Item 7. Management’s Discussion and Analysis
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 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, 2021, we have expanded our footprint into fifteen full service profit centers, two loan production offices, and two trust offices located across four states. Following the completion of the Teton Financial Services, Inc. (“Teton”) acquisition in the fourth quarter of 2021, we added three full service profit centers in Jackson Hole, Pinedale, and Rock Springs, Wyoming. As of and for the year ended December 31, 2021, we had $2.53 billion in total assets, $95.4 million in total revenues and provided fiduciary and advisory services on $7.35 billion of assets under management ( " AUM " ).
Response to COVID-19
The spread of COVID-19 has caused significant disruptions in the U.S. economy since it was declared a pandemic in March 2020 by the World Health Organization. Disruptions include temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. The changes have impacted our clients and their industries, as well as the financial services industry.
The Company activated its Business Continuity Plan in early 2020 in response to the emergence of COVID-19 and has continued to adjust as the crisis continues to impact our markets, clients and business. A majority of our associates have been working remotely since early 2020. All of our offices are open, functioning, and continue to operate as usual. We are taking additional precautions within our profit centers, including enhanced cleaning procedures and physical distancing measures, to ensure the safety of our clients and our associates.
62
Table of Contents
A provision in the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") created the Paycheck Protection Program ("PPP"), which is administered by the Small Business Administration ("SBA"). The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA PPP lender and participated in all rounds of the program.
The last round of program funds were depleted in early May 2021. With the originations closed, the SBA turned their attention to forgiveness, processing applications submitted by the Company. Loans funded in 2021 became eligible for forgiveness after the covered period of 8 to 24 weeks, which began for some clients in early second quarter of 2021. As of December 31, 2021, we have received forgiveness payments of $236.3 million from the SBA and have 134 PPP loans for a total of $46.8 million with an average loan size of $0.3 million remaining.
As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company has offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years. The Company had sixty-nine loans across multiple industries in the amount of $130.4 million of loans that took part in the Company’s COVID loan modification program. As of December 31, 2021, the modification periods have ended for all loans in the loan modification program and all loans were performing according to Bank policy.
The Company also participated in the Federal Reserve’s Main Street Lending Program ("MSLP") to support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. As of December 31, 2021, the Company had five loans with a balance held by the Bank of $6.8 million.
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.
Net Interest Income
Net interest income represents interest income less interest expense. We generate interest income on interest-earning assets, primarily loans and available-for-sale 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, available-for-sale securities and other interest-earning assets; (ii) the costs of deposits and other funding sources; (iii) the rates incurred on borrowings and other interest-bearing liabilities; and (iv) the regulatory risk weighting associated with the assets. Interest income is primarily impacted by loan growth and loan repayments, along with changes in interest rates on the loans. Interest expense is primarily impacted by changes in deposit balances, changes in interest rates on deposits, along with the volume and type of interest-bearing liabilities. Net interest income is primarily impacted by changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities.
63
Table of Contents
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, 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") 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.
● Bank fees —income generated through bank-related service charges such as: electronic transfer fees, treasury management fees, bill pay fees, servicing fees for MSLP, and other banking fees. 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.
● Net gain on equity interests —gain on sale of equity securities and other assets sold. Net gain on sale of securities/assets are primarily impacted by the amount of securities/assets sold, the type of securities/assets sold and market conditions.
● Other —non-operating income generated through a transition services agreement with the buyer of the Los Angeles (“LA”) fixed income team.
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.
● 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.
64
Table of Contents
● 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.
● Net loss on assets held for sale —represents the fair value adjustment on assets being sold or business lines being divested.
● Provision for other real estate owned —represents the fair value adjustment for other real estate owned ( " OREO " ).
● 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 OREO for sale, director compensation and travel, and other general corporate expenses that do not fit within one of the specific non-interest expense lines described above. Other operational expenses are generally impacted by our business activities and needs.
Operating Segments
The Company’s reportable segments consist of Wealth Management and Mortgage. We measure the overall profitability of operating segments based on income before income tax. We believe this is a more useful measurement as our wealth management products and services are fully integrated with our private trust bank. We allocate costs to our segments, which consist primarily of compensation and overhead expense directly attributable to the products and services within the Wealth Management and Mortgage segments. We measure the profitability of each segment based on a post-allocation basis, as we believe it better approximates the operating cash flows generated by our reportable operating segments. A description of each segment is provided in Note 18 - Segment Reporting of the accompanying Notes to the Consolidated Financial Statements.
P rimary Factors Used to Evaluate our Balance Sheet
The primary factors we use to evaluate our balance sheet include asset and liability levels, asset quality, capital, liquidity, and potential profit production from assets.
We manage our asset levels to ensure our lending initiatives are efficiently and profitably supported and to ensure we have the necessary liquidity and capital to meet the required regulatory capital ratios. Funding needs are evaluated and forecasted by communicating with clients, reviewing loan maturity and draw expectations, and projecting new loan opportunities.
We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity and trend of problem assets such as those determined to be classified, delinquent, non-accrual, non-performing or restructured; the adequacy of our allowance for loan losses; the diversification and quality of loan and investment portfolios; the extent of counterparty risks, credit risk concentrations, and other factors.
65
Table of Contents
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, 2021, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III.
Acquisitions and Divestitures
On July 22, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement” or “Teton Acquisition”) with Teton, parent company of Rocky Mountain Bank, a Wyoming-chartered bank headquartered in Jackson, Wyoming. The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, Teton would merge into the Company, with the Company continuing as the surviving corporation. The Merger Agreement also provides that following the merger, Rocky Mountain Bank would merge with and into the Bank, with the Bank surviving the bank merger. The transaction successfully closed on December 31, 2021. See Note 2 – Acquisitions of the accompanying Notes to the Consolidated Financial Statements for additional information.
On September 18, 2020, the Company entered into an agreement to sell its LA fixed income team and certain related advisory and sub-advisory arrangements to Lido Advisors, LLC and Oakhurst Advisors, LLC. On November 13, 2020, the Company completed the sale. On an ongoing basis, the sale of the LA fixed income team is expected to be earnings neutral to the Company, as the revenue decrease will be approximately in-line with the expected expense reduction. The sale is not expected to have an impact on Bank clients but reduced the Company’s assets under management by $330.6 million during 2020. As a result of the sale, the Company evaluated its reportable segments and determined the remaining assets following the sale in the Capital Management segment no longer meet the thresholds of income before income tax to be a reportable segment. The residual assets that remained in the Capital Management segment are now included in the Wealth Management segment.
On February 10, 2020, the Company entered into a branch purchase and assumption agreement (“Branch Acquisition”) with Simmons Bank, pursuant to which the Company agreed to acquire all of Simmons’ Colorado locations, including three branches and one loan production office located in metro Denver, as well as certain deposits and loans and other assets. On May 15, 2020, the Branch Acquisition was successfully completed. See Note 2 - Acquisitions of the accompanying Notes to Consolidated Financial Statements for additional information.
