First Western Financial Inc MYFW US Equity☆

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. See "Cautionary Statement Regarding Forward-Looking Statements." Also, see the risk factors and other cautionary statements described under the heading "Item 1A – Risk Factors" included in Item 1A of this Annual Report on Form 10-K. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Company Overview

We are a financial holding company founded in 2002 and headquartered in Denver, Colorado. We provide a fully integrated suite of wealth management services to our clients including banking, trust, and investment management products and services. Our mission is to be the best private bank for the Western wealth management client. We target entrepreneurs, professionals, and high-net worth individuals, typically with $1.0 million-plus in liquid net worth, and their related philanthropic and business organizations, which we refer to as the "Western wealth management client." We believe that the Western wealth management client shares our entrepreneurial spirit and values our sophisticated, high-touch wealth management services that are tailored to meet their specific needs. We partner with our clients to solve their unique financial needs through our expert integrated services provided in a team approach.

We offer our services through a branded network of boutique private trust bank offices, which we believe are strategically located in affluent and high-growth markets in locations across Colorado, Arizona, Wyoming, Montana, and California. Our profit centers, which are comprised of private bankers, lenders, wealth planners and portfolio managers, under the leadership of a local chairman and/or president, are also supported centrally by teams providing management services such as operations, risk management, credit administration, marketing, technology support, human capital, and accounting/finance services, which we refer to as support centers.

From 2004, when we opened our first profit center, until December 31, 2022, we have expanded our footprint into thirteen full service profit centers, three loan production offices, and two trust offices located across five states. Following the completion of the Teton Financial Services, Inc. (“Teton”) acquisition in the fourth quarter of 2021, we added three full service profit centers in Jackson Hole, Pinedale, and Rock Springs, Wyoming. As of and for the year ended December 31, 2022, we had $2.87 billion in total assets, $107.9 million in total revenues and provided fiduciary and advisory services on $6.11 billion of assets under management ("AUM").

Response to COVID-19

The spread of COVID-19 caused significant disruptions in the U.S. economy since it was declared a pandemic in March 2020 by the World Health Organization. Disruptions include temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, and related emergency response legislation. The changes have impacted our clients and their industries, as well as the financial services industry.

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 was intended to provide loans to small businesses to pay their employees, rent, mortgage interest, and utilities. The loans could 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 was an approved SBA PPP lender and participated in all rounds of the program.

The last round of program funds were depleted in early May 2021. With the originations closed, the SBA turned their attention to forgiveness, processing applications submitted by the Company. Loans funded in 2021 became eligible for forgiveness after the covered period of 8 to 24 weeks, which began for some clients in early second quarter of 2021. As of December 31, 2022, we have received forgiveness payments of $308.4 million from the SBA and have 26 PPP loans for a total of $7.1 million with an average loan size of $0.3 million remaining.

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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. In 2021, the deferral period ended for all non-acquired loans previously modified and payments resumed under the original terms. As of December 31, 2022, the Company's loan portfolio included 49 non-acquired loans which were previously modified under the loan modification program, totaling $78.4 million. Through the Teton Acquisition, the Company acquired loans which were previously modified and are still in their deferral period. As of December 31, 2022, there were 14 of these loans, totaling $3.3 million.

The Company also participated in the Federal Reserve’s Main Street Lending Program ("MSLP") to support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. As of December 31, 2022, the Company had five loans with a balance held by the Bank of $6.6 million.

Primary Factors Used to Evaluate the Results of Operations

As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the comparative levels and trends of the line items in our Consolidated Balance Sheets and Statements of Income as well as various financial ratios that are commonly used in our industry. The primary factors we use to evaluate our results of operations include net interest income, non-interest income and non-interest expense.

Net Interest Income

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

Non-Interest Income

Non-interest income primarily consists of the following:

•Trust and investment management fees—fees and other sources of income charged to clients for managing their trust and investment assets, providing financial planning consulting services, 401(k) and retirement advisory consulting services, and other wealth management services. Trust and investment management fees are primarily impacted by rates charged and increases and decreases in AUM. AUM is primarily impacted by opening and closing of client advisory and trust accounts, contributions and withdrawals, and the fluctuation in market values.

•Net gain on mortgage loans—gain on originating and selling mortgages and origination fees, less commissions to loan originators, document review, and other costs specific to originating and selling the loan. The market adjustments for interest rate lock commitments ("IRLC"), mortgage derivatives, and gains and losses incurred on the mandatory trading of loans are also included in this line item. Net gain on mortgage loans is primarily impacted by the amount of loans sold, the type of loans sold, and market conditions.

•Bank fees—income generated through bank-related service charges such as: electronic transfer fees, treasury management fees, bill pay fees, servicing fees for MSLP, and other banking fees. Banking fees are primarily impacted by the level of business activities and cash movement activities of our clients.

•Risk management and insurance fees—commissions earned on insurance policies we have placed for clients through our client risk management team who incorporate insurance services, primarily life insurance, to

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support our clients’ wealth planning needs. Our insurance revenues are primarily impacted by the type and volume of policies placed for our clients.

•Income on company-owned life insurance—income earned on the growth of the cash surrender value of life insurance policies we hold on certain key associates. The income on the increase in the cash surrender value is non-taxable income.

Non-Interest Expense

Non-interest expense is comprised primarily of the following:

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

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

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

•Technology and information systems—costs related to software and information technology services to support office activities and internal networks. Technology and information system costs are primarily impacted by the number of locations we occupy, the number of associates we have, and the level of service we require from our third-party technology vendors.

•Data processing—costs related to processing fees paid to our third-party data processing system providers relating to our core private trust banking platform. Data processing costs are primarily impacted by the number of loan, deposit and trust accounts we have and the level of transactions processed for our clients.

•Marketing—costs related to promoting our business through advertising, promotions, charitable events, sponsorships, donations, and other marketing-related expenses. Marketing costs are primarily impacted by the levels of advertising programs and other marketing activities and events held throughout the year.

•Amortization of other intangible assets—primarily represents the amortization of intangible assets including client lists, core deposit intangibles, and other similar items recognized in connection with acquisitions.

