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目錄
美國
證券交易委員會
華盛頓特區20549
_________________________________________
表格 10-Q
_________________________________________
x根據1934年證券交易所法第13條或第15(d)條的季度報告
截至季度結束日期的財務報告2024年9月30日
或者
o根據1934年證券交易所法第13或第15(d)節的規定,過渡性報告
過渡期從________到_________
委員會文件號 001-38595
_________________________________________
第一西部金融公司。
(根據其章程規定的註冊人準確名稱)
_________________________________________
科羅拉多州37-1442266
(國家或其他管轄區的
公司成立或組織)
(IRS僱主
唯一識別號碼)
1900 16th Street, 1200套房
丹佛, CO
80202
,(主要行政辦公地址)(郵政編碼)
公司電話,包括區號:303.531.8100
_________________________________________
在法案第12(b)條的規定下注冊的證券:
每個課程的標題交易符號註冊的每個交易所的名稱
普通股,無面值MYFW納斯達克股票市場有限責任公司
請勾選以下選項以指示註冊人是否在過去12個月內(或在註冊人需要提交此類報告的較短時間內)已提交證券交易法1934年第13或15(d)條所要求提交的所有報告,並且在過去90天內已受到此類報告提交要求的影響。x o
請在以下勾選方框表示註冊人是否已在Regulation S-T Rule 405規定的前12個月(或在註冊人需要提交此類文件的較短期間內)提交了每個互動數據文件。x o
請在交易所法案第120億。2條中查看「大型加速文件提交者,」「加速文件提交者,」「小型報告公司」和「新興成長公司」的定義,然後使用勾選標記指示申報人是否屬於上述任何一類。
大型加速歸檔者o
加速文件提交人x
非加速歸檔者o
較小的報告公司
x
新興成長公司
o
如果是新興成長型企業,請勾選複選標記,表明註冊者已選擇不使用延長過渡期來符合根據證券交易法第13(a)條規定提供的任何新財務會計準則。 o
用勾選標記表示註冊人是否爲空殼公司(如法規第120億.2條規定)。 ox
請指示在最新可行日期每個申報人普通股類別的流通股數。
截至目前爲止的流通股數
2024年10月30日
沒有名義價值的普通股9,664,101
1

目錄
第一西部金融公司。
目錄
2

目錄
關於本季度報告中信息的重要通知
除非另有說明或上下文另有要求,本季度報告中對"我們"、"我們的"、"我們"、"公司" 和 "第一西部" 的引用是指First Western Financial, Inc.及其合併子公司,包括First Western Trust 銀行,有時我們稱之爲 "銀行" 或 "我們的銀行"。
本季報告所含信息僅截至本季度10-Q表格的日期和本文指定日期為準。
3

目錄
關於前瞻性陳述的注意事項
本季度的10-Q表格中包含前瞻性聲明。這些前瞻性聲明反映了我們對未來事件以及我們的財務表現的當前看法。這些聲明通常是通過諸如"可能","應該","可能","預測","潛在","相信","很可能會導致","預計","繼續","將","預期","尋求","估計","打算","計劃","投影","將會","展望"這樣的詞語或短語進行表達,或者這些詞語的負面版本或其他類似的表達未來或前瞻性質的詞語或短語。這些前瞻性聲明並非歷史事實,而是基於我們對行業板塊,管理層的信仰以及管理層所做的一些假設的當前期望,評估和對我們的控制範圍之外的那些事物的投資,特別是關於其他金融機構健全性相關發展的。因此,我們警告您,任何這類前瞻性聲明均不是未來表現的保證,而是受到難以預測的風險,假設和不確定性的影響。儘管我們認爲這些前瞻性聲明所反映的期望在提出的日期是合理的,但實際結果可能與前瞻性聲明所表達或暗示的結果有實質不同。
有或將有重要因素可能導致我們的實際結果與這些前瞻性陳述所示結果不同,包括但不限於以下因素:
在科羅拉多、亞利桑那、懷俄明、蒙大拿和加利福尼亞存在地理集中;
其他金融機構的穩健性;
經濟變化影響房地產價值和流動性;
與較高通貨膨脹相關的風險;
利率的變化;
經濟條件疲弱,全球貨幣交易;
我們繼續發起住宅房地產貸款並出售此類貸款;
risks specific to commercial loans and borrowers;
risks related to non-performing assets, borrowers' solvency and ability to repay and the value of loan collateral;
claims and litigation pertaining to our fiduciary responsibilities;
competition for investment managers and professionals and our ability to retain our associates;
fluctuation in the value of our investment securities;
the terminable nature of our investment management contracts;
changes to the level or type of investment activity by our clients;
investment performance, in either relative or absolute terms;
legislative changes or the adoption of tax reform policies;
external business disruptors in the financial services industry;
the adequacy of our allowance for credit losses;
liquidity risks;
our ability to maintain a strong core deposit base or other low-cost funding sources;
continued positive interaction with and financial health of our referral sources;
retaining our largest trust clients;
our ability to achieve our strategic objectives;
competition from other banks, financial institutions, and wealth and investment management firms;
our ability to implement our internal growth strategy and manage the risks associated with our anticipated growth;
4

Table of Contents
the acquisition of other banks and financial services companies and integration risks and other unknown risks associated with acquisitions;
the accuracy of estimates and assumptions;
our ability to protect against and manage fraudulent activity, breaches of our information security, and cybersecurity attacks;
our reliance on communications, information, operating and financial control systems technology and related services from third-party service providers;
technological change, including the use of artificial intelligence as a commonly used resource and its effects;
our ability to attract and retain clients;
unforeseen or catastrophic events, including pandemics, wars, terrorist attacks, extreme weather events or other natural disasters;
new lines of business or new products and services;
regulation of the financial services industry;
legal and regulatory proceedings, investigations and inquiries, fines and sanctions;
limited trading volume and liquidity in the market for our common stock;
fluctuations in the market price of our common stock;
actual or anticipated issuances or sales of our common stock or preferred stock in the future;
the initiation and continuation of securities analysts coverage of the Company;
potential impairment of goodwill recorded on our balance sheet and possible requirements to recognize significant charges to earnings due to impairment of intangible assets;
future issuances of debt securities;
our ability to manage our existing and future indebtedness;
available cash flows from the Bank; and
other factors that are discussed in "Item 1A - Risk Factors" in our Annual Report on Form 10-K.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in the section titled Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission ("SEC") on March 15, 2024. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
5

Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST WESTERN FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
September 30,
2024
December 31,
2023
Assets
Cash and cash equivalents:
Cash and due from banks$18,979 $7,284 
Interest-bearing deposits in other financial institutions257,243 247,158 
Total cash and cash equivalents276,222 254,442 
Held-to-maturity debt securities, net of allowance for credit losses of $71 and $71, (fair value of $70,826 and $66,617), respectively
76,745 74,102 
Correspondent bank stock, at cost5,746 7,155 
Mortgage loans held for sale, at fair value12,324 7,254 
Loans held for sale, at fair value473  
Loans (includes $8,646 and $13,726 measured at fair value, respectively)
2,383,199 2,530,915 
Allowance for credit losses(18,796)(23,931)
Loans, net2,364,403 2,506,984 
Premises and equipment, net24,350 25,256 
Accrued interest receivable10,455 11,428 
Accounts receivable4,864 5,095 
Other receivables10,397 4,467 
Other real estate owned, net37,036  
Goodwill and other intangible assets, net31,684 31,854 
Deferred tax assets, net4,075 6,407 
Company-owned life insurance16,849 16,530 
Other assets36,325 24,488 
Total assets$2,911,948 $2,975,462 
Liabilities  
Deposits:  
Noninterest-bearing$473,576 $482,579 
Interest-bearing2,029,478 2,046,460 
Total deposits2,503,054 2,529,039 
Borrowings:  
Federal Home Loan Bank and Federal Reserve borrowings62,373 125,711 
Subordinated notes52,508 52,340 
Accrued interest payable3,339 3,793 
Other liabilities41,843 21,841 
Total liabilities2,663,117 2,732,724 
Shareholders' Equity  
Preferred stock - no par value; 10,000,000 shares authorized; 0 issued and outstanding
  
Common stock - no par value; 90,000,000 shares authorized; 9,664,101 and 9,581,183 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively
  
Additional paid-in capital193,274 192,894 
Retained earnings56,767 51,042 
Accumulated other comprehensive loss(1,210)(1,198)
Total shareholders’ equity248,831 242,738 
Total liabilities and shareholders’ equity$2,911,948 $2,975,462 
See accompanying notes to condensed consolidated financial statements (unaudited).
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FIRST WESTERN FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amounts)
Three Months Ended September 30,Nine Months Ended September 30,
2024202320242023
Interest and dividend income:
Loans, including fees$35,353 $34,141 $105,767 $99,804 
Loans accounted for under the fair value option141 300 518 1,078 
Investment securities708 607 1,962 1,863 
Interest-bearing deposits in other financial institutions1,754 1,292 5,961 4,361 
Dividends, restricted stock134 141 334 459 
Total interest and dividend income38,090 36,481 114,542 107,565 
Interest expense:
Deposits21,150 17,467 62,620 46,423 
Other borrowed funds1,372 2,248 4,506 6,368 
Total interest expense22,522 19,715 67,126 52,791 
Net interest income15,568 16,766 47,416 54,774 
Less: Provision for credit losses501 329 2,907 1,862 
Net interest income, after provision for credit losses15,067 16,437 44,509 52,912 
Non-interest income:
Trust and investment management fees4,728 4,846 14,533 14,083 
Net gain on mortgage loans1,451 654 4,535 2,447 
Net gain (loss) on loans held for sale  117 (178)
Bank fees392 427 1,610 1,610 
Risk management and insurance fees367 145 525 375 
Income on company-owned life insurance108 96 319 277 
Net loss on loans accounted for under the fair value option(233)(252)(850)(1,919)
Unrealized gain (loss) recognized on equity securities24 (19)16 (20)
Other135 202 416 (808)
Total non-interest income6,972 6,099 21,221 15,867 
Total income before non-interest expense22,039 22,536 65,730 68,779 
Non-interest expense:
Salaries and employee benefits11,439 10,968 33,803 35,214 
Occupancy and equipment2,126 1,807 6,182 5,660 
Professional services1,893 1,867 6,130 5,648 
Technology and information systems1,045 906 3,097 2,569 
Data processing1,101 1,159 3,150 3,350 
Marketing374 355 811 1,125 
Amortization of other intangible assets57 62 170 188 
Other1,333 1,190 4,722 3,607 
Total non-interest expense19,368 18,314 58,065 57,361 
Income before income taxes2,671 4,222 7,665 11,418 
Income tax expense537 1,104 1,940 2,974 
Net income available to common shareholders$2,134 $3,118 $5,725 $8,444 
Earnings per common share:
Basic$0.22 $0.33 $0.59 $0.89 
Diluted0.22 0.32 0.59 0.87 
See accompanying notes to condensed consolidated financial statements (unaudited).
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FIRST WESTERN FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2024202320242023
Net income$2,134 $3,118 $5,725 $8,444 
Other comprehensive (loss) income items:
Amortization of net unrealized loss for the reclassification of available-for-sale securities transferred to held-to-maturity included in interest income98 86 288 266 
Income tax effect(24)(21)(70)(72)
Unrealized (loss) gain on cash flow hedge(837)299 (303)983 
Income tax effect202 (73)73 (238)
Total other comprehensive (loss) income items(561)291 (12)939 
Comprehensive income$1,573 $3,409 $5,713 $9,383 
See accompanying notes to condensed consolidated financial statements (unaudited).
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FIRST WESTERN FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)
Shares
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Total
Balance as of July 1, 20239,545,071$191,968 $51,143 $(869)$242,242 
Net income— 3,118 — 3,118 
Other comprehensive income, net of tax and reclassification— — 291 291 
Settlement of share awards8,638(78)— — (78)
Options exercised6,500130 — — 130 
Stock-based compensation553 — — 553 
Balance as of September 30, 20239,560,209$192,573 $54,261 $(578)$246,256 
Balance as of July 1, 20249,660,548$192,891 $54,633 $(649)$246,875 
Net income— 2,134 — 2,134 
Other comprehensive loss, net of tax and reclassifications— — (561)(561)
Repurchase of common stock(5,501)(89)— — (89)
Settlement of share awards9,054(46)— — (46)
Stock-based compensation518 — — 518 
Balance as of September 30, 20249,664,101$193,274 $56,767 $(1,210)$248,831 
Balance as of January 1, 20239,495,440$190,494 $51,887 $(1,517)$240,864 
Cumulative change in accounting principle(1)
— — (5,319)— (5,319)
Balance at January 1, 2023 (as adjusted for change in accounting principle)9,495,440$190,494 $46,568 $(1,517)$235,545 
Net income— 8,444 — 8,444 
Other comprehensive income, net of tax and reclassifications— — 939 939 
Dissolution of RSI entity(1)
751 (751)—  
Settlement of share awards52,509(361)— — (361)
Options exercised12,260245 — — 245 
Stock-based compensation1,444 — — 1,444 
Balance as of September 30, 20239,560,209$192,573 $54,261 $(578)$246,256 
Balance as of January 1, 20249,581,183$192,894 $51,042 $(1,198)$242,738 
Net income— 5,725 — 5,725 
Other comprehensive loss, net of tax and reclassifications— — (12)(12)
Repurchase of common stock(5,501)(89)— — (89)
Settlement of share awards88,419(680)— — (680)
Stock-based compensation1,149 — — 1,149 
Balance as of September 30, 20249,664,101$193,274 $56,767 $(1,210)$248,831 
(1) Refer to Note 1 Organization and Summary of Significant Accounting Policies for further information.
See accompanying notes to condensed consolidated financial statements (unaudited).
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FIRST WESTERN FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended September 30,
20242023
Cash flows from operating activities
Net income$5,725 $8,444 
Adjustments to reconcile net income to net cash from operating activities:
Net amortization of investment securities(60)(12)
Stock dividends received on correspondent bank stock(334)(459)
Provision for credit losses2,907 1,862 
(Gain) or Loss on loans held for sale(117)178 
Net gain on mortgage loans(4,535)(2,447)
Origination of mortgage loans held for sale(270,136)(217,774)
Proceeds from mortgage loans268,733 216,913 
Depreciation and amortization1,909 1,748 
Net amortization of purchase accounting adjustments204 555 
Deferred income tax (benefit) expense(3,187)155 
Increase in cash surrender value of company-owned life insurance(319)(277)
Stock-based compensation1,149 1,444 
Change in fair value of equity securities(16)20 
Change in fair value of loans accounted for under the fair value option850 1,919 
Change in fair value of loans held for sale (269)
Net changes in operating assets and liabilities:
Change in accounts receivable310 (227)
Change in accrued interest receivable and other assets(980)50 
Change in accrued interest payable and other liabilities1,765 (1,757)
Net cash used in operating activities3,868 10,066 
Cash flows from investing activities
Activity in held-to-maturity securities:
Maturities, prepayments, and calls6,488 5,717 
Purchases(8,783) 
Purchases of correspondent bank stock(6,866)(23,727)
Redemption of correspondent bank stock8,609 19,991 
Contributions to low-income housing tax credit investments(537)(1,140)
Loan and note receivable originations and principal collections, net106,458 (101,180)
Purchases of premises and equipment(835)(1,890)
Proceeds from loans held for sale previously classified as loans held for investment3,470 40,602 
Purchases of loans (1,162)
Net cash provided by (used in) investing activities108,004 (62,789)
Cash flows from financing activities  
Net change in deposits(25,985)14,767 
Payments to Federal Home Loan Bank borrowings(483,624)(1,262,893)
Proceeds from Federal Home Loan Bank borrowings442,449 1,306,462 
Payments to Federal Reserve borrowings(82,296)(292,059)
Proceeds from Federal Reserve borrowings60,133 361,534 
Repurchase of common stock(89) 
Proceeds from the exercise of stock options 245 
Cash paid for withholding taxes on share-based awards(680)(361)
Net cash (used in) provided by financing activities(90,092)127,695 
Net change in cash and cash equivalents21,780 74,972 
Cash and cash equivalents, beginning of year254,442 196,512 
Cash and cash equivalents, end of period$276,222 $271,484 
FIRST WESTERN FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(continued)
(in thousands)
Nine Months Ended September 30,
20242023
Supplemental cash flow information:
Interest paid on deposits and borrowed funds$67,580 $50,713 
Income tax payment93 2,935 
Cash paid for lease liabilities2,617 2,370 
Supplemental noncash disclosures:
Transfer of loans held for investment to loans held for sale3,722 39,221 
Adoption of ASU 2016-13, net of tax 5,319 
Dissolution of RSI entity 751 
Lease right-of-use-asset obtained in exchange for lease liabilities11,882 1,704 
Transfers from loans, net of participations, to other real estate owned27,390  
See accompanying notes to condensed consolidated financial statements (unaudited).
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FIRST WESTERN FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation: The condensed consolidated financial statements include the accounts of First Western Financial, Inc. ("FWFI"), incorporated in Colorado on July 18, 2002, and its direct and indirect wholly-owned subsidiaries listed below (collectively referred to as the "Company," "we," "us," or "our").
FWFI is a bank holding company with financial holding company status registered with the Board of Governors of the Federal Reserve System. FWFI wholly owns the following subsidiary: First Western Trust Bank (the "Bank"). The Bank wholly owns First Western Merger Corporation ("Merger Corp"), which is therefore indirectly wholly owned by FWFI. RRI, LLC ("RRI"), which was wholly owned by the Bank, was dissolved on February 3, 2023. Ryder, Stilwell Inc. ("RSI"), which was wholly owned by FWFI, was dissolved on March 21, 2023.
The Company provides a fully-integrated suite of wealth management services including: private banking, personal trust, investment management, mortgage loans, and institutional asset management services to individual and corporate clients principally in Colorado (metro Denver, Aspen, Boulder, Fort Collins, Loveland, and Vail Valley), Arizona (Phoenix and Scottsdale), California (Century City), Montana (Bozeman), and Wyoming (Jackson, Pinedale, Rock Springs and Cheyenne). 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 condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. The December 31, 2023 condensed consolidated balance sheet has been derived from the audited financial statements for the year ended December 31, 2023.
In the opinion of management, all adjustments that were recurring in nature and considered necessary have been included for fair presentation of the Company’s financial position and results of operations. Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of results that may be expected for the full year ending December 31, 2024. In preparing the condensed consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could be significantly different from those estimates.
The condensed consolidated financial statements and notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the SEC.
Consolidation: The Company’s policy is to consolidate all majority-owned subsidiaries in which it has a controlling financial interest and variable-interest entities where the Company is deemed to be the primary beneficiary. All material intercompany accounts and transactions have been eliminated in consolidation.
Business Combinations and Divestitures: Business combinations are accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total consideration transferred in connection with the acquisition is allocated to the tangible and intangible assets acquired, liabilities assumed, and any non-controlling interest in the acquired entity based on fair values. Goodwill acquired in connection with business combinations represents the excess of consideration transferred over the net tangible and identifiable intangible assets acquired. Certain assumptions and estimates are used in evaluating the fair value of assets acquired and liabilities assumed. These estimates may be affected by factors such as changing market conditions or changes in government regulations.
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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 condensed consolidated financial statements and the disclosures provided, and actual results could differ. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, and changes in the financial condition of borrowers. Material estimates that are particularly susceptible to significant change include: the determination of the allowance for credit losses, the evaluation of goodwill impairment, and the fair value of certain 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, Loveland, Boulder, and Vail, Colorado; Phoenix and Scottsdale, Arizona; Bozeman, Montana; and Jackson, Cheyenne, Pinedale, and Rock Springs, Wyoming. The Company does not believe it has significant concentrations in any one industry or customer. As of September 30, 2024 and December 31, 2023, 78.4% 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.
Allowance for Credit Losses (“ACL”) loans: The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The ACL excludes loans held for sale and loans accounted for under the fair value option. The Company elected to not measure an ACL for accrued interest receivables, as we write off applicable accrued interest receivable balances in a timely manner when a loan is placed on non-accrual status, in which any accrued but uncollected interest is reversed from current income. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Actual Company and regional peer historical credit loss experience provides the basis for the estimation of expected credit losses. The Company identified and grouped portfolio segments based on risk characteristics and underlying collateral. The call code for each financial asset type was assessed and, expanded for certain call codes into separate segments based on risk characteristics.
The ACL for pooled loans are estimated using a discounted cash flow (“DCF”) methodology using the amortized cost basis (excluding interest) for all loans modeled within a performing pool of loans. The DCF analysis pairs loan-level term information, for example, maturity date, payment amount, interest rate, with top-down pool assumptions such as default rates, prepayment speeds, to produce individual expected cash flows for every instrument in the segment. The results are then aggregated to produce segment level results and reserve requirements for each segment based on similar risk characteristics.
The quantitative DCF model also incorporates forward-looking macroeconomic information over a reasonable and supportable period of four quarters. Subsequent to the four quarter period, the Company reverts to its historical loss rate and historical prepayment and curtailment speeds on a straight-line basis over a four quarter reversion period. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals, and modifications. Annually the Company performs a rate study which updates the prepayment and curtailment rates used in the DCF model.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the pooled loan evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
Qualitative adjustments to historical loss data are made based on management’s assessment of the risks that may lead to a future credit loss or differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, changes in environmental and economic conditions, or other relevant factors.
ACL - off-balance sheet credit exposures: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on off-balance sheet credit exposures is adjusted through the Provision for credit losses and is recorded in Other liabilities. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The probability of funding is based on historical utilization statistics for unfunded loan commitments. The loss rates used are calculated using the same assumptions as the associated funded balance.
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ACL - Held-to-maturity (“HTM”) debt securities: HTM debt securities are carried at amortized cost when management has the positive intent and ability to hold them to maturity. The majority of our held-to-maturity investment portfolio consists of securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we have elected the practical expedient to not record an ACL for these securities. The Company's non-government backed securities include private label CMO and MBS debt securities and corporate bonds. Private label refers to private institutions such as brokerage firms, banks, and home builders, that also securitize mortgages.
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management reviewed the collectability of CMO and MBS debt securities and corporate bonds taking into consideration factors such as the asset quality and delinquencies of the issuers.
Modifications: On January 1, 2023, the Company adopted FASB ASU 2022-02, Financial Instruments - Credit Losses, Troubled Debt Restructurings and Vintage Disclosures, which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Accounting Standard Codification(“ASC”) Subtopic 310-40, and enhanced the disclosure requirements for certain loan refinancing and restructures by creditors when a borrower is experiencing financial difficulty. The company identifies modifications to borrowers experiencing financial difficulty as a loan that has been modified for the borrower that is experiencing financial difficulties. The Company considers some of the indicators that a borrower is experiencing financial difficulty to be: currently in payment default on any of their debt, declaring bankruptcy, going concern, and other indicators of inability to meet obligations. This list does not include all potential indicators of a borrower’s financial difficulties. The allowance for credit losses on loans that are considered modifications to borrowers experiencing financial difficulty are measured using the same method as all other loans held for investment. Prior to the adoption of this guidance, restructured loans were considered to be a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would have not otherwise considered. The allowance for credit losses on a TDR were measured using the same method as all other loans held for investment.
Derivatives: At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness of a hedge. These three types are as follows:
Fair Value Hedge: a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment. For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings as fair values change.
Cash Flow Hedge: a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transactions affect earnings.
Stand-alone derivative: an instrument with no hedging designation. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement in the same line as the cash flows of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitments is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.
