First Western Financial
Annual Report 2018

Plain-text annual report

ANNUAL REPORT 2018 To Our Shareholders: We are very pleased to report our financial results for 2018, our first year as a public company. It was a milestone year for First Western Financial, which included profitable organic growth the completion of our initial public offering, the raising of $34 million in equity to support our future growth, the improvement of our capital structure, and the continued strengthening of our senior leadership team. The completion of the IPO in July and the common equity we raised represented a key inflection point in the financial performance of the Company. With the proceeds from the offering, we were able to retire higher cost capital sources and remove the Basel III constraints that had limited our balance sheet growth over the past few years. As a result, we saw a significant improvement in loan and deposit growth, which helped drive our earnings per share to $0.22 in the fourth quarter of 2018, compared to a loss of $0.09 per share in the same quarter of the prior year. We also saw positive trends across most of our key metrics including a stable net interest margin, an improved efficiency ratio, and a very low level of credit losses. Starting in 2017, we began preparing the Company for accelerated growth in 2019, leveraging the capital raised in our IPO. We made a number of investments designed to enhance our new client acquisition capabilities including adding strong regional presidents and completing national searches for top-tier leaders to take our credit and our trust and investment management functions to the next level. We also added business development officers in most offices and began integrating the mortgage loan officers (MLOs) from the mortgage company we acquired in 2017. As these individuals have gained experience at First Western, we have seen steady improvement in winning new clients and capitalizing on the cross-selling opportunities generated by these sales professionals. Our stronger business development capabilities resulted in significant revenue growth across many of our profit centers. During 2018, our offices in Aspen, Denver, Scottsdale, Cherry Creek and Jackson Hole all increased revenue by more than 20% over the prior year. As these profit centers continue to scale and drive more revenue growth, we are seeing improved efficiencies and margins, resulting in higher levels of profitability. We expect to see continued growth in our profit centers in 2019, particularly in Colorado and Arizona where we are building our teams to capitalize on the strong economies, in-migration and housing trends in these states. Longer term, we believe we are uniquely positioned to capitalize on the dislocation taking place in the Colorado banking market, which has left First Western as one of only two remaining publicly held banks in the state. With our fully integrated, “ConnectView” service delivery model, we provide the trust, wealth management and banking services that high net worth clients need to achieve their financial goals for themselves, their families, businesses and community interests. As current and prospective clients evaluate their banking relationships in the wake of acquisitions taking place in our markets, we believe we have a value proposition that will enable us to effectively attract new clients to First Western, drive additional profitable growth, and create significant value for our shareholders in the years ahead. Sincerely, Scott C. Wylie Chairman, President & CEO Company Headquarters Locations 1900 16th Street, Suite 1200 Denver, CO 80202 (303) 531-8100 NASDAQ: MYFW Board of Directors Scott C. Wylie Julie A. Caponi David R. Duncan Thomas A. Gart Patrick H. Hamill Luke A. Latimer Eric D. Sipf Mark L. Smith Joseph C. Zimlich Denver, CO Aspen, CO Boulder, CO Cherry Creek, CO Greenwood Village, CO Englewood, CO Fort Collins, CO Jackson Hole, WY Laramie, WY Los Angeles, CA Phoenix, AZ Scottsdale, AZ First Western’s mission is to be the best private bank for the Western Wealth Management Client. We believe that each of our clients shares our entrepreneurial spirit and values our sophisticated, high-touch wealth management services that are tailored to meet their specific needs. We provide a trusted advisor platform with an established approach to investment management through a branded network of boutique private trust bank offices located across Colorado, Arizona, Wyoming, and California. We provide a fully integrated suite of wealth management services on our private trust bank platform, which includes a comprehensive selection of deposit, loan, trust, wealth planning and investment management products and services. We believe our integrated business model distinguishes us from other banks and non- bank financial services companies in the markets in which we operate. ANNUAL REPORT 2018 Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THETRANSITION PERIOD FROM TO Commission File Number 001-38595First Western Financial, Inc.(Exact name of Registrant as specified in its Charter) Colorado37-1442266( State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)1900 16th Street, Suite 1200Denver, CO80202(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 Name of each exchange on which registeredCommon Stock, no par value The Nasdaq Stock Market LLC Securities registered pursuant to Section 12(b) of the Act: common stock, no par value; common stock listed on the NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒ 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 thepreceding 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 past90 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growthcompany. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of theExchange 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 revisedfinancial 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 Exchange Act). YES ☐ NO ☒ As of June 30, 2018, the last day of the registrant’s most recently completed second quarter, the registrant’s common stock was not publicly traded. The registrant’scommon stock began trading on the NASDAQ Global Select Market on July 19, 2018. As of July 19, 2018, the aggregate market value of the common stock held bynon-affiliates of the Registrant, based on the closing price of the Registrant’s common stock on the NASDAQ Global Select Market, was approximately $148.6 million.The number of shares of the registrant’s common stock outstanding as of March 18, 2019 was 7,968,420.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s Definitive Proxy Statement relating to its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-Kto the extent stated herein. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’sfiscal year ended December 31, 2018. Table of ContentsFIRST WESTERN FINANCIAL, INC.TABLE OF CONTENTSTable of Contents PagePART I Item 1. Business5Item 1A. Risk Factors29Item 1B. Unresolved Staff Comments53Item 2. Properties53Item 3. Legal Proceedings53Item 4. Mine Safety Disclosures54 PART II Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of EquitySecurities54Item 6. Selected Financial Data56Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations60Item 7A. Quantitative and Qualitative Disclosures About Market Risk83Item 8. Financial Statements and Supplementary Data85Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure94Item 9A. Controls and Procedures94Item 9B. Other Information94 PART III Item 10. Directors, Executive Officers and Corporate Governance95Item 11. Executive Compensation95Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters95Item 13. Certain Relationships and Related Transactions, and Director Independence95Item 14. Principal Accounting Fees and Services95 PART IV Item 15. Exhibits, Financial Statement Schedules96Item 16. Form 10-K Summary97 Signatures98 Important Notice about Information in this Annual ReportUnless we state otherwise or the context otherwise requires, references in this Annual Report on Form 10-K 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 Annual Report on Form 10-K is accurate only as of the date of this Annual Reporton Form 10-K and as of the dates specified herein.2 Table of ContentsCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains forward-looking statements. These forward-looking statements reflectour current views with respect to, among other things, future events and our financial performance. These statements areoften, 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, estimatesand projections about our industry, management’s beliefs and certain assumptions made by management, many of which, bytheir nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-lookingstatements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult topredict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the datemade, actual results may prove to be materially different from the results expressed or implied by the forward-lookingstatements. When considering forward-looking statements, you should keep in mind the risk factors and other cautionarystatements described in “Item 1A – Risk Factors” of this Annual Report on Form 10-K.There are or will be important factors that could cause our actual results to differ materially from those indicated inthese forward-looking statements, including, but not limited to, the following:·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 credit 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;3 Table of Contents·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 anticipatedgrowth;·the acquisition of other banks and financial services companies and integration risks and other unknown risksassociated with acquisitions;·the accuracy of estimates and assumptions;·our ability to protect against and manage fraudulent activity, breaches of our information security, andcybersecurity attacks;·our reliance on communications, information, operating and financial control systems technology and relatedservices from third-party service providers;·technological change;·our ability to attract and retain clients;·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 recognizesignificant 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; and4 Table of Contents·other factors that are discussed in “Part I – Item 1A - Risk Factors.”The foregoing factors should not be construed as exhaustive. If one or more events related to these or other risks oruncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially fromwhat 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 updateor review any forward-looking statement, whether as a result of new information, future developments or otherwise. Newfactors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess theimpact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results todiffer materially from those contained in any forward-looking statements. PART I Item 1: BusinessOur CompanyFirst Western Financial, Inc. is a financial holding company headquartered in Denver, Colorado. We provide a fullyintegrated suite of wealth management services on our private trust bank platform, which includes a comprehensive selectionof deposit, loan, trust, wealth planning and investment management products and services. We believe our integratedbusiness model distinguishes us from other banks and non-bank financial services companies in the markets in which weoperate. As of December 31, 2018, we provided fiduciary and advisory services on $5.2 billion of trust and investmentmanagement assets (referred to as "AUM"), and we had total assets of $1.1 billion, total loans of $894.0 million, total depositsof $937.8 million and total shareholders' equity of $116.9 million.Our mission is to be the best private bank for the Western wealth management client. We believe that the "Westernwealth management client" shares our entrepreneurial spirit and values our sophisticated, high-touch wealth managementservices that are tailored to meet their specific needs. Our target clients include successful entrepreneurs, professionals andother high net worth individuals or families, along with their businesses and philanthropic organizations. We offer ourservices through a branded network of boutique private trust bank offices, which we believe are strategically located inaffluent and high-growth markets in thirteen locations across Colorado, Arizona, Wyoming and California.We generate a significant portion of our revenues from non-interest income, which we produce primarily from ourtrust, investment management and other advisory services as well as through the origination and sale of mortgage loans. Thebalance of our revenue is generated from net interest income, which we derive from our traditional banking products andservices. For the year ended December 31, 2018, non-interest income was $27.2 million, or 47.0% of gross revenue (which isour total income before non-interest expense, less gains on securities sold, plus provision for credit losses), and net interestincome was $30.6 million, or 53.0% of gross revenueWe believe that we have developed a unique approach to private banking to best serve our Western wealthmanagement clients primarily as a result of the combination of the following factors:·Offering sophisticated wealth management products and services, including traditional banking as well as trust,wealth planning, investment management and other related services often provided by larger financialinstitutions with the high-touch and personalized experience that is typically associated with community andtrust banks;·Delivering services through our strategically located private trust bank offices, which we refer to internally as"profit centers"; and·Using our relationship-based team approach to become a "trusted advisor" to our clients by understanding theirinvestment management, ultimate goals and banking needs and tailoring our products and services to meetthose needs.5 Table of ContentsOur Initial Public OfferingWe completed an initial public offering of our common stock on July 23, 2018. Our common stock is listed on theNASDAQ Global Market under the symbol “MYFW.”Our History and GrowthWe were founded in 2002 by our Chairman, Chief Executive Officer and President, Scott C. Wylie, and a group oflocal business leaders with the vision of building the best private bank for the Western wealth management client. Sinceopening our first profit center in Denver, Colorado in 2004, we have grown organically primarily by establishing thirteenoffices, attracting new clients and expanding our relationships with existing clients, as well as through a series of tenstrategic acquisitions of various trust, registered investment advisory and other financial services firms. Balance Sheet GrowthSince opening our first profit center in 2004, we have also experienced growth in gross loans, total deposits andAUM throughout various economic cycles. From 2004 to 2008, which we refer to as our “Growth & Expansion” period, weexperienced significant growth in our gross loans, total deposits and assets under management primarily through the openingof six profit centers and organic growth, enhanced with seven acquisitions.From 2009 to 2013, which we refer to as our “Conservative Growth” period due to difficult economic and industryconditions prevalent at such time, growth in gross loans, total deposits and assets under management was limited as wefocused our efforts on integrating prior acquisitions, opening three new profit centers and improving our asset quality.During this time, we strengthened our regulatory capital position through a number of preferred stock and subordinated debtofferings, which limited dilution to our common shareholders.From 2013 to our intitial public offering, effective July 23, 2018, which we refer to as our “Capital ConstrainedGrowth” period, we have strategically focused our efforts on building our team, distribution channels and products forimproved growth and earnings, while managing our balance sheet to stay below $1.0 billion in assets through December 31,2017, in order to retain the benefits available to us under the Small Bank Holding Company Policy Statement of the Board ofGovernors of the Federal Reserve System (referred to as the “Federal Reserve”), including not being subject to consolidatedcapital ratio requirements under the final rules adopted by federal bank regulators implementing the December 2010 finalcapital framework for strengthening international capital standards (known as “Basel III”) of the Basel Committee onBanking Supervision.Since December 31, 2014, we have increased gross loans from $532.5 million at December 31, 2014 to$894.0 million at December 31, 2018, representing a compound annual growth rate or, CAGR of 13.8% and we haveincreased total deposits from $588.8 million at December 31, 2014 to $937.8 million at December 31, 2018, representing aCAGR of 12.3%.Revenue, Expense & Pre‑Tax, Pre‑Provision Income GrowthSince December 31, 2014, we have increased gross revenues from $43.7 million for the year ended December 31,2014 to $57.8 million for the year ended December 31, 2018, representing a CAGR of 7.2%, while total non‑interest expenseincreased from $43.5 million for the year ended December 31, 2014 to $50.2 million for the year ended December 31, 2018,representing a CAGR of 3.7%. This 195% operating leverage (which we calculate as the ratio of gross revenue CAGR to totalnon‑interest expense CAGR) has resulted in improved pre‑tax, pre‑provision income, which increased 15.6 times over thesame time period. We believe that while the higher fixed costs of our product groups have limited our earnings, we havedemonstrated significant operating leverage by growing pre‑tax, pre‑provision income at a faster rate than expenses. Pre‑tax,pre‑provision income is a non‑GAAP measure. The nearest GAAP measure is income before income tax, which was $7.4million for the year ended December 31, 2018. See “Non‑GAAP Reconciliation and Management Explanation of Non‑GAAPFinancial Measures.” Pre‑tax, pre‑provision income increased from $0.5 million6 Table of Contentsfor the year ended December 31, 2014 to $7.6 million for the year ended December 31, 2018, as indicated in the followingchart.Pre‑Tax, Pre‑Provision Income ($ in millions) Our Business StrategyWe believe we have built a premier private trust bank in the Western United States that is focused on providing thebest financial solutions to our clients. We are service-driven, solution-oriented and relationship-based. We (intend to)accomplish this by continuing to execute on the following strategies:·Building Out Existing Markets. Once we have established a presence in a particular geographic market thatcontains attractive high net worth household demographics, we then look to establish additional locations thatare closely situated to sub-concentrations of affluent households and/or commercial activity (a “hub and spoke”market build-out, as we have commenced in Denver and Phoenix). We also seek to employ highly capableassociates with local market experience and relationships. ·Deepening Existing Client Relationships. We deliver our services though our local boutique private trust bankoffices. This allows us to use multi-discipline sales and client service teams, in-market, to ensure we are meetingeach client’s comprehensive set of needs. These teams take the time to understand the complexities of ourclients’ financial world through wealth planning solutions and create the financial plan that helps them reachtheir goals. This profit center-based service model is a critical component of our future growth as we continue todevelop our understanding of our clients’ evolving needs, allowing us to deepen, broaden and grow ourexisting relationships. ·Generating Referrals for New Client Relationships. We believe we have demonstrated a successful sales andmarketing capability, built around the personal and professional networks and centers of influence of our localprofit center leadership. Our existing client base also provides a significant amount of new clients throughreferrals. In surveys, our clients generally rate us very favorably overall in areas of professionalism, reliability,service-orientation, and trust. We have added wealth advisors in each of our profit centers as commissionedsales associates to enhance our acquisition of new clients. ·Developing Client Relationships through our Product Groups. Each profit center is designed to feel like aboutique private trust bank office and is staffed with business development and client service personnel. Theprofit centers work closely with our central product groups to customize our services to each client’s specificsituation, without sacrificing the flexibility, expertise and authority to quickly meet complex client needs. Ourcentral product groups are designed to support a significantly larger client and AUM base, providing anopportunity for significant operating leverage as we open additional profit centers. We have sales and servicespecialists in our product groups, such as Retirement Services and Mortgage Services, who are able to buildrelationships within their area of expertise and provide expertise and high quality service that creates anopportunity for a broader relationship across our suite of products and services. 7 Table of Contents·Expanding to New Markets. We believe that our profit centers are profitable and stable businesses when mature.We also believe that our product group and support center teams have a high degree of operating leverage(i.e., we believe that increasing the number of profit centers would not require a proportionate increase in ourproduct group or support center expenses). Therefore, a key strategy of ours is to add incremental profit centersand grow them to maturity. The trends in the financial services industry that make our business modelsuccessful in our existing geographic markets also exist in other locations in the Western United States. Ouranalysis indicates that there are hundreds of markets and submarkets in the Western United States that couldsupport our profit centers and fit our target demographics. As such, we intend to continue to explore newWestern United States markets with favorable high net worth demographics and competitive marketplaces. ·Growing our Core Deposit Franchise. The strength of our deposit franchise is derived from the long-standingrelationships we have with our clients and the strong ties we have to the markets we serve. Our deposit footprinthas provided, and we believe will continue to provide, primary support for our loan growth. A key part of ourstrategy is to continue to enhance our funding sources by continuing to build our private and commercialbanking capabilities to keep building our base of attractively priced core deposits.·Attracting Talent. Our team of seasoned associates has been, and will continue to be, an important driver of ourorganic growth by further developing relationships with current and potential clients. We have a record ofhiring experienced associates to enhance our organic growth, and sourcing and hiring talent will continue to bea core focus for us. We believe that our recent initial public offering will further enhance our ability to attractand retain this talent. ·Developing New Products. We seek to be the primary source of financial products and services for our clients.By continuing to expand our product offerings—either by internal product development or establishing third-party relationships—we work to meet expanding client needs while further diversifying our revenue streams.Most recently, we have added a Health Savings Account consulting capability to our business services team,again providing additional client ties to increase revenues per client, improve “stickiness,” and allow forbuilding broader relationships.Our Service Model and ProductsWe deliver a broad array of wealth management products and services through our profit centers using ourproprietary ConnectView® approach, which looks holistically across a client’s current and projected financial situation. Webelieve providing financial solutions in one area (such as estate, retirement planning or lending) often impacts other areas ofour clients’ wealth planning (such as risk or balance sheet management), which provides us opportunities to evaluateproposed solutions across multiple business lines and offer additional services to our clients.We have designed our business around having each profit center staffed with seasoned management. Typically, eachprofit center team is led by a president, who is a senior investment advisor or banker with strong client relationships and salesand leadership skills. The local team includes deposit, loan, trust, wealth planning, and related professionals, creating astrong interdisciplinary sales and service team. In addition to this service team, we recently added wealth advisors as acommissioned sales force to several profit centers to enhance our acquisition of new clients.We provide a broad array of products and services through our boutique private trust bank offices, largely comprisedof the products and services described below.LendingGeneral. Through our relationship-oriented private bank lending approach, our strategy is to offer a broad range ofcustomized consumer and commercial lending products for the personal investment and business needs of our clients. Ourclients are typically well diversified and the purpose for their loan and liquidity needs often does not correlate to thecollateral used to secure the loan.8 Table of ContentsOur commercial lending products include commercial loans, business term loans and lines of credit to a diversifiedmix of small and midsized businesses. We offer both owner occupied and non-owner occupied commercial real estate loans,as well as construction loans.Our consumer lending products include residential first mortgage loans, originated loans for our own portfolio, aswell as those for which we conduct mortgage banking activities whereby we originate and sell, servicing-released, wholeloans in the secondary market. Our mortgage banking loan sales activities are primarily directed at originating single familymortgages, which generally conform to Fannie Mae guidelines and are delivered to the investor shortly after funding.Additionally, we offer installment loans and lines of credit, typically to facilitate investment opportunities for consumerclients whose financial characteristics support the request. We also provide clients and prospects loans collateralized by cashand marketable securities.We employ experienced banking and business development teams who provide superior client service, value-addlending solutions and competitive pricing to market our lending products and services. As of December 31, 2018, gross loanswere $894.0 million, an increase of $80.3 million, or 9.9%, compared to $813.7 million as of December 31, 2017. Theseincreases were primarily due to our continued organic growth in our market areas and in the commercial and residentialmortgage segments of our loan portfolio.As of December 31, 2018, our loan portfolio contained a balanced and diverse mix of loans, as shown below:Our loan portfolio includes commercial and industrial loans, residential real estate loans, commercial real estateloans and other consumer loans. The principal risk associated with each category of loans we make is the creditworthiness ofthe borrower. Borrower creditworthiness is affected by general economic conditions and the attributes of the borrower and theborrower’s market or industry. We underwrite for strong cash flow, multiple sources of repayment, adequate collateral,borrower experience and backup guarantors. Attributes of the relevant business market or industry include the competitiveenvironment, client and supplier availability, the threat of substitutes and barriers to entry and exit.1-4 Family Residential. Our 1-4 family residential loan portfolio consists of loans and home equity lines of creditsecured 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 loanwith owner occupied or non-owner occupied 1-4 family residential properties. At December 31, 2018, 1-4 family residentialloans were $350.9 million, or 39.3% of our total loan portfolio, consisting of $104.6 million and $246.3 million of fixed-rateand adjustable-rate loans, respectively. While we typically originate loans with adjustable rates and9 Table of Contentsmaturities up to 30 years, as of December 31, 2018, the average term on our 1-4 family portfolio was 17.4 years with anaverage remaining term of 15.3 years. Such loans typically remain outstanding for substantially shorter periods becauseborrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the originalloan.Commercial loans secured by 1-4 family residential are dependent on the strength of the local economy, and localresidential and commercial real estate markets. Borrower demand for adjustable-rate compared to fixed-rate loans is afunction of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between theinterest rates and loans fees offered for fixed-rate mortgage loans as compared to the interest-rates and loans fees foradjustable rate loans.The loan fees, interest rates, and other provisions of mortgage loans are determined by us on the basis of our ownpricing criteria and competitive market conditions. The loans are secured by the real estate, and appraisals are obtained tosupport the loan amount at origination. Loans collateralized by 1-4 family residential real estate generally are originated inamounts of no more than 80% of appraised value. Generally, our loans conform to Fannie Mae and Freddie Mac underwritingguidelines and conform to internal policies for debt-to-income or free cash flow levels. We retain a valid lien on real estate,obtain a title insurance policy that insures that the property is free from encumbrances and require hazard insurance.Our focus