Results of Operations
Overview
The year ended December 31, 2021 compared with the year ended December 31, 2020 . For the year ended December 31, 2021, we reported net income available to common shareholders of $20.6 million, compared to net income available to common shareholders for December 31, 2020 of $24.5 million, a $3.9 million, or 16.0% decrease. For the year ended December 31, 2021, our income before income tax was $27.3 million, a $5.8 million, or 17.5%, decrease from December 31, 2020. The decrease was primarily driven by a $13.2 million decrease in net gain on mortgage loans and an $8.6 million increase in non-interest expense, partially offset by a $13.9 million increase in net interest income, after provision for loan losses. The decrease in net gain on mortgage loans was primarily driven by a slowdown in new lock volume associated with the decrease in refinance activity. The increase in non-interest expense was primarily driven by acquisition related costs from the Teton Acquisition and an increase in personnel expense to support the growth in the balance sheet. The increase in net interest income was due to an increase in average loan balances and a reduction in our average cost of funds.
66
Table of Contents
Net Interest Income
The year ended December 31, 2021 compared with the year ended December 31, 2020 . For the year ended December 31, 2021, compared to the year ended December 31, 2020, net interest income, before the provision for loan losses, increased $10.4 million, or 22.6%, to $56.5 million. This increase was driven by a $275.4 million increase in average loans outstanding and a 19 bps decrease in the average cost of funds, partially offset by a decrease in our average yield on loans to 3.81% for the year ended December 31, 2021 from 3.94% for the year ended December 31, 2020. For the year ended December 31, 2021, our net interest margin was 2.99% and our net interest spread was 2.87%. For the year ended December 31, 2020, our net interest margin was 3.09% and our net interest spread was 2.92%.
The increase in average loans outstanding for the year ended December 31, 2021 compared to the same periods in 2020 was primarily due to organic growth. Net interest income is also impacted by changes in the amount and type of interest-earning assets and interest-bearing liabilities. To evaluate net interest income, we measure and monitor the yields on our loans and other interest-earning assets and the costs of our deposits and other funding sources.
Interest income on our available-for-sale securities portfolio decreased as a result of lower average investment balances for the year ended December 31, 2021 compared to the same period in 2020. Our average available-for-sale securities balance during the year ended December 31, 2021 was $30.9 million, a decrease of $14.6 million from the year ended December 31, 2020. The impact of the reduction in average balances was partially offset by a higher average yield on the securities portfolio.
Interest expense on deposits decreased during the year ended December 31, 2021 compared to the same period in 2020. Average rates on interest bearing deposits decreased 30 basis points, consistent with the lower interest rate environment. The reduction in cost of deposits was partially offset by an increase in average interest-bearing deposit accounts of $211.8 million compared to the prior year.
67
Table of Contents
The following presents an analysis of net interest income and net interest margin for the periods presented, using daily average balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid and the average rate earned or paid on those assets or liabilities.
As of and For the Year Ended December 31,
2021
2020
Interest
Average
Interest
Average
Average
Earned /
Yield /
Average
Earned /
Yield /
(Dollars in thousands)
Balance (1)
Paid
Rate
Balance (1)
Paid
Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other financial institutions
$
261,752
$
397
0.15
%
$
129,670
$
458
0.35
%
Federal funds sold
1,491
—
—
—
—
—
Available-for-sale securities (2)
30,885
770
2.49
45,466
878
1.93
Loans (3)
1,594,084
60,758
3.81
1,318,648
51,998
3.94
Interest-earning assets (4)
1,888,212
61,925
3.28
1,493,784
53,334
3.57
Mortgage loans held for sale (5)
88,651
2,490
2.81
80,469
2,388
2.97
Total interest-earning assets, plus mortgage loans held for sale
1,976,863
64,415
3.26
1,574,253
55,722
3.54
Allowance for loan losses
(12,763)
(9,945)
Noninterest-earning assets
95,808
94,935
Total assets
$
2,059,908
$
1,659,243
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits
$
1,187,941
3,482
0.29
$
976,108
5,794
0.59
FHLB and Federal Reserve borrowings
103,925
385
0.37
122,773
584
0.48
Subordinated notes
29,232
1,549
5.30
13,812
854
6.18
Total interest-bearing liabilities
1,321,098
5,416
0.41
1,112,693
7,232
0.65
Noninterest-bearing liabilities:
Noninterest-bearing deposits
550,683
383,271
Other liabilities
18,651
21,402
Total noninterest-bearing liabilities
569,334
404,673
Shareholders’ equity
169,476
141,877
Total liabilities and shareholders’ equity
$
2,059,908
$
1,659,243
Net interest rate spread (6)
2.87
2.92
Net interest income (7)
$
56,509
$
46,102
Net interest margin (8)
2.99
3.09
(1) Average balance represents daily averages, unless otherwise noted.
(2) Available-for-sale securities represents monthly averages.
(3) Non-performing loans are included in the respective average loan balances. Income, if any, on such loans is recognized on a cash basis.
(4) Tax-equivalent yield adjustments are immaterial.
(5) Mortgage loans held for sale are separated from the interest-earning assets above, as these loans are held for a short period of time until sold in the secondary market and are not held for investment purposes, with interest income recognized in the net gain on mortgage loans line of the income statement. These balances are excluded from the margin calculations in these tables.
(6) Net interest spread is the average yield on interest-earning assets (excluding mortgage loans held for sale) minus the average rate on interest-bearing liabilities.
(7) Net interest income is the difference between income earned on interest-earning assets, which does not include interest earned on mortgage loans held for sale, and expense paid on interest-bearing liabilities.
(8) Net interest margin is equal to net interest income divided by average interest-earning assets (excluding mortgage loans held for sale).
68
Table of Contents
The following presents the dollar amount of changes in interest income and interest expense for the periods presented, for each component of interest-earning assets and interest-bearing liabilities (excluding mortgage loans held for sale), and distinguishes between changes attributable to volume and interest rates. Changes attributable to both rate and volume that cannot be separated have been allocated to volume.
Year Ended December 31, 2021
Compared to 2020
Increase
(Decrease) Due
Total
to Change in:
Increase
(Dollars in thousands)
Volume
Rate
(Decrease)
Interest-earning assets:
Interest-bearing deposits in other financial institutions
$
201
$
(262)
$
(61)
Available-for-sale securities
(364)
256
(108)
Loans
10,498
(1,738)
8,760
Total increase (decrease) in interest income
$
10,335
$
(1,744)
$
8,591
Interest-bearing liabilities:
Interest-bearing deposits
621
(2,933)
(2,312)
FHLB and Federal Reserve borrowings
(70)
(129)
(199)
Subordinated notes
817
(122)
695
Total increase (decrease) in interest expense
$
1,368
$
(3,184)
$
(1,816)
Increase in net interest income
$
8,967
$
1,440
$
10,407
Provision for Loan 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, 2021 and 2020, we recorded $1.2 million and $4.7 million, respectively, of provision for loan losses.
The Company has increased loan level reviews and portfolio monitoring to address the changing environment. Management believes the financial strength of the Bank’s clientele and the diversity of the portfolio continues to mitigate the credit risk within the portfolio.
Non-Interest Income
The year ended December 31, 2021 compared with the year ended December 31, 2020 . For the year ended December 31, 2021 compared to the year ended December 31, 2020, non-interest income decreased $11.0 million, or 21.6%, to $40.2 million. The decrease in non-interest income was primarily a result of a $13.2 million decrease in net gain on mortgage loans, compared to the same period in 2020.