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The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. All of the contracts to which the Company is a party settle monthly or quarterly. In addition, the Company obtains collateral above certain thresholds of the fair value of its derivatives for each dealer counterparty based upon their credit standing and the Company has netting agreements with the dealers with which it does business.
Mortgage Loans Held for Sale: Mortgage loans held for sale generally consist of long-term, fixed rate, conforming, single-family residential real estate loans intended to be sold on the secondary market. Mortgage loans held for sale are recorded at fair value and are typically sold with servicing rights released. Changes in the fair values of mortgage loans held for sale are included in the Net gain on mortgage loans line of the Condensed Consolidated Statements of Income. Fair value elections are made at the time of origination based on the Company’s fair value election policy.
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 Condensed 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 Condensed Consolidated Statements of Income.
Other Real Estate Owned (“OREO”): Property acquired by foreclosure or deed-in-lieu of foreclosure is initially recorded at fair value less estimated selling cost at acquisition date, establishing a new cost basis. The Company is considered to have received physical possession of real estate property collateralizing a loan upon the occurrence of either the Company obtaining legal title to the property or the borrower conveying all interest in the property through a deed-in-lieu or similar agreement. Fair value is determined as the amount that could be reasonably expected in a current sale between a willing buyer and a willing seller in an orderly transaction between market participants at the measurement date. Subsequent to the initial acquisition, if the fair value of the asset, less estimated selling cost, is less than the cost of the property, a loss is recognized within non-interest expense and the asset carrying value is reduced. Gain or loss on disposition of OREO is recorded in non-interest income. In determining the fair value of the properties on the date of transfer and any subsequent estimated losses of net realizable value, the fair value of other real estate acquired by foreclosure or deed-in-lieu of foreclosure is determined primarily based upon appraisal or evaluation of the underlying property value.
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 during the three and nine months ended September 30, 2024 and 2023. Receivables are recorded on the Condensed 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 Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2024 and 2023 are considered in scope of Topic 606.
Transition of LIBOR to an Alternative Reference Rate: In July 2017, the United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate ("LIBOR"), announced that after 2022 it will no longer persuade or compel banks to submit rates for the calculation of LIBOR. In response, the Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee and on February 27, 2023 the Federal Reserve Board adopted a final rule establishing the Secured Overnight Financing Rate ("SOFR") as the replacement rate index for LIBOR. SOFR is based on a broad segment of the overnight Treasury repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities.
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On December 21, 2022, the FASB issued Accounting Standards Update (ASU) 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. On June 30, 2023, LIBOR ceased to be a representative index rate. ASU 2022-06 extends the period of time financial statement preparers can utilize the reference rate reform relief guidance through December 31, 2024.
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 completed a LIBOR transition plan, which addressed governance, risk management, legal, operational, systems, fallback language, and other aspects of planning. The Company no longer originates LIBOR indexed loans and as of December 31, 2023, all loans indexed to LIBOR had been converted to the new index. Consumer indexed loans are being managed in accordance with Interagency Guidance.
Bank Term Funding Program: On March 12, 2023, in response to two large bank failures, the Federal Reserve Board announced it would make additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of depositors. The additional funding has been made available through the creation of a new Bank Term Funding Program (“BTFP”), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets valued at par as collateral. The BTFP is meant to be an additional resource of liquidity against high-quality securities, eliminating an institutions need to quickly sell those securities in times of stress. See Note 7 - Borrowings for details on the Company’s borrowings.
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 Company has not adopted any additional accounting pronouncements since the end of the Company's fiscal year ended December 31, 2023.
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, 2023.
On November 27, 2023, the FASB issued ASU 2023-07 Segment Reporting - Improvements to Reportable Segment Disclosures, which provides additional transparency into a company's reportable segments’ significant expenses on an interim and annual basis. This guidance is effective for companies with fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Companies must adopt the changes to the segment reporting guidance on a retrospective basis. Early adoption is permitted. The Company expects to adopt this standard beginning with fiscal year ended December 31, 2024. The Company is currently evaluating these new disclosure requirements and does not expect the adoption to have a material impact.
On December 14, 2023, the FASB issued ASU 2023-09 Income Taxes - Improvements to Income Tax Disclosures, which enhances a company's income tax disclosures to include additional information related to rate reconciliations and income taxes paid. This guidance is effective for companies with fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company expects to adopt this standard beginning January 1, 2025. The Company is currently evaluating these new disclosure requirements and does not expect the adoption to have a material impact.
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NOTE 2 – DEBT SECURITIES
The following presents the amortized cost, fair value, and allowance for credit losses of debt securities held-to-maturity and the corresponding amounts of gross unrecognized gains and losses as of the date noted (dollars in thousands):
September 30, 2024Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Allowance for
Credit Losses
Debt securities held-to-maturity:
U.S. Treasury debt$246 $2 $ $248 $ 
Corporate bonds23,654  (2,986)20,668 (71)
Government National Mortgage Association ("GNMA") mortgage-backed securities ("MBS") – residential31,605 28 (2,437)29,196  
Federal National Mortgage Association ("FNMA") MBS – residential12,507 112 (345)12,274  
Government collateralized mortgage obligations ("GMO") and MBS – commercial5,205 10 (245)4,970  
Corporate collateralized mortgage obligations ("CMO") and MBS 3,599  (129)3,470  
Total debt securities held-to-maturity$76,816 $152 $(6,142)$70,826 $(71)
December 31, 2023Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Allowance for Credit Losses
Debt securities held-to-maturity:
U.S. Treasury debt$253 $ $(11)$242 $ 
Corporate bonds23,687  (3,020)20,667 (71)
GNMA mortgage-backed securities – residential34,579  (3,410)31,169  
FNMA mortgage-backed securities – residential6,035  (509)5,526  
Government GMO and MBS – commercial5,836 9 (377)5,468  
Corporate CMO and MBS3,783  (238)3,545  
Total debt securities held-to-maturity$74,173 $9 $(7,565)$66,617 $(71)
As of September 30, 2024, the amortized cost and estimated fair value of held-to-maturity debt securities have contractual maturity dates shown in the table below (dollars in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Debt securities not due at a single maturity date are shown separately.
September 30, 2024Amortized
Cost
Fair
Value
Due within one year$ $ 
Due between one year and five years4,312 3,970 
Due between five years and ten years19,407 16,781 
Due after ten years181 165 
Securities (CMO and MBS)52,916 49,910 
Total$76,816 $70,826 
In 2022, the Company committed $6.0 million in total to two bank technology funds. During the nine months ended September 30, 2024, the Company made $0.3 million of contributions to the partnerships and received $0.2 million of returns on investment. During the year ended December 31, 2023, the Company made $0.8 million of contributions to the partnerships and received $0.1 million of returns on investment. As of September 30, 2024 and December 31, 2023, the Company held a balance of $2.3 million and $2.0 million, respectively, which is included in Other assets in the accompanying Condensed Consolidated Balance Sheets. The Company may be obligated to invest up to an additional $3.7 million in future contributions.
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In 2014, the Company began investing in a small business investment company ("SBIC") fund administered by the Small Business Administration. The Company made $0.2 million of contributions to the SBIC fund during the nine months ended September 30, 2024. During the year ended December 31, 2023, the Company made $0.2 million of contributions to the SBIC fund. As of September 30, 2024 and December 31, 2023, the Company held a balance of $2.4 million and $2.2 million, respectively, in the SBIC fund, which is included in Other assets in the accompanying Condensed Consolidated Balance Sheets. The Company may be obligated to invest up to an additional $0.6 million in future SBIC investments.
As of September 30, 2024, securities with market values totaling $36.9 million were pledged to secure various public deposits and credit facilities of the Company, including $9.5 million pledged under the BTFP program (refer to Note 1 – Organization and Summary of Significant Accounting Policies for more information on the BTFP program). As of December 31, 2023, securities with market values of $45.1 million were pledged to secure various public deposits and credit facilities of the Company, including $39.3 million pledged under the BTFP program.
As of September 30, 2024 and December 31, 2023, there were no holdings of debt securities of any one issuer, other than the U.S. Government sponsored entities and agencies, in an amount greater than 10% of shareholders’ equity.
Allowance for Credit Losses for HTM Debt Securities
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. The majority of our held-to-maturity investment portfolio consists of securities issued by U.S. government entities and agencies and we consider the risk of credit loss to be zero and, therefore, we do not record an ACL. The Company's non-government backed debt securities include private label CMO and MBS and corporate bonds. Accrued interest receivable on held-to-maturity debt securities totaled $0.5 million and $0.4 million as of September 30, 2024 and December 31, 2023, respectively, and is excluded from the estimate of credit losses. Refer to Note 1 Organization and Summary of Significant Accounting Policies for additional information on the Company’s methodology on estimating credit losses. The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity by major security type for the periods noted:
Three Months Ended September 30,
20242023
(dollars in thousands)Corporate BondsCorporate CMOCorporate BondsCorporate CMO
Allowance for credit losses:
Beginning balance$71 $ $71 $ 
Provision for credit losses    
Securities charged-off (recoveries)    
Total ending allowance balance$71 $ $71 $ 
Nine Months Ended September 30,
20242023
(dollars in thousands)Corporate BondsCorporate CMOCorporate BondsCorporate CMO
Allowance for credit losses:
Beginning balance$71 $ $ $ 
Impact of ASU 2016-13 adoption  71  
Provision for credit losses    
Securities charged-off (recoveries)    
Total ending allowance balance$71 $ $71 $ 
The Company monitors the credit quality of held-to-maturity debt securities on a quarterly basis. As of September 30, 2024, there were no held-to-maturity debt securities past due or on non-accrual.
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NOTE 3 – LOANS AND THE ALLOWANCE FOR CREDIT LOSSES
The following presents a summary of the Company’s loans at amortized cost as of the dates noted:
(dollars in thousands)
September 30,
2024
December 31,
2023
Cash, Securities, and Other$119,284 $139,947 
Consumer and Other12,193 27,028 
Construction and Development300,270 345,516 
1-4 Family Residential922,725 927,965 
Non-Owner Occupied CRE605,323 543,692 
Owner Occupied CRE174,928 195,861 
Commercial and Industrial239,830 337,180 
Total2,374,553 2,517,189 
Allowance for credit losses(18,796)(23,931)
Total, net$2,355,757 $2,493,258 
Loans accounted for under the fair value option(1)
8,646 13,726 
Loans, net$2,364,403 $2,506,984 
______________________________________
(1)Includes $8.9 million and $14.1 million of unpaid principal balance of loans held for investment measured at fair value as of September 30, 2024 and December 31, 2023, respectively. Includes fair value adjustments on loans held for investment accounted for under the fair value option. See Note 12 – Fair Value.
As of September 30, 2024 and December 31, 2023, total loans held for investment included $172.6 million and $208.2 million, respectively, of performing loans purchased through mergers or acquisitions.
As of September 30, 2024, the Cash, Securities, and Other portion of the loan portfolio included $2.6 million of SBA Paycheck Protection Program (“PPP”) loans, or 2.1% of the total category. As of December 31, 2023, the Cash, Securities, and Other portion of the loan portfolio included $4.2 million of PPP loans, or 3.0% of the total category.
As of September 30, 2024, the Company’s Commercial and Industrial loans included one Main Street Lending Program (“MSLP”) loan with the net carrying amount of $2.0 million, or 0.8% of the total category. This MSLP loan is risk rated pass. As of December 31, 2023, the Company’s Commercial and Industrial loans included three MSLP loans with the net carrying amount of $5.1 million, or 1.5% of the total category.
The following presents, by class, an aging analysis of the amortized cost basis in loans past due as of the date noted (dollars in thousands):
September 30, 202430-59
Days
Past Due
60-89
Days
Past Due
90 or
More Days
Past Due
Total
Loans
Past Due
CurrentTotal
Amortized
Cost
Loans Accounted for Under the Fair Value Option(1)
Total Loans
Cash, Securities, and Other$ $ $1,704 $1,704 $117,580 $119,284 $— $119,284 
Consumer and Other2 2  4 12,189 12,193 8,646 20,839 
Construction and Development    300,270 300,270 — 300,270 
1-4 Family Residential3  1,115 1,118 921,607 922,725 — 922,725 
Non-Owner Occupied CRE    605,323 605,323 — 605,323 
Owner Occupied CRE    174,928 174,928 — 174,928 
Commercial and Industrial2,020 10,272 790 13,082 226,748 239,830 — 239,830 
Total$2,025 $10,274 $3,609 $15,908 $2,358,645 $2,374,553 $8,646 $2,383,199 
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December 31, 202330-59
Days
Past Due
60-89
Days
Past Due
90 or
More Days
Past Due
Total
Loans
Past Due
CurrentTotal Amortized Cost
Loans Accounted for Under the Fair Value Option(1)
Total Loans
Cash, Securities, and Other$ $76 $1,704 $1,780 $138,167 $139,947 $— $139,947 
Consumer and Other676 11 7,504 8,191 18,837 27,028 13,726 40,754 
Construction and Development 1,500  1,500 344,016 345,516 — 345,516 
1-4 Family Residential1,093  2,722 3,815 924,150 927,965 — 927,965 
Non-Owner Occupied CRE    543,692 543,692 — 543,692 
Owner Occupied CRE  3,980 3,980 191,881 195,861 — 195,861 
Commercial and Industrial19,305 1,085 29,180 49,570 287,610 337,180 — 337,180 
Total$21,074 $2,672 $45,090 $68,836 $2,448,353 $2,517,189 $13,726 $2,530,915 
(1)Refer to Note 12 – Fair Value for additional information on the measurement of loans accounted for under the fair value option.
Loan Modifications
The following table presents the amortized cost basis as of September 30, 2024 of the loans modified to borrowers experiencing financial difficulty disaggregated by class of financing receivable and type of concession granted during the nine months ended September 30, 2024. For the three months ended September 30, 2024, there were no loan modifications made to borrowers experiencing financial difficulty. For the three and nine months ended September 30, 2023, the Company made protective advances of $0.0 million and $0.5 million to borrowers experiencing financial difficulty. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.
(dollars in thousands)Principal forgivenessInterest rate reductionTerm extensionCombination: term extension and principal forgivenessCombination: term extension and interest rate reductionTotal class of financing receivable
Commercial and Industrial$ $ $978 $ $ 0.4 %
Total$ $ $978 $ $ 
The following table presents the amortized cost basis as of September 30, 2023 of the loans modified to borrowers experiencing financial difficulty disaggregated by class of financing receivable and type of concession granted during the three and nine months ended September 30, 2023.
(dollars in thousands)Principal forgivenessInterest rate reductionTerm extensionCombination: term extension and principal forgivenessCombination: term extension and interest rate reductionTotal class of financing receivable
Commercial and Industrial$ $ $ $185 $ 0.1 %
Total$ $ $ $185 $ 
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The following tables present the financial effect by type of modification made to borrowers experiencing financial difficulty during the periods noted:
Three Months Ended September 30, 2024Nine Months Ended September 30, 2024
(dollars in thousands)Principal forgivenessWeighted average interest rate reductionWeighted average term extensionPrincipal forgivenessWeighted average interest rate reductionWeighted average term extension
Commercial and Industrial5 months
Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
(dollars in thousands)Principal forgivenessWeighted average interest rate reductionWeighted average term extensionPrincipal forgivenessWeighted average interest rate reductionWeighted average term extension
Commercial and Industrial$1852.8 years$1852.8 years
There were no loans that experienced a default during the three and nine months ended September 30, 2024, subsequent to being granted a modification in the preceding twelve months. There were no loans that experienced a default during the three and nine months ended September 30, 2023, subsequent to being granted a modification in the preceding twelve months.
Non-Accrual Loans
The accrual of interest on loans is discontinued at the time the loan becomes 90 days or more delinquent unless the loan is well secured and in the process of collection or renewal due to maturity. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged off if collection of interest or principal is considered doubtful. The following presents the amortized cost basis of loans on non-accrual status and loans past due over 89 days still accruing by class as of the dates noted:
As of September 30, 2024
(dollars in thousands)Non-accrual loans with
no ACL
Total non-accrual loans(1)
Loans past due over 89 days still accruing
Cash, Securities, and Other$1,704 $1,704 $ 
Consumer and Other   
Construction and Development   
1-4 Family Residential1,468 1,468  
Non-Owner Occupied CRE   
Owner Occupied CRE   
Commercial and Industrial11,063 11,242  
Total$14,235 $14,414 $ 
(1)As of September 30, 2024, the Company had an allowance of $36 thousand on non-accrual loans.
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As of December 31, 2023
(dollars in thousands)Non-accrual loans with
no ACL
Total non-accrual loans(1)
Loans past due over 89 days still accruing
Cash, Securities, and Other$1,704 $1,704 $ 
Consumer and Other4 7,504  
Construction and Development2,719 2,719  
1-4 Family Residential578 3,016 285 
Owner Occupied CRE 3,980  
Commercial and Industrial2,355 31,893  
Total$7,360 $50,816 $285 
(2)As of December 31, 2023, the Company had an allowance of $3.8 million on non-performing loans.
The Company recognized no interest income on non-accrual loans during the three and nine months ended September 30, 2024. The Company recognized an immaterial amount and $0.2 million of interest income on non-accrual loans during the three and nine months ended September 30, 2023, respectively.
Collateral Dependent Loans
A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following presents the amortized cost basis of collateral-dependent loans, which are individually evaluated to determine expected credit losses, by class of loans as of the date noted:
As of September 30, 2024
Collateral Dependent Loans
(dollars in thousands)Secured by Real EstateSecured by Cash and
Securities
Secured by OtherTotal
Cash, Securities, and Other$ $1,704 $ $1,704 
Consumer and Other    
Construction and Development    
1-4 Family Residential1,468   1,468 
Non-Owner Occupied CRE    
Owner Occupied CRE    
Commercial and Industrial  12,220 12,220 
Total$1,468 $1,704 $12,220 $15,392 
As of December 31, 2023
Collateral Dependent Loans
(dollars in thousands)Secured by Real EstateSecured by Cash and
Securities
Secured by OtherTotal
Cash, Securities, and Other$ $1,704 $ $1,704 
Consumer and Other  7,500 7,500 
Construction and Development2,719   2,719 
1-4 Family Residential3,016   3,016 
Owner Occupied CRE3,980   3,980 
Commercial and Industrial  31,893 31,893 
Total$9,715 $1,704 $39,393 $50,812 
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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. In the second quarter of 2024, the Company recorded $11.4 million of OREO as a result of obtaining physical possession of two foreclosed properties as partial consideration for amounts owed on non-performing loans related to an isolated loan relationship. During the third quarter of 2024, the Company recorded an additional $25.6 million of OREO related to a third foreclosed property within the same loan relationship. As of September 30, 2024, these OREO properties had a carrying amount of $37.0 million. As of December 31, 2023, the Company did not own any OREO properties.
Allowance for Credit Losses on Loans
The allowance for credit losses for loans is measured on the loan’s amortized cost basis, excluding interest receivable. Interest receivable excluded at September 30, 2024 and December 31, 2023 was $9.7 million and $10.8 million, respectively, presented in Accrued interest receivable on the Condensed Consolidated Balance Sheets. Refer to Note 1 – Organization and Summary of Significant Accounting Policies for additional information related to the Company’s methodology on estimated credit losses.
The Allowance for credit losses on loans (“ACL”) represents Management’s best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms, adjusted for expected prepayments when appropriate. Our quantitative discounted cash flow models use economic forecasts including; housing price index (“HPI”), gross domestic product (“GDP”), and national unemployment. The HPI, GDP, and unemployment twelve-month forecasts used in our model remained consistent during the nine months ended September 30, 2024. As such, the $1.6 million release of provision on pooled loans for the nine months ended September 30, 2024 was predominately due to net pay downs in the loan portfolio. The allowance for credit losses on individually analyzed loans was $0.3 million and $3.8 million as of September 30, 2024 and December 31, 2023, respectively. This $3.5 million release of provision on individually analyzed loans for the nine months ended September 30, 2024 was primarily due to the migration of one loan relationship out of non-performing loans and into OREO, pay downs, charge-offs, and the sale of a non-performing loan.
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Allocation of a portion of the allowance for credit losses to one category of loans does not preclude its availability to absorb losses in other categories. The following table presents the activity in the allowance for credit losses by portfolio segment during the periods presented:
(dollars in thousands)Cash,
Securities
and Other
Consumer
and
Other
Construction
and
Development
1-4
Family
Residential
Non-Owner
Occupied
CRE
Owner
Occupied
CRE
Commercial
and
Industrial
Total
Changes in allowance for credit losses for the three months ended September 30, 2024:
Beginning balance$375 $75 $7,596 $4,310 $2,203 $973 $11,787 $27,319 
(Release) provision for credit losses26 62 (2,262)1,014 2,139 (282)99 796 
Charge-offs— (4)— — — — (9,336)(9,340)
Recoveries— 4 — 1 — — 16 21 
Ending balance$401 $137 $5,334 $5,325 $4,342 $691 $2,566 $18,796 
Changes in allowance for credit losses for the nine months ended September 30, 2024:
Beginning balance$961 $124 $7,945 $4,370 $2,325 $1,034 $7,172 $23,931 
(Release) provision for credit losses(560)16 (2,611)948 2,017 (343)4,708 4,175 
Charge-offs— (30)— — — — (9,336)(9,366)
Recoveries— 27 — 7 — — 22 56 
Ending balance$401 $137 $5,334 $5,325 $4,342 $691 $2,566 $18,796 
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(dollars in thousands)Cash,
Securities
and Other
Consumer
and
Other
Construction
and
Development
1-4
Family
Residential
Non-Owner
Occupied
CRE
Owner
Occupied
CRE
Commercial
and
Industrial
Total
Changes in allowance for credit losses for the three months ended September 30, 2023:
Beginning balance$1,311 $137 $7,496 $3,579 $2,495 $1,182 $5,844 $22,044 
(Release) provision for credit losses(185)(15)405 38 (240)(172)1,490 1,321 
Charge-offs— (12)— — — — (186)(198)
Recoveries— 4 — 3 — — 1 8 
Ending balance$1,126 $114 $7,901 $3,620 $2,255 $1,010 $7,149 $23,175 
Changes in allowance for credit losses for the nine months ended September 30, 2023:
Beginning balance, prior to the adoption of ASU 2016-13$1,198 $191 $2,025 $6,309 $3,490 $1,510 $2,460 $17,183 
Impact of adopting ASU 2016-13193 106 4,681 (2,808)(689)(104)2,091 3,470 
(Release) provision for credit losses(265)(160)1,195 116 (546)(396)2,781 2,725 
Charge-offs— (42)— — — — (186)(228)
Recoveries— 19 — 3 — — 3 25 
Ending balance$1,126 $114 $7,901 $3,620 $2,255 $1,010 $7,149 $23,175 
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans by credit risk on a quarterly basis. The Company uses the following definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies, or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified.
Substandard: Substandard loans are considered "classified" and are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrual status and may individually be evaluated.
Doubtful: Loans graded Doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. However, the amount of certainty of eventual loss is not known because of specific pending factors.
Loans accounted for under the fair value option are not rated.
