First Western Financial Inc - Quarter Report: 2021 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 001-38595

FIRST WESTERN FINANCIAL, INC.

(Exact name of registrant as specified in its charter)


Colorado		37-1442266
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1900 16th Street, Suite 1200 Denver, CO		80202
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 303.531.8100

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, no par value	MYFW	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ⌧ Yes ◻ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧ Yes ◻ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ◻	Accelerated filer ⌧

Non-accelerated filer ◻	Smaller reporting company ☒

	Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ⌧ No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


	Shares outstanding as of August 2, 2021
Common Stock, no par value	7,996,438

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FIRST WESTERN FINANCIAL, INC.

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PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	6

	Condensed Consolidated Balance Sheets as of June 30, 2021 (Unaudited) and December 31, 2020	6

	Condensed Consolidated Statements of Income (Unaudited) for the Three Months and Six Months Ended June 30, 2021 and June 30, 2020	7

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Six Months Ended June 30, 2021 and June 30, 2020	8

	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Three Months and Six Months Ended June 30, 2021 and June 30, 2020	9

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2021 and June 30, 2020	10

	Notes to Condensed Consolidated Financial Statements (Unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	69

Item 4.	Controls and Procedures	70

PART II. OTHER INFORMATION		70

Item 1.	Legal Proceedings	70

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

Item 3.	Defaults upon Senior Securities	71

Item 4.	Mine Safety Disclosures	71

Item 5.	Other Information	71

Item 6.	Exhibits	72

SIGNATURES		73

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Important Notice about Information in this Quarterly Report

Unless we state otherwise or the context otherwise requires, references in this Quarterly Report 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 information contained in this Quarterly Report is accurate only as of the date of this Quarterly Report on Form 10-Q and as of the dates specified herein.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "should," "could," "predict," "potential," "believe," "will likely result," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would" and "outlook, " or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to COVID-19. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

●

The impact of the COVID-19 pandemic and actions taken by governmental authorities in response to the pandemic;

●

geographic concentration in Colorado, Arizona, Wyoming and California;

●

changes in the economy affecting real estate values and liquidity;

●

our ability to continue to originate residential real estate loans and sell such loans;

●

risks specific to commercial loans and borrowers;

●

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;

●

changes in interest rates;

●

the adequacy of our allowance for loan losses;

●

weak economic conditions and global trade;

●

legislative changes or the adoption of tax reform policies;

●

external business disruptors in the financial services industry;

●

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;

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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;

●

our ability to attract and retain clients;

●

unforeseen or catastrophic events, including pandemics, 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;

●

potential impairment of goodwill recorded on our balance sheet and possible requirements to recognize significant charges to earnings due to impairment of intangible assets;

●

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;

●

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 12, 2021. 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.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share amounts)


	June 30,		December 31,
	2021		2020
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	2,921	$	2,405
Interest-bearing deposits in other financial institutions		286,168		153,584
Total cash and cash equivalents		289,089		155,989

Available-for-sale securities, at fair value		25,532		36,666
Correspondent bank stock, at cost		2,053		2,552
Mortgage loans held for sale		48,563		161,843
Loans, net of allowance of $12,552 and $12,539		1,558,508		1,520,294
Premises and equipment, net		5,885		5,320
Accrued interest receivable		5,986		6,618
Accounts receivable		4,923		4,865
Other receivables		1,056		1,422
Other real estate owned, net		—		194
Goodwill and other intangible assets, net		24,250		24,258
Deferred tax assets, net		5,742		6,056
Company-owned life insurance		15,626		15,449
Other assets		22,091		32,129
Total assets	$	2,009,304	$	1,973,655

LIABILITIES
Deposits:
Noninterest-bearing	$	555,106	$	481,457
Interest-bearing		1,123,947		1,138,453
Total deposits		1,679,053		1,619,910
Borrowings:
Federal Home Loan Bank and Federal Reserve borrowings		120,762		149,563
Subordinated notes		24,261		24,291
Accrued interest payable		312		453
Other liabilities		16,930		24,476
Total liabilities		1,841,318		1,818,693

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; 7,994,832 and 7,951,773 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		—		—
Additional paid-in capital		145,622		144,703
Retained earnings		21,855		9,579
Accumulated other comprehensive income		509		680
Total shareholders’ equity		167,986		154,962
Total liabilities and shareholders’ equity	$	2,009,304	$	1,973,655

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 June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Interest and dividend income:
Loans, including fees	$	15,287	$	12,202	$	29,499	$	23,204
Investment securities		169		224		365		519
Federal funds sold and other		92		44		183		259
Total interest and dividend income		15,548		12,470		30,047		23,982

Interest expense:
Deposits		866		1,319		1,840		3,712
Other borrowed funds		459		355		931		543
Total interest expense		1,325		1,674		2,771		4,255
Net interest income		14,223		10,796		27,276		19,727
Less: Provision for loan losses		12		2,124		12		2,491
Net interest income, after provision for loan losses		14,211		8,672		27,264		17,236

Non-interest income:
Trust and investment management fees		5,009		4,609		9,856		9,340
Net gain on mortgage loans		3,914		10,173		9,110		12,654
Bank fees		394		221		767		589
Risk management and insurance fees		92		333		143		429
Income on company-owned life insurance		89		91		177		182
Other		—		—		60		—
Total non-interest income		9,498		15,427		20,113		23,194
Total income before non-interest expense		23,709		24,099		47,377		40,430

Non-interest expense:
Salaries and employee benefits		9,643		6,690		19,504		15,172
Occupancy and equipment		1,443		1,515		2,852		2,955
Professional services		1,370		1,231		2,649		2,254
Technology and information systems		904		993		1,846		1,962
Data processing		1,093		1,037		2,108		1,884
Marketing		398		253		719		668
Amortization of other intangible assets		4		38		8		40
Net loss on assets held for sale		—		—		—		553
Other		666		887		1,464		1,803
Total non-interest expense		15,521		12,644		31,150		27,291
Income before income taxes		8,188		11,455		16,227		13,139
Income tax expense		1,911		2,759		3,951		3,109
Net income available to common shareholders	$	6,277	$	8,696	$	12,276	$	10,030
Earnings per common share:
Basic	$	0.79	$	1.10	$	1.54	$	1.27
Diluted	$	0.76	$	1.10	$	1.50	$	1.26

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 June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Net income	$	6,277	$	8,696	$	12,276	$	10,030
Other comprehensive income items, net of tax effect:
Net change in unrealized (losses)/gains on available-for-sale securities		(70)		1,601		(171)		1,008
Comprehensive income	$	6,207	$	10,297	$	12,105	$	11,038

See accompanying notes to condensed consolidated financial statements (unaudited).

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FIRST WESTERN FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share amounts)


				Retained		Accumulated
	Shares	Additional		Earnings		Other
	Common	Paid-In		(Accumulated		Comprehensive
	Stock	Capital		Deficit)		Income (Loss)		Total
Balance at April 1, 2020	7,917,489	$	143,081	$	(13,621)	$	(757)	$	128,703

Net income	—		—		8,696		—		8,696
Other comprehensive income, net of tax	—		—		—		1,601		1,601
Settlement of share awards	21,535		(170)		—		—		(170)
Stock-based compensation	—		587		—		—		587
Balance at June 30, 2020	7,939,024	$	143,498	$	(4,925)	$	844	$	139,417

Balance at April 1, 2021	7,957,900	$	145,282	$	15,578	$	579	$	161,439

Net income	—		—		6,277		—		6,277
Other comprehensive loss, net of tax	—		—		—		(70)		(70)
Settlement of share awards	36,932		(372)		—		—		(372)
Stock-based compensation	—		712		—		—		712
Balance at June 30, 2021	7,994,832	$	145,622	$	21,855	$	509	$	167,986

Balance at January 1, 2020	7,940,168	$	142,797	$	(14,955)	$	(164)	$	127,678

Net income	—		—		10,030		—		10,030
Other comprehensive income, net of tax	—		—		—		1,008		1,008
Settlement of share awards	21,535		(170)		—		—		(170)
Share repurchase	(22,679)		(370)		—		—		(370)
Stock-based compensation	—		1,241		—		—		1,241
Balance, June 30, 2020	7,939,024	$	143,498	$	(4,925)	$	844	$	139,417

Balance at January 1, 2021	7,951,773	$	144,703	$	9,579	$	680	$	154,962

Net income	—		—		12,276		—		12,276
Other comprehensive loss, net of tax	—		—		—		(171)		(171)
Settlement of share awards	43,059		(406)		—		—		(406)
Stock-based compensation	—		1,325		—		—		1,325
Balance, June 30, 2021	7,994,832	$	145,622	$	21,855	$	509	$	167,986

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)


	Six Months Ended June 30,
	2021		2020
Cash flows from operating activities
Net income	$	12,276	$	10,030
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		547		552
Deferred income tax expense/(benefits), net of valuation allowance		384		(1,314)
Stock-based compensation		1,325		1,241
Provision for loan losses		12		2,491
Net amortization of investment securities		278		231
Stock dividends received on correspondent bank stock		(43)		(12)
Increase in cash surrender value of company-owned life insurance		(177)		(182)
Net gain on mortgage loans		(9,110)		(12,654)
Origination of mortgage loans held for sale		(810,517)		(541,222)
Proceeds from mortgage loans		938,152		526,355
Loss on assets held for sale		—		553
Recognition of capitalized subordinated notes issuance costs		(30)		(116)
Change in accounts receivable		40		633
Change in accrued interest receivable and other assets		809		(2,444)
Change in accrued interest payable and other liabilities		(4,054)		6,588
Net cash provided by/(used in) operating activities		129,892		(9,270)
Cash flows from investing activities
Activity in available-for-sale securities:
Maturities, prepayments, and calls		10,877		12,662
Purchases of correspondent bank stock		(1)		(698)
Redemption of correspondent bank stock		543		—
Purchases of premises and equipment		(1,104)		(523)
Proceeds from sale of other real estate owned		194		—
Net cash paid on acquisitions		—		(61,316)
Loan and note receivable originations and principal collections, net		(37,237)		(304,658)
Net cash used in investing activities		(26,728)		(354,533)
Cash flows from financing activities
Net change in deposits		59,143		257,068
Proceeds from subordinated notes		—		8,000
Repurchase of common stock		—		(370)
Settlement of restricted stock		(406)		(170)
Payments to Federal Reserve borrowings		(112,475)		—
Proceeds from Federal Reserve borrowings		83,674		204,313
Payments to Federal Home Loan Bank borrowings		—		(27,000)
Proceeds from Federal Home Loan Bank borrowings		—		35,000
Net cash provided by financing activities		29,936		476,841

Net change in cash and cash equivalents		133,100		113,038
Cash and cash equivalents, beginning of year		155,989		78,638
Cash and cash equivalents, end of period	$	289,089	$	191,676
Supplemental cash flow information:
Interest paid on deposits and borrowed funds	$	2,912	$	4,349
Income tax payment, net of refunds received		2,488		1,122
Cash paid for amounts included in the measurement of lease liabilities		2,581		2,893
Supplemental noncash disclosures:
Change in unrealized gain on available-for-sale securities		(241)		1,334

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 subsidiaries: First Western Trust Bank (the "Bank") and Ryder, Stilwell Inc. ("RSI"). The Bank wholly owns the following subsidiaries, which are therefore indirectly wholly-owned by FWFI: First Western Merger Corporation ("Merger Corp"), and RRI, LLC ("RRI"). RSI and RRI are not active operating entities.

The Company provides a fully-integrated suite of wealth management services including, private banking, personal trust, investment management, mortgage loans, and institutional asset management services to individual and corporate clients principally in Colorado (metro Denver, Aspen, Boulder, Fort Collins and Vail Valley), Arizona (Phoenix and Scottsdale), California (Century City) and Wyoming (Jackson Hole and Laramie). 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, 2020 condensed consolidated balance sheet has been derived from the audited financial statements for the year ended December 31, 2020.

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 six months ended June 30, 2021 are not necessarily indicative of results that may be expected for the full year ending December 31, 2021. 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, 2020 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: On May 15, 2020, the Company completed a branch purchase and assumption transaction ("Branch Acquisition") with Simmons Bank ("Simmons"). Management concluded that the acquisition represented a business combination, which is accounted for using the acquisition method, with the results of operations included in the Company’s consolidated financial statements as of the acquisition date.

On November 13, 2020, the Company completed the sale of its LA fixed income team and certain related advisory and sub-advisory arrangements to Lido Advisors, LLC and Oakhurst Advisors, LLC. As a result of this transaction, the Company recorded a contingent consideration asset with an initial fair value estimated at $3.1 million to be received in quarterly payments over three years and a portion will be received in perpetuity. The asset is carried at its net present value in our Other assets line item of the Condensed Consolidated Balance Sheets.

Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ. Information available which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including the impact of the COVID-19 pandemic, and changes in the financial condition of borrowers. Material estimates that are particularly susceptible to significant change include: the determination of the allowance for loan losses, the evaluation of goodwill impairment, and the fair value of financial instruments.

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The Company could experience a material adverse effect on its business as a result of the impact of the COVID-19 pandemic, and the resulting governmental actions to curtail its spread.

Concentration of Credit Risk: Most of the Company’s lending activity is to clients located in and around metro Denver, Colorado; Phoenix and Scottsdale, Arizona; and Jackson Hole and Laramie, Wyoming. The Company does not believe it has significant concentrations in any one industry or customer. As of June 30, 2021 and December 31, 2020, 71.6% and 66.9%, respectively, of the Company’s loan portfolio was secured by real estate collateral. Declines in real estate values in the primary markets the Company operates in could negatively impact the Company.

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 mortgage derivatives. 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.

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. There were no performance based incentive fees earned with respect to investment management contracts for the three and six months ended June 30, 2021. Performance based incentive fees earned with respect to investment management contracts for the year ended December 31, 2020 were immaterial. 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 six months ended June 30, 2021 and 2020 are considered in scope of Topic 606.

Transition of LIBOR to an Alternative Reference Rate: In July 2017, the United Kingdom's Financial Conduct Authority, which regulates the London Interbank Offered Rate ("LIBOR"), announced that after 2021 it will no longer persuade or compel banks to submit rates for the calculation of LIBOR. In response, the Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee to identify a set of alternative reference interest rates for possible use as market benchmarks. This committee has proposed the Secured Overnight Financing Rate ("SOFR") as its recommended alternative to U.S. dollar LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in the second quarter of 2018. SOFR is based on a broad segment of the overnight Treasury repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities.

The administrator of LIBOR has proposed to extend publication of the most commonly used U.S. Dollar LIBOR settings to June 30, 2023, and to cease publishing other LIBOR settings on December 31, 2021.

Certain of the Company’s assets and liabilities are indexed to LIBOR, with exposure extending beyond December 31, 2021. The Company is currently evaluating and planning for the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. In general, the transition away from LIBOR may result in increased market risk, credit risk, operational risk and business risk for the Company. The Company has developed a LIBOR transition plan, which addresses governance, risk management, legal, operational, systems, fallback language, and other aspects of planning. The Company has prepared a timeline to transition from LIBOR before the end of 2021.

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COVID-19 and CARES Act: On March 11, 2020 the World Health Organization declared the outbreak of COVID-19 a global pandemic, which continues to spread throughout the United States and the around the world. In response to the COVID-19 pandemic, the President signed the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") into law on March 27, 2020. The objective of the CARES Act is to prevent a severe economic downturn using various measures, including economic stimulus to significantly impacted industry sectors. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act and other government actions.

The CARES Act created the Paycheck Protection Program ("PPP"), which is administered by the Small Business Administration ("SBA"). The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA lender and supported the community and clients by originating PPP loans during the six months ended June 30, 2021. PPP loans are classified in the Cash, Securities and Other portion of the loan portfolio. See Note 3 for further discussion on our PPP loans.

The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as troubled debt restructurings ("TDR"). The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from Federal Reserve and the Federal Deposit Insurance Corporation ("FDIC") confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered a TDR. We believe our loan modification program meets that definition and have not classified any of these modifications as a TDR as of June 30, 2021. See Note 3 for further discussion on our loan modification program.

The Company is a participant in the Federal Reserve’s Main Street Lending Program ("MSLP") to support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. The Company may sell a 95% participation in a new MSLP loan to the Main Street Special Purpose Vehicle ("SPV") at par value. The Company must retain 5% of the MSLP loan until (i) it matures or (ii) neither the Main Street SPV nor a Governmental Assignee holds an interest in MSLP Loan in any capacity, whichever comes first. See Note 3 for further discussion on our participation in the program.

Reclassifications: Certain items in prior year financial statements were reclassified to conform to the current presentation. Such reclassifications had no impact on net income or total shareholders’ equity.

Recently adopted accounting pronouncements: The following reflects recent accounting pronouncements that were adopted by the Company since the end of the Company’s fiscal year ended December 31, 2020.

In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope" ("ASU 2021-01"). ASU 2021-01 clarifies the scope of Topic 848, originally issued in 2020 (ASU 2020-04). ASU 2021-01 clarifies that derivatives affected by the related discounting transition are explicitly eligible for certain optional expedients and exceptions. ASU 2021-01 also clarifies that a receive-variable-rate, pay-variable-rate cross-currency interest rate swap may be considered an eligible hedging instrument in a net investment hedge if both legs of the swap do not have the same repricing intervals and dates as a result of reference rate reform. ASU 2021-01 was effective for the Company on January 7, 2021 and did not have a material impact on the Company’s financial statement disclosures.

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, 2020.

In February 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) ("ASU 2016-13"). ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss ("CECL") model. The CECL model is applicable to the measurement of credit losses on the financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained earnings and the allowance for loan losses as of the beginning of the first reporting period in which the guidance is effective. ASU 2016-13 was set to be effective for most public companies on January 1, 2020. However, at the October 16, 2019 FASB meeting,

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the FASB voted unanimously to delay the effective date of CECL adoption for smaller reporting companies ("SRCs") to January 1, 2023.