•Other—includes costs related to operational expenses associated with office supplies, postage, travel expenses, meals and entertainment, dues and memberships, costs to maintain or prepare other real estate owned ("OREO") for sale, director compensation and travel, and other general corporate expenses that do not fit within one of the specific non-interest expense lines described above. Other operational expenses are generally impacted by our business activities and needs.

Operating Segments

The Company’s reportable segments consist of Wealth Management and Mortgage. We measure the overall profitability of operating segments based on income before income tax. We believe this is a more useful measurement as our wealth management products and services are fully integrated with our private trust bank. We allocate costs to our segments, which consist primarily of compensation and overhead expense directly attributable to the products and services within the Wealth Management and Mortgage segments. We measure the profitability of each segment based on a post-allocation basis, as we believe it better approximates the operating cash flows generated by our reportable operating segments. A description of each segment is provided in Note 18 - Segment Reporting of the accompanying Notes to the Consolidated Financial Statements.

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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 December 31, 2022, the Bank’s capital ratios exceeded the current well capitalized regulatory requirements established under Basel III.

Acquisitions

On December 31, 2021, the Company closed on our Agreement and Plan of Merger (the “Merger Agreement” or “Teton Acquisition”) with Teton, parent company of Rocky Mountain Bank, a Wyoming-chartered bank headquartered in Jackson, Wyoming. The Merger Agreement provided that, subject to the terms and conditions set forth in the Merger Agreement, Teton would merge into the Company, with the Company continuing as the surviving corporation. The Merger Agreement also provided that following the merger, Rocky Mountain Bank would merge with and into the Bank, with the Bank surviving the bank merger. See Note 2 – Acquisitions of the accompanying Notes to the Consolidated Financial Statements for additional information.

Results of Operations

Overview

The year ended December 31, 2022 compared with the year ended December 31, 2021. For the year ended December 31, 2022, we reported net income available to common shareholders of $21.7 million, compared to net income available to common shareholders for December 31, 2021 of $20.6 million, a $1.1 million, or 5.3% increase. For the year ended December 31, 2022, our income before income taxwas $28.8 million, a $1.5 million, or 5.7%, increase from December 31, 2021. The increase was primarily driven by a $24.2 million increase in net interest income, after provision for loan losses, partially offset by a $10.8 million decrease in net gain on mortgage loans and an $11.0 million increase in non-interest expense. The increase in net interest income was due to an increase in average loan balances and an increase in average loan yields. 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 an increase in personnel expense to support the growth in the balance sheet, and an increase in occupancy and equipment expense driven by building depreciation on the locations acquired with the Teton acquisition and an increase in office lease space related to new Bank locations.

Net Interest Income

The year ended December 31, 2022 compared with the year ended December 31, 2021. For the year ended December 31, 2022, compared to the year ended December 31, 2021, net interest income, before the provision for loan losses, increased $26.6 million, or 47.0%, to $83.2 million. This increase was driven by a $560.2 million increase in average loans outstanding and a 64 bps increase in the average yield on loans, partially offset by a $365.8 million increase

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in average interest bearing deposit balances and a 54 bps increase in average rates paid on interest bearing deposits. For the year ended December 31, 2022, our net interest margin was 3.35% and our net interest spread was 3.02%. For the year ended December 31, 2021, our net interest margin was 2.99% and our net interest spread was 2.88%.

The increase in average loans outstanding for the year ended December 31, 2022 compared to the same periods in 2021 was primarily due to organic growth and the Teton acquisition at the end of 2021. Average loan yield was 4.45% for the year ended December 31, 2022, compared to 3.81% for the year ended December 31, 2021. The increase in loan yield during the period was primarily driven by the addition of higher yielding loans from the Teton acquisition, a beneficial mix shift in the loan portfolio due to PPP loan forgiveness, and the rising interest rate environment.

Interest income on our investment securities portfolio increased as a result of higher average investment balances for the year ended December 31, 2022 compared to the same period in 2021. Our average investment securities balance during the year ended December 31, 2022 was $74.1 million, an increase of $43.2 million from the year ended December 31, 2021.

Interest expense on deposits increased during the year ended December 31, 2022 compared to the same period in 2021. Average rates on interest bearing deposits increased 54 basis points, consistent with the higher interest rate environment, while the growth in interest-bearing deposits was primarily attributable to organic growth through expanded client relationships.

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

As of and For the Year Ended December 31,

Assets

Interest-earning assets:

Liabilities and Shareholders’ Equity

Interest-bearing liabilities:

Noninterest-bearing liabilities:

Net interest rate spread(6) 3.02 2.88

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(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 of the income statement. These balances are excluded from the margin calculations in these tables.

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

(7)Net interest income is the difference between income earned on interest-earning assets (excluding interest 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 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 (dollars in thousands):

Increase(Decrease) Dueto Change in: TotalIncrease(Decrease)

(Dollars in thousands) Volume Rate

Interest-earning assets:

Interest-bearing liabilities:

Provision for Loan Losses

We have a dedicated problem loan resolution team comprised of associates from our credit, senior leadership, risk, and accounting teams that meets frequently to ensure that watch list and problem credits are identified early and actively managed. We work to identify potential losses in a timely manner and proactively manage the problem credits to minimize losses. For the years ended December 31, 2022 and 2021, we recorded $3.7 million and $1.2 million, respectively, of provision for loan losses.

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

Non-Interest Income

The year ended December 31, 2022 compared with the year ended December 31, 2021. For the year ended December 31, 2022 compared to the year ended December 31, 2021, non-interest income decreased $11.6 million, or 29.0%, to $28.4 million. The decrease in non-interest income was primarily a result of a slowdown in new lock volume on held for sale loans associated with rising interest rates, reduced housing inventory, and origination volume more heavily weighted to portfolio loans held for investment.

