mortgage loans 4,912 2,826 2,086 73.8 Total income before non-interest expense 6,044 3,547 2,497 70.4 Salaries and employee benefits expense 3,598 4,546 (948) (20.9) Depreciation and amortization expense 30 33 (3) (9.1) All other non-interest expense (1) 1,466 1,567 (101) (6.4) Income (loss) before income taxes $ 950 $ (2,599) $ 3,549 136.6 Total assets $ 27,422 $ 8,850 $ 18,572 209.9 % _____________________________ (1) All other non-interest expense primarily includes Occupancy and equipment, Data processing, and Other. The Mortgage segment reported Income before income tax of $1.0 million for the year ended December 31, 2024, compared to a loss before income tax of $2.6 million for the same period in 2023. The increase in Income before taxes was primarily driven by an increase in Non-interest income and a decrease in Non-interest expense. The increase in Non-interest income was primarily driven by higher average gain on sale margins and origination volume. The decrease in Non-interest expense was primarily due to lower Salaries and employee benefits. 64 Table of Contents Financial Condition The following table presents our condensed Consolidated Balance Sheets as of the dates noted: December 31, (dollars in thousands) 2024 2023 $ Change % Change Balance Sheet Data: Cash and cash equivalents $ 236,041 $ 254,442 $ (18,401) (7.2) % Held-to-maturity debt securities, at amortized cost, net of allowance for credit losses of $71 and $71 (fair value of $68,161 and $66,617), respectively 75,724 74,102 1,622 2.2 Loans (includes $7,283 and $13,726 measured at fair value, respectively) 2,425,565 2,530,915 (105,350) (4.2) Allowance for credit losses (18,330) (23,931) 5,601 23.4 Loans, net of allowance 2,407,235 2,506,984 (99,749) (4.0) Loans held for sale at fair value 251 — 251 * Mortgage loans held for sale, at fair value 25,455 7,254 18,201 250.9 Other real estate owned, net 35,929 — 35,929 * Goodwill and other intangible assets, net 31,627 31,854 (227) (0.7) Company-owned life insurance 16,961 16,530 431 2.6 Other assets 89,814 84,296 5,518 6.5 Total assets $ 2,919,037 $ 2,975,462 $ (56,425) (1.9) Deposits $ 2,514,209 $ 2,529,039 $ (14,830) (0.6) Borrowings 109,603 178,051 (68,448) (38.4) Other liabilities 42,903 25,634 17,269 67.4 Total liabilities 2,666,715 2,732,724 (66,009) (2.4) Total shareholders’ equity 252,322 242,738 9,584 3.9 Total liabilities and shareholders’ equity $ 2,919,037 $ 2,975,462 $ (56,425) (1.9) _____________________________ (*) Represents percentages that are not meaningful.. Cash and cash equivalents decreased by $18.4 million, or 7.2%, to $236.0 million as of December 31, 2024 compared to December 31, 2023. The decrease was a result of decreases in Borrowings and Deposits, offset partially by the decrease in Loans. Held-to-maturity debt securities increased by $1.6 million, or 2.2%, to $75.7 million as of December 31, 2024 compared to December 31, 2023. The increase was primarily due to Held-to-maturity debt security purchases throughout the year. Loans, net of allowance decreased by $99.7 million, or 4.0%, to $2.41 billion as of December 31, 2024 compared to December 31, 2023. The decrease was due to payoffs outpacing new production as well as the migration of a large relationship out of loans and into OREO. Mortgage loans held for sale increased by $18.2 million, or 250.9%, to $25.5 million as of December 31, 2024 compared to December 31, 2023. The increase was driven driven by higher funded loan volume and the timing of loan sale settlements. Goodwill and other intangible assets, net decreased by $0.2 million, or 0.7%, to $31.6 million as of December 31, 2024 compared to December 31, 2023. The decrease was driven by amortization on intangible assets. Other real estate owned, net increased by $35.9 million as of December 31, 2024 compared to December 31, 2023. The increase was due to the migration of a large relationship out of loans and into OREO. Other assets increased by $5.5 million, or 6.5%, to $89.8 million as of December 31, 2024 compared to December 31, 2023. The increase was driven by a $10.2 million increase in our lease assets primarily due to an extension of a lease, offset partially by a $3.3 million decrease in Deferred tax assets, net. 65 Table of Contents Deposits decreased $14.8 million, or 0.6%, to $2.51 billion as of December 31, 2024 compared to December 31, 2023. The decrease was driven primarily by operating account fluctuations and clients using liquidity for strategic investments. Noninterest-bearing deposit accounts decreased $107.0 million, or 22.2%, to $375.6 million as of December 31, 2024. Money market deposit accounts increased $127.5 million, or 9.2%, to $1.51 billion as of December 31, 2024 compared to December 31, 2023. Time deposit accounts decreased $25.0 million, or 5.0%, to $471.4 million as of December 31, 2024. Interest checking accounts decreased $8.1 million, or 5.5%, to $139.4 million compared to December 31, 2023. The decrease in noninterest-bearing deposit accounts and net increases in interest-bearing deposit accounts was primarily attributable to operating account fluctuations and a shift from noninterest-bearing deposit products into higher yielding products as clients seek higher rates for excess liquidity. Borrowings decreased $68.4 million, or 38.4%, to $109.6 million as of December 31, 2024 compared to December 31, 2023. The decrease was primarily driven by a by a lower reliance on FHLB and FRB borrowings due to the decrease in loans. Other liabilities increased $17.3 million, or 67.4%, to $42.9 million as of December 31, 2024 compared to December 31, 2023. The increase was primarily due to a $9.6 million increase in payables related to participated non-performing assets and a $10.1 million increase in our lease liability due to an extension of a lease, offset partially by a $1.5 million decrease in the unfunded commitment liability due to decreases in noncancellable commitments. Total shareholders’ equity increased $9.6 million, or 3.9%, to $252.3 million as of December 31, 2024. The increase was primarily due to Net income for the year and a $0.7 million increase in Additional paid-in capital driven by stock-based compensation expense. 66 Table of Contents Assets Under Management Year Ended December 31, (dollars in millions) 2024 2023 Managed Trust Balance as of Beginning of Period $ 1,913 $ 1,802 New relationships 8 10 Closed relationships (19) (11) Contributions 74 51 Withdrawals (289) (277) Market change, net 331 338 Ending Balance $ 2,018 $ 1,913 Yield* 0.17 % 0.18 % Directed Trust Balance as of Beginning of Period $ 1,622 $ 1,285 New relationships — — Closed relationships (6) (5) Contributions 108 214 Withdrawals (132) (40) Market change, net 342 168 Ending Balance $ 1,934 $ 1,622 Yield* 0.09 % 0.07 % Investment Agency Balance as of Beginning of Period $ 1,607 $ 1,618 New relationships 28 56 Closed relationships (28) (82) Contributions 98 78 Withdrawals (288) (240) Market change, net 167 177 Ending Balance $ 1,584 $ 1,607 Yield* 0.77 % 0.77 % Custody Balance as of Beginning of Period $ 545 $ 493 New relationships 8 9 Closed relationships (4) (20) Contributions 145 90 Withdrawals (199) (109) Market change, net 94 82 Ending Balance $ 589 $ 545 Yield* 0.05 % 0.04 % 401(k)/Retirement Balance as of Beginning of Period $ 1,066 $ 909 New relationships 10 3 Closed relationships (127) (4) Contributions 164 124 Withdrawals (108) (101) Market change, net 191 135 Ending Balance (1) $ 1,196 $ 1,066 Yield* 0.13 % 0.15 % Total Assets Under Management as of Beginning of Period $ 6,753 $ 6,107 New relationships 54 78 Closed relationships (184) (122) Contributions 589 557 Withdrawals (1,016) (767) Market change, net 1,125 900 Total Assets Under Management $ 7,321 $ 6,753 Yield* 0.26 % 0.28 % _____________________________ (*) Trust and investment management fees divided by period-end balance. (1) AUM reported for the current period is one quarter in arrears. AUM increased $568.0 million, or 8.4%, to $7.32 billion for the year ended December 31, 2024. The increase was attributable to contributions and improving market conditions year-over-year resulting in an increase in the value of assets under management balances, offset partially by net withdrawals. 