for mortgage lending is to originate high-quality loans to drive growth in our mortgage loan portfolio.Our mortgage strategy includes attracting new loan clients with our mortgage loan products and services, which we believewill provide an opportunity for our profit centers to bring in well-qualified prospects, and to cross-sell other products andservices to clients. We believe that cross-selling enables us to generate additional revenues, increase client retention, andprovide products that benefit our clients. We have developed a scalable platform, including loan processing, underwritingand closings, for both secondary sales and origination of 1-4 family residential mortgages maintained in our portfolio andbelieve we have significant opportunities to grow this business.Cash, Securities and Other. Our cash, securities and other loan portfolio consists of consumer and commercialpurpose loans that are primarily secured by securities managed and under custody with us, cash on deposit with us or lifeinsurance policies. In addition, loans in this portfolio are collateralized with other sources of consumer collateral, whichtypically leaves an immaterial amount of the loan balance unsecured. At December 31, 2018, loans secured with cash,marketable securities and other were $114.2 million, or 12.8% of our total loan portfolio. This segment of our portfolio isaffected by a variety of local and national economic factors affecting borrowers’ employment prospects, income levels, andoverall economic sentiment.Commercial and Industrial. We make 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 loanproducts, primarily in our target markets. These loans are underwritten on the basis of the borrower’s ability to service thedebt from income, with maturities tied to the underlying life of the collateral. We generally take a lien on all business assets,including, among other things, available real estate, accounts receivable, inventory and equipment and generally obtain apersonal guaranty of the principal(s). Our commercial and industrial loans generally have variable interest rates and termsthat typically range from one to five years. Fixed-rate commercial and industrial loan maturities are generally short-term, withthree- to five-year maturities, including periodic interest rate resets. At December 31, 2018, commercial and industrial loanswere $113.7 million, or 12.7% of our total loan portfolio. The average maturity on our commercial and industrial portfoliowas four years with an average remaining term of one year. This portfolio primarily consists of term loans and lines of creditwhich are mostly dependent on the strength of the industries of the related borrowers and the success of their businesses.Commercial Real Estate, Owner Occupied and Non-Owner Occupied. We make commercial loans collateralized byreal estate. These loans may be collateralized by owner occupied or non-owner occupied real estate, as well as multi-familyresidential real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment isdependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debtservice. We require our commercial real estate loans to be secured by well-managed property with adequate margins andgenerally obtain a guaranty from responsible parties who have outside cash flows, experience and/or other assets. Ourcommercial real estate loans are generally secured by properties used for business purposes such as office10 Table of Contentsbuildings, industrial facilities and retail facilities. Loan amounts generally do not exceed 80% or 75% of the property’sappraised value for owner occupied and non-owner occupied respectively. In addition, aggregate debt service ratios,including the guarantor’s cash flow and the borrower’s other projects, are required by policy to have a minimum annual cashflow to debt service ratio of 2.0x. We require independent appraisals or evaluations from a list of approved appraisers on allloans secured by commercial real estate. At December 31, 2018, owner occupied commercial real estate loans were $108.5million, or 12.2% of our total loan portfolio and non-owner occupied commercial real estate loans were $173.7 million, or19.5% of our total loan portfolio. These loans are primarily dependent on the strength of the industries of the relatedborrowers and the success of their businesses.Construction and Development. We make loans to finance the construction of residential and non-residentialproperties. Construction and development loans are generally collateralized by first liens on real estate and usually havefloating interest rates. Our construction and development loans typically have maturities of up to two years depending onfactors such as the type and size of the development and the financial strength of the borrower/guarantor, and are typicallystructured with an interest only construction period. These loans are underwritten to either mature at the completion ofconstruction, or transition to a traditional amortizing commercial real estate facility with the terms and characteristics in linewith other commercial real estate loans we hold in our portfolio. At December 31, 2018, construction and development loanswere $31.9 million, or 3.5% of our total loan portfolio.Concentrations. Most of our lending activity and credit exposure, including real estate collateral for many of ourloans, are concentrated in Colorado, Arizona, Wyoming and California, as approximately 97.5% of the loans in our loanportfolio as of December 31, 2018. were made to borrowers who live in or conduct business in those states. Our commercialreal estate loans are generally secured by first liens on real property. The remaining commercial and industrial loans aretypically secured by general business assets, accounts receivable inventory and/or the corporate guaranty of the borrower andpersonal guaranty of its principals. The geographic concentration subjects the loan portfolio to the general economicconditions within Colorado, Arizona, Wyoming and California. The risks created by such concentrations have beenconsidered by management in the determination of the adequacy of the allowance for loan losses. As of December 31, 2018,management believes the allowance for loan losses is adequate to absorb probable losses in our loan portfolio.Sound risk management practices and appropriate levels of capital are essential elements of a sound commercial realestate lending program. Concentrations of commercial real estate exposures add a dimension of risk that compounds the riskinherent in individual loans. Interagency guidance on commercial real estate concentrations describe sound risk managementpractices which include board and management oversight, portfolio management, management information systems, marketanalysis, portfolio stress testing and sensitivity analysis, credit underwriting standards, and credit risk review functions.Management believes it has implemented these practices in order to monitor concentrations in commercial real estate in ourloan portfolio.Credit Policies and ProceduresGeneral. Asset quality and robust underwriting are integral to our strategy and credit culture. We place aconsiderable emphasis on effective risk management and preserving sound credit underwriting standards as we grow our loanportfolio. Underwriting considerations include collateral, defined sources of repayment, strength of guarantor(s) andopportunities to broaden the relationship with the client. Our credit policy requires key risks be identified and measured,documented and mitigated, to the extent possible, to seek to ensure the soundness of our loan portfolio.Loan Underwriting and Approval. Historically, we believe we have made sound, high quality loans whilerecognizing that lending money involves a degree of business risk. We have loan policies designed to assist us in managingthis business risk. These policies provide a general framework for our loan origination, monitoring and funding activities,while recognizing that not all risks can be anticipated. Our board of directors delegates limited lending authority toindividuals and internal loan committees. When the total relationship exceeds an individual’s loan authority, a higherauthority or credit committee approval is required. The objective of our approval process is to provide a disciplined,collaborative approach to larger credits while maintaining responsiveness to client needs. Loan decisions are documented asto the borrower’s business, purpose of the loan, evaluation of the repayment source and the associated risks, evaluation ofcollateral, covenants and monitoring requirements, and the risk rating rationale.11 Table of ContentsManaging credit risk is an enterprise-wide process. Our strategy for credit risk management includes well-defined,central credit policies, uniform underwriting criteria and ongoing risk monitoring and review processes. Our processesemphasize early stage review of loans, regular credit evaluations and management reviews of loans, which supplement theongoing and proactive credit monitoring and loan servicing provided by our bankers. Our Chief Credit Officer, together withour central underwriting, credit administration and loan operations teams, provides credit oversight. We periodically reviewall credit risk portfolios to ensure that the risk identification processes are functioning properly and that our credit standardsare followed. In addition, a third-party loan review is performed to assist in the identification of problem assets and toconfirm our internal risk rating of loans.Our loan policies include other underwriting guidelines for loans collateralized by real estate. These underwritingstandards are designed to determine the maximum loan amount that a borrower has the capacity to repay based upon the typeof collateral securing the loan and the borrower’s income. Such loan policies include maximum amortization schedules andloan terms for each category of loans collateralized by liens on real estate. In addition, our loan policies provide guidelinesfor personal guarantees; an environmental review; loans to employees, executive officers and directors; problem loanidentification; maintenance of an adequate allowance for loan losses; and other matters relating to lending practices.We believe that an important part of our assessment of client risk is the ongoing completion of periodic risk ratingreviews. As part of these reviews, we seek to review the risk rating of each facility within a client relationship and mayrecommend an upgrade or downgrade to the risk rating. We categorize loans into risk categories based on relevantinformation about the ability of the borrowers to service their debt such as: current financial information, historical paymentexperience, credit documentation, public information, and current economic trends, among other factors. We analyze loansindividually by classifying the loans as to credit risk on a quarterly basis. We attempt to identify potential problem loansearly in an effort to seek aggressive resolution of these situations before the loans become a loss, record any necessarycharge-offs promptly and maintain adequate allowance levels for probable incurred loan losses in the loan portfolio.Lending Limits. Our lending activities are subject to a variety of lending limits imposed by state and federalregulation. The Bank is subject to a legal lending limit on loans to related borrowers based on the Bank’s capital level. Thedollar amounts of the Bank’s lending limit increases or decreases as the Bank’s capital increases or decreases. The Bank isable to sell participations in its larger loans to other financial institutions, which allows it to manage the risk involved inthese loans and to meet the lending needs of its clients requiring extensions of credit in excess of these limits.DepositsThe strength of our deposit franchise is derived from the long-standing relationships we have with our clients andthe strong ties we have to the markets we serve. Our deposit footprint has provided, and we believe will continue to provide,primary support for our loan growth. A key part of our strategy is to continue to enhance our funding sources by continuingto build our private and commercial banking capabilities to keep building our base of attractively priced core deposits.We provide a broad range of deposit products and services, including demand deposits, interest-bearing transactionaccounts, money market accounts, time and savings deposits, certificates of deposit and CDARS® reciprocal products. Otherthan client deposits obtained through our locations that choose to use the CDARS program, we do not accept brokereddeposits as a source of funding. We also offer a range of treasury management products including electronic receivablesmanagement, remote deposit capture, cash vault services, merchant services and other cash management services. Depositflows are significantly influenced by general and local economic conditions, changes in prevailing interest rates, internalpricing decisions and competition. Our deposits are primarily obtained from depositors located in our geographic footprint,and we believe that we have attractive opportunities to capture additional deposits in our markets. In order to attract andretain deposits, we rely on providing quality service, offering a suite of retail and commercial products and services andintroducing new products and services that meet our clients’ needs as they evolve.We have experienced banking and business development teams who we believe provide superior client service,creative cash management solutions and competitive pricing to market our depository products and services. As of12 Table of ContentsDecember 31, 2018, total deposits were $937.8 million, an increase of $121.6 million, or 14.9%, compared to $816.1 millionas of December 31, 2017.As of December 31, 2018, our deposit portfolio contained a balanced and diverse mix of deposits, as shown below:Trust and Investment Management, AdvisoryWe offer sophisticated wealth advisory and planning services including investment management, trusts and estateservices, philanthropic services, insurance planning and retirement consulting. Our client relationships frequently include in-depth proprietary ConnectView® financial plans and sophisticated, institutional quality investment management that isdriven by comprehensive investment policy statements and access to industry-leading money managers. These customizeddocuments—ConnectView® wealth plans and investment policy statements—form the roadmap for how we serve each clientand monitor our progress in achieving their goals.We have experienced trust officers in several profit centers, plus expert trust and estate attorneys on our centralproduct group team, to provide fiduciary services through our profit centers. These include traditional fiduciary, directedtrusts, special needs trusts, and custody services. Most of our investment management business is conducted