NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation: The consolidated financial statements include the accounts of First Western Financial, Inc. ("FWFI"), incorporated in Colorado on July 18, 2002, and its direct and indirect wholly-owned subsidiaries listed below (collectively referred to as the "Company," "we," "us," or "our").
FWFI is a bank holding company with financial holding company status registered with the Board of Governors of the Federal Reserve System. FWFI wholly owns the following subsidiaries: First Western Trust Bank (the "Bank") and Ryder, Stilwell Inc. ("RSI"). The Bank wholly owns the following subsidiaries, which are therefore indirectly wholly-owned by FWFI: First Western Merger Corporation ("Merger Corp.") and RRI, LLC ("RRI"). RSI and RRI are not active operating entities.
The Company provides a fully-integrated suite of wealth management services including private banking, personal trust, investment management, mortgage loans, and institutional asset management services to individual and corporate clients principally in Colorado (metro Denver, Aspen, Boulder, Fort Collins and Vail Valley), Arizona (Phoenix and Scottsdale), California (Century City), Montana (Bozeman), and Wyoming (Jackson Hole, Laramie, Pinedale and Rock Springs). The Company’s revenues are generated from its full range of product offerings as noted above, but principally from net interest income (the interest income earned on the Bank’s assets net of funding costs), fee-based wealth advisory, investment management, asset management and personal trust services, and net gains earned on mortgage loans.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") for financial information, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"), and where applicable, reporting practices prescribed for the banking and investment advisory industries.
Consolidation: The Company’s policy is to consolidate all majority-owned subsidiaries in which it has a controlling financial interest and variable-interest entities where the Company is deemed to be the primary beneficiary. All material intercompany accounts and transactions have been eliminated in consolidation.
Business Combinations and Divestitures: On December 31, 2021, the Company completed its merger pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) with Teton Financial Services, Inc. (“Teton”), parent company of Rocky Mountain Bank, a Wyoming-chartered bank headquartered in Jackson, Wyoming. Management concluded that the merger represented a business combination, which is accounted for using the acquisition method, with the results of operations included in the Company’s consolidated financial statements as of the acquisition date.
Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including the impact of the COVID-19 pandemic, and changes in the financial condition of borrowers. Material estimates that are particularly susceptible to significant change include: the determination of the allowance for loan losses, the evaluation of goodwill impairment, and the fair value of financial instruments.
Concentration of Credit Risk: Most of the Company’s lending activity is to clients located in and around metro Denver, Aspen, Fort Collins, and Vail, Colorado; Phoenix and Scottsdale, Arizona; Bozeman, Montana; and Jackson Hole, Wyoming. The Company does not believe it has significant concentrations in any one industry or customer. As of December 31, 2022 and December 31, 2021, 77.9% and 76.1%, respectively, of the Company’s loan portfolio was secured by real estate collateral. Declines in real estate values in the primary markets the Company operates in could negatively impact the Company.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, deposits at other financial institutions with original maturities fewer than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements.
Investment Securities: Investments we intend to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale and are recorded at fair value using current market information from a pricing service, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax. The carrying values of our investment securities classified as available-for-sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders' equity.
Investments for which we have the intent and ability to hold to their maturity are classified as held-to-maturity securities and are recorded at amortized cost. Securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity.
As of December 31, 2022, equity mutual funds have been recorded at fair value within the Other assets line of the Consolidated Balance Sheets with changes recorded in the Unrealized gain/(loss) recognized on equity securities line of the Consolidated Statements of Income.
The Company invests in projects to create affordable housing. These investments are classified as Other assets on the Consolidated Balance Sheets. Investments in affordable housing projects that qualify for low-income housing tax credits ("LIHTC") are accounted for using the proportional amortization method. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other benefits received and recognized as a component of applicable income tax expense in the Consolidated Statements of Income.
Net purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities, without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Declines in the fair value of available-for-sale securities and held-to-maturity securities below their cost that are deemed to be other-than-temporary are recorded in earnings as realized losses in Non-interest income.
Management evaluates securities for other-than-temporary impairment ("OTTI") on a quarterly basis, or more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to loss on securities, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income (loss). The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. As of December 31, 2022 and 2021, no securities were determined to be other-than-temporarily impaired.
Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Correspondent Bank Stock: Correspondent bank stock includes stock in the Federal Home Loan Bank of Topeka ("FHLB"), Federal Reserve Bank ("FRB"), and Bankers’ Bank of the West ("BBW"), which are considered restricted securities because the Company may be required to hold the stock in order to maintain the correspondent banking relationship with these institutions. No ready market exists for the FHLB and FRB stock and therefore, no quoted market values exist. For financial reporting purposes, the FHLB and FRB stock is carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value. The BBW stock is carried at fair value. No impairment was recorded as of December 31, 2022 and 2021. Both cash and stock dividends are reported as income when received.
Mortgage Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at fair value. Net unrealized losses, if any, are recorded and charged to earnings. Servicing rights are released when the associated mortgage loans are sold. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
Loans: Loans the Company has the intent and ability to hold for the foreseeable future, until maturity, or until payoff are reported at their outstanding unpaid principal balances, adjusted for charge-offs and recoveries, net of deferred costs (fees) and unamortized premiums/(unaccreted discounts), and the allowance for loan losses. Interest income is accrued on unpaid principal balances. Fees received at origination, net of certain direct origination costs for providing loan
commitments and letters of credit that result in loans, are deferred and amortized to interest income over the life of the related loan or until payoff, at which time the remaining unamortized fee is recorded as interest income. Fees, net of certain direct origination costs on commitments and letters of credit, are amortized to interest income over the commitment period.
Past Due Loans: The accrual of interest on loans is discontinued at the time the loan becomes 90 days delinquent unless the loan is well secured and in the process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off if collection of interest or principal is considered doubtful.
Interest accrued but not collected is charged off against interest income at the time a loan is placed on non-accrual status. The interest collected on non-accrual loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans can be returned to accrual status when there is a sustained period of repayment performance (usually six-months or longer) and the collectability of future payments is reasonably assured.
Troubled Debt Restructurings: A troubled debt restructuring ("TDR") is a loan the Company, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower the Company would not otherwise consider.
The loan terms which have been modified or restructured due to a borrower’s financial difficulty, include but are not limited to (i) a reduction in the stated interest rate of the loan, (ii) an extension of the maturity date of the loan at an interest rate below market, or (iii) a reduction of the accrued interest.
Loan modifications granted by the Company are reviewed on a case-by-case basis to determine if they should be considered a restructured loan.
COVID-19 Loan Modifications: As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the prior two years, primarily for a period of 180 days or less.
COVID-19 and CARES Act: On March 11, 2020 the World Health Organization declared the outbreak of COVID-19 a global pandemic, which continues to spread throughout the United States and the around the world. In response to the COVID-19 pandemic, the President signed the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") into law on March 27, 2020. The objective of the CARES Act is to prevent a severe economic downturn using various measures, including economic stimulus to significantly impacted industry sectors. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act and other government actions. See Note 5 - Loans and the Allowance for Loan Losses for further discussion on our loan modification program.
All loans modified in response to COVID-19 are classified as performing and pass rated as of December 31, 2022 and 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. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.
The Company is a participant 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. The Company sold a 95% participation in new MSLP loans to the Main Street Special Purpose Vehicle ("SPV") at par value. The Company must retain 5% of the MSLP loan until (i) it matures or (ii) neither the Main Street SPV nor a Governmental Assignee holds an interest in MSLP Loan in any capacity, whichever comes first. See Note 5 - Loans and the Allowance for Loan Losses for further discussion on our participation in the program.
Allowance for Loan Losses: The Company’s reserve for loan losses is an estimate of the probable incurred loan losses and is comprised of (i) the allowance for loan losses and (ii) the reserve for unfunded commitments. The reserve for unfunded commitments is included in Other liabilities in the accompanying Consolidated Balance Sheets and the loan balances in the accompanying Consolidated Balance Sheets are reported net of the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses, which is a noncash charge to earnings. Loan
losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses.
The allowance for loan losses is 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 may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
We are closely monitoring the changing dynamics in the economy and related impacts to our clients. Management will continue to closely monitor the loan portfolio and analyze the economic data to assess the impact on the allowance for loan losses.
A loan is considered impaired when, based on current information and events, it is probable the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.
TDR and non-accrual loans are separately evaluated for impairment and included in the separately identified impairment disclosures. If cash flow dependent, TDR and non-accrual loans will be measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR or non-accrual loan is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDR and non-accrual loans that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses on loans individually identified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting all scheduled principal and interest payments. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
The allowance for loan losses is comprised of specific loan loss reserves and general loan loss reserves. The impairment of a specific loan is measured based either on (i) the present value of expected future cash flows discounted at the loan’s effective interest rate, or (ii) the fair value of the underlying collateral, less costs to sell, if the repayment is expected to be provided predominantly by the sale of the underlying collateral. Specific impairments are measured on a loan-by-loan basis if risk characteristics are unique to an individual borrower. The general loan loss reserve covers non-impaired loans and is established by evaluating the incurred loss on homogenous pools of loans, not specifically reviewed for impairment as noted above, that have common risk characteristics. The general loan loss reserve is based on historical loss experiences adjusted for nine qualitative factors on all loans in the portfolio not considered impaired. Certain factors are applied to each pool and certain factors are applied to all non-individually reviewed loans. The nine qualitative factors the Company considers are:
•Changes in relevant economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.
•Levels and trends in net charge-offs.
•The existence and effect of any concentrations of credit and changes in the level of such concentrations.
•Changes in the nature or volume of the loan portfolio and in the terms of loans.
•Changes in the experience, ability, and depth of lending management and other relevant staff.
•Changes in the volume and severity of past due loans.
•Changes in the quality of the loan review system and associated grading changes.
•Change in the level of overdrafts.
•Levels and status of loans modified as a result of COVID-19.
The following portfolio segments have been identified:
•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 as of December 31, 2022 and 2021.
•Consumer and Other—consists of unsecured consumer loans. Loans held for investment accounted for under the fair value option are also classified within this line item.
•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 ("CRE"), 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. This category includes MSLP loans as of December 31, 2022 and 2021.
The reserve for unfunded commitments represents the estimate for probable loan losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include commercial and standby letters of credit, unused lines of credit, and unfunded loan commitments expected to be funded.
The process used to determine the reserve for unfunded commitments is consistent with the process for determining the allowance for loan losses, adjusted for estimated funding probabilities. Changes to the level of the reserve for unfunded commitments are recognized through the provision for loan losses for off-balance sheet credit exposures, included in the non-interest other expense line of the Consolidated Statements of Income.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Prior to participating in the MSLP, the Company obtained a true sale opinion with regards to the legal isolation condition of the contract. Legal counsel determined that given the facts and circumstances provided, consistent with the FDIC rule entitled “Treatment of financial assets transferred in connection with a securitization or participation”, 12 C.F.R. §360.6, that the MSLP documents would be considered a true sale to the buyer. As such, Management concludes the MSLP loans qualify for sales accounting treatment and are true sales contracts under GAAP.
Premises and Equipment: Premises and equipment are carried at cost, net of accumulated depreciation, with the exception of artwork and land, which are carried at cost. The Company acquired land and three buildings associated with the Teton Acquisition. These assets were initially recorded at their fair values based on recent appraisals and the buildings will be depreciated over their new remaining useful life, ranging from 25 to 50 years. Leasehold improvements are depreciated using the straight-line method and recognized over the shorter of the lease term or estimated useful lives of the assets, ranging from 7 to 15 years. Furniture/equipment and software are depreciated using the straight-line method and recognized over the estimated useful lives of the assets, ranging from 3 to 7 years.
Goodwill and Other Intangible Assets: Goodwill represents the excess of purchase price over the fair value of net identifiable tangible and intangible assets acquired in business combinations. The Company has acquired other identifiable intangible assets, primarily consisting of customer relationships, non-competition agreements, and recorded goodwill through its acquisition of financial services companies. Goodwill and other indefinite-lived intangible assets are not amortized, but are tested for impairment at the reporting unit level at least annually by applying a fair value-based test using discounted estimated future net cash flows. The Company has selected October 31 as the date to perform its annual impairment tests. Impairment exists when the carrying amount of the goodwill and other intangible assets exceeds their estimated fair values. Impairment losses, if any, are recognized as a charge to non-interest expense and an adjustment to the carrying value of the goodwill or other intangible assets. Subsequent reversals of impairment charges are prohibited. Goodwill is the only intangible asset with an indefinite life on the Company’s Consolidated Balance Sheets. Other definite-lived intangible assets, including customer relationship intangibles, are amortized on an accelerated basis over periods representing the estimated remaining lives of the assets of one to ten years and are evaluated for impairment when events or changes in circumstances indicate the carrying values of such assets may not be recoverable. As of December 31, 2022, the Company believes the carrying value of its goodwill not to be impaired and other intangible assets to be recoverable.
Accounts Receivable: Accounts receivable primarily represents the billed but unpaid fees from trust and investment advisory services owed by clients, which are typically calculated as a percentage of average invested balances. The majority of the Company’s investment advisory clients are billed quarterly in arrears based on the daily average balance in the client’s trust or investment accounts for that quarter.
Other Receivables: Other accounts receivable represents compensation paid to employees that is contingent on future employment and recognized in the Consolidated Statements of Income over the estimated service period and sales of investments and assets in which the Company has obtained a firm commitment as of the balance sheet dates.
Leases: Leases represent a contract that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company leases certain identified assets from third parties. Leases in which the Company is determined to be the lessee are primarily operating leases. Leases in which the Company is determined to be the lessor are considered operating leases and consist of the partial lease of Company owned buildings. Operating leases are included in the Other assets and Other liabilities line items of the Consolidated Balance Sheets and lease expense for lease payments is recognized on a straight-line basis over the lease term. Right-of-use (“ROU”) assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. An ROU asset represents the right to use the underlying asset for the lease term and also includes any direct costs and payments made prior to lease commencement and excludes lease incentives. When an implicit rate is not available, an incremental borrowing rate based on the information available at commencement date is used in determining the present value of the lease payments. A lease term may include an option to extend or terminate the lease when it is reasonably certain the option will be exercised. Short-term leases of 12 months or less are excluded from accounting guidance; as a result, the lease payments are recognized on a straight-line basis over the lease term and the leases are not reflected on the Company’s Consolidated Balance Sheets. Renewal and termination options are considered when determining short-term leases. Leases are accounted for on an individual lease level. Rent holidays and rent escalations are recognized on a straight-line basis to lease expense over the lease term. The landlord/tenant incentives are recorded as a reduction to the right of use asset and depreciated on a straight line basis over the remaining lease term once the assets are placed in service.
Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less selling costs, at the date of foreclosure, establishing a new cost basis in the asset. Physical possession of residential real estate property collateralizing a residential mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through similar legal agreement. Subsequent to foreclosure, valuations are periodically performed by management, with any subsequent declines in value recorded as a charge to expense through an impairment recorded directly against the other real estate owned assets. Changes in the valuation allowance are recorded as provision for losses on other real estate owned. Revenue and expenses from operations related to other real estate owned are included in the Provision on other real estate owned line of the Consolidated Statements of Income.