69
Table of Contents
The following presents the significant categories of our non-interest income for the year ended December 31, 2021 and 2020.
Year Ended
December 31,
Change
(Dollars in thousands)
2021
2020
$
%
Non-interest income:
Trust and investment management fees
$
20,220
$
19,022
$
1,198
6.3
%
Net gain on mortgage loans
16,060
29,276
(13,216)
(45.1)
Bank fees
1,847
1,320
527
39.9
Risk management and insurance fees
1,120
1,199
(79)
(6.6)
Income on company-owned life insurance
354
363
(9)
(2.5)
Net gain on equity interests
489
—
489
*
Other
60
—
60
*
Total non-interest income
$
40,150
$
51,180
$
(11,030)
(21.6)
________________
* Not meaningful
Trust and investment management fees — For the year ended December 31, 2021 compared to the same period in 2020, our trust and investment management fees increased by $1.2 million, or 6.3%, to $20.2 million. The increase is driven by asset growth, partially offset by a reduction in trust and investment management fees generated by the LA Fixed Income team that was sold in November 2020.
Net gain on mortgage loans — For the year ended December 31, 2021 compared to the year ended December 31, 2020, our net gain on mortgage loans decreased by $13.2 million, or 45.1%, to $16.1 million. The decrease in net gain on mortgage loans was primarily driven by a slowdown in new interest rate locks with clients associated with the decrease in refinance activity.
Bank fees — For the year ended December 31, 2021 compared to the same period in 2020, our bank fees increased by $0.5 million or 39.9%. The increase was driven by servicing fees related to participation in the MSLP as well as increased activity consistent with the growth of the loan portfolio.
Net gain on equity interests — For the year ended December 31, 2021, the Company recognized a net gain on equity interests of $0.5 million.
Non-Interest Expense
The year ended December 31, 2021 compared with the year ended December 31, 2020 . The increase in non-interest expense of 14.5% to $68.1 million for the year ended December 31, 2021, was primarily due to $4.1 million in acquisition related costs incurred as a result of the Teton Acquisition. The remaining increase is primarily due to increased salaries and employee benefits commensurate with and to support the increased production and revenues in the Wealth Management segment.
70
Table of Contents
The following presents the impact from mergers and acquisitions activity for the periods noted:
Year Ended December 31,
(Dollars in thousands)
2021
2020
Mergers and acquisitions expense:
Salaries and employee benefits
$
547
$
13
Occupancy and equipment
—
108
Professional services
1,118
477
Technology and information systems
—
19
Data processing
2,428
47
Other
8
20
Total mergers and acquisitions expense
$
4,101
$
684
The following presents the significant categories of our non-interest expense for the periods noted:
Year Ended
December 31,
Change
(Dollars in thousands)
2021
2020
$
%
Non-interest expense:
Salaries and employee benefits
$
40,746
$
34,785
$
5,961
17.1
%
Occupancy and equipment
5,990
6,009
(19)
(0.3)
Professional services
6,473
5,035
1,438
28.6
Technology and information systems
3,707
4,035
(328)
(8.1)
Data processing
6,327
4,000
2,327
58.2
Marketing
1,613
1,478
135
9.1
Amortization of other intangible assets
17
14
3
21.4
Net loss on assets held for sale
—
553
(553)
*
Provision on other real estate owned
—
176
(176)
*
Other
3,276
3,452
(176)
(5.1)
Total non-interest expense
$
68,149
$
59,537
$
8,612
14.5
* Not meaningful
Salaries and employee benefits— The increase in salaries and employee benefits of $6.0 million, or 17.1%, was primarily related to an increase in staffing and compensation and employee benefits commensurate with increased production and revenues in the Wealth Management segment.
Professional Services— The increase in professional services of $1.4 million, or 28.6%, was driven by acquisition related expenses of $1.1 million, additional expenses related to the PPP program, and additional FDIC insurance expense related to our balance sheet growth.
Data processing— The increase in data processing costs of $2.3 million, or 58.2%, was primarily driven by $2.4 million in acquisition related expenses as a result of the Teton Acquisition in the fourth quarter of 2021.
Net loss on assets held for sale— The net loss on assets held for sale of $0.6 million in 2020 was attributable to the completion of the sale of assets and related net loss taken on the sale of the LA fixed income team.
Income Tax
During the year ended December 31, 2021, the Company recorded an income tax provision of $6.7 million, reflecting an effective tax rate 24.5%. During the year ended December 31, 2020, the Company recorded an income tax provision of $8.5 million, reflecting an effective tax rate of 25.8%.
71
Table of Contents
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. Our Mortgage segment consists of operations relating to the Company’s residential mortgage service offerings. Mortgage products and services are financial in nature for which premiums are recognized, net of expenses, upon the sale of mortgage loans to third parties. Services provided by our Mortgage segment include soliciting, originating and selling mortgage loans into the secondary market. Mortgage loans originated and held for investment purposes are recorded in the Wealth Management segment, as this segment provides ongoing services to our clients.
The following presents key metrics related to our segments:
Year Ended December 31, 2021
Wealth
(Dollars in thousands)
Management
Mortgage
Consolidated
Income (1)
$
79,310
$
16,119
$
95,429
Income before taxes
21,378
5,902
27,280
Profit margin
27.0
%
36.6
%
28.6
%
Year Ended December 31, 2020
Wealth
(Dollars in thousands)
Management
Mortgage
Consolidated
Income (1)
$
63,256
$
29,344
$
92,600
Income before taxes
12,086
20,977
33,063
Profit margin
19.1
%
71.5
%
35.7
%
(1) Net interest income after provision 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)
2021
2020
$ Change
% Change
Total interest income
$
61,925
$
53,334
$
8,591
16.1
%
Total interest expense
5,416
7,232
(1,816)
(25.1)
Provision for loan losses
1,230
4,682
(3,452)
(73.7)
Net interest income, after provision for loan losses
55,279
41,420
13,859
33.5
Non-interest income
24,031
21,836
2,195
10.1
Total income
79,310
63,256
16,054
25.4
Depreciation and amortization expense
1,147
1,035
112
10.8
All other non-interest expense
56,785
50,135
6,650
13.3
Income before income tax
$
21,378
$
12,086
$
9,292
76.9
Goodwill
$
30,588
$
24,191
$
6,397
26.4
Total assets
2,494,207
1,798,416
695,791
38.7
72
Table of Contents
The Wealth Management segment reported income before income tax of $21.4 million for the year ended December 31, 2021, compared to $12.1 million, for the same period in 2020. The increase in net interest income, after provision for loan losses is primarily driven by an increase in average loans outstanding, a decrease in average cost of funds, and a decrease in provision for loan losses. Non-interest income primarily increased due to increasing assets under management resulting in increased trust and investment management fees. Non-interest expense increased due to $4.1 million in acquisition related expenses as well as increases in salaries and employee benefits with additional staffing and compensation to support the growth of the organization. During the year ended December 31, 2021, average loans increased $275.4 million and the cost of funds decreased to 0.29% from 0.48% compared to the year ended December 31, 2020.