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The following presents the significant categories of our non-interest income during the periods presented (dollars in thousands):

Year Ended December 31, Change

Non-interest income:

Income on company-owned life insurance 349 354 (5) (1.4)

Net gain on equity interests 7 — 7 *

Net loss on loans accounted for under the fair value option (891) — (891) *

Unrealized gain recognized on equity securities 342 469 (127) (27.1)

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*Not meaningful

Trust and investment management fees— For the year ended December 31, 2022 compared to the same period in 2021, our trust and investment management fees decreased by $1.3 million, or 6.2%, to $18.9 million. The decrease is due to client withdrawals and a decreased value of AUM balances caused by unfavorable market conditions during 2022.

Net gain on mortgage loans— For the year ended December 31, 2022 compared to the same period in 2021, our net gain on mortgage loans decreased by $10.8 million, or 67.0%, to $5.3 million. The decrease in net gain on mortgage loans was primarily driven by a slowdown in new lock volume on held for sale loans associated with rising interest rates, reduced housing inventory, and origination volume more heavily weighted to portfolio loans held for investment.

Bank fees— For the year ended December 31, 2022 compared to the same period in 2021, our bank fees increased by $0.9 million or 49.4%. The increase was driven by increased debit card, loan prepayment, and treasury management fees consistent with the Company's larger client base.

Risk management and insurance fees— For the year ended December 31, 2022 compared to the same period in 2021, our risk management and insurance fees increased by $0.1 million, or 9.9%, to $1.2 million.

Net gain/(loss) on loans accounted for under the fair value option— The Company elected the fair value option on certain new loans purchased in 2022. During the year ended December 31, 2022, the Company recorded a net loss on loans accounted for under the fair value option of $0.9 million. The losses were attributable to the decline in fair value as a result of the rising interest rates on comparable loans in the market. There were no loans held for investment accounted for under the fair value option in the same period in 2021.

Unrealized gain/(loss) on Equity Securities— For the year ended December 31, 2022 compared to the same period in 2021, our unrealized gains on equity securities decreased by $0.1 million, or 27.1% . The decrease was primarily driven by fair value adjustments on equity warrants. There were no equity warrants in equity securities during the same period in 2021.

Net gain on equity interests— For the year ended December 31, 2022, the Company recognized an immaterial net gain on equity interests. No such net gain on equity interest was recognized in the year ended December 31, 2021.

Other— For the year ended December 31, 2022 compared to the same period in 2021, our other income increased by $0.4 million. The increase was primarily driven by lease income from buildings acquired with the Teton acquisition.

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Non-Interest Expense

The year ended December 31, 2022 compared with the year ended December 31, 2021. The increase in non-interest expense of 16.1% to $79.1 million for the year ended December 31, 2022, was primarily driven by the addition of Teton's operations and additional headcount to support the growth of the Company.

The following presents the significant categories of our non-interest expense for the periods presented (dollars in thousands):

Year EndedDecember 31, Change

Non-interest expense:

Amortization of other intangible assets 308 17 291 *

Net gain on assets held for sale (4) — (4) *

Net gain on sale of other real estate owned (44) — (44) *

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*Not meaningful

Salaries and employee benefits—The increase in salaries and employee benefits of $7.5 million, or 18.4%, was primarily related to the additional associates added through the Teton acquisition and additional headcount to support the growth of the Company.

Occupancy and equipment— The increase in occupancy and equipment of $1.5 million, or 25.5%, was primarily driven by the addition of depreciation expense relating to buildings acquired with the Teton acquisition and an increase in office lease space related to new Bank locations.

Professional Services—The increase in professional services of $1.4 million, or 22.0%, was driven by additional expenses related to the addition of Teton's operations, increased audit fees related to the implementation of CECL, and nonrecurring system conversion costs and internal process improvement costs.

Technology and information systems— The increase in technology and information systems of $0.8 million, or 20.4%, was primarily driven by increased expenses to support the balance sheet growth.

Data processing—The decrease in data processing costs of $2.0 million, or 32.3%, was primarily driven by $2.4 million in non-recurring system conversion and termination fees incurred during the fourth quarter of 2021 as a result of the Teton acquisition, which closed in the fourth quarter of 2021.

Marketing— The increase in marketing of $0.3 million, or 17.0%, was primarily driven by marketing expenses associated with the onboarding of clients from the Teton acquisition and event sponsorships to support client acquisition efforts.

Amortization of other intangible assets— The increase in amortization of other intangible assets of $0.3 million was driven by amortization of intangibles acquired through the Teton acquisition.

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Other— The increase in other of $1.3 million, or 39.7%, was driven by increased subscription costs related to system and process improvements, increased travel for client meetings, and higher costs related to associate training and development programs in 2022 compared to 2021.

Income Tax

During the year ended December 31, 2022, the Company recorded an income tax provision of $7.1 million, reflecting an effective tax rate 24.7%. During the year ended December 31, 2021, the Company recorded an income tax provision of $6.7 million, reflecting an effective tax rate of 24.5%.

Segment Reporting

We have two reportable operating segments: Wealth Management and Mortgage. Our Wealth Management segment consists of operations relating to the Company’s fully integrated wealth management products and services. Services provided include deposit, loan, insurance, and trust and investment management advisory products and services for which fee revenue is recognized. Our Mortgage segment consists of operations relating to the Company’s residential mortgage service offerings. Services provided by our mortgage segment include soliciting, originating, and selling mortgage loans into the secondary market. Mortgage products are financial in nature for which origination fees are recognized net of origination expenses, upon the funding of the mortgage loans. Mortgage loans held for sale are accounted for under the fair value option with changes in fair value reported through earnings at inception when loans are locked to the borrower and until the loan is sold to third parties, at which time additional gains or losses on the sale are recorded. Mortgage loans originated and held for investment purposes are recorded in the Wealth Management segment, as this segment provides ongoing services to our clients.