During the six months ended June 30, 2021, the CECL committee of the Company continued to work through its implementation plan. The Company has integrated historical and current loan level data as required by CECL and is working with its third-party vendor solution to begin evaluating the methodologies available under the CECL model on its loan portfolios. The Company also continues to evaluate documentation requirements, internal control structure, relevant data sources, and system configurations. The Company has completed a successful integration of the required fields and historical data for key loan, client and collateral data within the third-party solution and has been able to run parallels of our current allowance for loan and lease losses ("ALLL") calculation in the software to compare to our internal calculation and reconcile known differences. The Company has started the process of selecting the methodologies to be used for each segment of its loan portfolio and started preliminarily testing to determine the impact of each methodology. Currently, we are unable to estimate the impact the adoption of this update will have on the consolidated financial statements and disclosures. However, the Company expects the impact of the adoption will be significantly influenced by the composition and characteristics of its loan portfolios along with economic conditions prevalent as of the date of adoption. The Company expects to implement the new standard beginning January 1, 2023.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which amended existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge of the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 was set to be effective for the Company on January 1, 2021. However, ASU 2019-10 amended the mandatory effective date for ASU 2014-07 to January 1, 2023 for SRC’s, with earlier adoption permitted. This update is not expected to have a significant impact on the financial statements and disclosures.

NOTE 2 - INVESTMENT SECURITIES

The following presents the amortized cost and fair value of securities available-for-sale, with unrealized gains and losses recognized in accumulated other comprehensive income as of June 30, 2021 and December 31, 2020 (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2021	Cost		Gains		Losses		Value
Investment securities available-for-sale:
U.S. Treasury debt	$	250	$	1	$	—	$	251
Corporate bonds		6,000		157		(15)		6,142
GNMA mortgage-backed securities – residential		15,619		467		—		16,086
FNMA mortgage-backed securities – residential		1,113		47		—		1,160
CMO and MBS		1,875		41		(23)		1,893
Total securities available-for-sale	$	24,857	$	713	$	(38)	$	25,532


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2020	Cost		Gains		Losses		Value
Investment securities available-for-sale:
U.S. Treasury debt	$	250	$	4	$	—	$	254
Corporate bonds		6,000		55		(11)		6,044
GNMA mortgage-backed securities – residential		23,806		798		—		24,604
FNMA mortgage-backed securities – residential		1,616		61		—		1,677
Corporate CMO and MBS		4,078		62		(53)		4,087
Total securities available-for-sale	$	35,750	$	980	$	(64)	$	36,666

As of June 30, 2021, the amortized cost and estimated fair value of available-for-sale securities have contractual maturity dates shown in the table below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

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	Amortized		Fair
June 30, 2021	Cost		Value
Due within one year	$	250	$	251
Due between one year and five years		1,250		1,245
Due between five years and ten years		4,750		4,897
Securities (agency, Corporate CMO, and MBS)		18,607		19,139
Total	$	24,857	$	25,532

In 2014, the Company began investing in a small business investment company ("SBIC") fund administered by the Small Business Administration. During the six months ended June 30, 2021, the Company did not make any contributions to the SBIC fund. During the year ended December 31, 2020, the Company invested $0.5 million in SBIC. As of June 30, 2021 and December 31, 2020, the Company held a balance of $2.1 million with SBIC, which is included in Other assets in the accompanying Condensed Consolidated Balance Sheets. The Company may be obligated to invest up to an additional $0.9 million in future SBIC investments.

As of June 30, 2021 and December 31, 2020, securities with carrying values totaling $2.9 million and $3.7 million, respectively, were pledged to secure various public deposits and credit facilities of the Company.

As of June 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities and agencies, in an amount greater than 10%of shareholders’ equity.

As of June 30, 2021 and December 31, 2020, five securities and seven securities were in an unrealized loss position, with unrealized losses totaling an immaterial amount and $0.1 million, respectively. One of the securities in an unrealized loss position as of June 30, 2021 has been in a continuous unrealized loss position for more than twelve months, and the remaining have been in a continuous unrealized loss position for less than twelve months. The unrealized loss positions were caused primarily by interest rate changes and market assumptions about prepayments of principal and interest on the underlying mortgages. Because the decline in market value is attributable to market conditions, not credit quality, and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be near or at maturity, the Company does not consider these investments to be other-than-temporarily impaired as of June 30, 2021.

The following table summarizes securities with unrealized losses as of June 30, 2021 and December 31, 2020, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands, before tax):


	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2021	Value		Losses		Value		Losses		Value		Losses
GNMA mortgage-backed securities – residential	$	286	$	*	$	—	$	—	$	286	$	*
Corporate bonds		1,735		(15)		—		—		1,735		(15)
Corporate CMO and MBS		—		—		615		(23)		615		(23)
Total	$	2,021	$	(15)	$	615	$	(23)	$	2,636	$	(38)

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*Not meaningful


	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2020	Value		Losses		Value		Losses		Value		Losses
Corporate bonds	$	3,489	$	(11)	$	—	$	—	$	3,489	$	(11)
Corporate CMO and MBS		880		(40)		566		(13)		1,446		(53)
Total	$	4,369	$	(51)	$	566	$	(13)	$	4,935	$	(64)

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The Company did not sell any securities during the three and six months ended June 30, 2021 or during the year ended December 31, 2020.

NOTE 3 - LOANS AND THE ALLOWANCE FOR LOAN LOSSES

The following presents a summary of the Company’s loans as of the dates noted (in thousands):


	June 30,		December 31,
	2021		2020
Cash, Securities and Other⁽¹⁾	$	290,907	$	357,020
Construction and Development		127,141		131,111
1-4 Family Residential		496,101		455,038
Non-Owner Occupied CRE		324,493		281,943
Owner Occupied CRE		178,847		163,042
Commercial and Industrial⁽²⁾		155,526		146,031
Total loans held for investment		1,573,015		1,534,185
Deferred fees and unamortized premiums/(unaccreted discounts), net		(1,955)		(1,352)
Allowance for loan losses		(12,552)		(12,539)
Loans, net	$	1,558,508	$	1,520,294

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⁽¹⁾ Includes PPP loans of $103.1 million and $142.9 million as of June 30, 2021 and December 31, 2020, respectively.

⁽²⁾ Includes MSLP loans of $6.7 million and $6.6 million as of June 30, 2021 and December 31, 2020, respectively.

As of June 30, 2021 and December 31, 2020, total loans held for investment included $116.1 million and $127.2 million, respectively, of performing loans purchased as part of the Branch Acquisition.

The CARES Act created the PPP, which is administered by the SBA. The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA lender and as of June 30, 2021, the Cash, Securities, and Other portion of the loan portfolio included $103.1 million of PPP loans, or 35.5% of the total category. As of December 31, 2020, the Cash, Securities, and Other portion of the loan portfolio included $142.9 million of PPP loans, or 40.0% of the total category.

The Company is a participant in the Federal Reserve’s MSLP to support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. As of June 30, 2021, the Company’s Commercial and Industrial loans included six MSLP loans with the net carrying amount of $6.7 million, or 4.3% of the total category. As of December 31, 2020, the Company’s Commercial and Industrial loans included six MSLP loans with the net carrying amount of $6.6 million, or 4.5% of the total category.

Loan Modifications

As of June 30, 2021, the Company’s loan portfolio included 76 loans which were previously modified under the loan modification program, totaling $143.1 million. As of June 30, 2021, the deferral period has ended for all loans previously modified and payments have resumed under the original terms.

The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as a TDR. The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from Federal Reserve and the FDIC confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program meets that definition. In accordance with that guidance, the Company recognized interest income on all loans modified for temporary payment moratoriums, primarily for a period of 180 days or less.

All loans modified in response to COVID-19 are classified as performing and pass rated as of June 30, 2021. These loans are included in the allowance for loan loss general reserve in accordance with ASC 450-20. Management has

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increased our loan level reviews and portfolio monitoring to address the changing environment. The Company continues to meet regularly with clients who could be more highly impacted by the recent COVID-19 pandemic. These are borrowers in accommodations, transportation and restaurant industries, which we believe may be more impacted by the pandemic, and those loans where there may be a greater than 50% probability of a downgrade, covenant violation or 20% reduction in collateral position. The portion of our credit exposure to the highest risk industries impacted by COVID-19, such as accommodations, transportation and restaurants, is less than 4.0% of our loan portfolio. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of June 30, 2021, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

The following presents, by class, an aging analysis of the recorded investments (excluding accrued interest receivable, deferred (fees) costs, and unamortized premiums/ (unaccreted discounts) which are not material) in loans past due as of June 30, 2021 and December 31, 2020 (in thousands):


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
June 30, 2021	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	—	$	—	$	12	$	12	$	290,895	$	290,907
Construction and Development		—		—		—		—		127,141		127,141
1-4 Family Residential		—		76		—		76		496,025		496,101
Non-Owner Occupied CRE		—		—		—		—		324,493		324,493
Owner Occupied CRE		—		—		—		—		178,847		178,847
Commercial and Industrial		1,898		—		3,105		5,003		150,523		155,526
Total	$	1,898	$	76	$	3,117	$	5,091	$	1,567,924	$	1,573,015


	30-59		60-89		90 or		Total				Total
	Days		Days		More Days		Loans				Recorded
December 31, 2020	Past Due		Past Due		Past Due		Past Due		Current		Investment
Cash, Securities and Other	$	752	$	—	$	48	$	800	$	356,220	$	357,020
Construction and Development		—		—		—		—		131,111		131,111
1-4 Family Residential		1,283		—		—		1,283		453,755		455,038
Non-Owner Occupied CRE		—		—		—		—		281,943		281,943
Owner Occupied CRE		479		—		—		479		162,563		163,042
Commercial and Industrial		271		—		3,529		3,800		142,231		146,031
Total	$	2,785	$	—	$	3,577	$	6,362	$	1,527,823	$	1,534,185

As of June 30, 2021 and December 31, 2020, the Company did not have any loans which were more than 90 days delinquent and accruing interest.

Non-Accrual Loans and Troubled Debt Restructurings

The following presents the recorded investment in non-accrual loans by class as of the dates noted (in thousands):


	June 30,		December 31,
	2021		2020
Cash, Securities and Other	$	15	$	50
Owner Occupied CRE		—		479
Commercial and Industrial		3,105		3,529
Total	$	3,120	$	4,058

Non-accrual loans classified as TDRs accounted for $3.1 million of the recorded investment as of June 30, 2021 and $3.6 million as of December 31, 2020. Non-accrual loans are classified as impaired loans and individually evaluated for impairment.

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The following presents a summary of the unpaid principal balance of loans classified as TDRs as of the dates noted (in thousands):


	June 30,		December 31,
	2021		2020
Non-accrual
Cash, Securities, and Other	$	12	$	48
Commercial and Industrial		3,105		3,529
Total		3,117		3,577
Allowance for loan losses associated with TDR		(1,751)		(1,619)
Net recorded investment	$	1,366	$	1,958

As of June 30, 2021 and December 31, 2020, the Company had not committed any additional funds to a borrower with a loan classified as a TDR.

The Company did not modify any loans resulting in TDR status during the six months ended June 30, 2021. The Company modified one loan resulting in TDR status during the year ended December 31, 2020. The Borrower was having difficulty making payments in accordance with the original contract terms. The Company restructured the loan including receiving a large paydown and extended the maturity and lowered the interest rate as a result of the Borrower’s financial difficulties. The loan was paid off in full as of December 31, 2020.

TDRs are reviewed individually for impairment and are included in the Company’s specific reserves in the allowance for loan losses. If charged off, the amount of the charge-off is included in the Company’s charge-off factors, which impact the Company’s reserves on non-impaired loans.

The following table presents impaired loans by portfolio and related valuation allowance as of the periods presented (in thousands):


	June 30, 2021						December 31, 2020
			Unpaid		Allowance				Unpaid		Allowance
	Total		Contractual		for		Total		Contractual		for
	Recorded		Principal		Loan		Recorded		Principal		Loan
	Investment		Balance		Losses		Investment		Balance		Losses
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	3	$	3	$	3	$	2	$	2	$	2
Commercial and Industrial		3,040		3,040		1,751		3,419		3,419		1,619
Total	$	3,043	$	3,043	$	1,754	$	3,421	$	3,421	$	1,621

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	12	$	12	$	—	$	48	$	48	$	—
Owner Occupied CRE		—		—		—		479		479		—
Commercial and Industrial		65		65		—		110		110		—
Total	$	77	$	77	$	—	$	637	$	637	$	—

Total impaired loans:
Cash, Securities, and Other	$	15	$	15	$	3	$	50	$	50	$	2
Owner Occupied CRE		—		—		—		479		479		—
Commercial and Industrial		3,105		3,105		1,751		3,529		3,529		1,619
Total	$	3,120	$	3,120	$	1,754	$	4,058	$	4,058	$	1,621

The recorded investment in loans in the previous tables excludes accrued interest, deferred (fees) costs, and unamortized premiums/ (unaccreted discounts), which are not material. Interest income, if any, was recognized on the cash basis on non-accrual loans.

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The average balance of impaired loans and interest income recognized on impaired loans during the three months ended June 30, 2021 and 2020 are included in the table below (in thousands):


	Three Months Ended June 30,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	4	$	—	$	—	$	—
Commercial and Industrial		3,230		21		3,462		—
Total	$	3,234	$	21	$	3,462	$	—

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	15	$	—	$	1,493	$	—
Owner Occupied CRE		—		51		—		—
Commercial and Industrial		82		—		5,998		84
Total	$	97	$	51	$	7,491	$	84

Total impaired loans:
Cash, Securities, and Other	$	19	$	—	$	1,493	$	—
Owner Occupied CRE		—		51		—		—
Commercial and Industrial		3,312		21		9,460		84
Total	$	3,331	$	72	$	10,953	$	84

The average balance of impaired loans and interest income recognized on impaired loans during the six months ended June 30, 2021 and 2020 are included in the table below (in thousands):


	Six Months Ended June 30,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Impaired loans with a valuation allowance:
Cash, Securities, and Other	$	2	$	—	$	—	$	—
Commercial and Industrial		2,162		21		3,476		—
Total	$	2,164	$	21	$	3,476	$	—

Impaired loans with no related valuation allowance:
Cash, Securities, and Other	$	20	$	—	$	1,925	$	—
Owner Occupied CRE		—		51		—
Commercial and Industrial		58		—		5,991		165
Total	$	78	$	51	$	7,916	$	165

Total impaired loans:
Cash, Securities, and Other	$	22	$	—	$	1,925	$	—
Owner Occupied CRE		—		51		—		—
Commercial and Industrial		2,220		21		9,467		165
Total	$	2,242	$	72	$	11,392	$	165

Allowance for Loan Losses

Allocation of a portion of the allowance for loan losses to one category of loans does not preclude its availability to absorb losses in other categories. The following presents the activity in the Company’s allowance for loan losses by portfolio class for the periods presented (in thousands):

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	Cash,		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		Family		Occupied		Occupied		and
	and Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the three months ended June 30, 2021
Beginning balance	$	2,573	$	766	$	3,152	$	2,211	$	1,123	$	2,714	$	12,539
(Recovery of)/provision for loan losses		(535)		105		247		12		102		81		12
Charge-offs		—		—		—		—		—		—		—
Recoveries		1		—		—		—		—		—		1
Ending balance	$	2,039	$	871	$	3,399	$	2,223	$	1,225	$	2,795	$	12,552

Changes in allowance for loan losses for the six months ended June 30, 2021
Beginning balance	$	2,579	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539
(Recovery of)/provision for loan losses		(541)		(61)		166		219		66		163		12
Charge-offs		—		—		—		—		—		—		—
Recoveries		1		—		—		—		—		—		1
Ending balance	$	2,039	$	871	$	3,399	$	2,223	$	1,225	$	2,795	$	12,552

Allowance for loan losses as of June 30, 2021 allocated to loans evaluated for impairment:
Individually	$	3	$	—	$	—	$	—	$	—	$	1,751	$	1,754
Collectively		2,036		871		3,399		2,223		1,225		1,044		10,798
Ending balance	$	2,039	$	871	$	3,399	$	2,223	$	1,225	$	2,795	$	12,552

Loans as of June 30, 2021, evaluated for impairment:
Individually	$	15	$	—	$	—	$	—	$	—	$	3,105	$	3,120
Collectively		290,892		127,141		496,101		324,493		178,847		152,421		1,569,895
Ending balance	$	290,907	$	127,141	$	496,101	$	324,493	$	178,847	$	155,526	$	1,573,015

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	Cash,		Construction		1-4		Non-Owner		Owner		Commercial
	Securities		and		Family		Occupied		Occupied		and
	and Other		Development		Residential		CRE		CRE		Industrial		Total
Changes in allowance for loan losses for the three months ended June 30, 2020
Beginning balance	$	1,092	$	186	$	3,008	$	1,403	$	884	$	1,669	$	8,242
Provision for/(recovery of) loan losses		1,345		298		(300)		80		(124)		825		2,124
Charge-offs		(24)		—		—		—		—		—		(24)
Recoveries		12		—		—		—		—		—		12
Ending balance	$	2,425	$	484	$	2,708	$	1,483	$	760	$	2,494	$	10,354

Changes in allowance for loan losses for the six months ended June 30, 2020
Beginning balance	$	1,058	$	200	$	2,850	$	1,176	$	911	$	1,680	$	7,875
Provision for/(recovery of) loan losses		1,379		284		(142)		307		(151)		814		2,491
Charge-offs		(24)		—		—		—		—		—		(24)
Recoveries		12		—		—		—		—		—		12
Ending balance	$	2,425	$	484	$	2,708	$	1,483	$	760	$	2,494	$	10,354

Allowance for loan losses as of December 31, 2020 allocated to loans evaluated for impairment:
Individually	$	2	$	—	$	—	$	—	$	—	$	1,619	$	1,621
Collectively		2,577		932		3,233		2,004		1,159		1,013		10,918
Ending balance	$	2,579	$	932	$	3,233	$	2,004	$	1,159	$	2,632	$	12,539

Loans as of December 31, 2020, evaluated for impairment:
Individually	$	50	$	—	$	—	$	—	$	479	$	3,529	$	4,058
Collectively		356,970		131,111		455,038		281,943		162,563		142,502		1,530,127
Ending balance	$	357,020	$	131,111	$	455,038	$	281,943	$	163,042	$	146,031	$	1,534,185

The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans by credit risk on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention—Loans classified as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified.

Substandard—Substandard loans are considered "classified" and are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrual status and may individually be evaluated for impairment if indicators of impairment exist.