Mortgage
As of and for the Year Ended December 31,
(Dollars in thousands)
2021
2020
$ Change
% Change
Total interest income
$
—
$
—
$
—
—
%
Total interest expense
—
—
—
—
Provision for loan losses
—
—
—
—
Net interest income, after provision for loan losses
—
—
—
—
Non-interest income
16,119
29,344
(13,225)
(45.1)
Total income
16,119
29,344
(13,225)
(45.1)
Depreciation and amortization expense
53
70
(17)
(24.3)
All other non-interest expense
10,164
8,297
1,867
22.5
Income before income tax
$
5,902
$
20,977
$
(15,075)
(71.9)
Total assets
$
33,282
$
175,239
$
(141,957)
(81.0)
The Mortgage segment reported income before income tax of $5.9 million for the year ended December 31, 2021, compared to $21.0 million for the same period in 2020. The overall decrease in non-interest income was primarily driven by a slowdown in new lock volume associated with the decrease in refinance activity.
73
Table of Contents
Financial Condition
The following presents our condensed Consolidated Balance Sheets as of the dates presented:
December 31,
December 31,
(Dollars in thousands)
2021
2020
$ Change
% Change
Balance Sheet Data:
Cash and cash equivalents
$
386,983
$
155,989
$
230,994
148.1
%
Investments
56,211
36,666
19,545
53.3
Loans
1,949,137
1,532,833
416,304
27.2
Allowance for loan losses
(13,732)
(12,539)
(1,193)
9.5
Loans, net of allowance
1,935,405
1,520,294
415,111
27.3
Mortgage loans held for sale
30,620
161,843
(131,223)
(81.1)
Goodwill and other intangible assets, net
31,902
24,258
7,644
31.5
Company-owned life insurance
15,803
15,449
354
2.3
Other assets
70,450
59,156
11,294
19.1
Assets held for sale
115
—
115
*
Total assets
$
2,527,489
$
1,973,655
$
553,834
28.1
Deposits
$
2,205,703
$
1,619,910
$
585,793
36.2
Borrowings
77,660
173,854
(96,194)
(55.3)
Other liabilities
25,085
24,929
156
0.6
Total liabilities
2,308,448
1,818,693
489,755
26.9
Total shareholders’ equity
219,041
154,962
64,079
41.4
Total liabilities and shareholders’ equity
$
2,527,489
$
1,973,655
$
553,834
28.1
* Not meaningful
Cash and cash equivalents increased by $231.0 million, or 148.1%, to $387.0 million as of December 31, 2021 compared to December 31, 2020. The increase in liquidity was driven by organic growth in deposits and a reduction in mortgage loans held for sale, along with cash and cash equivalents acquired through the Teton Acquisition.
Investments increased by $19.5 million, or 53.3%, to $56.2 million as of December 31, 2021 compared to December 31, 2020. The increase is due to available-for-sale securities acquired through the Teton Acquisition.
Loans, net of allowance increased by $415.1 million, or 27.3%, to $1.94 billion as of December 31, 2021 compared to December 31, 2020. The increase was driven by organic growth and the Teton Acquisition. We experienced growth in all categories excluding PPP loans which are included in the Cash, Securities and Other category.
Mortgage loans held for sale decreased $131.2 million, or 81.1%, to $30.6 million as of December 31, 2021 compared to December 31, 2020. The decrease was driven by a decrease in loan origination volume primarily driven by a slowdown in new mortgage loan origination volume associated with the decrease in refinance activity.
Goodwill and other intangible assets, net increased by $7.6 million, or 31.5%, to $31.9 million as of December 31, 2021 compared to December 31, 2020. The increase was driven by the recording of $6.4 million in goodwill and $1.2 million of core deposit intangibles related to the Teton Acquisition.
Other assets increased by $11.3 million, or 19.1%, to $70.5 million as of December 31, 2021 compared to December 31, 2020. This was primarily related to the acquisition of buildings and land related to the Teton Acquisition of $17.8 million, partially offset by a $8.4 million decrease in unfunded mortgage IRLC.
Deposits increased $585.8 million, or 36.2%, to $2.21 billion as of December 31, 2021 compared to December 31, 2020. The increase was primarily attributable to the Teton Acquisition and an increase in non-interest bearing and money market deposits resulting from inflows from commercial depositors and higher deposit balances across the Company’s clientele due to the improving economic and business environment.
74
Table of Contents
Money market deposit accounts increased $209.2 million, or 24.7%, to $1.06 billion as of December 31, 2021 compared to December 31, 2020. Time deposit accounts decreased $2.2 million, or 1.3%, to $170.5 million as of December 31, 2021. Negotiable order of withdrawal ("NOW") accounts increased $196.9 million, or 174.2%, to $309.9 million compared to December 31, 2020.
Borrowings decreased $96.2 million, or 55.3%, to $77.7 million as of December 31, 2021 compared to December 31, 2020. The decrease is primarily attributed to a reduction in outstanding advances on the Federal Reserve’s Paycheck Protection Program Loan Facility. Borrowing from this facility is expected to trend in the same direction as the PPP loan balances.
Total shareholders’ equity increased $64.1 million, or 41.4%, to $219.0 million as of December 31, 2021. The increase is primarily due to the Teton Acquisition and net income of $20.6 million for the year ended December 31, 2021.
75
Table of Contents
Assets Under Management
Year Ended
December 31,
(Dollars in millions)
2021
2020
Managed Trust Balance at Beginning of Period
$
1,890
$
1,750
New relationships
27
17
Closed relationships
(2)
(12)
Contributions
62
98
Withdrawals
(192)
(119)
Acquisitions
184
—
Market change, net
235
156
Ending Balance
$
2,204
$
1,890
Yield*
0.15
%
0.17
%
Directed Trust Balance at Beginning of Period
$
951
$
989
New relationships
131
18
Closed relationships
(7)
(6)
Contributions
52
42
Withdrawals
(26)
(96)
Acquisitions
133
—
Market change, net
75
4
Ending Balance
$
1,309
$
951
Yield*
0.07
%
0.08
%
Investment Agency Balance at Beginning of Period
$
1,840
$
2,009
New relationships
75
179
Closed relationships (2)
(77)
(451)
Contributions
269
268
Withdrawals
(216)
(231)
Market change, net
172
66
Ending Balance
$
2,063
$
1,840
Yield*
0.68
%
0.73
%
Custody Balance at Beginning of Period
$
518
$
452
New relationships
—
7
Closed relationships
(2)
(4)
Contributions
81
105
Withdrawals
(26)
(82)
Market change, net
62
40
Ending Balance
$
633
$
518
Yield*
0.03
%
0.03
%
401(k)/Retirement Balance at Beginning of Period
$
1,056
$
988
New relationships
8
23
Closed relationships
(122)
(60)
Contributions
110
133
Withdrawals
(110)
(85)
Market change, net
201
57
Ending Balance (1)
$
1,143
$
1,056
Yield*
0.14
%
0.15
%
Total Assets Under Management at Beginning of Period
$
6,255
$
6,188
New relationships
241
244
Closed relationships (2)
(210)
(533)
Contributions
574
646
Withdrawals
(570)
(613)
Acquisitions
317
—
Market change, net
745
323
Total Assets Under Management
$
7,352
$
6,255
Yield*
0.28
%
0.30
%
* Trust and investment management fees divided by period-end balance.