67 Table of Contents Debt securities Debt securities for which we have the intent and ability to hold to their maturity are classified as Held-to-maturity debt securities and are recorded at amortized cost. Debt securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity. As of December 31, 2024 and 2023, all our investments in debt securities were classified as held-to-maturity. The following tables present the amortized cost and estimated fair value of our debt securities as of the dates noted: December 31, 2024 (dollars in thousands) Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Fair Value Allowance for Credit Losses Debt securities held-to-maturity: U.S. Treasury debt $ 246 $ — $ (4) $ 242 $ — Corporate bonds 23,578 — (2,801) 20,777 (71) Government National Mortgage Association ("GNMA") mortgage-backed securities – residential 31,361 — (3,383) 27,978 — Federal National Mortgage Association ("FNMA") mortgage-backed securities – residential 12,011 — (689) 11,322 — Government collateralized mortgage obligations ("GMO") and mortgage-backed securities ("MBS") – commercial 5,075 5 (483) 4,597 — Corporate collateralized mortgage obligations ("CMO") and MBS 3,524 — (279) 3,245 — Total debt securities held-to-maturity $ 75,795 $ 5 $ (7,639) $ 68,161 $ (71) December 31, 2023 (dollars in thousands) Amortized Cost Gross Unrecognized Gains Gross Unrecognized Losses Fair Value Allowance for Credit Losses Debt 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 GMO and MBS – commercial 5,836 9 (377) 5,468 — Corporate CMO and MBS 3,783 — (238) 3,545 — Total debt securities held-to-maturity $ 74,173 $ 9 $ (7,565) $ 66,617 $ (71) 68 Table of Contents The following presents the book value of our contractual maturities and weighted average yield for our debt securities as of the dates presented. Contractual maturities may differ from expected maturities because issuers can have the right to call or prepay obligations without penalties. Our debt securities are taxable securities. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security as of December 31, 2024. Weighted average yields are not presented on a taxable equivalent basis. Maturity as of December 31, 2024 One Year or Less One to Five Years Five to Ten Years After Ten Years (dollars in thousands) Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Debt securities held-to-maturity: U.S. Treasury debt $ — — % $ 246 0.01 % $ — — % $ — — % Corporate bonds — — 3,995 0.34 19,410 1.20 173 * GNMA mortgage-backed securities – residential — — 35 * 27 * 31,299 1.07 FNMA mortgage-backed securities – residential — — 3,137 0.21 812 0.02 8,060 0.37 Government GMO and MBS – commercial — — 112 0.01 1,391 0.06 3,573 0.10 Corporate CMO and MBS — — 15 * 357 0.03 3,153 0.16 Total debt securities held-to-maturity $ — — % $ 7,540 0.57 % $ 21,997 1.31 % $ 46,258 1.70 % Maturity as of December 31, 2023 One Year or Less One to Five Years Five to Ten Years After Ten Years (dollars in thousands) Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Debt securities held-to-maturity: U.S. Treasury Debt $ 253 * % $ — — % $ — — % $ — — % Corporate bonds — — 4,078 0.30 19,395 1.23 214 0.01 GNMA mortgage-backed securities – residential — — 66 * — — 34,513 1.14 FNMA mortgage-backed securities – residential — — — — 1,116 0.02 4,919 0.13 Government GMO and MBS – commercial — — 178 0.01 1,579 0.07 4,079 0.13 Corporate CMO and MBS — — — — 415 0.03 3,368 0.18 Total debt securities held-to-maturity $ 253 — % $ 4,322 0.31 % $ 22,505 1.35 % $ 47,093 1.59 % _____________________________ (*) Represents percentages that are insignificant As of December 31, 2024 and 2023, there were no holdings of debt s ecurities of any one issuer, other than the U.S. Government sponsored entities and its agencies, in an amount greater than 10% of shareholders’ equity. 69 Table of Contents Allowance for Credit Losses for HTM Debt 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 debt securities issued 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 debt securities include private label CMO and MBS as well as corporate bonds. Accrued interest receivable on Held-to-maturity debt securities totaled $0.3 million and $0.4 million as of December 31, 2024 and 2023, respectively, and was excluded from the estimate of credit losses. The following table presents the activity in the allowance for credit losses for Held-to-maturity debt securities by major security type for the years noted: Year Ended December 31, 2024 2023 (dollars in thousands) Corporate Bonds Corporate CMO Corporate Bonds Corporate CMO Allowance for credit losses: Beginning balance $ 71 $ — $ — $ — Impact of ASU 2016-13 adoption — — 71 — Provision for credit losses — — — — Securities charged-off (recoveries) — — — — Total ending allowance balance $ 71 $ — $ 71 $ — Loan Portfolio Our primary source of interest income is derived through interest earned on loans to high net worth individuals and their related commercial interests. Our senior lending and credit team consists of seasoned, experienced personnel, and we believe that our officers are well versed in the types of lending in which we are engaged. Underwriting policies and decisions are managed centrally and the approval process is tiered based on loan size, making the process consistent, efficient, and effective. The management team and credit culture demands prudent, practical, and conservative approaches to all credit requests in compliance with the credit policy guidelines to ensure strong credit underwriting practices. In addition to originating loans for our own portfolio, we conduct mortgage banking activities in which we originate and sell, servicing-released, whole loans in the secondary market. Our mortgage banking loan sales activities are primarily directed at originating single family mortgages that are priced and underwritten to conform to previously agreed-upon criteria before loan funding, and are delivered to the investor shortly after funding. The level of future loan originations, loan sales and loan repayments depends on overall credit availability, the interest rate environment, the strength of the general economy, local real estate markets and the housing industry, and conditions in the secondary loan sale market. The amount of gain or loss on the sale of loans is primarily driven by market conditions and changes in interest rates, as well as our pricing and asset liability management strategies. As of December 31, 2024 and 2023, we had Mortgage loans held for sale of $25.5 million and $7.3 million , respectively, in residential mortgage loans we originated. As of December 31, 2024 and 2023, we had Loans held for sale of $0.3 million and $0.0 million , respectively. Beginning in the first quarter of 2022, the Company entered into whole loan purchase agreements to acquire third party originated and serviced unsecured consumer loans to hold for investment and elected the fair value option to account for these loans. As of December 31, 2024, the Compan y has $7.3 million in loans accounted for under the fair value option with an unpaid principal balance of $7.5 million. As of December 31, 2023, the Company had $13.7 million in loans accounted for under the fair value option with an unpaid principal balance $14.1 million. See Note 16 – Fair Value in the Notes to the Consolidated Financial Statements. As of December 31, 2024 , the Company has $2.0 million in PPP loans outstanding with $40 thousand in remaining fees to be recognized. As of December 31, 2023 , the Company had $4.2 million in PPP loans outstanding with $0.1 million in remaining fees to be recognized. The remaining fees represent the net amount of the fees from the SBA for participation in the PPP less the loan origination costs on these loans. The current amortization of this income is being recognized over a five-year period from the time of origination, however, if a loan receives full forgiveness from the SBA or if the borrower repays the loan, the remaining income will be recognized upon payoff. 70 Table of Contents The following presents our loan portfolio by type of loan as of the dates noted: As of December 31, 2024 2023 (dollars in thousands) Amount % of Total Amount % of Total Cash, Securities, and Other (1) $ 119,834 5.0 % $ 139,947 5.6 % Consumer and Other 17,482 0.7 27,028 1.1 Construction and Development 314,481 13.0 345,516 13.7 1-4 Family Residential 962,901 39.8 927,965 36.9 Non-Owner Occupied CRE 611,239 25.3 543,692 21.6 Owner Occupied CRE 172,019 7.1 195,861 7.8 Commercial and Industrial 220,326 9.1 337,180 13.3 Total loans held for investment at amortized cost $ 2,418,282 100.0 % $ 2,517,189 100.0 % Loans accounted for under the fair value option (2) 7,283 13,726 Total loans held for investment $ 2,425,565 $ 2,530,915 Mortgage loans held for sale, at fair value (3) $ 25,455 $ 7,254 Loans held for sale, at fair value (4) $ 251 $ — _____________________________ (1) Includes PPP loans of $2.0 million an d $4.2 million as of December 31, 2024 and 2023, respectively. (2) Includes $7.5 million and $14.1 million of unpaid principal balance of loans held for investment accounted for under the fair value option as o f December 31, 2024 and 2023, respectively. (3) Include s $25.2 million and $7.1 million of u npaid principal balance of mortgage loans held for sale as of December 31, 2024 and 2023, respectively. (4) Includes $0.6 million of pr incipal balance of loans held for sale as of December 31, 2024. • 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 $2.0 million and $4.2 million as of December 31, 2024 and 2023, 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 $7.5 million and $14.1 million as of December 31, 2024 and 2023, 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 $1.7 million and $5.1 million as of December 31, 2024 and 2023, respectively, are included in this category. 71 Table of Contents The largest category of the Company’s loan portfolio is Commercial Real Estate (“CRE”). An additional breakdown of the Company’s CRE portfolio follows. As of December 31, 2024 (dollars in thousands) Owner Occupied Non-Owner Occupied Total Percent of Total CRE Multi-family $ — $ 203,690 $ 203,690 26.0 % Industrial and warehouse 49,086 142,873 191,959 24.5 Office 57,889 120,563 178,452 22.8 Retail 30,050 61,515 91,565 11.7 Hotel 5,382 50,503 55,885 7.1 Restaurant and entertainment 16,179 14,888 31,067 4.0 Land 2,241 — 2,241 0.3 Other commercial real estate 11,192 17,207 28,399 3.6 Total CRE loan portfolio $ 172,019 $ 611,239 $ 783,258 100.0 % The following table summarizes the Company’s CRE portfolio by geographic location as of the dates indicated: As of December 31, 2024 (dollars in thousands) Amount Percent of Total CRE Colorado $ 579,892 74.1 % Arizona 53,517 6.8 Wyoming 51,864 6.6 Montana 24,291 3.1 California 19,943 2.5 Other 53,751 6.9 Total CRE loan portfolio $ 783,258 100.0 % The CRE portfolio is comprised of loans made to purchase, construct and finance commercial real estate properties. On average, the balances are small and geographically disbursed across our footprint. Specifically, our CRE portfolio has an average loan balance of $2.47 million with a weighted average loan-to-value ratio (“LTV”) of 52.9% as of December 31, 2024. Due to the recent trends in the banking industry, there has been increased risk associated with commercial real estate loans, including with respect to the higher vulnerability of these credits to pressure as interest rates remain elevated and market conditions in many large metropolitan areas continue to show signs of stress. The Company has limited exposure to the office building sector in central business districts as the office portfolio is generally diversified in suburban markets with strong occupancy levels. The Company maintains a practice of regular and ongoing loan reviews, stress tests, and sensitivity analyses to assess the level of risk in the loan portfolio. Loan reviews include monitoring past due rates, non-performing trends, concentrations, LTV’s, among other qualitative factors. Credit policies are robust and are updated as needed to meet the strategic and risk mitigation goals of the company. 72 Table of Contents The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range, at amortized cost as of the dates noted, are summarized in the following tables: As of December 31, 2024 (dollars in thousands) One Year or Less One Through Five Years Five Through Fifteen Years After Fifteen Years Total Cash, Securities, and Other $ 40,409 (1) $ 76,386 (1) $ 2,376 $ 663 $ 119,834 Consumer and Other 10,129 5,430 712 1,211 17,482 Construction and Development 120,043 187,101 124 7,213 314,481 1-4 Family Residential 99,641 141,450 26,106 695,704 962,901 Non-Owner Occupied CRE 123,471 403,385 71,889 12,494 611,239 Owner Occupied CRE 11,903 97,600 54,942 7,574 172,019 Commercial and Industrial 91,564 84,459 44,303 — 220,326 Total loans $ 497,160 $ 995,811 $ 200,452 $ 724,859 $ 2,418,282 Loans accounted for under the fair value option (2) 257 6,895 131 — 7,283 Total loans $ 497,417 $ 1,002,706 $ 200,583 $ 724,859 $ 2,425,565 Amounts with fixed rates 220,192 650,979 100,903 31,371 1,003,445 Amounts with floating rates 277,225 351,727 99,680 693,488 1,422,120 Total loans $ 497,417 $ 1,002,706 $ 200,583 $ 724,859 $ 2,425,565 As of December 31, 2023 (dollars in thousands) One Year or Less One Through Five Years Five Through Fifteen Years After Fifteen Years Total Cash, Securities, and Other $ 70,558 (1) $ 67,101 (1) $ 1,611 $ 677 $ 139,947 Consumer and Other 18,425 6,175 1,206 1,222 27,028 Construction and Development 106,993 180,210 51,253 7,060 345,516 1-4 Family Residential 43,275 172,349 34,053 678,288 927,965 Non-Owner Occupied CRE 34,328 334,516 161,669 13,179 543,692 Owner Occupied CRE 13,491 93,844 79,610 8,916 195,861 Commercial and Industrial 120,061 187,240 29,879 — 337,180 Total loans $ 407,131 $ 1,041,435 $ 359,281 $ 709,342 $ 2,517,189 Loans accounted