through the trustdepartment in agency accounts where we are not serving as trustee.We also have experienced portfolio managers and business development teams in our profit centers who providehigh-touch, tailored solutions that we believe further exemplify our superior client service. These local teams have personaland professional networks and relationships with centers of influence to market our wealth advisory products and services. Asof December 31, 2018, total AUM was $5.2 billion, a decrease of $139.0 million, or 2.6%, compared to $5.4 billion as ofDecember 31, 2017.13 Table of ContentsAs of December 31, 2018, we provided fiduciary and advisory services on $5.2 billion of trust and investmentmanagement assets, as shown below:Our investment management platform combines a broad range of asset and sub asset classes meeting the needs ofboth taxable and tax-free private client accounts as well as trust investment services. We deliver most of our discretionarymoney management by allocating client portfolios across a centrally controlled platform of select third-party managers ineach asset and sub asset class, including separately managed and comingled options, and with active and passivemanagement strategies. We also have a limited number of proprietary products that we believe further differentiates us frommany of our competitors.We believe acting as an investment manager, and not just a manager of managers, has a number of critical benefitsfor our clients. These include the ability to have our money managers available to meet with clients and prospects, to tailorproducts and separately managed accounts for our clients, to better educate and inform our client-facing portfolio managers,and to develop new solutions as market conditions and client needs change. We manage proprietary fixed income and equitystrategies, including acting as the advisor on our three highly rated First Western mutual funds. By combining internalresearch and a dedicated team of accredited specialized advisors like Certified Financial Analysts and Certified FinancialPlanners with our pairing of proprietary and third-party investment options, we create unique solutions tailored to thespecific needs of each of our clients.Other ProductsIn addition to the traditional loan, deposit and trust and investment management products and services, our profitcenters are supported by a central team of specialized product experts in our “product groups,” which include experiencedprofessionals in commercial banking, investment management, wealth planning, risk management/insurance, personal trust,retirement planning and tax-advantaged products, and mortgage lending. We believe that the sophistication of our productgroups rivals the offerings and expertise typically provided by larger financial institutions. Our product groups are led andstaffed with highly accredited and well known professionals, each with significant experience in their fields. Beyondtraditional banking, trust and wealth management activities, at each profit center we provide other services including:·Mortgage Lending. Although our primary objective is to originate loans for our own portfolio, we also conductmortgage banking activities in which we originate and sell, servicing-released, whole loans in the secondarymarket. Typically, loans with a fixed interest rate of greater than 10 years are available-for-sale14 Table of Contentsand sold on the secondary market. Our mortgage banking loan sales activities are primarily directed atoriginating single family mortgages that are priced and underwritten to conform to previously agreed criteriabefore 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, thestrength of the general economy, local real estate markets and the housing industry, and conditions in thesecondary loan sale market. The amount of gain or loss on the sale of loans is primarily driven by marketconditions and changes in interest rates, as well as our pricing and asset liability management strategies. As ofDecember 31, 2018, we had mortgage loans held for sale of $14.8 million in residential mortgage loans weoriginated. For the year ended December 31, 2018, we had net proceeds of $486.5 million on mortgage loansthat we originated and sold into the secondary market.·Treasury Management. We offer a broad range of customized treasury management products and services forcommercial accounts, including disbursement and payables management, liquidity management and onlinebusiness banking services. Our profit center sales and service teams are supported by a central team of treasurymanagement specialists and deposit operations professionals. ·Risk Management. Through the wealth planning process, our profit center teams are supported by a central teamof insurance planning experts, specializing in risk management services, estate tax law, trusts and tax planning.We offer customized solutions in the form of, among others, charitable giving tax strategies, deferred-compensation plans, irrevocable life insurance trusts, long-term care insurance, and executive key personinsurance. ·Specialized Philanthropic Services. We provide advisory services for nonprofit organizations seeking toeffectively manage their funds as well as individuals seeking to use philanthropic strategies, for example, builda legacy, instill shared values in the next generation, or contribute to causes about which they are passionate. ·Retirement Services, including 401(k) Plan Consulting. We have a team of retirement plan consultants whopartner with businesses to sponsor retirement plans. We offer creative corporate retirement plan design andanalysis solutions and fiduciary liability management, providing tools such as corporate retirement plans,health savings accounts, and third-party administrative services along with ERISA regulation compliance,education and expertise.Our profit centers and product groups are also supported centrally by teams providing management services such asoperations, risk management, credit administration, technology support, marketing, human capital and accounting/financeservices, which we refer to as “support centers.” Our associates in our support centers have significant experience in wealthmanagement, investment advisory, and commercial banking, including areas such as lending, underwriting, creditadministration, risk management, accounting/finance, operations and information technology. We have structured our teams,services and product offerings to use technology to efficiently provide our clients with a high-touch, solution-orientedexperience, that we believe is scalable and provides operating leverage for future growth.To demonstrate how these three groups—profit centers, product groups and support centers—work together todeliver a highly competitive product offering through a team of local professionals, our investment management offering isan example:·In each profit center, there are one or more portfolio managers that work as part of that local team’s sales andservice delivery. These portfolio managers are typically Certified Financial Planners with experience in wealthplanning and portfolio construction. They meet with clients and develop an overall wealth managementstrategy, specific goals and objectives, an investment policy statement, and an implementation plan. They useour guided architecture, a diverse array of select third-party and proprietary investment products covering abroad range of asset classes as their source for structure, asset allocation and products. Sales and marketingsupport is provided centrally but delivered locally.15 Table of Contents·Our investment platform is controlled by our central investment management product group, which has a strongresearch focus and includes many associates who have Chartered Financial Analyst designations, with oversightby our Chief Investment Officer and our Investment Policy Committee. ·Operational support for these profit center and product group teams is provided by our central trust andinvestment management support center team.Investment ActivitiesThe primary objectives of our Bank portfolio investment policy are to provide a source of liquidity, to provide anappropriate return on funds invested, to manage interest rate risk, to meet pledging requirements and to meet regulatorycapital requirements. As of December 31, 2018, the carrying value of our investment portfolio totaled $44.9 million, with anaverage yield of 2.24%.Our investment policy outlines investment type limitations, security mix parameters, authorization guidelines andrisk management guidelines. The policy authorizes us to invest in a variety of investment securities, subject to variouslimitations. Our current investment portfolio consists of obligations of the U.S. Treasury and other U.S. government agencies,corporate or sponsored entities, including mortgage-backed securities, collateralized mortgage obligations and mutual funds.We are required to maintain an investment in Federal Home Loan Bank of Topeka (“FHLB Topeka”) stock, which investmentis based on the level of our FHLB Topeka borrowings. Our board of directors has the overall responsibility for the investmentportfolio, including approval of our investment policy. Our Asset and Liability Committee (“ALCO”) and management areresponsible for implementation of the investment policy and monitoring of our investment performance. Our ALCO andmanagement review the status of our investment portfolio at least monthly.Our MarketsOur strategic market area is defined by metropolitan areas in the Western United States having strong long-termeconomic growth prospects, a significant wealth demographic measured by growth in high net worth households, a dynamiccommercial business landscape and the ability to sustain one or more of our profit centers. We target households with morethan $1.0 million in liquid net worth and their related businesses and philanthropic interests. We believe that the complexand diverse financial needs of this market segment presents an opportunity to serve a broad array of client needs efficientlyand cost effectively.Our current operating markets have a high concentration of our targeted client segment and are expected toexperience high growth, providing opportunity for continued future organic growth through demographic and market sharegrowth.We seek to expand our presence in our existing markets as well as other Western markets with similar demographicprofiles. With improved access to capital as a result of our initial public offering, we expect to proactively evaluateopportunities to accelerate our organic growth and acquire banks, investment management firms and related businesses,while also seeking to hire talented personnel. We believe consolidation in the financial services industry along with theindustry’s movement towards automated and impersonal client service further presents the Company with a unique andsignificant opportunity. Our business model differentiates us from the industry, which we expect will enable us to increaseour market share in existing markets and, on a strategic and opportunistic basis, expand our geographic footprint into newmarkets in the Western United States that share similar characteristics to our current markets.Information TechnologyWe continue to make investments in our information technology systems as we adapt to the changing technology,online and mobile, and other platform needs and wants of our clients. We believe that this investment is essential to ourability to offer new products and optimize overall client experience, provide opportunities for future growth andacquisitions, and provide a control structure that supports our operations. We leverage the experience of a third-party serviceprovider to provide managed information technology services, enhance our IT security, and deliver the technical expertisearound network design and architecture required to operate effectively. The majority of our systems are hosted16 Table of Contentsby third-party service providers. The scalability of this infrastructure supports our growth strategy. In addition, the testedcapability of these vendors to switch over to standby systems should allow us to recover our systems and provide redundancyand business continuity quickly in case of a disaster.Enterprise Risk ManagementWe place significant emphasis on our holistic approach to integrated risk management that provides oversight,control, and discipline to drive continuous improvement. Our governance framework includes a process of anticipating,identifying, assessing, managing and monitoring risks within the organization. We have developed an Enterprise RiskManagement (“ERM”) Committee that oversees our ERM program. This group contains key members of managementincluding the Chief Executive Officer and the Chief Financial Officer. In order to carry out the ERM program, we havedeveloped the following objectives to:·Integrate ERM practices with our strategy setting process and performance management practices to realizebenefits related to value;·Improve the Company’s ability to identify risks and establish appropriate responses to reduce costs and limitlosses; ·Identify operational gaps to reduce performance variability; ·Identify interrelated risks within First Western and establish an integrated response; and ·Assess the positive and negative aspects of risk to address challenges and opportunities within our internal andexternal environment.We routinely monitor and measure risk throughout the organization and allocate resources and capital to maintainthe quality of information and compliance within our regulatory environment.CompetitionThe financial services industry is highly competitive and we compete in a number of areas, including commercialand consumer banking, residential mortgages, wealth advisory, investment management, trust, and insurance among others.We compete with other bank and nonbank institutions located within our market area, along with competitors situatedregionally, nationally or with only an online presence. These include large banks and other financial intermediaries, such asconsumer finance companies, brokerage firms, mortgage banking companies, business leasing and finance companies andinsurance agencies, as well as major retailers, all actively engaged in providing various types of loans and other financialservices. We also face growing competition from online businesses with few or no physical locations, including onlinebanks, lenders and consumer and commercial lending platforms as well as automated retirement and investment servicesproviders. Competition involves efforts to retain current clients, obtain new loan, deposit and advisory services customers,increase the scope and type of services offered, and offer competitive interest rates paid on deposits, charged on loans, orcharged for advisory services. We believe our integrated and high-touch service offering, along with our sophisticatedrelationship-oriented approach