(1) AUM reported for the current period are one quarter in arrears.
(2) Sale of LA fixed income team resulted in closed accounts of $330.6 million in 2020.
76
Table of Contents
Assets under management increased $1.10 billion, or 17.5%, to $7.35 billion for the year ended December 31, 2021. The increase was primarily attributable to improving market conditions resulting in an increase in the value of assets under management balances and the Teton Acquisition.
Available-for-sale securities
Investments we intend to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale and are recorded at fair value using current market information from a pricing service, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax. All our investments in securities were classified as available-for-sale for the periods presented below. The carrying values of our investment securities classified as available-for-sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity.
The following presents the amortized cost and estimated fair value of our investment securities as of December 31, 2021:
December 31, 2021
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
(Dollars in thousands)
Cost
Gains
Losses
Value
Investment securities available-for-sale:
U.S. Treasury debt
$
250
$
—
$
(3)
$
247
U.S Government Agency
3,522
—
—
3,522
Corporate bonds
8,113
227
(15)
8,325
Government National Mortgage Association ("GNMA") mortgage -backed securities—residential
26,611
185
(146)
26,650
Federal National Mortgage Association ("FNMA") mortgage-backed securities—residential
14,400
43
—
14,443
Government collateralized mortgage obligations ("GMO") and mortgage-backed securities ("MBS") - commercial
878
—
—
878
Corporate collateralized mortgage obligations ("CMO") and mortgage-backed securities ("MBS")
1,492
23
(18)
1,497
Other
649
—
—
649
Total securities available-for-sale
$
55,915
$
478
$
(182)
$
56,211
The following presents the amortized cost and estimated fair value of our investment securities as of December 31, 2020:
December 31, 2020
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
(Dollars in thousands)
Cost
Gains
Losses
Value
Investment securities available-for-sale:
U.S. Treasury debt
$
250
$
4
$
—
$
254
Corporate bonds
6,000
55
(11)
6,044
GNMA mortgage -backed securities—residential
23,806
798
—
24,604
FNMA mortgage-backed securities—residential
1,616
61
—
1,677
Corporate CMO and MBS
4,078
62
(53)
4,087
Total securities available-for-sale
$
35,750
$
980
$
(64)
$
36,666
77
Table of Contents
The following tables represent the book value of our contractual maturities and weighted average yield for our investment securities as of the dates presented. Contractual maturities may differ from expected maturities because issuers can have the right to call or prepay obligations without penalties. Our investments are taxable securities. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security as of December 31, 2021. Weighted average yields are not presented on a taxable equivalent basis.
Maturity as of December 31, 2021
One Year or Less
One to Five Years
Five to Ten Years
After Ten Years
Weighted
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
(Dollars in thousands)
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Available-for-sale:
U.S. Treasury debt
$
—
—
%
$
250
*
%
$
—
—
%
$
—
—
%
U.S. Government agency
506
0.02
164
*
1,190
0.04
1,662
0.07
Corporate bonds
—
—
—
—
8,113
0.71
—
—
GNMA mortgage-backed securities - residential
—
—
—
—
—
—
26,611
0.92
FNMA mortgage-backed securities - residential
—
—
176
0.01
2,183
0.10
12,041
0.36
Government CMO and MBS - commercial
—
—
202
0.01
—
—
676
0.04
Corporate CMO and MBS
—
—
—
—
33
*
1,459
0.07
Other
649
*
—
—
—
—
—
—
Total available-for-sale
$
1,155
0.02
%
$
792
0.02
%
$
11,519
0.85
%
$
42,449
1.46
%
* Not meaningful
Maturity as of December 31, 2020
One Year or Less
One to Five Years
Five to Ten Years
After Ten Years
Weighted
Weighted
Weighted
Weighted
Amortized
Average
Amortized
Average
Amortized
Average
Amortized
Average
(Dollars in thousands)
Cost
Yield
Cost
Yield
Cost
Yield
Cost
Yield
Available-for-sale:
U.S. Treasury debt
$
250
0.02
%
$
—
—
%
$
—
—
%
$
—
—
%
Corporate bonds
—
—
1,250
0.17
—
—
4,750
0.60
GNMA mortgage-backed securities - residential
—
—
—
—
—
—
23,806
1.59
FNMA mortgage-backed securities - residential
—
—
—
—
—
—
1,616
0.10
Corporate CMO and MBS
—
—
—
—
43
*
4,035
0.31
Total available-for-sale
$
250
0.02
%
$
1,250
0.17
%
$
43
—
%
$
34,207
2.60
%
* Not meaningful
As of December 31, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.
Loan Portfolio
Our primary source of interest income is derived through interest earned on loans to high net worth individuals and their related commercial interests. Our senior lending and credit team consists of seasoned, experienced personnel and we believe that our officers are well versed in the types of lending in which we are engaged. Underwriting policies and decisions are managed centrally and the approval process is tiered based on loan size, making the process consistent, efficient and effective. The management team and credit culture demands prudent, practical, and conservative approaches to all credit requests in compliance with the loan policy guidelines to ensure strong credit underwriting practices.
78
Table of Contents
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, 2021 and December 31, 2020, we had mortgage loans held for sale of $30.6 million and $161.8 million, respectively, in residential mortgage loans we originated.
Loan balances include the impacts of PPP and the Branch Acquisition. See Note 2 - Acquisitions of the accompanying Notes to Consolidated Financial Statements for additional information.
As of December 31, 2021, the Company has $46.8 million in PPP loans outstanding with $0.7 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 two-year period, however if a loan receives full forgiveness from the SBA, the remaining income will be recognized upon receipt of the funds from the SBA. For PPP balances not forgiven, the remaining net fee is extended and amortized over a 5-year payback period.
The following presents our loan portfolio by type of loan as of the dates indicated, in thousands:
As of December 31,
2021
2020
(Dollars in thousands)
Amount
% of Total
Amount
% of Total
Cash, Securities and Other
$
295,948
15.2
%
$
357,020
23.3
%
Construction and Development
178,716
9.1
131,111
8.5
1-4 Family Residential
580,872
29.7
455,038
29.7
Non-Owner Occupied CRE
482,622
24.7
281,943
18.4
Owner Occupied CRE
212,426
10.9
163,042
10.6
Commercial and Industrial
203,584
10.4
146,031
9.5
Total loans held for investment (1)
$
1,954,168
100.0
%
$
1,534,185
100.0
%
Mortgage loans held for sale
$
30,620
$
161,843
(1) Loans held for investment exclude deferred costs/(fees) and unamortized premiums/(unaccreted discounts), net of ($5.0) million and ($1.4) million as of December 31, 2021 and 2020, respectively.
● Cash, Securities and Other— consists of consumer and commercial purpose loans that are primarily secured by securities managed and under custody with us, cash on deposit with us or life insurance policies. In addition, loans in this portfolio are collateralized with other sources of consumer collateral and an immaterial amount of each loan may be unsecured. 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 $46.8 million and $142.9 million as of December 31, 2021 and 2020, 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.