for under the fair value option (2) 105 13,163 458 — 13,726 Total loans $ 407,236 $ 1,054,598 $ 359,739 $ 709,342 $ 2,530,915 Amounts with fixed rates 141,485 699,578 235,132 23,903 1,100,098 Amounts with floating rates 265,751 355,020 124,607 685,439 1,430,817 Total loans $ 407,236 $ 1,054,598 $ 359,739 $ 709,342 $ 2,530,915 _____________________________ (1) Includes PPP loans. (2) Loans accounted for under the fair value option are disclosed at fair value rather than amortized cost 73 Table of Contents Loan Modifications 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. Each modified loan is separately negotiated with the borrower and includes terms and conditions that reflect the borrower’s prospective ability to service their obligations as modified. The Company had loan modifications of $1.1 million at December 31, 2024. For additional information on loan modifications, see Note 4 – Loans and the Allowance For Credit Losses. Non-Performing Assets Non-performing assets include non-accrual loans and OREO. The accrual of interest on loans is discontinued at the time the loan becomes 90 or more days delinquent unless the loan is well secured and in the process of collection or renewal due to maturity. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged off if collection of interest or principal is considered doubtful. OREO represents assets acquired through, or in lieu of, foreclosure. The amounts reported as OREO are supported by recent appraisals, with the appraised values adjusted, where applicable, for expected transaction fees likely to be incurred upon sale of the property. We incur recurring expenses relating to OREO in the form of maintenance, taxes, insurance and legal fees, among others, until the OREO parcel is disposed. While disposition efforts with respect to our OREO are generally ongoing, if these properties are appraised at lower-than-expected values or if we are unable to sell the properties at the prices for which we expect to be able to sell them, we may incur additional losses. In the second quarter of 2024, the Company recorded $11.4 million of OREO as a result of obtaining physical possession of two foreclosed properties as partial consideration for amounts owed on non-performing loans related to an isolated loan relationship. During the third quarter of 2024, the Company recorded an additional $25.6 million of OREO related to a third foreclosed property within the same loan relationship. During the year ended December 31, 2024, the Company recorded a provision for Other real estate owned of $1.1 million. As of December 31, 2024, the Company owned OREO properties totaling $35.9 million. As of December 31, 2023, the Company did not own OREO properties. The Company had $0.7 million and $1.7 million of interest reversed on non-accrual loans during the years ended December 31, 2024 and 2023, respectively. The amount of interest income that would have been recognized on loans accounted for on a non-accrual basis pursuant to contractual terms was $6.8 million and $4.0 million for the years ended December 31, 2024 and 2023, respectively. We had amortized cost of $48.7 million and $50.8 million in non-performing assets as of December 31, 2024 and 2023, respectively. Although consistent balances of non-performing assets when comparing December 31, 2024 and December 31, 2023, there was significant activity during the ended December 31, 2024. Non-performing loans decreased $38.1 million and OREO increased $35.9 million. These changes were predominately due to the migration of one loan relationship out of non-performing loans and into OREO, as well as pay downs, charge-offs, and write-downs, offset by additions to non-performing loans. 74 Table of Contents The following presents the amortized cost basis of non-performing loans as of the dates indicated: As of December 31, (dollars in thousands) 2024 2023 Non-accrual loans by category Cash, Securities, and Other $ 1,704 $ 1,704 Consumer and Other — 7,504 Construction and Development — 2,719 1-4 Family Residential — 3,016 Owner Occupied CRE — 3,980 Commercial and Industrial 11,048 31,893 Total non-performing loans 12,752 50,816 OREO (1) 35,929 — Total non-performing assets $ 48,681 $ 50,816 Non-accrual loans to total loans (2) 0.53 % 2.02 % Non-performing assets to total assets 1.67 % 1.71 % Allowance for credit losses to non-accrual loans 143.74 % 47.09 % Accruing loans 90 or more days past due $ — $ 285 _____________________________ (1) Held at the lower of cost or market as described in Note 16. (2) Excludes mortgage loans held for sale of $25.5 million and $7.3 million as of December 31, 2024 and 2023, respectively. Excludes $7.3 million and $13.7 million of loans held for investment accounted for under fair value option as of December 31, 2024 and 2023, respectively. Credit Quality Indicators We categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans by credit risk on a quarterly basis, which are segregated into the following definitions for risk ratings: Special Mention —Loans categorized as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies, or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified. Substandard— Substandard loans are considered "classified" and are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrual status and may individually be evaluated. Doubtful —Loans graded doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. However, the amount or certainty of eventual loss is not known because of specific pending factors. Loans accounted for under the fair value option are not rated. Loans not meeting any of the three criteria above are considered to be pass-rated loans. 75 Table of Contents As of December 31, 2024 and 2023, non-performing loans of $12.8 million and $50.8 million, respectively, were included in the substandard category in the table below. The following presents the amortized cost basis of loans by credit quality indicator, by class of financing receivable, as of the dates noted: December 31, 2024 Pass Special Mention Substandard Doubtful Not Rated Total Cash, Securities, and Other (1) $ 118,130 $ — $ 1,704 $ — $ — $ 119,834 Consumer and Other (2) 17,482 — — — 7,283 24,765 Construction and Development 310,196 — 4,285 — — 314,481 1-4 Family Residential 962,901 — — — — 962,901 Non-Owner Occupied CRE 611,239 — — — — 611,239 Owner Occupied CRE 169,573 — 2,446 — — 172,019 Commercial and Industrial 192,484 9,120 18,722 — — 220,326 Total $ 2,382,005 $ 9,120 $ 27,157 $ — $ 7,283 $ 2,425,565 December 31, 2023 Pass Special Mention Substandard Doubtful Not Rated Total Cash, Securities, and Other (1) $ 138,243 $ — $ 1,704 $ — $ — $ 139,947 Consumer and Other (2) 19,528 — 7,500 — 13,726 40,754 Construction and Development 328,454 14,343 2,719 — — 345,516 1-4 Family Residential 924,949 — 3,016 — — 927,965 Non-Owner Occupied CRE 538,693 4,999 — — — 543,692 Owner Occupied CRE 191,881 — 3,980 — — 195,861 Commercial and Industrial 302,276 649 34,255 — — 337,180 Total $ 2,444,024 $ 19,991 $ 53,174 $ — $ 13,726 $ 2,530,915 _____________________________ (1) Includes PPP loans of $2.0 million an d $4.2 million as of December 31, 2024 and 2023, respectively. (2) Includes $7.3 million and $13.7 million of loans held for investment accounted for under the fair value option as of December 31, 2024 and 2023, respectively. Allowance for Credit Losses on Loans On January 1, 2023, the Company adopted the new CECL standard, ASU 2016-13, using the modified retrospective method for all financial assets measured at amortized cost. 