sets us apart from our competitors.AssociatesAs of December 31, 2018, we had 245 associates. We provide extensive training to our associates in an effort toensure that our clients receive superior service and that our risks are well managed. None of our associates are represented byany collective bargaining unit or are parties to a collective bargaining agreement. We believe that our relations with ourassociates are good.17 Table of ContentsAvailable InformationThe Company files reports, proxy statements and other information with the Securities and Exchange Commission(“SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Electronic copies of our SEC filingsare available to the public at the SEC’s website at https://www.sec.gov. You may also obtain copies of our annual, quarterlyand special reports, proxy statements and certain other information filed by the Company with the SEC, as well asamendments thereto, free of charge from the Company’s website, https://myfw.gcs-web.com/investor-relations. Thesedocuments are posted to our website after we have filed them with the SEC. Our corporate governance guidelines, includingour code of business conduct and ethics applicable to all of our associates, officers and directors, as well as the charters of ouraudit committee, compensation committee and corporate governance and nominating committee are available athttps://myfw.gcs-web.com/investor-relations. The foregoing information is also available in print to any shareholder whorequests it from the Company. Except as explicitly provided, information furnished by the Company and information on, oraccessible through, the SEC’s or the Company’s website is not incorporated into this Annual Report on Form 10-K or ourother securities filings and is not a part of them.Supervision and RegulationThe U.S. banking industry is highly regulated under federal and state law. Banking laws, regulations, and policiesaffect the operations of the Company and its subsidiaries. Investors should understand that the primary objective of the U.S.bank regulatory regime is the protection of depositors, the Deposit Insurance Fund (“DIF”), and the banking system as awhole, not the protection of the Company’s shareholders.As a bank holding company, we are subject to inspection, examination, supervision, and regulation by the Board ofGovernors of the Federal Reserve System (the “Federal Reserve”). The Bank, which is our subsidiary, is a Colorado-charteredcommercial bank and is not a member of the Federal Reserve System (a “state nonmember bank”). As such, the Bank issubject to regulation, supervision, and examination by both the Colorado Division of Banking (the “CDB”) and the FederalDeposit Insurance Corporation (“FDIC”). In addition, we expect that any additional businesses that we may invest in oracquire will be regulated by various state and/or federal banking regulators.Banking statutes and regulations are subject to continual review and revision by Congress, state legislatures andfederal and state regulatory agencies. A change in such statutes or regulations, including changes in how they are interpretedor implemented, could have a material effect on our business. In addition to laws and regulations, state and federal bankregulatory agencies may issue policy statements, interpretive letters and similar written guidance pursuant to such laws andregulations, which are binding on us and our subsidiaries.Banking statutes, regulations and policies could restrict our ability to diversify into other areas of financial services,acquire depository institutions, and make distributions or pay dividends on our equity securities. They may also require us toprovide financial support to any bank that we control, maintain capital balances in excess of those desired by management,and pay higher deposit insurance premiums as a result of a general deterioration in the financial condition of the Bank orother depository institutions we control.The description below summarizes certain elements of the applicable bank regulatory framework. This description isnot intended to describe all laws and regulations applicable to us and our subsidiaries. The description is qualified in itsentirety by reference to the full text of the statutes, regulations, policies, interpretive letters and other written guidance thatare described.Regulatory CapitalThe Company and the Bank are each required to comply with applicable capital adequacy standards established bythe Federal Reserve and the FDIC. The current risk-based capital standards applicable to the Company and the Bank arebased on the December 2010 final capital framework for strengthening international capital standards, known as Basel III, ofthe Basel Committee on Banking Supervision, or Basel Committee. In July 2013, the federal bank regulators approved finalrules, the Basel III Capital Rules, implementing the Basel III framework as well as certain provisions of the Dodd-Frank Act.The Basel III Capital Rules became effective for the Company and the Bank on January 1, 201518 Table of Contents(subject to a phase-in period for certain provisions). The Basel III Capital Rules require banks and bank holding companies,including the Company and the Bank, to maintain four minimum capital standards: (1) a Tier 1 capital‑to‑adjusted totalassets ratio, or leverage capital ratio, of at least 4.0%; (2) a Tier 1 capital to risk‑weighted assets ratio, or Tier 1 risk‑basedcapital ratio, of at least 6.0%; (3) a total risk‑based capital (Tier 1 plus Tier 2) to risk‑weighted assets ratio, or total risk‑basedcapital ratio, of at least 8.0%; and (4) a common equity tier 1 (“CET1”) capital ratio of at least 4.5%.The Basel III Capital Rules also call for bank holding companies and banks to maintain a “capital conservationbuffer” on top of the minimum risk‑based capital requirements. The buffer must be composed of common equity Tier 1capital. This buffer is intended to help to ensure that banking organizations conserve capital when it is most needed,allowing them to better weather periods of economic stress. The buffer, which became fully phased in on January 1, 2019, is2.5% of risk‑weighted assets.The Basel III Capital Rules also attempt to improve the quality of capital by implementing changes to the definitionof capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that woulddisallow the inclusion of certain instruments, such as trust preferred securities (other than grandfathered trust preferredsecurities such as those issued by the Company), in Tier 1 capital going forward and new constraints on the inclusion ofminority interests, mortgage‑servicing assets, deferred tax assets and certain investments in the capital of unconsolidatedfinancial institutions. In addition, the Basel III Capital Rules require that most regulatory capital deductions be made fromCET1 capital.The Federal Reserve and the FDIC may also set higher capital requirements for individual institutions whosecircumstances warrant it. For example, institutions experiencing internal growth or making acquisitions are expected tomaintain strong capital positions substantially above the minimum supervisory levels, without significant reliance onintangible assets. At this time, the bank regulatory agencies are more inclined to impose higher capital requirements to meetwell capitalized standards and future regulatory change could impose higher capital standards as a routine matter. TheCompany’s regulatory capital ratios and those of the Bank are in excess of the levels established for “well capitalized”institutions under the rules.These rules also set forth certain changes in the methods of calculating certain risk‑weighted assets, which in turnwill affect the calculation of risk‑based ratios. Under the Basel III Capital Rules, higher or more sensitive risk weights havebeen assigned to various categories of assets, including certain credit facilities that finance the acquisition, development orconstruction of real property, certain exposures or credits that are 90 days past due or on nonaccrual status, foreign exposuresand certain corporate exposures. In addition, these rules include greater recognition of collateral and guarantees, and revisedcapital treatment for derivatives and repo‑style transactions.In September 2017, the federal bank regulators proposed to revise and simplify the capital treatment for certaindeferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests forbanking organizations, such as the Company and the Bank, that are not subject to the advanced approaches requirements. InNovember 2017, the federal banking regulators revised the Basel III Capital Rules to extend the transitional treatment ofthese items for non-advanced approaches banking organizations until the September 2017 proposal is finalized. TheSeptember 2017 proposal would also change the capital treatment of certain commercial real estate loans under thestandardized approach, which we use to calculate our capital ratios.In December 2017, the Basel Committee published standards that it described as the finalization of the Basel IIIpost-crisis regulatory reforms (commonly referred to as Basel IV). Among other things, these standards revise the BaselCommittee’s standardized approach for credit risk (including by recalibrating risk weights and introducing new capitalrequirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and providesa new standardized approach for operational risk capital. Under the Basel framework, these standards will generally beeffective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S.capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, andnot to the Company or the Bank. The impact of Basel IV on us will depend on the manner in which it is implemented by thefederal bank regulators.19 Table of ContentsThe Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”), which wasdesigned to ease certain restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the“Dodd-Frank Act”), was enacted on May 24, 2018. Section 201 of the Regulatory Relief Act directs the federal bankingagencies to develop a community bank leverage ratio (“CBLR”) of not less than 8% and not more than 10% for qualifyingcommunity banks and bank holding companies with total consolidated assets of less than $10 billion. Qualifyingcommunity banking organizations that exceed the CBLR level established by the agencies, and that elect to be covered bythe CBLR framework, will be considered to have met: (i) the generally applicable leverage and risk-based capitalrequirements under the banking agencies’ capital rules; (ii) the capital ratio requirements necessary to be considered “wellcapitalized” under the banking agencies’ prompt corrective action framework in the case of insured depository institutions;and (iii) any other applicable capital or leverage requirements. On February 8, 2019, the Office of the Comptroller of theCurrency, the Federal Reserve Board, and the FDIC published for comment a proposed rule to implement the provisions ofSection 201 of the Regulatory Relief Act. Under the proposal, a qualifying community banking organization would bedefined as a depository institution or depository institution holding company with less than $10 billion in assets andspecified limited amounts of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets, and certaintemporary difference deferred tax assets. A qualifying community banking organization would be permitted to elect theCBLR framework if its CBLR were greater than 9%. The proposed rulemaking also addresses opting in and opting out of theCBLR framework by a community banking organization, the treatment of a community banking organization that fallsbelow CBLR requirements, and the effect of various CBLR levels for purposes of the prompt corrective action categoriesapplicable to insured depository institutions. Advanced approaches banking organizations (generally, institutions with$250 billion or more in consolidated assets or $10 billion or more in on-balance sheet foreign exposure), or subsidiaries ofsuch banking organizations, would not be eligible to use the CBLR framework.Regulation of the CompanyThe Bank Holding Company Act of 1956, as amended, or the BHC Act, and other federal laws subject bank holdingcompanies to particular restrictions on the types of activities in which they may engage, and to a range of supervisoryrequirements and activities, including regulatory enforcement actions for violations of laws and regulations.Permitted Activities. Generally, bank holding companies are prohibited under the BHC Act from engaging in, oracquiring direct or indirect control of more than 5% of the voting shares of any company engaged in any activity other than(i) banking or managing or controlling banks or (ii) an activity that the Federal Reserve determines to be so closely related tobanking as to be a proper incident to the business of banking. The Federal Reserve has the authority to require a bankholding company to terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates whenthe Federal Reserve believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to thefinancial safety, soundness or stability of any of its banking subsidiaries.Status as a Financial Holding Company. Under the BHC Act, a bank holding company may file an election withthe Federal Reserve to be treated as a financial holding company and engage in an expanded list of financial activities. Theelection must be accompanied by a certification that all of the company’s insured depository institution subsidiaries are“well capitalized” and “well managed.” Additionally, the Community Reinvestment Act of 1977 (“CRA”) rating of eachsubsidiary bank must be satisfactory or better. If, after becoming a financial holding company and undertaking activities notpermissible for a bank holding company, the company fails to continue to meet any of the prerequisites for financial holdingcompany status, the company must enter into an agreement with the Federal Reserve to comply with all applicable capitaland management requirements. If the company does not return to compliance within 180 days, the Federal Reserve may orderthe company to divest its subsidiary banks or the company may discontinue or divest investments in companies engaged inactivities permissible only for a bank holding company that has elected to be treated as a financial holding company. TheCompany filed an election and became a financial holding company in 2006.Sound Banking Practices. Bank holding companies and their non-banking subsidiaries are prohibited fromengaging in activities that represent unsafe or unsound banking practices. For example, under certain circumstances theFederal Reserve’s Regulation Y requires a holding company to give the Federal Reserve prior notice of any redemption orrepurchase of its own equity securities if the consideration to be paid, together with the consideration paid for anyrepurchases in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reservemay oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would20 Table of Contentsviolate a regulation. As another example, a holding company is prohibited from impairing its subsidiary bank’s soundness bycausing the bank to make funds available to non-banking subsidiaries or their customers if the Federal Reserve believes itnot prudent to do so. The Federal Reserve has the power to assess civil money penalties for knowing or reckless violations ifthe activities leading to a violation caused a substantial loss to a depository institution. Potential penalties are as high as$1.0 million for each day the activity continues.Source of Strength. In accordance with the Dodd-Frank Act and long-standing Federal Reserve policy, theCompany must act as a source of financial and managerial strength to the Bank. Under this policy, the Company mustcommit resources to support the Bank, including at times when the Company may not be in a financial position to provide it.As discussed below, the Company could be required to guarantee the capital plan of the Bank if it becomes undercapitalizedfor purposes of banking regulations. Any capital loans by a bank holding company to its subsidiary bank are subordinate inright of payment to deposits and to certain other indebtedness of such subsidiary bank. The BHC Act provides that, in theevent of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatoryagency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to priority ofpayment.Regulatory agencies have promulgated regulations to increase the capital requirements for bank holding companiesto a level that matches those of banking institutions.Anti-Tying Restrictions. Bank holding companies and affiliates are prohibited from tying the provision of services,such as extensions of credit, to other services offered by a holding company or its affiliates.Acquisitions. The BHC Act, Section 18(c) of the Federal Deposit Insurance Act, as amended (”FDIA”) the ColoradoBanking Code and other federal and state statutes regulate acquisitions of commercial banks and their holding companies.The BHC Act generally limits acquisitions by bank holding companies to commercial banks and companies engaged inactivities that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto. TheBHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before: (i) acquiring morethan 5% of the voting stock of any bank or other bank holding company; (ii) acquiring all or substantially all of the assets ofany bank or bank holding company; or (iii) merging or consolidating with any other bank holding company.In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authoritiesgenerally consider, among other things, the competitive effect and public benefits of the transactions, the financial andmanagerial resources and future prospects of the combined organization (including the capital position of the combinedorganization), the applicant’s performance record under the Community Reinvestment Act, or CRA (see the sectioncaptioned “Community Reinvestment Act” included below in this item), fair housing laws and the effectiveness of thesubject organizations in combating money laundering activities.The Company is also subject to the Change in Bank Control Act of 1978 (“Control Act”) and related FederalReserve regulations, which provide that any person who proposes to acquire at least 10% (but less than 25%) of any class of abank holding company’s voting securities is presumed to control the company (unless the company is not publicly held orsome other shareholder owns a greater percentage of voting stock). Any person who would be presumed to acquire control orwho proposes to acquire control of more than 25% of any class of a bank holding company’s voting securities, or whoproposes to acquire actual control, must provide the Federal Reserve with at least 60 days’ prior written notice of theacquisition. The Federal Reserve may disapprove a proposed acquisition if: (i) it would result in adverse competitive effects;(ii) the financial condition of the acquiring person might jeopardize the target institution’s financial stability or prejudice theinterests of depositors; (iii) the competence, experience or integrity of any acquiring person indicates that the proposedacquisition would not be in the best interests of the depositors or the public; or (iv) the acquiring person fails to provide allof the information required by the Federal Reserve. Any proposed acquisition of the voting securities of a bank holdingcompany that is subject to approval under the BHC Act is not subject to the Control Act notice requirements. Any companythat proposes to acquire “control,” as those terms are defined in the BHC Act and Federal Reserve regulations, of a bankholding company or to acquire 25% or more of any class of voting securities of a bank holding company would be requiredto seek the Federal Reserve’s prior approval under the BHC Act to become a bank holding company.21 Table of ContentsDividends. The Company’s earnings and activities are affected by legislation, by regulations and by locallegislative and administrative bodies and decisions of courts in the jurisdictions in which we conduct business. Theseinclude limitations on the ability of the Bank to pay dividends to the Company and the Company’s ability to pay dividendsto its shareholders. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends oncommon stock only out of income available over the past year and only if prospective earnings retention is consistent withthe organization’s expected future needs and financial condition. The policy provides that bank holding companies shouldnot maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength toits banking subsidiary. Consistent with such policy, a banking organization should have comprehensive policies ondividend payments that clearly articulate the organization’s objectives and approaches for maintaining a strong capitalposition and achieving the objectives of the policy statement.As a Colorado state-chartered bank, the Bank is subject to limitations under Colorado law on the payment ofdividends. The Colorado Banking Code provides that a bank may declare dividends from retained earnings and othercomponents of capital specifically approved by the Colorado State Banking Board so long as the declaration is made incompliance with rules established by the Colorado State Banking Board.In addition, a state nonmember bank may not declare a dividend if paying the dividend would result in the bankbeing undercapitalized under FDIA, discussed above, and must comply with any discretionary distribution restrictionsimposed on it under the federal banking agencies’ capital buffer rules. The FDIC has stated that, in general, state nonmemberbanks can pay dividends in reasonable amounts only after the bank’s earnings have first been applied to the elimination oflosses and the establishment of necessary reserves and prudent capital levels. The FDIC may also direct state nonmemberbanks that are poorly rated or subject to written supervisory actions not to pay dividends in order to ensure adequate capitalexists to support their risk profile.In 2009, the Federal Reserve issued a supervisory letter providing greater clarity to its policy statement on thepayment of dividends by bank holding companies. In this letter, the Federal Reserve stated that when a holding company’sboard of directors is deciding on the level of dividends to declare, it should consider, among other factors: (i) overall assetquality, potential need to increase reserves and write down assets, and concentrations of credit; (ii) potential forunanticipated losses and declines in asset values; (iii) implicit and explicit liquidity and credit commitments, including off-balance sheet and contingent liabilities; (iv) quality and level of current and prospective earnings, including earningscapacity under a number of plausible economic scenarios; (v) current and prospective cash flow and liquidity; (vi) ability toserve as an ongoing source of financial and managerial strength to depository institution subsidiaries insured by the FDIC,including the extent of double leverage and the condition of subsidiary depository institutions; (vii) other risks that affectthe holding company’s financial condition and are not fully captured in regulatory capital calculations; (viii) level,composition, and quality of capital; and (ix) ability to raise additional equity capital in prevailing market and economicconditions (the “Dividend Factors”). It is particularly important for a bank holding company’s board of directors to ensurethat the dividend level is prudent relative to the organization’s financial position and is not based on overly optimisticearnings scenarios. In addition, a bank holding company’s board of directors should strongly consider, after careful analysisof the Dividend Factors, reducing, deferring or eliminating dividends when the quantity and quality of the holdingcompany’s earnings have declined or the holding company is experiencing other financial problems, or when themacroeconomic outlook for the holding company’s primary profit centers has deteriorated. The Federal Reserve further statedthat, as a general matter, a bank holding company should eliminate, defer or significantly reduce its distributions if: (i) its netincome is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with itscapital needs and overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting,its minimum regulatory capital adequacy ratios. Failure to do so could result in a supervisory finding that the bank holdingcompany is operating in an unsafe and unsound manner.Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-banksubsidiaries with which it can prevent or remedy actions that represent unsafe or unsound practices, or violations ofapplicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks andbank holding companies.Stock Redemptions and Repurchases. It is an essential principle of safety and soundness that a bankingorganization’s redemption and repurchases of regulatory capital instruments, including common stock, from investors be22 Table of Contentsconsistent with the organization’s current and prospective capital needs. In assessing such needs, the board of directors andmanagement of a bank holding company should consider the Dividend Factors discussed above under “Dividends.” The risk-based capital rule directs bank holding companies to consult with the Federal Reserve before redeeming any equity or othercapital instrument included in Tier 1 or Tier 2 capital prior to stated maturity, if such redemption could have a material effecton the level or composition of the organization’s capital base. Bank holding companies that are experiencing financialweaknesses, or that are at significant risk of developing financial weaknesses, must consult with the appropriate FederalReserve supervisory staff before redeeming or repurchasing common stock or other regulatory capital instruments for cash orother valuable consideration. Similarly, any bank holding company considering expansion, whether through acquisitions orthrough organic growth and new activities, generally also must consult with the appropriate Federal Reserve supervisory staffbefore redeeming or repurchasing common stock or other regulatory capital instruments for cash or other valuableconsideration. In evaluating the appropriateness of a bank holding company’s proposed redemption or repurchase of capitalinstruments, the Federal Reserve will consider the potential losses that the holding company may suffer from the prospectiveneed to increase reserves and write down assets from continued asset deterioration and the holding company’s ability to raiseadditional common stock and other Tier 1 capital to replace capital instruments that are redeemed or repurchased. A bankholding company must inform the Federal Reserve of a redemption or repurchase of common stock or perpetual preferredstock for cash or other value resulting in a net reduction of the bank holding company’s outstanding amount of commonstock or perpetual preferred stock below the amount of such capital instrument outstanding at the beginning of the quarter inwhich the redemption or repurchase occurs. In addition, a bank holding company must advise the Federal Reservesufficiently in advance of such redemptions and repurchases to provide reasonable opportunity for supervisory review andpossible objection should the Federal Reserve determine a transaction raises safety and soundness concerns.Regulation Y requires that a bank holding company that is not well capitalized or well managed, or that is subject toany unresolved supervisory issues, provide prior notice to the Federal Reserve for any repurchase or redemption of its equitysecurities for cash or other value that would reduce by 10% or more the holding company’s consolidated net worthaggregated over the preceding 12-month period.Annual Reporting; Examinations. The Company is required to file an annual report with the Federal Reserve andto provide such additional information as the Federal Reserve may require. The Federal Reserve may examine a bank holdingcompany and any of its subsidiaries, and charge the company for the cost of such an examination.The Bank is examined from time to time by its primary federal banking regulator, the FDIC, and the CDB and ischarged for the cost of such an examination. Depending on the results of a given examination, the FDIC and the CDB mayrevalue the Bank’s assets and require that the Bank establish specific reserves to compensate for the difference between thevalue determined by the regulator and the book value of the assets.Imposition of Liability for Undercapitalized Subsidiaries. FDIA requires bank regulators to take “promptcorrective action” to resolve problems associated with insured depository institutions. In the event an institution becomes“undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by theregulators unless each company “having control of” the undercapitalized institution “guarantees” the subsidiary’scompliance with the capital restoration plan until it becomes “adequately capitalized.” For purposes of this statute, theCompany has control of the Bank. Under FDIA, the aggregate liability of all companies controlling a particular institution islimited to the lesser of five percent of the depository institution’s total assets at the time it became undercapitalized or theamount necessary to bring the institution into compliance with applicable capital standards. FDIA grants greater powers tobank regulators in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit acapital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain priorFederal Reserve approval of proposed distributions, or might be required to consent to a merger or to divest the troubledinstitution or other affiliates.State Law Restrictions. As a Colorado corporation, the Company is subject to certain limitations and