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The following tables present the amortized cost basis of loans by credit quality indicator, by class of financing receivable, and year of origination for term loans as of September 30, 2024 and December 31, 2023. For revolving lines of credit that converted to term loans, if the conversion involved a credit decision, such loans are included in the origination year in which the credit decision was made. If revolving lines of credit converted to term loans without a credit decision, such lines of credit are included in the “Revolving lines of credit converted to term” column in the following table (dollars in thousands):
Term Loans Amortized Cost by Origination Year
September 30, 202420242023202220212020PriorRevolving Loans Amortized Cost BasisTotal
Cash, Securities, and Other
Pass$12,252 $6,158 $3,426 $13,708 $4,914 $13,859 $63,263 $117,580 
Special mention        
Substandard      1,704 1,704 
Doubtful        
Total Cash, Securities, and Other$12,252 $6,158 $3,426 $13,708 $4,914 $13,859 $64,967 $119,284 
Current year-to-date gross charge-offs$ $ $ $ $ $ $ $ 
Consumer and Other
Pass 19 1,584 369 425 572 9,175 12,144 
Special mention        
Substandard      49 49 
Doubtful        
Not rated(1)
  7,302 1,206 82 56  8,646 
Total Consumer and Other$ $19 $8,886 $1,575 $507 $628 $9,224 $20,839 
Current year-to-date gross charge-offs$ $1 $ $ $10 $19 $ $30 
Construction and Development
Pass$36,075 $53,010 $195,294 $1,028 $9,396 $ $1,182 $295,985 
Special mention        
Substandard469 3,816      4,285 
Doubtful        
Total Construction and Development$36,544 $56,826 $195,294 $1,028 $9,396 $ $1,182 $300,270 
Current year-to-date gross charge-offs$ $ $ $ $ $ $ $ 
1-4 Family Residential
Pass$51,354 $92,037 $352,962 $128,314 $105,056 $64,567 $126,414 $920,704 
Special mention        
Substandard353 553  1,115    2,021 
Doubtful        
Total 1-4 Family Residential$51,707 $92,590 $352,962 $129,429 $105,056 $64,567 $126,414 $922,725 
Current year-to-date gross charge-offs$ $ $ $ $ $ $ $ 
Non-Owner Occupied CRE
Pass$27,294 $42,585 $253,600 $118,008 $68,869 $58,261 $31,312 $599,929 
Special mention    4,898   4,898 
Substandard      496 496 
Doubtful        
Total Non-Owner Occupied CRE$27,294 $42,585 $253,600 $118,008 $73,767 $58,261 $31,808 $605,323 
Current year-to-date gross charge-offs$ $ $ $ $ $ $ $ 
Owner Occupied CRE
Pass$2,212 $3,158 $43,983 $42,252 $31,333 $48,252 $2,337 $173,527 
Special mention        
Substandard  1,401     1,401 
Doubtful        
Total Owner Occupied CRE$2,212 $3,158 $45,384 $42,252 $31,333 $48,252 $2,337 $174,928 
Current year-to-date gross charge-offs$ $ $ $ $ $ $ $ 
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Term Loans Amortized Cost by Origination Year
September 30, 202420242023202220212020PriorRevolving Loans Amortized Cost BasisTotal
Commercial and Industrial
Pass$19,145 $13,882 $46,981 $11,703 $10,516 $23,408 $97,992 $223,627 
Special mention      484 484 
Substandard978 179 2,821   11,062 679 15,719 
Doubtful        
Total Commercial and Industrial$20,123 $14,061 $49,802 $11,703 $10,516 $34,470 $99,155 $239,830 
Current year-to-date gross charge-offs$ $298 $ $6,935 $2,103 $ $ $9,336 
Total pass$148,332 $210,849 $897,830 $315,382 $230,509 $208,919 $331,675 $2,343,496 
Total special mention    4,898  484 5,382 
Total substandard1,800 4,548 4,222 1,115  11,062 2,928 25,675 
Total doubtful        
Total not rated  7,302 1,206 82 56  8,646 
Total$150,132 $215,397 $909,354 $317,703 $235,489 $220,037 $335,087 $2,383,199 
(1)Includes loans held for investment measured at fair value as of September 30, 2024. Includes fair value adjustments on loans held for investment accounted for under the fair value option.
Term Loans Amortized Cost by Origination Year
December 31, 202320232022202120202019PriorRevolving Loans Amortized Cost BasisTotal
Cash, Securities, and Other
Pass$8,091 $17,878 $17,181 $5,966 $6,337 $13,188 $69,602 $138,243 
Special mention        
Substandard      1,704 1,704 
Doubtful        
Total Cash, Securities, and Other$8,091 $17,878 $17,181 $5,966 $6,337 $13,188 $71,306 $139,947 
Current year-to-date gross charge-offs$ $ $ $ $ $ $ $ 
Consumer and Other
Pass$614 $2,013 $647 $633 $797 $24 $14,800 $19,528 
Special mention        
Substandard      7,500 7,500 
Doubtful        
Not rated(1)
 10,469 2,544 614 99   13,726 
Total Consumer and Other$614 $12,482 $3,191 $1,247 $896 $24 $22,300 $40,754 
Current year-to-date gross charge-offs$ $ $ $8 $91 $2 $ $101 
Construction and Development
Pass$32,509 $231,103 $42,796 $21,615 $ $ $431 $328,454 
Special mention 14,343      14,343 
Substandard2,719       2,719 
Doubtful        
Total Construction and Development$35,228 $245,446 $42,796 $21,615 $ $ $431 $345,516 
Current year-to-date gross charge-offs$ $ $ $ $ $ $ $ 
1-4 Family Residential
Pass$97,901 $373,525 $143,694 $108,815 $37,756 $31,452 $131,806 $924,949 
Special mention        
Substandard578 2,438      3,016 
Doubtful        
Total 1-4 Family Residential$98,479 $375,963 $143,694 $108,815 $37,756 $31,452 $131,806 $927,965 
Current year-to-date gross charge-offs$ $ $ $ $ $ $ $ 
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Term Loans Amortized Cost by Origination Year
December 31, 202320232022202120202019PriorRevolving Loans Amortized Cost BasisTotal
Non-Owner Occupied CRE
Pass$42,799 $197,122 $125,726 $75,026 $24,411 $53,056 $20,553 $538,693 
Special mention   4,999    4,999 
Substandard        
Doubtful        
Total Non-Owner Occupied CRE$42,799 $197,122 $125,726 $80,025 $24,411 $53,056 $20,553 $543,692 
Current year-to-date gross charge-offs$ $ $ $ $ $ $ $ 
Owner Occupied CRE
Pass$3,229 $46,751 $44,805 $37,957 $5,555 $51,259 $2,325 $191,881 
Special mention        
Substandard  3,980     3,980 
Doubtful        
Total Owner Occupied CRE$3,229 $46,751 $48,785 $37,957 $5,555 $51,259 $2,325 $195,861 
Current year-to-date gross charge-offs$ $ $ $ $ $ $ $ 
Commercial and Industrial
Pass$38,497 $59,612 $15,430 $13,457 $6,430 $16,068 $152,782 $302,276 
Special mention      649 649 
Substandard1,618  29,355 1,674  920 688 34,255 
Doubtful        
Total Commercial and Industrial$40,115 $59,612 $44,785 $15,131 $6,430 $16,988 $154,119 $337,180 
Current year-to-date gross charge-offs$ $8,737 $ $ $ $ $ $8,737 
Total pass$223,640 $928,004 $390,279 $263,469 $81,286 $165,047 $392,299 $2,444,024 
Total special mention 14,343  4,999   649 19,991 
Total substandard4,915 2,438 33,335 1,674  920 9,892 53,174 
Total doubtful        
Total not rated 10,469 2,544 614 99   13,726 
Total$228,555 $955,254 $426,158 $270,756 $81,385 $165,967 $402,840 $2,530,915 
(1)Includes loans held for investment measured at fair value as of December 31, 2023. Includes fair value adjustments on loans held for investment accounted for under the fair value option.
NOTE 4 – GOODWILL
Goodwill is tested annually for impairment on October 31 or earlier upon the occurrence of certain events. A significant amount of judgement is involved in determining if an indicator of goodwill impairment occurred. Such indicators may include, among others; a significant decline in expected future cash flows; a sustained significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse assessment or action by a regulator; and unanticipated competition.
The 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 September 30, 2024, there has not been any impairment of goodwill identified or recorded. Goodwill totaled $30.4 million as of September 30, 2024 and December 31, 2023.
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NOTE 5 – 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 2036. 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 Condensed Consolidated Balance Sheets. The following table presents the classification of the right-of-use assets and corresponding liabilities within the Condensed Consolidated Balance Sheets, as of the dates noted:
(dollars in thousands)September 30,
2024
December 31,
2023
Lease Right-of-Use AssetsClassification
Operating lease right-of-use assetsOther assets$18,511 $8,929 
Lease LiabilitiesClassification
Operating lease liabilitiesOther liabilities$21,334 $10,900 
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. The following table presents information related to operating leases:
September 30,
2024
December 31,
2023
Weighted-Average Remaining Lease Term
Operating leases9.72 years4.67 years
Weighted-Average Discount Rate
Operating leases4.12 %2.78 %
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 Condensed Consolidated Statements of Income. The following presents the Company’s net lease costs during the periods presented:
(dollars in thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2024202320242023
Lease Costs
Operating lease cost$874 $720 $2,474 $2,239 
Variable lease cost591 453 1,723 1,426 
Lease costs, net$1,465 $1,173 $4,197 $3,665 
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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
2024⁽¹⁾$904 
20252,935 
20262,443 
20273,415 
20283,115 
Thereafter15,122 
Total future minimum lease payments27,934 
Less: imputed interest(6,600)
Present value of net future minimum lease payments$21,334 
______________________________________
(1)Amount represents the remaining three months of year.
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. The Company recognized $0.1 million of lease income during the three months ended September 30, 2024 and 2023. The Company recognized $0.2 million and $0.3 million of lease income during the nine months ended September 30, 2024 and 2023, respectively.
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
2024⁽¹⁾$66 
2025188 
2026144 
2027119 
Thereafter 
Total undiscounted operating lease income$517 
______________________________________
(1)Amount represents the remaining three months of the year.
NOTE 6 – DEPOSITS
The following presents the Company’s interest-bearing deposits as of the dates noted:
(dollars in thousands)
September 30,
2024
December 31,
2023
Money market deposit accounts$1,350,619 $1,386,149 
Time deposits533,452 496,452 
Interest checking accounts130,255 147,488 
Savings accounts15,152 16,371 
Total interest-bearing deposits$2,029,478 $2,046,460 
Aggregate time deposits of $250 or greater$87,647 $91,038 
Overdraft balances classified as loans totaled $0.1 million as of September 30, 2024 and December 31, 2023, respectively.
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The following presents the scheduled maturities of all time deposits for each of the next five years and total amounts thereafter (dollars in thousands):
Year ending December 31,Time Deposits
2024(1)
$154,835 
2025336,200 
20263,530 
20273,956 
202834,643 
Thereafter288 
Total$533,452 
______________________________________
(1)Amount represents the remaining three months of year.
NOTE 7 – BORROWINGS
The Bank has executed a blanket pledge and security agreement with the FHLB which requires certain loans and securities be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of September 30, 2024 and December 31, 2023 amounted to $1.30 billion and $1.31 billion, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $612.1 million as of September 30, 2024.
On March 12, 2023 the Federal Reserve Board announced it would make additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of depositors made available through the creation of a new Bank Term Funding Program (“BTFP”). The BTFP is meant to be an additional resource of liquidity against high-quality securities, eliminating an institutions need to quickly sell those securities in times of stress. On March 27, 2024 the Company repaid $31.0 million of BTFP borrowings. As of September 30, 2024, the Company has pledged a par value of $10.3 million in securities under the BTFP and borrowed $10.0 million with a maturity date of January 10, 2025. The rate for the borrowing is based on the one year overnight swap rate plus 10 basis points and is fixed over the term of the advance based on the date of the advance. Upon maturity, the Company renewed a three-month $50 million FHLB advance on July 1, 2024. The rate for the borrowing is adjusted daily based on the SOFR rate plus 15 basis points. The advance matured on October 1, 2024 and was renewed for an additional three months. Additionally, the Company paid off its FHLB line of credit balance of $128.7 million on July 1, 2024 and did not draw on the line during the remainder of the third quarter.
The following presents the Company’s maturities of FHLB and FRB borrowings (dollars in thousands):
Maturity DateRate %September 30,
2024
December 31,
2023
January 1, 2024(1)
5.55 %$ $41,175 
March 27, 20244.78  30,997 
March 29, 20245.60  50,000 
October 1, 20244.99 50,000  
January 10, 20254.87 10,000  
$60,000 $122,172 
______________________________________
(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. As of September 30, 2024 and December 31, 2023, the Company had outstanding $2.4 million and $3.5 million, respectively, under the PPPLF program which is included in the FHLB and Federal Reserve borrowings line of the Condensed 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 September 30, 2024 and December 31, 2023, there were no amounts outstanding on any of the federal funds lines.
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The following presents the Company’s subordinated notes included in the Subordinated notes line of the Condensed Consolidated Balance Sheets as of the periods noted (dollars in thousands):
Issuance DateStated RateInterest PaidMaturityCarrying ValueInitial Debt Issuance Costs
Remaining Net Balance(1)
March 2020
5.125% per annum until 3/31/2025, then alternative rate plus 450 basis points until maturity
Quarterly3/31/2030$8,000 $120 $7,988 
November 2020
4.25% per annum until 12/1/2025, then SOFR plus 402 basis points until maturity
Semi-annual (Quarterly beginning 12/01/25)12/1/203010,000 162 9,942 
August 2021
3.25% per annum until 9/1/2026, then SOFR plus 258 basis points until maturity
Semi-annual (Quarterly beginning 09/01/26)9/1/203115,000 242 14,894 
December 2022
7.00% per annum until 12/15/2027, then SOFR plus 328 basis points until maturity
Semi-annual (Quarterly beginning 12/15/27)12/15/203220,000 506 19,684 
______________________________________
(1)Remaining net balance includes amortization of debt issuance costs.
For the three months ended September 30, 2024 and 2023, the Company recorded $0.6 million and $0.7 million, respectively, of interest expense related to the collective subordinated notes. For the nine months ended September 30, 2024 and 2023, the Company recorded $2.0 million and $2.0 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 16 – Regulatory Capital Matters for additional information. As of September 30, 2024 and December 31, 2023, the Company was in compliance with the covenant requirements.
NOTE 8 – 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 Condensed Consolidated Balance Sheets. Commitments may expire without being utilized. The Company’s exposure to credit loss is represented by the contractual amount of these commitments, although material losses are not anticipated. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.
The following table presents the Company’s financial instruments whose contract amounts represent credit risk, as of the dates noted:
September 30, 2024December 31, 2023
(dollars in thousands)Fixed RateVariable RateFixed RateVariable Rate
Unused lines of credit$56,617 $468,986 $86,398 $540,255 
Standby letters of credit10,204 10,331 13,922 12,094 
Commitments to make loans to sell56,214 — 18,917 — 
Commitments to make loans1,535 9,110 5,275 7,115 
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.
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Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client’s obligation to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Substantially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The Company holds collateral supporting those commitments if deemed necessary.
Commitments to make loans to sell are agreements to lend to a client which would then be sold to an investor in the secondary market for which the interest rate has been locked with the client, provided there is no violation of any condition within the contract with either party. Commitments to make loans to sell have fixed interest rates. Since commitments may expire without being extended, total commitment amounts may not necessarily represent cash requirements.
Commitments to make loans are agreements to lend to a client, provided there is no violation of any condition within the contract. Commitments to make loans generally have fixed expiration dates or other termination clauses. Since commitments may expire without being extended, total commitment amounts may not necessarily represent cash requirements.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
To estimate the ACL on unfunded loan commitments that are not unconditionally cancellable, the Company determines the probability of funding based on historical utilization statistics for unfunded loan commitments. Loss rates are calculated using the same assumptions as the associated funded balance. Refer to Note 3 Loans and the Allowance for Credit Losses for changes in the factors that influenced the current estimate of ACL and reasons for the changes. The following table presents the changes in the ACL on unfunded loan commitments:
Three Months Ended September 30,
Nine Months Ended September 30,
(dollars in thousands)2024202320242023
Beginning balance$1,205 $4,029 $2,178 $419 
Impact of adopting ASU 2016-13   3,481 
(Release) provision for credit losses(295)(992)(1,268)(863)
Ending balance$910 $3,037 $910 $3,037 
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 condensed consolidated financial statements.
NOTE 9 – 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 held (though certain voting restrictions may exist on non-vested restricted stock).
On June 13, 2024, the Company announced that its board of directors authorized the repurchase of up to 200,000 shares of the Company’s common stock, no par value, from time to time, within one year (the “2024 Repurchase Plan”) and that the Board of Governors of the Federal Reserve System advised the Company that it has no objection to the Company’s 2024 Repurchase Plan. The Company may repurchase shares in privately negotiated transactions, in the open market, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 promulgated by the Securities and Exchange Commission, or otherwise in a manner that complies with applicable federal securities laws. The 2024 Repurchase Plan does not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice. During the three months ended September 30, 2024, the Company repurchased 5,501 shares under the authorization of the 2024 Repurchase Plan. As of September 30, 2024, there were 194,499 shares available for repurchase under the plan.
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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 three and nine months ended September 30, 2024, the Company sold no shares of common stock.
Stock-Based Compensation Plans
The 2008 Stock Incentive Plan ("the 2008 Plan") was frozen in connection with the adoption of First Western Financial, Inc. 2016 Omnibus Incentive Plan (“the 2016 Plan”) and no new awards may be granted under the 2008 Plan. Remaining shares not issued under the 2008 Plan poured into the 2016 Plan. As of September 30, 2024, there were a total of 409,857 shares available for issuance under the 2016 Plan. If the Awards outstanding under the 2008 Plan or the 2016 Plan are forfeited, cancelled or terminated with no consideration paid to the Company, those amounts will increase the number of shares eligible to be granted under the 2016 Plan.
Stock Options
The Company did not grant any stock options during the nine months ended September 30, 2024 and 2023.
During the three and nine months ended September 30, 2024 and 2023, the Company recognized no stock based compensation expense associated with stock options. As of September 30, 2024, the Company has no unrecognized stock-based compensation expense related to stock options.
The following presents activity for nonqualified stock options during the nine months ended September 30, 2024:
Number
of
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding as of December 31, 2023130,936$23.79 
Granted 
Exercised  
Forfeited or expired(49,175)21.28 
Outstanding as of September 30, 202481,76125.29 1.25
(1)
Options fully vested / exercisable as of September 30, 202481,76125.29 1.25
(1)
______________________________________
(1)Nonqualified stock options outstanding at the end of the period and those fully vested/exercisable had immaterial aggregate intrinsic values.
As of September 30, 2024, there were 81,761 options that were exercisable. Exercise prices are between $24.32 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 2025 to 2026.
Restricted Stock Units
Pursuant to the 2016 Plan, the Company may 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.
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The following presents the activity for the Time Vesting Units and the Financial Performance Units during the nine months ended September 30, 2024:
Time
Vesting
Units
Financial
Performance
Units
Outstanding as of December 31, 2023242,524291,416
Granted75,07042,805
Vested(65,765)(59,449)
Forfeited (26,848)(64,769)
Outstanding as of September 30, 2024224,981210,003
During the three months ended September 30, 2024, the Company issued 9,054 net shares of common stock upon the settlement of Restricted Stock Units. The remaining 2,776 shares, with a combined market value at the dates of settlement of $46 thousand, were withheld to cover employee withholding taxes and were subsequently added back to the Company’s pool of shares available for issuance. During the nine months ended September 30, 2024, the Company issued 88,419 net shares of common stock upon the settlement of Restricted Stock Units. The remaining 36,795 shares, with a combined market value at the dates of settlement of $0.7 million, were withheld to cover employee withholding taxes and were subsequently added back to the Company’s pool of shares available for issuance. During the three months ended September 30, 2023, the Company issued 8,638 net shares of common stock upon the settlement of Restricted Stock Units. The remaining 3,580 shares, with a combined market value at the dates of settlement of $0.1 million, were withheld to cover employee withholding taxes and were subsequently added back to the Company’s pool of shares available for issuance. During the nine months ended September 30, 2023, the Company issued 52,509 net shares of common stock upon the settlement of Restricted Stock Units. The remaining 20,381 shares, with a combined market value at the dates of settlement of $0.4 million, were withheld to cover employee withholding taxes and were subsequently added back to the Company’s pool of shares available for issuance.
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 75,070 Time Vesting Units during the nine months ended September 30, 2024. During the three months ended September 30, 2024 and 2023, the Company recognized compensation expense of $0.4 million for the Time Vesting Units. During the nine months ended September 30, 2024 and 2023, the Company recognized compensation expense of $1.1 million and $1.2 million, respectively, for the Time Vesting Units. As of September 30, 2024, there was $4.2 million of unrecognized compensation expense related to the Time Vesting Units, which is expected to be recognized over a weighted-average period of 3.2 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.
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The following presents the Company’s existing Financial Performance Units as of September 30, 2024 (dollars in thousands, except share amounts):
Grant PeriodThreshold AccrualMaximum Issuable
Shares at Current
Threshold
Unrecognized Compensation
Expense
Weighted-Average (1)
Financial Metric End DateVesting Requirement End Date
May 1, 2020 through December 31, 2021, excluding November 18, 2020150 %55,517$37,147 0.3 yearsDecember 31, 2022December 31, 2024
On November 18, 2020114 10,76040,753 1.1 yearsDecember 31, 2022
50% November 18, 2023 & 2025
May 3, 2021 through August 11, 202155 15,721108,094 1.3 yearsDecember 31, 2023December 31, 2025
May 2, 2022 through November 2, 2022, excluding August 4, 2022 (2)
   2.3 yearsDecember 31, 2024December 31, 2026
On August 4, 2022 (3)
33 9,090127,346 2.3 yearsDecember 31, 2024December 31, 2026
On May 1, 2023 (2)
   3.3 yearsDecember 31, 2025December 31, 2027
On May 1, 2024100 40,224620,922 4.3 yearsDecember 31, 2026December 31, 2028
______________________________________
(1)Represents the expected unrecognized stock-based compensation expense recognition period.
(2) As the performance threshold is not expected to be met in future performance periods, there is no related unrecognized compensation as of September 30, 2024.
(3) Performance threshold was not met for the years ended December 31, 2022 and 2023. As of September 30, 2024, the 100% threshold is expected to be met for the year ended December 31, 2024.
The following table presents the Company’s Financial Performance Units activity for the periods noted (dollars in thousands, except share amounts):
Units GrantedCompensation Expense Recognized
Nine Months Ended September 30,Three Months Ended September 30,Nine Months Ended September 30,
Grant Period202420232024202320242023
May 1, 2019 through April 30, 202022,577$ $(18)$ $65 
May 1, 2020 through December 31, 2021, excluding November 18, 202024,23037 29 (11)115 
On November 18, 20202,9219 91 19 131 
May 3, 2021 through August 11, 202122 10 (64)(81)
May 2, 2022 through November 2022, excluding August 4, 2022(1)
322    
On August 4, 2022 (2)
14 14 42 19 
On May 1, 2023 (1)
52,117    
On May 1, 202442,80536  61  
______________________________________
(1) Performance threshold was not met for the three and nine months ended September 30, 2024 and 2023, therefore, no compensation expense was recognized for the three and nine month periods ended September 30, 2024 and 2023.
(2) Performance threshold was not met for the years ended December 31, 2022 and December 31, 2023. As of September 30, 2024, the threshold is expected to be met for the year ended December 31, 2024.