The following presents key metrics related to our segments during the periods presented (dollars in thousands):

(Dollars in thousands) Wealth Management Mortgage Consolidated

(Dollars in thousands) Wealth Management Mortgage Consolidated

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

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The following presents selected financial metrics of each segment as of and for the periods presented:

Wealth Management

As of and for the Year Ended December 31,

(Dollars in thousands) 2022 2021 $ Change % Change

The Wealth Management segment reported income before income tax of $31.1 million for the year ended December 31, 2022, compared to $21.4 million, for the same period in 2021. The increase in net interest income, after provision for loan losses is primarily driven by an increase in average loans outstanding and an increase in average loan yields. Non-interest income primarily decreased due to decreasing assets under management due to client withdrawals, which were also negatively impacted by lower equity and fixed income market valuations, resulting in decreased trust and investment management fees. Non-interest expense increased due to the addition of Teton's operations and additional headcount to support the growth of the Company, and due to increased occupancy and equipment costs primarily driven by building depreciation on the locations acquired with the Teton acquisition and an increase in office lease space related to new Bank locations.

Mortgage

As of and for the Year Ended December 31,

(Dollars in thousands) 2022 2021 $ Change % Change

Total interest and dividend income $ — $ — $ — — %

Total interest expense — — — —

Provision for loan losses — — — —

Net interest income, after provision for loan losses — — — —

Depreciation and amortization expense 42 53 (11) (20.8)

The Mortgage segment reported a loss before income tax of $2.3 million for the year ended December 31, 2022, compared to income before income tax of $5.9 million for the same period in 2021. The overall decrease in non-interest income was primarily driven by a slowdown in new lock volume on held for sale loans associated with rising interest rates, reduced housing inventory, and origination volume more heavily weighted to portfolio loans held for investment. The decrease in non-interest expense was driven by a reduction in headcount to better align the operations functions with the slowdown in volume.

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Financial Condition

The following presents our condensed Consolidated Balance Sheets as of the dates noted (dollars in thousands):

December 31, December 31,

(Dollars in thousands) 2022 2021 $ Change % Change

Balance Sheet Data:

Loans held for sale at fair value 1,965 — 1,965 *

Assets held for sale — 115 (115) *

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*Not meaningful

Cash and cash equivalents decreased by $190.5 million, or 49.2%, to $196.5 million as of December 31, 2022 compared to December 31, 2021. The decrease in liquidity was driven by record loan production in the second quarter of 2022 with continued strong production in the third and fourth quarters of 2022.

Investments increased by $25.5 million, or 45.9%, to $81.1 million as of December 31, 2022 compared to December 31, 2021. The increase is due to held-to-maturity securities purchased throughout 2022.

Loans, net of allowance increased by $516.8 million, or 26.7%, to $2.45 billion as of December 31, 2022 compared to December 31, 2021. The increase was driven by record loan production in the second quarter of 2022 with continued strong production in the third and fourth quarters of 2022. The Company experienced loan growth in all loan categories except Cash, Securities, and Other.

Mortgage loans held for sale decreased $21.8 million, or 71.1%, to $8.8 million as of December 31, 2022 compared to December 31, 2021. The decrease was driven by a reduction in loan origination volume primarily driven by a slowdown in new mortgage loan origination volume associated with the decrease in refinance activity.

Goodwill and other intangible assets, net increased by $0.2 million, or 0.6%, to $32.1 million as of December 31, 2022 compared to December 31, 2021. The increase was driven by measurement period adjustments to the provisional estimates of fair values of assets acquired and liabilities assumed in the Teton acquisition. During the first quarter of 2022, goodwill was reduced by $0.2 million as a result of a $0.1 million decrease in fair value adjustment to deferred tax liabilities, net and a $0.1 million increase in fair value adjustment to net assets acquired.

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Other assets increased by $6.8 million, or 9.6%, to $77.9 million as of December 31, 2022 compared to December 31, 2021. This was primarily driven by the purchase of correspondent bank stock during the year, which increased, net of redemptions, by $4.5 million.

Deposits increased $199.5 million, or 9.0%, to $2.41 billion as of December 31, 2022 compared to December 31, 2021. The increase was attributable to organic growth through expanded client relationships and increased brokered deposits.

Money market deposit accounts increased $279.4 million, or 26.4%, to $1.34 billion as of December 31, 2022 compared to December 31, 2021. Time deposit accounts increased $53.6 million, or 31.4%, to $224.1 million as of December 31, 2022. Negotiable order of withdrawal ("NOW") accounts decreased $75.2 million, or 24.3%, to $234.8 million compared to December 31, 2021.

Borrowings increased $121.4 million, or 156.3%, to $199.0 million as of December 31, 2022 compared to December 31, 2021. The increase is primarily attributed to additional FHLB borrowings to support the strong loan growth in 2022, partially offset by the redemption of subordinated notes on January 1, 2022 in the amount of $6.6 million and a reduction in outstanding advances on the Federal Reserve's Paycheck Protection Program Loan Facility. Borrowings from this facility are expected to trend in the same direction as the PPP loan balances. The increase is also attributed to the Company's issuance of subordinated notes on December 5, 2022 (the "December 2022 Sub Notes") totaling $20.0 million in aggregate principal amount.

Total shareholders’ equity increased $21.8 million, or 10.0%, to $240.9 million as of December 31, 2022. The increase is primarily due to net income.

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Assets Under Management

Year Ended

December 31,

Managed Trust Balance at Beginning of Period $ 2,204 $ 1,890

New relationships 41 27

Closed relationships (24) (2)

Acquisitions — 184

Directed Trust Balance at Beginning of Period 1,309 951

New relationships 7 131

Closed relationships (4) (7)

Withdrawals (22) (26)

Acquisitions — 133

Market change, net (127) 75

Investment Agency Balance at Beginning of Period 2,063 1,840

New relationships 61 75

Closed relationships (61) (77)

Custody Balance at Beginning of Period 633 518

New relationships 16 —

Closed relationships (1) (2)

Market change, net (43) 62

401(k)/Retirement Balance at Beginning of Period $ 1,143 $ 1,056

New relationships 14 8

Closed relationships (45) (122)

Total Assets Under Management at Beginning of Period $ 7,352 $ 6,255

Closed relationships (135) (210)

Acquisitions — 317

Total Assets Under Management 6,107 $ 7,352

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*Trust and 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 decreased $1.24 billion, or 16.9%, to $6.11 billion for the year ended December 31, 2022. The decrease was primarily attributable to client withdrawals and unfavorable market conditions resulting in a decrease in the value of assets under management balances.