restrictionsunder applicable Colorado corporate law. For example, state law restrictions in Colorado include limitations and restrictionsrelating to indemnification of directors; distributions and dividends to shareholders; transactions involving directors, officersor interested shareholders; maintenance of books, records, and minutes; and observance of certain corporate formalities.23 Table of ContentsRegulation of the BankCapital Adequacy. Under the Basel III Capital Rules, discussed above, the FDIC monitors the capital adequacy ofthe Bank by using a combination of risk‑based guidelines and leverage ratios. The FDIC considers the Bank’s capital levelswhen taking action on various types of applications and when conducting supervisory activities related to the safety andsoundness of the Bank and the banking system. Higher capital levels may be required if warranted by the circumstances orrisk profiles of individual institutions, or if required by the banking regulators due to the economic conditions impacting ourmarkets. For example, FDIC regulations provide that higher capital may be required to take adequate account of, amongother things, interest rate risk and the risks posed by concentrations of credit, nontraditional activities or securities tradingactivities.As of December 31, 2018, the Bank exceeded all regulatory minimum capital requirements.Prompt Corrective Regulatory Action. Under applicable federal statutes, the federal bank regulatory agencies arerequired to take “prompt corrective action” with respect to institutions that do not meet specified minimum capitalrequirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized,undercapitalized, significantly undercapitalized and critically undercapitalized. Under the FDIC’s prompt corrective actionregulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, aTier 1 capital to risk-weighted assets ratio of 8.0% or greater, a common equity Tier 1 to risk-weighted assets ratio of 6.5% orbetter and a Tier 1 leverage ratio of 5.0% or greater. An institution is “adequately capitalized” if it has a total risk-basedcapital ratio of 8.0% or greater, a Tier 1 capital to risk-weighted assets ratio of 6.0% or greater, a common equity Tier 1capital to risk-weighted assets ratio of 4.5% or better and a Tier 1 leverage ratio of 4.0% or greater. An institution is“undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 capital to risk-weighted assets ratio ofless than 6.0%, a common equity Tier 1 to risk-weighted assets ratio of less than 4.5% or a Tier 1 leverage ratio of less than4.0%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than6.0%, a Tier 1 capital to risk-weighted assets ratio of less than 4.0%, a common equity Tier 1 to risk-weighted assets ratio ofless than 3.0% or a Tier 1 leverage ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if ithas a ratio of tangible equity to total assets that is equal to or less than 2.0%.Undercapitalized institutions are subject to growth limitations and are required to submit a capital restoration planto the FDIC. The federal bank regulatory agencies may not accept such a plan without determining, among other things, thatthe plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. Inaddition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guaranteethat the institution will comply with such capital restoration plan. If a depository institution fails to submit an acceptableplan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may besubject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequatelycapitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Criticallyundercapitalized” institutions are subject to the appointment of a receiver or conservator.As of December 31, 2018, the Bank qualified as “well capitalized” under the prompt corrective action rules.Deposit Insurance Assessments. All of a depositor’s accounts at an insured bank, including all noninterest-bearingtransaction accounts, are insured by the FDIC up to $250,000. FDIC-insured banks are required to pay deposit insurancepremiums to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutionspay insurance premiums at rates based on their risk classification. An institution’s risk classification is assigned based on itscapital levels and the level of supervisory concern the institution poses to the regulators.Assessments are based on an institution’s average total consolidated assets less average tangible equity (subject torisk-based adjustments that would further reduce the assessment base for custodial banks). The Bank may be able to pass partor all of this cost on to its clients, including in the form of lower interest rates on deposits, or fees to some depositors,depending on market conditions.The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financialcondition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any24 Table of Contentsapplicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. If deposit insurancefor a banking business that we invest in or acquire were to be terminated, that would have a material adverse effect on thatbanking business and potentially on the Company as a whole.Depositor Preference. FDIA provides that, in the event of the “liquidation or other resolution” of an insureddepository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insureddepositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other generalunsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, alongwith the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holdingcompany, with respect to any extensions of credit they have made to such insured depository institution.Consumer Financial Protection. The Bank is subject to a number of federal and state consumer protection lawsthat extensively govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the FairCredit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the ExpeditedFunds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act,the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Service Members Civil Relief Act and theselaws’ respective state law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices.These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts,provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit reportinformation, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict the Bank’sability to raise interest rates and subject the Company and the Bank to substantial regulatory oversight. Violations ofapplicable consumer protection laws can result in significant potential liability from litigation brought by customers,including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and localconsumer protection agencies may also seek to enforce consumer protection requirements and obtain these and otherremedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in eachjurisdiction in which we operate and civil money penalties. Failure to comply with consumer protection requirements mayalso result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions the Companymay want to pursue or our prohibition from engaging in such transactions even if approval is not required.The Consumer Financial Protection Bureau (“CFPB”) has broad rulemaking authority for a wide range of consumerfinancial laws that apply to all banks. The CFPB is authorized to issue rules for both bank and non-bank companies that offerconsumer financial products and services, subject to consultation with the prudential banking regulators. In general,however, banks with assets of $10 billion or less, such as the Bank, will continue to be examined for consumer complianceby their primary bank regulator.Much of the CFPB’s rulemaking has focused on mortgage lending and servicing, including an important rulerequiring lenders to ensure that prospective buyers have the ability to repay their mortgages. Other areas of current CFPBfocus include consumer protections for prepaid cards, payday lending, debt collection, overdraft services and privacynotices. The CFPB has been particularly active in issuing rules and guidelines concerning residential mortgage lending andservicing, issuing numerous rules and guidance related to residential mortgages. Perhaps the most significant of theseguidelines is the “Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act” portions ofRegulation Z. Under the Dodd-Frank Act, creditors must make a reasonable and good faith determination, based on verifiedand documented information, that the consumer has a reasonable “ability to repay” a residential mortgage according to itsterms. There is a statutory presumption of compliance with this requirement for mortgages that meet the requirements to bedeemed “qualified mortgages.” The CFPB rule defines the key threshold terms “ability to repay” and “qualified mortgage.”The CFPB has actively issued enforcement actions against both large and small entities and to entities across theentire financial service industry. The CFPB has relied upon “unfair, deceptive, or abusive acts” prohibitions as its primaryenforcement tool. However, the CFPB and Department of Justice (‘DOJ”) continue to be focused on fair lending in takingenforcement actions against banks with renewed emphasis on alleged “redlining” practices. Failure to comply with theselaws and regulations could give rise to regulatory sanctions, client rescission rights, actions by state and local attorneysgeneral and civil or criminal liability.25 Table of ContentsBrokered Deposit Restrictions. Well capitalized institutions are not subject to limitations on brokered deposits,while an adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from theFDIC and is subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are generally notpermitted to accept, renew or roll over brokered deposits.Community Reinvestment Act. The CRA is intended to encourage banks to help meet the credit needs of theirentire communities, including low- and moderate-income neighborhoods, consistent with safe and sound operations. Theregulators examine banks and assign each bank a public CRA rating. The CRA then requires bank regulators to take intoaccount the bank’s record in meeting the needs of its community when considering certain applications by a bank, includingapplications to establish a banking center or to conduct certain mergers or acquisitions. The Federal Reserve is required toconsider the CRA records of a bank holding company’s controlled banks when considering an application by the bankholding company to acquire a bank or to merge with another bank holding company.When we apply for regulatory approval to make certain investments, the regulators will consider the CRA record ofthe target institution and our depository institution subsidiary. An unsatisfactory CRA record could substantially delayapproval or result in denial of an application.Insider Credit Transactions. Banks are subject to certain restrictions imposed by the Federal Reserve Act onextensions of credit to certain executive officers, directors, principal shareholders and any related interests of such persons.Extensions of credit to such persons must (a) be made on substantially the same terms, including interest rates and collateral,and follow credit underwriting procedures that are not less stringent than those prevailing at the time for comparabletransactions with persons not covered by such restrictions, and (b) not involve more than the normal risk of repayment orpresent other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to suchpersons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affectedbank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that bank, theimposition of a cease and desist order, and other regulatory sanctions.Safety and Soundness Standards. Under the FDIC Improvement Act (“FDICIA”), each federal banking agency hasprescribed, by regulation, non-capital safety and soundness standards for institutions under its authority. These standardscover internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rateexposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agencydetermines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution which fails to meetthese standards must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet thestandards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.Financial Privacy. In accordance with the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”), federal bankingregulators adopted rules that limit the ability of banks and other financial institutions to disclose nonpublic informationabout consumers to nonaffiliated third parties. These rules require disclosure of privacy policies to consumers and, in somecircumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. Theprivacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companiesand conveyed to outside vendors.Anti-Money Laundering. Under federal law, including the Bank Secrecy Act and Title III of the Uniting andStrengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USAPATRIOT Act”), certain types of financial institutions, including insured depository institutions, must maintain anti-moneylaundering programs that include established internal policies, procedures and controls; a designated compliance officer; anongoing training program; and testing of the program by an independent audit function. Financial institutions are restrictedfrom entering into specified financial transactions and account relationships and must meet enhanced standards for duediligence, client identification and recordkeeping, including in their dealings with non-U.S. financial institutions and non-U.S. clients. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guardagainst money laundering and to report any suspicious information maintained by financial institutions. Bank regulatorsroutinely examine institutions for compliance with these obligations and they must consider an institution’s anti-moneylaundering compliance when considering regulatory applications filed by the26 Table of Contentsinstitution, including applications for banking mergers and acquisitions. The regulatory authorities have imposed “cease anddesist” orders and civil money penalty sanctions against institutions found to be violating these obligations.Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affecttransactions with designated foreign countries, foreign nationals and others. These are typically known as the “OFAC” rulesbased on their administration by the U.S. Department of the Treasury Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of thefollowing elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against director indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financialtransactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country;and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have aninterest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control ofU.