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NOTE 10 – EARNINGS PER COMMON SHARE
The following presents the calculation of basic and diluted earnings per common share during the periods presented (dollars in thousands, except share and per share amounts):
Three Months Ended September 30,Nine Months Ended September 30,
2024202320242023
Earnings per common share - Basic
Numerator:
Net income available for common shareholders$2,134 $3,118 $5,725 $8,444 
Denominator:
Basic weighted average shares9,663,1319,553,3319,643,9989,529,996
Earnings per common share - basic$0.22 $0.33 $0.59 $0.89 
Earnings per common share - Diluted
Numerator:
Net income available for common shareholders$2,134 $3,118 $5,725 $8,444 
Denominator:
Basic weighted average shares9,663,1319,553,3319,643,9989,529,996
Diluted effect of common stock equivalents:
Stock options 5,341
Time Vesting Units 27,21245,14324,38180,174
Financial Performance Units76,313144,79674,387105,452
Total diluted effect of common stock equivalents103,525189,93998,768190,967
Diluted weighted average shares9,766,6569,743,2709,742,7669,720,963
Earnings per common share - diluted$0.22 $0.32 $0.59 $0.87 
Diluted earnings per share was computed without consideration to potentially dilutive instruments as their inclusion would have been anti-dilutive.
The following table presents potentially dilutive securities excluded from the diluted earnings per share calculation during the periods presented:
Three Months Ended September 30,Nine Months Ended September 30,
2024202320242023
Stock options81,761149,72599,378134,307 
Time Vesting Units87,436136,437107,682116,586 
Financial Performance Units9,0903,0306,060 
Total potentially dilutive securities169,197295,252210,090256,953
NOTE 11 – INCOME TAXES
During the three and nine months ended September 30, 2024, the Company recorded an income tax provision of $0.5 million and $1.9 million, respectively, reflecting an effective tax rate of 20.1% and 25.3%, respectively. During the three and nine months ended September 30, 2023, the Company recorded an income tax provision of $1.1 million and $3.0 million, respectively, reflecting an effective tax rate of 26.1% and 26.0%, respectively.
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NOTE 12 – 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
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 asset fair value by using strike prices, option expiration dates, risk-free interest rates, and option volatility assumptions (Level 3).
Guarantee Asset and Liability: The guarantee asset represents the fair value of the consideration received in exchange for the credit enhancement fee. The guarantee liability represents a financial guarantee to cover the second layer of any losses on loans sold to FHLB under the MPF 125 loan sales agreement. The guarantee liability value on day one is equivalent to the guarantee asset fair value, which is the consideration for the credit enhancement fee paid over the life of the loans. The liability is then carried at amortized cost. Significant inputs in the valuation analysis for the asset are Level 3, due to the nature of this asset and the lack of market quotes. The fair value of the guarantee asset is determined using a discounted cash flow model, for which significant unobservable inputs include assumed future prepayment rates ("CPR") and market discount rate (Level 3). An increase in prepayment rates or discount rate would generally reduce the estimated fair value of the guarantee asset.
Derivatives: Derivatives include our swap derivatives, which are compromised of cash flow hedges and derivatives not designated as hedges. The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.
Mortgage Related Derivatives: Mortgage related derivatives include our IRLC, FSC, and the forward commitments on our loans held for sale pipeline. The fair value estimate of our IRLC is based on valuation models using market data from secondary market loan sales and direct contacts with third party investors as of the measurement date and pull through assumptions (Level 3). The FSC fair value estimate reflects the potential pair off fee associated with mandatory trades and is estimated by using a market differential and pair off penalty assessed by the investor (Level 3). The fair value estimate of the forward commitments is based on market prices of similar securities to the underlying MBS (Level 2).
Loans Held at Fair Value: The fair value of loans held for investment are typically determined based on discounted cash flow analysis using market-based interest rate spreads. Discounted cash flow analyses 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.
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Loans Held for Sale: The fair value of loans held for sale is determined using actual quoted commitments from third party investors resulting in Level 1 classification. Where commitments are not yet available, fair value is estimated based on quotes for similar assets resulting in Level 2 classification.
The following presents assets and liabilities measured on a recurring basis as of the dates noted (dollars in thousands):
September 30, 2024Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Reported
Balance
Financial Assets
Mortgage loans held for sale$ $12,324 $ $12,324 
Loans held for sale$ $473 $ $473 
Loans held at fair value$ $ $8,646 $8,646 
Forward commitments and FSC$ $85 $ $85 
Equity securities$649 $122 $ $771 
Guarantee asset$ $ $270 $270 
IRLC, net$ $ $1,078 $1,078 
Equity warrants$ $ $795 $795 
Swap derivative assets$ $1,441 $ $1,441 
Financial Liabilities
Forward commitments and FSC$ $112 $1 $113 
Swap derivative liabilities$ $1,712 $ $1,712 
December 31, 2023Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Reported
Balance
Financial Assets
Mortgage loans held for sale$ $7,254 $ $7,254 
Loans held at fair value$ $ $13,726 $13,726 
Forward commitments and FSC$ $7 $ $7 
Equity securities$636 $122 $ $758 
Guarantee asset$ $ $189 $189 
IRLC, net$ $ $345 $345 
Equity warrants$ $ $795 $795 
Swap derivative asset$ $763 $ $763 
Financial Liabilities
Forward commitments and FSC$ $358 $ $358 
Swap derivative liabilities$ $740 $ $740 
There were no transfers between levels during the nine months ended September 30, 2024 or year ended December 31, 2023.
As of September 30, 2024, equity securities, equity warrants, IRLC, and guarantee assets have been recorded at fair value within the Other assets line item in the Condensed Consolidated Balance Sheets. All changes are recorded in Non-interest income in the Condensed Consolidated Statements of Income.
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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 Condensed 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.
During the three months ended September 30, 2024, the Company reclassified $1.0 million of loans held for investment to loans held for sale. During the nine months ended September 30, 2024, the Company reclassified $3.7 million of loans held for investment to loans held for sale. During the year ended December 31, 2023, the Company reclassified $39.2 million of loans held for investment to loans held for sale. The transfers occurred at the point in time the Company decided to sell the loans. During the year ended December 31, 2023, a total of $40.8 million reclassified loans held for sale were sold. As of September 30, 2024 and December 31, 2023, there were $0.5 million and $0.0 million of loans held for sale, respectively.
As of September 30, 2024, there were 56 loans totaling $0.2 million, accounted for under the fair value option that were on non-accrual. As of December 31, 2023, there were 98 loans totaling $0.2 million, accounted for under the fair value option that were on non-accrual. During the three months ended September 30, 2024 and 2023, the Company recorded net charge-offs of $0.3 million and $0.4 million, respectively, on loans accounted for under the fair value option to Net gain/(loss) on loans accounted for under the fair value option on the Condensed Consolidated Statements of Income. During the nine months ended September 30, 2024 and 2023, the Company recorded net charge-offs of $1.0 million and $1.4 million, respectively, on loans accounted for under the fair value option to Net gain/(loss) on loans accounted for under the fair value option on the condensed consolidated statements of income.
The following tables provide more information about the fair value carrying amount and unpaid principal outstanding of loans accounted for under the fair value option as of the dates noted (dollars in thousands):
September 30, 2024
Total LoansNon Accruals90 Days or More Past Due
Fair Value Carrying
Amount
Unpaid Principal
Balance
DifferenceFair Value Carrying
Amount
Unpaid Principal
Balance
DifferenceFair Value Carrying
Amount
Unpaid Principal
Balance
Difference
Mortgage loans held for sale$12,324 $12,099 $225 $— $— $— $— $— $— 
Loans held for sale473 594 (121)473 594 (121)473 594 (121)
Loans held for investment8,646 8,883 (237)153 158 (5)153 158 (5)
$21,443 $21,576 $(133)$626 $752 $(126)$626 $752 $(126)
December 31, 2023
Total LoansNon Accruals90 Days or More Past Due
Fair Value Carrying
Amount
Unpaid Principal
Balance
DifferenceFair Value Carrying
Amount
Unpaid Principal
Balance
DifferenceFair Value Carrying
Amount
Unpaid Principal
Balance
Difference
Mortgage loans held for sale$7,254 $7,106 $148 $— $— $— $— $— $— 
Loans held for investment13,726 14,129 (403)210 220 (10)210 220 (10)
$20,980 $21,235 $(255)$210 $220 $(10)$210 $220 $(10)
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The following table presents the changes in fair value of loans accounted for under the fair value option as of the dates noted:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(dollars in thousands)
2024202320242023
Mortgage loans held for sale$(346)$(163)$16 $(35)
Loans held for sale   (20)
Loans held for investment66 110 166 (547)
$(280)$(53)$182 $(602)
The following summarizes the activity pertaining to loans accounted for under the fair value option as of the dates noted (dollars in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
Mortgage loans held for sale2024202320242023
Balance at beginning of period$26,856 $19,746 $7,254 $8,839 
Loans originated97,878 66,586 270,136 217,774 
Fair value changes(346)(163)16 (35)
Sales(112,033)(74,064)(265,034)(214,467)
Settlements(31) (48)(6)
Balance at end of period$12,324 $12,105 $12,324 $12,105 
Three Months Ended
September 30,
Nine Months Ended
September 30,
Loans held for sale2024202320242023
Balance at beginning of period$ $ $ $1,965 
Loans transferred from held for investment993  3,722 39,221 
Fair value changes   (20)
Sales(520) (3,249)(40,761)
Settlements   (405)
Balance at end of period$473 $ $473 $ 
Three Months Ended
September 30,
Nine Months Ended
September 30,
Loans held for investment, fair value option2024202320242023
Balance at beginning of period$10,190 $17,523 $13,726 $23,321 
Loans acquired   1,162 
Fair value changes66 110 166 (547)
Net charge-offs(299)(363)(1,016)(1,371)
Settlements(1,311)(1,806)(4,230)(7,101)
Balance at end of period$8,646 $15,464 $8,646 $15,464 
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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):
Three Months Ended September 30, 2024Loans Held at Fair ValueGuarantee AssetIRLCEquity Warrants
Beginning balance$10,190 $228 $912 $795 
Acquisitions— — 1,078 — 
Originations— 21 (1,345)— 
Gains/(losses) in net income, net66 39 433 — 
Net charge-offs(299)— — — 
Settlements(1,311)(18)— — 
Ending balance$8,646 $270 $1,078 $795 
Three Months Ended September 30, 2023Loans Held at Fair ValueGuarantee Asset IRLC Equity Warrants
Beginning balance$17,523 $166 $453 $825 
Acquisitions— — 312 — 
Originations— 6 (606)— 
Gains/(losses) in net income, net110 (8)160 — 
Net charge-offs(363)— — — 
Settlements(1,806)(6)— — 
Ending balance$15,464 $158 $319 $825 
Nine Months Ended September 30, 2024Loans Held at Fair ValueGuarantee AssetIRLCEquity Warrants
Beginning balance$13,726 $189 $345 $795 
Acquisitions— — 2,803 — 
Originations— 68 (3,458)— 
Gains/(losses) in net income, net166 50 1,388 — 
Net charge-offs(1,016)— — — 
Settlements(4,230)(37)— — 
Ending balance$8,646 $270 $1,078 $795 
Nine Months Ended September 30, 2023Loans Held at Fair ValueGuarantee AssetIRLCEquity Warrants
Beginning balance$23,321 $143 $229 $825 
Acquisitions1,162 — 1,652 — 
Originations— 20 (2,784)— 
Gains/(losses) in net income, net(547)11 1,222 — 
Net charge-offs(1,371)— — — 
Settlements(7,101)(16)— — 
Ending balance$15,464 $158 $319 $825 
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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 quarterly for additional impairment and adjusted accordingly.
Collateral Dependent Loans, net of ACL: The fair value of collateral dependent loans individually analyzed and not included in the pooled loan analysis under the ACL is generally based on recent appraisals and the value of any credit enhancements associated with the loan. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. Collateral dependent loans are evaluated monthly and adjusted accordingly if needed.
Appraisals for both collateral-dependent 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 quantitative information about Level 3 assets measured on a recurring and nonrecurring basis as of the dates noted:
Quantitative Information about Level 3 Fair Value Measurements as of September 30, 2024
(dollars in thousands)Fair ValueValuation
Technique
Significant
Unobservable Input
Range
(Weighted Average)
Recurring fair value
Loans held for investment at fair value$8,646 Discounted cash flowDiscount rate
8% (8%)
Guarantee asset270 Discounted cash flowDiscount rate
Prepayment rate
5% (5%)
8.5% (8.5%)
IRLC, net1,078 Best execution modelPull through
66% to 100%
(84%)
Equity warrants795 Black-Scholes option pricing modelVolatility
Risk-free interest rate
Remaining life
23.0% to 59.6% (30.4%)
4.06% (4.06%)
0 to 1.25 years
Nonrecurring fair value
OREO:
1-4 Family Residential$11,421 Appraisal valueCommission, cost to sell, closing costs
5% (5.0 %)
Commercial and Industrial25,615 Appraisal valueCommission, cost to sell, closing costs
6.0% (6.0%)
Collateral dependent loans, net of ACL:
Commercial and Industrial691 Sales Comparison-Market Value ApproachMarket Rate Adjustments
11% (11%)
Commercial and Industrial144 Sales comparison, Market approach - guideline transaction methodLoss given default
8% to 62%
(42%)
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Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2023
(dollars in thousands)Fair ValueValuation
Technique
Significant
Unobservable Input
Range
(Weighted Average)
Recurring fair value
Loans held for investment at fair value$13,726 Discounted cash flowDiscount rate
7% to 8% (8%)
Guarantee asset189 Discounted cash flowDiscount rate
Prepayment rate
5% (5%)
5% (5%)
IRLC, net345 Best execution modelPull through
48% to 100% (86%)
Equity warrants795 Black-Scholes option pricing modelVolatility
Risk-free interest rate
Remaining life
20.1% to 23.0% (22.4%)
4.62% (4.62%)
2.00 to 2.03 years
Nonrecurring fair value
Collateral dependent loans:
Consumer and Other$7,500 Sales Comparison-Market Value ApproachMarket rate adjustments
46% (8%)
1-4 Family Residential2,438 Sales Comparison-Market Value ApproachMarket rate adjustments
46% (8%)
Commercial and Industrial24,791 Sales Comparison-Market Value ApproachMarket rate adjustments
46% (8%)
Commercial and Industrial148 Sales comparison,
Market approach –
guideline transaction
method
Loss given default
14% to 62% (20%)
Commercial and Industrial799 Sales Comparison-Market Value ApproachMarket rate adjustments
21% (11%)
Owner Occupied CRE3,980 Sales Comparison-Market Value ApproachMarket rate adjustments
46% (8%)
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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:
September 30, 2024Level 1Level 2Level 3
Assets:
Cash and cash equivalents$276,222 $276,222 $— $— 
Held-to-maturity securities, net of ACL76,745 247 62,829 7,750 
Loans, net(1)
2,355,757 — — 2,286,056 
Accrued interest receivable10,455 10,455 — — 
Liabilities:    
Term deposits(2)
533,452 480,413 — 54,016 
Non-term deposits1,969,602 1,969,602 — — 
Borrowings:    
FHLB borrowings – floating rate50,000 — 49,993 — 
Federal Reserve borrowings – fixed rate12,373 2,373 9,979 — 
Subordinated notes – fixed-to-floating rate52,508 — — 47,727 
Accrued interest payable3,339 3,339 — — 
Carrying
Amount
Fair Value Measurements Using:
December 31, 2023Level 1Level 2Level 3
Assets:
Cash and cash equivalents$254,442 $254,442 $— $— 
Held-to-maturity securities, net of ACL74,102 242 58,231 8,144 
Loans, net(1)
2,493,258 — — 2,395,468 
Accrued interest receivable11,428 11,428 — — 
Liabilities:
Term deposits(2)
496,452 414,613 — 82,564 
Non-term deposits2,032,587 2,032,587 — — 
Borrowings:
FHLB borrowings – fixed rate41,175 — 41,372 — 
FHLB borrowings – floating rate50,000 — 49,986 — 
Federal Reserve borrowings – fixed rate34,536 3,539 30,936 — 
Subordinated notes – fixed-to-floating rate52,340 — — 48,228 
Accrued interest payable3,793 3,793 — — 
(1) Excludes loans accounted for under the fair value option of $8.6 million and $13.7 million as of September 30, 2024 and December 31, 2023, respectively, as these are carried at fair value.
(2) Term deposits due within one year totaling $480.4 million and $414.6 million as of September 30, 2024 and December 31, 2023, respectively, are classified under Level 1 fair value measurement.
The fair value estimates presented and discussed above are based on pertinent information available to management as of the dates specified. The estimated fair value amounts are based on the exit price notion set forth by ASU 2016-01. Although management is not aware of any factors that would significantly affect the estimated fair values, such amounts have not been comprehensively revalued for purposes of these condensed 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.
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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 and Floating 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 13 – DERIVATIVES
During the first quarter of 2023, the Company entered into interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.
Cash Flow Hedges: On March 21, 2023, the Company executed an interest rate swap with a notional amount that was designated as a cash flow hedge of certain Federal Home Loan Bank borrowings. The swap hedges the benchmark index (SOFR) with a receive float/pay fixed swap for the period March 21, 2023 through April 1, 2026. The notional amount of the interest rate swap as of September 30, 2024 and December 31, 2023 was $50.0 million. As of September 30, 2024 and December 31, 2023, this hedge was determined to be effective, and the Company expects the hedge to remain effective during the remaining terms of the swap.
Derivatives Not Designated as Hedges: The Company periodically enters into interest rate swaps to offset interest rate exposure with its commercial and residential variable rate loan clients. Clients with variable rate loans may choose to enter into an interest rate swap to hedge the interest rate risk on the loan and effectively pay a fixed rate payment. The Company will simultaneously enter into an interest rate swap on the same underlying loan and notional amount to hedge risk on the fixed rate loan. The notional amount of interest rate swaps with its loan customers as of September 30, 2024 and December 31, 2023 was $50.6 million and $30.3 million, respectively. While these derivatives represent economic hedges, they do not qualify as hedges for accounting purposes.
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The Company presents derivative position gross on the balance sheet. The following table reflects the fair value of derivatives recorded on the condensed consolidated balance sheets as of the periods noted:
As of September 30, 2024As of December 31, 2023
(dollars in thousands)
Notional AmountFair ValueNotional AmountFair Value
Included in other assets:
Derivatives designated as hedges:
Interest rate swaps – cash flow hedge$— $— $50,000 $77 
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans50,586 1,441 30,325 686 
Total included in other assets$1,441 $763 
Included in other liabilities:
Derivatives designated as hedges:
Interest rate swaps – cash flow hedge$50,000 $226 $— $— 
Derivatives not designated as hedging instruments:
Interest rate swaps related to customer loans50,586 1,486 30,325 740 
Total included in other liabilities$1,712 $740 
The effect of cash flow hedge accounting on accumulated other comprehensive income for the periods noted are as follows:
Three Months Ended September 30,
20242023
(dollars in thousands)Unrealized Gain (Loss) Recorded in OCI on DerivativeLocation of Gain (Loss) Reclassified from OCI into IncomeAmount of Gain (Loss) Reclassified from OCI into IncomeUnrealized Gain (Loss) Recorded in OCI on DerivativeLocation of Gain (Loss) Reclassified from OCI into IncomeAmount of Gain (Loss) Reclassified from OCI into Income
Interest rate contracts$(635)$ $ $226 $ $ 
Nine Months Ended September 30,
20242023
(dollars in thousands)Unrealized Gain (Loss) Recorded in OCI on DerivativeLocation of Gain (Loss) Reclassified from OCI into IncomeAmount of Gain (Loss) Reclassified from OCI into IncomeUnrealized Gain (Loss) Recorded in OCI on DerivativeLocation of Gain (Loss) Reclassified from OCI into IncomeAmount of Gain (Loss) Reclassified from OCI into Income
Interest rate contracts$(230)$ $ $745 $ $ 
For the three and nine months ended September 30, 2024, the Company recorded $0.2 million and $0.6 million of interest income related to the swap to Other borrowed funds interest expense on the Condensed Consolidated Statements of Income. For the three and nine months ended September 30, 2023, the Company recorded $0.2 million and $0.3 million of interest income related to the swap.
The effect of derivatives not designated as hedging instruments recorded in Other non-interest income on the condensed consolidated statements of income for the three and nine months ended September 30, 2024 and 2023 was immaterial.
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NOTE 14 – 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 as of or during the periods presented (dollars in thousands):
As of or for the three months ended September 30, 2024Wealth
Management
MortgageConsolidated
Income Statement
Total interest income$37,818 $272 $38,090 
Total interest expense22,522 — 22,522 
Provision for credit losses501 — 501 
Net interest income, after provision for credit losses14,795 272 15,067 
Non-interest income5,501 1,471 6,972 
Total income before non-interest expense20,296 1,743 22,039 
Depreciation and amortization expense642 8 650 
All other non-interest expense17,436 1,282 18,718 
Income before income taxes$2,218 $453 $2,671 
Goodwill$30,400 $— $30,400 
Total assets$2,897,317 $14,631 $2,911,948 
As of or for the three months ended September 30, 2023Wealth
Management
MortgageConsolidated
Income Statement
Total interest income$36,267 $214 $36,481 
Total interest expense19,715 — 19,715 
Provision for credit losses329 — 329 
Net interest income, after provision for credit losses16,223 214 16,437 
Non-interest income5,424 675 6,099 
Total income before non-interest expense21,647 889 22,536 
Depreciation and amortization expense581 8 589 
All other non-interest expense15,964 1,761 17,725 
Income (loss) before income taxes$5,102 $(880)$4,222 
Goodwill$30,400 $— $30,400 
Total assets $2,989,028 $13,725 $3,002,753 
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As of or for the nine months ended September 30, 2024Wealth
Management
MortgageConsolidated
Income Statement
Total interest income$113,813 $729 $114,542 
Total interest expense67,126 — 67,126 
Provision for credit losses2,907 — 2,907 
Net interest income, after provision for credit losses43,780 729 44,509 
Non-interest income16,648 4,573 21,221 
Total income before non-interest expense60,428 5,302 65,730 
Depreciation and amortization expense1,884 25 1,909 
All other non-interest expense52,284 3,872 56,156 
Income before income taxes$6,260 $1,405 $7,665 
Goodwill$30,400 $— $30,400 
Total assets$2,897,317 $14,631 $2,911,948 
As of or for the nine months ended September 30, 2023Wealth
Management
MortgageConsolidated
Income Statement
Total interest income$107,009 $556 $107,565 
Total interest expense52,791 — 52,791 
Provision for credit losses1,862 — 1,862 
Net interest income, after provision for credit losses52,356 556 52,912 
Non-interest income13,364 2,503 15,867 
Total income before non-interest expense65,720 3,059 68,779 
Depreciation and amortization expense1,747 25 1,772 
All other non-interest expense50,687 4,902 55,589 
Income (loss) before income taxes$13,286 $(1,868)$11,418 
Goodwill$30,400 $— $30,400 
Total assets $2,989,028 $13,725 $3,002,753 
F
NOTE 15 – LOW-INCOME HOUSING TAX CREDIT INVESTMENTS
On December 19, 2019, the Company invested in a low-income housing tax credit ("LIHTC") investment. On June 26, 2023, the Company entered into two additional LIHTC investments for $3.0 million per investment. As of September 30, 2024 and December 31, 2023, total unfunded commitments related to LIHTC investments totaled $4.3 million and $4.9 million, respectively. As of September 30, 2024 and December 31, 2023, the total balance of all LIHTC investments was $3.1 million. These balances are reflected in the Other assets line item of the Condensed Consolidated Balance Sheets.