Doubtful—Loans graded Doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. However, the amount of certainty of eventual loss is not known because of specific pending factors.

Loans not meeting any of the three criteria above are considered to be pass-rated loans. The following presents, by class and by credit quality indicator, the recorded investment in the Company’s loans as of June 30, 2021 and December 31, 2020 (in thousands):

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			Special
June 30, 2021	Pass		Mention		Substandard			Total
Cash, Securities and Other	$	290,892	$	—	$	15	$	290,907
Construction and Development		127,141		—		—		127,141
1-4 Family Residential		496,101		—		—		496,101
Non-Owner Occupied CRE		318,512		5,981		—		324,493
Owner Occupied CRE		178,146		—		701		178,847
Commercial and Industrial		150,523		—		5,003		155,526
Total	$	1,561,315	$	5,981	$	5,719	$	1,573,015


			Special
December 31, 2020	Pass		Mention		Substandard			Total
Cash, Securities and Other	$	356,970	$	—	$	50	$	357,020
Construction and Development		131,111		—		—		131,111
1-4 Family Residential		451,918		—		3,120		455,038
Non-Owner Occupied CRE		275,627		6,316		—		281,943
Owner Occupied CRE		161,850		—		1,192		163,042
Commercial and Industrial		140,432		—		5,599		146,031
Total	$	1,517,908	$	6,316	$	9,961	$	1,534,185

The Company had no loans graded doubtful as of June 30, 2021 and December 31, 2020.

NOTE 4 - GOODWILL

Changes in the carrying amount of goodwill were as follows (in thousands):


	June 30,		December 31,
	2021		2020
Beginning balance	$	24,191	$	19,686
Acquisition activity		—		4,505
Ending balance	$	24,191	$	24,191

During the year ended December 31, 2020, the Company recorded $4.5 million of goodwill as a result of the Branch Acquisition on May 15, 2020.

Goodwill is tested annually for impairment on October 31 or earlier upon the occurrence of certain events.

Step 1 of 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 carrying amount of a reporting unit exceeds its fair value, we are required to perform the second step to the impairment test.

As of June 30, 2021 and December 31, 2020, the Company's reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded the carrying value. Therefore, the Company did not complete the two-step impairment test.

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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 2032. Certain properties contain portions that are subleased with terms that ended in 2020. In accordance with ASC 842, operating leases are required to be recognized as a right-of-use asset with a corresponding lease liability.

The following table presents the classification of the right-of-use asset and corresponding liability within the Condensed Consolidated Balance Sheets. The Company elected to not include short-term leases with initial terms of twelve months or less, on the Condensed Consolidated Balance Sheets, (in thousands).


		June 30,		December 31,
		2021		2020
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Other assets	$	10,064	$	11,341

Lease Liabilities	Classification
Operating lease liabilities	Other liabilities	$	12,525	$	13,970

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.


	June 30,		December 31,
	2021		2020
Weighted-Average Remaining Lease Term
Operating leases	4.38	years	4.79	years

Weighted-Average Discount Rate
Operating leases	3.02	%	3.04	%

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 table represents the Company’s net lease costs, (in thousands):

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	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Lease Costs
Operating lease cost	$	731	$	814	$	1,483	$	1,615
Variable lease cost		416		498		828		959
Sublease income		—		(100)		—		(199)
Lease costs, net	$	1,147	$	1,212	$	2,311	$	2,375

The following table presents a maturity analysis of the Company’s operating lease liabilities on an annual basis for each of the next five years and total amounts thereafter as of June 30, 2021 (in thousands):


Year Ending December 31,	Operating Leases
2021⁽¹⁾	$	1,676
2022		3,239
2023		2,937
2024		2,784
2025		1,783
Thereafter		876
Total future minimum lease payments		13,295
Less: imputed interest		(770)
Present value of net future minimum lease payments	$	12,525

________________________________________

⁽¹⁾ Amount represents the remaining six months of year.

NOTE 6 - DEPOSITS

The following presents the Company’s interest-bearing deposits at the dates noted (in thousands):


	June 30,		December 31,
	2021		2020
Money market deposit accounts	$	840,073	$	847,430
Time deposits		137,499		172,682
Negotiable order of withdrawal accounts		141,076		113,052
Savings accounts		5,299		5,289
Total interest-bearing deposits	$	1,123,947	$	1,138,453
Aggregate time deposits of $250,000 or greater	$	64,360	$	73,401

Deposits acquired through acquisitions during the year ended 2020 totaled $63.1 million.

Overdraft balances classified as loans totaled $0.1 million as of June 30, 2021 and December 31, 2020.

The following presents the scheduled maturities of all time deposits for the next five years ending June 30 (in thousands):


Year Ending December 31,		Time Deposits
2021⁽¹⁾	$	69,580
2022		39,732
2023		23,155
2024		2,263
2025		1,540
Thereafter		1,229
Total	$	137,499

________________________________________

⁽¹⁾ Amount represents the remaining six months of year.

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NOTE 7 - BORROWINGS

The Bank has executed a blanket pledge and security agreement with the FHLB that requires certain loans and securities be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as of June 30, 2021 and December 31, 2020 amounted to $698.3 million and $668.6 million, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $457.7 million as of June 30, 2021. Each advance is payable at its maturity date.

The Company had the following required maturities on FHLB borrowings as of the dates noted (in thousands):


		June 30,		December 31,
Maturity Date	Rate %	2021		2020
April 22, 2022	0.37	$	5,000	$	5,000
May 5, 2023	0.76		10,000		10,000
Total		$	15,000	$	15,000

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 June 30, 2021 and December 31, 2020, the Company utilized $105.8 million and $134.6 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 three unsecured federal funds lines of credit up to $10.0 million, $19.0 million, and $25.0 million. As of June 30, 2021 and December 31, 2020, there were no amounts outstanding on any of the federal funds lines.

On October 28, 2020, the Company entered into a Business Loan Agreement and associated Promissory Note (the "Note"), dated June 30, 2020, with a correspondent lending partner. The Note is secured by stock of the Bank and bears interest at the one month ICE Benchmark Administration ("IBA") LIBOR plus 2.5%. As of June 30, 2021 and December 31, 2020, there were no amounts outstanding and the borrowing capacity associated with this facility was $5.0 million.

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). As of June 30, 2021 and December 31, 2020, 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 loan loss is represented by the contractual amount of these commitments, although material losses are not anticipated. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

The following presents the Company’s financial instruments whose contract amounts represent credit risk, as of the dates noted (in thousands):


	June 30, 2021				December 31, 2020
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	65,274	$	424,856	$	78,506	$	360,883
Standby letters of credit		3,555		16,125		1,933		17,524
Commitments to make loans to sell		115,213		—		370,512		—
Commitments to make loans	$	44,384	$	31,840	$	24,225	$	25,316

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

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not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the client.

Unused lines of credit under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing clients. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client’s obligation to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Substantially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The Company holds collateral supporting those commitments if deemed necessary.

Commitments to make loans to sell are agreements to lend to a client which would then be sold to an investor in the secondary market for which the interest rate has been locked with the client, provided there is no violation of any condition within the contract with either party. Commitments to make loans to sell have fixed interest rates. Since commitments may expire without being extended, total commitment amounts may not necessarily represent cash requirements.

Commitments to make loans are agreements to lend to a client, provided there is no violation of any condition within the contract. Commitments to make loans generally have fixed expiration dates or other termination clauses. Since commitments may expire without being extended, total commitment amounts may not necessarily represent cash requirements.

Litigation, Claims and Settlements

The Company is, from time to time, involved in various legal actions arising in the normal course of business. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is the opinion of management, based on advice from legal counsel, that no proceedings exist, either individually or in the aggregate, which, if determined adversely to the Company, would have a material effect on the Company’s 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 (though certain voting restrictions may exist on non-vested restricted stock) held.

On June 14, 2019, the Company announced that its board of directors had authorized a share repurchase plan (the "2019 Repurchase Plan") under which the Company may repurchase up to 300,000 shares of its common stock and that the Board of Governors of the Federal Reserve System advised the Company that it had no objection to the Company’s 2019 Repurchase Plan. The 2019 Repurchase Plan was in effect for a one-year period, with the timing of purchases and the number of shares repurchased under the program dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements and market conditions. The 2019 Repurchase Plan expired in June of 2020. During the six months ended June 30, 2020, the Company repurchased 22,679 shares at an average price of $16.50.

On November 3, 2020, the Company announced that its board of directors authorized the repurchase of up to 400,000 shares of the Company’s common stock, no par value, from time to time, within one year (the "2020 Repurchase Plan") and that the Board of Governors of the Federal Reserve System advised the Company that it has no objection to the Company’s 2020 Repurchase Plan. The Company may repurchase shares in privately negotiated transactions, in the open market, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 promulgated by the SEC, or otherwise in a manner that complies with applicable federal securities laws. The 2020 Repurchase Plan does not obligate the Company to acquire a specific dollar amount or number of shares and it may be extended, modified or discontinued at any time without notice. During the three and six months ended June 30, 2021, the Company did not repurchase any shares under the 2020 Repurchase Plan.

During the six months ended June 30, 2021 and 2020, the Company sold no shares of common stock.

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Restricted Stock Awards

In 2017, the Company issued 105,264 shares of common stock ("Restricted Stock Awards") with a value of $3.0 million to the sole member of EMC Holdings, LLC ("EMC"), subject to forfeiture based on his continued employment with the Company. Half of the Restricted Stock Awards ($1.5 million or 52,632 shares) vests ratably over five-years. The remaining $1.5 million, or 52,632 shares, may be earned based on performance of the mortgage division of the Company. During the six months ended June 30, 2020, the Company recognized compensation expense of $0.1 million, representing 14,114 shares, related to the performance-based awards. The performance based awards fully vested in the second quarter of 2020.

As of June 30, 2021, the Restricted Stock Awards have a weighted-average grant date fair value of $28.50 per share. The Company recognized compensation expense of $0.1 million for the three months ended June 30, 2021 and 2020, for the Restricted Stock Awards. During the six months ended June 30, 2021 and 2020, the Company recognized compensation expense of $0.2 million and $0.3 million, respectively, for the Restricted Stock Awards. As of June 30, 2021, the Company has $0.4 million of unrecognized stock-based compensation expense related to the shares issued, which is expected to be recognized over a weighted average period of less than one year. No Restricted Stock Awards vested during the six months ended June 30, 2021 or 2020.

Stock-Based Compensation Plans

The 2008 Stock Incentive Plan ("the 2008 Plan") was frozen in connection with the adoption of the 2016 Plan and no new awards may be granted under the 2008 Plan. As of June 30, 2021, there were a total of 389,468 shares available for issuance under the First Western Financial, Inc. 2016 Omnibus Incentive Plan ("the 2016 Plan"). If the Awards outstanding under the 2008 Plan or the 2016 Plan are forfeited, cancelled or terminated with no consideration paid to the Company, those amounts will increase the number of shares eligible to be granted under the 2016 Plan.

Stock Options

The Company did not grant any stock options during the six months ended June 30, 2021 and 2020.

During the three months ended June 30, 2021 and 2020, the Company recognized an immaterial amount and $0.1 million, respectively, of stock based compensation expense associated with stock options. During the six months ended June 30, 2021 and 2020, the Company recognized an immaterial amount and $0.1 million, respectively, of stock based compensation expense associated with stock options. As of June 30, 2021, the Company has an immaterial amount of unrecognized stock-based compensation expense related to stock options which are unvested. That cost is expected to be recognized over a weighted-average period of less than one year.

The following summarizes activity for nonqualified stock options for the six months ended June 30, 2021:


				Weighted
		Weighted		Average
	Number	Average		Remaining	Aggregate
	of	Exercise		Contractual	Intrinsic
	Options	Price		Term	Value
Outstanding as of December 31, 2020	419,197	$	29.02
Granted	—		—
Exercised	—		—
Forfeited or expired	(34,050)		36.43
Outstanding as of June 30, 2021	385,147		28.36	2.2	⁽¹⁾
Options fully vested / exercisable as of June 30, 2021	381,577	$	28.38	2.2	⁽¹⁾

______________________________________

⁽¹⁾ Nonqualified stock options outstanding at the end of the period and those fully vested / exercisable had immaterial aggregate intrinsic values.

As of June 30, 2021, there were 381,577 options that were exercisable. Exercise prices are between $20.00 and $40.00 per share, and the options are exercisable for a period of ten-years from the original grant date and expire on various dates between 2022 and 2026.

Restricted Stock Units

Pursuant to the 2016 Plan, the Company can grant associates and non-associate directors long-term cash and stock-based compensation. Historically, the Company has granted certain associates restricted stock units which are earned

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over time or based on various performance measures and convert to common stock upon vesting, which are summarized here and expanded further below.

The following summarizes the activity for the Time Vesting Units, the Financial Performance Units and the Market Performance Units for the six months ended June 30, 2021:


	Time	Financial	Market
	Vesting	Performance	Performance
	Units	Units	Units
Outstanding as of December 31, 2020	285,052	152,430	14,862
Granted	58,817	41,366	—
Vested	(60,428)	—	—
Forfeited	(8,771)	(3,953)	(611)
Outstanding as of June 30, 2021	274,670	189,843	14,251

During the three months ended June 30, 2021, the Company issued 36,932 shares of common stock upon the settlement of Restricted Stock Units. The remaining 14,545 shares were surrendered with a combined market value at the dates of settlement of $0.4 million to cover employee withholding taxes. During the six months ended June 30, 2021, the Company issued 43,059 shares of common stock upon the settlement of Restricted Stock Units. The remaining 17,369 shares were surrendered with a combined market value at the dates of settlement of $0.4 million to cover employee withholding taxes. During the three and six months ended June 30, 2020, the Company issued 34,260 shares of common stock upon the settlement of Restricted Stock Units. The remaining 19,852 shares were surrendered with a combined market value at the dates of settlement of $0.3 million to cover employee withholding taxes.

Time Vesting Units

Time Vesting Units are granted to full-time associates and board members at the date approved by the Company’s board of directors. The Company granted 58,817 Time Vesting Units with a five-year service period during the six months ended June 30, 2021, that vest in equal installments of 20% on the anniversary of the grant date, assuming continuous employment through the scheduled vesting dates. During the three months ended June 30, 2021 and 2020, the Company recognized compensation expense of $0.4 million and $0.3 million, respectively, for the Time Vesting Units. During the six months ended June 30, 2021 and 2020, the Company recognized compensation expense of $0.8 million and $0.6 million, respectively, for the Time Vesting Units. As of June 30, 2021, there was $4.5 million of unrecognized compensation expense related to the Time Vesting Units, which is expected to be recognized over a weighted-average period of 2.1 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 June 30, 2021 (dollars in thousands, except share amounts):

Grant Period

Threshold Accrual

Maximum Issuable Shares at Current Threshold

Unrecognized Compensation Expense

Weighted-Average ⁽¹⁾

Financial Metric End Date

Vesting Requirement End Date

Prior to May 1, 2019

50% on half; 100% on other half

9,577

0.5 years

December 31, 2019

December 31, 2021

May 1, 2019 through April 30, 2020

150%

83,961

431

2.6 years

December 31, 2021

December 31, 2023

May 1, 2020 through December 31, 2020, excluding November 18, 2020

150%

85,044

533

3.5 years

December 31, 2022

December 31, 2023

On November 18, 2020

150%

34,752

363

3.4 years

December 31, 2022

50% November 18, 2023 & 2025

On May 3, 2021

150%

61,854

1,039

4.5 years

December 31, 2023

December 31, 2025

______________________________________

⁽¹⁾ Represents the expected unrecognized stock-based compensation expense recognition period.

The following presents the Company’s Financial Performance Units activity for the years noted June 30 (dollars in thousands, except share amounts):


	Units Granted		Compensation Expense Recognized
Grant Period	2021	2020	2021		2020
Prior to May 1, 2019	—	—	$	18	$	34
May 1, 2019 through April 30, 2020	—	1,866		117		181
May 1, 2020 through December 31, 2020, excluding November 18, 2020	—	58,294		109		39
On November 18, 2020		—		64		—
On May 3, 2021	41,366	—	$	57	$	—

Market Performance Units

Market Performance Units were granted to certain key associates and are earned based on growth in the value of the Company’s common stock, and were dependent on the Company completing an initial public offering of stock during a defined period of time. On July 23, 2018, the Company completed its initial public offering and the Market Performance Units performance condition was met. Subsequent to the performance condition there is also a market condition as a vesting requirement for the Market Performance Units which affects the determination of the grant date fair value. The Company estimated the grant date fair value using various valuation assumptions. During the three and six months ended June 30, 2021 and 2020, the Company recognized an immaterial amount of compensation expense for the Market Performance Units. As of June 30, 2021, there was $0.4 million of unrecognized compensation expense related to the Market Performance Units which is expected to be recognized over a weighted-average period of 1 year.

If the Company’s common stock is trading at or above certain prices, over a performance period which ended on June 30, 2020, the Market Performance Units would have been determined to be earned and vest following the completion of a subsequent service period ending on June 30, 2022. The Company’s common stock did not trade at or above the required prices over the performance period and as a result, no Market Performance Units are eligible to be earned.

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NOTE 10 - EARNINGS PER COMMON SHARE

The table below presents the calculation of basic and diluted earnings per common share for the periods indicated (dollars in thousands, except share and per share amounts):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Earnings per common share - Basic
Numerator:
Net income available for common shareholders	$	6,277	$	8,696	$	12,276	$	10,030

Denominator:
Basic weighted average shares		7,961,785		7,890,337		7,948,796		7,876,951
Earnings per common share - basic	$	0.79	$	1.10	$	1.54	$	1.27

Earnings per common share - Diluted
Numerator:
Net income available for common shareholders	$	6,277	$	8,696	$	12,276	$	10,030

Denominator:
Basic weighted average shares		7,961,785		7,890,337		7,948,796		7,876,951
Diluted effect of common stock equivalents:
Stock options		35,849		—		20,386		—
Time Vesting Units		131,684		18,401		117,107		23,517
Financial Performance Units		70,746		6,558		59,953		15,804
Market Performance Units		13,836		13,222		14,017		13,294
Total diluted effect of common stock equivalents		252,115		38,181		211,463		52,615
Diluted weighted average shares		8,213,900		7,928,518		8,160,259		7,929,566
Earnings per common share - diluted	$	0.76	$	1.10	$	1.50	$	1.26

Diluted earnings per share was computed without consideration to potentially dilutive instruments as their inclusion would have been anti-dilutive.