Company-Owned Life Insurance: The Company has purchased life insurance policies on certain current and former officers and key employees. Company-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Mortgage Banking Derivatives: Commitments to fund mortgage loans, interest rate lock commitments ("IRLC") and forward sale commitments ("FSC"), to be sold in the secondary market for the future delivery of these loans are accounted for as free standing derivatives. The fair value of the IRLC is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. The Company sells mortgage loans to third party investors at the best execution available which includes best efforts, mandatory, and bulk bids. Loans committed under mandatory or bulk bid are considered FSC and qualify as financial derivatives. Fair values of these mortgage derivatives are estimated based on the change in the loan pricing from the date of the commitment to the period end date for any unsettled commitments. Changes in the fair values of these derivatives are included in the Net gain on mortgage loans line of the Consolidated Statements of Income.
In order to manage the interest rate risk on our uncommitted IRLC and mortgage loans held for sale pipeline, the Company enters into mortgage derivative financial instruments called To Be Announced ("TBA"), which we refer to as forward commitments. TBA agreements are forward contracts to purchase mortgage backed securities ("MBS") that will be issued by a US Government Sponsored Enterprise. The Bank purchases or sells these derivatives to offset the changes in value of our mortgage loans held for sale and IRLC adjusted pipeline where we have exposure to interest rate volatility. Changes in the fair values of these derivatives are included in the Net gain on mortgage loans line of the Consolidated Statements of Income.
Stock-Based Compensation: The Company has stock-based compensation plans that provide for the granting of stock options, restricted stock awards, restricted stock units and performance stock units to associates and non-associate directors who perform services for the Company. The Company estimates the fair value of its stock option awards on the date of grant using the Black-Scholes option-pricing model. The Company determines the fair value of the restricted and performance stock units as well as restricted stock awards based on the estimated market value of the underlying shares at the date of grant.
Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s policy is to recognize forfeitures as they occur.
Income Taxes: Income tax expense is the total of the current year income tax due and the change in the deferred tax assets and liabilities. Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
The Company recognizes tax benefits from uncertain tax positions when it is more-likely-than-not, based on the technical merits of the position, the tax position will be sustained upon examination, including the resolution of any appeals or litigation. Tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon resolution.
The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments have historically been minimal and immaterial to financial results. The Company classifies interest and penalties, if any, as a component of income tax expense.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale, net of taxes, which is also recognized as a separate component of equity.
Earnings per Common Share: Earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during each period. See Note 13 – Earnings Per Common Share for the common share equivalents that have been included and excluded from the calculation of earnings per common share.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as unused lines of credit, commitments to make loans and commercial and standby letters of credit. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the consolidated financial statements.
Deposits: Deposit products include money market accounts, demand deposit accounts, time-deposit accounts (typically certificates of deposit), NOW accounts (interest checking accounts), and savings accounts. Our accounts are federally insured by the FDIC up to the legal maximum amount.
Borrowings: Short-term and long-term borrowing sources utilized to supplement deposits and meet liquidity needs. A blanket pledge and security agreement is in place with FHLB that requires certain loans and securities to be pledged as collateral for any outstanding borrowings under the agreement. Our borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 17 – Fair Value. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Revenue Recognition: In accordance with the Financial Accounting Standards Board ("FASB"), Revenue Contracts with Customers ("Topic 606"), trust and investment management fees are earned by providing trust and investment services to customers. The Company’s performance obligation under these contracts is satisfied over time as the services are provided. Fees are recognized monthly based on the average monthly value of the assets under management and the corresponding fee rate based on the terms of the contract. No performance based incentive fees were earned with respect to investment management contracts for the years ended December 31, 2022 and 2021. Receivables are recorded on the Consolidated Balance Sheets in the Accounts receivable line item. Income related to trust and investment management fees, bank fees, and risk management and insurance fees on the Consolidated Statements of Income for the years ended December 31, 2022 and 2021 are considered in scope of Topic 606.
Transition of LIBOR to an Alternative Reference Rate: In July 2017, the United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate ("LIBOR") announced that after 2021 it will no longer persuade or compel banks to submit rates for the calculation of LIBOR. In response, the Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee to identify a set of alternative reference interest rates for possible use as market benchmarks. This committee has proposed the Secured Overnight Financing Rate ("SOFR") as its recommended alternative to U.S. dollar LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in the second quarter of 2018. SOFR is based on a broad segment of the overnight Treasury repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities.
In March 2020, the Financial Accounting Standards Board (‘FASB”) issued Accounting Standards Update (“ASU’) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.
On December 21, 2022, the FASB issued Accounting Standards Update (ASU) 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. ASU 2022-06 extends the period of time financial statement preparers can utilize the reference rate reform relief guidance through December 31, 2024.
Certain of the Company’s assets and liabilities are indexed to LIBOR, with exposure extending past December 31, 2022. The Company is currently evaluating and planning for the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. In general, the transition away from LIBOR may result in increased market risk, credit risk, operational risk and business risk for the Company. The Company has developed a LIBOR transition plan, which addresses governance, risk management, legal, operational, systems and operations, fallback language, and other aspects of planning. The company no longer originates LIBOR indexed loans and is working on transitioning existing LIBOR loans to SOFR. Consumer indexed loans are being managed in accordance with Interagency Guidance.
Restrictions on Cash: During the year ended December 31, 2021, the Board of Governors of the Federal Reserve System reduced reserve requirement ratios to zero percent. This action eliminated reserve requirements for all depository institutions.
Reclassifications: Certain items in prior year financial statements were reclassified to conform to the current presentation. Such reclassifications had no impact on net income available to common shareholders or total shareholders’ equity.
Recently adopted accounting pronouncements: The following reflect recent accounting pronouncements that have been adopted by the Company during the Company’s fiscal year ended December 31, 2022.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which amended existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge of the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 was set to be effective for the Company on January 1, 2021. However, ASU 2019-10 amended the mandatory effective date for ASU 2014-07 to January 1, 2023 for SRC’s, with earlier adoption permitted. On January 1, 2022, the Company adopted the new guidance. The adoption of this ASU has not had a material impact on the consolidated financial statements, and the Company has not recorded goodwill impairment to date as of part of the acquisition activity.
Recently issued accounting pronouncements, not yet adopted: The following reflects pending pronouncements with an update to the expected impact since the end of the Company’s fiscal year ended December 31, 2022.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This was issued to clarify the guidance in Topic 820, Fair Value Measurement, when measuring fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The Company is currently assessing the impact of this guidance on our existing equity securities. This guidance is effective for the Company in fiscal years after December 15, 2023.
In February 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) ("ASU 2016-13"). ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss ("CECL") model. The CECL model is applicable to the measurement of credit losses on the financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and reinsurance receivables. 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. For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained earnings and the allowance for credit losses as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 was set to be effective for most public companies on January 1, 2020. However, at the October 16, 2019 FASB meeting, the FASB voted unanimously to delay the effective date of CECL adoption for smaller reporting companies ("SRCs") to January 1, 2023.
During the year ended December 31, 2022, the Company’s CECL project team continued to work through its implementation plan. The Company selected a champion quantitative model to approximate expected losses by call code segment using regional and other appropriate peers. The Company selected qualitative factors and evaluated those factors for each loan segment for the quarter ended December 31, 2022. The Company has completed a model validation and worked to finalize policies and procedures, internal control structure, and process flows. Using this information, the Company successfully ran parallel models for each completed quarter of 2022 in order for management to review and compare results between the initial CECL model and existing ALLL model. Based on preliminary results, the Company expects its allowance for credit losses ("ACL") coverage ratio to be within a range of approximately 75-90 bps of total loans and 30-45 bps coverage on off-balance sheet commitments. The Company will implement the new standard beginning January 1, 2023.
In March, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326); Troubled Debt Restructurings (“TDR”) and Vintage Disclosures. This ASU will be effective for the Company at the same time we adopt CECL, January 1, 2023. The amendments eliminate the TDR recognition and measurement guidance and instead require an entity to evaluate whether the modification represents a new loan or a continuation of an existing loan (consistent with accounting for other modifications). The amendments also enhance existing disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.
NOTE 2 – ACQUISITIONS
On July 22, 2021, the Company entered into the Merger Agreement with Teton, parent company of Rocky Mountain Bank, a Wyoming-chartered bank headquartered in Jackson, Wyoming. As provided by the Merger Agreement, Teton merged into the Company, as subject to the terms and conditions set forth in the Merger Agreement, with the Company continuing as the surviving corporation. As provided by the Merger Agreement, Rocky Mountain Bank merged with and into the Bank, with the Bank surviving the bank merger. The transaction closed on December 31, 2021 with an aggregate purchase price of $51.3 million. As part of its long-term growth strategy, the Teton Acquisition expands First Western’s presence in Wyoming and allows the Bank to deliver its unique approach to private and commercial banking to more clients in the region.
The Teton Acquisition was accounted for under the acquisition method of accounting and therefore all assets and liabilities were measured and recorded at their fair values as of the acquisition close date of December 31, 2021 with final measurement period adjustments made as of March 31, 2022. All non-equity acquisition related costs were expensed as incurred. Certain acquisition costs related to the issuance of equity were capitalized as of December 31, 2021. Market value adjustments for assets acquired and liabilities assumed were amortized or accreted on a level yield basis over the estimated life of the asset or liability. Loans acquired were recorded at their estimated fair value and therefore no allowance for loan and lease losses was recorded at the date of acquisition. Goodwill of $6.2 million, which is not tax deductible, was recognized in the transaction and represents expected synergies and cost savings resulting from combining the expanded footprint and expertise of the associates. Additionally, core deposit intangible assets were identified and recorded at their estimated fair values and are amortized over their estimated useful life. On August 31, 2021, the Company completed the issuance and sale of subordinated notes, which provided partial funding of the transaction. See Note 10 – Borrowings for more information.
The following presents the final, recorded fair values of the assets acquired and liabilities assumed in the transaction with Teton as of December 31, 2021, including all measurement period adjustments to the provisional estimates. The measurement period has closed, with no further adjustments expected (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Fair value of consideration transferred | | Provisional Estimates | | Measurement Period Adjustments | | December 31,
2021 |
| Cash consideration | | $ | 11,501 | | | $ | — | | | $ | 11,501 | |
| Common stock issued | | 39,818 | | | — | | | 39,818 | |
| Total fair value of consideration transferred | | 51,319 | | | — | | | 51,319 | |
| | | | | | |
| Assets acquired | | | | | | |
| Cash and cash equivalents | | 132,498 | | | — | | | 132,498 | |
| Available-for-sale securities, at fair value | | 18,058 | | | — | | | 18,058 | |
| Correspondent bank stock, at cost | | 928 | | | — | | | 928 | |
| Mortgage loans held for sale | | 840 | | | — | | | 840 | |
| Loans, net | | 252,275 | | | (857) | | | 251,418 | |
| Premises and equipment | | 17,758 | | | — | | | 17,758 | |
| Accrued interest receivable | | 923 | | | — | | | 923 | |
| Accounts receivable | | 95 | | | — | | | 95 | |
| Other receivable | | 520 | | | — | | | 520 | |
Core deposit intangible(1) | | 1,264 | | | 698 | | | 1,962 | |
| Other assets | | 226 | | | 242 | | | 468 | |
| Assets held for sale | | 115 | | | 5 | | | 120 | |
| Total assets acquired | | 425,500 | | | 88 | | | 425,588 | |
| | | | | | |
| Liabilities assumed | | | | | | |
| Deposits | | 379,227 | | | (29) | | | 379,198 | |
| Accrued interest payable | | 26 | | | — | | | 26 | |
| Other liabilities | | 1,283 | | | — | | | 1,283 | |
| Deferred tax liabilities, net | | 42 | | | (71) | | | (29) | |
| Total liabilities assumed | | 380,578 | | | (100) | | | 380,478 | |
| Net assets acquired | | 44,922 | | | 188 | | | 45,110 | |
| Goodwill recognized | | $ | 6,397 | | | $ | (188) | | | $ | 6,209 | |
_____________________________
(1)The core deposit intangible was determined to have an estimated life of 10 years.
The fair value adjustments were determined using discounted expected cash flows. Loans had a fair value of $252.3 million and a contractual balance of $256.3 million as of December 31, 2021. The discount on the loans acquired in this transaction due to anticipated credit loss, as well as considerations for market interest rates, totaled $4.0 million, representing 1.6% of their contractual balance. There were no loans acquired that were considered to be purchased credit impaired ("PCI") loans.
The composition of the contractual balance of acquired loans as of December 31, 2021 is detailed in the table below (dollars in thousands):
| | | | | |
| Year Ended
December 31, |
| 2021 |
Cash, Securities and Other (1) | $ | 20,080 | |
| Construction and Development | 33,977 | |
| 1-4 Family Residential | 70,348 | |
| Non-Owner Occupied CRE | 43,162 | |
| Owner Occupied CRE | 33,000 | |
| Commercial and Industrial | 55,690 | |
| Total loans | 256,257 | |
| Acquisition fair value adjustments | (3,982) | |
| Loans, net | $ | 252,275 | |
_____________________________
(1)Includes $6.7 million in PPP loans.
The Company incurred $1.2 million and $4.1 million in expenses related to the acquisition during the years ended December 31, 2022 and December 31, 2021, respectively. The following presents the acquisition expenses within Non-interest expense of the Consolidated Statements of Income as of the dates noted (dollars in thousands):
| | | | | | | | | | | |
| Year Ended
December 31, | | Year Ended
December 31, |
| 2022 | | 2021 |
| Mergers and acquisitions expense: | | | |
| Salaries and employee benefits | $ | 591 | | | $ | 547 | |
| Professional services | 563 | | | 1,118 | |
| Technology and information systems | 7 | | | — | |
| Data processing | (73) | | | 2,428 | |
| Marketing | 81 | | | — | |
| Other | 54 | | | 8 | |
| Total mergers and acquisitions expense | $ | 1,223 | | | $ | 4,101 | |
The following table presents pro forma information for the years ended December 31, 2022 and 2021, as if the Teton Acquisition had occurred on January 1, 2021. The information for the year ended December 31, 2022 reflects actual results presented in our Consolidated Statements of Income. Information for the year ended December 31, 2021 has been prepared for comparative purposes only, and is not indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the period presented, nor is it indicative of future results (in thousands, except per share data):
| | | | | | | | | | | |
| Pro Forma |
| Twelve Months Ended December 31, |
| 2022 | | 2021 |
| Net interest income after provision for loan losses | $ | 79,522 | | | $ | 68,019 | |
| Noninterest income | 28,412 | | | 41,206 | |
| Net income | 21,698 | | | 23,234 | |
| Pro forma earnings per share: | | | |
| Basic | 2.29 | | | 2.49 | |
| Diluted | 2.23 | | | 2.43 | |
NOTE 3 - INVESTMENT SECURITIES
The following presents the amortized cost and fair value of securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses as of the date noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | Amortized
Cost | | Gross
Unrecognized
Gains | | Gross
Unrecognized
Losses | | Fair
Value |
| Investment securities held-to-maturity: | | | | | | | | |
| U.S. Treasury debt | | $ | 243 | | | $ | — | | | $ | (9) | | | $ | 234 | |
| | | | | | | | |
| Corporate bonds | | 23,819 | | | — | | | (2,453) | | | 21,366 | |
| GNMA mortgage-backed securities – residential | | 39,426 | | | — | | | (2,800) | | | 36,626 | |
| FNMA mortgage-backed securities – residential | | 6,708 | | | — | | | (506) | | | 6,202 | |
| Government CMO and MBS - commercial | | 6,786 | | | 13 | | | (403) | | | 6,396 | |
| Corporate CMO and MBS | | 4,074 | | | — | | | (180) | | | 3,894 | |
| | | | | | | | |
| Total securities held-to-maturity | | $ | 81,056 | | | $ | 13 | | | $ | (6,351) | | | $ | 74,718 | |
The following presents the amortized cost and fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss as of the date noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
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 | |
| GNMA mortgage-backed securities – residential | | 26,611 | | | 185 | | | (146) | | | 26,650 | |
| FNMA mortgage-backed securities – residential | | 14,400 | | | 43 | | | — | | | 14,443 | |
| Government CMO and MBS - commercial | | 878 | | | — | | | — | | | 878 | |
| Corporate CMO and MBS | | 1,492 | | | 23 | | | (18) | | | 1,497 | |
| Total securities available-for-sale | | $ | 55,266 | | | $ | 478 | | | $ | (182) | | | $ | 55,562 | |
Net amortization of premiums and discounts related to mortgage securities during each of the years ended December 31, 2022 and 2021 was $0.1 million and is included in Net interest income in the Consolidated Statements of Income.