79
Table of Contents
● 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 $6.8 million and $6.6 million as of December 31, 2021 and 2020, respectively, are included in this category.
The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range, excluding deferred costs (fees), and unamortized premiums/(unaccreted discounts), as of the date indicated are summarized in the following tables:
As of December 31, 2021
One Year
One Through
Five Through
After
(Dollars in thousands)
or Less
Five Years
Fifteen Years
Fifteen Years
Total
Cash, Securities and Other
$
136,298
(1)
$
148,889
(1)
$
5,561
$
5,200
$
295,948
Construction and Development
74,111
96,817
7,788
—
178,716
1-4 Family Residential
24,824
126,681
33,085
396,282
580,872
Non-Owner Occupied CRE
66,036
275,057
125,330
16,199
482,622
Owner Occupied CRE
5,255
66,656
129,890
10,625
212,426
Commercial and Industrial
46,742
107,596
49,246
—
203,584
Total loans
$
353,266
$
821,696
$
350,900
$
428,306
$
1,954,168
Amounts with fixed rates
$
120,549
$
506,040
$
253,223
$
26,682
$
906,494
Amounts with floating rates
232,717
315,656
97,677
401,624
1,047,674
Total loans
$
353,266
$
821,696
$
350,900
$
428,306
$
1,954,168
(1) Includes PPP loans.
As of December 31, 2020
One Year
One Through
Five Through
After
(Dollars in thousands)
or Less
Five Years
Fifteen Years
Fifteen Years
Total
Cash, Securities and Other
$
90,053
$
259,611
(1)
$
6,246
$
1,110
$
357,020
Construction and Development
78,900
50,703
1,508
—
131,111
1-4 Family Residential
41,211
78,359
33,682
301,786
455,038
Non-Owner Occupied CRE
25,801
175,476
80,666
—
281,943
Owner Occupied CRE
8,355
54,403
100,284
—
163,042
Commercial and Industrial
47,397
68,607
30,027
—
146,031
Total loans
$
291,717
$
687,159
$
252,413
$
302,896
$
1,534,185
Amounts with fixed rates
$
76,130
$
469,155
$
200,111
$
5,438
$
750,834
Amounts with floating rates
215,587
218,004
52,302
297,458
783,351
Total loans
$
291,717
$
687,159
$
252,413
$
302,896
$
1,534,185
(1) Includes PPP loans.
Loan Modifications
As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company was offering loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years.
80
Table of Contents
The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as a TDR. The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from Federal Reserve and the FDIC confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program meets that definition. In accordance with that guidance, the Company is recognizing interest income on all loans modified for temporary payment moratoriums, primarily for a period of 180 days or less.
The Company had sixty-nine loans across multiple industries in the amount of $130.4 million of loans that took part in the Company’s COVID loan modification program. No loans in the loan modification program were delinquent according to Bank policy as of December 31, 2021. No loans were still in the modification period as of December 31, 2021. As of December 31, 2020, the Company’s loans included two modified loans, which were still in the modification period, across multiple industries in the amount of $2.1 million, representing 0.13% of total loans.
All loans modified in response to COVID-19 are classified as performing and pass rated as of December 31, 2021. These loans are included in the allowance for loan loss general reserve in accordance with ASC 450-20. Management has increased our loan level reviews and portfolio monitoring to address the changing environment. The Company continues to meet regularly with clients who could be more highly impacted by the recent COVID-19 pandemic. These are borrowers in industries we believe may be more impacted by the pandemic, for instance those loans where there may be a greater than 50% probability of a downgrade, covenant violation or 20% reduction in collateral position. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.
Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of December 31, 2021, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.
Non-Performing Assets
Non-performing assets include non-accrual loans, TDRs, loans past due 90 days or more and still accruing interest, 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. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged off if collection of interest or principal is considered doubtful.
OREO represents assets acquired through, or in lieu of, foreclosure. The amounts reported as OREO are supported by recent appraisals, with the appraised values adjusted, where applicable, for expected transaction fees likely to be incurred upon sale of the property. We incur recurring expenses relating to OREO in the form of maintenance, taxes, insurance and legal fees, among others, until the OREO parcel is disposed. While disposition efforts with respect to our OREO are generally ongoing, if these properties are appraised at lower-than-expected values or if we are unable to sell the properties at the prices for which we expect to be able to sell them, we may incur additional losses. During the year ended December 31, 2020, we incurred $0.2 million in losses as a result of sales contracts in place which were lower than the carrying value.
The amount of lost interest for non-accrual loans was $0.2 million for each of the years ended December 31, 2021 and 2020.
We had $4.3 million in non-performing assets as of December 31, 2021 and December 31, 2020.
81
Table of Contents
The following presents information regarding non-performing loans as of the dates indicated:
As of December 31,
(Dollars in thousands)
2021
2020
Non-accrual loans by category (1)
Cash, Securities and Other
$
8
$
50
Construction and Development
—
—
1-4 Family Residential
75
—
Non-Owner Occupied CRE
—
—
Owner Occupied CRE
1,241
479
Commercial and Industrial
2,938
3,529
Total non-accrual loans
4,262
4,058
TDRs still accruing
55
—
Accruing loans 90 or more days past due
10
—
Total non-performing loans
4,327
4,058
OREO
—
194
Total non-performing assets
$
4,327
$
4,252
Non-accrual loans to total loans (2)
0.22
%
0.26
%
Non-performing loans to total loans (2)
0.22
0.26
Non-performing assets to total assets
0.17
0.22
Allowance for loan losses to non-accrual loans
322.20
308.99
Allowance for loan losses to non-performing loans
317.36
308.99
(1) As of December 31, 2021, all but one non-accrual loan, totaling an immaterial amount, were also classified as TDRs. As of December 31, 2020, all but two non-accrual loans, totaling $0.5 million, were also classified as TDRs. See Note 5 – Loans and the Allowance for Loan Losses to the Consolidated Financial Statements.
(2) Excludes mortgage loans held for sale of $30.6 million and $161.8 million as of December 31, 2021 and 2020, respectively.
Potential Problem Loans
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 for impairment if indicators of impairment exist.
Doubtful —Loans graded doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. However, the amount or certainty of eventual loss is not known because of specific pending factors.
Loans not meeting any of the three criteria above are considered to be pass-rated loans.
82
Table of Contents
As of December 31, 2021 and December 31, 2020 non-performing loans of $4.3 million and $4.1 million, respectively, were included in the substandard category in the table below. The following presents, by class and by credit quality indicator, the recorded investment in our loans as of the dates indicated:
As of December 31, 2021
As of December 31, 2020
Special
Special
(Dollars in thousands)
Pass
Mention
Substandard
Total
Pass
Mention
Substandard
Total
Cash, Securities and Other
$
295,940
$
—
$
8
$
295,948
$
356,970
$
—
$
50
$
357,020
Construction and Development
176,194
2,522
—
178,716
131,111
—
—
131,111
1-4 Family Residential
580,797
—
75
580,872
451,918
—
3,120
455,038
Non-Owner Occupied CRE
476,670
5,952
—
482,622
275,627
6,316
—
281,943
Owner Occupied CRE
210,493
—
1,933
212,426
161,850
—
1,192
163,042
Commercial and Industrial
198,368
401
4,815
203,584
140,432
—
5,599
146,031
Total
$
1,938,462
$
8,875
$
6,831
$
1,954,168
$
1,517,908
$
6,316
$
9,961
$
1,534,185
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses, which is a noncash charge to earnings. Loan losses are charged against the allowance when management believes that a loan balance is confirmed uncollectable. Subsequent recoveries, if any, are credited to the allowance for loan losses.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and dollar volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off.