The Company uses the proportional amortization method to account for this investment. Amortization expense is included within the Income tax expense line item of the Condensed Consolidated Statements of Income. During the three months ended September 30, 2024 and 2023, the Company recognized amortization expense of $0.2 million and $0.2 million, respectively. During the nine months ended September 30, 2024 and 2023, the Company recognized amortization expense of $0.6 million and $0.3 million, respectively.
Additionally, during the three months ended September 30, 2024 and 2023, the Company recognized $0.2 million and $0.1 million of tax credits and other benefits from the LIHTC investment, respectively. During the nine months ended September 30, 2024 and 2023, the Company recognized $0.5 million and $0.3 million of tax credits and other benefits, respectively. During the three and nine months ended September 30, 2024 and 2023, the Company did not incur any impairment losses.
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NOTE 16 – 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 condensed 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") have been fully phased in. The net unrealized gain or loss on held-to-maturity securities included in AOCI and accumulated net gains or losses on cash flow hedges are not included in computing regulatory capital. During the nine months ended September 30, 2024 and the year ended December 31, 2023, First Western made no capital injections into the Bank. Management believes as of September 30, 2024, First Western and the Bank meet all capital adequacy requirements to which they are subject.
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 September 30, 2024, were calculated in accordance with the requirements of Basel III. The final rules of Basel III also established a “capital conservation buffer” of 2.5% above new regulatory minimum capital ratios. The minimum capital ratios inclusive of the capital conservation buffer are as follows: (i) a CET1 ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. Banks are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its 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 September 30, 2024 and December 31, 2023, the most recent filings with the FDIC categorized First Western and the Bank as well capitalized under the regulatory guidelines. To be categorized as well capitalized, an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as set forth in the following table. Management believes there are no conditions or events since September 30, 2024, 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 it was subject as of September 30, 2024 and December 31, 2023.
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The following table presents the actual and required capital amounts and ratios as of dates noted (dollars in thousands):
Actual
Required for Capital Adequacy Purposes(1)
To be Well Capitalized
Under Prompt
Corrective Action
Regulations
September 30, 2024AmountRatio AmountRatio AmountRatio
Tier 1 capital to risk-weighted assets
Bank$252,549 11.39 %$133,040 6.0 %$177,387 8.0 %
Consolidated223,126 10.06 N/AN/AN/AN/A
CET1 to risk-weighted assets
Bank252,549 11.39 99,780 4.5 144,127 6.5 
Consolidated223,126 10.06 N/AN/AN/AN/A
Total capital to risk-weighted assets 
Bank 268,970 12.13 177,387 8.0 221,734 10.0 
Consolidated292,546 13.19 N/AN/AN/AN/A
Tier 1 capital to average assets 
Bank252,549 9.11 110,905 4.0 138,632 5.0 
Consolidated223,126 8.04 N/AN/AN/AN/A
Actual
Required for Capital
Adequacy Purposes(1)
To be Well Capitalized
Under Prompt
Corrective Action
Regulations
December 31, 2023AmountRatio AmountRatio AmountRatio
Tier 1 capital to risk-weighted assets
Bank$244,390 10.54 %$139,126 6.0 %$185,502 8.0 %
Consolidated218,150 9.40 N/AN/AN/AN/A
CET1 to risk-weighted assets
Bank244,390 10.54 104,345 4.5 150,720 6.5 
Consolidated218,150 9.40 N/AN/AN/AN/A
Total capital to risk-weighted assets 
Bank 265,391 11.45 185,502 8.0 231,877 10.0 
Consolidated292,151 12.59 N/AN/AN/AN/A
Tier 1 capital to average assets 
Bank244,390 8.71 112,244 4.0 140,306 5.0 
Consolidated218,150 7.77 N/AN/AN/AN/A
______________________________________
(1)Does not include capital conservation buffer.
The Company's principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of September 30, 2024, $110.3 million of retained earnings is available to pay dividends from the Bank. As of September 30, 2024 and December 31, 2023, no dividends were declared and paid by the Bank.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to assist readers in understanding our financial condition and results of operations for the three and nine months ended September 30, 2024 and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included in this Quarterly Report on Form 10-Q (this "Form 10-Q") and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 15, 2024. Unless we state otherwise or the context otherwise requires, references in this Form 10-Q to "we," "our," "us," "the Company," and "First Western" refer to First Western Financial, Inc. and its consolidated subsidiaries, including First Western Trust Bank, which we sometimes refer to as "the Bank" or "our Bank."
The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs, and expected performance. We caution that assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the differences can be material. See "Cautionary Note Regarding Forward-Looking Statements." Also, see the risk factors and other cautionary statements described under the heading "Item 1A - Risk Factors" included in our Annual Report Form 10-K filed with the SEC on March 15, 2024 and in Part II–Item 1A of this Form 10-Q. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Company Overview
We are a financial holding company founded in 2002 and headquartered in Denver, Colorado. We provide a fully integrated suite of wealth management services to our clients including banking, trust, and investment management products and services. Our mission is to be the best private bank for the Western wealth management client. We target entrepreneurs, professionals, and high-net worth individuals, typically with $1.0 million-plus in liquid net worth, and their related philanthropic and business organizations, which we refer to as the "Western wealth management client". We believe that the Western wealth management client shares our entrepreneurial spirit and values our sophisticated, high-touch wealth management services that are tailored to meet their specific needs. We partner with our clients to solve their unique financial needs through our expert integrated services provided in a team approach.
We offer our services through a branded network of boutique private trust bank offices, which we believe are strategically located in affluent and high-growth markets in locations across Colorado, Arizona, Wyoming, Montana, and California. Our profit centers, which are comprised of private bankers, lenders, wealth planners, and portfolio managers, under the leadership of a local chairman and/or president, are also supported centrally by teams providing management services such as operations, risk management, credit administration, marketing, technology support, human capital, and accounting/finance services, which we refer to as support centers.
From 2004, when we opened our first profit center, until September 30, 2024, we have expanded our footprint into fourteen full service profit centers, five loan production offices, and one trust office located across five states. As of and for the nine months ended September 30, 2024, we had $2.91 billion in total assets, $65.7 million in total revenues, and provided fiduciary and advisory services on $7.5 billion of assets under management ("AUM").
Recent Industry Developments
During 2023, the banking industry experienced significant disruption and volatility with the failure of multiple banks creating industry wide concerns related to liquidity, deposit outflows, unrealized securities losses, and eroding consumer confidence in the banking industry. Despite the market wide impact to bank stock prices, the Bank remains stable with strong fundamentals including uninsured deposits at $929.4 million, or 37.1% of total deposits as of September 30, 2024. The Company has a low amount of held-to-maturity securities, which represent 2.6% of total assets, and carries unrecognized losses amounting to 2.5% of Total shareholders’ equity as of September 30, 2024. We have a conservative credit appetite as evidenced by our limited exposure to non-owner occupied office space commercial real estate (“CRE”) which has been impacted by the shift to hybrid work environments. Our client base is well diversified with no single industry concentration.
Primary Factors Used to Evaluate the Results of Operations
As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the comparative levels and trends of the line items in our Condensed Consolidated Balance Sheets and Statements of Income as well as various financial ratios that are commonly used in our industry. The primary factors we use to evaluate our results of operations include net interest income, non-interest income, and non-interest expense.
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Net Interest Income
Net interest income represents interest income less interest expense. We generate interest income on interest-earning assets, primarily loans and investment securities. We incur interest expense on interest-bearing liabilities, primarily interest-bearing deposits and borrowings. To evaluate Net interest income, we measure and monitor: (i) yields on loans, investment securities, and other interest-earning assets; (ii) the costs of deposits and other funding sources; (iii) the rates incurred on borrowings and other interest-bearing liabilities; and (iv) the regulatory risk weighting associated with the assets. Interest income is primarily impacted by loan growth and loan repayments, along with changes in interest rates on the loans. Interest expense is primarily impacted by changes in deposit balances, changes in interest rates on deposits, along with the volume and type of interest-bearing liabilities. Net interest income is primarily impacted by changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities.
Non-Interest Income
Non-interest income primarily consists of the following:
Trust and investment management fees—fees and other sources of income charged to clients for managing their trust and investment assets, providing financial planning consulting services, 401(k) and retirement advisory consulting services, and other wealth management services. Trust and investment management fees are primarily impacted by rates charged and increases and decreases in AUM. AUM is primarily impacted by opening and closing of client advisory and trust accounts, contributions and withdrawals, and the fluctuation in market values.
Net gain on mortgage loans—gain on originating and selling mortgages and origination fees, less commissions to loan originators, document review, and other costs specific to originating and selling the loan. The market adjustments for interest rate lock commitments ("IRLC"), mortgage derivatives, and gains and losses incurred on the mandatory trading of loans are also included in this line item. Net gain on mortgage loans is primarily impacted by the amount of loans sold, the type of loans sold, and market conditions.
Net gain on loans accounted for under the fair value option—unrealized gains or losses on the fair value adjustments to held for investment loans on which the Bank has elected the fair value option of accounting. This also includes realized gains or losses on charge-offs and recoveries.
Bank fees—income generated through bank-related service charges such as: electronic transfer fees, treasury management fees, bill pay fees, servicing fees for Main Street Lending Program (“MSLP”), loan prepayment penalty fees, loan interest rate swap fees, and other banking fees. Banking fees are primarily impacted by the level of business activities and cash movement activities of our clients.
Risk management and insurance fees—commissions earned on insurance policies we have placed for clients through our client risk management team who incorporate insurance services, primarily life insurance, to support our clients’ wealth planning needs. Our insurance revenues are primarily impacted by the type and volume of policies placed for our clients.
Income on company-owned life insurance—income earned on the growth of the cash surrender value of life insurance policies we hold on certain key associates. The income on the increase in the cash surrender value is non-taxable income.
Non-Interest Expense
Non-interest expense is comprised primarily of the following:
Salaries and employee benefits—all forms of compensation-related expenses including salary, incentive compensation, payroll-related taxes, stock-based compensation, benefit plans, health insurance, 401(k) plan match costs, and other benefit-related expenses. Salaries and employee benefit costs are primarily impacted by changes in headcount and fluctuations in benefits costs.
Occupancy and equipment—costs related to building and land maintenance, leasing our office space, depreciation charges for the buildings, building improvements, furniture, fixtures and equipment, amortization of leasehold improvements, utilities, and other occupancy-related expenses. Occupancy and equipment costs are primarily impacted by the number of locations we occupy.
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Professional services—costs related to legal, accounting, tax, consulting, personnel recruiting, insurance, and other outsourcing arrangements. Professional services costs are primarily impacted by corporate activities requiring specialized services. FDIC insurance expense is also included in this line and represents the assessments we pay to the FDIC for deposit insurance.
Technology and information systems—costs related to software and information technology services to support office activities and internal networks. Technology and information system costs are primarily impacted by the number of locations we occupy, the number of associates we have, and the level of service we require from our third-party technology vendors.
Data processing—costs related to processing fees paid to our third-party data processing system providers relating to our core private trust banking platform. Data processing costs are primarily impacted by the number of loan, deposit, and trust accounts we have and the level of transactions processed for our clients.
Marketing—costs related to promoting our business through advertising, promotions, charitable events, sponsorships, donations, and other marketing-related expenses. Marketing costs are primarily impacted by the levels of advertising programs and other marketing activities and events held throughout the year.
Amortization of other intangible assets—primarily represents the amortization of intangible assets including client lists, core deposit intangibles, and other similar items recognized in connection with acquisitions.
Other—includes costs related to operational expenses associated with office supplies, postage, travel expenses, meals and entertainment, dues and memberships, costs to maintain or prepare other real estate owned (“OREO”) for sale, director compensation and travel, and other general corporate expenses that do not fit within one of the specific non-interest expense lines described above. Other operational expenses are generally impacted by our business activities and needs.
Operating Segments
The Company’s reportable segments consist of Wealth Management and Mortgage. We measure the overall profitability of operating segments based on Income before income tax. We believe this is a more useful measurement as our wealth management products and services are fully integrated with our private trust bank. We allocate costs to our segments, which consist primarily of compensation and overhead expense directly attributable to the products and services within the Wealth Management and Mortgage segments. We measure the profitability of each segment based on a post-allocation basis, as we believe it better approximates the operating cash flows generated by our reportable operating segments. A description of each segment is provided in Note 14 – Segment Reporting of the accompanying Notes to the Condensed Consolidated Financial Statements.
Primary Factors Used to Evaluate our Balance Sheet
The primary factors we use to evaluate our balance sheet include asset and liability levels, asset quality, capital, liquidity, and potential profit production from assets.
We manage our asset levels to ensure our lending initiatives are efficiently and profitably supported and to ensure we have the necessary liquidity and capital to meet the required regulatory capital ratios. Funding needs are evaluated and forecasted by communicating with clients, reviewing loan maturity and draw expectations, and projecting new loan opportunities.
We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity, and trend of problem assets such as those determined to be classified, delinquent, non-accrual, non-performing or restructured; the adequacy of our allowance for credit losses; the diversification and quality of loan and investment portfolios; the extent of counterparty risks, credit risk concentrations, and other factors.
We manage our liquidity based upon factors that include the level and quality of capital and our overall financial condition, the trend and volume of problem assets, our balance sheet risk exposure, the level of deposits as a percentage of total loans, the amount of non-deposit funding used to fund assets, the availability of unused funding sources and off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold, and other factors.
Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The Company has adopted the Basel III regulatory capital framework. As of September 30, 2024, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III.
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Results of Operations
Overview
The three months ended September 30, 2024 compared with the three months ended September 30, 2023. We reported Net income available to common shareholders of $2.1 million for the three months ended September 30, 2024, compared to $3.1 million of Net income available to common shareholders for the three months ended September 30, 2023, a $1.0 million, or 31.6% decrease. For the three months ended September 30, 2024, our Income before income tax was $2.7 million, a $1.6 million, or 36.7% decrease from the three months ended September 30, 2023. The decrease was primarily driven by an increase in Non-interest expense and decrease in Net interest income as a result of higher Interest expense due to higher deposit costs, offset partially by higher Non-interest income.
The nine months ended September 30, 2024 compared with the nine months ended September 30, 2023. We reported Net income available to common shareholders of $5.7 million for the nine months ended September 30, 2024, compared to $8.4 million of Net income available to common shareholders for the nine months ended September 30, 2023, a $2.7 million, or 32.2% decrease. For the nine months ended September 30, 2024, our Income before income tax was $7.7 million, a $3.8 million, or 32.9% decrease from the nine months ended September 30, 2023. The decrease was primarily driven by a $8.4 million decrease in Net interest income, after Provision for credit losses partially offset by a $5.4 million increase in Non-interest income. The decrease in Net interest income, after Provision for credit losses, was due to higher rates on deposits and borrowings resulting from increased market rates partially offset by higher interest income.
Net Interest Income
The three months ended September 30, 2024 compared with the three months ended September 30, 2023. For the three months ended September 30, 2024, Net interest income, before the Provision for credit losses, was $15.6 million, a decrease of $1.2 million, or 7.1%, compared to the three months ended September 30, 2023. The decrease in Net interest income was primarily driven by a $160.9 million increase in average Interest-bearing deposit balances and a 44 basis point increase in the average rates on interest-bearing deposits. Net interest margin decreased 14 basis points to 2.32% in the third quarter of 2024 from 2.46% reported in the third quarter of 2023 primarily due to pricing pressure on Interest-bearing deposits and an unfavorable mix shift in the deposit portfolio offset partially by an increase in average yield on interest earning assets.
The nine months ended September 30, 2024 compared with the nine months ended September 30, 2023. For the nine months ended September 30, 2024, Net interest income, before the Provision for credit losses, was $47.4 million, a decrease of $7.4 million, or 13.4%, compared to the nine months ended September 30, 2023. The decrease in Net interest income was driven by a $172.2 million increase in average Interest-bearing deposits with a 78 basis point increase in the average rates on Interest-bearing deposits. Net interest income was also negatively impacted by a $10.3 million decrease in average loans outstanding excluding loans held for sale and loans held at fair value offset by a 34 basis point increase in the average yield on loans. Net interest margin decreased 37 basis points to 2.34% for the nine months ended September 30, 2024 from 2.71% reported for the nine months ended September 30, 2023.
The decrease in average loans outstanding for the three months ended September 30, 2024 compared to the same period in 2023 was primarily due to a net decline in the Cash, Securities and Other, Construction and Development, and Commercial and Industrial portfolios offset by net growth in the Commercial Real Estate portfolio. Another contributing factor to the decline was the resolution of a problem credit relationship, which decreased non-performing loans by $30.0 million and increased Other real estate owned ("OREO") by $25.6 million. Average loan yields excluding Loans held for sale and Loans held at fair value were 5.74% and 5.72% for the three and nine months ended September 30, 2024, compared to 5.42% and 5.38% for the three and nine months ended September 30, 2023. The increase in loan yields during the three and nine month periods were primarily driven by an increase in yields on the variable rate portfolio and an increase in yields on new loan production due to the rising interest rate environment.
Interest income on our investment securities portfolio increased as a result of higher average yields, partially offset by lower average investment balances for the three and nine months ended September 30, 2024 compared to the same period in 2023. Our average investment yields during the three and nine months ended September 30, 2024 were 3.57% and 3.43%, an increase of 48 basis points and 32 basis points compared to the same periods in 2023. Our average investment securities balance during the three and nine months ended September 30, 2024 was $79.0 million and $76.4 million, a decrease of $1.0 million and $3.7 million compared to the same period in 2023.
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Interest expense on deposits increased during the three and nine months ended September 30, 2024 compared to the same period in 2023. Average interest-bearing deposit rates were 4.19% and 4.17% for the three and nine months ended September 30, 2024, compared to 3.75% and 3.39% for the three and nine months ended September 30, 2023. The increase in Interest-bearing deposit rates was primarily attributable to the higher interest rate environment and highly competitive deposit market.
The following presents an analysis of Net interest income and Net interest margin during the periods presented, using daily average balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid, and the average rate earned or paid on those assets or liabilities.
As of or for the Three Months Ended September 30,
20242023
(dollars in thousands)
Average
Balance(1)
Interest
Earned /
Paid
Average
Yield /
Rate
Average
Balance(1)
Interest
Earned /
Paid
Average
Yield /
Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other financial institutions$129,629 $1,754 5.38 %$102,510 $1,292 5.00 %
Debt securities(2)
79,007 708 3.57 78,057 607 3.09 
Correspondent bank stock6,281 134 8.49 7,162 141 7.81 
Loans(3)
2,429,927 35,081 5.74 2,485,704 33,927 5.42 
Mortgage loans held for sale(4)
18,423 272 5.87 12,680 214 6.70 
Loans held at fair value9,691 141 5.79 16,715 300 7.12 
Total interest-earning assets(5)
2,672,958 38,090 5.67 2,702,828 36,481 5.35 
Allowance for credit losses(27,236)(22,122)
Noninterest-earning assets161,072 125,774 
Total assets$2,806,794 $2,806,480 
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits$2,007,265 21,150 4.19 $1,846,318 17,467 3.75 
FHLB and Federal Reserve borrowings62,589 634 4.03 125,250 1,447 4.58 
Subordinated notes52,470 738 5.60 52,242 801 6.08 
Total interest-bearing liabilities2,122,324 22,522 4.22 2,023,810 19,715 3.86 
Noninterest-bearing liabilities:  
Noninterest-bearing deposits395,755 512,956 
Other liabilities40,089 24,228 
Total noninterest-bearing liabilities435,844 537,184 
Total shareholders’ equity248,626 245,486 
Total liabilities and shareholders’ equity$2,806,794 $2,806,480 
Net interest rate spread(6)
1.45 1.49 
Net interest income(7)
$15,568 $16,766 
Net interest margin(8)
2.32 %2.46 %
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As of or for the Nine Months Ended September 30,
20242023
(dollars in thousands)
Average
Balance(1)
Interest
Earned /
Paid
Average
Yield /
Rate
Average
Balance(1)
Interest
Earned /
Paid
Average
Yield /
Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other financial institutions$149,511 $5,961 5.33 %$121,866 $4,361 4.78 %
Debt securities(2)
76,378 1,962 3.43 80,090 1,863 3.11 
Correspondent bank stock5,182 334 8.61 8,524 459 7.20 
Loans(3)
2,454,631 105,038 5.72 2,464,902 99,248 5.38 
Mortgage loans held for sale(4)
15,155 729 6.43 12,033 556 6.18 
Loans held at fair value11,374 518 6.08 19,732 1,078 7.30 
Total interest-earning assets(5)
2,712,231 114,542 5.64 2,707,147 107,565 5.31 
Allowance for credit losses(25,166)(20,848)
Noninterest-earning assets142,985 125,165 
Total assets$2,830,050 $2,811,464 
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits$2,005,740 62,620 4.17 $1,833,514 46,423 3.39 
FHLB and Federal Reserve borrowings73,952 2,294 4.14 130,426 4,182 4.29 
Subordinated notes52,415 2,212 5.64 52,189 2,186 5.60 
Total interest-bearing liabilities2,132,107 67,126 4.21 2,016,129 52,791 3.50 
Noninterest-bearing liabilities:
Noninterest-bearing deposits418,235 528,609 
Other liabilities32,159 24,754 
Total noninterest-bearing liabilities450,394 553,363 
Total shareholders’ equity247,549 241,972 
Total liabilities and shareholders’ equity$2,830,050 $2,811,464 
Net interest rate spread(6)
1.43 1.81 
Net interest income(7)
$47,416 $54,774 
Net interest margin(8)
2.34 %2.71 %
__________________________________
(1)Average balance represents daily averages, unless otherwise noted.
(2)Represents monthly averages.
(3)Non-performing loans are included in the respective average loan balances. Income, if any, on such loans is recognized on a cash basis.
(4)Mortgage loans held for sale are included in the interest-earning assets above, with interest income recognized in the Interest and dividend income on loans, including fees line in the Condensed Consolidated Statements of Income. These balances are included in the margin calculations in these tables.
(5)Tax-equivalent yield adjustments are immaterial.
(6)Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(7)Net interest income is the difference between income earned on interest-earning assets and expense paid on interest-bearing liabilities.
(8)Net interest margin is equal to annualized net interest income divided by average interest-earning assets.