The Company reassessed classification of investment securities and, effective April 1, 2022, elected to transfer all securities, fair valued at $58.7 million, from available-for-sale to held-to-maturity. The related unrealized loss of $2.3 million included in other comprehensive income on April 1, 2022 remained in other comprehensive income and is being amortized out with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. No gain or loss was recorded at the time of transfer.
As of December 31, 2022, the amortized cost and estimated fair value of held-to-maturity securities have contractual maturity dates shown in the table below (dollars in thousands). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
| | | | | | | | | | | | | | |
| December 31, 2022 | | Amortized
Cost | | Fair
Value |
| Due within one year | | $ | — | | | $ | — | |
| Due between one year and five years | | 2,234 | | | 2,048 | |
| Due between five years and ten years | | 21,548 | | 19,290 |
| Due after ten years | | 280 | | 262 |
| Securities (CMO and MBS) | | 56,994 | | 53,118 |
| Total | | $ | 81,056 | | | $ | 74,718 | |
For the year ended December 31, 2022, the Company committed $6.0 million in total to two bank technology funds. During the year ended December 31, 2022, the Company made $1.3 million in contributions to both partnerships and received a $0.1 million return on investment. As of December 31, 2022, the Company held a balance of $1.3 million, which is included in Other assets in the accompanying Consolidated Balance Sheets. The Company may be obligated to invest up to an additional $4.7 million in future contributions.
In 2014, the Company began investing in a small business investment company ("SBIC") fund administered by the Small Business Administration. During the years ended December 31, 2022 and 2021, the Company did not make any contributions to the SBIC fund and received a $0.1 million return of capital. As of December 31, 2022 and 2021, the Company held a balance of $2.0 million in the SBIC fund, which is included in Other assets in the accompanying Consolidated Balance Sheets. The Company may be obligated to invest up to an additional $1.0 million in future SBIC investments.
As of December 31, 2022 and December 31, 2021, securities with carrying values totaling $22.6 million and $17.3 million, respectively, were pledged to secure various public deposits and credit facilities of the Company.
As of December 31, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities and agencies, in an amount greater than 10% of shareholders’ equity.
As of December 31, 2022, 98 securities were in an unrecognized loss position, with unrecognized losses totaling $6.4 million. As of December 31, 2021, 10 securities were in an unrealized loss position with unrealized losses totaling $0.2 million. Of the securities in an unrecognized loss position as of December 31, 2022, 14 have been in a continuous unrecognized loss position for more than twelve months, and the remaining have been in a continuous unrecognized loss position for less than twelve months. The unrecognized loss positions were caused primarily by interest rate changes and market assumptions about prepayments of principal and interest on the underlying mortgages. Because the decline in market value is attributable to market conditions, not credit quality, and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be near or at maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2022.
The following presents securities with unrecognized losses aggregated by major security type and length of time in a continuous unrecognized loss position as of the date noted (dollars in thousands, before tax):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or Longer | | Total |
| December 31, 2022 | | Fair
Value | | Unrecognized
Losses | | Fair
Value | | Unrecognized
Losses | | Fair
Value | | Unrecognized
Losses |
| Investment securities held-to-maturity: | | | | | | | | | | | | |
| U.S. Treasury debt | | $ | — | | | $ | — | | | $ | 234 | | | $ | (9) | | | $ | 234 | | | $ | (9) | |
| | | | | | | | | | | | |
| Corporate bonds | | 20,911 | | | (2,436) | | | 455 | | | (17) | | | 21,366 | | | (2,453) | |
| GNMA mortgage-backed securities – residential | | 22,371 | | | (1,051) | | | 14,255 | | | (1,749) | | | 36,626 | | | (2,800) | |
| FNMA mortgage-backed securities – residential | | 6,202 | | | (506) | | | — | | | — | | | 6,202 | | | (506) | |
| Government CMO and MBS - commercial | | 5,591 | | | (403) | | | — | | | — | | | 5,591 | | | (403) | |
| Corporate CMO and MBS | | 3,499 | | | (147) | | | 395 | | | (33) | | | 3,894 | | | (180) | |
| Total | | $ | 58,574 | | | $ | (4,543) | | | $ | 15,339 | | | $ | (1,808) | | | $ | 73,913 | | | $ | (6,351) | |
The following presents securities with unrealized losses aggregated by major security type and length of time in a continuous unrealized loss position as of the date noted (dollars in thousands, before tax):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or Longer | | Total |
| December 31, 2021 | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses | | Fair
Value | | Unrealized
Losses |
| Investment securities available-for-sale: | | | | | | | | | | | | |
| U.S. Treasury Debt | | $ | 247 | | | $ | (3) | | | $ | — | | | $ | — | | | $ | 247 | | | $ | (3) | |
| Corporate bonds | | 485 | | | (15) | | | — | | | — | | | 485 | | | (15) | |
| GNMA mortgage-backed securities - residential | | 17,205 | | | (146) | | | — | | | — | | | 17,205 | | | $ | (146) | |
| Corporate CMO and MBS | | — | | | — | | | 521 | | | (18) | | | 521 | | | (18) | |
| Total | | $ | 17,937 | | | $ | (164) | | | $ | 521 | | | $ | (18) | | | $ | 18,458 | | | $ | (182) | |
The Company did not sell any securities during the years ended December 31, 2022 or 2021.
NOTE 4 – CORRESPONDENT BANK STOCK
The following presents the Company’s investments in correspondent bank stock, as of the dates noted (dollars in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| FHLB | $ | 7,078 | | | $ | 1,625 | |
| BBW | 32 | | | 31 | |
| FRB | — | | | 928 | |
| Total | $ | 7,110 | | | $ | 2,584 | |
NOTE 5 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The following presents a summary of the Company’s loans as of the dates noted (dollars in thousands):
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
Cash, Securities and Other(1) | $ | 165,670 | | | $ | 261,190 | |
Consumer and Other(2) | 49,954 | | | 34,758 | |
| Construction and Development | 288,497 | | | 178,716 | |
| 1-4 Family Residential | 898,154 | | | 580,872 | |
| Non-Owner Occupied CRE | 496,776 | | | 482,622 | |
| Owner Occupied CRE | 216,056 | | | 212,426 | |
Commercial and Industrial(3) | 361,028 | | | 203,584 | |
| Total loans held for investment | 2,476,135 | | | 1,954,168 | |
Deferred fees and unamortized premiums/(unaccreted discounts), net(4) | (6,722) | | | (5,031) | |
| Allowance for loan losses | (17,183) | | | (13,732) | |
| Loans, net | $ | 2,452,230 | | | $ | 1,935,405 | |
_____________________________
(1)Includes Paycheck Protection Program ("PPP") loans of $7.1 million and $46.8 million as of December 31, 2022 and 2021, respectively.
(2)Includes $23.4 million of unpaid principal balance of loans held for investment measured at fair value as of December 31, 2022.
(3)Includes MSLP loans of $6.6 million and $6.8 million as of December 31, 2022 and 2021, respectively.
(4)Includes fair value adjustments on loans held for investment accounted for under the fair value option.
As of December 31, 2022 and 2021, total loans held for investment included $234.7 million and $356.7 million, respectively, of performing loans purchased through mergers or acquisitions. As of December 31, 2022, Consumer and Other included $23.4 million of unpaid principal balance of loans held for investment measured at fair value. See Note 17 – Fair Value Option.
The 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 lender and as of December 31, 2022, the Cash, Securities and Other portion of the loan portfolio included $7.1 million of PPP loans, or 4.3% of the total category. As of December 31, 2021, the Cash, Securities, and Other portion of the loan portfolio included $46.8 million of PPP loans, or 17.9% of the total category.
The Company is a participant in the Federal Reserve’s MSLP to support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. As of December 31, 2022, the Company’s Commercial and Industrial loans included five MSLP loans with the net carrying amount of $6.6 million, or 1.8% of the total category. As of December 31, 2021, the Company’s Commercial and Industrial loans included five MSLP loans with the net carrying amount of $6.8 million, or 3.3% of the total category.
Loan Modifications
As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years.
In 2021, the deferral period ended for all non-acquired loans previously modified and payments have resumed under the original terms. As of December 31, 2022, the Company’s loan portfolio included 49 non-acquired loans which were previously modified under the loan modification program, totaling $78.4 million. Through the Teton Acquisition, the Company acquired loans which were previously modified and are still in their deferral period. As of December 31, 2022, there were 14 of these loans, totaling $3.3 million.
The 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 and have not classified any of these modifications as a TDR as of December 31, 2022 and 2021. In accordance with that guidance, the Company recognized interest income on all loans modified for temporary payment moratoriums, primarily for a period of 180 days or less.
All loans modified in response to COVID-19 are classified as performing and pass rated as of December 31, 2022. 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. 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, 2022, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.
The following presents, by class, an aging analysis of the recorded investments (excluding accrued interest receivable, deferred fees, and unamortized premiums/(unaccreted discounts) which are not material) in loans past due as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | 30-59
Days
Past Due | | 60-89
Days
Past Due | | 90 or
More Days
Past Due | | Total
Loans
Past Due | | Current | | Total
Recorded
Investment |
| Cash, Securities and Other | | $ | 1,735 | | | $ | 539 | | | $ | 4 | | | $ | 2,278 | | | $ | 163,392 | | | $ | 165,670 | |
| Consumer and Other | | 996 | | | 167 | | | 145 | | | 1,308 | | | 48,646 | | | 49,954 | |
| Construction and Development | | — | | | — | | | 201 | | | 201 | | | 288,296 | | | 288,497 | |
| 1-4 Family Residential | | 1,747 | | | — | | | — | | | 1,747 | | | 896,407 | | | 898,154 | |
| Non-Owner Occupied CRE | | 1,073 | | | — | | | — | | | 1,073 | | | 495,703 | | | 496,776 | |
| Owner Occupied CRE | | 1,165 | | | — | | | — | | | 1,165 | | | 214,891 | | | 216,056 | |
| Commercial and Industrial | | 5,051 | | | 10,724 | | | 1,318 | | | 17,093 | | | 343,935 | | | 361,028 | |
| Total | | $ | 11,767 | | | $ | 11,430 | | | $ | 1,668 | | | $ | 24,865 | | | $ | 2,451,270 | | | $ | 2,476,135 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | 30-59
Days
Past Due | | 60-89
Days
Past Due | | 90 or
More Days
Past Due | | Total
Loans
Past Due | | Current | | Total
Recorded
Investment |
| Cash, Securities and Other | | $ | 745 | | | $ | — | | | $ | 6 | | | $ | 751 | | | $ | 260,439 | | | $ | 261,190 | |
| Consumer and Other | | 454 | | | — | | | 2 | | | 456 | | | 34,302 | | | 34,758 | |
| Construction and Development | | 2,758 | | | — | | | — | | | 2,758 | | | 175,958 | | | 178,716 | |
| 1-4 Family Residential | | 1,449 | | | — | | | — | | | 1,449 | | | 579,423 | | | 580,872 | |
| Non-Owner Occupied CRE | | — | | | 2,548 | | | — | | | 2,548 | | | 480,074 | | | 482,622 | |
| Owner Occupied CRE | | 1,419 | | | — | | | — | | | 1,419 | | | 211,007 | | | 212,426 | |
| Commercial and Industrial | | 748 | | | — | | | 2,200 | | | 2,948 | | | 200,636 | | | 203,584 | |
| Total | | $ | 7,573 | | | $ | 2,548 | | | $ | 2,208 | | | $ | 12,329 | | | $ | 1,941,839 | | | $ | 1,954,168 | |
As of December 31, 2022 and 2021, the Company had one loan, totaling an immaterial amount, in the Commercial and Industrial portfolio that was more than 90 days delinquent and accruing interest.
Non-Accrual Loans and Troubled Debt Restructurings
The following presents the recorded investment in non-accrual loans by class as of the dates noted (dollars in thousands):
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| Cash, Securities and Other | $ | 4 | | | $ | 6 | |
| Consumer and Other | 146 | | | 2 | |
| Construction and Development | 201 | | | — | |
| 1-4 Family Residential | — | | | 75 | |
| Owner Occupied CRE | 1,165 | | | 1,241 | |
| Commercial and Industrial | 10,833 | | | 2,938 | |
| Total | $ | 12,349 | | | $ | 4,262 | |
Non-accrual loans classified as TDR accounted for $3.1 million of the recorded investment as of December 31, 2022 and $4.3 million as of December 31, 2021. Non-accrual loans are classified as impaired loans and individually evaluated for impairment.
The following presents a summary of the unpaid principal balance of loans classified as TDRs as of the dates noted (dollars in thousands):
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| Accruing | | | |
| Non-Owner Occupied CRE | $ | — | | | $ | 55 | |
| Non-accrual | | | |
| Cash, Securities, and Other | 4 | | | 6 | |
| 1-4 Family Residential | — | | | 75 | |
| Owner Occupied CRE | 1,165 | | | 1,241 | |
| Commercial and Industrial | 1,951 | | | 2,938 | |
| Total | 3,120 | | | 4,315 | |
| Allowance for loan losses associated with TDR | — | | | (1,751) | |
| Net recorded investment | $ | 3,120 | | | $ | 2,564 | |
As of December 31, 2022 and December 31, 2021, the Company had not committed any additional funds to a borrower with a loan classified as a TDR.
The Company did not modify any loans resulting in TDR status during the year ended December 31, 2022. The Company modified three loans resulting in TDR status during the year ended December 31, 2021. The first loan was a small mortgage with a remaining balance of $0.1 million where the borrower was unable to make payments or obtain additional financing to pay off the mortgage. As a result, we modified the loan at the maturity date with a one-year renewal to allow the borrower time to seek a refinance. As of December 31, 2022, the loan has been paid in full as agreed in the loan modification. The second and third loans modified are in relation to one borrower who has two loans, one Commercial Real Estate Loan in the amount of $1.2 million, which is the space where the related business operates, and a Commercial loan with a balance of $0.7 million. The borrower had experienced a reduction in cash flow through ongoing impact from the pandemic and related shut downs and hiring shortages. As a result, the Company modified both loans allowing for a six month interest only period to provide cash flow relief. The Company obtained a reduced term on the business loan as well as additional collateral from the Borrower. All three of the loans modified during 2021 were sufficiently collateralized and therefore did not require any specific reserve.
TDRs are reviewed individually for impairment and are included in the Company’s specific reserves in the allowance for loan losses. If charged off, the amount of the charge off is included in the Company’s charge off factors, which impact the Company’s reserves on non-impaired loans.