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, 2024 and 2023 was $9.8 million and $10.8 million, respectively. The Allowance for credit losses (“ACL”) is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The ACL excludes loans held for sale and loans accounted for under the fair value option. The Company elected to not measure an ACL for accrued interest receivables, as we write off applicable accrued interest receivable balances in a timely manner when a loan is placed on non-accrual status, in which any accrued but uncollected interest is reversed from current income. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Actual Company and regional peer historical credit loss experience provides the basis for the estimation of expected credit losses. The Company identified and grouped portfolio segments based on risk characteristics and underlying collateral. The call code for each financial asset type was assessed and, where appropriate, expanded for certain call codes into separate segments based on risk characteristics. CECL requires an allowance for credit losses on all portfolio loans including purchased loans without credit deterioration. As of December 31, 2024, the Company held $164.3 million in acquired loans with $1.4 million in allowance for credit losses as well as $4.0 million in unamortized net discounts. As of December 31, 2023 , the Company held $208.2 million in acquired loans with $2.0 million in Allowance for credit losses as well as $3.9 million in unamortized net discounts. 76 Table of Contents ACL for pooled loans are estimated using a discounted cash flow (“DCF”) methodology using the amortized cost basis (excluding interest) for all loans modeled within a performing pool of loans. The DCF analysis pairs loan-level term information, for example, maturity date, payment amount, interest rate, with top-down pool assumptions such as default rates, prepayment speeds, to produce individual expected cash flows for every instrument in the segment. The results are then aggregated to produce segment level results and reserve requirements for each segment. The quantitative DCF model also incorporates forward-looking macroeconomic information over a reasonable and supportable period of four quarters. Subsequent to the four quarter period, the Company reverts to its historical loss rate and historical prepayment and curtailment speeds on a straight-line basis over a four quarter reversion period. The Company applies qualitative factors to capture losses that are expected but may not be adequately reflected in the quantitative model described above. Qualitative adjustments are made based on management’s assessment of the risks that may lead to a future credit loss or differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, changes in environmental and economic conditions, or other relevant factors. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the pooled loan evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. ACL - held-to-maturity debt securities: Held-to-maturity debt securities are carried at amortized cost when management has the positive intent and ability to hold them to maturity. The majority of our held-to-maturity investment portfolio consists of securities issues by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we do not record an ACL for these securities. The Company's non-government backed securities include private label CMO and MBS and bank subordinated debt. Private label refers to private institutions such as brokerage firms, banks, and home builders, that also securitize mortgages. 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 reviewed the collectability of CMO and MBS debt securities and corporate bonds taking into consideration factors such as the asset quality and delinquencies of the issuers. ACL - off-balance sheet credit exposures: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted through the Provision for credit losses and is recorded in Other liabilities. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The probability of funding is based on historical utilization statistics for unfunded loan commitments. The loss rates used are calculated using the same assumptions as the associated funded balance. The Allowance for credit losses for loans represents Management’s best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms, adjusted for expected prepayments when appropriate. Our quantitative discounted cash flow models use twelve-month economic forecasts including; housing price index (“HPI”), gross domestic product (“GDP”), and national unemployment. The $2.1 million release of provision on pooled loans for the year ended December 31, 2024 was predominately due to net pay downs in the loan portfolio as well as modest HPI, GDP, and unemployment forecast improvements. The allowance for credit losses on non-performing loans was $0.3 million and $3.8 million as of December 31, 2024 and 2023, respectively. This $3.5 million decrease in provision on individually analyzed loans for the year ended December 31, 2024 was primarily due to the migration of one loan relationship out of non-performing loans and into OREO, pay downs, and charge-offs. 77 Table of Contents The following presents summary information regarding our allowance for credit losses for the periods presented: Year Ended December 31, (dollars in thousands) 2024 2023 Average loans outstanding (1)(2) $ 2,437,398 $ 2,479,175 Total loans outstanding at end of period (3) $ 2,418,282 $ 2,517,189 Allowance for credit losses at beginning of period $ 23,931 $ 17,183 Impact of adopting ASU 2016-13 — 3,470 Provision for credit losses 3,439 12,077 Charge-offs: Consumer and Other (50) (101) Commercial and Industrial (9,352) (8,737) Total charge-offs (9,402) (8,838) Recoveries: Consumer and Other 29 22 1-4 Family Residential 6 13 Commercial and Industrial 327 4 Total recoveries 362 39 Net charge-offs (9,040) (8,799) Allowance for credit losses at end of period $ 18,330 $ 23,931 Allowance for credit losses to total loans 0.76 % 0.95 % Net charge-offs to average loans 0.37 0.35 _____________________________ (1) Average balances are average daily balances. (2) Excludes average outstanding balances of mortgage loans held for sale of $18.0 million and $11.5 million for the years ended December 31, 2024 and 2023, respectively. Excludes average outstanding balances of loans held for investment under the fair value option of $10.6 million and $18.5 million for the years ended December 31, 2024 and 2023, respectively. (3) Excludes Mortgage loans held for sale of $25.5 million and $7.3 million as of December 31, 2024 and 2023, respectively. Excludes Loans held for sale of $0.3 million and $0.0 million as of December 31, 2024 and 2023, respectively. Excludes $7.3 million and $13.7 million of loans held for investment accounted for under the fair value option as of December 31, 2024 and 2023, respectively. The following represents the allocation of the allowance for credit losses among loan categories and other summary information. The allocation for credit losses by category should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The allocation of a portion of the allowance for credit losses to one category of loans does not preclude its availability to absorb losses in other categories. As of December 31, 2024 2023 (dollars in thousands) Amount % (1) Amount % (1) Cash, Securities and Other $ 410 5.0 % $ 961 5.6 % Consumer and Other 185 0.7 124 1.1 Construction and Development 5,184 13.0 7,945 13.7 1-4 Family Residential 5,200 39.8 4,370 36.9 Non-Owner Occupied CRE 4,340 25.3 2,325 21.6 Owner Occupied CRE 654 7.1 1,034 7.8 Commercial and Industrial 2,357 9.1 7,172 13.3 Total allowance for credit losses $ 18,330 100.0 % $ 23,931 100.0 % _____________________________ (1) Represents the percentage of loans to total loans in the respective category. 