Investment securities

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

Investments for which we have the intent and ability to hold to their maturity are classified as held-to-maturity securities and are recorded at amortized cost. Securities held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts using the level-yield method over the remaining period until maturity.

As of December 31, 2021, all our investments in securities were classified as available-for-sale. The Company reassessed classification of investment securities and, effective April 1, 2022, elected to transfer all securities, fair valued at $58.7 million, from available-for-sale to held-to-maturity. The related unrealized loss of $2.3 million included in other comprehensive income on April 1, 2022 remained in other comprehensive income and is being amortized out with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. No gain or loss was recorded at the time of transfer. As of December 31, 2022. all of our investment securities were classified as held-to-maturity.

The following presents the amortized cost and estimated fair value of our investment securities as of the dates noted (dollars in thousands):

Investment securities held-to-maturity:

U.S. Treasury debt $ 243 $ — $ (9) $ 234

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Investment securities available-for-sale:

U.S. Treasury debt $ 250 $ — $ (3) $ 247

FNMA mortgage-backed securities—residential 14,400 43 — 14,443

GMO and MBS—commercial 878 — — 878

The following presents the book value of our contractual maturities and weighted average yield for our investment securities as of the dates presented. Contractual maturities may differ from expected maturities because issuers can have the right to call or prepay obligations without penalties. Our investments are taxable securities. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security as of December 31, 2022. Weighted average yields are not presented on a taxable equivalent basis.

Maturity as of December 31, 2022

One Year or Less One to Five Years Five to Ten Years After Ten Years

Held-to-maturity:

U.S. Treasury debt $ — — % $ 243 * % $ — — % $ — — %

U.S. Government agency — — — — — — — —

GNMA mortgage-backed securities - residential — — 103 * — — 39,323 1.22

FNMA mortgage-backed securities - residential — — — — 1,334 0.02 5,374 0.12

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Maturity as of December 31, 2021

One Year or Less One to Five Years Five to Ten Years After Ten Years

Available-for-sale:

U.S. Treasury debt $ — — % $ 250 * $ — — % $ — — %

Corporate bonds — — — — 8,113 0.71 — —

GNMA mortgage-backed securities - residential — — — — — — 26,611 0.92

Government CMO and MBS - commercial — — 202 0.01 — — 676 0.04

_____________________________

*Not meaningful

As of December 31, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government 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 sales activities are primarily directed at originating single family mortgages that are priced and underwritten to conform to previously agreed-upon criteria before loan funding and are delivered to the investor shortly after funding. The level of future loan originations, loan sales and loan repayments depends on overall credit availability, the interest rate environment, the strength of the general economy, local real estate markets and the housing industry, and conditions in the secondary loan sale market. The amount of gain or loss on the sale of loans is primarily driven by market conditions and changes in interest rates, as well as our pricing and asset liability management strategies. As of December 31, 2022 and December 31, 2021, we had mortgage loans held for sale of $8.8 million and $30.6 million, respectively, in residential mortgage loans we originated.

Beginning in the first quarter of 2022, the Company entered into whole loan purchase agreements to acquire third party originated and serviced unsecured consumer loans to hold for investment and elected the fair value option to account for these loans. As of December 31, 2022, the Company has $23.3 million in loans accounted for under the fair value option with an unpaid principal balance of $23.4 million. See Note 17 - Fair Value in the Notes to Condensed Consolidated Financial Statements.

As of December 31, 2022, the Company has $7.1 million in PPP loans outstanding with $0.2 million in remaining fees to be recognized. The remaining fees represent the net amount of the fees from the SBA for participation in the PPP less the loan origination costs on these loans. The current amortization of this income is being recognized over a five-year period from the time of origination, however, if a loan receives full forgiveness from the SBA or if the borrower repays the loan, the remaining income will be recognized upon payoff.

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The following presents our loan portfolio by type of loan as of the dates noted (dollars in thousands):

As of December 31,

(Dollars in thousands) Amount % of Total Amount % of Total

Mortgage loans held for sale, at fair value $ 8,839 $ 30,620

Loans held for sale, at fair value 1,965 —

_____________________________

(1)Includes PPP loans of $7.1 million and $46.8 million as of December 31, 2022 and 2021, respectively.

(2)Includes loans held for investment accounted for under fair value option of $23.4 million as of December 31, 2022.

(3)Loans held for investment exclude deferred fees, unamortized premiums/(unaccreted discounts), net, and fair value adjustments on loans held for investment accounted for under fair value option, which collectively totaled ($6.7) million and ($5.0) million as of December 31, 2022 and 2021, respectively.

•Cash, Securities and Other—consists of consumer and commercial purpose loans that are primarily secured by securities managed and under custody with us, cash on deposit with us or life insurance policies. In addition, loans in this portfolio are collateralized with other sources of collateral. This segment of our portfolio is affected by a variety of local and national economic factors affecting borrowers’ employment prospects, income levels, and overall economic sentiment. PPP loans that are fully guaranteed by the SBA are classified within this line item and had balances of $7.1 million and $46.8 million as of December 31, 2022 and 2021, respectively.

•Consumer and Other—consists of unsecured consumer loans. Loans held for investment accounted for under the fair value option are also classified within this line item and had a balance of $23.4 million as of December 31, 2022. There were no loans held for investment accounted for under the fair value option as of December 31, 2021.

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

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

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

•Commercial and Industrial—consists of commercial and industrial loans, including working capital lines of credit, permanent working capital term loans, business asset loans, acquisition, expansion and development loans, and other loan products, primarily in our target markets. This portfolio primarily consists of term loans and lines of credit which are dependent on the strength of the industries of the related borrowers and the success of their businesses. MSLP loans of $6.6 million and $6.8 million as of December 31, 2022 and 2021, respectively, are included in this category.

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The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range, excluding deferred fees, and unamortized premiums/(unaccreted discounts), as of the dates noted, are summarized in the following tables:

_____________________________

(1)Includes PPP loans.