The following presents impaired loans by portfolio and related valuation allowance as of the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Total
Recorded
Investment | | Unpaid
Contractual
Principal
Balance | | Allowance
for
Loan
Losses | | Total
Recorded
Investment | | Unpaid
Contractual
Principal
Balance | | Allowance
for
Loan
Losses |
| Impaired loans with a valuation allowance: | | | | | | | | | | | |
| Consumer and Other | $ | — | | | $ | — | | | $ | — | | | $ | 2 | | | $ | 2 | | | $ | 2 | |
| Commercial and Industrial | — | | | — | | | — | | | 2,190 | | | 2,190 | | | 1,751 | |
| Total | $ | — | | | $ | — | | | $ | — | | | $ | 2,192 | | | $ | 2,192 | | | $ | 1,753 | |
| | | | | | | | | | | |
| Impaired loans with no related valuation allowance: | | | | | | | | | | | |
| Cash, Securities, and Other | $ | 4 | | | $ | 4 | | | $ | — | | | $ | 6 | | | $ | 6 | | | $ | — | |
| Construction and Development | 201 | | | 201 | | | — | | | — | | | — | | | — | |
| 1-4 Family Residential | — | | | — | | | — | | | 75 | | | 75 | | | — | |
| Owner Occupied CRE | 1,165 | | | 1,165 | | | — | | | 1,241 | | | 1,241 | | | — | |
| Commercial and Industrial | 10,833 | | | 10,833 | | | — | | | 748 | | | 748 | | | — | |
| Total | $ | 12,203 | | | $ | 12,203 | | | $ | — | | | $ | 2,070 | | | $ | 2,070 | | | $ | — | |
| | | | | | | | | | | |
| Total impaired loans: | | | | | | | | | | | |
| Cash, Securities, and Other | $ | 4 | | | $ | 4 | | | $ | — | | | $ | 6 | | | $ | 6 | | | $ | — | |
| Consumer and Other | — | | | — | | | — | | | 2 | | | 2 | | | 2 | |
| Construction and Development | 201 | | | 201 | | | — | | | — | | | — | | | — | |
| Commercial and Industrial | 10,833 | | | 10,833 | | | — | | | 2,938 | | | 2,938 | | | 1,751 | |
| 1-4 Family Residential | — | | | — | | | — | | | 75 | | | 75 | | | — | |
| Owner Occupied CRE | 1,165 | | | 1,165 | | | — | | | 1,241 | | | 1,241 | | | — | |
| Total | $ | 12,203 | | | $ | 12,203 | | | $ | — | | | $ | 4,262 | | | $ | 4,262 | | | $ | 1,753 | |
The recorded investment in loans in the previous tables excludes accrued interest, deferred fees, and unamortized premiums/(unaccreted discounts), which are not material. Interest income, if any, was recognized on the cash basis on non-accrual loans.
The following presents the average balance of impaired loans and interest income recognized on impaired loans during the periods presented (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Average
Recorded
Investment | | Interest
Income
Recognized | | Average
Recorded
Investment | | Interest
Income
Recognized |
| Impaired loans with a valuation allowance: | | | | | | | |
| Cash, Securities, and Other | $ | — | | | $ | — | | | $ | 2 | | | $ | — | |
| Consumer and Other | 1 | | | — | | | — | | | — | |
| Commercial and Industrial | — | | | — | | | 2,413 | | | 21 | |
| Total | $ | 1 | | | $ | — | | | $ | 2,415 | | | $ | 21 | |
| | | | | | | |
| Impaired loans with no related valuation allowance: | | | | | | | |
| Cash, Securities, and Other | $ | 4 | | | $ | — | | | $ | 17 | | | $ | — | |
| Construction and Development | 81 | | | — | | | — | | | — | |
| Owner Occupied CRE | 1,201 | | | — | | | 248 | | | 51 | |
| Commercial and Industrial | 4,297 | | | * | | 205 | | | 262 | |
| 1-4 Family Residential | 57 | | | — | | | 15 | | | — | |
| Total | $ | 5,640 | | | $ | — | | | $ | 485 | | | $ | 313 | |
| | | | | | | |
| Total impaired loans: | | | | | | | |
| Cash, Securities, and Other | $ | 4 | | | $ | — | | | $ | 19 | | | $ | — | |
| Consumer and Other | 1 | | | — | | | — | | | — | |
| Construction and Development | 81 | | | — | | | — | | | — | |
| Owner Occupied CRE | 1,201 | | | — | | | 248 | | | 51 | |
| Commercial and Industrial | 4,297 | | | * | | 2,618 | | | 283 | |
| 1-4 Family Residential | 57 | | | — | | | 15 | | | — | |
| Total | $ | 5,641 | | | $ | — | | | $ | 2,900 | | | $ | 334 | |
_____________________________(•)The Company recognized an immaterial amount of interest income during the period.
Allowance for Loan Losses
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 following presents the activity in the Company’s allowance for loan losses by portfolio class for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash,
Securities
and Other | | Consumer and Other | | Construction
and
Development | | 1-4
Family
Residential | | Non-Owner
Occupied
CRE | | Owner
Occupied
CRE | | Commercial
and
Industrial | | Total |
| Changes in allowance for loan losses for the year ended December 31, 2022 | | | | | | | | | | | | | | | |
| Beginning balance | $ | 1,598 | | | $ | 266 | | | $ | 1,092 | | | $ | 3,553 | | | $ | 2,952 | | | $ | 1,292 | | | $ | 2,979 | | | $ | 13,732 | |
| (Recovery of)/provision for loan losses | (399) | | | 84 | | | 933 | | | 2,756 | | | 538 | | | 218 | | | (448) | | | 3,682 | |
| Charge-offs | (1) | | | (262) | | | — | | | — | | | — | | | — | | | (71) | | | (334) | |
| Recoveries | — | | | 103 | | | — | | | — | | | — | | | — | | | — | | | 103 | |
| Ending balance | $ | 1,198 | | | $ | 191 | | | $ | 2,025 | | | $ | 6,309 | | | $ | 3,490 | | | $ | 1,510 | | | $ | 2,460 | | | $ | 17,183 | |
| | | | | | | | | | | | | | | |
| Allowance for loan losses as of December 31, 2022 allocated to loans evaluated for impairment: | | | | | | | | | | | | | | | |
| Individually | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Collectively | 1,198 | | | 191 | | | 2,025 | | | 6,309 | | | 3,490 | | | 1,510 | | | 2,460 | | | 17,183 | |
| Ending balance | $ | 1,198 | | | $ | 191 | | | $ | 2,025 | | | $ | 6,309 | | | $ | 3,490 | | | $ | 1,510 | | | $ | 2,460 | | | $ | 17,183 | |
| | | | | | | | | | | | | | | |
| Loans as of December 31, 2022, evaluated for impairment: | | | | | | | | | | | | | | | |
| Individually | $ | 4 | | | $ | — | | | $ | 201 | | | $ | — | | | $ | — | | | $ | 1,165 | | | $ | 10,833 | | | $ | 12,203 | |
| Collectively | 165,666 | | | 26,539 | | | 288,296 | | | 898,154 | | | 496,776 | | | 214,891 | | | 350,195 | | | 2,440,517 | |
| Measured at fair value | — | | | 23,415 | | | — | | | — | | | — | | | — | | | — | | | 23,415 | |
| Ending balance | $ | 165,670 | | | $ | 49,954 | | | $ | 288,497 | | | $ | 898,154 | | | $ | 496,776 | | | $ | 216,056 | | | $ | 361,028 | | | $ | 2,476,135 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash,
Securities
and Other | | Consumer and Other | | Construction
and
Development | | 1-4
Family
Residential | | Non-Owner
Occupied
CRE | | Owner
Occupied
CRE | | Commercial
and
Industrial | | Total |
| Changes in allowance for loan losses for the year ended December 31, 2021 | | | | | | | | | | | | | | | |
| Beginning balance | $ | 2,439 | | | $ | 140 | | | $ | 932 | | | $ | 3,233 | | | $ | 2,004 | | | $ | 1,159 | | | $ | 2,632 | | | $ | 12,539 | |
| Provision for/(recovery of) loan losses | (841) | | | 163 | | | 160 | | | 320 | | | 948 | | | 133 | | | 347 | | | 1,230 | |
| Charge-offs | — | | | (44) | | | — | | | — | | | — | | | — | | | — | | | (44) | |
| Recoveries | — | | | 7 | | | — | | | — | | | — | | | — | | | — | | | 7 | |
| Ending balance | $ | 1,598 | | | $ | 266 | | | $ | 1,092 | | | $ | 3,553 | | | $ | 2,952 | | | $ | 1,292 | | | $ | 2,979 | | | $ | 13,732 | |
| | | | | | | | | | | | | | | |
| Allowance for loan losses as of December 31, 2021 allocated to loans evaluated for impairment: | | | | | | | | | | | | | | | |
| Individually | $ | — | | | $ | 2 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,751 | | | $ | 1,753 | |
| Collectively | 1,598 | | | 264 | | | 1,092 | | | 3,553 | | | 2,952 | | | 1,292 | | | 1,228 | | | 11,979 | |
| Ending balance | $ | 1,598 | | | $ | 266 | | | $ | 1,092 | | | $ | 3,553 | | | $ | 2,952 | | | $ | 1,292 | | | $ | 2,979 | | | $ | 13,732 | |
| | | | | | | | | | | | | | | |
| Loans as of December 31, 2021, evaluated for impairment: | | | | | | | | | | | | | | | |
| Individually | $ | 6 | | | $ | 2 | | | $ | — | | | $ | 75 | | | $ | — | | | $ | 1,241 | | | $ | 2,938 | | | $ | 4,262 | |
| Collectively | 261,184 | | | 34,756 | | | 178,716 | | | 580,797 | | | 482,622 | | | 211,185 | | | 200,646 | | | 1,949,906 | |
| Ending balance | $ | 261,190 | | | $ | 34,758 | | | $ | 178,716 | | | $ | 580,872 | | | $ | 482,622 | | | $ | 212,426 | | | $ | 203,584 | | | $ | 1,954,168 | |
The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans by credit risk on a quarterly basis. The Company uses the following definitions for risk ratings:
Special Mention—Loans classified as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified.
Substandard—Substandard loans are considered "classified" and are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrual status and may individually be evaluated 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 of 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. The following presents, by class and by credit quality indicator, the recorded investment in the Company’s loans as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | Pass | | Special
Mention | | Substandard | | Not Rated | | Total |
| Cash, Securities and Other | | $ | 165,666 | | | $ | — | | | $ | 4 | | | $ | — | | | $ | 165,670 | |
| Consumer and Other | | 26,539 | | | — | | | — | | | 23,415 | | | 49,954 | |
| Construction and Development | | 288,296 | | | — | | | 201 | | | — | | | 288,497 | |
| 1-4 Family Residential | | 898,154 | | | — | | | — | | | — | | | 898,154 | |
| Non-Owner Occupied CRE | | 496,776 | | | — | | | — | | | — | | | 496,776 | |
| Owner Occupied CRE | | 214,891 | | | — | | | 1,165 | | | — | | | 216,056 | |
| Commercial and Industrial | | 347,803 | | | 2,392 | | | 10,833 | | | — | | | 361,028 | |
| Total | | $ | 2,438,125 | | | $ | 2,392 | | | $ | 12,203 | | | $ | 23,415 | | | $ | 2,476,135 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Pass | | Special
Mention | | Substandard | | Not Rated | | Total |
| Cash, Securities and Other | | $ | 261,184 | | | $ | — | | | $ | 6 | | | $ | — | | | $ | 261,190 | |
| Consumer and Other | | 34,756 | | | — | | | 2 | | | — | | | 34,758 | |
| Construction and Development | | 176,194 | | | 2,522 | | | — | | | — | | | 178,716 | |
| 1-4 Family Residential | | 580,797 | | | — | | | 75 | | | — | | | 580,872 | |
| Non-Owner Occupied CRE | | 476,670 | | | 5,952 | | | — | | | — | | | 482,622 | |
| Owner Occupied CRE | | 210,493 | | | — | | | 1,933 | | | — | | | 212,426 | |
| Commercial and Industrial | | 198,368 | | | 401 | | | 4,815 | | | — | | | 203,584 | |
| Total | | $ | 1,938,462 | | | $ | 8,875 | | | $ | 6,831 | | | $ | — | | | $ | 1,954,168 | |
| | | | | | | | | | |
The Company had no loans graded doubtful as of the years ended December 31, 2022 and 2021.
NOTE 6 – PREMISES AND EQUIPMENT, NET
The following presents a summary of the cost and accumulated depreciation of premises and equipment as December 31 (dollars in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Building and building improvements | $ | 12,190 | | | $ | 12,190 | |
| Leasehold improvements, including artwork | 12,879 | | | 11,464 | |
| Land | 4,980 | | | 4,980 | |
| Equipment and software | 5,815 | | | 6,144 | |
| Gross premise and equipment | 35,864 | | | 34,778 | |
| Less: accumulated depreciation | (10,746) | | | (10,802) | |
| Premises and equipment, net | $ | 25,118 | | | $ | 23,976 | |
During the year ended December 31, 2022, the Company retired an immaterial amount of equipment and software for an immaterial loss.
During the year ended December 31, 2021, the Company acquired buildings and land associated with the Teton Acquisition. These assets were recorded at their fair value on December 31, 2021 and the buildings will be depreciated over their remaining useful lives.
Depreciation expense for premises and equipment for the years ended December 31, 2022 and 2021 totaled $1.8 million and $1.2 million, respectively.
NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following presents changes in the carrying amount of goodwill as of the dates noted (dollars in thousands):
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| Beginning balance | $ | 30,588 | | | $ | 24,191 | |
| Acquisition activity | (188) | | | 6,397 | |
| Ending balance | $ | 30,400 | | | $ | 30,588 | |
During the year ended December 31, 2021, the Company recorded $6.4 million of goodwill as a result of the Teton Acquisition on December 31, 2021. In the first quarter of 2022, goodwill was adjusted by ($0.2) million as a result of the measurement period adjustments. See Note 2 – Acquisitions for more information.
Goodwill is tested annually for impairment on October 31 or earlier upon the occurrence of certain events.
The goodwill impairment analysis includes the determination of the carrying value of the reporting unit, including the existing goodwill, and estimating the fair value of the reporting unit. If the fair value is less than its carrying amount, goodwill impairment is recognized equal to the difference between the fair value and its carrying amount, not to exceed its carrying amount. As of December 31, 2022, there has not been any impairment of goodwill identified or recorded. Goodwill totaled $30.4 million and $30.6 million as of December 31, 2022 and 2021, respectively.
The following presents the Company’s intangible assets and related accumulated amortization as of the dates noted (dollars in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Other intangibles | $ | 5,926 | | | $ | 5,857 | |
| Less: accumulated amortization on other intangibles | (4,222) | | | (4,543) | |
| Other intangible assets, net | $ | 1,704 | | | $ | 1,314 | |
Amortization expense on definite-lived customer relationship and non-compete intangible assets was $0.3 million and an immaterial amount for the years ended December 31, 2022 and 2021, respectively. The following presents the expected amortization expense on definite-lived intangible assets existing as of December 31, 2022 (dollars in thousands):
| | | | | | | | |
| Year | | Expense |
| 2023 | | $ | 250 | |
| 2024 | | 226 | |
| 2025 | | 206 | |
| 2026 | | 193 | |
| 2027 | | 183 | |
| Thereafter | | 646 | |
| Total | | $ | 1,704 | |
NOTE 8 - LEASES
Leases in which the Company is determined to be the lessee are primarily operating leases comprised of real estate property and office space for our corporate headquarters and profit centers with terms that extend to 2032. In accordance with ASC 842, operating leases are required to be recognized as a right-of-use asset with a corresponding lease liability.