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The following table presents the dollar amount of changes in interest income and interest expense during the periods presented for each component of interest-earning assets and interest-bearing liabilities, and distinguishes between changes attributable to volume and interest rates. Changes attributable to both rate and volume that cannot be separated have been allocated to volume:
Three Months Ended September 30, 2024Nine Months Ended September 30, 2024
Compared to 2023Compared to 2023
Increase
(Decrease) Due
Change in:
Total
Increase
(Decrease)
Increase
(Decrease) Due
Change in:
Total Increase (Decrease)
(dollars in thousands)
VolumeRateVolumeRate
Interest-earning assets:
Interest-bearing deposits in other financial institutions$367 $95 $462 $1,102 $498 $1,600 
Debt securities92 101 (95)194 99 
Correspondent bank stock(19)12 (7)(215)90 (125)
Loans(805)1,959 1,154 (440)6,230 5,790 
Mortgage loans held for sale85 (27)58 150 23 173 
Loans held at fair value(102)(57)(159)(381)(179)(560)
Total increase in interest income(465)2,074 1,609 121 6,856 6,977 
Interest-bearing liabilities:   
Interest-bearing deposits1,696 1,987 3,683 5,377 10,820 16,197 
FHLB and Federal Reserve borrowings(635)(178)(813)(1,752)(136)(1,888)
Subordinated notes(66)(63)10 16 26 
Total increase in interest expense1,064 1,743 2,807 3,635 10,700 14,335 
Decrease in net interest income$(1,529)$331 $(1,198)$(3,514)$(3,844)$(7,358)
Provision for Credit Losses
We have a dedicated problem loan resolution team comprised of associates from our credit, senior leadership, risk, and accounting teams that meets frequently to ensure that watch list and problem credits are identified early and actively managed. We work to identify potential losses in a timely manner and proactively manage the problem credits to minimize losses. For the three and nine months ended September 30, 2024, we recorded a $0.5 million and $2.9 million Provision for credit losses, respectively. For the three and nine months ended September 30, 2023, we recorded a $0.3 million and $1.9 million Provision for credit losses, respectively. The $0.5 million provision recorded for the three months ended September 30, 2024 was primarily due to two non-performing loans written down to fair value through the provision and transfered to Loans held for sale offset by a recovery on one non-performing loan. The $2.9 million provision recorded for the nine months ended September 30, 2024 was primarily due to an increase in Provision for credit losses on individually analyzed loans due to the charge-off and resolution of one loan relationship partially offset by the release of Provision for credit losses on unfunded loan commitments.
The Company has increased loan level reviews and portfolio monitoring to address the changing environment. Management believes the financial strength of the Bank’s clientele and the diversity of the portfolio continues to mitigate the credit risk within the portfolio.
Non-Interest Income
The three months ended September 30, 2024 compared with the three months ended September 30, 2023. For the three months ended September 30, 2024 compared with the three months ended September 30, 2023, Non-interest income increased $0.9 million, or 14.3%, to $7.0 million. The increase in Non-interest income during the three months ended September 30, 2024 was driven primarily by an increases in Net gain on mortgage loans and Risk management and insurance fees.
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The nine months ended September 30, 2024 compared with the nine months ended September 30, 2023. For the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023, Non-interest income increased $5.4 million, or 33.7%, to $21.2 million. The increase in Non-interest income during the nine months ended September 30, 2024 was primarily driven by an increase in Net gain on mortgage loans and a decrease in net loss on loans accounted for under the fair value option.
The following presents the significant categories of our non-interest income during the periods presented:
Three Months Ended September 30,Change
(dollars in thousands)
20242023$%
Non-interest income:
Trust and investment management fees$4,728 $4,846 $(118)(2.4)%
Net gain on mortgage loans1,451 654 797 121.9 
Bank fees392 427 (35)(8.2)
Risk management and insurance fees367 145 222 153.1 
Income on company-owned life insurance108 96 12 12.5 
Net loss on loans accounted for under the fair value option(233)(252)19 7.5 
Unrealized gain (loss) recognized on equity securities24 (19)43 226.3 
Other135 202 (67)(33.2)
Total non-interest income$6,972 $6,099 $873 14.3%
Nine Months Ended September 30,Change
(dollars in thousands)
20242023$%
Non-interest income:
Trust and investment management fees$14,533 $14,083 $450 3.2 %
Net gain on mortgage loans4,535 2,447 2,088 85.3 
Net gain (loss) on loans held for sale117 (178)295 165.7 
Bank fees1,610 1,610 — — 
Risk management and insurance fees525 375 150 40.0 
Income on company-owned life insurance319 277 42 15.2 
Net loss on loans accounted for under the fair value option(850)(1,919)1,069 55.7 
Unrealized gain (loss) recognized on equity securities16 (20)36 180.0 
Other416 (808)1,224 151.5 
Total non-interest income$21,221 $15,867 $5,354 33.7 %
______________________________________
*Represents percentages that are insignificant
Trust and investment management fees—Trust and investment management fees decreased $0.1 million, or 2.4% for the three months ended September 30, 2024. The increase in Trust and investment management fees of $0.5 million, or 3.2% for the nine months ended September 30, 2024 was primarily attributable to an increase in assets under management due to an increase in market values and an increase in our fee structure compared to the prior year.
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Net gain on mortgage loans—The increase in Net gain on mortgage loans of $0.8 million, or 121.9% for the three months ended September 30, 2024 was driven by higher origination volumes. The increase in Net gain on mortgage loans of $2.1 million, or 85.3% for the nine months ended September 30, 2024 was driven by higher average gain on sale margins and origination volumes.
Net gain (loss) on loans held for sale—During the nine months ended September 30, 2024, the Company reclassified $3.7 million of loans held for investment to loans held for sale for three non-performing notes. The transfers occurred at the point in time the Company decided to sell the loans. During the nine months ended September 30, 2024, a total of $3.2 million reclassified loans held for investment were sold, resulting in a Net gain on loans held for sale of $0.1 million. During the nine months ended September 30, 2023, the Company transferred $39.2 million of non-relationship loans held for investment to Loans held for sale. Upon transfer of the loans, the Company recorded a net loss on Loans held for sale of $0.2 million, primarily attributable to the slight decline in fair value as a result of the rising interest rates on comparable loans in the market.
Risk management and insurance fees—The increase in Risk management and insurance fees of $0.2 million, or 153.1% and $0.2 million, or 40.0% for the three and nine months ended September 30, 2024 was primarily driven by an increase in insurance client agreements.
Net loss on loans accounted for under the fair value option—The Company elected the fair value option on certain loans purchased in 2022. The decrease in loss on loans accounted for under the fair value option of $1.1 million, or 55.7% for the nine months ended September 30, 2024 was primarily attributable to improvement in fair value due to an increase in interest rates and overall improved performance of the portfolio.
Other—The increase in other income of $1.2 million, or 151.5% for the nine months ended September 30, 2024 was attributable to a $1.2 million impairment taken in 2023 to the carrying value of a contingent consideration asset related to the sale of First Western Capital Management in 2020. The value was established using asset growth assumptions provided by the buyer, which had not materialized.
Non-Interest Expense
The three months ended September 30, 2024 compared with the three months ended September 30, 2023. The increase in Non-interest expense of 5.8% to $19.4 million for the three months ended September 30, 2024 was driven by Salaries and employee benefits due to increased front office headcount and higher insurance commissions, Technology and information system costs related to enhancements of our information technology infrastructure, and Occupancy and equipment costs related to additional rent expense on the extension of a lease in the first quarter of 2024.
The nine months ended September 30, 2024 compared with the nine months ended September 30, 2023. The increase in Non-interest expense of 1.2% to $58.1 million for the nine months ended September 30, 2024, was driven by Other operational costs attributed to higher costs on non-performing asset workouts and fraud losses, Technology and information system costs related to enhancements of our information technology infrastructure, and Occupancy and equipment costs related to additional rent expense on the extension of a lease in the first quarter of 2024, offset by lower Salaries and employee benefits as a result of staffing reductions in 2023 to better align expenses with lower revenue.
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The following presents the significant categories of our Non-interest expense during the periods presented:
Three Months Ended September 30,Change
(dollars in thousands)
20242023$%
Non-interest expense:    
Salaries and employee benefits$11,439 $10,968 $471 4.3 %
Occupancy and equipment2,126 1,807 319 17.7 
Professional services1,893 1,867 26 1.4 
Technology and information systems1,045 906 139 15.3 
Data processing1,101 1,159 (58)(5.0)
Marketing374 355 19 5.4 
Amortization of other intangible assets57 62 (5)(8.1)
Other 1,333 1,190 143 12.0 
Total non-interest expense$19,368 $18,314 $1,054 5.8 %
Nine Months Ended September 30,Change
(dollars in thousands)
20242023$%
Non-interest expense:
Salaries and employee benefits$33,803 $35,214 $(1,411)(4.0)%
Occupancy and equipment6,182 5,660 522 9.2 
Professional services6,130 5,648 482 8.5 
Technology and information systems3,097 2,569 528 20.6 
Data processing3,150 3,350 (200)(6.0)
Marketing811 1,125 (314)(27.9)
Amortization of other intangible assets170 188 (18)(9.6)
Other 4,722 3,607 1,115 30.9 
Total non-interest expense$58,065 $57,361 $704 1.2 %
Salaries and employee benefits—The increase in Salaries and employee benefits of $0.5 million, or 4.3% for the three months ended September 30, 2024 was primarily due to increased front office headcount. The decrease in Salaries and employee benefits of $1.4 million, or 4.0% for the nine months ended September 30, 2024 was primarily related to staffing reductions in 2023 to better align expenses with lower revenue.
Occupancy and equipment—The increase in Occupancy and equipment of $0.3 million, or 17.7%, and $0.5 million, or 9.2% for the three and nine months ended September 30, 2024, was driven by additional rent expense relating to the extension of a lease in the first quarter of 2024.
Professional services—The increase in Professional services of $0.5 million, or 8.5% for the nine months ended September 30, 2024, was driven by increased legal fees, audit fees, and FDIC insurance costs due to an increase in our assessment rate.
Technology and information systems—The increase in Technology and information systems of $0.1 million, or 15.3%, and $0.5 million or 20.6% for the three and nine months ended September 30, 2024, was primarily driven by increased costs related to enhancements of our information technology infrastructure.
Data processingThe decrease in Data processing of $0.2 million, or 6.0% for the nine months ended September 30, 2024, was driven by lower system costs related to our trust and investment management system.
Marketing—The decrease in Marketing $0.3 million, or 27.9% for the nine months ended September 30, 2024, was driven by lower advertising costs and decreased events and sponsorships to better align expenses with lower revenue.
Other—The increase in Other of $0.1 million, or 12.0%, for the three months ended September 30, 2024, was primarily driven by costs related to non-performing asset workouts. The increase in Other of $1.1 million, or 30.9%, for the nine months ended September 30, 2024, was primarily driven by increased costs related to non-performing asset workouts and fraud losses.
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Income Tax
The Company recorded an income tax provision of $0.5 million and $1.1 million for the three months ended September 30, 2024 and 2023, respectively, reflecting an effective tax rate of 20.1% and 26.1%, respectively. The Company recorded an income tax provision of $1.9 million and $3.0 million for the nine months ended September 30, 2024 and 2023, respectively, reflecting an effective tax rate of 25.3% and 26.0%, respectively.
Segment Reporting
We have two reportable operating segments: Wealth Management and Mortgage. Our Wealth Management segment consists of operations relating to the Company’s fully integrated wealth management products and services. Services provided include deposit, loan, insurance, and trust and investment management advisory products and services for which fee revenue is recognized. Our Mortgage segment consists of operations relating to the Company’s residential mortgage service offerings. Services provided by our Mortgage segment include soliciting, originating, and selling mortgage loans into the secondary market. Mortgage products are financial in nature, for which origination fees are recognized net of origination expenses, upon the funding of the mortgage loans. Mortgage loans held for sale are accounted for under the fair value option with changes in fair value reported through earnings at inception when loans are locked to the borrower and until the loan is sold to third parties, at which time additional gains or losses on the sale are recorded. Mortgage loans originated and held for investment purposes are recorded in the Wealth Management segment, as this segment provides ongoing services to our clients.
The following table presents key metrics related to our segments during the periods presented:
Three Months Ended September 30, 2024Nine Months Ended September 30, 2024
(dollars in thousands)Wealth
Management
MortgageConsolidatedWealth
Management
MortgageConsolidated
Income(1)
$20,296 $1,743 $22,039 $60,428 $5,302 $65,730 
Income before taxes2,218 453 2,671 6,260 1,405 7,665 
Profit margin10.9 %26.0 %12.1 %10.4 %26.5 %11.7 %
Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
(dollars in thousands)Wealth
Management
MortgageConsolidatedWealth
Management
MortgageConsolidated
Income(1)
$21,647 $889 $22,536 $65,720 $3,059 $68,779 
Income (loss) before taxes5,102 (880)4,222 13,286 (1,868)11,418 
Profit margin23.6 %(99.0)%18.7 %20.2 %(61.1)%16.6 %
______________________________________
(1)Net interest income after provision plus non-interest income.
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The following presents selected financial metrics of each segment as of and during the periods presented:
Wealth Management
As of or for the Three Months Ended September 30,
(dollars in thousands)20242023$ Change% Change
Total interest income$37,818 $36,267 $1,551 4.3 %
Total interest expense22,522 19,715 2,807 14.2 
Provision for credit losses501 329 172 52.3 
Net interest income, after provision for credit losses14,795 16,223 (1,428)(8.8)
Non-interest income5,501 5,424 77 1.4 
Total income20,296 21,647 (1,351)(6.2)
Depreciation and amortization expense642 581 61 10.5 
All other non-interest expense17,436 15,964 1,472 9.2 
Income before income taxes$2,218 $5,102 $(2,884)(56.5)
Goodwill$30,400 $30,400 $— — 
Total assets$2,897,317 $2,989,028 $(91,711)(3.1)%
As of or for the Nine Months Ended September 30,
(dollars in thousands)20242023$ Change% Change
Total interest income$113,813 $107,009 $6,804 6.4 %
Total interest expense67,126 52,791 14,335 27.2 
Provision for credit losses2,907 1,862 1,045 56.1 
Net interest income, after provision for credit losses43,780 52,356 (8,576)(16.4)
Non-interest income16,648 13,364 3,284 24.6 
Total income60,428 65,720 (5,292)(8.1)
Depreciation and amortization expense1,884 1,747 137 7.8 
All other non-interest expense52,284 50,687 1,597 3.2 
Income before income taxes$6,260 $13,286 $(7,026)(52.9)
Goodwill$30,400 $30,400 $— — 
Total assets$2,897,317 $2,989,028 $(91,711)(3.1)%
The Wealth Management segment reported Income before income tax of $2.2 million for the three months ended September 30, 2024, compared to $5.1 million for the same period in 2023. The Wealth Management segment reported Income before income tax of $6.3 million for the nine months ended September 30, 2024, compared to $13.3 million for the same period in 2023. The majority of our assets and liabilities are on the Wealth Management segment balance sheet and the decrease in Income before taxes is primarily driven by a decrease in Net interest income and increase in Non-interest expense partially offset by an increase in Non-interest income. The decrease in Net interest income is primarily due to pricing pressure on interest-bearing deposits and an unfavorable mix shift in the deposit portfolio, offset partially by an increase in Interest income.
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Mortgage
As of or for the Three Months Ended September 30,
(dollars in thousands)20242023$ Change% Change
Total interest income$272 $214 $58 27.1 %
Total interest expense— — — — 
Provision for credit losses— — — — 
Net interest income, after provision for credit losses272 214 58 27.1 
Non-interest income1,471 675 796 117.9 
Total income1,743 889 854 96.1 
Depreciation and amortization expense— — 
All other non-interest expense1,282 1,761 (479)(27.2)
Income (loss) before income taxes$453 $(880)$1,333 151.5 %
Total assets$14,631 $13,725 $906 6.6 %
As of or for the Nine Months Ended September 30,
(dollars in thousands)20242023$ Change% Change
Total interest income$729 $556 $173 31.1 %
Total interest expense— — — — 
Provision for credit losses— — — — 
Net interest income, after provision for credit losses729 556 173 31.1 
Non-interest income4,573 2,503 2,070 82.7 
Total income5,302 3,059 2,243 73.3 
Depreciation and amortization expense25 25 — — 
All other non-interest expense3,872 4,902 (1,030)(21.0)
Income (loss) before income taxes$1,405 $(1,868)$3,273 175.2 %
Total assets$14,631 $13,725 $906 6.6 %
The Mortgage segment reported Income before income tax of $0.5 million for the three months ended September 30, 2024, compared to a loss before income tax of $0.9 million for the same period in 2023. The Mortgage segment reported Income before income tax of $1.4 million for the nine months ended September 30, 2024, compared to a loss before income tax of $1.9 million for the same period in 2023. The overall increase in Income before taxes was primarily driven by an increase in Non-interest income and a decrease in Non-interest expense. The increase in Non-interest income was primarily driven by higher average gain on sale margins and origination volume. The decrease in Non-interest expense was due to lower Salaries and employee benefits as a result of staffing reductions in 2023 to better align expenses with lower levels of origination activity.
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Financial Condition
The following presents our Condensed Consolidated Balance Sheets as of the dates noted:
September 30,December 31,
(dollars in thousands)20242023$ Change% Change
Balance Sheet Data:
Cash and cash equivalents$276,222 $254,442 $21,780 8.6 %
Held-to-maturity debt securities, net of allowance for credit losses of $71 and $71, (fair value of $70,826 and $66,617), respectively
76,745 74,102 2,643 3.6 
Loans (includes $8,646 and $13,726 measured at fair value, respectively)
2,383,199 2,530,915 (147,716)(5.8)
Allowance for credit losses(18,796)(23,931)5,135 21.5 
Loans, net of allowance2,364,403 2,506,984 (142,581)(5.7)
Loans held for sale, at fair value473 — 473 — 
Mortgage loans held for sale, at fair value12,324 7,254 5,070 69.9 
Goodwill and other intangible assets, net31,684 31,854 (170)(0.5)
Company-owned life insurance16,849 16,530 319 1.9 
Other assets133,248 84,296 48,952 58.1 
Total assets$2,911,948 $2,975,462 $(63,514)(2.1)%
Deposits$2,503,054 $2,529,039 $(25,985)(1.0)%
Borrowings114,881 178,051 (63,170)(35.5)
Other liabilities45,182 25,634 19,548 76.3 
Total liabilities2,663,117 2,732,724 (69,607)(2.5)
Total shareholders’ equity248,831 242,738 6,093 2.5 
Total liabilities and shareholders’ equity$2,911,948 $2,975,462 $(63,514)(2.1)%

Cash and cash equivalents increased by $21.8 million, or 8.6%, to $276.2 million as of September 30, 2024 compared to December 31, 2023. The increase was a result of the decrease in loans, offset partially by a decrease in borrowings and deposits.
Held-to-maturity debt securities increased by $2.6 million, or 3.6%, to $76.7 million as of September 30, 2024 compared to December 31, 2023. The increase is primarily due to Held-to-maturity debt security purchases executed during the second quarter of 2024.
Loans, net of allowance decreased by $142.6 million, or 5.7%, to $2.4 billion as of September 30, 2024 compared to December 31, 2023. The decrease is due to limited new production that was more than offset by payoffs and a lower level of draws on existing credit lines than previous quarters.
Mortgage loans held for sale increased $5.1 million, or 69.9%, to $12.3 million as of September 30, 2024 compared to December 31, 2023. The increase was driven by higher funded loan volume and the timing of loan sale settlements.
Other assets increased by $49.0 million, or 58.1%, to $133.2 million as of September 30, 2024 compared to December 31, 2023. The increase was primarily driven by an increase in our lease assets due to an extension of a lease recorded during the first quarter and an increase of $37.0 million in other real estate owned due to taking physical possession of three foreclosed properties during the second and third quarters.
Deposits decreased $26.0 million, or 1.0%, to $2.50 billion as of September 30, 2024 compared to December 31, 2023. The decrease was driven primarily by seasonal tax payments, operating account fluctuations and clients using liquidity for strategic investments. Money market deposit accounts decreased $35.5 million, or 2.6%, to $1.35 billion as of September 30, 2024 compared to December 31, 2023. Time deposit accounts increased $37.0 million, or 7.5%, from December 31, 2023 to $533.5 million as of September 30, 2024. Interest checking accounts decreased $17.2 million, or 11.7%, to $130.3 million from December 31, 2023 to September 30, 2024.
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Borrowings decreased $63.2 million, or 35.5%, to $114.9 million as of September 30, 2024 compared to December 31, 2023. The decrease was primarily driven by a lower reliance on FHLB and FRB borrowings due to the decrease in loans.
Other liabilities increased $19.5 million, or 76.3%, to $45.2 million as of September 30, 2024 compared to December 31, 2023. The increase is primarily due to an increase in payables related to participated problem credits and an increase in our lease liability due to an extension of a lease recorded in the first quarter, offset by lower salaries payable due to timing of 401K match payouts and incentive compensation payments and a decrease in accrued interest payable on borrowings related to the interest on the $31.0 million repayment of a Bank Term Funding Program loan that matured in March 2024.
Total shareholders’ equity increased $6.1 million, or 2.5%, from December 31, 2023 to $248.8 million as of September 30, 2024. The increase is primarily due to Net income for the year.
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Assets Under Management
Three Months EndedNine Months Ended
September 30,September 30,
(dollars in millions)2024202320242023
Managed Trust Balance as of Beginning of Period$1,936 $1,957 $1,913 $1,802 
New relationships— 
Closed relationships(3)(2)(17)(8)
Contributions17 29 11 
Withdrawals(97)(16)(272)(123)
Market change, net142 (107)335 149 
Ending Balance$1,995 $1,840 $1,995 $1,840 
Yield*0.15 %0.19 %0.25 %0.19 %
Directed Trust Balance as of Beginning of Period$1,734 $1,318 $1,622 $1,285 
New relationships— — — — 
Closed relationships(3)(2)(3)(2)
Contributions18 58 95 62 
Withdrawals(23)(8)(46)(23)
Market change, net342 45 400 89 
Ending Balance$2,068 $1,411 $2,068 $1,411 
Yield*0.11 %0.09 %0.14 %0.08 %
Investment Agency Balance as of Beginning of Period$1,591 $1,655 $1,607 $1,618 
New relationships26 44 
Closed relationships(5)(32)(24)(77)
Contributions23 13 54 54 
Withdrawals(66)(53)(203)(148)
Market change, net89 (41)173 57 
Ending Balance$1,633 $1,548 $1,633 $1,548 
Yield*0.72 %0.84 %1.12 %0.80 %
Custody Balance as of Beginning of Period$598 $531 $545 $493 
New relationships
Closed relationships— — (2)— 
Contributions136 52 
Withdrawals(49)(6)(190)(105)
Market change, net32 (28)93 60 
Ending Balance$590 $507 $590 $507 
Yield*0.05 %0.03 %0.08 %0.03 %
401(k)/Retirement Balance as of Beginning of Period$1,153 $1,043 $1,066 $909 
New relationships— — 
Closed relationships(3)(77)(4)
Contributions32 32 128 89 
Withdrawals(27)(24)(84)(71)
Market change, net21 39 147 164 
Ending Balance(1)
$1,180 $1,090 $1,180 $1,090 
Yield*0.13 %0.14 %0.20 %0.14 %
Total Assets Under Management as of Beginning of Period$7,012 $6,504 $6,753 $6,107 
New relationships15 41 63 
Closed relationships(10)(39)(123)(91)
Contributions93 115 442 268 
Withdrawals(262)(107)(795)(470)
Market change, net626 (92)1,148 519 
Total Assets Under Management$7,466 $6,396 $7,466 $6,396 
Yield*0.25 %0.30 %0.39 %0.29 %
______________________________________
*Trust & investment management fees divided by period end balance.
(1)AUM reported for the current period is one quarter in arrears.
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AUM increased $454.0 million, or 6.5%, during the three months ended September 30, 2024 driven primarily by a net increase in market values, offset slightly by asset withdrawals. For the nine months ended September 30, 2024, AUM increased $713.0 million, or 10.6%. The increase was attributable to contributions and improving market conditions year-over-year resulting in an increase in the value of assets under management balances offset partially by withdrawals.
Debt Securities
Debt securities 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 debt 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.
Debt securities for which we have the intent and ability to hold to their maturity are classified as Held-to-maturity debt securities and are recorded at amortized cost. Debt securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity. As of September 30, 2024 and December 31, 2023, all our investments in debt securities were classified as held-to-maturity.