(2)Includes loans held for investment accounted for under fair value option

_____________________________

(1)Includes PPP loans.

Loan Modifications

As a result of the COVID-19 pandemic, a loan modification program was designed and implemented to assist our clients experiencing financial stress resulting from the economic impacts caused by the global pandemic. The Company offered loan extensions, temporary payment moratoriums, and financial covenant waivers for commercial and consumer borrowers impacted by the pandemic who had a pass risk rating and had not been delinquent over 30 days on payments in the last two years.

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

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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.

In 2021, the deferral period ended for all non-acquired loans previously modified and payments resumed under the original terms. As of December 31, 2022, the Company's loan portfolio included 49 non-acquired loans which were previously modified under the loan modification program, totaling $78.4 million. Through the Teton acquisition, the Company acquired loans which were previously modified and are still in their deferral period. As of December 31, 2022, there were 14 of these loans, totaling $3.3 million.

All loans modified in response to COVID-19 are classified as performing and pass rated as of December 31, 2022. Non-acquired COVID modified loans are included in the allowance for loan loss general reserve in accordance with ASC 450-20. Management has increased our loan level reviews and portfolio monitoring to address the changing environment. Management believes the diversity of the loan portfolio is prudent and remains consistent with the credit culture and goals of the Bank.

Interest accrued during the modification term on modified loans is deferred to the end of the loan term. As of December 31, 2022, no allowance for loan loss was deemed necessary on the accrued interest balances related to loan modifications.

Non-Performing Assets

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

OREO represents assets acquired through, or in lieu of, foreclosure. The amounts reported as OREO are supported by recent appraisals, with the appraised values adjusted, where applicable, for expected transaction fees likely to be incurred upon sale of the property. We incur recurring expenses relating to OREO in the form of maintenance, taxes, insurance and legal fees, among others, until the OREO parcel is disposed. While disposition efforts with respect to our OREO are generally ongoing, if these properties are appraised at lower-than-expected values or if we are unable to sell the properties at the prices for which we expect to be able to sell them, we may incur additional losses. During the year ended December 31, 2022, we recognized an immaterial amount of gains on the sale of OREO.

The amount of lost interest for non-accrual loans was $0.2 million for each of the years ended December 31, 2022 and 2021.

We had $12.3 million and $4.3 million in non-performing assets as of December 31, 2022 and December 31, 2021, respectively. The increase in non-performing assets is related to the addition of $8.9 million for two related problem loan credits at the end of the fourth quarter. The Company did not add a specific reserve to these new problem credits due to adequate collateral coverage as of December 31, 2022.

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

As of December 31,

Non-accrual loans by category (1)

Cash, Securities, and Other $ 4 $ 6

Consumer and Other 146 2

Construction and Development 201 —

1-4 Family Residential — 75

TDRs still accruing — 55

OREO — —

Non-accrual loans to total loans(2) 0.50 % 0.22 %

Non-performing loans to total loans(2) 0.50 0.22

Non-performing assets to total assets 0.43 0.17

Allowance for loan losses to non-accrual loans 139.14 322.20

Allowance for loan losses to non-performing loans 139.14 317.36

Accruing loans 90 or more days past due $ 25 $ 10

_____________________________

(1)As of December 31, 2022, all but three non-accrual loans, totaling $9.1 million, were also classified as TDRs. As of December 31, 2021, all but one non-accrual loan, totaling an immaterial amount, was also classified as a TDR. See Note 5 – Loans and the Allowance for Loan Losses to the Consolidated Financial Statements.

(2)Excludes mortgage loans held for sale of $8.8 million and $30.6 million as of December 31, 2022 and 2021, respectively. Excludes loans held for sale, at fair value of $2.0 million as of December 31, 2022.

Potential Problem Loans

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

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

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

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

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Loans accounted for under the fair value option are not rated.

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

As of December 31, 2022 and December 31, 2021, non-performing loans of $12.2 million and $4.3 million, respectively, were included in the substandard category in the table below. The following presents, by class and by credit quality indicator, the recorded investment in our loans as of the dates noted (dollars in thousands):

(Dollars in thousands) Pass SpecialMention Substandard Not Rated Total

(Dollars in thousands) Pass SpecialMention Substandard Not Rated Total

_____________________________

(1)Includes PPP loans of $7.1 million and $46.8 million as of December 31, 2022 and 2021, respectively.

(2)Includes $23.4 million of unpaid principal balance of loans held for investment accounted for under fair value option as of December 31, 2022.

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 uncollectible. 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 related impacts to our clients. Our clientele is generally comprised of high net-worth individuals and commercial borrowers with strong credit profiles and multiple sources of repayment. During the year ended December 31, 2022, the Company recorded a provision of $3.7 million. Management will continue to closely monitor the loan portfolio and analyze the economic data to assess the impact on the allowance for loan loss. We believe the allowance for loan losses is adequate as of December 31, 2022.

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The following presents summary information regarding our allowance for loan losses for the periods presented (dollars in thousands):

Year Ended December 31,

Allowance for loan losses at beginning of period $ 13,732 $ 12,539

Charge-offs:

Cash, Securities, and Other (1) —

Consumer and Other (262) (44)

Construction and Development — —

1-4 Family Residential — —

Non-Owner Occupied CRE — —

Owner Occupied CRE — —

Commercial and Industrial (71) —

Total charge-offs (334) (44)

Recoveries:

Cash, Securities, and Other — 7

Consumer and Other 103 —

Construction and Development — —

1-4 Family Residential — —

Non-Owner Occupied CRE — —

Owner Occupied CRE — —

Commercial and Industrial — —

Total recoveries 103 7

Net (charge-offs) recoveries (231) (37)

Allowance for loan losses at end of period $ 17,183 $ 13,732

Allowance for loan losses to total loans(4) 0.70 % 0.70 %

Net charge-offs to average loans 0.01 *

_____________________________

(1)Average balances are average daily balances.

(2)Excludes average outstanding balances of mortgage loans held for sale of $15.6 million and $88.7 million for the years ended December 31, 2022 and 2021, respectively.