The Company elected to not include short-term leases with initial terms of twelve months or less, on the Consolidated Balance Sheets. The following table presents the classification of the right-of-use assets and corresponding liabilities within the Consolidated Balance Sheets, as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | |
| | December 31,
2022 | | December 31,
2021 |
| Lease Right-of-Use Assets | Classification | | | |
| Operating lease right-of-use assets | Other assets | $ | 8,602 | | | $ | 10,720 | |
| | | | |
| Lease Liabilities | Classification | | | |
| Operating lease liabilities | Other liabilities | $ | 11,163 | | | $ | 13,863 | |
The Company’s operating lease agreements typically include an option to renew the lease at the Company’s discretion. To the extent the Company is reasonably certain it will exercise the renewal option at the inception of the lease, the Company will include the extended term in the calculation of the right-of-use asset and lease liability. ASC 842 requires the use of the rate implicit in the lease when it is readily determinable. As this rate is typically not readily determinable, at the inception of the lease, the Company uses its collateralized incremental borrowing rate over a similar term. The amount of the right-of-use asset and lease liability are impacted by the discount rate used to calculate the present value of the minimum lease payments over the term of the lease.
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| Weighted-Average Remaining Lease Term | | | |
| Operating leases | 4.85 years | | 5.26 years |
| | | |
| Weighted-Average Discount Rate | | | |
| Operating leases | 2.63% | | 2.67% |
The Company’s operating leases contain fixed and variable lease components and it has elected to account for all classes of underlying assets as a single lease component. Variable lease costs primarily represent common area maintenance and parking. The Company recognized lease costs in Occupancy and equipment expense in the accompanying Consolidated Statements of Income. The following represents the Company’s net lease costs during the periods presented (dollars in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Lease Costs | | | |
| Operating lease cost | $ | 3,151 | | | $ | 3,040 | |
| Variable lease cost | 2,104 | | | 1,756 | |
| | | |
| Lease costs, net | $ | 5,255 | | | $ | 4,796 | |
The following presents a maturity analysis of the Company’s operating lease liabilities on an annual basis for each of the next five years and total amounts thereafter (dollars in thousands):
| | | | | | | | |
| Year Ending December 31, | | Operating Leases |
| 2023 | | $ | 3,228 | |
| 2024 | | 3,083 | |
| 2025 | | 2,141 | |
| 2026 | | 810 | |
| 2027 | | 734 | |
| Thereafter | | 1,752 | |
| Total future minimum lease payments | | 11,748 | |
| Less: imputed interest | | (585) | |
| Present value of net future minimum lease payments | | $ | 11,163 | |
Leases in which the Company is determined to be the lessor are considered operating leases and consist of the partial lease of Company owned buildings. In accordance with ASC 842, these leases have been accounted for as operating leases. During the year ended December 31, 2022, the Company recognized $0.3 million of lease income.
The following presents a maturity analysis of the Company’s lease payments to be received on an annual basis for each of the next five years and total amounts thereafter (dollars in thousands):
| | | | | | | | |
| Year Ending December 31, | | Undiscounted Operating Lease Income |
| 2023 | | $ | 242 |
| 2024 | | 199 |
| 2025 | | — |
| 2026 | | — |
| 2027 | | — |
| Thereafter | | — |
| Total undiscounted operating lease income | | $ | 441 |
NOTE 9 - DEPOSITS
The following presents the Company’s interest-bearing deposits as of the dates noted (dollars in thousands):
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| Money market deposit accounts | $ | 1,336,092 | | | $ | 1,056,669 | |
| Time deposits | 224,090 | | | 170,491 | |
| Negotiable order of withdrawal accounts | 234,778 | | | 309,940 | |
| Savings accounts | 27,177 | | | 32,299 | |
| Total interest-bearing deposits | $ | 1,822,137 | | | $ | 1,569,399 | |
| Estimated aggregate time deposits of $250 or greater | $ | 77,972 | | | $ | 75,747 | |
Deposits acquired through the Teton acquisition closed on December 31, 2021 totaled $379.2 million. See Note 2 – Acquisitions for additional information.
Overdraft balances classified as loans totaled $0.2 million and an immaterial amount as of December 31, 2022 and 2021, respectively.
The following presents the scheduled maturities of all time deposits for the next five years ending December 31 (dollars in thousands):
| | | | | | | | |
| Year Ending December 31, | | Time Deposits |
| 2023 | | $ | 181,036 | |
| 2024 | | 32,892 | |
| 2025 | | 2,998 | |
| 2026 | | 2,121 | |
| 2027 | | 5,043 | |
| Thereafter | | — | |
| Total | | $ | 224,090 | |
NOTE 10 - BORROWINGS
The Bank has executed a blanket pledge and security agreement with the FHLB that requires certain loans and securities be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of December 31, 2022 and December 31, 2021 amounted to $1.26 billion and $771.4 million, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $751.2 million as of December 31, 2022. Each advance is payable at its maturity date.
The Company had the following required maturities on FHLB borrowings as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Maturity Date | | Rate % | | December 31,
2022 | | December 31,
2021 |
| April 22, 2022 | | 0.37 | | | $ | — | | | $ | 5,000 | |
January 1, 2023 (1) | | 4.48 | | | 131,498 | | | — | |
| May 5, 2023 | | 0.76 | | | 10,000 | | | 10,000 | |
| Total | | | | $ | 141,498 | | | $ | 15,000 | |
(1) The borrowing has a one day, automatic daily renewal maturity date, subject to FHLB discretion not to renew.
To bolster the effectiveness of the SBA’s PPP, the Federal Reserve is supplying liquidity to participating financial institutions through term financing collateralized by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility ("PPPLF") extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value and bearing interest at 35 bps. The terms of the loans are directly tied to the underlying PPP loans, which were originated at 2 or 5 years. For the years ended December 31, 2022 and 2021, the Company had outstanding $5.4 million and $23.6 million, respectively, under the PPPLF program which is included in the FHLB and Federal Reserve borrowings line of the Consolidated Balance Sheets.
The Bank has borrowing capacity associated with two unsecured federal funds lines of credit up to $10.0 million and $19.0 million. As of December 31, 2022 and 2021, there were no amounts outstanding on any of the federal funds lines.
On December 5, 2022, the Company completed the issuance and sale of subordinated notes (the "December 2022 Sub Notes") totaling $20.0 million in aggregate principal amount. The issuance included $0.5 million of issuance costs resulting in a net balance of $19.5 million as of December 31, 2022 included in the Subordinated notes line of the Consolidated Balance Sheets. The December 2022 Sub Notes accrue interest at a rate of 7.00% per annum until December 15, 2027, at which time the rate will reset quarterly to an interest rate per annum equal to three-month term SOFR, or an alternative rate determined in accordance with the terms of the December 2022 Sub Notes, plus 328 basis points, payable quarterly in arrears; mature on December 15, 2032; are redeemable at the option of the Company on or after December 15, 2027.
On January 1, 2022, the Company redeemed the subordinated notes due December 31, 2026 in the amount of $6.6 million, which were redeemable on or after January 1, 2022. The redemption price was equal to 100% of the principal amount being redeemed, plus accrued and unpaid interest up to, but excluding the date of redemption.
On August 31, 2021, the Company completed the issuance and sale of subordinated notes (the Notes”) totaling $15.0 million in aggregate principal amount and including $0.3 million of issuance costs. As of December 31, 2022, $14.8 million was included in the Subordinated notes line of the Consolidated Balance Sheets. The Notes accrue interest at a rate of 3.25% per annum until September 1, 2026, at which time the rate will adjust each quarter to the then current three-month SOFR, or an alternative rate determined in accordance with the terms of the Notes, plus 258 basis points; mature on September 1, 2031; are redeemable at the option of the Company on or after September 1, 2026; and pay interest quarterly.
On November 25, 2020, the Company completed the issuance and sale of subordinated notes (the "November 2020 Sub Notes") totaling $10.0 million in aggregate principal amount and including $0.2 million of issuance costs. As of December 31, 2022, $9.9 million was included in the Subordinated notes line of the Consolidated Balance Sheets. The November 2020 Sub Notes accrue interest at a rate of 4.25% per annum until December 1, 2025, at which time the rate will adjust each quarter to the then current three-month term SOFR, or an alternative rate determined in accordance with the terms of the November 2020 Sub Notes, plus 402 basis points; mature on December 1, 2030; are redeemable at the option of the Company on or after December 1, 2025; and pay interest semi-annually prior to December 1, 2025 and quarterly after December 1, 2025.
On March 17, 2020, the Company completed the issuance and sale of subordinated notes (the "March 2020 Sub Notes") totaling $8.0 million in aggregate principal amount and including $0.1 million of issuance costs. As of December 31, 2022, $7.9 million was included in the Subordinated notes line of the Consolidated Balance Sheets. The March 2020 Sub Notes accrue interest at a rate of 5.125% per annum until March 31, 2025, at which time the rate will adjust each quarter to the then current three-month LIBOR, or an alternative rate determined in accordance with the terms of the March 2020 Sub Notes, plus 450 basis points; mature on March 31, 2030; are redeemable at the option of the Company on or after March 31, 2025; and pay interest quarterly.
For the years ended December 31, 2022 and 2021, the Company recorded $1.4 million and $1.5 million, respectively, of interest expense related to the collective subordinated notes. The subordinated notes are included in Tier 2 capital under current regulatory guidelines and interpretations, subject to limitations.
The Company’s borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies. See Note 22 – Regulatory Capital Matters for additional information. As of December 31, 2022 and 2021, the Company was in compliance with the covenant requirements.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
The Company is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. Commitments may expire without being utilized. The Company’s exposure to loan loss is represented by the contractual amount of these commitments, although material losses are not anticipated. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.
The following presents the Company’s financial instruments whose contract amounts represent credit risk, as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Fixed Rate | | Variable Rate | | Fixed Rate | | Variable Rate |
| Unused lines of credit | $ | 211,285 | | | $ | 601,202 | | | $ | 136,289 | | | $ | 442,035 | |
| Standby letters of credit | 8,571 | | | 16,737 | | | 2,420 | | | 20,940 | |
| Commitments to make loans to sell | 13,553 | | | — | | | 60,529 | | | — | |
| Commitments to make loans | 20,895 | | | 81,663 | | | 16,256 | | | 14,920 | |
Unused lines of credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Several of the commitments may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the client.
Unused lines of credit under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing clients. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client’s obligation to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Substantially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The Company holds collateral supporting those commitments if deemed necessary.
Commitments to make loans to sell are agreements to lend to a client which would then be sold to an investor in the secondary market for which the interest rate has been locked with the client, provided there is no violation of any condition within the contract with either party. Commitments to make loans to sell have fixed interest rates. Since commitments may expire without being extended, total commitment amounts may not necessarily represent cash requirements.
Commitments to make loans are agreements to lend to a client, provided there is no violation of any condition within the contract. Commitments to make loans generally have fixed expiration dates or other termination clauses. Since commitments may expire without being extended, total commitment amounts may not necessarily represent cash requirements.
Litigation, Claims and Settlements
The Company is, from time to time, involved in various legal actions arising in the normal course of business. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is the opinion of management, based on advice from legal counsel, that no proceedings exist, either individually or in the aggregate, which, if determined adversely to the Company, would have a material effect on the Company’s consolidated financial statements.
NOTE 12 – SHAREHOLDERS’ EQUITY
Common Stock
The Company’s common stock has no par value and each holder of common stock is entitled to one vote for each share (though certain voting restrictions may exist on non-vested restricted stock) held.
On January 6, 2022, the Company filed a Form S-3 Registration Statement with the SEC providing that the Company may offer and sell from time to time, separately or together, in multiple series or in one or more offering, any combination of common stock, preferred stock, debt securities, warrants, depository shares and units, up to a maximum aggregate offer price of $100 million. During the year ended December 31, 2022, the Company sold no shares of common stock.
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 have repurchased shares in privately negotiated transactions, in the open market, including pursuant to any trading plan that might be adopted in accordance with Rule 10b5-1 promulgated by the SEC, or otherwise in a manner that complies with applicable federal securities laws. The 2020 Repurchase Plan did not obligate the Company to acquire a specific dollar amount or number of shares and it may have 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.
On December 31, 2021, the Company closed on the Merger Agreement with Teton. As part of the Merger Agreement, the Company issued 1,337,791 shares of common stock to Teton shareholders. For additional information, see Note 2 – Acquisitions for additional information.
Restricted Stock Awards
In 2017, the Company issued 105,264 shares of common stock ("Restricted Stock Awards") with a value of $3.0 million to the sole member of EMC Holdings, LLC ("EMC"), subject to forfeiture based on his continued employment with the Company. Half of the Restricted Stock Awards ($1.5 million or 52,632 shares) vested ratably over five years. These awards fully vested during the year ended Decembere 31, 2022. The remaining $1.5 million, or 52,632 shares, were able to be earned based on performance of the mortgage division of the Company. The performance based awards fully vested during the year ended December 31, 2020.
As of December 31, 2022 and 2021, the Restricted Stock Awards have a weighted-average grant date fair value of $28.50 per share. During the years ended December 31, 2022 and 2021, the Company recognized compensation expense of $0.2 million and $0.3 million, respectively, for the Restricted Stock Awards. During the years ended December 31, 2022 and 2021, 10,527 and 10,526 shares, respectively, of the restricted stock awards vested. As of December 31, 2022, all restricted stock awards were fully vested and no unrecognized compensation expense remains.
Stock-Based Compensation Plans
The 2008 Stock Incentive Plan (“the 2008 Plan”) was frozen in connection with the adoption of the 2016 Plan and no new awards may be granted under the 2008 Plan. As of December 31, 2022, there were a total of 329,035 shares available for issuance under the First Western Financial, Inc. 2016 Omnibus Incentive Plan ("the 2016 Plan"). If the Awards outstanding under the 2008 Plan or the 2016 Plan are forfeited, cancelled or terminated with no consideration paid to the Company, those amounts will increase the number of shares eligible to be granted under the 2016 Plan.
Stock Options
The Company did not grant any stock options during the years ended December 31, 2022 and 2021.
During the year ended December 31, 2022, the Company recognized no stock based compensation expense associated with stock options. During the year ended December 31, 2021, the Company recognized an immaterial amount of stock based compensation expense associated with stock options. As of December 31, 2022, the Company has no unrecognized stock-based compensation expense related to stock options.
The following presents activity for nonqualified stock options for the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number
of
Options | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| Outstanding as of December 31, 2021 | 308,574 | | $ | 29.21 | | | | | | |
| | | | | | | | |
| Exercised | (8,309) | | 21.50 | | | | | | |
| Forfeited or expired | (116,100) | | 40.00 | | | | | | |
| Outstanding as of December 31, 2022 | 184,165 | | 22.76 | | | 2.1 | | | (1) |
| Options fully vested/exercisable as of December 31, 2022 | 184,165 | | 22.76 | | | 2.1 | | | (1) |
_____________________________
(1)Nonqualified stock options outstanding at the end of the period and those fully vested/exercisable had immaterial aggregate intrinsic values.
As of December 31, 2022 and December 31, 2021, there were 184,165 and 308,574 options, respectively, that were exercisable. Exercise prices are between $20.00 and $27.00 per share, and the options are exercisable for a period of ten years from the original grant date and expire on various dates between 2023 and 2026.