We are closely monitoring the changing dynamics in the economy and the client impact driven by the COVID-19 pandemic. We have intensified our portfolio management, focusing on higher impacted industries and commercial property types. Our clientele is generally comprised of high net-worth individuals and commercial borrowers with strong credit profiles and multiple sources of repayment. Excluding loans acquired through the Teton Acquisition, the portion of our credit exposure to the highest risk industries impacted by COVID-19, such as accommodations, transportation and restaurants, is less than 4.3% of our loan portfolio. We are actively reviewing our acquired loans for any exposure to high risk industries. The Company has increased our loan level reviews and portfolio monitoring to address the changing environment and continues to engage in more frequent communication with these borrowers to better understand the impact on our borrower’s cash flows and respond proactively. While the length of time some of these businesses are unable to operate or operate at full capacity is unknown, it could have a significant impact on many factors that impact our borrowers and our reserve requirement. Management will continue to closely monitor the loan portfolio and analyze the economic data to assess the impact on the allowance for loan loss. We believe the allowance for loan losses is adequate as of December 31, 2021.
83
Table of Contents
The following presents summary information regarding our allowance for loan losses for the periods indicated:
Year Ended December 31,
(Dollars in thousands)
2021
2020
Average loans outstanding (1)(2)
$
1,594,084
$
1,318,648
Total loans outstanding at end of period (3)
$
1,949,137
$
1,532,833
Allowance for loan losses at beginning of period
$
12,539
$
7,875
Provision for loan losses
1,230
4,682
Charge-offs:
Cash, Securities and Other
44
31
Construction and Development
—
—
1-4 Family Residential
—
—
Non-Owner Occupied CRE
—
—
Owner Occupied CRE
—
—
Commercial and Industrial
—
—
Total charge-offs
44
31
Recoveries:
Cash, Securities and Other
7
13
Construction and Development
—
—
1-4 Family Residential
—
—
Non-Owner Occupied CRE
—
—
Owner Occupied CRE
—
—
Commercial and Industrial
—
—
Total recoveries
7
13
Net charge-offs (recoveries)
37
18
Allowance for loan losses at end of period
$
13,732
$
12,539
Allowance for loan losses to total loans (4)
0.70
%
0.82
%
Net charge-offs to average loans (5)
—
—
(1) Average balances are average daily balances.
(2) Excludes average outstanding balances of mortgage loans held for sale of $88.7 million and $80.5 million for the years ended December 31, 2021 and 2020, respectively.
(3) Excludes mortgage loans held for sale of $30.6 million and $161.8 million as of December 31, 2021 and 2020, respectively.
(4) End of period loans as of December 31, 2021 includes $252.3 million in acquired loans and $46.8 million in PPP loans, of which $6.7 million are acquired PPP loans. No reserve is allocated for these loans. Excluding these loans would result in an increase of the ratio for the year ended December 31, 2021
(5) For percentages shown as a dash, the ratio of net charge-offs to average loans is negligible or immaterial.
The following table represents the allocation of the allowance for loan losses among loan categories and other summary information. The allocation for loan losses by category should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The allocation of a portion of the allowance for loan losses to one category of loans does not preclude its availability to absorb losses in other categories. The primary driver for the increase in the allowance from December 31, 2020 to December 31, 2021 was the loan portfolio growth. Additionally, the Company adjusted certain macro-economic factors based on continued signs of growth and recovery in the economy due to the COVID-19 pandemic.
As of December 31,
2021
2020
(Dollars in thousands)
Amount
% (1)
Amount
% (1)
Cash, Securities and Other
$
1,864
15.2
%
$
2,579
23.3
%
Construction and Development
1,092
9.1
932
8.5
1-4 Family Residential
3,553
29.7
3,233
29.7
Non-Owner Occupied CRE
2,952
24.7
2,004
18.4
Owner Occupied CRE
1,292
10.9
1,159
10.6
Commercial and Industrial
2,979
10.4
2,632
9.5
Total allowance for loan losses
$
13,732
100.0
%
$
12,539
100.0
%
(1) Represents the percentage of loans to total loans in the respective category.
84
Table of Contents
Deferred Tax Assets, Net
Deferred tax assets, net represent the differences in timing of when items are recognized for GAAP purposes and when they are recognized for tax purposes, as well as our net operating losses. 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, 2021, increased $0.8 million from December 31, 2020.
Deposits
Our deposit products include money market accounts, demand deposit accounts, time-deposit accounts (typically certificates of deposit), NOW accounts (interest checking accounts), and saving accounts. Our accounts are federally insured by the FDIC up to the legal maximum amount.
Total deposits increased by $585.8 million, or 36.2%, to $2.21 billion as of December 31, 2021 from December 31, 2020. The increase was attributable to the Teton Acquisition and continued organic growth with new client accounts, as well as increased deposit balances within the existing deposit accounts, offset partially by intentional runoff of higher rate non-relationship deposits. Total average deposits for the year ended December 31, 2021 were $1.74 billion, an increase of $379.2 million, or 27.9%, compared to $1.36 billion as of December 31, 2020.
The following presents the average balances and average rates paid on deposits for the periods below:
As of and For the Year Ended December 31,
2021
2020
Average
Average
Average
Average
(Dollars in thousands)
Balance
Rate
Balance
Rate
Deposits
Money market deposit accounts
$
899,970
0.23
%
$
719,946
0.46
%
NOW accounts
134,039
0.17
92,383
0.25
Uninsured time deposits
43,199
1.28
59,996
1.69
Other time deposits
104,637
0.63
98,231
1.28
Total time deposits
147,836
0.82
158,227
1.44
Savings accounts
6,096
0.03
5,552
0.08
Total interest-bearing deposits
1,187,941
0.29
976,108
0.59
Noninterest-bearing accounts
550,683
383,271
Total deposits
$
1,738,624
0.20
%
$
1,359,379
0.43
%
Average noninterest-bearing deposits to average total deposits was 31.7% and 28.2% for the year ended December 31, 2021 and 2020, respectively.
Our average cost of funds was 0.29% and 0.48% during the year ended December 31, 2021 and 2020, respectively. The decrease was driven by a 30 basis point reduction in interest bearing deposit costs consistent with the lower interest rate environment.
Total money market accounts as of December 31, 2021 were $1.06 billion, an increase of $209.2 million, or 24.7%, compared to $847.4 million as of December 31, 2020. NOW accounts increased $196.9 million, or 174.2%, to $309.9 million compared to December 31, 2020.
Total time deposits as of December 31, 2021 were $170.5 million, a decrease of $2.2 million, or 1.3%, compared to December 31, 2020.