(3)Excludes mortgage loans held for sale of $8.8 million and $30.6 million as of December 31, 2022 and 2021, respectively. Excludes loans held for sale, at fair value of $2.0 million as of December 31, 2022.

(4)End of period loans as of December 31, 2022 includes $234.7 million in acquired loans and $7.1 million in PPP loans, of which $0.7 million are acquired PPP loans. No reserve is allocated for these loans. Excluding these loans would result in an increase of the ratio for the year ended December 31, 2022.

(*) Immaterial

The following 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

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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.

As of December 31,

(Dollars in thousands) Amount %(1) Amount %(1)

_____________________________

(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, for the year ended December 31, 2022, increased $0.1 million from December 31, 2021.

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 $199.5 million, or 9.0%, to $2.41 billion as of December 31, 2022 from December 31, 2021. The increase was driven primarily by organic growth through expanded client relationships. Total average deposits for the year ended December 31, 2022 were $2.22 billion, an increase of $485.4 million, or 27.9%, compared to $1.74 billion as of December 31, 2021.

The following presents the average balances and average rates paid on deposits during the periods presented (dollars in thousands):

As of and For the Year Ended December 31,

(Dollars in thousands) AverageBalance AverageRate AverageBalance AverageRate

Deposits

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Average noninterest-bearing deposits to average total deposits was 30.1% and 31.7% for the year ended December 31, 2022 and 2021, respectively.

Our average cost of funds was 0.73% and 0.29% during the year ended December 31, 2022 and 2021, respectively. The increase was driven by a 54 basis point increase in interest bearing deposit costs consistent with the higher interest rate environment.

Total money market accounts as of December 31, 2022 were $1.34 billion, an increase of $279.4 million, or 26.4%, compared to $1.06 billion as of December 31, 2021. NOW accounts decreased $75.2 million, or 24.3%, to $234.8 million compared to December 31, 2021.

Total time deposits as of December 31, 2022 were $224.1 million, an increase of $53.6 million, or 31.4%, compared to December 31, 2021.

The following presents the amount of certificates of deposit by time remaining until maturity as of December 31, 2022 (dollars in thousands):

Borrowings

We have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs. As of December 31, 2022 and December 31, 2021, borrowings totaled $199.0 million and $77.7 million, respectively. On January 1, 2022, the Company redeemed subordinated notes due December 31, 2026 in the amount of $6.6 million, which were redeemable on or after January 1, 2022. On December 5, 2022, the Company completed the issuance and sale of subordinated notes totaling $20.0 million in aggregate principal amount. The issuance included $0.5 million of issuance costs resulting in a net balance of $19.5 million as of December 31, 2022.

The increase in other borrowings is primarily attributed to additional FHLB borrowings to support the strong loan growth in 2022, partially offset by the paydown of loans in the Paycheck Protection Program Loan Facility ("PPPLF") from the Federal Reserve with a period end balance of $5.4 million and the redemption of $6.6 million in subordinated notes. Borrowing from the PPPLF facility is expected to trend in the same direction as the PPP loan balances. The following presents balances of each of the borrowing facilities as of the dates noted (dollars in thousands):

December 31, December 31,

Borrowings

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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 December 31, 2022 and December 31, 2021 amounted to $1.26 billion and $771.4 million, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company was eligible to borrow an additional $751.2 million as of December 31, 2022.

As of and for the Year EndedDecember 31,

(Dollars in thousands) 2022

Short-term borrowings

Maximum outstanding at any month-end during the period $ 310,921

Balance outstanding at end of period 141,498

Average outstanding during the period 88,102

Average interest rate during the period 0.99 %

Average interest rate at the end of the period 2.11

The Bank has borrowing capacity associated with two unsecured federal funds lines of credit up to $10 million and $19 million. As of December 31, 2022 and 2021, there were no amounts outstanding on any of the federal funds lines.

Our borrowing facilities include various financial and other covenants, including, but not limited to, a requirement that the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies. As of December 31, 2022 and December 31, 2021, 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 presents, during the periods presented, the composition of our funding sources and the average assets in which those funds are invested as a percentage of average total assets for the periods presented.

Sources of Funds:

Deposits:

FHLB and Federal Reserve borrowings 3.72 5.05

Uses of Funds:

Investment securities 2.84 1.50

Correspondent bank stock 0.19 0.10

Mortgage loans held for sale 0.60 4.30

Interest-bearing deposits in other financial institutions 9.54 12.71

Noninterest-earning assets 4.71 4.55

Average noninterest-bearing deposits to total average deposits 30.14 % 31.67 %

Average loans to total average deposits 96.86 91.69

Average interest-bearing deposits to total average deposits 69.86 68.33

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 $21.8 million, or 10.0%, to $240.9 million as of December 31, 2022 compared to December 31, 2021. The increase is primarily due to net income.

On January 6, 2022, the Company filed a Form S-3 Registration Statement with the SEC providing that the Company may offer and sell from time to time, separately or together, in multiple series or in one or more offerings, any combination of common stock, preferred stock, debt securities, warrants, depository shares and units, up to a maximum aggregate offer price of $100 million.

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

Capital levels are viewed as important indicators of an institution’s financial soundness by banking regulators. Generally, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. As of December 31, 2022 and December 31, 2021, respectively, our

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holding company and Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized," for purposes of the prompt corrective action regulations. As we continue to grow our operations and maintain capital requirements, our regulatory capital levels may decrease depending on our level of earnings. During the years ended December 31, 2022 and 2021, First Western made capital injections of $6.0 million and $2.9 million, respectively, into the Bank. We continue to monitor growth and control our capital activities in order to remain in compliance with all applicable regulatory capital standards.

The following presents our regulatory capital ratios for the dates noted.

(Dollars in thousands) Amount Ratio Amount Ratio

Tier 1 capital to risk-weighted assets

CET1 to risk-weighted assets

Total capital to risk-weighted assets

Tier 1 capital to average assets

Contractual Obligations and Off-Balance Sheet Arrangements

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

The following presents future contractual obligations to make future payments for the periods presented (dollars in thousands):

_____________________________

(1)Reflects contractual maturity dates of March 31, 2030, December 1, 2030, September 1, 2031, and December 15, 2032.