The table below presents potentially dilutive securities excluded from the diluted earnings per share calculation for the periods indicated:


	Three Months Ended June 30,		Six Months Ended June 30,
	2021	2020	2021	2020
Stock options	141,639	419,197	209,874	419,197
Time Vesting Units	—	92,388	1,991	89,656
Financial Performance Units	26,735	96,257	24,952	48,129
Restricted Stock Awards	—	41,830	10,527	51,749
Total potentially dilutive securities	168,374	649,672	247,344	608,731

NOTE 11 - INCOME TAXES

During the three and six months ended June 30, 2021, the Company recorded an income tax provision of $1.9 million and $4.0 million, respectively, reflecting an effective tax rate of 23.3% and 24.3%, respectively. During the three and six months ended June 30, 2020, the Company recorded an income tax provision of $2.8 million and $3.1 million, respectively, reflecting an effective tax rate of 24.1% and 23.7%, respectively.

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NOTE 12 - RELATED-PARTY TRANSACTIONS

The Bank extends credit to certain covered parties including Company directors, executive officers and their affiliates. As of June 30, 2021 and December 31, 2020, there were no delinquent or non-performing loans to any executive officer or director of the Company. These covered parties, along with principal owners, management, immediate family of management or principal owners, a parent company and its subsidiaries, trusts for the benefit of employees, and other parties, may be considered related parties. The following presents a summary of related-party loan activity as of the dates noted (in thousands):


	June 30, 2021		December 31, 2020
Balance, beginning of year	$	14,321	$	5,675
Funded loans		4,505		17,348
Payments collected		(6,000)		(8,702)
Balance, end of period	$	12,826	$	14,321

Deposits from related parties held by the Bank as of June 30, 2021 and December 31, 2020 totaled $24.1 million and $26.2 million, respectively.

The Company leases office spaces from entities controlled by one of the Company’s board members. During the six months ended June 30, 2021 and 2020, the Company incurred $0.1 million and $0.1 million, respectively, of expenses related to these leases.

NOTE 13 - 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.

The Company used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Guarantee Asset and Liability: The guarantee asset represents the fair value of the consideration received in exchange for the credit enhancement fee. The guarantee liability represents a financial guarantee to cover the second layer of any losses on loans sold to FHLB under the MPF 125 loan sales agreement. The guarantee liability value on day one is equivalent to the guarantee asset fair value which is the consideration for the credit enhancement fee paid over the life of the loans. The liability is then carried at amortized cost. Significant inputs in the valuation analysis for the asset are Level 3, due to the nature of this asset and the lack of market quotes. The fair value of the guarantee asset is determined using a discounted cash flow model, for which significant unobservable inputs include assumed future prepayment rates ("CPR") and market discount rate (Level 3). An increase in prepayment rates or discount rate would generally reduce the estimated fair value of the guarantee asset.

Mortgage Related Derivatives: Mortgage related derivatives include our IRLC, FSC, and the forward commitments on our loans held for sale pipeline. The fair value estimate of our IRLC is based on valuation models using market data from secondary market loan sales and direct contacts with third party investors as of the measurement date and pull through assumptions (Level 3). The FSC fair value estimate reflects the potential pair off fee associated with mandatory trades and is estimated by using a market differential and pair off penalty assessed by the investor (Level 3).

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The fair value estimate of the forward commitments is based on market prices of similar securities to the underlying MBS (Level 2).

Our mortgage derivatives are carried at fair value in the Company’s financial statements with changes in the fair value accounted for within the Condensed Consolidated Statements of Income.

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.

Other Real Estate Owned: 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. Other real estate owned is evaluated annually for additional impairment and adjusted accordingly.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. Impaired loans are evaluated monthly for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and other real estate owned 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.

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The following presents assets and liabilities measured on a recurring basis as of June 30, 2021 and December 31, 2020 (in thousands):


	Quoted
	Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs		Reported
June 30, 2021	(Level 1)		(Level 2)		(Level 3)		Balance
Investment securities available-for-sale:
U.S. Treasury debt	$	251	$	—	$	—	$	251
Corporate bonds		—		6,142		—		6,142
GNMA mortgage-backed securities - residential		—		16,086		—		16,086
FNMA mortgage-backed securities - residential		—		1,160		—		1,160
Corporate CMO and MBS		—		1,893		—		1,893
Total securities available-for-sale	$	251	$	25,281	$	—	$	25,532
Equity securities	$	719	$	—	$	—	$	719
Guarantee asset	$	—	$	—	$	196	$	196
IRLC, net	$	—	$	—	$	2,808	$	2,808
Forward commitments and FSC	$	—	$	(140)	$	—	$	(140)
Mortgage loans held for sale	$	—	$	48,563	$	—	$	48,563


	Quoted
	Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs		Reported
December 31, 2020	(Level 1)		(Level 2)		(Level 3)		Balance
Investment securities available-for-sale:
U.S. Treasury debt	$	254	$	—	$	—	$	254
Corporate bonds		—		6,044		—		6,044
GNMA mortgage-backed securities - residential		—		24,604		—		24,604
FNMA mortgage-backed securities - residential		—		1,677		—		1,677
Corporate CMO and MBS		—		4,087		—		4,087
Total securities available-for-sale	$	254	$	36,412	$	—	$	36,666
Equity securities	$	730	$	—	$	—	$	730
Guarantee asset	$	—	$	—	$	232	$	232
IRLC, net	$	—	$	—	$	9,841	$	9,841
Forward commitments and FSC	$	—	$	(2,534)	$	(89)	$	(2,623)
Mortgage loans held for sale	$	—	$	161,843	$	—	$	161,843

The following presents a reconciliation for level 3 instruments measured at fair value on a recurring basis (in thousands):


Three Months Ended June 30, 2021	Guarantee Asset		IRLC		FSC
Beginning balance	$	188	$	2,105	$	(173)
Acquisitions		—		5,823		—
Originations		2		(5,981)		—
Gains (losses) in net income, net		6		861		173
Other settlements		—		—		—
Ending balance	$	196	$	2,808	$	—

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Three Months Ended June 30, 2020	Guarantee Asset		IRLC		FSC
Beginning balance	$	—	$	4,025	$	(16)
Acquisitions		—		9,395		(84)
Originations		244		(6,574)		—
Gains (losses) in net income, net		16		720		16
Other settlements		(38)		—		—
Ending balance	$	222	$	7,566	$	(84)


Six Months Ended June 30, 2021	Guarantee Asset		IRLC		FSC
Beginning balance	$	232	$	9,841	$	(89)
Acquisitions		—		8,507		(173)
Originations		2		(12,997)		—
Gains (losses) in net income, net		(38)		(2,543)		262
Other settlements		—		—		—
Ending balance	$	196	$	2,808	$	—


Six Months Ended June 30, 2020	Guarantee Asset		IRLC		FSC
Beginning balance	$	—	$	1,184	$	—
Acquisitions		—		16,718		(100)
Originations		244		(10,983)		—
Gains (losses) in net income, net		16		647		16
Other settlements		(38)		—		—
Ending balance	$	222	$	7,566	$	(84)

U.S. Treasury debt is reported at fair value utilizing Level 1 inputs. The remaining portfolio of securities are reported at fair value with Level 2 inputs provided by a pricing service. As of June 30, 2021 and December 31, 2020, the majority of the securities had credit support provided by the Federal Home Loan Mortgage Corporation, GNMA, and FNMA. Factors used to value the securities by the pricing service include: benchmark yields, reported trades, interest spreads, prepayments, and other market research. In addition, ratings and collateral quality are considered.

As of June 30, 2021, equity securities, IRLC, and guarantee assets have been recorded at fair value within the Other assets line item and the FSC have been recorded at fair value with the Other liabilities line item in the Condensed Consolidated Balance Sheets. All changes are recorded in the Other line item in the Condensed Consolidated Statements of Income.

The following presents quantitative information about Level 3 assets measured on a recurring basis as of June 30, 2021 and December 31, 2020 (dollars in thousands):

Quantitative Information about Level 3 Fair Value Measurements as of June 30, 2021

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Guarantee asset

196

Discounted cash flow

Discount rate
Prepayment rate

3% (3%)
24% (24%)

IRLC, net

2,808

Best execution model

Pull through

72% to 100% (88%)

FSC

—

Internal pricing model

Market Differential

3bps to 61bps
(19bps)

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Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2020

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Guarantee asset

232

Discounted cash flow

Discount rate
Prepayment rate

3% (3%)
25% (25%)

IRLC, net

9,841

Best execution model

Pull through

55% to 100% (86%)

FSC

(89)

Internal pricing model

Market Differential

-59bps to -17bps
(-31bps)

The following presents assets measured on a nonrecurring basis as of June 30, 2021 and December 31, 2020 (in thousands):

Quoted

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Reported

June 30, 2021

(Level 1)

(Level 2)

(Level 3)

Balance

Impaired loans⁽¹⁾:

Commercial and Industrial

—

1,289


	Quoted
	Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs		Reported
December 31, 2020	(Level 1)		(Level 2)		(Level 3)		Balance
Other real estate owned:
Commercial properties	$	—	$	—	$	194	$	194

Impaired loans⁽¹⁾:
Commercial and Industrial	$	—	$	—	$	1,800	$	1,800

______________________________________

⁽¹⁾ Two immaterial Cash, Securities, and Other loan were fully reserved for using a specific allowance as of June 30, 2021 and December 31, 2020.

The sales comparison approach was utilized for estimating the fair value of non-recurring assets.

As of June 30, 2021, the Company did not own any OREO properties. As of December 31, 2020, OREO had a carrying amount of $0.2 million, which is the cost basis of $2.1 million net of a valuation allowance of $1.9 million.

As of June 30, 2021, total impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had carrying values of $3.0 million with valuation allowances of $1.8 million and were classified as Level 3. As of December 31, 2020, impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had carrying values of $3.4 million with valuation allowances of $1.6 million and were classified as Level 3.

Impaired loans accounted for specific reserves of $1.8 million and $1.6 million as of June 30, 2021 and December 31, 2020. The Company did not have any charge offs during the six months ended June 30, 2021 from the specific reserve. The Company charged off an immaterial amount during the year ended December 31, 2020 from the specific reserve.

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The following presents quantitative information about the significant unobservable inputs used in the fair value measurement of nonrecurring assets categorized within Level 3 of the fair value hierarchy as of June 30, 2021 and December 31, 2020 (dollars in thousands):

Quantitative Information about Level 3 Fair Value Measurements as of June 30, 2021

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Impaired loans⁽¹⁾:

Commercial and Industrial

1,289

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 45% (31%)

Quantitative Information about Level 3 Fair Value Measurements as of December 31, 2020

Valuation

Significant

Range

Fair Value

Technique

Unobservable Input

(Weighted Average)

Other real estate owned:

Commercial properties

194

Sales contract

Commission, cost to sell, closing costs

5% (5%)

Impaired loans⁽¹⁾:

Commercial and Industrial

1,800

Sales comparison, Market approach - guideline transaction method

Management discount for asset/property type

17% - 35% (26%)

______________________________________

⁽¹⁾ Two immaterial Cash, Securities and Other loans were fully reserved for using a specific allowance as of June 30, 2021 and one immaterial Cash, Securities and Other loan was fully reserved for using a specific allowance as of December 31, 2020.

The following presents carrying amounts and estimated fair values for financial instruments not carried at fair value as of June 30, 2021 and December 31, 2020 (in thousands):


	Carrying		Fair Value Measurements Using:
June 30, 2021	Amount		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	289,089	$	289,089	$	—	$	—
Loans, net		1,558,508		—		—		1,552,344
Accrued interest receivable		5,986		—		19		5,967
Liabilities:
Deposits		1,679,053		—		1,680,464		—
Borrowings:
FHLB borrowings – fixed rate		15,000		—		15,062		—
Federal Reserve borrowings – fixed rate		105,762		—		105,762		—
Subordinated notes – fixed-to-floating rate		24,261		—		—		23,895
Accrued interest payable	$	312	$	—	$	106	$	206

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	Carrying		Fair Value Measurements Using:
December 31, 2020	Amount		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents	$	155,989	$	155,989	$	—	$	—
Loans, net		1,520,294		—		—		1,512,699
Accrued interest receivable		6,618		—		90		6,528
Liabilities:
Deposits		1,619,910		—		1,621,648		—
Borrowings:
FHLB borrowings – fixed rate		15,000		—		15,099		—
Federal Reserve borrowings – fixed rate		134,563		—		134,563		—
Subordinated notes – fixed-to-floating rate		24,291		—		—		25,750
Accrued interest payable	$	453	$	—	$	124	$	329

The fair value estimates presented and discussed above are based on pertinent information available to management as of the dates specified. The estimated fair value amounts are based on the exit price notion set forth by ASU 2016-01. Although management is not aware of any factors that would significantly affect the estimated fair values, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since the balance sheet dates. Therefore, current estimates of fair value may differ significantly from the amounts presented herein.

The methods and assumptions, not previously presented, used to estimate fair values are described as follows.

Cash and Cash Equivalents and Restricted Cash: The carrying amounts of cash and cash equivalents and restricted cash approximate fair values as maturities are less than 90 days and balances are generally in accounts bearing current market interest rates.

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, taking into account the loan type, maturity and a required return on capital.

Accrued Interest Receivable and Payable: The carrying amounts of accrued interest approximate fair value due to their short-term nature.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting dates. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Fixed Rate Borrowings: Borrowings with fixed rates are valued using inputs such as discounted cash flows and current interest rates for similar instruments and borrowers with similar credit ratings.

Fixed-to-Floating Rate Borrowings: Borrowings with fixed-to-floating rates are valued using inputs such as discounted cash flows and current interest rates for similar instruments and assume the Company will redeem the instrument prior to the first interest rate reset date.

NOTE 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 Company completed the sale of its LA fixed income team in the fourth quarter 2020. The LA fixed income team and the related assets made up a majority of the previously reported Capital Management Segment. As a result of the sale the Company evaluated its reportable segments and determined the remaining assets following the sale in the Capital

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Management segment no longer meet the thresholds of income before income tax to be a reportable segment. The residual assets that remained in the Capital Management segment are now included in the Wealth Management segment.

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.

For 2020 periods presented, the Wealth Management segment includes the previously reported key metrics of the previously reported Capital Management segment.

The tables below present the financial information for each segment that is specifically identifiable or based on allocations using internal methods as of or for the three and six months ended June 30, 2021 and 2020 (in thousands):


As of and for the three months ended June 30, 2021	Wealth Management		Mortgage		Consolidated
Income Statement
Total interest income	$	15,548	$	—	$	15,548
Total interest expense		1,325		—		1,325
Provision for loan losses		12		—		12
Net interest income, after provision for loan losses		14,211		—		14,211
Non-interest income		5,571		3,927		9,498
Total income before non-interest expense		19,782		3,927		23,709
Depreciation and amortization expense		262		13		275
All other non-interest expense		12,537		2,709		15,246
Income before income taxes	$	6,983	$	1,205	$	8,188

Goodwill	$	24,191	$	—	$	24,191
Total assets	$	1,956,393	$	52,911	$	2,009,304


As of and for the three months ended June 30, 2020	Wealth Management		Mortgage		Consolidated
Income Statement
Total interest income	$	12,470	$	—	$	12,470
Total interest expense		1,674		—		1,674
Provision for loan losses		2,124		—		2,124
Net interest income, after provision for loan losses		8,672		—		8,672
Non-interest income		5,230		10,197		15,427
Total income before non-interest expense		13,902		10,197		24,099
Depreciation and amortization expense		255		21		276
All other non-interest expense		10,499		1,869		12,368
Income before income taxes	$	3,148	$	8,307	$	11,455

Goodwill	$	24,191	$	—	$	24,191
Assets held for sale		3,010		—		3,010
Total assets	$	1,730,957	$	79,569	$	1,810,526

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As of and for the six months ended June 30, 2021	Wealth Management		Mortgage		Consolidated
Income Statement
Total interest income	$	30,047	$	—	$	30,047
Total interest expense		2,771		—		2,771
Provision for loan losses		12		—		12
Net interest income, after provision for loan losses		27,264		—		27,264
Non-interest income		10,989		9,124		20,113
Total income before non-interest expense		38,253		9,124		47,377
Depreciation and amortization expense		520		27		547
All other non-interest expense		24,833		5,770		30,603
Income before income taxes	$	12,900	$	3,327	$	16,227

Goodwill	$	24,191	$	—	$	24,191
Total assets	$	1,956,393	$	52,911	$	2,009,304


As of and for the six months ended June 30, 2020	Wealth Management			Mortgage		Consolidated
Income Statement
Total interest income	$	23,982		$	—	$	23,982
Total interest expense		4,255			—		4,255
Provision for loan losses		2,491			—		2,491
Net interest income, after provision for loan losses		17,236			—		17,236
Non-interest income		10,493			12,701		23,194
Total income before non-interest expense		27,729			12,701		40,430
Depreciation and amortization expense		510			42		552
All other non-interest expense		23,100	⁽¹⁾		3,639		26,739
Income before income taxes	$	4,119		$	9,020	$	13,139

Goodwill	$	24,191		$	—	$	24,191
Assets held for sale		3,010			—		3,010
Total assets	$	1,730,957		$	79,569	$	1,810,526

______________________________________

⁽¹⁾ Includes loss on assets held for sale of $0.6 million.

NOTE 15 – LOW-INCOME HOUSING TAX CREDIT INVESTMENTS

On December 19, 2019, the Company invested in a low-income housing tax credit ("LIHTC") investment. As of June 30, 2021 and December 31, 2020, the balance of the investment for LIHTC was $0.9 million and $1.1 million, respectively. These balances are reflected in the Other assets line item of the Condensed Consolidated Balance Sheets. Total unfunded commitments related to the investment in the LIHTC total $2.1 million and $2.2 million as of June 30, 2021 and December 31, 2020, respectively. The Company expects to fulfill these commitments during the year ending 2021.

The Company uses the proportional amortization method to account for this investment. During the three and six months ended June 30, 2021, the Company recognized amortization expense of $0.1 million and $0.2 million, respectively, which was included within the Income tax expense line item of the Condensed Consolidated Statements of Income. The Company did not recognize any related amortization expense during the three and six months ended June 30, 2020.