85
Table of Contents
The following presents the amount of certificates of deposit by time remaining until maturity as of December 31, 2021:
(Dollars in thousands)
Three Months or Less
Three to Six Months
Six to 12 Months
After 12 Months
Total
Uninsured Time Deposits
$
4,931
$
6,215
$
16,069
$
26,543
$
53,758
Other
26,983
17,127
42,748
29,875
116,733
Total
$
31,914
$
23,342
$
58,817
$
56,418
$
170,491
Borrowings
We have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs. As of December 31, 2021 and December 31, 2020, borrowings totaled $77.7 million and $173.9 million, respectively. On August 31, 2021, the Company completed the issuance and sale of subordinated notes totaling $15.0 million. On December 22, 2021, the Company issued Notices of Redemption to debt holders totaling $6.6 million to be redeemed on January 2, 2022.
The decrease in other borrowings is primarily attributed to the paydown of loans in the Paycheck Protection Program Loan Facility from the Federal Reserve with a period end balance of $23.6 million. Borrowing from this facility is expected to trend in the same direction as the PPP loan balances. The following presents balances of each of the borrowing facilities as of the dates indicated:
December 31,
December 31,
(Dollars in thousands)
2021
2020
Borrowings
FHLB borrowings
$
15,000
$
15,000
Federal Reserve borrowings
23,629
134,563
Subordinated notes
39,031
24,291
Total
$
77,660
$
173,854
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, 2021 and December 31, 2020 amounted to $771.4 million and $668.6 million, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $509.7 million as of December 31, 2021.
As of and for the
Year Ended
December 31,
(Dollars in thousands)
2021
Short-term borrowings:
Maximum outstanding at any month-end during the period
$
15,000
Balance outstanding at end of period
15,000
Average outstanding during the period
15,000
Average interest rate during the period
0.32
%
Average interest rate at the end of the period
0.32
The Bank has borrowing capacity associated with three unsecured federal funds lines of credit up to $10.0 million, $19.0 million, and $25.0 million. As of December 31, 2021 and 2020, there were no amounts outstanding on any of the federal funds lines.
On October 28, 2020, the Company entered into a Business Loan Agreement and associated Promissory Note (the “Note”), dated June 30, 2020, with a corresponding lending partner. The Note is secured by stock of the Bank and bears interest at the one month ICE Benchmark Administration (“IBA”) LIBOR plus 2.5%. As of December 31, 2020, there were no amounts outstanding and the borrowing capacity associated with this facility was $5.0 million. The Business Loan Agreement expired on June 30, 2021, in accordance with its terms, and was not renewed.
86
Table of Contents
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, 2021 and December 31, 2020, the Company was in compliance with the covenant requirements.
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 presents, during the periods presented, the composition of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the period indicated.
Average Percentage for the Year Ended
Average Percentage for the Year Ended
December 31,
December 31,
2021
2020
Sources of Funds:
Deposits:
Noninterest-bearing
26.73
%
23.10
%
Interest-bearing
57.67
58.83
FHLB and Federal Reserve borrowings
5.05
7.40
Subordinated notes
1.42
0.83
Other liabilities
0.90
1.29
Shareholders’ equity
8.23
8.55
Total
100.00
%
100.00
%
Uses of Funds:
Total loans
76.77
%
78.87
%
Available-for-sale securities
1.50
2.74
Mortgage loans held for sale
4.30
4.85
Interest-bearing deposits in other financial institutions
12.78
7.82
Noninterest-earning assets
4.65
5.72
Total
100.00
%
100.00
%
Average noninterest-bearing deposits to total average deposits
31.67
%
28.19
%
Average loans to total average deposits
91.69
97.00
Average interest-bearing deposits to total average deposits
68.33
71.81
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 $64.1 million, or 41.4%, to $219.0 million as of December 31, 2021 compared to December 31, 2020. The increase is primarily due to $39.8 million in equity issued as consideration for the Teton Acquisition and net income of $20.6 million.
87
Table of Contents
On November 3, 2020, the Company announced that its board of directors authorized the repurchase of up to 400,000 shares of the Company’s common stock, no par value, from time to time, within one year (the "2020 Repurchase Plan") and that the Board of Governors of the Federal Reserve System advised the Company that it has no objection to the Company’s 2020 Repurchase Plan. The Company may repurchase shares in privately negotiated transactions, in the open market, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 promulgated by the Securities and Exchange Commission, or otherwise in a manner that complies with applicable federal securities laws. The 2020 Repurchase Plan does not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice. The 2020 Repurchase Plan expired in November 2021. During the year ended December 31, 2021, the Company did not repurchase any shares under the 2020 Repurchase plan.
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, 2021 and December 31, 2020, respectively, our holding company and Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized," for purposes of the prompt corrective action regulations. As we continue to grow our operations and maintain capital requirements, our regulatory capital levels may decrease depending on our level of earnings. During the years ended December 31, 2021 and 2020, First Western made capital injections of $2.9 million and $10.0 million, respectively, into the Bank. We continue to monitor growth and control our capital activities in order to remain in compliance with all applicable regulatory capital standards.
The following presents our regulatory capital ratios for the dates noted.
December 31, 2021
December 31, 2020
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Tier 1 capital to risk-weighted assets
Bank
$
203,164
11.40
%
$
133,963
10.22
%
Consolidated Company
188,777
10.54
131,507
9.96
Common Equity Tier 1(CET1) to risk-weighted assets
Bank
203,164
11.40
133,963
10.22
Consolidated Company
188,777
10.54
131,507
9.96
Total capital to risk-weighted assets
Bank
217,215
12.19
146,853
11.20
Consolidated Company
242,388
13.54
168,957
12.80
Tier 1 capital to average assets
Bank
203,164
10.05
133,963
7.62
Consolidated Company
188,777
9.31
131,507
7.45
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 loan 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.
88
Table of Contents
The following presents future contractual obligations to make future payments for the periods indicated (amounts in thousands):
As of December 31, 2021
More than
More than
1 Year
1 Year but Less
3 Years but Less
5 Years
or Less
than 3 Years
than 5 Years
or More
Total
FHLB and Federal Reserve
$
7,519
$
10,000
$
21,110
$
—
$
38,629
Subordinated notes
—
—
—
39,031
(1)
39,031
Time deposits
114,073
36,058
20,337
23
170,491
Minimum lease payments
3,461
6,274
2,776
2,168
14,679
Total
$
125,053
$
52,332
$
44,223
$
41,222
$
262,830
(1) Reflects contractual maturity dates of December 31, 2026, March 31, 2030, December 1, 2030, and September 1, 2031. Notice of early redemption has been provided for the subordinated notes due December 31, 2026.
The following presents financial instruments whose contract amounts represent credit risk, as of the dates indicated.
December 31,
December 31,
2021
2020
(Dollars in thousands)
Fixed Rate
Variable Rate
Fixed Rate
Variable Rate
Unused lines of credit
$
136,289
$
442,035
$
78,506
$
360,883
Standby letters of credit
2,420
20,940
1,933
17,524
Commitments to make loans to sell
60,529
—
370,512
—
Commitments to make loans
16,256
14,920
24,225
25,316
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
Our accounting policies and procedures are described in Note 1 - Organization and Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements.
89
Table of Contents