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The following presents financial instruments whose contract amounts represent credit risk, as of the periods presented (dollars in thousands):

December 31, December 31,

(Dollars in thousands) Fixed Rate Variable Rate Fixed Rate Variable Rate

Commitments to make loans to sell 13,553 — 60,529 —

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

Critical Accounting Policies

Our accounting policies and procedures are described in Note 1 - Organization and Summary of Significant Accounting Policies in the accompanying Notes to the Consolidated Financial Statements.

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ITEM 7A. 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 economic value of equity in the event of hypothetical changes in interest rates. If potential changes to net economic value of equity and net interest income resulting from hypothetical interest rate changes are not within the limits established by our board of directors, the board of directors may direct management to adjust the asset and liability mix to bring interest rate risk within board-approved limits.

The following presents the sensitivity in net interest income and fair value of equity as of the dates indicated, using a parallel ramp scenario.

Base — — — —

The model simulations as of December 31, 2022 imply that our balance sheet has shifted to a more neutral position in terms of interest rate sensitivity compared to our balance sheet as of December 31, 2021. Further, our balance sheet is better positioned to protect net interest margin in a declining interest rate environment as of December 31, 2022 compared to our balance sheet as of December 31, 2021.

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 consolidated financial statements and related notes included within this Form 10-K have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

Our assets and liabilities are substantially monetary in nature. Therefore, changes in interest rates can significantly impact our performance beyond the general effects of inflation. Interest rates do not necessarily move in the same direction

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or magnitude as prices of general goods and services, while other operating expenses can be correlated with the impact of general levels of inflation.

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ITEM 8:FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements and accompanying notes, including the Report of Independent Registered Public Accounting Firm, are set forth on pages F-1 to F-57 of this Annual Report on Form 10-K.

Audited Financial Statements

Description Page Number

Report of Independent Registered Public Accounting Firm (PCAOB ID: 173) F-1

Consolidated Balance Sheets as of December 31, 2022 and 2021 F-2

Notes to Consolidated Financial Statements F-8

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors

First Western Financial, Inc.

Denver, Colorado

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of First Western Financial, Inc. (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Crowe LLP

We have served as the Company’s auditor since 2013.

Denver, Colorado

March 15, 2023

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FIRST WESTERN FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

Assets

Cash and cash equivalents:

Federal funds sold — 1,491

Interest-bearing deposits in other financial institutions 191,586 379,005

Available-for-sale securities, at fair value — 55,562

Correspondent bank stock, at cost 7,110 2,584

Mortgage loans held for sale, at fair value 8,839 30,620

Loans held for sale, at fair value 1,965 —

Goodwill and other intangible assets, net 32,104 31,902

Assets held for sale — 115

Liabilities

Deposits:

Borrowings:

Federal Home Loan Bank and Federal Reserve borrowings 146,886 38,629

Shareholders' Equity

Accumulated other comprehensive (loss)/income (1,517) 223

See accompanying notes to consolidated financial statements.

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FIRST WESTERN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

Year Ended December 31,

Interest and dividend income:

Loans accounted for under the fair value option 1,347 —

Interest-bearing deposits in other financial institutions 2,245 397

Dividends, restricted stock 381 86

Interest expense:

Less: Provision for loan losses 3,682 1,230

Net interest income, after provision for loan losses 79,522 55,365

Non-interest income:

Risk management and insurance fees 1,231 1,120

Income on company-owned life insurance 349 354

Net gain on equity interests 7 —

Net loss on loans accounted for under the fair value option (891) —

Unrealized gain recognized on equity securities 342 469

Non-interest expense:

Technology and information systems 4,462 3,707

Amortization of other intangible assets 308 17

Net gain on assets held for sale (4) —

Net gain on sale of other real estate owned (44) —

Net income available to common shareholders $ 21,698 $ 20,610

Earnings per common share:

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See accompanying notes to consolidated financial statements.

FIRST WESTERN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Year Ended December 31,

Other comprehensive (loss)/income:

Unrealized losses on available-for-sale securities (2,591) (620)

Income tax effect (70) —

Total other comprehensive loss (1,740) (457)

See accompanying notes to consolidated financial statements.

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FIRST WESTERN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share amounts)

Other comprehensive loss, net of tax — — — (457) (457)

Stock-based compensation — 2,903 — — 2,903

Other comprehensive loss, net of tax — — — (1,740) (1,740)

Stock-based compensation — 2,562 — — 2,562

See accompanying notes to consolidated financial statements.

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FIRST WESTERN FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended December 31,

Cash flows from operating activities

Adjustments to reconcile net income to net cash used in operating activities:

Net amortization of investment securities 130 670

Stock dividends received on correspondent bank stock (381) (86)

Gain on disposal of fixed assets and intangibles (21) —

Depreciation and amortization 2,012 1,256

Net amortization of purchase accounting adjustments 55 187

Deferred income tax expense (benefit), net of valuation allowance 557 (668)

Increase in cash surrender value of company-owned life insurance (349) (354)

Gain on sale of other real estate owned (44) —

Change in fair value of equity securities (342) (469)

Change in fair value of loans accounted for under the fair value option 891 —

(Gain)/loss on assets held for sale (4) 27

Net changes in operating assets and liabilities:

Change in accounts receivable 426 (275)

Change in accrued interest receivable and other assets (3,647) 695

Change in accrued interest payable and other liabilities (1,681) 1,852

Net cash provided by operating activities 48,278 162,515

Cash flows from investing activities

Activity in available-for-sale securities:

Maturities, prepayments, and calls 3,218 16,241

Activity in held-to-maturity securities:

Maturities, prepayments, and calls 9,040 —

Purchases of correspondent bank stock (13,999) (1)

Redemption of correspondent bank stock 9,854 983

Contributions to low-income housing tax credit investments (214) (2,087)

Purchases of premises and equipment (2,967) (2,108)