Additionally, during the three and six months ended June 30, 2021, the Company recognized $0.1 million and $0.2 million of tax credits and other benefits from this investment in the LIHTC. The Company did not recognize any related tax credits or other benefits during the three and six months ended June 30, 2020. During the three and six months ended June 30, 2021 and 2020, the Company did not incur any impairment losses.

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

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additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, First Western and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

First Western and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks ("Basel III rules") has been fully phased in. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Management believes as of June 30, 2021, First Western and the Bank meet all capital adequacy requirements to which they are subject to.

Prompt corrective action regulations for First Western and the Bank provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

The standard ratios established by First Western and the Bank’s primary regulators to measure capital require First Western and the Bank to maintain minimum amounts and ratios, set forth in the following table. These ratios are common equity Tier 1 capital ("CET1"), Tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined).

The actual capital ratios of First Western and the Bank, along with the applicable regulatory capital requirements as of June 30, 2021, were calculated in accordance with the requirements of Basel III. The final rules of Basel III also established a “capital conservation buffer” of 2.5% above new regulatory minimum capital ratios, which are fully effective following minimum ratios: (i) a CET1 ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. Banks are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if 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 June 30, 2021 and December 31, 2020, 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 June 30, 2021, 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 June 30, 2021 and December 31, 2020.

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The following presents the actual and required capital amounts and ratios as of June 30, 2021 and December 31, 2020 (dollars in thousands):


									To be Well Capitalized
									Under Prompt
					Required for Capital				Corrective Action
	Actual				Adequacy Purposes⁽¹⁾				Regulations
June 30, 2021	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 capital to risk-weighted assets
Bank	$	148,443	11.03	%	$	80,738	6.0	%	$	107,650	8.0	%
Consolidated		144,728	10.68			N/A	N/A			N/A	N/A
CET1 to risk-weighted assets
Bank		148,443	11.03			60,553	4.5			87,466	6.5
Consolidated		144,728	10.68			N/A	N/A			N/A	N/A
Total capital to risk-weighted assets
Bank		161,335	11.99			107,650	8.0			134,563	10.0
Consolidated		182,180	13.45			N/A	N/A			N/A	N/A
Tier 1 capital to average assets
Bank		148,443	7.98			74,429	4.0			93,036	5.0
Consolidated	$	144,728	7.75	%		N/A	N/A			N/A	N/A


									To be Well Capitalized
									Under Prompt
					Required for Capital				Corrective Action
	Actual				Adequacy Purposes⁽¹⁾				Regulations
December 31, 2020	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 capital to risk-weighted assets
Bank	$	133,963	10.22	%	$	78,660	6.0	%	$	104,880	8.0	%
Consolidated		131,507	9.96			N/A	N/A			N/A	N/A
CET1 to risk-weighted assets
Bank		133,963	10.22			58,995	4.5			85,215	6.5
Consolidated		131,507	9.96			N/A	N/A			N/A	N/A
Total capital to risk-weighted assets
Bank		146,853	11.20			104,880	8.0			131,100	10.0
Consolidated		168,957	12.80			N/A	N/A			N/A	N/A
Tier 1 capital to average assets
Bank		133,963	7.62			70,301	4.0			87,877	5.0
Consolidated	$	131,507	7.45	%		N/A	N/A			N/A	N/A

______________________________________

⁽¹⁾ Does not include capital conservation buffer.

NOTE 17 – SUBSEQUENT EVENTS

On July 22, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Teton Financial Services, Inc. (“Teton”), parent company of Rocky Mountain Bank, a Wyoming-chartered bank headquartered in Jackson, Wyoming. As of June 30, 2021, Teton had assets of $420.7 million, total deposits of $374.6 million, and total loans of $267.9 million. The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, Teton will be merged with into the Company (the “Merger”), with the Company continuing as the surviving corporation. The Merger Agreement also provides that following the Merger, Rocky Mountain Bank will be merged with and into the Bank, with the Bank surviving the bank merger.

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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 six months ended June 30, 2021 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 12, 2021. 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 in our Annual Report Form 10-K filed with the SEC on March 12, 2021 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 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 June 30, 2021, we have expanded our footprint into eleven full service profit centers, two loan production offices, and two trust offices located across four states. As of and for the six months ended June 30, 2021, we had $2.01 billion in total assets, $47.4 million in total revenues, and provided fiduciary and advisory services on $6.76 billion of assets under management ("AUM").

Response to COVID-19

The spread of COVID-19 has caused significant disruptions in the U.S. economy since it was declared a pandemic in March of 2020 by the World Health Organization. Disruptions include temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future. The changes have impacted our clients and their industries, as well as the financial services industry. At this time, we cannot predict the impact or how long the economy or our impacted clients will be disrupted.

The Company activated its Business Continuity Management Plan in early 2020 in response to the emergence of COVID-19 and has continued to adjust as the crisis continues to impact our markets, clients and business. A majority of our associates have been working remotely since early 2020. All of our offices are open, functioning, and continue to operate as usual. We are taking additional precautions within our profit centers, including enhanced cleaning procedures and physical distancing measures, to ensure the safety of our clients and our associates.

A provision in the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") created the Paycheck Protection Program ("PPP"), which is administered by the Small Business Administration ("SBA"). The PPP is intended to provide loans to small businesses to pay their employees, rent, mortgage interest and utilities. The loans may be forgiven conditioned upon the client providing payroll documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. The Bank is an approved SBA lender and participated in all rounds of the

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program. As of June 30, 2021, we held 516 PPP loans for a total of $103.1 million with an average loan size of $0.2 million. As of June 30, 2021, the Company had submitted loans with original loan amounts of $202.7 million to the SBA for forgiveness and had received forgiveness on 722 loans totaling $177.4 million.

During the second quarter of 2021, the Company funded an additional $5.4 million in new PPP loans before the program funds were depleted in early May. With the originations closed, the SBA turned their attention to forgiveness, processing applications submitted by the Company and approved and paid $91.4 million in forgiveness payments. Loans funded in 2021 become eligible for forgiveness after the covered period of 8 to 24 weeks, which begins for some clients in early second quarter of 2021.

As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company has offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who have a pass risk rating and have not been delinquent over 30 days on payments in the last two years. The Company had seventy-six loans across multiple industries in the amount of $143.1 million of loans that participated in the Company’s COVID loan modification program. No loans in the loan modification program remain in their deferral period and there were no loans which were delinquent according to Bank policy as of June 30, 2021.

The Company also participated in the Federal Reserve’s Main Street Lending Program ("MSLP") to support lending to small and medium-sized for-profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. As of June 30, 2021, the Company had six loans with a balance held by the Bank of $6.7 million.

Primary Factors Used to Evaluate the Results of Operations

As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the comparative levels and trends of the line items in our 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.

Net Interest Income

Net interest income represents interest income less interest expense. We generate interest income on interest-earning assets, primarily loans and available-for-sale securities. We incur interest expense on interest-bearing liabilities, primarily interest-bearing deposits and borrowings. To evaluate net interest income, we measure and monitor: (i) yields on loans, available-for-sale securities, and other interest-earning assets; (ii) the costs of deposits and other funding sources; (iii) the rates incurred on borrowings and other interest-bearing liabilities; and (iv) the regulatory risk weighting associated with the assets. Interest income is primarily impacted by loan growth and loan repayments, along with changes in interest rates on the loans. Interest expense is primarily impacted by changes in deposit balances, changes in interest rates on deposits, along with the volume and type of interest-bearing liabilities. Net interest income is primarily impacted by changes in market interest rates, the slope of the yield curve, and interest we earn on interest-earning assets or pay on interest-bearing liabilities.

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

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loans is primarily impacted by the amount of loans sold, the type of loans sold, and market conditions.

●

Bank fees—income generated through bank-related service charges such as: electronic transfer fees, treasury management fees, bill pay fees, servicing fees for Main Street Lending Program, 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.

●

Other—non-operating income generated through a transition services agreement with the buyer of the LA fixed income team.

Non-Interest Expense

Non-interest expense is comprised primarily of the following:

●

Salaries and employee benefits—all forms of compensation-related expenses including salary, incentive compensation, payroll-related taxes, stock-based compensation, benefit plans, health insurance, 401(k) plan match costs, and other benefit-related expenses. Salaries and employee benefit costs are primarily impacted by changes in headcount and fluctuations in benefits costs.

●

Occupancy and equipment—costs related to leasing our office space, depreciation charges for the furniture, fixtures and equipment, amortization of leasehold improvements, utilities, and other occupancy-related expenses. Occupancy and equipment costs are primarily impacted by the number of locations we occupy.

●

Professional services—costs related to legal, accounting, tax, consulting, personnel recruiting, insurance, and other outsourcing arrangements. Professional services costs are primarily impacted by corporate activities requiring specialized services. FDIC insurance expense is also included in this line and represents the assessments that we pay to the FDIC for deposit insurance.

●

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 and other similar items recognized in connection with acquisitions.

●

Net loss on assets held for sale—represents the fair value adjustment on disposal groups held for sale.

●

Other—includes costs related to operational expenses associated with office supplies, postage, travel

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expenses, meals and entertainment, dues and memberships, costs to maintain or prepare OREO for sale, director compensation and travel, and other general corporate expenses that do not fit within one of the specific non-interest expense lines described above. Other operational expenses are generally impacted by our business activities and needs.

Operating Segments

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 loan 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 June 30, 2021, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III.

Results of Operations

Overview

The three months ended June 30, 2021 compared with the three months ended June 30, 2020. We reported net income available to common shareholders of $6.3 million for the three months ended June 30, 2021, compared to $8.7 million of net income available to common shareholders for the three months ended June 30, 2020, a $2.4 million, or 27.8%, decrease. For the three months ended June 30, 2021, our income before income tax was $8.2 million, a $3.3 million, or 28.5%, decrease from the three months ended June 30, 2020. The decrease was primarily driven by a $6.3 million decrease in net gain on mortgage loans and a $2.9 million increase in non-interest expense, partially offset by a $5.5 million increase in net interest income, after provision for loan losses. The decrease in net gain on mortgage loans was primarily driven by a slowdown in new lock volume associated with the decrease in refinance activity. The increase in non-interest expense was primarily driven by a $2.9 million decrease in deferred compensation, an increase in personnel expense to support the growth in the balance sheet, and added personnel from the branch purchase and assumption transaction ("Branch Acquisition"). The increase in net interest income was due to an increase in average loan balances and a reduction in our average cost of funds.

The six months ended June 30, 2021 compared with the six months ended June 30, 2020. We reported net income available to common shareholders of $12.3 million for the six months ended June 30, 2021, compared to $10.0 million of net income available to common shareholders for the six months ended June 30, 2020, a $2.2 million, or 22.4%, increase.

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For the six months ended June 30, 2021, our income before income tax was $16.2 million, a $3.1 million, or 23.5%, increase from the six months ended June 30, 2020. The increase was primarily driven by a $10.0 million increase in net interest income, after provision for loan losses, partially offset by a $3.5 million decrease in net gain on mortgage loans and a $3.9 million increase in non-interest expense. The increase in net interest income was due to an increase in average loan balances and a reduction in our average cost of funds. The decrease in net gain on mortgage loans was primarily driven by a slowdown in new lock volume associated with the decrease in refinance activity. The increase in non-interest expense was primarily driven by a $1.9 million decrease in deferred compensation, an increase in personnel expense to support the growth in the balance sheet, and added personnel from the Branch Acquisition.

Net Interest Income

The three months ended June 30, 2021 compared with the three months ended June 30, 2020. For the three months ended June 30, 2021, net interest income, before the provision for loan losses, was $14.2 million, an increase of $3.4 million, or 31.7%, compared to the three months ended June 30, 2020. The increase in net interest income was driven by a $304.8 million increase in average loans outstanding and a 20 basis point decrease in the average cost of funds, partially offset by a $235.9 million increase in average interest bearing deposit balances. Net interest margin decreased 9 basis points to 3.01%, in the second quarter of 2021, from 3.10% reported in the second quarter of 2020. The decrease in net interest margin was primarily a result of a more liquid balance sheet mix resulting from continued strong deposit growth as a result of inflows from large commercial depositors and higher deposit balances across the Company’s clientele due to the improving economic and business environment.

The six months ended June 30, 2021 compared with the six months ended June 30, 2020. For the six months ended June 30, 2021, net interest income, before the provision for loan losses, was $27.3 million, an increase of $7.5 million, or 38.3%, compared to the six months ended June 30, 2020. The increase in net interest income was driven by a $421.9 million increase in average loans outstanding and a 39 basis point decrease in the average cost of funds, partially offset by a $284.1 million increase in average interest bearing deposit balances. Net interest margin decreased 16 basis points to 2.95%, in the six months ended June 30, 2021, from the 3.11% reported in the six months ended June 30, 2020. The decrease in net interest margin was primarily a result of a 29 basis point decrease in average loan yield and a more liquid balance sheet mix.

The increase in average loans outstanding for the three and six months ended June 30, 2021 compared to the same periods in 2020 was due to three primary factors: organic growth, PPP loan originations and the Branch Acquisition. Net interest income related to PPP loans increased $0.7 million and $1.5 million for the three and six months ended June 30, 2021. Average loan yields were 3.89% and 3.77% for the three and six months ended June 30, 2021, compared to 3.85% and 4.06% for the three and six months ended June 30, 2020. The increase in loan yields during the three-month period was primarily driven by an increase in PPP net origination fees. The decrease in loan yields during the six-month period was primarily driven by a lower interest rate environment and higher PPP loans outstanding, offset partially by an increase in PPP net origination fees.

Interest income on our available-for-sale securities portfolio decreased as a result of lower average balances for the three and six months ended June 30, 2021 compared to the same period in 2020. Our average yield on available-for-sale securities during the three and six months ended June 30, 2021 was 2.55% and 2.50%, a 71 and 50 basis point increase, compared to the same period in 2020. The impact of the reduction in average balances was partially offset by a higher average yield on the securities portfolio.

Interest expense on deposits decreased during the three and six months ended June 30, 2021 compared to the same period in 2020. The decrease was driven primarily by a 20 and 41 basis point decline in cost of deposits for the three and six months ended June 30, 2021 compared to the same period in 2020. The decrease in cost of deposits was driven by a reduction in deposit rates consistent with the lower interest rate environment as well as the intentional reduction in higher rate non-relationship deposit balances. The reduction in cost of deposits was partially offset by an increase in average interest-bearing deposit accounts of $235.9 million and $284.1 million, for the three and six months ended June 30, 2021, compared to the same period in 2020.

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The following tables present an analysis of net interest income and net interest margin for the periods presented, using daily average balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid and the average rate earned or paid on those assets or liabilities.


	As of and for the Three Months Ended June 30,
	2021						2020
			Interest		Average				Interest		Average
	Average		Earned /		Yield /		Average		Earned /		Yield /
(Dollars in thousands)	Balance⁽¹⁾		Paid		Rate		Balance⁽¹⁾		Paid		Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	292,615	$	92	0.13	%	$	76,463	$	44	0.23	%
Available-for-sale securities⁽²⁾		26,474		169	2.55			48,614		224	1.84
Loans⁽³⁾		1,573,553		15,287	3.89			1,268,797		12,202	3.85
Interest-earning assets⁽⁴⁾		1,892,642		15,548	3.29			1,393,874		12,470	3.58
Mortgage loans held for sale⁽⁵⁾		86,760		625	2.88			68,212		550	3.23
Total interest-earning assets, plus mortgage loans held for sale		1,979,402		16,173	3.27			1,462,086		13,020	3.56
Allowance for loan losses		(12,540)						(8,694)
Noninterest-earning assets		93,629						89,817
Total assets	$	2,060,491					$	1,543,209
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,165,734		866	0.30		$	929,805		1,319	0.57
FHLB and Federal Reserve borrowings		148,869		117	0.31			64,067		129	0.81
Subordinated notes		24,252		342	5.64			14,445		226	6.26
Total interest-bearing liabilities		1,338,855		1,325	0.40			1,008,317		1,674	0.66
Noninterest-bearing liabilities:
Noninterest-bearing deposits		539,613						379,374
Other liabilities		16,558						18,815
Total noninterest-bearing liabilities		556,171						398,189
Total shareholders’ equity		165,465						136,703
Total liabilities and shareholders’ equity	$	2,060,491					$	1,543,209
Net interest rate spread⁽⁶⁾					2.89						2.92
Net interest income⁽⁷⁾			$	14,223					$	10,796
Net interest margin⁽⁸⁾					3.01	%					3.10	%

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	As of and For the Six Months Ended June 30,
	2021						2020
			Interest		Average				Interest		Average
	Average		Earned /		Yield /		Average		Earned /		Yield /
(Dollars in thousands)	Balance⁽¹⁾		Paid		Rate		Balance ⁽¹⁾		Paid		Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	253,314	$	183	0.14	%	$	72,249	$	259	0.72	%
Available-for-sale securities⁽²⁾		29,205		365	2.50			51,911		519	2.00
Loans⁽³⁾		1,564,323		29,499	3.77			1,142,472		23,204	4.06
Interest-earning assets⁽⁴⁾		1,846,842		30,047	3.25			1,266,632		23,982	3.79
Mortgage loans held for sale⁽⁵⁾		131,079		1,777	2.71			53,005		876	3.31
Total interest-earning assets, plus mortgage loans held for sale		1,977,921		31,824	3.22			1,319,637		24,858	3.77
Allowance for loan losses		(12,541)						(8,352)
Noninterest-earning assets		96,988						86,936
Total assets	$	2,062,368					$	1,398,221
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,164,379		1,840	0.32		$	880,270		3,712	0.84
FHLB and Federal Reserve borrowings		143,279		248	0.35			37,281		180	0.97
Subordinated notes		24,256		683	5.63			11,150		363	6.51
Total interest-bearing liabilities		1,331,914		2,771	0.42			928,701		4,255	0.92
Noninterest-bearing liabilities:
Noninterest-bearing deposits		548,610						316,593
Other liabilities		18,842						19,345
Total noninterest-bearing liabilities		567,452						335,938
Shareholders’ equity		163,002						133,582
Total liabilities and shareholders’ equity	$	2,062,368					$	1,398,221
Net interest rate spread⁽⁶⁾					2.84						2.87
Net interest income⁽⁷⁾			$	27,276					$	19,727
Net interest margin⁽⁸⁾					2.95	%					3.11	%

_____________________________________________________________

⁽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⁾ Tax-equivalent yield adjustments are immaterial.