78 Table of Contents Allowance for credit losses - off-balance sheet credit exposure The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted through Provision for credit losses and is recorded in Other liabilities. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The probability of funding is based on historical utilization statistics for unfunded loan commitments. The loss rates used are calculated using the same assumptions as the associated funded balance. Refer above for changes in the factors that influenced the current estimate of ACL and reasons for the changes. In addition to changes in loss rates, another reason for the decrease in the ACL on unfunded loan commitments was a significant decrease in non-cancellable commitments throughout 2024. The following table presents the changes in the ACL on unfunded loan commitments: December 31, (dollars in thousands) 2024 2023 Beginning balance $ 2,178 $ 419 Impact of adopting ASU 2016-13 — 3,481 Release of credit losses (1,506) (1,722) Ending balance $ 672 $ 2,178 Deferred Tax Assets, Net Deferred tax assets, net of our valuation allowance, represent the differences in timing of when items are recognized for GAAP purposes and when they are recognized for tax purposes, as well as our net operating losses. Our deferred tax assets, net, are valued based on the amounts that are expected to be recovered in the future utilizing the tax rates in effect at the time recognized. Our deferred tax assets, net for the year ended December 31, 2024, decreased $3.3 million, or 51.9%, from December 31, 2023. The decrease was primarily due to changes in temporary differences, most notably the decrease in Allowance for credit losses and stock compensation as of and during the year ended December 31, 2024. Deposits Our deposit products include money market accounts, demand deposit accounts, time-deposit accounts (typically certificates of deposit), interest checking accounts, and saving accounts. Our accounts are federally insured by the FDIC up to the legal maximum amount. Total deposits decreased by $14.8 million, or 0.6%, to $2.51 billion as of December 31, 2024 from December 31, 2023. The decrease was driven primarily by operating account fluctuations and clients using liquidity for strategic investments. Total average deposits for the year ended December 31, 2024 were $2.44 billion, an increase of $78.2 million, or 3.3%, compared to $2.36 billion for the year ended December 31, 2023. The increase in average deposits for the year ended December 31, 2024, compared to the same period in 2023, was driven primarily by Interest-bearing deposits due to new and expanded deposit relationships offset partially by a decline in Noninterest-bearing deposits. 79 Table of Contents The following table presents the average balances and average rates paid on deposits during the periods presented: For the Year Ended December 31, 2024 2023 (dollars in thousands) Average Balance Average Rate Average Balance Average Rate Deposits Money market deposit accounts $ 1,384,589 4.18 % $ 1,296,139 3.86 % Interest checking accounts 136,960 0.33 177,522 0.38 Uninsured time deposits 62,573 4.49 63,813 3.68 Other time deposits 428,766 5.00 297,286 4.16 Total time deposits 491,339 4.93 361,099 4.08 Savings accounts 15,340 0.09 19,257 0.06 Total interest-bearing deposits 2,028,228 4.07 1,854,017 3.53 Noninterest-bearing accounts 414,514 510,506 Total deposits $ 2,442,742 3.38 % $ 2,364,523 2.77 % Average noninterest-bearing deposits to average total deposits was 17.0% and 21.6% for the years ended December 31, 2024 and 2023, respectively. Our average cost of funds was 3.44% and 2.92% during the years ended December 31, 2024 and 2023, respectively. The increase in cost was primarily driven by an unfavorable mix shift in the deposit portfolio and increased rates on Interest-bearing deposit accounts due to the competitive deposit market and an unfavorable mix shift in deposit balances. Total money market accounts as of December 31, 2024 were $1.51 billion, an increase of $127.5 million, or 9.2%, compared to $1.39 billion as of December 31, 2023. Interest checking accounts decreased $8.1 million, or 5.5%, to $139.4 million compared to December 31, 2023. Total time deposits as of December 31, 2024 were $471.4 million, a decrease of $25.0 million, or 5.0%, compared to December 31, 2023. The following table presents the amount of certificates of deposit by time remaining until maturity as of December 31, 2024: (dollars in thousands) Three Months or Less Three to Six Months Six to 12 Months After 12 Months Total Uninsured Time Deposits $ 24,697 $ 16,587 $ 25,768 $ 2,824 $ 69,876 Other 154,307 135,874 71,775 39,583 401,539 Total $ 179,004 $ 152,461 $ 97,543 $ 42,407 $ 471,415 Borrowings We have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs. As of December 31, 2024 and 2023, borrowings totaled $109.6 million and $178.1 million, respectively. 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 was 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 had pledged a par value of $44.3 million in securities under the BTFP and borrowed $31.0 million with a maturity date of March 27, 2024 . In 2024 , an additional $10.0 million was borrowed and $41.0 million was repaid, resulting in no outstanding balance as of December 31, 2024 . The rate for the borrowings was based on the one year overnight swap rate plus 10 basis points and was fixed over the term of the advance based on the date of the advance. 80 Table of Contents The decrease in borrowings as of December 31, 2024, compared to December 31, 2023, was driven by a lower reliance on FHLB and FRB borrowings due to the decrease in loans. Additionally, borrowings from the Paycheck Protection Program Loan Facility ("PPPLF") from the Federal Reserve decreased from $3.5 million as of December 31, 2023 to $2.0 million as of December 31, 2024 due to the pay down of PPP loans . Borrowing from the PPPLF facility is expected to trend in the same direction as the PPP loan balances. The following table presents balances of each of the borrowing facilities as of the dates noted: December 31, (dollars in thousands) 2024 2023 Borrowings FHLB borrowings $ 55,000 $ 91,175 Federal Reserve borrowings 2,038 34,536 Subordinated notes 52,565 52,340 Total $ 109,603 $ 178,051 FHLB We have a blanket pledge and security agreement with FHLB that requires certain loans and securities to be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of December 31, 2024 and 2023 amounted to $1.30 billion and $1.31 billion, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $582.0 million as of December 31, 2024. (dollars in thousands) As of and for the Year Ended December 31, 2024 Short-term borrowings Maximum outstanding at any month-end during the period $ 178,712 Balance outstanding at end of period 55,000 Average outstanding during the period 51,250 Average interest rate during the period 5.23 % Average Interest rate at the end of the period 4.83 The Bank has borrowing capacity associated with two unsecured federal funds lines of credit up to $10 million and $19 million. As of December 31, 2024 and 2023, there were no amounts outstanding on any of the federal funds lines. Our borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies. As of December 31, 2024 and 2023, the Company was in compliance with the covenant requirements. Derivatives Cash Flow Hedges : On March 21, 2023, the Company executed an interest rate swap with a notional amount that was designated as a cash flow hedge of certain Federal Home Loan Bank borrowings. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. The swap hedges the benchmark index (SOFR) with a receive float/pay fixed swap for the period March 21, 2023 through April 1, 2026. The notional amount of the interest rate swap as of December 31, 2024 and 2023 was $50.0 million . As of December 31, 2024 and 2023, this hedge was determined to be effective, and the Company expects the hedge to remain effective during the remaining terms of the swap. 81 Table of Contents Derivatives Not Designated as Hedges : The Company periodically enters into interest rate swaps to offset interest rate exposure with its commercial 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, 2024 and 2023 was $70.4 million and $30.3 million, respectively . While these derivatives represent economic hedges, they do not qualify as hedges for accounting purposes. During the years ended December 31, 2024 and 2023, the Company recognized $0.3 million and $0.4 million , respectively, of fees related to new interest rate swaps, which are included in the Bank fees line of the Condensed Consolidated Statements of Income Liquidity and Capital Resources Liquidity resources primarily include interest-bearing and noninterest-bearing deposits which primarily contribute to our ability to raise funds to support asset growth, acquisitions, and meet deposit withdrawals and other payment obligations. Access to purchased funds primarily include the ability to borrow from FHLB, other correspondent banks and the use of brokered deposits. The following table presents, during the periods shown, the composition of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the periods presented: Average Percentage for the Year Ended December 31, 2024 2023 Sources of Funds: Deposits: Noninterest-bearing 14.55 % 18.12 % Interest-bearing 71.21 65.79 FHLB and Federal Reserve borrowings 2.42 4.71 Subordinated notes 1.85 1.85 Other liabilities 1.25 0.88 Shareholders’ equity 8.72 8.65 Total 100.00 % 100.00 % Uses of Funds: Total loans 84.75 % 87.21 % Investment securities 2.69 2.81 Correspondent bank stock 0.19 0.29 Mortgage loans held for sale 0.63 0.41 Loans held at fair value 0.37 0.66 Interest-bearing deposits in other financial institutions 6.01 4.17 Noninterest-earning assets 5.36 4.45 Total 100.00 % 100.00 % Average noninterest-bearing deposits to total average deposits 16.97 % 21.59 % Average loans to total average deposits 99.78 104.85 Average interest-bearing deposits to total average deposits 83.03 78.41 Our primary source of funds is interest-bearing and noninterest-bearing deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Capital Resources Total shareholders’ equity increased $9.6 million , or 3.9%, to $252.3 million as of December 31, 2024 compared to December 31, 2023. The increase was primarily due to Net income and a $0.7 million increase in Additional paid-in capital driven by stock-based compensation expense. 82 Table of Contents On June 13, 2024, the Company announced that its Board of Directors authorized the repurchase of up to 200,000 shares of the Company’s common stock, no par value, from time to time, within one year (the “2024 Repurchase Plan”) and that the Board of Governors of the Federal Reserve System advised the Company that it has no objection to the Company’s 2024 Repurchase Plan. The Company may repurchase shares in privately negotiated transactions, in the open market, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 promulgated by the Securities and Exchange Commission, or otherwise in a manner that complies with applicable federal securities laws. The 2024 Repurchase Plan does not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice. During the year ended December 31, 2024, the Company repurchased 5,501 shares under the authorization of the 2024 Repurchase Plan. As of December 31, 2024, there were 194,499 shares available for repurchase under the plan. We are subject to various regulatory capital adequacy requirements at a consolidated level and the bank level. These requirements are administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital levels are viewed as important indicators of an institution’s financial soundness by banking regulators. Generally, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. As of December 31, 2024 and 2023, our holding company and Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized," for purposes of the prompt corrective action regulations. As we continue to grow our operations and maintain capital requirements, our regulatory capital levels may decrease depending on our level of earnings. We continue to monitor growth and control our capital activities in order to remain in compliance with all applicable regulatory capital standards. The following table presents our regulatory capital ratios for the dates noted: December 31, 2024 December 31, 2023 (dollars in thousands) Amount Ratio Amount Ratio Tier 1 capital to risk-weighted assets Bank $ 256,419 11.41 % $ 244,390 10.54 % Consolidated 226,244 10.07 218,150 9.40 CET1 to risk-weighted assets Bank 256,419 11.41 244,390 10.54 Consolidated 226,244 10.07 218,150 9.40 Total capital to risk-weighted assets Bank 271,981 12.10 265,391 11.45 Consolidated 294,807 13.12 292,151 12.59 Tier 1 capital to average assets Bank 256,419 8.94 244,390 8.71 Consolidated 226,244 7.88 218,150 7.77 Contractual Obligations and Off-Balance Sheet Arrangements We enter into credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our clients. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. Commitments may expire without being utilized. Our exposure to credit loss is represented by the contractual amount of these commitments, although material losses are not anticipated. We follow the same credit policies in making commitments as we do for on-balance sheet instruments. 