Restricted Stock Units
Pursuant to the 2016 Plan, the Company can grant associates and non-associate directors long-term cash and stock-based compensation. Historically, the Company has granted certain associates restricted stock units which are earned
over time or based on various performance measures and convert to common stock upon vesting, which are summarized here and expanded further below:
The following presents the activity for the Time Vesting Units, the Financial Performance Units and the Market Performance Units during the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | |
| Time
Vesting
Units | | Financial
Performance
Units | | Market
Performance
Units |
| Outstanding as of December 31, 2021 | 249,821 | | 183,483 | | 13,746 |
| Granted | 157,682 | | 92,697 | | — |
| Vested | (83,918) | | (12,100) | | — |
| Forfeited | (37,590) | | (28,568) | | (13,746) |
| Outstanding as of December 31, 2022 | 285,995 | | 235,512 | | — |
During the year ended December 31, 2022, the Company issued 67,860 shares of common stock upon the settlement of Restricted Stock Units. The remaining 28,158 shares were surrendered with a combined market value at the dates of settlement of $0.9 million to cover employee withholding taxes. During the year ended December 31, 2021, the Company issued 58,884 shares of common stock upon the settlement of Restricted Stock Units. The remaining 20,693 shares were surrendered with a combined market value at the dates of settlement of $0.5 million to cover employee withholding taxes.
Time Vesting Units
Time Vesting Units are granted to full-time associates and board members at the date approved by the Company’s board of directors. The Company granted 157,682 Time Vesting Units with a five-year service period during the year ended December 31, 2022, that vest in equal installments of 20% on the anniversary of the grant date, assuming continuous employment through the scheduled vesting dates. During both the years ended December 31, 2022 and 2021, the Company recognized compensation expense of $1.7 million for the Time Vesting Units. As of December 31, 2022, there was $5.8 million of unrecognized compensation expense related to the Time Vesting Units, which is expected to be recognized over a weighted-average period of 1.9 years.
Financial Performance Units
Financial Performance Units are granted to certain key associates and are earned based on the Company achieving various financial performance metrics. If the Company achieves the financial metrics, which include various thresholds from 0% up to 150%, then the Financial Performance Units will have a subsequent vesting period.
The following presents the Company’s existing Financial Performance Units as of December 31, 2022 (dollars in thousands, except share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grant Period | | Threshold Accrual | | Maximum
Issuable Shares at
Current Threshold | | Unrecognized Compensation Expense | | Weighted-Average Life (1) | | Financial Metric End Date | | Vesting Requirement End Date |
| May 1, 2019 through April 30, 2020 | | 150 | % | | 69,306 | | $ | 145 | | | 1.0 years | | December 31, 2021 | | December 31, 2023 |
| May 1, 2020 through December 31, 2020, excluding November 18, 2020 | | 150 | % | | 74,364 | | 267 | | | 2.0 years | | December 31, 2022 | | December 31, 2023 |
| On November 18, 2020 | | 115 | % | | 24,161 | | 238 | | | 1.9 years | | December 31, 2022 | | 50% November 18, 2023 and 2025 |
| May 3, 2021 through August 11, 2021 | | 150 | % | | 53,882 | | 604 | | | 3.0 years | | December 31, 2023 | | December 31, 2025 |
May 2, 2022 through November 2, 2022, excluding August 4, 2022(2) | | — | % | | — | | | — | | | 4.0 years | | December 31, 2024 | | December 31, 2026 |
On August 4, 2022 (3) | | 100 | % | | 18,181 | | 680 | | | 4.0 years | | December 31, 2024 | | December 31, 2026 |
_____________________________
(1)Represents the expected unrecognized stock-based compensation expense recognition period.
(2)As the performance threshold is not expected to be met in future performance periods, there is no related unrecognized compensation as of December 31, 2022.
(3)Performance threshold was not met for the year ended December 31, 2022. The 100% threshold is expected to be met for the years ended December 31, 2023 and 2024.
The following presents the Company’s Financial Performance Units activity for the years noted December 31 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Units Granted | | Compensation Expense Recognized |
| Grant Period | | 2022 | | 2021 | | 2022 | | 2021 |
| Prior to May 1, 2019 | | — | | — | | $ | — | | | $ | 110 | |
| May 1, 2019 through April 30, 2020 | | — | | — | | 122 | | | 216 | |
| May 1, 2020 through December 31, 2020, excluding November 18, 2020 | | — | | — | | 168 | | | 208 | |
| On November 18, 2020 | | | | — | | 41 | | | 125 | |
| May 3, 2021 through August 11, 2021 | | — | | 41,743 | | 273 | | | 221 | |
May 2, 2022 through November 2, 2022, excluding August 4, 2022(1) | | 65,425 | | — | | — | | | — | |
On August 4, 2022(2) | | 27,272 | | — | | 47 | | | — | |
_____________________________
(1) Performance threshold was not met for the year ended December 31, 2022; therefore, no compensation expense was recognized as of the year ended December 31, 2022.
(2) Performance threshold was not met for the year ended December 31, 2022. The 100% threshold is expected to be met for the years ended December 31, 2023 & 2024.
Market Performance Units
Market Performance Units were granted to certain key associates and are earned based on growth in the value of the Company’s common stock, and were dependent on the Company completing an initial public offering of stock during a defined period of time. On July 23, 2018, the Company completed its initial public offering and the Market Performance Units performance condition was met. Subsequent to the performance condition there was also a market condition as a vesting requirement for the Market Performance Units. If the Company's common stock was trading at or above certain prices, over a performance period which ended on June 30, 2020, the Market Performance Units would have been determined to be earned and vest following the completion of a subsequent service period, which ended on June 30, 2022. The Company's common stock did not trade at or above the required prices over the performance period and as a result, no Market Performance Units were eligible to be earned.
During the year ended December 31, 2022, the Company recognized an immaterial amount of compensation expense for the Market Performance Units. During the year ended December 31, 2021, the Company recognized an immaterial amount of compensation expense for the Market Performance Units. As of the end of the subsequent service period, or June 30, 2022, the Company had no remaining unrecognized compensation expense related to the Market Performance Units.
NOTE 13 - EARNINGS PER COMMON SHARE
The following presents the calculation of basic and diluted earnings per common share for the periods indicated (dollars in thousands, except share and per share amounts):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Earnings per common share - Basic | | | |
| Numerator: | | | |
| Net income available for common shareholders | $ | 21,698 | | | $ | 20,610 | |
| | | |
| Denominator: | | | |
| Basic weighted average shares | 9,461,349 | | 7,980,491 |
| Earnings per common share - basic | $ | 2.29 | | | $ | 2.58 | |
| | | |
| Earnings per common share - Diluted | | | |
| Numerator: | | | |
| Net income available for common shareholders | $ | 21,698 | | | $ | 20,610 | |
| | | |
| Denominator: | | | |
| Basic weighted average shares | 9,461,349 | | 7,980,491 |
| Diluted effect of common stock equivalents: | | | |
| Stock options | 42,944 | | 30,661 |
| Time Vesting Units | 117,774 | | 139,829 |
| Financial Performance Units | 88,143 | | 70,437 |
| Market Performance Units | 3,413 | | 13,760 |
| Total diluted effect of common stock equivalents | 252,274 | | 254,687 |
| Diluted weighted average shares | 9,713,623 | | 8,235,178 |
| Earnings per common share - diluted | $ | 2.23 | | | $ | 2.50 | |
Diluted earnings per share was computed without consideration to potentially dilutive instruments as their inclusion would have been anti-dilutive.
The following presents potentially dilutive securities excluded from the diluted earnings per share calculation during the periods presented:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Stock options | — | | | 168,872 |
| Time Vesting Units | 86,145 | | 996 |
| Financial Performance Units | 23,553 | | 32,713 |
| Restricted Stock Awards | — | | | 7,895 |
| Total potentially dilutive securities | 109,698 | | 210,476 |
NOTE 14 - INCOME TAXES
The following presents the components of the Company’s income tax expense as of December 31 (dollars in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Current: | | | |
| Federal | $ | 5,637 | | | $ | 6,228 | |
| State and local | 936 | | | 1,110 | |
| Total current tax expense | 6,573 | | | 7,338 | |
| Deferred: | | | |
| Federal | 536 | | | (734) | |
| State and local | (55) | | | 66 | |
| Valuation allowance | 76 | | | — | |
| Total deferred tax expense (benefit) | 557 | | | (668) | |
| Income tax expense | $ | 7,130 | | | $ | 6,670 | |
The following is a reconciliation of income taxes reflected on the Consolidated Statements of Income for the years ended December 31, 2022 and 2021, with income tax expense computed by applying the United States federal income tax rate of 21% to income before income taxes (dollars in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Income tax expense computed at 21% statutory rate | $ | 6,054 | | | $ | 5,729 | |
| Differences: | | | |
| Permanent differences | 101 | | | 169 | |
| State taxes, net of federal expense | 1,005 | | | 1,018 | |
| LIHTC investment tax credit | (404) | | | (386) | |
| LIHTC investment proportional amortization | 378 | | | 539 | |
| Valuation allowance | 76 | | | — | |
| Other, net | (80) | | | (399) | |
| Income tax expense | $ | 7,130 | | | $ | 6,670 | |
The following presents the principal components of the Company’s deferred tax items as of December 31 (dollars in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 472 | | | $ | 395 | |
| Allowance for loan losses | 4,165 | | | 3,385 | |
| Acquired loans fair market value adjustments | 826 | | | 976 | |
| Assets acquired at fair value | — | | | 226 | |
| Loans accounted for under the fair value option | 146 | | | — | |
| Deferred rent | 621 | | | 753 | |
| Stock-based compensation | 1,705 | | | 1,800 | |
| Provision on other real estate owned | — | | | 463 | |
| Other intangible assets | 254 | | | 279 | |
| Unrealized losses on securities | 495 | | | — | |
| Accrued bonuses | — | | | 868 | |
| Loan fees | 459 | | | — | |
| Accrued expenses | — | | | 821 | |
| Other | 1,574 | | | 382 | |
| Total deferred tax assets | 10,717 | | | 10,348 | |
| Deferred tax liabilities: | | | |
| Goodwill | (1,087) | | | (1,137) | |
| Depreciation | (1,864) | | | (1,636) | |
| Unrealized gain on securities | — | | | (73) | |
| Loan fees | — | | | (155) | |
| Acquired loans fair market value adjustments | (215) | | | — | |
| Other | (189) | | | (130) | |
| Total deferred tax liabilities | (3,355) | | | (3,131) | |
| Net operating loss valuation allowance | (448) | | | (372) | |
| Net deferred tax asset | $ | 6,914 | | | $ | 6,845 | |
Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the total deferred tax assets. The net operating loss ("NOL") carryforwards expire in tax years 2028 through 2032. As of December 31, 2022 and December 31, 2021, the Company had $5.5 million of California NOLs available for utilization. For taxable years 2020, 2021, and 2022, California has suspended the NOL carryover deduction. On February 9, 2022, Senate Bill 113 was signed to reinstate the NOL deduction for businesses and individuals that have $1 million or more of net income subject to tax in California for tax years beginning January 1, 2022. Both corporations and individual tax payers may continue to compute and carryover an NOL during the suspension period. Different rules apply depending on the amount of income per year. The suspension does not apply to corporate tax payers if their income subject to California taxation is less than $1 million. During 2020, as a result of this tax legislation and certain divestitures in California, the Company was uncertain as to the probability of realizing the full NOL. As such, the Company recorded a valuation allowance related to the California NOLs. As of December 31, 2022, $5.2 million is recorded as a valuation allowance, resulting in a tax effected valuation allowance of $0.4 million. The Company identified no other material uncertain tax positions for which it is reasonably possible the total amount of unrecognized tax benefits will significantly increase or decrease within 12 months.
The Company and its subsidiaries file tax returns for the United States and for multiple states and localities. The United States federal income tax returns of the Company are eligible to be examined for the years 2019 and forward. There are no federal or state tax examinations currently in progress.
NOTE 15 – EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) Plan, which is a defined contribution plan, in which substantially all associates are eligible to participate in and associates may contribute up to 100% of their compensation subject to certain limits based on federal tax laws. The Company may elect to make matching contributions as defined by the plan. For the years ended December 31, 2022 and 2021, the Company expensed matching contributions to the plan totaling $1.0 million. For the years ended December 31, 2022 and 2021, the Company incurred $0.1 million of administrative fees attributable to the plan.
NOTE 16 – RELATED-PARTY TRANSACTIONS
The Bank extends credit to certain covered parties including Company directors, executive officers, and their affiliates. As of December 31, 2022 and December 31, 2021, there were no delinquent or non-performing loans to any executive officer or director of the Company. These covered parties, along with principal owners, management, immediate family of management or principal owners, a parent company and its subsidiaries, trusts for the benefit of employees, and other parties, may be considered related parties. The following presents a summary of related-party loan activity as of the dates noted (dollars in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Balance, beginning of year | $ | 12,833 | | | $ | 14,321 | |
| Funded loans | 15,079 | | | 11,294 | |
| Payments collected | (11,053) | | | (12,782) | |
| Balance, end of period | $ | 16,859 | | | $ | 12,833 | |
Deposits from related parties held by the Bank as of December 31, 2022 and December 31, 2021 totaled $36.9 million and $51.0 million, respectively.
The Company leases office spaces from entities controlled by one of the Company’s board members. During each of the years ended December 31, 2022 and 2021, the Company incurred $0.2 million of expense related to these leases.
The Company earned trust and investment management fees of $0.1 million from related parties during each of the years ended December 31, 2022 and 2021. Assets under management for those related parties totaled $123.5 million and $103.1 million as of December 31, 2022 and 2021, respectively.
NOTE 17 - FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
| | | | | |
| Level 1: | Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
| |
| Level 2: | Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| |
| Level 3: | Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
Recurring Fair Value
Available-for-sale securities: The fair values for available-for-sale investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based
on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Equity Securities: Fair value of equity securities represents the market value of mutual funds based on quoted market prices (Level 1) and the value of stock held in other companies, which is based on recent market transactions or quoted rates that are not actively traded (Level 2).
Equity Warrants: Fair value of equity warrants of private companies are priced using a Black-Scholes option pricing model to estimate the fair value by using strike prices, option expiration dates, risk-free interest rates, and option volatility assumptions (Level 3).
Guarantee Asset and Liability: The guarantee asset represents the fair value of the consideration received in exchange for the credit enhancement fee. The guarantee liability represents a financial guarantee to cover the second layer of any losses on loans sold to FHLB under the MPF 125 loan sales agreement. The guarantee liability value on day one is equivalent to the guarantee asset fair value, which is the consideration for the credit enhancement fee paid over the life of the loans. The liability is then carried at amortized cost. Significant inputs in the valuation analysis for the asset are Level 3, due to the nature of this asset and the lack of market quotes. The fair value of the guarantee asset is determined using a discounted cash flow model, for which significant unobservable inputs include assumed future prepayment rates (“CPR”) and market discount rate (Level 3). An increase in prepayment rates or discount rate would generally reduce the estimated fair value of the guarantee asset.
Mortgage Related Derivatives: Mortgage related derivatives include our IRLC, FSC, and the forward commitments on our loans held for sale pipeline. The fair value estimate of our IRLC is based on valuation models using market data from secondary market loan sales and direct contacts with third party investors as of the measurement date and pull through assumptions (Level 3). The FSC fair value estimate reflects the potential pair off fee associated with mandatory trades and is estimated by using a market differential and pair off penalty assessed by the investor (Level 3). The fair value estimate of the forward commitments is based on market prices of similar securities to the underlying MBS (Level 2).
Loans Held for Investment: The fair value of loans held for investment are typically determined based on discounted cash flow analysis using market-based interest rate spreads. Discounted cash flow analysis are adjusted, as appropriate, to reflect current market conditions and borrower specific credit risk. Due to the nature of the valuation inputs, loans held for investment are classified within Level 3 of the valuation hierarchy.