⁽⁵⁾ Mortgage loans held for sale are separated from the interest-earning assets above, as these loans are held for a short period of time until sold in the secondary market and are not held for investment purposes, with interest income recognized in the net gain on mortgage loans line in the Condensed Consolidated Statements of Income. These balances are excluded from the margin calculations in these tables.

⁽⁶⁾ Net interest spread is the average yield on interest-earning assets (excluding mortgage loans held for sale) minus the average rate on interest-bearing liabilities.

⁽⁷⁾ Net interest income is the difference between income earned on interest-earning assets, which does not include interest earned on mortgage loans held for sale, and expense paid on interest-bearing liabilities.

⁽⁸⁾ Net interest margin is equal to net interest income divided by average interest-earning assets (excluding mortgage loans held for sale).

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The following table presents the dollar amount of changes in interest income and interest expense for the periods presented, for each component of interest-earning assets and interest-bearing liabilities (excluding mortgage loans held for sale) and distinguishes between changes attributable to volume and interest rates. Changes attributable to both rate and volume that cannot be separated have been allocated to volume.


	Three Months Ended June 30, 2021						Six Months Ended June 30, 2021
	Compared to 2020						Compared to 2020
	Increase						Increase
	(Decrease) Due				Total		(Decrease) Due				Total
	to Change in:				Increase		to Change in:				Increase
(Dollars in thousands)	Volume		Rate		(Decrease)		Volume		Rate		(Decrease)
Interest-earning assets:
Interest-bearing deposits in other financial institutions	$	68	$	(20)	$	48	$	131	$	(207)	$	(76)
Available-for-sale securities		(142)		87		(55)		(284)		130		(154)
Loans		2,961		124		3,085		7,955		(1,660)		6,295
Total increase (decrease) in interest income	$	2,887	$	191	$	3,078	$	7,802	$	(1,737)	$	6,065
Interest-bearing liabilities:
Interest-bearing deposits		175		(628)		(453)		449		(2,321)		(1,872)
FHLB and Federal Reserve borrowings		67		(79)		(12)		184		(116)		68
Subordinated notes		138		(22)		116		369		(49)		320
Total increase (decrease) in interest expense	$	380	$	(729)	$	(349)	$	1,002	$	(2,486)	$	(1,484)
Increase in net interest income	$	2,507	$	920	$	3,427	$	6,800	$	749	$	7,549

Non-Interest Income

The three months ended June 30, 2021 compared with the three months ended June 30, 2020. For the three months ended June 30, 2021 compared with the three months ended June 30, 2020, non-interest income decreased $5.9 million, or 38.4%, to $9.5 million. The decrease in non-interest income during the three months ended June 30, 2021 was primarily a result of a $6.3 million decrease in net gain on mortgage loans, compared to the same period in 2020.

The six months ended June 30, 2021 compared with the six months ended June 30, 2020. For the six months ended June 30, 2021 compared with the six months ended June 30, 2020, non-interest income decreased $3.1 million, or 13.3%, to $20.1 million. The decrease in non-interest income during the six months ended June 30, 2021 was primarily a result of a $3.5 million decrease in net gain on mortgage loans, compared to the same period in 2020.

The tables below present the significant categories of our non-interest income for the three and six months ended June 30, 2021 and 2020:


	Three Months Ended
	June 30,				Change
(Dollars in thousands)	2021		2020		$		%
Non-interest income:
Trust and investment management fees	$	5,009	$	4,609	$	400		8.7	%
Net gain on mortgage loans		3,914		10,173		(6,259)		(61.5)
Banking fees		394		221		173		78.3
Risk management and insurance fees		92		333		(241)		(72.4)
Income on company-owned life insurance		89		91		(2)		(2.2)
Total non-interest income	$	9,498	$	15,427	$	(5,929)	(38.4)		%

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	Six Months Ended
	June 30,				Change
(Dollars in thousands)	2021		2020		$		%
Non-interest income:
Trust and investment management fees	$	9,856	$	9,340	$	516		5.5	%
Net gain on mortgage loans		9,110		12,654		(3,544)		(28.0)
Bank fees		767		589		178		30.2
Risk management and insurance fees		143		429		(286)		(66.7)
Income on company-owned life insurance		177		182		(5)		(2.7)
Other		60		—		60		*
Total non-interest income	$	20,113	$	23,194	$	(3,081)	(13.3)		%

________________________________________

* Not meaningful

Trust and investment management fees—For the three months ended June 30, 2021 compared to the same period in 2020, our trust and investment management fees increased $0.4 million, or 8.7%. For the six months ended June 30, 2021 compared to the same period in 2020, our trust and investment management fees increased $0.5 million, or 5.5%. The increase is driven by asset growth, partially offset by a reduction in trust and investment management fees generated by the LA Fixed Income team that was sold in November 2020.

Net gain on mortgage loans—For the three months ended June 30, 2021 compared to the same period in 2020, our net gain on mortgage loans decreased by $6.3 million, or 61.5%, to $3.9 million. For the six months ended June 30, 2021 compared to the same period in 2020, our net gain on mortgage loans decreased by $3.5 million, or 28.0%, to $9.1 million. The decrease in net gain on mortgage loans was primarily driven by a slowdown in new lock volume associated with the decrease in refinance activity.

Provision for Loan Losses

We have a dedicated problem loan resolution team comprised of associates from our credit, senior leadership, risk and accounting teams that meets frequently to ensure that watch list and problem credits are identified early and actively managed. We work to identify potential losses in a timely manner and proactively manage the problem credits to minimize losses. For the six months ended June 30, 2021, we recorded an immaterial provision for credit losses.

The Company has increased loan level reviews and portfolio monitoring to address the changing environment. Management believes the financial strength of the Company’s clientele and the diversity of the portfolio continues to mitigate the credit risk within the portfolio.

Non-Interest Expense

The three months ended June 30, 2021 compared with the three months ended June 30, 2020. The increase in non-interest expense of 22.8% to $15.5 million for the three months ended June 30, 2021, was primarily due to higher salaries and employee benefits, professional services, and marketing expenses, offset partially by a reduction in other non-interest expense.

The six months ended June 30, 2021 compared with the six months ended June 30, 2020. The increase in non-interest expense of 14.1% to $31.2 million for the six months ended June 30, 2021, was primarily due to higher salaries and employee benefits, professional services, and data processing expenses, offset partially by a reduction in net loss on assets held for sale and other non-interest expense.

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The tables below present the significant categories of our non-interest expense for the periods noted:


	Three Months Ended
	June 30,				Change
(Dollars in thousands)	2021		2020		$		%
Non-interest expense:
Salaries and employee benefits	$	9,643	$	6,690	$	2,953	44.1	%
Occupancy and equipment		1,443		1,515		(72)	(4.8)
Professional services		1,370		1,231		139	11.3
Technology and information systems		904		993		(89)	(9.0)
Data processing		1,093		1,037		56	5.4
Marketing		398		253		145	57.3
Amortization of other intangible assets		4		38		(34)	(89.5)
Other		666		887		(221)	(24.9)
Total non-interest expense	$	15,521	$	12,644	$	2,877	22.8	%

	Six Months Ended
	June 30,				Change
(Dollars in thousands)	2021		2020		$		%
Non-interest expense:
Salaries and employee benefits	$	19,504	$	15,172	$	4,332	28.6	%
Occupancy and equipment		2,852		2,955		(103)	(3.5)
Professional services		2,649		2,254		395	17.5
Technology and information systems		1,846		1,962		(116)	(5.9)
Data processing		2,108		1,884		224	11.9
Marketing		719		668		51	7.6
Amortization of other intangible assets		8		40		(32)	(80.0)
Net loss on assets held for sale		—		553		(553)	*
Other		1,464		1,803		(339)	(18.8)
Total non-interest expense	$	31,150	$	27,291	$	3,859	14.1	%

________________________________________

* Not meaningful

Salaries and employee benefits—Salaries and employee benefits increased $3.0 million, or 44.1%, and $4.3 million, or 28.6%, for the three and six months ending June 30, 2021, respectively. The increase in the three-month period was driven by a $2.9 million decrease in deferred compensation. The increase during the six-month period was primarily driven by a $1.9 million decrease in deferred compensation and an increase in personnel expense to support the growth in the balance sheet, and added personnel from the Branch Acquisition.

Professional services—The increase in professional services of $0.1 million, or 11.3%, and $0.4 million, or 17.5%, for the three and six months ending June 30, 2021, respectively, was primarily driven by additional FDIC insurance expense related to our balance sheet growth and expenses related to the PPP program.

Data processing—The increase in data processing costs of $0.1 million, or 5.4%, and $0.2 million, or 11.9%, for the three and six months ending June 30, 2021, respectively, was primarily driven by an increase in core systems cost as a result of an increase in accounts and transactions related to the balance sheet growth and growth in our Mortgage segment.

Net loss on assets held for sale—The decrease in net loss on assets held for sale of $0.6 million for the six months ending June 30, 2021 was driven by the completion of the sale of held for sale assets in 2020.

Other—The decrease in other of $0.2 million, or 24.9%, and $0.3 million, or 18.8% for the three and six months ending June 30, 2021, respectively, was primarily driven by an SEC penalty of $0.2 million and other fraud losses in 2020.

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Income Tax

The Company recorded an income tax provision of $1.9 million and $2.8 million, respectively, for the three months ended June 30, 2021 and 2020, reflecting an effective tax rate of 23.3% and 24.1%, respectively. The Company recorded an income tax provision of $4.0 million and $3.1 million, respectively, for the six months ended June 30, 2021 and 2020, reflecting an effective tax rate of 24.3% and 23.7%, respectively. The decrease in effective tax for the three months ended June 30, 2021 was primarily attributable to a favorable benefit from vested shares with a vesting date fair value greater than the grant date fair value.

Segment Reporting

We have two reportable operating segments: Wealth Management and Mortgage. Our Wealth Management segment consists of operations relating to the Company’s fully integrated wealth management products and services. Services provided include deposit, loan, insurance, and trust and investment management advisory products and services. Our Mortgage segment consists of operations relating to the Company’s residential mortgage service offerings. Mortgage products and services are financial in nature, for which premiums are recognized net of expenses, upon the sale of mortgage loans to third parties. Services provided by our Mortgage segment include soliciting, originating, and selling mortgage loans into the secondary market. Mortgage loans originated and held for investment purposes are recorded in the Wealth Management segment, as this segment provides ongoing services to our clients.

The Company completed the sale of its LA fixed income team in the fourth quarter 2020. The LA fixed income team and the related assets made up a majority of the previously reported Capital Management Segment. As a result of the sale, the Company evaluated its reportable segments and determined the remaining assets in the Capital Management segment no longer met the thresholds to be a reportable segment.

For all periods presented, the Wealth Management segment includes the key metrics of the previously reported Capital Management segment.

The following tables present key metrics related to our segments:


	Three Months Ended June 30, 2021									Six Months Ended June 30, 2021
	Wealth									Wealth
(Dollars in thousands)	Management			Mortgage			Consolidated			Management			Mortgage			Consolidated
Income⁽¹⁾	$	19,782		$	3,927		$	23,709		$	38,253		$	9,124		$	47,377
Income before taxes	$	6,983		$	1,205		$	8,188		$	12,900		$	3,327		$	16,227
Profit margin		35.3	%		30.7	%		34.5	%		33.7	%		36.5	%		34.3	%


	Three Months Ended June 30, 2020									Six Months Ended June 30, 2020
	Wealth									Wealth
(Dollars in thousands)	Management			Mortgage			Consolidated			Management			Mortgage			Consolidated
Income⁽¹⁾	$	13,902		$	10,197		$	24,099		$	27,729		$	12,701		$	40,430
Income before taxes	$	3,148		$	8,307		$	11,455		$	4,119		$	9,020		$	13,139
Profit margin		22.6	%		81.5	%		47.5	%		14.9	%		71.0	%		32.5	%

________________________________________

⁽¹⁾ Net interest income after provision plus non-interest income.

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The tables below present selected financial metrics of each segment as of and for the periods presented:

Wealth Management


	As of and for the Three Months Ended June 30,
(Dollars in thousands)	2021		2020⁽¹⁾			$ Change		% Change
Total interest income	$	15,548	$	12,470		$	3,078	24.7	%
Total interest expense		1,325		1,674			(349)	(20.8)
Provision for loan losses		12		2,124			(2,112)	(99.4)
Net interest income, after provision for loan losses		14,211		8,672			5,539	63.9
Non-interest income		5,571		5,230			341	6.5
Total income		19,782		13,902			5,880	42.3
Depreciation and amortization expense		262		255			7	2.7
All other non-interest expense		12,537		10,499			2,038	19.4
Income before income tax	$	6,983	$	3,148		$	3,835	121.8	%
Goodwill	$	24,191	$	24,191		$	—	—
Assets held for sale		—		3,010			(3,010)	*
Total assets	$	1,956,393	$	1,730,957		$	225,436	13.0	%

	As of and for the Six Months Ended June 30,
(Dollars in thousands)	2021		2020⁽¹⁾			$ Change		% Change
Total interest income	$	30,047	$	23,982		$	6,065	25.3	%
Total interest expense		2,771		4,255			(1,484)	(34.9)
Provision for loan losses		12		2,491			(2,479)	(99.5)
Net interest income, after provision for loan losses		27,264		17,236			10,028	58.2
Non-interest income		10,989		10,493			496	4.7
Total income		38,253		27,729			10,524	38.0
Depreciation and amortization expense		520		510			10	2.0
All other non-interest expense		24,833		23,100	⁽²⁾		1,733	7.5
Income before income tax	$	12,900	$	4,119		$	8,781	213.2	%
Goodwill	$	24,191	$	24,191		$	—	—	%
Assets held for sale		—		3,010			(3,010)	*
Total assets	$	1,956,393	$	1,730,957		$	225,436	13.0	%

________________________________________

* Not meaningful

⁽¹⁾ Period includes financial information previously reported under the Capital Management segment.

⁽²⁾ Includes loss on assets held for sale of $0.6 million previously reported Capital Management segment.

The Wealth Management segment reported income before income tax of $7.0 million and $12.9 million for the three and six months ended June 30, 2021, respectively, compared to $3.1 million and $4.1 million for the same periods in 2020. The majority of our assets and liabilities are on the Wealth Management segment balance sheet and the increase in income before taxes is primarily driven by an increase in net interest income, after provision for loan losses, offset partially by an increase in non-interest expense. As the revenues have increased corresponding with the growth in the balance sheet, non-interest expense has increased at a slower pace.

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Mortgage


	As of and for the Three Months Ended June 30,
(Dollars in thousands)	2021		2020		$ Change		% Change
Total interest income	$	—	$	—	$	—	—	%
Total interest expense		—		—		—	—
Provision for loan losses		—		—		—	—
Net interest income, after provision for loan losses		—		—		—	—
Non-interest income		3,927		10,197		(6,270)	(61.5)
Total income		3,927		10,197		(6,270)	(61.5)
Depreciation and amortization expense		13		21		(8)	(38.1)
All other non-interest expense		2,709		1,869		840	44.9
Income before income tax	$	1,205	$	8,307	$	(7,102)	(85.5)
Total assets	$	52,911	$	79,569	$	(26,658)	(33.5)	%

	As of and for the Six Months Ended June 30,
(Dollars in thousands)	2021		2020		$ Change		% Change
Total interest income	$	—	$	—	$	—	—	%
Total interest expense		—		—		—	—
Provision for loan losses		—		—		—	—
Net interest income, after provision for loan losses		—		—		—	—
Non-interest income		9,124		12,701		(3,577)	(28.2)
Total income		9,124		12,701		(3,577)	(28.2)
Depreciation and amortization expense		27		42		(15)	(35.7)
All other non-interest expense		5,770		3,639		2,131	58.6
Income before income tax	$	3,327	$	9,020	$	(5,693)	(63.1)	%
Total assets	$	52,911	$	79,569	$	(26,658)	(33.5)	%

The Mortgage segment reported income before income tax of $1.2 million and $3.3 million for the three and six months ended June 30, 2021, respectively, compared to $8.3 million and $9.0 million for the same periods in 2020. The overall decrease in non-interest income was primarily driven by a slowdown in new lock volume associated with the decrease in refinance activity. The overall increase in non-interest expense was primarily driven by variable costs associated with the increase in mortgage originations during the three and six months ended June 30, 2021, compared to the three and six months ended June 30, 2020.

Financial Condition

The table below presents our Condensed Consolidated Balance Sheets as of the dates presented:

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	June 30,		December 31,
(Dollars in thousands)	2021		2020		$ Change		% Change
Balance Sheet Data:
Cash and cash equivalents	$	289,089	$	155,989	$	133,100	85.3	%
Investments		25,532		36,666		(11,134)	(30.4)
Gross loans		1,571,060		1,532,833		38,227	2.5
Allowance for loan losses		(12,552)		(12,539)		(13)	*
Loans, net of allowance		1,558,508		1,520,294		38,214	2.5
Mortgage loans held for sale		48,563		161,843		(113,280)	(70.0)
Goodwill & other intangible assets, net		24,250		24,258		(8)	(0.0)
Company-owned life insurance		15,626		15,449		177	1.1
Other assets		47,736		59,156		(11,420)	(19.3)
Total assets	$	2,009,304	$	1,973,655	$	35,649	1.8

Deposits	$	1,679,053	$	1,619,910	$	59,143	3.7
Borrowings		145,023		173,854		(28,831)	(16.6)
Other liabilities		17,242		24,929		(7,687)	(30.8)
Total liabilities		1,841,318		1,818,693		22,625	1.2
Total shareholders’ equity		167,986		154,962		13,024	8.4
Total liabilities and shareholders’ equity	$	2,009,304	$	1,973,655	$	35,649	1.8	%

________________________________________

* Not meaningful

Cash and cash equivalents increased by $133.1 million, or 85.3%, to $289.1 million as of June 30, 2021 compared to December 31, 2020. The increase in liquidity was driven by organic growth in deposits and a reduction in mortgage loans held for sale. Deposit growth was driven by new client relationships, in addition to increases in existing client accounts, and corporate initiatives to support current and future balance sheet growth. The decrease in mortgage loans held for sale balances was due to the increase in loan sale volume. During the same period, investments decreased by $11.1 million, or 30.4%, to $25.5 million as of June 30, 2021. The decrease was driven by the Company's decision to not reinvest cash flows due to the low rate environment.