The following presents the amortized cost and estimated fair value of our debt securities as of the dates noted:
September 30, 2024
(dollars in thousands)Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Allowance for Credit Losses
Debt securities held-to-maturity:
U.S. Treasury debt$246 $$— $248 $— 
Corporate bonds23,654 — (2,986)20,668 (71)
Government National Mortgage Association ("GNMA") mortgage-backed securities ("MBS") – residential31,605 28 (2,437)29,196 — 
Federal National Mortgage Association ("FNMA") MBS – residential12,507 112 (345)12,274 — 
Government collateralized mortgage obligations ("GMO") and MBS – commercial5,205 10 (245)4,970 — 
Corporate collateralized mortgage obligations ("CMO") and MBS3,599 — (129)3,470 — 
Total debt securities held-to-maturity$76,816 $152 $(6,142)$70,826 $(71)
December 31, 2023
(dollars in thousands)Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Allowance for Credit Losses
Debt securities held-to-maturity:
U.S. Treasury debt$253 $— $(11)$242 $— 
Corporate bonds23,687 — (3,020)20,667 (71)
GNMA mortgage-backed securities – residential34,579 — (3,410)31,169 — 
FNMA mortgage-backed securities – residential6,035 — (509)5,526 — 
Government GMO and MBS – commercial5,836 (377)5,468 — 
Corporate CMO and MBS3,783 — (238)3,545 — 
Total debt securities held-to-maturity$74,173 $$(7,565)$66,617 $(71)
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The following presents the book value of our contractual maturities and weighted average yield for our investment securities as of the dates presented. Contractual maturities may differ from expected maturities because issuers can have the right to call or prepay obligations without penalties. Our investments are taxable securities. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security as of September 30, 2024. Weighted average yields are not presented on a taxable equivalent basis.
Maturities as of September 30, 2024
One Year or LessAfter One to Five YearsAfter Five to Ten YearsAfter Ten Years
(dollars in thousands)Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Held-to-maturity:
U.S. Treasury debt$— — %$246 0.01 %$— — %$— — %
Corporate bonds— — 4,066 0.36 19,407 1.19 181 — 
GNMA mortgage-backed securities – residential— — 45 — 28 — 31,531 1.05 
FNMA mortgage-backed securities – residential— — 3,039 0.21 964 0.02 8,505 0.40 
Government GMO and MBS – commercial— — 128 0.01 1,321 0.05 3,757 0.11 
Corporate CMO and MBS— — — — 371 0.02 3,227 0.16 
Total held-to-maturity$— — %$7,524 0.59 %$22,091 1.28 %$47,201 1.72 %
Maturities as of December 31, 2023
One Year or LessAfter One to Five YearsAfter Five to Ten YearsAfter Ten Years
(dollars in thousands)Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Held-to-maturity:
U.S. Treasury debt$253 * %$— — %$— — %$— — %
Corporate bonds— — 4,078 0.30 %19,395 1.23 214 0.01 
GNMA mortgage-backed securities – residential— — 66 *— — 34,513 1.14 
FNMA mortgage-backed securities – residential— — — — 1,116 0.02 4,919 0.13 
Government GMO and MBS – commercial— — 178 0.01 1,579 0.07 4,079 0.13 
Corporate CMO and MBS— — — — 415 0.03 3,368 0.18 
Total held-to-maturity$253 — %$4,322 0.31 %$22,505 1.35 %$47,093 1.59 %
______________________________________
*Represents percentages that are not meaningful due to being insignificant or exceeding 100%
As of September 30, 2024 and December 31, 2023, 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.
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Allowance for Credit Losses for HTM Debt Securities

Management measures expected credit losses on Held-to-maturity debt securities on a collective basis by major security type. The majority of our held-to-maturity investment portfolio consists of debt securities issued by U.S. government entities and agencies and we consider the risk of credit loss to be zero and, therefore, we do not record an ACL. The Company's non-government backed debt securities include private label CMO and MBS as well as corporate bonds. Accrued interest receivable on Held-to-maturity debt securities totaled $0.5 million and $0.4 million as of September 30, 2024 and December 31, 2023, respectively, and is excluded from the estimate of credit losses. The following table presents the activity in the Allowance for credit losses for debt securities held-to-maturity by major security type for the periods noted:
Three Months Ended September 30,
20242023
(dollars in thousands)Corporate BondsCorporate CMOCorporate BondsCorporate CMO
Allowance for credit losses:
Beginning balance$71 $— $71 $— 
Provision for credit losses— — — — 
Securities charged-off (recoveries)— — — — 
Total ending allowance balance$71 $— $71 $— 
Nine Months Ended September 30,
20242023
(dollars in thousands)Corporate BondsCorporate CMOCorporate BondsCorporate CMO
Allowance for credit losses:
Beginning balance$71 $— $— $— 
Impact of ASU 2016-13 adoption— — 71 — 
Provision for credit losses— — — — 
Securities charged-off (recoveries)— — — — 
Total ending allowance balance$71 $— $71 $— 
Loan Portfolio
Our primary source of interest income is derived through interest earned on loans to high net worth individuals and their related commercial interests. Our senior lending and credit team consists of seasoned, experienced personnel and we believe that our officers are well versed in the types of lending in which we are engaged. Underwriting policies and decisions are managed centrally and the approval process is tiered based on loan size, making the process consistent, efficient, and effective. The management team and credit culture demands prudent, practical, and conservative approaches to all credit requests in compliance with the loan policy guidelines to ensure strong credit underwriting practices.
In addition to originating loans for our own portfolio, we conduct mortgage banking activities in which we originate and sell servicing-released, whole loans in the secondary market. Our mortgage banking loan sale activities are primarily directed at originating single family mortgages that are priced and underwritten to conform to previously agreed-upon criteria before loan funding and are delivered to the investor shortly after funding. The level of future loan originations, loan sales, and loan repayments depends on overall credit availability, the interest rate environment, the strength of the general economy, local real estate markets and the housing industry, and conditions in the secondary loan sale market. The amount of gain or loss on the sale of loans is primarily driven by market conditions and changes in interest rates, as well as our pricing and asset liability management strategies. As of September 30, 2024 and December 31, 2023, we had Mortgage loans held for sale of $12.3 million and $7.3 million, respectively, of residential mortgage loans we originated. As of September 30, 2024 and December 31, 2023, we had loans held for sale of $0.5 million and $0.0 million, respectively, consisting of one non-performing loan.
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Beginning in the first quarter of 2022, the Company entered into whole loan purchase agreements to acquire third party originated and serviced unsecured consumer loans to hold for investment. As of September 30, 2024, the Company has $8.6 million in loans accounted for under the fair value option with an unpaid principal balance amount of $8.9 million. As of December 31, 2023, the Company had $13.7 million in loans accounted for under the fair value option with an unpaid principal balance amount of $14.1 million. See Note 12 – Fair Value in the Notes to Condensed Consolidated Financial Statements.
As of September 30, 2024, the Company has $2.6 million in PPP loans outstanding with $50 thousand in remaining fees to be recognized. As of December 31, 2023, the Company had $4.2 million in PPP loans outstanding with $0.1 million in remaining fees to be recognized. The remaining fees represent the net amount of the fees from the SBA for participation in the PPP less the loan origination costs on these loans. The current amortization of this income is being recognized over a five-year period from the time of origination, however, if a loan receives full forgiveness from the SBA or if the borrower repays the loan, the remaining income will be recognized upon payoff.
The following presents the amortized cost of our loan portfolio by type of loan as of the dates noted (dollars in thousands):
September 30,December 31,
20242023
Amount% of Total Amount% of Total
Cash, Securities, and Other(1)
$119,284 5.0 %$139,947 5.6 %
Consumer and Other12,193 0.5 27,028 1.1 
Construction and Development300,270 12.6 345,516 13.7 
1-4 Family Residential922,725 38.9 927,965 36.9 
Non-Owner Occupied CRE605,323 25.5 543,692 21.6 
Owner Occupied CRE174,928 7.4 195,861 7.8 
Commercial and Industrial239,830 10.1 337,180 13.3 
Loans held for investment at amortized cost$2,374,553 100.0 %$2,517,189 100.0 %
Loans accounted for under the fair value option(2)
8,646 13,726 
Total loans held for investment$2,383,199 $2,530,915 
Mortgage loans held for sale, at fair value(3)
$12,324  $7,254  
Loans held for sale, at fair value$473 $— 
______________________________________
(1)Includes PPP loans of $2.6 million and $4.2 million as of September 30, 2024 and December 31, 2023, respectively.
(2)Includes $8.9 million and $14.1 million of unpaid principal balance of Loans held for investment accounted for under fair value option as of September 30, 2024 and December 31, 2023, respectively.
(3)Includes $12.1 million and $7.1 million of unpaid principal balance of Mortgage loans held for sale as of September 30, 2024 and December 31, 2023, respectively.
Cash, Securities, and Other—consists of consumer and commercial purpose loans, which are primarily secured by securities managed and under custody with us, cash on deposit with us, or life insurance policies. In addition, loans in this portfolio are collateralized with other sources of collateral. This segment of our portfolio is affected by a variety of local and national economic factors affecting borrowers’ employment prospects, income levels, and overall economic sentiment. PPP loans that are fully guaranteed by the SBA are classified within this line item and had balances of $2.6 million and $4.2 million as of September 30, 2024 and December 31, 2023, respectively.
Consumer and Other—consists of unsecured consumer loans. This segment of our portfolio is affected by a variety of local and national economic factors affecting borrowers’ employment prospects, income levels, and overall economic sentiment. Loans held for investment accounted for under the fair value option are primarily consumer and other loans and are presented separately within the above table. They had an unpaid principal balance of $8.9 million and $14.1 million as of September 30, 2024 and December 31, 2023, respectively.
Construction and Development—consists of loans to finance the construction of residential and non-residential properties. These loans are dependent on the strength of the industries of the related borrowers and the risks consistent with construction projects.
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1-4 Family Residential—consists of loans and home equity lines of credit secured by 1-4 family residential properties. These loans typically enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the owner. In addition, some borrowers secure a commercial purpose loan with owner occupied or non-owner occupied 1-4 family residential properties. Loans in this segment are dependent on the industries tied to these loans as well as the national and local economies, and local residential and commercial real estate markets.
Commercial Real Estate, Owner Occupied, and Non-Owner Occupied—consists of commercial loans collateralized by real estate. These loans may be collateralized by owner occupied or non-owner occupied real estate, as well as multi-family residential real estate. These loans are dependent on the strength of the industries of the related borrowers and the success of their businesses.
Commercial and Industrial—consists of commercial and industrial loans, including working capital lines of credit, permanent working capital term loans, business asset loans, acquisition, expansion and development loans, and other loan products, primarily in our target markets. This portfolio primarily consists of term loans and lines of credit which are dependent on the strength of the industries of the related borrowers and the success of their businesses. MSLP loans of $2.0 million and $5.1 million as of September 30, 2024 and December 31, 2023, respectively, are included in this category.
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The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range, at amortized cost as of the dates noted, are summarized in the following tables:
As of September 30, 2024
(dollars in thousands)
One Year
or Less
After One Through
Five Years
After Five Through
Fifteen Years
After
Fifteen Years
Total
Cash, Securities, and Other$37,313 
(1)
$78,928 
(1)
$2,375 $668 $119,284 
Consumer and Other5,389 4,945 712 1,147 12,193 
Construction and Development80,686 208,319 4,497 6,768 300,270 
1-4 Family Residential68,862 141,908 27,286 684,669 922,725 
Non-Owner Occupied CRE86,860 407,427 98,438 12,598 605,323 
Owner Occupied CRE11,454 97,787 57,888 7,799 174,928 
Commercial and Industrial80,505 130,831 28,494 — 239,830 
Total$371,069 $1,070,145 $219,690 $713,649 $2,374,553 
Loans accounted for under the fair value option484 8,003 159 — 8,646 
Total loans$371,553 $1,078,148 $219,849 $713,649 $2,383,199 
Amounts with fixed rates156,185 694,030 132,857 30,131 1,013,203 
Amounts with floating rates215,368 384,118 86,992 683,518 1,369,996 
Total loans$371,553 $1,078,148 $219,849 $713,649 $2,383,199 
As of December 31, 2023
(dollars in thousands)One Year
or Less
After One Through
Five Years
After Five Through
Fifteen Years
After
Fifteen Years
Total
Cash, Securities, and Other$70,558 
(1)
$67,101 
(1)
$1,611 $677 $139,947 
Consumer and Other18,425 6,175 1,206 1,222 27,028 
Construction and Development106,993 180,210 51,253 7,060 345,516 
1-4 Family Residential43,275 172,349 34,053 678,288 927,965 
Non-Owner Occupied CRE34,328 334,516 161,669 13,179 543,692 
Owner Occupied CRE13,491 93,844 79,610 8,916 195,861 
Commercial and Industrial120,061 187,240 29,879 — 337,180 
Total$407,131 $1,041,435 $359,281 $709,342 $2,517,189 
Loans accounted for under the fair value option105 13,163 458 — 13,726 
Total loans$407,236 $1,054,598 $359,739 $709,342 $2,530,915 
Amounts with fixed rates141,485 699,578 235,132 23,903 1,100,098 
Amounts with floating rates265,751 355,020 124,607 685,439 1,430,817 
Total loans$407,236 $1,054,598 $359,739 $709,342 $2,530,915 
______________________________________
(1) Includes PPP loans.

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Loan Modifications
The following table presents the amortized cost basis as of September 30, 2024 of the loans modified to borrowers experiencing financial difficulty disaggregated by class of financing receivable and type of concession granted during the nine months ended September 30, 2024. For the three months ended September 30, 2024, there were no loan modifications made to borrowers experiencing financial difficulty. For the three and nine months ended September 30, 2023, the Company made protective advances of $0.0 million and $0.5 million to borrowers experiencing financial difficulty. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.
(dollars in thousands)Principal forgivenessInterest rate reductionTerm extensionCombination: term extension and principal forgivenessCombination: term extension and interest rate reductionTotal class of financing receivable
Commercial and Industrial$— $— $978 $— $— 0.4 %
Total$— $— $978 $— $— 
The following table presents the amortized cost basis as of September 30, 2023 of the loans modified to borrowers experiencing financial difficulty disaggregated by class of financing receivable and type of concession granted during the three and nine months ended September 30, 2023.
(dollars in thousands)Principal forgivenessInterest rate reductionTerm extensionCombination: term extension and principal forgivenessCombination: term extension and interest rate reductionTotal class of financing receivable
Commercial and Industrial$— $— $— $185 $— 0.1 %
Total$— $— $— $185 $— 
The following tables present the financial effect by type of modification made to borrowers experiencing financial difficulty during the periods noted:
Three Months Ended September 30, 2024Nine Months Ended September 30, 2024
(dollars in thousands)Principal forgivenessWeighted average interest rate reductionWeighted average term extensionPrincipal forgivenessWeighted average interest rate reductionWeighted average term extension
Commercial and Industrial5 months
Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
(dollars in thousands)Principal forgivenessWeighted average interest rate reductionWeighted average term extensionPrincipal forgivenessWeighted average interest rate reductionWeighted average term extension
Commercial and Industrial$1852.8 years$1852.8 years
There were no loans that experienced a default during the three and nine months ended September 30, 2024, subsequent to being granted a modification in the preceding twelve months. There were no loans that experienced a default during the three and nine months ended September 30, 2023, subsequent to being granted a modification in the preceding twelve months.
Non-Performing Assets
Non-performing assets include non-accrual loans and OREO. The accrual of interest on loans is discontinued at the time the loan becomes 90 or more days delinquent unless the loan is well secured and in the process of collection or renewal due to maturity. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged off if collection of interest or principal is considered doubtful.
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OREO represents assets acquired through, or in lieu of, foreclosure. The amounts reported as OREO are supported by recent appraisals, with the appraised values adjusted, where applicable, for expected transaction fees likely to be incurred upon sale of the property. We incur recurring expenses relating to OREO in the form of maintenance, taxes, insurance, and legal fees, among others, until the OREO parcel is disposed. While disposition efforts with respect to our OREO are generally ongoing, if these properties are appraised at lower-than-expected values or if we are unable to sell the properties at the prices for which we expect to be able to sell them, we may incur additional losses. In the second quarter of 2024, the Company recorded $11.4 million of OREO as a result of obtaining physical possession of two foreclosed properties as partial consideration for amounts owed on non-performing loans related to an isolated loan relationship. During the third quarter of 2024, the Company recorded an additional $25.6 million of OREO related to a third foreclosed property within the same loan relationship. As of September 30, 2024, these OREO properties had a carrying amount of $37.0 million. As of December 31, 2023, we did not own any OREO properties.
The amount of lost interest for non-accrual loans was $1.6 million and $0.5 million for the three months ended September 30, 2024 and 2023, respectively. The amount of lost interest for non-accrual loans was $6.2 million and $1.4 million for the nine months ended September 30, 2024 and 2023, respectively.
We had amortized cost of $51.5 million and $50.8 million in non-performing assets as of September 30, 2024 and December 31, 2023, respectively. Although consistent balances of non-performing assets when comparing September 30, 2024 and December 31, 2023, there was significant activity within the three months ended September 30, 2024. Non-performing assets increased $2.7 million during the three months ended September 30, 2024, which was the combination of an increase in OREO of $25.6 million, offset by a decrease in non-performing loans of $22.9 million. The decrease in non-performing loans was driven by the migration of one loan relationship out of non-performing loans and into OREO, pay downs, charge-offs, and the sale of a non-performing loan, offset by additions to non-performing loans.
The following table presents the amortized cost basis of non-performing assets as of the dates noted:
September 30,December 31,
(dollars in thousands)20242023
Non-accrual loans by category
Cash, Securities, and Other$1,704 $1,704 
Consumer and Other— 7,504 
Construction and Development— 2,719 
1-4 Family Residential1,468 3,016 
Owner Occupied CRE— 3,980 
Commercial and Industrial11,242 31,893 
Total non-performing loans14,414 50,816 
OREO(2)
37,036 — 
Total non-performing assets$51,450 $50,816 
Non-accrual loans to total loans(1)
0.61 %2.02 %
Non-performing assets to total assets1.77 %1.71 %
Allowance for credit losses to non-accrual loans130.40 %47.09 %
Accruing loans 90 or more days past due$— $285 
______________________________________
(1) Excludes Mortgage loans held for sale of $12.3 million and $7.3 million as of September 30, 2024 and December 31, 2023, respectively. Excludes loans held for sale of $0.5 million and $0.0 million as of September 30, 2024 and December 31, 2023, respectively. Excludes $8.9 million and $14.1 million of unpaid principal balance of loans held for investment accounted for under the fair value option as of September 30, 2024 and December 31, 2023, respectively.
(2) Held at the lower of cost or market as noted per Note 12.
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Credit Quality Indicators
We categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans by credit risk on a quarterly basis, which are segregated into the following definitions for risk ratings:
Special Mention—Loans categorized as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies, or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified.
Substandard—Substandard loans are considered "classified" and are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrual status and may individually be evaluated.
Doubtful—Loans graded doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable. However, the amount or certainty of eventual loss is not known because of specific pending factors.
Loans accounted for under the fair value option are not rated.
Loans not meeting any of the three criteria above are considered to be pass-rated loans.
As of September 30, 2024 and December 31, 2023, non-performing loans of $14.4 million and $50.8 million, respectively, were included in the substandard category in the table below. The following presents the amortized cost basis of loans by credit quality indicator, by class of financing receivable, as of the dates noted:
As of September 30, 2024
(dollars in thousands)PassSpecial
Mention
SubstandardDoubtfulNot RatedTotal
Cash, Securities, and Other(1)
$117,580 $— $1,704 $— $— $119,284 
Consumer and Other(2)
12,144 — 49 — 8,646 20,839 
Construction and Development295,985 — 4,285 — — 300,270 
1-4 Family Residential920,704 — 2,021 — — 922,725 
Non-Owner Occupied CRE599,929 4,898 496 — — 605,323 
Owner Occupied CRE173,527 — 1,401 — — 174,928 
Commercial and Industrial223,627 484 15,719 — — 239,830 
Total$2,343,496 $5,382 $25,675 $— $8,646 $2,383,199 
As of December 31, 2023
(dollars in thousands)PassSpecial
Mention
SubstandardDoubtfulNot RatedTotal
Cash, Securities, and Other(1)
$138,243 $— $1,704 $— $— $139,947 
Consumer and Other(2)
19,528 — 7,500 — 13,726 40,754 
Construction and Development328,454 14,343 2,719 — — 345,516 
1-4 Family Residential924,949 — 3,016 — — 927,965 
Non-Owner Occupied CRE538,693 4,999 — — — 543,692 
Owner Occupied CRE191,881 — 3,980 — — 195,861 
Commercial and Industrial302,276 649 34,255 — — 337,180 
Total$2,444,024 $19,991 $53,174 $— $13,726 $2,530,915 
______________________________________
(1)Includes PPP loans of $2.6 million and $4.2 million as of September 30, 2024 and December 31, 2023, respectively.
(2)Includes $8.6 million and $13.7 million of loans held for investment accounted for under fair value option as of September 30, 2024 and December 31, 2023, respectively.
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Allowance for Credit Losses on Loans
The Allowance for credit losses (“ACL”) is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The ACL excludes loans held for sale and loans accounted for under the fair value option. The Company elected to not measure an ACL for accrued interest receivables, as we write off applicable accrued interest receivable balances in a timely manner when a loan is placed on non-accrual status, in which any accrued but uncollected interest is reversed from current income. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Management estimates the allowance balance using relevant available information, from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Actual Company and regional peer historical credit loss experience provides the basis for the estimation of expected credit losses. The Company identified and grouped portfolio segments based on risk characteristics and underlying collateral. The call code for each financial asset type was assessed and, where appropriate, expanded for certain call codes into separate segments based on risk characteristics.
ASU 2016-13 for Current Expected Credit Losses (“CECL”) requires an allowance for credit losses on all portfolio loans including purchased loans without credit deterioration. As of September 30, 2024, the Company held $172.6 million in acquired loans with $1.4 million in Allowance for credit losses as well as $3.9 million in unamortized discounts. As of December 31, 2023, the Company held $208.2 million in acquired loans with $2.0 million in Allowance for credit losses as well as $3.9 million in unamortized discounts.
ACL for pooled loans are estimated using a discounted cash flow (“DCF”) methodology using the amortized cost basis (excluding interest) for all loans modeled within a performing pool of loans. The DCF analysis pairs loan-level term information, for example, maturity date, payment amount, interest rate, with top-down pool assumptions such as default rates, prepayment speeds, to produce individual expected cash flows for every instrument in the segment. The results are then aggregated to produce segment level results and reserve requirements for each segment.
The quantitative DCF model also incorporates forward-looking macroeconomic information over a reasonable and supportable period of four quarters. Subsequent to the four quarter period, the Company reverts to its historical loss rate and historical prepayment and curtailment speeds on a straight-line basis over a four quarter reversion period.
The Company applies qualitative factors to capture losses that are expected but may not be adequately reflected in the quantitative model described above. Qualitative adjustments are made based on management’s assessment of the risks that may lead to a future loan loss or differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, changes in environmental and economic conditions, or other relevant factors.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the pooled loan evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
ACL – held-to-maturity securities: Held-to maturity securities are carried at amortized cost when management has the positive intent and ability to hold them to maturity. The majority of our held-to-maturity investment portfolio consists of securities issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. With respect to these securities, we consider the risk of credit loss to be zero and, therefore, we do not record an ACL for these securities. The Company's non-government backed securities include private label CMO and MBS debt securities and corporate bonds. Private label refers to private institutions such as brokerage firms, banks, and home builders, that also securitize mortgages.