Mortgage Loans Held for Sale: The fair value of mortgage loans held for sale is estimated based upon quotes from third party investors for similar assets resulting in a Level 2 classification.
Loans Held for Sale: The fair value of loans held for sale is determined using actual quoted commitments from third party investors resulting in a Level 1 classification.
The following presents assets and liabilities measured on a recurring basis as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Reported
Balance |
| Mortgage loans held for sale | | $ | — | | | $ | 8,839 | | | $ | — | | | $ | 8,839 | |
| Loans held for sale | | $ | 1,965 | | | $ | — | | | $ | — | | | $ | 1,965 | |
| Loans held at fair value | | $ | — | | | $ | — | | | $ | 23,321 | | | $ | 23,321 | |
| Forward commitments and FSC | | $ | — | | | $ | 46 | | | $ | — | | | $ | 46 | |
| Equity securities | | $ | 627 | | | $ | 122 | | | $ | — | | | $ | 749 | |
| Guarantee asset | | $ | — | | | $ | — | | | $ | 143 | | | $ | 143 | |
| IRLC, net | | $ | — | | | $ | — | | | $ | 229 | | | $ | 229 | |
| Equity warrants | | $ | — | | | $ | — | | | $ | 825 | | | $ | 825 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Reported
Balance |
| Investment securities available-for-sale: | | | | | | | | |
| U.S. Treasury debt | | $ | 247 | | | $ | — | | | $ | — | | | $ | 247 | |
| U.S. Government Agency | | — | | | 3,522 | | | — | | | 3,522 | |
| Corporate bonds | | — | | | 6,212 | | | 2,113 | | | 8,325 | |
| GNMA mortgage-backed securities - residential | | — | | | 26,650 | | | — | | | 26,650 | |
| FNMA mortgage-backed securities - residential | | — | | | 14,443 | | | — | | | 14,443 | |
| Government CMO and MBS | | — | | | 878 | | | — | | | 878 | |
| Corporate CMO and MBS | | — | | | 1,497 | | | — | | | 1,497 | |
| Total securities available-for-sale | | $ | 247 | | | $ | 53,202 | | | $ | 2,113 | | | $ | 55,562 | |
| Mortgage loans held for sale | | $ | — | | | $ | 30,620 | | | $ | — | | | $ | 30,620 | |
| Forward commitments and FSC | | $ | — | | | $ | (65) | | | $ | (9) | | | $ | (74) | |
| Equity securities | | $ | 709 | | | $ | 489 | | | $ | — | | | $ | 1,198 | |
| Guarantee asset | | $ | — | | | $ | — | | | $ | 237 | | | $ | 237 | |
| IRLC, net | | $ | — | | | $ | — | | | $ | 1,473 | | | $ | 1,473 | |
| Equity warrants | | $ | — | | | $ | — | | | $ | 160 | | | $ | 160 | |
There were no transfers between levels during the year ended December 31, 2022 or 2021. On April 1, 2022, the Company elected to transfer all securities classified as available-for-sale to held-to-maturity and are now carried at amortized cost. See Note 3 - Investment Securities for more information.
As of December 31, 2021, U.S. Treasury debt was reported at fair value utilizing Level 1 inputs. Three Corporate bonds were reported at fair value utilizing Level 3 inputs. The remaining portfolio of securities were reported at fair value with Level 2 inputs provided by a pricing service. The majority of the securities had credit support provided by the Federal Home Loan Mortgage Corporation, GNMA, and FNMA. Factors used to value the securities by the pricing service include: benchmark yields, reported trades, interest spreads, prepayments, and other market research. In addition, ratings and collateral quality were considered.
As of December 31, 2022, equity securities, equity warrants, IRLC, and guarantee assets have been recorded at fair value within the Other assets line item in the Consolidated Balance Sheets. All changes are recorded in Non-interest income in the Consolidated Statements of Income.
Fair Value Option
The Company has elected to account for certain purchased whole loans held for investment under the fair value option in order to align the accounting presentation with the Company's viewpoint of the economics of the loans. Interest income on loans held for investment accounted for under the fair value option is recognized within Interest and dividend income in the accompanying Consolidated Statements of Income. Not electing fair value generally results in a larger discount being recorded on the date of the loan purchase. The discount is subsequently accreted into interest income over the underlying loan's remaining term using the effective interest method. Additionally, management has elected the fair value option for mortgage loans originated and held for sale and loans held for sale.
As of December 31, 2022, the Company reclassified $2.0 million of loans held for investment to loans held for sale. The transfer occurred at the point in time the Company decided to sell the loan and received a commitment from third party investors to purchase the loan.
There were no loans accounted for under the fair value option that were 90 days or more past due and still accruing interest as of December 31, 2022 or December 31, 2021. As of December 31, 2022, there were 145 loans, totaling $0.1 million, accounted for under the fair value option that were on nonaccrual. As of December 31, 2021, there were no loans accounted for under the fair value option that were on nonaccrual.
The following provides more information about the fair value carrying amount and unpaid principal outstanding of loans accounted for under the fair value option as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Total Loans | | Non Accruals | | 90 Days or More Past Due |
| | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference |
| Mortgage loans held for sale | | $ | 8,839 | | | $ | 8,750 | | | $ | 89 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Loans held for sale | | 1,965 | | | 1,984 | | | (19) | | | — | | | — | | | $ | — | | | — | | | — | | | — | |
| Loans held for investment | | 23,321 | | | 23,415 | | | (94) | | | 139 | | | 140 | | | (1) | | | 139 | | | 140 | | | (1) | |
| | $ | 34,125 | | | $ | 34,149 | | | $ | (24) | | | $ | 139 | | | $ | 140 | | | $ | (1) | | | $ | 139 | | | $ | 140 | | | $ | (1) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Total Loans | | Non Accruals | | 90 Days or More Past Due |
| | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference | | Fair Value Carrying Amount | | Unpaid Principal Balance | | Difference |
| Mortgage loans held for sale | | $ | 30,620 | | | $ | 29,857 | | | $ | 763 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Loans held for investment | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | $ | 30,620 | | | $ | 29,857 | | | $ | 763 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
The following presents the changes in fair value of loans accounted for under the fair value option as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | | Year Ended December 31, |
| | | | | | 2022 | | 2021 |
| Mortgage loans held for sale | | | | | | | | $ | (673) | | | $ | 4,712 | |
| Loans held for sale | | | | | | | | (20) | | | — | |
| Loans held for investment | | | | | | | | (94) | | | — | |
| | | | | | | | $ | (787) | | | $ | 4,712 | |
The following summarizes the activity pertaining to loans accounted for under the fair value option as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended |
| | | | December 31, |
| Mortgage loans held for sale | | | | | | 2022 | | 2021 |
| Balance at beginning of period | | | | | | | | $ | 30,620 | | | $ | 161,843 | |
| Loans originated | | | | | | | | | 439,682 | | | | 1,425,713 | |
| Loans acquired | | | | | | | | | — | | | | 840 | |
| Fair value changes | | | | | | | | | (673) | | | | (4,712) | |
| Sales | | | | | | | | | (460,514) | | | | (1,548,405) | |
| Settlements | | | | | | | | | (276) | | | | (4,659) | |
| Balance at end of period | | | | | | | | $ | 8,839 | | | $ | 30,620 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended |
| | | | December 31, |
| Loans held for sale | | | | | | 2022 | | 2021 |
| Balance at beginning of period | | | | | | | | $ | — | | | $ | — | |
| Loans transferred from held for investment | | | | | | | | | 1,985 | | | | — | |
| | | | | | | | | | | | |
| Fair value changes | | | | | | | | | (20) | | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Balance at end of period | | | | | | | | $ | 1,965 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended |
| | | | December 31, |
| Loans held for investment | | | | | | 2022 | | 2021 |
| Balance at beginning of period | | | | | | | | — | | | $ | — | |
| | | | | | | | | | | |
| Loans acquired | | | | | | | | 35,616 | | | | — | |
| Fair value changes | | | | | | | | (94) | | | | — | |
| | | | | | | | | | | |
| Settlements | | | | | | | | (12,201) | | | | — | |
| Balance at end of period | | | | | | | | $ | 23,321 | | | $ | — | |
Nonrecurring Fair Value
Other Real Estate Owned ("OREO"): Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. They are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than on an annual basis. Appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. OREO is evaluated annually for additional impairment and adjusted accordingly.
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. Impaired loans are evaluated monthly for additional impairment and adjusted accordingly.
Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Company reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.
The following presents assets measured on a nonrecurring basis as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Reported
Balance |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Impaired loans(1): | | | | | | | | |
| Commercial and Industrial | | $ | — | | | $ | — | | | $ | 439 | | | $ | 439 | |
_____________________________
(1)One immaterial Consumer and Other loan was fully reserved for using a specific allowance as of December 31, 2021.
The sales comparison approach was utilized for estimating the fair value of non-recurring assets. There were no assets measured on a nonrecurring basis for the year ended December 31, 2022.
During the year ended December 31, 2022, the Company recorded $0.4 million of OREO as a result of obtaining physical possession of foreclosed property as partial consideration for amounts owed on an impaired loan. The Company sold the property during the year ended December 31, 2022, resulting in an immaterial gain. As of December 31, 2022 and December 31, 2021, the Company did not own any OREO properties.
As of December 31, 2021, total impaired loans measured for impairment using the fair value of the collateral dependent loans had carrying values of $2.2 million with valuation allowances of $1.8 million and were classified as Level 3.
Impaired loans accounted for no specific reserves as of December 31, 2022 and $1.8 million as of December 31, 2021. The Company did not have any charge offs during the year ended December 31, 2022 from the specific reserve. The Company charged off an immaterial amount during the year ended December 31, 2021 from the specific reserve.
Level 3 Analysis
The following presents a reconciliation for Level 3 instruments measured at fair value on a recurring basis as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Corporate Bonds | | Loans Held at Fair Value | | FSC | | Guarantee Asset | | IRLC | | Equity Warrants |
| Beginning balance | | $ | 2,113 | | | $ | — | | | $ | (9) | | | $ | 237 | | | $ | 1,473 | | | $ | 160 | |
| Acquisitions | | 4,000 | | | 35,616 | | | 9 | | | — | | | 3,213 | | | 344 | |
| Originations | | — | | | — | | | — | | | 1 | | | (5,048) | | | — | |
| Gains (losses) in net income, net | | — | | | (94) | | | — | | | (75) | | | 591 | | | 321 | |
| Unrealized gains, net | | 102 | | | — | | | — | | | — | | | — | | | — | |
| Transfer to held-to-maturity | | (6,215) | | | — | | | — | | | — | | | — | | | — | |
| Settlements | | — | | | (12,201) | | | — | | | (20) | | | — | | | — | |
| Ending balance | | $ | — | | | $ | 23,321 | | | $ | — | | | $ | 143 | | | $ | 229 | | | $ | 825 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | Corporate Bonds | | Loans Held at Fair Value | | FSC | | Guarantee Asset | | IRLC | | Equity Warrants |
| Beginning balance | | $ | — | | | $ | — | | | $ | (89) | | | $ | 232 | | | $ | 9,841 | | | $ | — | |
| Acquisitions | | 2,113 | | | — | | | (182) | | | — | | | 19,526 | | | 160 | |
| Originations | | — | | | — | | | — | | | 2 | | | (25,804) | | | — | |
| | | | | | | | | | | | |
| Gains (losses) in net income, net | | — | | | — | | | 262 | | | 32 | | | (2,090) | | | — | |
| Other settlements | | — | | | — | | | — | | | (29) | | | — | | | — | |
| Ending balance | | $ | 2,113 | | | $ | — | | | $ | (9) | | | $ | 237 | | | $ | 1,473 | | | $ | 160 | |
The following presents quantitative information about Level 3 assets measured on a recurring and nonrecurring basis as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2022 |
| | Fair Value | | Valuation
Technique | | Significant
Unobservable Input | | Range
(Weighted Average) |
| Recurring fair value | | | | | | | | |
| Loans held for investment at fair value | | $ | 23,321 | | | Discounted cash flow | | Discount rate | | 4% to 18% (8)% |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Guarantee asset | | 143 | | | Discounted cash flow | | Discount rate
Prepayment rate | | 5% (5%) 4% (4)% |
| | | | | | | | |
| IRLC, net | | 229 | | | Best execution model | | Pull through | | 73% to 100% (91)% |
| | | | | | | | |
| Equity Warrants | | 825 | | | Black-Scholes option pricing model | | Volatility
Risk-free interest rate
Remaining life | | 31.2% to 44.7% (34.8)% 4.04% to 4.14% (4.05)% 0 to 4 years |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2021 |
| | Fair Value | | Valuation
Technique | | Significant
Unobservable Input | | Range
(Weighted Average) |
| Recurring fair value | | | | | | | | |
| Corporate Bonds | | $ | 2,113 | | | Discounted cash flow | | Discount rate | | 7% (7)% |
| | | | | | | | |
| FSC | | (9) | | | Internal pricing model | | Market Differential | | (14) bps to (2) bps ((6) bps) |
| | | | | | | | |
| Guarantee asset | | 237 | | | Discounted cash flow | | Discount rate
Prepayment rate | | 3% (3%) 18% (18%) |
| | | | | | | | |
| IRLC, net | | 1,473 | | | Best execution model | | Pull through | | 71% to 100% (88)% |
| | | | | | | | |
| Equity warrants | | 160 | | | Black-Scholes option pricing model | | Volatility
Risk-free interest rate
Remaining life | | 24% to 37% (32)% 0.30% to 1.10% (0.97)% 0 to 4 years |
| | | | | | | | |
| Nonrecurring fair value | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Impaired loans(1): | | | | | | | | |
| Commercial and Industrial | | 439 | | | Sales comparison, Market approach - guideline transaction method | | Management discount for asset/property type | | 17% - 45% (39%) |
_____________________________
(1)One immaterial Consumer and Other loan was fully reserved for using a specific allowance as of December 31, 2021.
Estimated Fair Value of Other Financial Instruments
The following presents carrying amounts and estimated fair values for financial instruments not carried at fair value as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying
Amount | | Fair Value Measurements Using: |
| December 31, 2022 | | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 196,512 | | | $ | 196,512 | | | $ | — | | | $ | — | |
| Held-to-maturity securities | | 81,056 | | | 234 | | | 67,433 | | | 7,051 | |
| Loans, net | | 2,452,230 | | | — | | | — | | | 2,379,406 | |
| Accrued interest receivable | | 10,445 | | | 5 | | | 362 | | | 10,078 | |
| Liabilities: | | | | | | | | |
| Deposits | | 2,405,229 | | | 2,181,139 | | | — | | | 228,868 | |
| Borrowings: | | | | | | | | |
| FHLB borrowings – fixed rate | | 141,498 | | | — | | | 141,867 | | | — | |
| Federal Reserve borrowings – fixed rate | | 5,388 | | | — | | | 5,388 | | | — | |
| Subordinated notes – fixed-to-floating rate | | 52,132 | | | — | | | — | | | 60,384 | |
| Accrued interest payable | | 1,125 | | | — | | | 587 | | | 538 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying
Amount | | Fair Value Measurements Using: |
| December 31, 2021 | | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 386,983 | | | $ | 386,983 | | | $ | — | | | $ | — | |
| Loans, net | | 1,935,405 | | | — | | | — | | | 1,919,625 | |
| Accrued interest receivable | | 7,151 | | | 2 | | | 203 | | | 6,946 | |
| Liabilities: | | | | | | | | |
| Deposits | | 2,205,703 | | | 2,035,212 | | | — | | | 172,240 | |
| Borrowings: | | | | | | | | |
| FHLB borrowings – fixed rate | | 15,000 | | | — | | | 14,990 | | | — | |
| Federal Reserve borrowings – fixed rate | | 23,629 | | | — | | | 23,629 | | | — | |
| Subordinated notes – fixed-to-floating rate | | 39,031 | | | — | | | — | | | 40,325 | |
| Accrued interest payable | | 355 | | | 9 | | | 77 | | | 269 | |
The fair value estimates presented and discussed above are based on pertinent information available to management as of the dates specified. The estimated fair value amounts are based on the exit price notion set forth by ASU 2016-01. Although management is not aware of any factors that would significantly affect the estimated fair values, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since the balance sheet dates. Therefore, current estimates of fair value may differ significantly from the amounts presented herein.