Loans, net of allowance increased by $38.2 million, or 2.5%, to $1.56 billion as of June 30, 2021 compared to December 31, 2020. The increase was driven by organic growth net of PPP loan forgiveness. We experienced growth in all categories excluding PPP loans that are included in the Cash, Securities and Other category.

Mortgage loans held for sale decreased $113.3 million, or 70.0%, to $48.6 million as of June 30, 2021 compared to December 31, 2020. The decrease was driven by an increase in loan sale volume.

Other assets decreased by $11.4 million, or 19.3%, to $47.7 million as of June 30, 2021 compared to December 31, 2020. This was primarily related to a $7.0 million decrease in balances related to unfunded mortgage IRLC.

Deposits increased $59.1 million, or 3.7%, to $1.68 billion as of June 30, 2021 compared to December 31, 2020. The increase was primarily attributable to an increase in non-interest bearing and money market deposits resulting from inflows from large commercial depositors and higher deposit balances across the Company’s clientele due to the improving economic and business environment.

Money market deposit accounts decreased $7.4 million, or 0.9%, to $840.1 million as of June 30, 2021 compared to December 31, 2020. Time deposit accounts decreased $35.2 million, or 20.4%, from December 31, 2020 to $137.5 million as of June 30, 2021. Negotiable order of withdrawal, or NOW accounts, increased $28.0 million, or 24.8%, to $141.1 million from December 31, 2020 to June 30, 2021.

Borrowings decreased $28.8 million, or 16.6%, to $145.0 million as of June 30, 2021 compared to December 31, 2020. The decrease is attributed to a reduction in outstanding advances on the Federal Reserve’s Paycheck Protection Program Loan Facility. Borrowing from this facility is expected to match fund the balances of PPP loans.

Other liabilities decreased $7.7 million, or 30.8%, to $17.2 million as of June 30, 2021 compared to December 31, 2020. The decrease is primarily attributed to decreases in salaries payable and payables related to the mortgage hedge position.

Total shareholders’ equity increased $13.0 million, or 8.4%, from December 31, 2020 to $168.0 million as of June 30, 2021. The increase is primarily due to an increase in net income.

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Assets Under Management


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in millions)	2021			2020			2021			2020
Managed Trust Balance at Beginning of Period	$	1,821		$	1,471		$	1,890		$	1,750
New relationships		1			2			16			12
Closed relationships		(1)			(1)			(1)			(11)
Contributions		10			11			28			65
Withdrawals		(34)			(11)			(154)			(100)
Market change, net		95			48			113			(196)
Ending Balance	$	1,892		$	1,520		$	1,892		$	1,520
Yield*		0.18	%		0.21	%		0.18	%		0.21	%

Directed Trust Balance at Beginning of Period	$	1,031		$	881		$	951		$	989
New relationships		6			5			82			5
Closed relationships		(7)			—			(7)			(5)
Contributions		13			23			18			24
Withdrawals		(9)			(2)			(14)			(70)
Market change, net		35			(24)			39			(60)
Ending Balance	$	1,069		$	883		$	1,069		$	883
Yield*		0.09	%		0.08	%		0.08	%		0.08	%

Investment Agency Balance at Beginning of Period	$	1,933		$	1,796		$	1,840		$	2,009
New relationships		20			40			61			79
Closed relationships		(9)			(3)			(23)			(9)
Contributions		73			53			168			107
Withdrawals		(53)			(50)			(128)			(129)
Market change, net		80			120			126			(101)
Ending Balance	$	2,044		$	1,956		$	2,044		$	1,956
Yield*		0.68	%		0.66	%		0.66	%		0.67	%

Custody Balance at Beginning of Period	$	595		$	458		$	518		$	452
New relationships		—			—			—			—
Closed relationships		—			(2)			(1)			(2)
Contributions		1			—			71			76
Withdrawals		(8)			(14)			(10)			(15)
Market change, net		26			32			36			(37)
Ending Balance	$	614		$	474		$	614		$	474
Yield*		0.03	%		0.03	%		0.03	%		0.03	%

401(k)/Retirement Balance at Beginning of Period	$	1,106		$	1,030		$	1,056		$	988
New relationships		1			3			8			4
Closed relationships		-			(38)			(52)			(44)
Contributions		28			29			55			60
Withdrawals		(30)			(20)			(58)			(41)
Market change, net		38			(85)			134			(48)
Ending Balance⁽¹⁾	$	1,143		$	919		$	1,143		$	919
Yield*		0.15	%		0.16	%		0.15	%		0.17	%

Total Assets Under Management at Beginning of Period	$	6,486		$	5,636		$	6,255		$	6,188
New relationships		28			50			167			100
Closed relationships		(17)			(44)			(84)			(71)
Contributions		125			116			340			332
Withdrawals		(134)			(97)			(364)			(355)
Market change, net		274			91			448			(442)
Total Assets Under Management	$	6,762		$	5,752		$	6,762		$	5,752
Yield*		0.30	%		0.32	%		0.29	%		0.32	%

________________________________________

* Trust & investment management fees divided by period end balance.

⁽¹⁾ AUM reported for the current period are one quarter in arrears.

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Assets under management increased $276.5 million, or 4.3%, for the three months ended June 30, 2021 and increased $506.8 million, or 8.1%, for the six months ended June 30, 2021. The increase was primarily attributable to improving market conditions resulting in an increase in the value of assets under management balances.

Available-for-sale securities

Investments we intend to hold for an indefinite period of time, but not necessarily to maturity, are classified as available-for-sale and are recorded at fair value using current market information from a pricing service, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax. All our investments in securities were classified as available-for-sale for the periods presented below. The carrying values of our investment securities classified as available-for-sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity.

The following tables summarize the amortized cost and estimated fair value of our investment securities as of June 30, 2021 and December 31, 2020:


	June 30, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Investment securities available-for-sale:
U.S. Treasury debt	$	250	$	1	$	—	$	251
Corporate bonds		6,000		157		(15)		6,142
Government National Mortgage Association ("GNMA") mortgage -backed securities—residential		15,619		467		—		16,086
Federal National Mortgage Association ("FNMA") mortgage-backed securities—residential		1,113		47		—		1,160
Corporate collateralized mortgage obligations ("CMO") and mortgage-backed securities ("MBS")		1,875		41		(23)		1,893
Total securities available-for-sale	$	24,857	$	713	$	(38)	$	25,532


	December 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
Investment securities available-for-sale:
U.S. Treasury debt	$	250	$	4	$	—	$	254
Corporate bonds		6,000		55		(11)		6,044
GNMA mortgage -backed securities—residential		23,806		798		—		24,604
FNMA mortgage-backed securities—residential		1,616		61		—		1,677
Corporate CMO and MBS		4,078		62		(53)		4,087
Total securities available-for-sale	$	35,750	$	980	$	(64)	$	36,666

The following tables represent the book value of our contractual maturities and weighted average yield for our investment securities as of the dates presented. Contractual maturities may differ from expected maturities because issuers can have the right to call or prepay obligations without penalties. Our investments are taxable securities. Weighted average

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yields are not presented on a taxable equivalent basis. Securities not due at a single maturity date are included as after ten years.


	Maturity as of June 30, 2021
	One Year or Less				One to Five Years				Five to Ten Years				After Ten Years
			Weighted				Weighted				Weighted				Weighted
	Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average
(Dollars in thousands)	Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield
Available-for-sale:
U.S. Treasury debt	$	250	0.03	%	$	—	—	%	$	—	—	%	$	—	—	%
Corporate bonds		—	—			1,250	0.24			4,750	0.87			—	—
GNMA mortgage-backed securities - residential		—	—			—	—			—	—			15,619	1.53
FNMA mortgage-backed securities - residential		—	—			—	—			—	—			1,113	0.09
Corporate CMO and MBS		—	—			—	—			41	*			1,834	0.22
Total available-for-sale	$	250	0.03	%	$	1,250	0.24	%	$	4,791	0.87	%	$	18,566	1.84	%


	Maturity as of December 31, 2020
	One Year or Less				One to Five Years				Five to Ten Years				After Ten Years
			Weighted				Weighted				Weighted				Weighted
	Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average
(Dollars in thousands)	Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield
Available-for-sale:
U.S. Treasury debt	$	250	0.02	%	$	—	—	%	$	—	—	%	$	—	—	%
Corporate bonds		—	—			1,250	0.17			—	—			4,750	0.60
GNMA mortgage-backed securities - residential		—	—			—	—			—	—			23,806	1.59
FNMA mortgage-backed securities - residential		—	—			—	—			—	—			1,616	0.10
Corporate CMO and MBS		—	—			—	—			43	*			4,035	0.31
Total available-for-sale	$	250	0.02	%	$	1,250	0.17	%	$	43	—	%	$	34,207	2.60	%

________________________________________

* Not meaningful

As of June 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

Loan Portfolio

Our primary source of interest income is derived through interest earned on loans to high net worth individuals and their related commercial interests. Our senior lending and credit team consists of seasoned, experienced personnel and we believe that our officers are well versed in the types of lending in which we are engaged. Underwriting policies and decisions are managed centrally and the approval process is tiered based on loan size, making the process consistent, efficient, and effective. The management team and credit culture demands prudent, practical, and conservative approaches to all credit requests in compliance with the loan policy guidelines to ensure strong credit underwriting practices.

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 June 30, 2021 and December 31, 2020, we had mortgage loans held for sale of $48.6 million and $161.8 million, respectively, in residential mortgage loans we originated.

As of June 30, 2021, the Company has $103.1 million in PPP loans outstanding with $2.1 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 two or

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five-year period, based on the PPP loan terms. If the loan receives partial forgiveness, the income related to the unforgiven balance is amortized over the remaining life of the loan based on the term in the note, which is five years for most PPP loans. If a loan receives full forgiveness from the SBA, the remaining income will be recognized upon receipt of the funds from the SBA. As of June 30, 2021, the Company had submitted loans with original loan amounts of $202.7 million to the SBA for forgiveness and had received forgiveness on 722 loans totaling $177.4 million.

The following table summarizes our loan portfolio by type of loan as of the dates indicated:


	June 30,				December 31,
	2021				2020
(Dollars in thousands)	Amount		% of Total		Amount		% of Total
Cash, Securities and Other	$	290,907	18.5	%	$	357,020	23.3	%
Construction and Development		127,141	8.1			131,111	8.5
1-4 Family Residential		496,101	31.5			455,038	29.7
Non-Owner Occupied CRE		324,493	20.6			281,943	18.4
Owner Occupied CRE		178,847	11.4			163,042	10.6
Commercial and Industrial		155,526	9.9			146,031	9.5
Total loans held for investment⁽¹⁾	$	1,573,015	100.0	%	$	1,534,185	100.0	%
Mortgage loans held for sale	$	48,563			$	161,843

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⁽¹⁾Loans held for investment exclude deferred (fees) costs and unamortized premiums/ (unaccreted discounts), net of $(2.0) million and $(1.4) million as of June 30, 2021 and December 31, 2020, 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 consumer collateral and an immaterial amount of each loan may be unsecured. This segment of our portfolio is affected by a variety of local and national economic factors affecting borrowers’ employment prospects, income levels, and overall economic sentiment. PPP loans that are fully guaranteed by the SBA are classified within this line item.

●

Construction and Development—consists of loans to finance the construction of residential and non-residential properties. These loans are dependent on the strength of the industries of the related borrowers and the risks consistent with construction projects.

●

1-4 Family Residential—consists of loans and home equity lines of credit secured by 1-4 family residential properties. These loans typically enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the owner. In addition, some borrowers secure a commercial purpose loan with owner occupied or non-owner occupied 1-4 family residential properties. Loans in this segment are dependent on the industries tied to these loans as well as the national and local economies, and local residential and commercial real estate markets.

●

Commercial Real Estate, Owner Occupied and Non-Owner Occupied—consists of commercial loans collateralized by real estate. These loans may be collateralized by owner occupied or non-owner occupied real estate, as well as multi-family residential real estate. These loans are dependent on the strength of the industries of the related borrowers and the success of their businesses.

●

Commercial and Industrial—consists of commercial and industrial loans, including working capital lines of credit, permanent working capital term loans, business asset loans, acquisition, expansion and development loans, and other loan products, primarily in our target markets. This portfolio primarily consists of term loans and lines of credit which are dependent on the strength of the industries of the related borrowers and the success of their businesses. MSLP loans are classified within this line item.

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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, excluding deferred (fees) costs, and unamortized premiums/ (unaccreted discounts), as of the date indicated are summarized in the following tables:


	As of June 30, 2021
	One Year		One Through			After
(Dollars in thousands)	or Less		Five Years			Five Years		Total
Cash, Securities and Other	$	85,690	$	197,819	⁽¹⁾	$	7,398	$	290,907
Construction and Development		59,576		64,831			2,734		127,141
1-4 Family Residential		55,588		80,906			359,607		496,101
Non-Owner Occupied CRE		34,543		194,555			95,395		324,493
Owner Occupied CRE		19,456		56,011			103,380		178,847
Commercial and Industrial		63,870		51,981			39,675		155,526
Total loans	$	318,723	$	646,103		$	608,189	$	1,573,015
Amounts with fixed rates	$	100,818	$	426,474		$	225,447	$	752,739
Amounts with floating rates		217,905		219,629			382,742		820,276
Total loans	$	318,723	$	646,103		$	608,189	$	1,573,015

________________________________________

⁽¹⁾Includes PPP loans.


	As of December 31, 2020
	One Year		One Through			After
(Dollars in thousands)	or Less		Five Years			Five Years		Total
Cash, Securities and Other	$	90,053	$	259,611	⁽¹⁾	$	7,356	$	357,020
Construction and Development		78,900		50,703			1,508		131,111
1-4 Family Residential		41,212		78,359			335,467		455,038
Non-Owner Occupied CRE		25,801		175,476			80,666		281,943
Owner Occupied CRE		8,355		54,403			100,284		163,042
Commercial and Industrial		47,397		68,607			30,027		146,031
Total loans	$	291,718	$	687,159		$	555,308	$	1,534,185
Amounts with fixed rates	$	76,131	$	469,155		$	205,548	$	750,834
Amounts with floating rates		215,587		218,004			349,760		783,351
Total loans	$	291,718	$	687,159		$	555,308	$	1,534,185

________________________________________

⁽¹⁾Includes PPP loans.

Loan Modifications

The CARES Act provides banks optional, temporary relief from accounting for certain loan modifications as a TDR. The modifications must be related to the adverse effects of COVID-19, and certain other criteria are required to be met in order to apply the relief. Interagency guidance from Federal Reserve and the FDIC confirmed with the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. We believe our loan modification program meets that definition. In accordance with that guidance, the Company is recognizing interest income on all loans modified for temporary payment moratoriums, primarily for a period of 180 days or less.

As of June 30, 2021, the Company’s loans include seventy-six modified loans, including acquired loans, across multiple industries in the amount of $143.1 million, representing 9.1% of total loans. No loans which participated in the loan modification program were delinquent according to Bank policy as of June 30, 2021. No loans which participated in the loan modification program were still in their deferral period as of June 30, 2021.

All loans modified in response to COVID-19 are classified as performing as of June 30, 2021. These loans are included in the allowance for loan loss general reserve in accordance with ASC 450-20. Management has increased our

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loan level reviews and portfolio monitoring to address the changing environment. The Company continues to meet regularly with clients who could be more highly impacted by the recent COVID-19 pandemic. These are borrowers in industries we believe may be more impacted by the pandemic, for instance those loans where there may be a greater than 50% probability of a downgrade, covenant violation or 20% reduction in collateral position. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Non-Performing Assets

Non-performing assets include non-accrual loans, TDRs, loans past due 90 days or more and still accruing interest, and OREO. The accrual of interest on loans is discontinued at the time the loan becomes 90 or more days delinquent unless the loan is well secured and in the process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual status or charged off if collection of interest or principal is considered doubtful.

OREO represents assets acquired through, or in lieu of, foreclosure. The amounts reported as OREO are supported by recent appraisals, with the appraised values adjusted, where applicable, for expected transaction fees likely to be incurred upon sale of the property. We incur recurring expenses relating to OREO in the form of maintenance, taxes, insurance, and legal fees, among others, until the OREO parcel is disposed. While disposition efforts with respect to our OREO are generally ongoing, if these properties are appraised at lower-than-expected values or if we are unable to sell the properties at the prices for which we expect to be able to sell them, we may incur additional losses.

The amount of lost interest for non-accrual loans was $0.1 million for each of the three months ended June 30, 2021 and 2020, respectively. For the six months ended June 30, 2021 and 2020, the amount of lost interest for non-accrual loans was $0.1 million.

We had $3.1 million in non-performing assets as of June 30, 2021 compared to $4.3 million as of December 31, 2020. The decrease in our non-performing assets was primarily related to the sale of the final OREO, resulting in a decrease of $0.2 million, and the payoffs of a $0.4 million loan in our Commercial and Industrial portfolio and a $0.5 million loan in our Owner-Occupied CRE portfolio.

The following table presents information regarding non-performing loans as of the dates indicated:


	June 30,			December 31,
(Dollars in thousands)	2021			2020
Non-accrual loans by category⁽¹⁾
Cash, Securities and Other	$	15		$	50
Construction and Development		—			—
1-4 Family Residential		—			—
Non-Owner Occupied CRE		—			—
Owner Occupied CRE		—			479
Commercial and Industrial		3,105			3,529
Total non-accrual loans		3,120			4,058
TDRs still accruing		—			—
Accruing loans 90 or more days past due		—			—
Total non-performing loans		3,120			4,058
OREO		—			194
Total non-performing assets	$	3,120		$	4,252
Non-performing loans to total loans⁽²⁾		0.20	%		0.26	%
Non-performing assets to total assets		0.16			0.22
Allowance for loan losses to non-performing loans		402.31	%		308.99	%

________________________________________

⁽¹⁾ As of June 30, 2021, two non-accrual loans, totaling an immaterial amount, were not classified as TDRs. As of December 31, 2020, two non-accrual loans were not classified as TDRs. See Note 3 – Loans and the Allowance for Loan Losses to the condensed consolidated financial statements.