83 Table of Contents The following presents future contractual obligations to make future payments for the periods presented: As of December 31, 2024 (dollars in thousands) 1 Year or Less More than 1 Year but Less than 3 Years More than 3 Years but Less than 5 Years 5 Years or More Total FHLB and Federal Reserve $ 55,000 $ — $ 2,038 $ — $ 57,038 Subordinated notes — — — 52,565 (1) 52,565 Time deposits 429,009 7,472 34,934 — 471,415 Minimum lease payments 3,047 3,003 4,200 16,632 26,882 Total $ 487,056 $ 10,475 $ 41,172 $ 69,197 $ 607,900 _____________________________ (1) Reflects contractual maturity dates of March 31, 2030, December 1, 2030, September 1, 2031, and December 15, 2032, although the Company can call the notes prior to their contractual maturity. The following presents financial instruments whose contract amounts represent credit risk, as of the periods presented: December 31, 2024 2023 (dollars in thousands) Fixed Rate Variable Rate Fixed Rate Variable Rate Unused lines of credit $ 68,427 $ 453,520 $ 86,398 $ 540,255 Standby letters of credit 13,864 8,000 13,922 12,094 Commitments to make loans to sell 19,769 — 18,917 — Commitments to make loans 4,029 15,563 5,275 7,115 We may enter into contracts for services in the conduct of ordinary business operations, which may require payment for services to be provided in the future and may contain penalty clauses for early termination of the contracts. We do not believe these off-balance sheet arrangements have or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. However, there can be no assurance that such arrangements will not have an effect on future operations. Critical Accounting Policies and Estimates The preparation of consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect reported amounts of assets, liabilities, income, and expenses. We base estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. Estimates are evaluated on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. We have identified our Allowance for Credit Losses ("ACL") and Goodwill as being critical because our policies require management to use significant judgement and use subjective and complex measurements about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. Our accounting policies and procedures, including those identified as being critical, are described in further detail in Note 1 – Organization and Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements. ACL: Our ACL policies govern the processes and procedures used to estimate potential for credit losses in our loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. 84 Table of Contents ACL - loans: The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. We perform periodic and systematic detailed reviews of our loan portfolio to assess overall collectability. The level of the ACL on loans reflects our estimate of the losses expected in the loan portfolio over the assets’ contractual term. As of December 31, 2024, the ACL had an ending balance of $18.3 million compared to the prior year ending balance of $23.9 million. The ACL is an estimate that is subject to uncertainty due to the various assumptions and judgments used in the estimation process. The estimate is based on our quantitative discounted cash flow models using economic forecasts including; HPI, GDP, and national unemployment. Potential changes in any one economic variable may or may not affect the overall allowance because a variety of economic variables and inputs are considered in estimating the allowance, and changes in those variables and inputs may not occur at the same rate, may not be consistent across product types and may have offsetting impacts to other changing variables and inputs. Changes in management’s assessment of the assumptions and key inputs used to determine the ACL could lead to changes in the ACL through increased or decreased provisions for credit losses. If actual losses and conditions differ materially from the assumptions used to determine the ACL, our actual credit losses could differ materially from our ACL estimate. A sensitivity analysis of our ACL was performed as of September 30, 2024 to estimate credit losses by increasing and decreasing model inputs such as economic forecasts including HPI, GDP, and national unemployment, the forecast period, the forecast reversion period, and prepayment rates, among others. Incorporating key model input changes in our calculation of the ACL resulted in both increases and decreases to the ACL. Management reviews the sensitivity analysis results to understand the impact that changes to model inputs and assumptions have on the model output. While management believes that it has established adequate allowances for lifetime credit losses on loans, actual results may prove different, and the differences could be material. Additionally, our ACL model adjusts for qualitative factors in addition to historical information and our economic forecast. Management considered factors that are likely to cause estimated credit losses and differ from historical loss experience. The factors management reviews include acquired loan underwriting, residential mortgage debt-to-income, macroeconomic factors, concentration of our loan portfolio, negative probability of default, classified loan trends, non-core loans, loan to value ratios, and CRE exposure. See Note 4 – Loans and the Allowance For Credit Losses for further details of the factors considered by us in estimating the necessary level of the ACL for loans . Goodwill: Goodwill represents the excess of purchase price over the fair value of net identifiable tangible and intangible assets acquired in business combinations. We have acquired other identifiable intangible assets, primarily consisting of customer relationships, non-competition agreements, and recorded goodwill through its acquisition of financial services companies. We are required to assess our goodwill for impairment on an annual basis, or more frequently if deemed necessary. We have selected October 31 as the date to perform our annual impairment test. The test is performed at the reporting unit level by applying a fair value-based test using discounted estimated future net cash flows. Impairment exists when the carrying amount of the goodwill exceeds estimated fair values. The estimate is considered to have a low level of uncertainty unless a triggering event occurs. Events that may trigger goodwill impairment include deterioration in economic conditions, increased competitive environment, negative trends in overall financial performance, legal or regulatory proceedings, loss of key personnel, and change in strategy or sustained decreases in share value. We performed a qualitative goodwill assessment as of October 31, 2024. The qualitative assessment was performed to determine whether it is more likely than not that the fair value of the Wealth Management reporting unit is less than its carrying value, including goodwill. In performing the assessment, the Company considered several factors, including macroeconomic conditions, actual operating results, forecasts, economic projections, and market data. Based on the results of the qualitative assessment, we believe that the fair value of our Wealth Management reporting unit continues to exceed the carrying value, including goodwill, as of the most recent assessment date. Significant negative industry or economic trends, including declines in the market price of our stock, reduced estimates of future cash flows or business disruptions, could result in impairments to goodwill in the future, which would result in recording an impairment loss. Any resulting impairment loss could have a material impact on our financial condition and results of operation. Management will continue evaluating the economic conditions at future reporting periods for triggering events. Goodwill totaled $30.4 million as of December 31, 2024 and 2023. As of December 31, 2024 and 2023, there has not been any impairment of goodwill identified or recorded. See Note 6 – Goodwill and Other Intangible Assets for further information on Goodwill. 85 Table of Contents