The methods and assumptions, not previously presented, used to estimate fair values are described as follows.
Cash and Cash Equivalents and Restricted Cash: The carrying amounts of cash and cash equivalents and restricted cash approximate fair values as maturities are less than 90 days and balances are generally in accounts bearing current market interest rates.
Held-to-maturity securities: The fair values for held-to-maturity investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities is not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Loans, net: The fair values for all fixed-rate and variable-rate performing loans were estimated using the income approach and by discounting the projected cash flows of such loans. Principal and interest cash flows were projected based on the contractual terms of the loans, including maturity, contractual amortization and adjustments for prepayments and expected losses, where appropriate. A discount rate was developed based on the relative risk of the cash flows, considering the loan type, maturity and a required return on capital.
Accrued Interest Receivable and Payable: The carrying amounts of accrued interest approximate fair value due to their short-term nature.
Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting dates. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Fixed Rate Borrowings: Borrowings with fixed rates are valued using inputs such as discounted cash flows and current interest rates for similar instruments and borrowers with similar credit ratings.
Fixed-to-Floating Rate Borrowings: Borrowings with fixed-to-floating rates are valued using inputs such as discounted cash flows and current interest rates for similar instruments and assume the Company will redeem the instrument prior to the first interest rate reset date.
NOTE 18 - SEGMENT REPORTING
The Company’s reportable segments consist of Wealth Management and Mortgage. The chief operating decision maker ("CODM") is the Chief Executive Officer. The measure of profit or loss used by the CODM to identify and measure the Company’s reportable segments is income before income tax.
The Wealth Management segment consists of operations relative to the Company’s fully integrated wealth management products and services. Services provided include deposit, loan, insurance, and trust and investment management advisory products and services.
The Mortgage segment consists of operations relative to the Company’s residential mortgage service offerings. Mortgage products and services are financial in nature for which premiums are recognized, net of expenses, upon the sale of mortgage loans to third parties.
The following presents the financial information for each segment that is specifically identifiable or based on allocations using internal methods for the years ended December 31, 2022 and 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| As of and for the year ended December 31, 2022 | | Wealth
Management | | Mortgage | | Consolidated |
| Income Statement | | | | | | |
| Total interest and dividend income | | $ | 100,474 | | | $ | — | | | $ | 100,474 | |
| Total interest expense | | 17,270 | | | — | | | 17,270 | |
| Provision for loan losses | | 3,682 | | | — | | | 3,682 | |
| Net interest income, after provision for loan losses | | 79,522 | | | — | | | 79,522 | |
| Non-interest income | | 23,094 | | | 5,318 | | | 28,412 | |
| Total income before non-interest expense | | 102,616 | | | 5,318 | | | 107,934 | |
| Depreciation and amortization expense | | 2,111 | | | 42 | | | 2,153 | |
| All other non-interest expense | | 69,366 | | | 7,587 | | | 76,953 | |
| Income before income taxes | | $ | 31,139 | | | $ | (2,311) | | | $ | 28,828 | |
| | | | | | |
| Goodwill | | $ | 30,400 | | | $ | — | | | $ | 30,400 | |
| Total assets | | 2,856,653 | | | 10,095 | | | 2,866,748 | |
| | | | | | | | | | | | | | | | | | | | |
| As of and for the year ended December 31, 2021 | | Wealth
Management | | Mortgage | | Consolidated |
| Income Statement | | | | | | |
| Total interest and dividend income | | $ | 62,011 | | | $ | — | | | $ | 62,011 | |
| Total interest expense | | 5,416 | | | — | | | 5,416 | |
| Provision for loan losses | | 1,230 | | | — | | | 1,230 | |
| Net interest income, after provision for loan losses | | 55,365 | | | — | | | 55,365 | |
| Non-interest income | | 23,924 | | | 16,119 | | | 40,043 | |
| Total income before non-interest expense | | 79,289 | | | 16,119 | | | 95,408 | |
| Depreciation and amortization expense | | 1,147 | | | 53 | | | 1,200 | |
| All other non-interest expense | | 56,764 | | | 10,164 | | | 66,928 | |
| Income before income taxes | | $ | 21,378 | | | $ | 5,902 | | | $ | 27,280 | |
| | | | | | |
| Goodwill | | $ | 30,588 | | | $ | — | | | $ | 30,588 | |
| Total assets | | 2,494,207 | | | 33,282 | | | 2,527,489 | |
NOTE 19 – LOW-INCOME HOUSING TAX CREDIT INVESTMENTS
On December 19, 2019, the Company invested in a low-income housing tax credit ("LIHTC") investment. As of December 31, 2022 and 2021, the balance of the investment for LIHTC was $2.4 million and $2.6 million, respectively. These balances are reflected in the Other assets line item of the Consolidated Balance Sheets. There were no unfunded commitments related to the LIHTC investment as of December 31, 2022. As of December 31, 2021, total unfunded commitments were $0.2 million.
The Company uses the proportional amortization method to account for this investment. Amortization expense is included within the Income tax expense line item of the Consolidated Statements of Income. During the year ended December 31, 2022, the Company recognized amortization expense of $0.4 million, which was included within the Income tax expense line item of the Consolidated Statements of Income. The Company recognized amortization expense of $0.5 million in the year ended December 31, 2021.
Additionally, during the year ended December 31, 2022, the Company recognized tax credits and other benefits from this investment in the LIHTC of $0.4 million. The Company recognized tax credits and other benefits from this investment in the LIHTC of $0.5 million in the year end December 31, 2021. During the years ending December 31, 2022 and 2021, the Company did not incur any impairment losses.
NOTE 20 – CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
The following presents condensed financial statements pertaining only to FWFI (dollars in thousands). Investments in subsidiaries are stated using the equity method of accounting.
| | | | | | | | | | | | | | |
| | December 31, | | December 31, |
| Condensed Balance Sheets | | 2022 | | 2021 |
| Assets | | | | |
| Cash and cash equivalents | | $ | 26,372 | | | $ | 18,124 | |
| Investment in subsidiaries | | 263,362 | | | 233,417 | |
| Loans, net | | — | | | 1,978 | |
| Other assets | | 3,723 | | | 3,611 | |
| Total assets | | $ | 293,457 | | | $ | 257,130 | |
| Liabilities | | | | |
| Subordinated notes | | $ | 52,132 | | | $ | 39,031 | |
Other liabilities(1) | | 461 | | | (942) | |
| Total liabilities | | 52,593 | | | 38,089 | |
| Shareholders' Equity | | | | |
| Total shareholders’ equity | | 240,864 | | | 219,041 | |
| Total liabilities and shareholders’ equity | | $ | 293,457 | | | $ | 257,130 | |
_____________________________
(1)As of December 31, 2021, taxes payable was in a receivable position as a result of timing of tax payments.
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Condensed Statements of Income | | 2022 | | 2021 |
| Income | | | | |
| Interest income | | $ | 46 | | | $ | 60 | |
| Non-interest income | | 7 | | | — | |
| Total income | | 53 | | | 60 | |
| Expense | | | | |
| Interest expense | | 1,609 | | | 1,549 | |
| Non-interest expense | | 272 | | | 285 | |
| Total expense | | 1,881 | | | 1,834 | |
| Loss before income tax and equity in undistributed income of subsidiaries | | (1,828) | | | (1,774) | |
| Income tax benefit | | 412 | | | 119 | |
| Loss before equity in undistributed income of subsidiaries | | (1,416) | | | (1,655) | |
| Equity in undistributed income to subsidiaries | | 23,114 | | | 22,265 | |
| Net income | | $ | 21,698 | | | $ | 20,610 | |
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Condensed Statements of Cash Flows | | 2022 | | 2021 |
| Cash flows from operating activities | | | | |
| Net income | | $ | 21,698 | | | $ | 20,610 | |
| Adjustments: | | | | |
| Depreciation and amortization | | 167 | | | 73 | |
| Deferred income tax expense | | 941 | | | 301 | |
| Stock-based compensation | | 2,562 | | | 2,903 | |
| Undistributed equity in subsidiaries | | (23,114) | | | (22,265) | |
| Change in other assets | | 235 | | | 678 | |
| Change in other liabilities | | 115 | | | 53 | |
| Net cash provided by/(used in) operating activities | | 2,604 | | | 2,353 | |
| Cash flows from investing activities | | | | |
| Net cash paid on acquisition | | — | | | (11,501) | |
| Investment in subsidiaries | | (8,571) | | | (2,913) | |
| Loan and note receivable originations and principal collections | | 1,978 | | | 43 | |
| Net cash used in investing activities | | (6,593) | | | (14,371) | |
| Cash flows from financing activities | | | | |
| Proceeds from subordinated notes, net of issuance costs | | 19,509 | | | 14,667 | |
| Payment on subordinated notes | | (6,575) | | | — | |
| | | | |
| Settlement of restricted stock | | (876) | | | (501) | |
| Proceeds from the exercise of stock options | | 179 | | | 1,706 | |
| Net cash provided by financing activities | | 12,237 | | | 15,872 | |
| | | | |
| Net change in cash and cash equivalents | | 8,248 | | | 3,854 | |
| Cash and cash equivalents, beginning of year | | 18,124 | | | 14,270 | |
| Cash and cash equivalents, end of year | | $ | 26,372 | | | $ | 18,124 | |
| | | | |
| Supplemental cash flow information: | | | | |
| Interest paid on borrowed funds | | $ | 1,609 | | | $ | 1,549 | |
| | | | |
| Supplemental noncash disclosures: | | | | |
| Common stock issued for Teton acquisition | | — | | | 39,818 | |
| | | | |
| | | | |
| | | | |
| | | | |
NOTE 21 – OTHER NON-INTEREST EXPENSE
Other non-interest expense as shown in the Consolidated Statements of Income is detailed in the following schedule to the extent the components exceed one percent of total interest income and other income (dollars in thousands):
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Other non-interest expense | | 2022 | | 2021 |
| Corporate development and related | | $ | 2,440 | | | $ | 1,769 | |
| Loan and deposit related | | 1,420 | | | 1,016 | |
| Other | | 687 | | | 470 | |
| Total other non-interest expense | | $ | 4,547 | | | $ | 3,255 | |
NOTE 22 - REGULATORY CAPITAL MATTERS
First Western and the Bank are subject to various regulatory capital adequacy requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, First Western and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.
First Western and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks ("Basel III rules") has been fully phased in. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. During the years ended December 31, 2022 and 2021, First Western made capital injections of $6.0 million and $2.9 million, respectively, into the Bank. Management believes as of December 31, 2022, First Western and the Bank meet all capital adequacy requirements to which they are subject to.
Prompt corrective action regulations for First Western and the Bank provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
The standard ratios established by First Western and the Bank’s primary regulators to measure capital require First Western and the Bank to maintain minimum amounts and ratios, set forth in the following table. These ratios are common equity Tier 1 capital ("CET1"), Tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined).
The actual capital ratios of First Western and the Bank, along with the applicable regulatory capital requirements as of December 31, 2022, were calculated in accordance with the requirements of Basel III. The final rules of Basel III also established a "capital conservation buffer" of 2.5% above new regulatory minimum capital ratios, which are fully effective following minimum ratios: (i) a CET1 ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. Banks are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if their capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that can be utilized for such activities.
As of December 31, 2022, the most recent filings with the FDIC categorized First Western and the Bank as well capitalized under the regulatory guidelines. To be categorized as well capitalized, an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as set forth in the following table. Management believes there are no conditions or events since December 31, 2022 that have changed the categorization of First Western and the Bank as well capitalized. Management believes First Western and the Bank met all capital adequacy requirements to which they are subject to as of December 31, 2022 and December 31, 2021.
The following presents the actual and required capital amounts and ratios as of the dates noted (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Required for Capital Adequacy Purposes(1) | | To be Well Capitalized
Under Prompt
Corrective Action
Regulations |
| December 31, 2022 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| Tier 1 capital to risk-weighted assets | | | | | | | | | | | | |
| Bank | | $ | 234,738 | | | 10.29 | % | | $ | 136,928 | | | 6.0 | % | | $ | 182,571 | | | 8.0 | % |
| Consolidated | | 212,229 | | | 9.28 | | | N/A | | N/A | | N/A | | N/A |
| CET1 to risk-weighted assets | | | | | | | | | | | | |
| Bank | | 234,738 | | | 10.29 | | | 102,696 | | | 4.5 | | | 148,339 | | | 6.5 | |
| Consolidated | | 212,229 | | | 9.28 | | | N/A | | N/A | | N/A | | N/A |
| Total capital to risk-weighted assets | | | | | | | | | | | | |
| Bank | | 252,398 | | | 11.06 | | | 182,571 | | | 8.0 | | | 228,213 | | | 10.0 | |
| Consolidated | | 282,889 | | | 12.37 | | | N/A | | N/A | | N/A | | N/A |
| Tier 1 capital to average assets | | | | | | | | | | | | |
| Bank | | 234,738 | | | 8.65 | | | 108,506 | | | 4.0 | | | 135,633 | | | 5.0 | |
| Consolidated | | 212,229 | | | 7.81 | | | N/A | | N/A | | N/A | | N/A |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Required for Capital Adequacy Purposes(1) | | To be Well Capitalized
Under Prompt
Corrective Action
Regulations |
| December 31, 2021 | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| Tier 1 capital to risk-weighted assets | | | | | | | | | | | | |
| Bank | | $ | 203,164 | | | 11.40 | % | | $ | 106,945 | | | 6.0 | % | | $ | 142,594 | | | 8.0 | % |
| Consolidated | | 188,777 | | | 10.54 | | | N/A | | N/A | | N/A | | N/A |
| CET1 to risk-weighted assets | | | | | | | | | | | | |
| Bank | | 203,164 | | | 11.40 | | | 80,209 | | | 4.5 | | | 115,858 | | | 6.5 | |
| Consolidated | | 188,777 | | | 10.54 | | | N/A | | N/A | | N/A | | N/A |
| Total capital to risk-weighted assets | | | | | | | | | | | | |
| Bank | | 217,215 | | | 12.19 | | | 142,594 | | | 8.0 | | | 178,242 | | | 10.0 | |
| Consolidated | | 242,388 | | | 13.54 | | | N/A | | N/A | | N/A | | N/A |
| Tier 1 capital to average assets | | | | | | | | | | | | |
| Bank | | 203,164 | | | 10.05 | | | 80,887 | | | 4.0 | | | 101,108 | | | 5.0 | |
| Consolidated | | 188,777 | | | 9.31 | | | N/A | | N/A | | N/A | | N/A |
_____________________________
(1)Does not include capital conservation buffer.
*****