⁽²⁾ Excludes mortgage loans held for sale of $48.6 million and $161.8 million as of June 30, 2021 and December 31, 2020, respectively.

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Potential Problem Loans

We categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans by credit risk on a quarterly basis, which are segregated into the following definitions for risk ratings:

Special Mention—Loans categorized as special mention have a potential weakness or borrowing relationships that require more than the usual amount of management attention. Adverse industry conditions, deteriorating financial conditions, declining trends, management problems, documentation deficiencies or other similar weaknesses may be evident. Ability to meet current payment schedules may be questionable, even though interest and principal are still being paid as agreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans in this risk grade are not considered adversely classified.

Doubtful—Loans graded doubtful are considered "classified" and have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. However, the amount or certainty of eventual loss is not known because of specific pending factors.

Loans not meeting any of the three criteria above are considered to be pass-rated loans.

As of June 30, 2021 and December 31, 2020 non-performing loans of $3.1 million and $4.1 million, respectively, were included in the substandard category in the table below. The following tables present, by class and by credit quality indicator, the recorded investment in our loans as of the dates indicated:


	As of June 30, 2021								As of December 31, 2020
			Special								Special
(Dollars in thousands)	Pass		Mention		Substandard		Total		Pass		Mention		Substandard		Total
Cash, Securities and Other	$	290,892	$	—	$	15	$	290,907	$	356,970	$	—	$	50	$	357,020
Construction and Development		127,141		—		—		127,141		131,111		—		—		131,111
1-4 Family Residential		496,101		—		—		496,101		451,918		—		3,120		455,038
Non-Owner Occupied CRE		318,512		5,981		—		324,493		275,627		6,316		—		281,943
Owner Occupied CRE		178,146		—		701		178,847		161,850		—		1,192		163,042
Commercial and Industrial		150,523		—		5,003		155,526		140,432		—		5,599		146,031
Total	$	1,561,315	$	5,981	$	5,719	$	1,573,015	$	1,517,908	$	6,316	$	9,961	$	1,534,185

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses, which is a noncash charge to earnings. Loan losses are charged against the allowance when management believes that a loan balance is confirmed uncollectable. Subsequent recoveries, if any, are credited to the allowance for loan losses.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and dollar volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged off.

We are closely monitoring the changing dynamics in the economy and the client impact driven by the COVID-19 pandemic. We have intensified our portfolio management, focusing on higher impacted industries and commercial property types. Our clientele is generally comprised of high net-worth individuals and commercial borrowers with strong credit profiles and multiple sources of repayment. There was an immaterial provision expense taken during the second quarter of 2021. Management will continue to closely monitor the loan portfolio and analyze the economic data to assess the impact on the allowance for loan loss. We believe the allowance for loan losses is adequate as of June 30, 2021.

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The following table presents summary information regarding our allowance for loan losses for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2021			2020			2021			2020
Average loans outstanding⁽¹⁾⁽²⁾	$	1,573,553		$	1,268,797		$	1,564,323		$	1,142,472
Gross loans outstanding at end of period⁽³⁾	$	1,571,060		$	1,422,440		$	1,571,060		$	1,422,440
Allowance for loan losses at beginning of period	$	12,539		$	8,242		$	12,539		$	7,875
Provision for loan losses		12			2,124			12			2,491
Charge-offs:
Cash, Securities and Other		—			24			—			24
Construction and Development		—			—			—			—
1-4 Family Residential		—			—			—			—
Non-Owner Occupied CRE		—			—			—			—
Owner Occupied CRE		—			—			—			—
Commercial and Industrial		—			—			—			—
Total charge-offs		—			24			—			24
Recoveries:
Cash, Securities and Other		1			12			1			12
Construction and Development		—			—			—			—
1-4 Family Residential		—			—			—			—
Non-Owner Occupied CRE		—			—			—			—
Owner Occupied CRE		—			—			—			—
Commercial and Industrial		—			—			—			—
Total recoveries		1			12			1			12
Net charge-offs (recoveries)		(1)			12			(1)			12
Allowance for loan losses at end of period	$	12,552		$	10,354		$	12,552		$	10,354
Allowance for loan losses to total loans⁽⁴⁾		0.80	%		0.73	%		0.80	%		0.73	%
Net charge-offs to average loans⁽⁵⁾		—	%		—	%		—	%		—	%

________________________________________

⁽¹⁾ Average balances are average daily balances.

⁽²⁾ Excludes average outstanding balances of mortgage loans held for sale of $86.8 million and $68.2 million for the three months ended June 30, 2021 and 2020, respectively and $131.1 million and $53.0 million for the six months ended June 30, 2021 and 2020, respectively.

⁽³⁾ Excludes mortgage loans held for sale of $48.6 million and $69.6 million as of June 30, 2021 and 2020, respectively.

⁽⁴⁾ End of period loans as of June 30, 2021 include $116.1 million in acquired loans, $102.4 million in bank originated PPP loans, and $0.7 million of acquired PPP loans. No reserve is allocated for those loans. Excluding these loans would result in an increase of the ratio for the three months ended June 30, 2021.

⁽⁵⁾ For percentages shown as a dash, the ratio of net charge-offs to average loans is negligible or immaterial.

The following table represents the allocation of the allowance for loan losses among loan categories and other summary information. The allocation for loan losses by category should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The allocation of a portion of the allowance for loan losses to one category of loans does not preclude its availability to absorb losses in other categories.

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	As of June 30,				As of December 31,
	2021				2020
(Dollars in thousands)	Amount		%⁽¹⁾		Amount		%⁽¹⁾
Cash, Securities and Other	$	2,039	18.5	%	$	2,579	23.3	%
Construction and Development		871	8.1			932	8.5
1-4 Family Residential		3,399	31.5			3,233	29.7
Non-Owner Occupied CRE		2,223	20.6			2,004	18.4
Owner Occupied CRE		1,225	11.4			1,159	10.6
Commercial and Industrial		2,795	9.9			2,632	9.5
Total allowance for loan losses	$	12,552	100.0	%	$	12,539	100.0	%

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⁽¹⁾ Represents the percentage of loans to total loans in the respective category.

Deferred Tax Assets, Net

Deferred tax assets, net represent the differences in timing of when items are recognized for GAAP purposes and when they are recognized for tax purposes, as well as our net operating losses. Our deferred tax assets, net, are valued based on the amounts that are expected to be recovered in the future utilizing the tax rates in effect at the time recognized. Our deferred tax assets, net as of June 30, 2021, decreased $0.3 million, or 5.2%, from December 31, 2020.

Deposits

Our deposit products include money market accounts, demand deposit accounts, time deposit accounts (typically certificates of deposit), NOW accounts (interest checking accounts), and saving accounts. Our accounts are federally insured by the FDIC up to the legal maximum amount.

Total deposits increased by $59.1 million, or 3.7%, to $1.68 billion as of June 30, 2021 from December 31, 2020. Total average deposits for the three months ended June 30, 2021 were $1.71 billion, an increase of $396.2 million, or 30.3%, compared to $1.31 billion as of June 30, 2020. The increase in total deposits from December 31, 2020 was attributable to continued organic growth with new client accounts as well as increased deposit balances within the existing deposit accounts, offset partially by intentional runoff of higher rate non-relationship deposits.

The following tables present the average balances and average rates paid on deposits for the periods below:


	For the Three Month Period Ending June 30,
	2021				2020
	Average		Average		Average		Average
(Dollars in thousands)	Balance		Rate		Balance		Rate
Deposits
Money market deposit accounts	$	878,341	0.22	%	$	687,900	0.36	%
Demand deposit accounts		130,197	0.16			85,414	0.28
Certificates and other time deposits > $250k		67,408	1.29			54,996	2.03
Certificates and other time deposits < $250k		83,088	0.51			95,894	1.51
Total time deposits		150,496	0.86			150,890	1.72
Savings accounts		6,700	0.03			5,601	0.05
Total interest-bearing deposits		1,165,734	0.30			929,805	0.57
Noninterest-bearing accounts		539,613				379,374
Total deposits	$	1,705,347	0.20	%	$	1,309,179	0.40	%

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	For the Six Month Period Ending June 30,
	2021				2020
	Average		Average		Average		Average
(Dollars in thousands)	Balance		Rate		Balance		Rate
Deposits
Money market deposit accounts	$	878,173	0.24	%	$	647,092	0.68	%
NOW accounts		122,917	0.17			85,707	0.29
Certificates and other time deposits > $250k		67,000	1.33			53,261	2.09
Certificates and other time deposits < $250k		89,803	0.56			89,279	1.81
Total time deposits		156,803	0.89			142,540	1.93
Savings accounts		6,486	0.03			4,931	0.13
Total interest-bearing deposits		1,164,379	0.32			880,270	0.84
Noninterest-bearing accounts		548,610				316,593
Total deposits	$	1,712,989	0.21	%	$	1,196,863	0.62	%

Average noninterest-bearing deposits to average total deposits was 31.6% and 29.0% for the three months ended June 30, 2021 and 2020, respectively, and 32.0% and 26.5% for the six months ended June 30, 2021 and 2020, respectively.

Our average cost of funds was 0.28% and 0.48% for the three months ended June 30, 2021 and 2020, respectively, and 0.29% and 0.68% for the six months ended June 30, 2021 and 2020, respectively. The decrease in cost of funds was driven by a reduction in deposit rates consistent with the lower interest rate environment, and increase in noninterest-bearing deposits and the intentional reduction in higher rate non-relationship deposit balances.

Total money market accounts as of June 30, 2021 were $840.1 million, a decrease of $7.4 million, or 0.9%, compared to $847.4 million as of December 31, 2020. NOW accounts increased $28.0 million, or 24.8%, to $141.1 million compared to December 31, 2020.

Total time deposits as of June 30, 2021 were $137.5 million, a decrease of $35.2 million, or 20.4%, from December 31, 2020.

The following table represents the amount of certificates of deposit by time remaining until maturity as of June 30, 2021:


	As of June 30, 2021
	Maturity Within:
(Dollars in thousands)	Three Months or Less		Three to Six Months		Six to 12 Months		After 12 Months		Total
Time, $250,000 and over	$	7,103	$	19,366	$	16,887	$	21,004	$	64,360
Other		21,470		21,641		10,262		19,766		73,139
Total	$	28,573	$	41,007	$	27,149	$	40,770	$	137,499

Borrowings

We have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs. As of June 30, 2021 and December 31, 2020, borrowings totaled $145.0 million and $173.9 million, respectively.

The decrease in other borrowings is primarily attributed to the paydown of loans in the Paycheck Protection Program Loan Facility from the Federal Reserve with a period end balance of $105.8 million. Borrowing from this facility is expected to match fund the balances of PPP loans. The table below presents balances of each of the borrowing facilities as of the dates indicated:


	June 30,		December 31,
(Dollars in thousands)	2021		2020
Borrowings
FHLB borrowings	$	15,000	$	15,000
Federal Reserve borrowings		105,762		134,563
Subordinated notes		24,261		24,291
Total	$	145,023	$	173,854

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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 June 30, 2021 and December 31, 2020 amounted to $698.3 million and $668.6 million, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $457.7 million as of June 30, 2021.


	As of and for the
	Six Months Ended
	June 30,
(Dollars in thousands)	2021
Short-term borrowings:
Maximum outstanding at any month-end during the period	$	15,000
Balance outstanding at end of period		15,000
Average outstanding during the period	$	15,000
Average interest rate during the period		0.32	%
Average interest rate at the end of the period		0.32	%

As of June 30, 2021 and December 31, 2020, we had a Promissory Note with a correspondent lending partner and the borrowing capacity associated with this facility was $5.0 million with no balance outstanding.

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 June 30, 2021 and December 31, 2020, the Company was in compliance with the covenant requirements.

Liquidity and Capital Resources

Liquidity resources primarily include interest-bearing and noninterest-bearing deposits which primarily contribute to our ability to raise funds to support asset growth, acquisitions, and meet deposit withdrawals and other payment obligations. Access to purchased funds primarily include the ability to borrow from FHLB, other correspondent banks, and the use of brokered deposits.

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The following table illustrates, during the periods presented, the composition of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the period indicated.


	Average Percentage for the Three Months Ended		Average Percentage for the Six Months Ended
	June 30,		June 30,
	2021		2021
Sources of Funds:
Deposits:
Noninterest-bearing	26.19	%	26.60	%
Interest-bearing	56.58		56.46
FHLB and Federal Reserve borrowings	7.22		6.95
Subordinated notes	1.18		1.18
Other liabilities	0.80		0.91
Shareholders’ equity	8.03		7.90
Total	100.00	%	100.00	%
Uses of Funds:
Total loans	75.76	%	75.24	%
Available-for-sale securities	1.28		1.42
Mortgage loans held for sale	4.21		6.36
Interest-bearing deposits in other financial institutions	14.20		12.28
Noninterest-earning assets	4.55		4.70
Total	100.00	%	100.00	%
Average noninterest-bearing deposits to total average deposits	31.64	%	32.03	%
Average loans to total average deposits	92.27		91.32
Average interest-bearing deposits to total average deposits	68.36	%	67.97	%

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 $13.0 million, or 8.4%, from December 31, 2020 to $168.0 million as of June 30, 2021. The increase is primarily due to an increase in net income.

We are subject to various regulatory capital adequacy requirements at a consolidated level and the Bank level. These requirements are administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

Capital levels are viewed as important indicators of an institution’s financial soundness by banking regulators. Generally, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. As of June 30, 2021 and December 31, 2020, 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

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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.


	June 30, 2021				December 31, 2020
(Dollars in thousands)	Amount		Ratio		Amount		Ratio
Tier 1 capital to risk-weighted assets
Bank	$	148,443	11.03	%	$	133,963	10.22	%
Consolidated Company		144,728	10.68			131,507	9.96
Common Equity Tier 1(CET1) to risk-weighted assets
Bank		148,443	11.03			133,963	10.22
Consolidated Company		144,728	10.68			131,507	9.96
Total capital to risk-weighted assets
Bank		161,335	11.99			146,853	11.20
Consolidated Company		182,180	13.45			168,957	12.80
Tier 1 capital to average assets
Bank		148,443	7.98			133,963	7.62
Consolidated Company	$	144,728	7.75	%	$	131,507	7.45	%

Contractual Obligations and Off-Balance Sheet Arrangements

We enter into credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our clients. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Condensed Consolidated Balance Sheets. Commitments may expire without being utilized. Our exposure to loan loss is represented by the contractual amount of these commitments, although material losses are not anticipated. We follow the same credit policies in making commitments as we do for on-balance sheet instruments.

The following table presents future contractual obligations to make future payments for the periods indicated:


	As of June 30, 2021
			More than		More than
	1 Year		1 Year but Less		3 Years but Less		5 Years
(Dollars in thousands)	or Less		than 3 Years		than 5 Years		or More			Total
FHLB and Federal Reserve	$	29,397	$	15,000	$	76,365	$	—		$	120,762
Subordinated notes		—		—		—		24,261	⁽¹⁾		24,261
Time deposits		69,580		62,887		3,803		1,229			137,499
Minimum lease payments		3,300		5,973		3,382		640			13,295
Total	$	102,277	$	83,860	$	83,550	$	26,130		$	295,817

________________________________________

⁽¹⁾ Reflects contractual maturity dates of December 31, 2026, March 31, 2030, and December 1, 2030.

The following table presents financial instruments whose contract amounts represent credit risk, as of the periods indicated.


	June 30,				December 31,
	2021				2020
(Dollars in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	65,274	$	424,856	$	78,506	$	360,883
Standby letters of credit		3,555		16,125		1,933		17,524
Commitments to make loans to sell		115,213		—		370,512		—
Commitments to make loans	$	44,384	$	31,840	$	24,225	$	25,316

We may enter into contracts for services in the conduct of ordinary business operations, which may require payment for services to be provided in the future and may contain penalty clauses for early termination of the contracts. We do not believe these off-balance sheet arrangements have or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. However, there can be no assurance that such arrangements will not have an effect on future operations.

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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, 2020 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 table summarizes the sensitivity in net interest income and fair value of equity over the periods indicated, using a parallel ramp scenario.


	As of June 30, 2021				As of December 31, 2020
	Percent Change		Percent Change		Percent Change		Percent Change
	in Net Interest		in Fair Value of		in Net Interest		in Fair Value of
Change in Interest Rates (Basis Points)	Income		Equity		Income		Equity
300	12.10	%	11.50	%	9.04	%	19.52	%
200	8.23		10.44		5.77		16.02
100	4.03		6.58		2.73		9.58
Base	—		—		—		—
−100	(2.63)	%	(26.86)	%	(2.83)	%	(27.89)	%

The model simulations as of June 30, 2021 imply that our balance sheet is slightly more asset sensitive compared to our balance sheet as of December 31, 2020.

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 on our performance beyond the general effects of inflation. Interest rates do not necessarily move in the same

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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.

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 months ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 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 of the Company in its 2020 Annual Report on Form 10-K filed with the SEC, on March 12, 2021.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Purchases of Equity Securities


					Maximum number (or
				Total number of	approximate dollar
				shares purchased	value) of shares
	Total number		Average	as part of publically	that may yet be
	of shares		price paid	announced plans	purchased under the
	purchased ⁽¹⁾		per share	or programs	plans or programs
April 1, 2021 through April 30, 2021	6,729	$	25.67	—	399,574
May 1, 2021 through May 31, 2021	7,816		25.67	—	399,574
June 1, 2021 through June 30, 2021	—	$	—	—	399,574

________________________________________

⁽¹⁾ These shares relate to the net settlement by employees related to vested, restricted stock awards and do not impact the shares available for repurchase under the 2020 Repurchase Plan. 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.

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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*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

104		Cover 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.

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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.

August 6, 2021	By:	/s/ Scott C. Wylie
Date		Scott C. Wylie
		Chairman, Chief Executive Officer and President

August 6, 2021	By:	/s/ Julie A. Courkamp
Date		Julie A. Courkamp
		Director, Chief Financial Officer and Treasurer