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management reviewed the collectability of CMO and MBS debt securities and corporate bonds taking into consideration factors such as the asset quality and delinquencies of the issuers.
ACL – off-balance sheet credit exposures: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted through the Provision for credit losses and is recorded in Other liabilities. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The probability of funding is based on historical utilization statistics for unfunded loan commitments. The loss rates used are calculated using the same assumptions as the associated funded balance.
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The ACL represents Management’s best estimate of current expected credit losses on loans considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms, adjusted for expected prepayments when appropriate. Our quantitative discounted cash flow models use economic forecasts including; housing price index (“HPI”), gross domestic product (“GDP”), and national unemployment. The HPI, GDP, and unemployment twelve-month forecasts used in our model remained consistent during the nine months ended September 30, 2024. As such, the $1.6 million release of provision on pooled loans for the nine months ended September 30, 2024 was predominately due to net pay downs in the loan portfolio. The Allowance for credit losses on individually analyzed loans was $0.3 million and $3.8 million as of September 30, 2024 and December 31, 2023, respectively. This $3.5 million release of provision on individually analyzed loans for the nine months ended September 30, 2024 was due to the migration of one loan relationship out of non-performing loans and into OREO, pay downs, charge-offs, and the sale of a non-performing loan.
The following presents summary information regarding our allowance for credit losses during the periods presented:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)
2024202320242023
Average loans outstanding(1)(2)
$2,429,927 $2,485,704 $2,454,631 $2,464,902 
Total loans outstanding at end of period(3)
$2,374,553 $2,514,995 $2,374,553 $2,514,995 
Allowance for credit losses at beginning of period$27,319 $22,044 $23,931 $17,183 
Impact of adopting ASU 2016-13— — — 3,470 
Provision for credit losses796 1,321 4,175 2,725 
Charge-offs:
Cash, Securities, and Other— — — — 
Consumer and Other(4)(12)(30)(42)
Construction and Development— — — — 
1-4 Family Residential— — — — 
Non-Owner Occupied CRE— — — — 
Owner Occupied CRE— — — — 
Commercial and Industrial(9,336)(186)(9,336)(186)
Total charge-offs(9,340)(198)(9,366)(228)
Recoveries:  
Cash, Securities, and Other— — — — 
Consumer and Other27 19 
Construction and Development— — — — 
1-4 Family Residential
Non-Owner Occupied CRE— — — — 
Owner Occupied CRE— — — — 
Commercial and Industrial16 22 
Total recoveries21 56 25 
Net (charge-offs) recoveries(9,319)(190)(9,310)(203)
Allowance for credit losses at end of period$18,796 $23,175 $18,796 $23,175 
Allowance for credit losses to total loans0.79 %0.92 %0.79 %0.92 %
Net charge-offs to average loans0.38 0.01 0.38 0.01 
______________________________________
(1)Average balances are average daily balances.
(2)Excludes average outstanding balances of Mortgage loans held for sale of $18.4 million and $12.7 million for the three months ended September 30, 2024 and 2023, respectively, and $15.2 million and $12.0 million for the nine months ended September 30, 2024 and 2023, respectively. Excludes average outstanding balances of loans held for investment under the fair value option of $9.7 million and $16.7 million for the three months ended September 30, 2024 and 2023, respectively, and $11.4 million and $19.7 million for the nine months ended September 30, 2024 and 2023, respectively.
(3)Excludes Mortgage loans held for sale of $12.3 million and $12.1 million as of September 30, 2024 and 2023, respectively. Excludes Loans held for sale of $0.5 million and $0.0 million as of September 30, 2024 and December 31, 2023, respectively. Excludes $8.9 million and $16.1 million of unpaid principal balance of loans held for investment accounted for under the fair value option as of September 30, 2024 and 2023, respectively.

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The following presents the allocation of the allowance for credit losses among loan categories and other summary information. The allocation for credit losses by category should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The allocation of a portion of the allowance for credit losses to one category of loans does not preclude its availability to absorb losses in other categories.
As of September 30, 2024As of December 31, 2023
(dollars in thousands)Amount
%(1)
Amount
%(1)
Cash, Securities, and Other$401 5.0 %$961 5.6 %
Consumer and Other137 0.5 124 1.1 
Construction and Development5,334 12.6 7,945 13.7 
1-4 Family Residential5,325 38.9 4,370 36.9 
Non-Owner Occupied CRE4,342 25.5 2,325 21.6 
Owner Occupied CRE691 7.4 1,034 7.8 
Commercial and Industrial2,566 10.1 7,172 13.3 
Total allowance for credit losses$18,796 100.0 %$23,931 100.0 %
______________________________________
(1)Represents the percentage of loans to total loans in the respective category.
Allowance for credit losses - off-balance sheet credit exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted through Provision for credit losses and is recorded in Other liabilities. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The probability of funding is based on historical utilization statistics for unfunded loan commitments. The loss rates used are calculated using the same assumptions as the associated funded balance. Refer above for changes in the factors that influenced the current estimate of ACL and reasons for the changes. The following table presents the changes in the ACL on unfunded loan commitments:
Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2024202320242023
Beginning balance$1,205 $4,029 $2,178 $419 
Impact of adopting ASU 2016-13— — — 3,481 
(Release) provision for credit losses(295)(992)(1,268)(863)
Ending balance$910 $3,037 $910 $3,037 
Deferred Tax Assets, Net
Deferred tax assets, net of our valuation allowance, represent the differences in timing of when items are recognized for GAAP purposes and when they are recognized for tax purposes, as well as our net operating losses. Our deferred tax assets, net, are valued based on the amounts that are expected to be recovered in the future utilizing the tax rates in effect at the time recognized. Deferred tax assets, net as of September 30, 2024 were $4.1 million, a decrease of $2.3 million, or 36.4%, from December 31, 2023.
Deposits
Our deposit products include money market accounts, demand deposit accounts, time-deposit accounts (typically certificates of deposit), interest checking accounts, and savings accounts. Our accounts are federally insured by the FDIC up to the legal maximum amount.
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Total deposits decreased by $26.0 million, or 1.0%, to $2.50 billion as of September 30, 2024, from December 31, 2023. Total average deposits for the three months ended September 30, 2024 were $2.40 billion, an increase of $43.7 million, or 1.9%, compared to $2.36 billion as of September 30, 2023. Total average deposits for the nine months ended September 30, 2024 were $2.42 billion, an increase of $61.9 million, or 2.6%, compared to $2.36 billion as of September 30, 2023. The increase in average deposits for the three and nine months ended September 30, 2024 compared to the same periods in 2023 were driven primarily by Interest-bearing deposits due to new and expanded deposit relationships offset partially by a decline in Noninterest-bearing deposits.
The following presents the average balances and average rates paid on deposits during the periods presented:
For the Three Month Period Ending September 30,
20242023
(dollars in thousands)Average
Balance
Average
Rate
Average
Balance
Average
Rate
Deposits    
Money market deposit accounts$1,334,760 4.30 %$1,293,580 4.05 %
Interest checking accounts131,090 0.36 159,219 0.38 
Uninsured time deposits62,966 4.57 67,273 4.08 
Other time deposits463,629 5.05 309,030 4.37 
Total time deposits526,595 4.99 376,303 4.32 
Savings accounts14,820 0.10 17,216 0.09 
Total interest-bearing deposits2,007,265 4.19 1,846,318 3.75 
Noninterest-bearing accounts395,755 512,956 
Total deposits$2,403,020 3.50 %$2,359,274 2.94 %
For the Nine Months Ended September 30,
20242023
(dollars in thousands)
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Deposits    
Money market deposit accounts$1,358,943 4.31 %$1,279,310 3.75 %
Interest checking accounts136,640 0.34 186,178 0.41 
Uninsured time deposits62,669 4.53 65,436 3.60 
Other time deposits431,617 5.03 282,247 3.91 
Total time deposits494,286 4.96 347,683 3.85 
Savings accounts15,871 0.09 20,343 0.05 
Total interest-bearing deposits2,005,740 4.17 1,833,514 3.39 
Noninterest-bearing accounts418,235  528,609  
Total deposits$2,423,975 3.45 %$2,362,123 2.63 %
Average noninterest-bearing deposits to average total deposits was 16.5% and 21.7% for the three months ended September 30, 2024 and 2023, respectively, and 17.3% and 22.4% for the nine months ended September 30, 2024 and 2023, respectively.
Our average cost of funds was 3.56% and 3.08% for the three months ended September 30, 2024 and 2023, respectively, and 3.52% and 2.77% for the nine months ended September 30, 2024 and 2023, respectively. The increase in cost of funds was primarily driven by increased rates on Interest-bearing deposit accounts and borrowings due to the current rate environment and an unfavorable mix shift in deposit balances.
Total money market accounts as of September 30, 2024 were $1.4 billion, a decrease of $35.5 million, or 2.6%, compared to December 31, 2023. Interest checking accounts decreased $17.2 million, or 11.7%, to $130.3 million compared to December 31, 2023.
Total time deposits as of September 30, 2024 were $533.5 million, an increase of $37.0 million, or 7.5%, from December 31, 2023.
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The following presents the amount of certificates of deposit by time remaining until maturity as of September 30, 2024:
(dollars in thousands)Three Months or LessThree to Six MonthsSix to 12 MonthsAfter 12 MonthsTotal
Uninsured Time Deposits$17,373$22,250$20,855$2,940$63,418
Other137,462144,156138,31750,099470,034
Total$154,835$166,406$159,172$53,039$533,452
Borrowings
We have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs. As of September 30, 2024 and December 31, 2023, borrowings totaled $114.9 million and $178.1 million, respectively.
On March 12, 2023 the Federal Reserve Board announced it would make additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of depositors made available through the creation of a new Bank Term Funding Program (“BTFP”). The BTFP is meant to be an additional resource of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress. On March 27, 2024, the Company repaid $31.0 million of BTFP borrowings. As of September 30, 2024, the Company has pledged a par value of $10.3 million in securities under the BTFP and borrowed $10.0 million with a maturity date of January 10, 2025. The rate for the borrowing is based on the one year overnight swap rate plus 10 basis points and is fixed over the term of the advance based on the date of the advance.
The decrease in borrowings as of September 30, 2024 compared to December 31, 2023 was driven by a lower reliance on FHLB and FRB borrowings due to the decrease in loans.
The following presents balances of each of the borrowing facilities as of the dates noted:
September 30,December 31, 
(dollars in thousands)20242023
Borrowings  
FHLB borrowings$50,000 $91,175 
Federal Reserve borrowings12,373 34,536 
Subordinated notes52,508 52,340 
Total$114,881 $178,051 
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FHLB
We have a blanket pledge and security agreement with FHLB that requires certain loans and securities to be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of September 30, 2024 and December 31, 2023 amounted to $1.30 billion and $1.31 billion, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $612.1 million as of September 30, 2024.
As of or for the
Nine Months Ended
September 30,
(dollars in thousands)2024
Short-term borrowings
Maximum outstanding at any month-end during the period$178,712 
Balance outstanding at end of period50,000 
Average outstanding during the period51,652 
Average interest rate during the period5.40 %
Average interest rate at the end of the period4.83 
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 September 30, 2024 and December 31, 2023, there were no amounts outstanding on any of the federal funds lines.
Our borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies. As of September 30, 2024 and December 31, 2023, the Company was in compliance with the covenant requirements.
Derivatives
Cash Flow Hedges: On March 21, 2023, the Company executed an interest rate swap with a notional amount that was designated as a cash flow hedge of certain Federal Home Loan Bank borrowings. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. The swap hedges the benchmark index (SOFR) with a receive float/pay fixed swap for the period March 21, 2023 through April 1, 2026. The notional amount of the interest rate swap as of September 30, 2024 and December 31, 2023 was $50.0 million. As of September 30, 2024 and December 31, 2023, this hedge was determined to be effective, and the Company expects the hedge to remain effective during the remaining terms of the swap.
Derivatives Not Designated as Hedges: The Company periodically enters into interest rate swaps to offset interest rate exposure with its commercial and residential variable rate loan clients. Clients with variable rate loans may choose to enter into an interest rate swap to hedge the interest rate risk on the loan and effectively pay a fixed rate payment. The Company will simultaneously enter into an interest rate swap on the same underlying loan and notional amount to hedge risk on the fixed rate loan. The notional amount of interest rate swaps with its loan customers as of September 30, 2024 and December 31, 2023 was $50.6 million and $30.3 million, respectively. While these derivatives represent economic hedges, they do not qualify as hedges for accounting purposes.
Liquidity and Capital Resources
Liquidity resources primarily include Interest-bearing and Noninterest-bearing deposits which contribute to our ability to raise funds to support asset growth, acquisitions, and meet deposit withdrawals and other payment obligations. Access to purchased funds include the ability to borrow from FHLB, other correspondent banks, and the use of brokered deposits.
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The following table presents the composition of our funding sources and the average assets in which those funds are invested as a percentage of average total assets during the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2024202320242023
Sources of Funds:
Deposits:
Noninterest-bearing14.10 %18.28 %14.78 %18.80 %
Interest-bearing71.51 65.79 70.87 65.22 
FHLB and Federal Reserve borrowings2.23 4.46 2.61 4.64 
Subordinated notes1.87 1.86 1.85 1.86 
Other liabilities1.43 0.86 1.14 0.88 
Shareholders’ equity8.86 8.75 8.75 8.60 
Total100.00 %100.00 %100.00 %100.00 %
Uses of Funds:
Total loans85.95 %88.38 %86.25 %87.63 %
Investment securities2.81 2.78 2.70 2.85 
Correspondent bank stock0.22 0.26 0.18 0.30 
Mortgage loans held for sale0.66 0.45 0.54 0.43 
Interest-bearing deposits in other financial institutions4.62 3.65 5.28 4.33 
Noninterest-earning assets5.74 4.48 5.05 4.46 
Total100.00 %100.00 %100.00 %100.00 %
Average noninterest-bearing deposits to total average deposits16.47 %21.74 %17.25 %22.38 %
Average loans to total average deposits101.12 %105.36 %101.26 %104.35 %
Average interest-bearing deposits to total average deposits83.53 %78.26 %82.75 %77.62 %
Our primary source of funds is Interest-bearing and Noninterest-bearing deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future.
Capital Resources
Total shareholders’ equity increased $6.1 million, or 2.5%, from December 31, 2023 to $248.8 million as of September 30, 2024. The increase was primarily due to Net income year to date.
On January 6, 2022, the Company filed a Form S-3 Registration Statement with the SEC providing that the Company may offer and sell from time to time, separately or together, in multiple series or in one or more offerings, any combination of common stock, preferred stock, debt securities, warrants, depository shares and units, up to a maximum aggregate offer price of $100 million.
On June 13, 2024, the Company announced that its board of directors authorized the repurchase of up to 200,000 shares of the Company’s common stock, no par value, from time to time, within one year (the “2024 Repurchase Plan”) and that the Board of Governors of the Federal Reserve System advised the Company that it has no objection to the Company’s 2024 Repurchase Plan. The Company may repurchase shares in privately negotiated transactions, in the open market, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 promulgated by the Securities and Exchange Commission, or otherwise in a manner that complies with applicable federal securities laws. The 2024 Repurchase Plan does not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice. During the three months ended September 30, 2024, the Company repurchased 5,501 shares under the authorization of the 2024 Repurchase Plan. As of September 30, 2024, there were 194,499 shares available for repurchase under the plan.
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We are subject to various regulatory capital adequacy requirements at a consolidated level and the Bank level. These requirements are administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our condensed consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.
Capital levels are viewed as important indicators of an institution’s financial soundness by banking regulators. Generally, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. As of September 30, 2024 and December 31, 2023, our holding company and Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized," for purposes of the prompt corrective action regulations. As we continue to grow our operations and maintain capital requirements, our regulatory capital levels may decrease depending on our level of earnings. We continue to monitor growth and control our capital activities in order to remain in compliance with all applicable regulatory capital standards.
The following table presents our regulatory capital ratios for the dates noted:
September 30, 2024December 31, 2023
(dollars in thousands)
AmountRatio AmountRatio
Tier 1 capital to risk-weighted assets  
Bank$252,549 11.39 %$244,390 10.54 %
Consolidated Company223,126 10.06 218,150 9.40 
Common Equity Tier 1(CET1) to risk-weighted assets
Bank252,549 11.39 244,390 10.54 
Consolidated Company223,126 10.06 218,150 9.40 
Total capital to risk-weighted assets
Bank268,970 12.13 265,391 11.45 
Consolidated Company292,546 13.19 292,151 12.59 
Tier 1 capital to average assets
Bank252,549 9.11 244,390 8.71 
Consolidated Company223,126 8.04 218,150 7.77 
Contractual Obligations and Off-Balance Sheet Arrangements
We enter into credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our clients. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Condensed Consolidated Balance Sheets. Commitments may expire without being utilized. Our exposure to credit loss is represented by the contractual amount of these commitments, although material losses are not anticipated. We follow the same credit policies in making commitments as we do for on-balance sheet instruments.
The following presents future contractual obligations to make future payments during the periods presented:
As of September 30, 2024
(dollars in thousands)
1 Year
or Less
After
1 Year Through 3 Years
After 3 Years Through
 5 Years
After 5 YearsTotal
FHLB and Federal Reserve$60,000 $— $2,373 $— $62,373 
Subordinated notes— — — 52,508 
(1)
52,508 
Time deposits480,412 17,983 35,057 — 533,452 
Minimum lease payments904 5,379 6,529 15,122 27,934 
Total$541,316 $23,362 $43,959 $67,630 $676,267 
______________________________________
(1)Reflects contractual maturity dates of March 31, 2030, December 1, 2030, September 1, 2031, and December 15, 2032.
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The following presents financial instruments whose contract amounts represent credit risk, as of the periods presented:
September 30, 2024December 31, 2023
(dollars in thousands)
Fixed Rate Variable RateFixed RateVariable Rate
Unused lines of credit$56,617$468,986$86,398$540,255
Standby letters of credit10,20410,33113,92212,094
Commitments to make loans to sell56,21418,917
Commitments to make loans1,5359,1105,2757,115
We may enter into contracts for services in the conduct of ordinary business operations, which may require payment for services to be provided in the future and may contain penalty clauses for early termination of the contracts. We do not believe these off-balance sheet arrangements have or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. However, there can be no assurance that such arrangements will not have an effect on future operations.
Critical Accounting Policies
Our accounting policies and procedures are described in Note 1 – Organization and Summary of Significant Accounting Policies in the accompanying Notes to the Condensed Consolidated Financial Statements as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the SEC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity and Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and rates, foreign currency exchange rates, commodity prices, and equity prices. Our market risk arises primarily from interest rate risk inherent in lending, investing, and deposit taking activities. To that end, management actively monitors and manages interest rate risk exposure. We do not have any market risk sensitive instruments entered into for trading purposes.
Management uses various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within established guidelines of acceptable levels of risk-taking.
The board of directors monitors interest rate risk by analyzing the potential impact on the net economic value of equity and net interest income from potential changes in interest rates and considers the impact of alternative strategies or changes in balance sheet structure. We manage our balance sheet, in part, to maintain the potential impact on economic value of equity and net interest income within acceptable ranges despite changes in interest rates.
Our exposure to interest rate risk is reviewed at least quarterly by the board of directors. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the change in net interest income and economic value of equity in the event of hypothetical changes in interest rates. If potential changes to net economic value of equity and net interest income resulting from hypothetical interest rate changes are not within the limits established by our board of directors, the board of directors may direct management to adjust the asset and liability mix to bring interest rate risk within board-approved limits.
The following presents the sensitivity in net interest income and fair value of equity during the periods presented, using a parallel ramp scenario.
Change in Interest Rates (Basis Points)As of September 30, 2024As of December 31, 2023
Percent Change
in Net Interest
Income
Percent Change
in Fair Value of
Equity
Percent Change
in Net Interest
Income
Percent Change
in Fair Value of
Equity
2001.84 %(7.05)%(5.19)%(11.03)%
1002.87 (1.17)(2.82)(5.90)
Base— — — — 
-1003.22 4.22 2.38 3.16 
-20013.70 (5.80)8.27 (5.27)
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The model simulations as of September 30, 2024 imply that our balance sheet maintains a relatively consistent interest rate risk profile compared to our balance sheet as of December 31, 2023.
Although the simulation model is useful in identifying potential exposure to interest rate changes, actual results for net interest income and economic value of equity may differ. There are a variety of factors that can impact the outcomes such as timing and magnitude of interest rate changes, asset and liability mix, pre-payment speeds, deposit beta assumptions, and decay rates that differ from our projections. Additionally, the results do not account for actions implemented to manage our interest rate risk exposure.
Impact of Inflation
Our Condensed Consolidated Financial Statements and related notes included within this Form 10-Q have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.
Our assets and liabilities are substantially monetary in nature. Therefore, changes in interest rates can significantly impact our performance beyond the general effects of inflation. Interest rates do not necessarily move in the same direction or magnitude as prices of general goods and services, while other operating expenses can be correlated with the impact of general levels of inflation.
Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the “Exchange Act”) were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three and nine months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION
Item 1.    Legal Proceedings
The Company, from time to time, is 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, after consulting with our 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 condensed consolidated financial statements. See Note 8 – Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements.
Item 1A.  Risk Factors
There has been no material change in the risk factors previously disclosed under “Item 1A. Risk Factors” of the Company’s 2023 Annual Report on Form 10-K filed with the SEC on March 15, 2024.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
Total number
of shares
purchased (1)
Average
price paid
per share
 
Total number of
shares purchased
as part of publicly
announced plans
or programs(2)
Maximum number (or
approximate dollar
value) of shares
that may yet be
purchased under the
plans or programs (2)
July 1, 2024 through July 31, 2024$— 200,000
August 1, 2024 through August 31, 20248,277 16.38 5,501194,499
September 1, 2024 through September 30, 2024194,499
______________________________________
(1) 2,776 of these shares relate to the net settlement by employees related to vested, restricted stock awards and do not impact the shares available for repurchase. They were purchased at an average price paid per share of $16.61. Net settlements represent instances where employees elect to satisfy their income tax liability related to the vesting of restricted stock through the surrender of a proportionate number of the vested shares to the Company.
(2) These shares relate to the 2024 Repurchase Plan. Refer to Note 9 - Shareholders' Equity for further information.
Item 3.    Defaults upon Senior Securities
Not applicable.
Item 4.    Mine Safety Disclosures
Not applicable.
Item 5.    Other Information
Not applicable.
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Item 6.    Exhibits
Exhibit No.Description
31.1*
31.2*
32.1**
32.2**
101.INS*Inline XBRL Instance Document
101.SCH*Inline XBRL Taxonomy Extension Schema Document
101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
______________________________________
*      Filed herewith.
**   These exhibits are furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.
† Indicates a management contract or compensatory plan.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
First Western Financial, Inc.
November 1, 2024By:/s/ Scott C. Wylie
DateScott C. Wylie
Chairman, Chief Executive Officer, and President of First Western Financial, Inc.
November 1, 2024By:/s/ David R. Weber
DateDavid R. Weber
Chief Financial Officer and Treasurer
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