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in anymanner without a license from OFAC. The Bank is responsible for, among other things, blocking accounts of, andtransactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reportingblocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal and reputationalconsequencesTransactions with AffiliatesTransactions between depository institutions and their affiliates, including transactions between the Bank and theCompany, are governed by Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve’s Regulation Wpromulgated thereunder. Generally, Section 23A limits the extent to which a depository institution and its subsidiaries mayengage in “covered transactions” with any one affiliate to an amount equal to 10% of the depository institution’s capitalstock and surplus, and contains an aggregate limit on all such transactions with all affiliates of an amount equal to 20% ofthe depository institution’s capital stock and surplus. Section 23A also establishes specific collateral requirements for loansor extensions of credit to, or guarantees, acceptances or letters of credit issued on behalf of, an affiliate. Section 23B requiresthat covered transactions and a broad list of other specified transactions be on terms substantially the same, or at least asfavorable to the depository institution and its subsidiaries, as those for similar transactions with non-affiliates.The Volcker RuleSection 619 of the Dodd-Frank Act, commonly known as the “Volcker Rule,” generally prohibits certain bankingentities from engaging in short-term proprietary trading of financial instruments and from owning, sponsoring or havingcertain relationships with hedge funds or private equity funds (collectively, “covered funds”). Management believes theinvestment portfolio and activities of the Bank, the Company, and their affiliates and subsidiaries are in compliance with theVolcker Rule and its implementing regulations.Concentration in Commercial Real Estate LendingAs a part of their regulatory oversight, the federal regulators have issued guidelines on sound risk managementpractices with respect to a financial institution’s CRE lending activities. The guidelines identify certain concentration levelsthat, if exceeded, will expose the institution to additional supervisory analysis surrounding the institution’s CREconcentration risk. The guidelines are designed to promote appropriate levels of capital and sound loan and risk managementpractices for institutions with a concentration of CRE loans. The Company’s CRE concentrations are discussed in the “RiskFactors” section below.Interstate Banking and BranchingUnder the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1999 (the “Riegle-Neal Act”), a bankholding company may acquire banks in states other than its home state, subject to any state requirement that the bank hasbeen organized and operating for a minimum period of time, not to exceed five years, and to certain deposit market-sharelimitations. Bank holding companies must be well capitalized and well managed, not merely adequately capitalized and27 Table of Contentsadequately managed, in order to acquire a bank located outside of the bank holding company’s home state. The Riegle-NealAct also authorizes banks to merge across state lines, thereby creating interstate branches.Colorado state law provides that a Colorado-chartered bank can establish a branch anywhere in Colorado providedthat the branch is approved in advance by the CDB. The branch must also be approved by the FDIC. The approval processtakes into account a number of factors, including financial history, capital adequacy, earnings prospects, character ofmanagement, needs of the community and consistency with corporate powers. The Dodd-Frank Act permits a national or statebank, with the approval of its regulator, to open a de novo branch in any state if the law of the state in which the branch isproposed would permit the establishment of the branch if the bank was charted in such state.The Federal Reserve, OCC and FDIC jointly issued a final rule in 1997 that adopted uniform regulationsimplementing Section 109 of the Riegle-Neal Act. Section 109 prohibits any bank from establishing or acquiring a branch orbranches outside of its home state primarily for the purpose of deposit production. Congress enacted Section 109 to ensurethat interstate branches would not take deposits from a community without the bank reasonably helping to meet the creditneeds of that community.Limitations on Incentive CompensationIn June 2016, several federal financial agencies (including the Federal Reserve and FDIC) re-proposed restrictionson incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1 billion ormore in total consolidated assets. For institutions with at least $1 billion but less than $50 billion in total consolidatedassets, the proposal would impose principles-based restrictions that are broadly consistent with existing interagencyguidance on incentive-based compensation. Such institutions would be prohibited from entering into incentivecompensation arrangements that encourage inappropriate risks by the institution (i) by providing an executive officer,employee, director, principal shareholder or individuals who are “significant risk takers” with excessive compensation, feesor benefits, or (ii) that could lead to material financial loss to the institution. The comment period for these proposedregulations has closed, but a final rule has not been published. Depending upon the outcome of the rule making process, theapplication of this rule to us could require us to revise our compensation strategy, increase our administrative costs andadversely affect our ability to recruit and retain qualified associates.CybersecurityIn March 2015, the Federal Financial Institutions Examination Council issued two related statements regardingcybersecurity. One statement indicates that financial institutions should design multiple layers of security controls toestablish lines of defense and to ensure that their risk management processes also address the risk posed by compromisedcustomer credentials, including security measures to reliably authenticate customers accessing internet-based services of thefinancial institution. The other statement indicates that a financial institution’s management is expected to maintainsufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of theinstitution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to developappropriate processes to enable recovery of data and business operations and address rebuilding network capabilities andrestoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe theregulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.2018 Regulatory ReformAs mentioned above, the Regulatory Relief Act was enacted in May 2018 and was designed to ease certainrestrictions imposed by the Dodd-Frank Act. Most of the provisions of the Regulatory Relief Act can be grouped into fivegeneral areas: mortgage lending; certain regulatory relief for “community” banks; enhanced consumer protections inspecific areas, including subjecting credit reporting agencies to additional requirements; certain regulatory relief for largefinancial institutions, including increasing the threshold at which institutions are classified a systemically importantfinancial institutions (from $50 billion to $250 billion) and therefore subject to stricter oversight, and revising the rules forlarger institution stress testing; and certain changes to Federal securities regulations designed to promote capitalformation. Some of the key provisions of the Regulatory Relief Act as it relates to community banks and bank holdingcompanies include, but are not limited to: (i) designating mortgages held in portfolio as “qualified mortgages” for banks withless28 Table of Contentsthan $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirementsrelating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiringthe federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assetsof not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will bedeemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtainingstable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits;(v) raising the eligibility threshold for use of short-form Call Reports from $1 billion to $5 billion in assets; (vi) clarifyingdefinitions pertaining to high volatility commercial real estate loans (“HVCRE”), which require higher capital allocations, sothat only loans with increased risk are subject to higher risk weightings; (vii) directing the Federal Reserve to raise the assetthreshold of the Policy Statement from $1 billion to $3 billion; and (viii) raising the consolidated asset threshold from $1billion to $3 billion for eligible banks to undergo 18-month examination cycles rather than annual cycles.We will continue to analyze the changes resulting from the Regulatory Relief Act and the federal banking agencies’implementation efforts, including the CBLR framework proposal. We believe these reforms are favorable to our operations,but the true impact remains difficult to predict until rulemaking is complete and the reforms are fully implemented.Changing Regulatory Structure and Future Legislation and RegulationCongress may enact further legislation that affects the regulation of the financial services industry, and statelegislatures may enact further legislation affecting the regulation of financial institutions chartered by or operating in thesestates. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change themanner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislationor regulations, or the application thereof, although enactment of the proposed legislation could impact the regulatorystructure under which the Company operates and may significantly increase costs, impede the efficiency of internal businessprocesses, require an increase in regulatory capital, require modifications to the Company’s business strategy, and limit theCompany’s ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatorypolicies applicable to the Company or any of its subsidiaries could have a material effect on our business.Monetary Policy and Economic EnvironmentThe policies of regulatory authorities, including the monetary policy of the Federal Reserve, can have a significanteffect on the operating results of bank holding companies and their subsidiaries. Among the means available to the FederalReserve to affect the money supply are open market operations in United States Government securities, changes in thediscount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These meansare used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, andtheir use may affect interest rates charged on loans or paid on deposits.The Federal Reserve’s monetary policies have materially affected the operating results of commercial banks in thepast and are expected to continue to do so in the future. The nature of future monetary policies and the effects of thesepolicies on the Bank’s business and earnings cannot be predicted. ITEM 1A. Risk FactorsOur business and results of operations are subject to numerous risks and uncertainties, many of which are beyondour control. The material risks and uncertainties that management believes affect the Company are describedbelow. Additional risks and uncertainties that management is not aware of, or that management currently deemsimmaterial, may also impair the Company’s business operations. This report is qualified in its entirety by these riskfactors. If any of the following risks actually occur, our business, financial condition and results of operations could bematerially and adversely affected. If this were to happen, the value of our securities could decline significantly, and youcould lose all or part of your investment. Some statements in the following risk factors constitute forward-looking29 Table of Contentsstatements. Please refer to “Cautionary Note Regarding Forward-Looking Statements” elsewhere in this Annual Report onForm 10-K.Risks Related to Our BusinessOur banking, trust and wealth advisory operations are geographically concentrated in Colorado, Arizona, Wyoming andCalifornia, leading to significant exposure to those markets.Our business activities and credit exposure, including real estate collateral for many of our loans, are concentrated inColorado, Arizona, Wyoming and California. As of December 31, 2018, 97.5% of the loans in our loan portfolio were madeto borrowers who live in or conduct business in those states. This geographic concentration imposes risks from lack ofgeographic diversification. Difficult economic conditions, including state and local government deficits, in Colorado,Arizona, Wyoming and California may affect our business, financial condition, results of operations and future prospects,where adverse economic developments, among other things, could affect the volume of loan originations, increase the levelof nonperforming assets, increase the rate of foreclosure losses on loans and reduce the value of our loans and loan servicingportfolio. Any regional or local economic downturn that affects Colorado, Arizona, Wyoming and California or existing orprospective borrowers or property values in such areas may affect us and our profitability more significantly and moreadversely than our competitors whose operations are less geographically concentrated. This includes a sustained downturn inthe oil and gas market, which is important for the general economic health of Colorado in particular. A prolonged period oflow oil prices could have a material adverse effect on our results of operations and financial condition.Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economyaffecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result inloan and other losses.As of December 31, 2018, approximately $657.1 million, or 73.6%, of our gross loans were loans with real estate as aprimary or secondary component of collateral. The repayment of such loans is highly dependent on the ability of theborrowers to meet their loan repayment obligations to us, which can be adversely affected by economic downturns that canlead to (i) declines in the rents and, therefore, in the cash flows generated by those real properties on which the borrowersdepend to fund their loan payments to us, (ii) decreases in the values of those real properties, which make it more difficult forthe borrowers to sell those real properties for amounts sufficient to repay their loans in full, and (iii) job losses of residentialhome buyers, which makes it more difficult for these borrowers to fund their loan payments. As a result, our operating resultsare more vulnerable to adverse changes in the real estate market than other financial institutions with more diversified loanportfolios, and we could incur losses in the event of changes in economic conditions that disproportionately affect the realestate markets.Real estate values in many of our markets have generally experienced periods of fluctuation over the last five years.The market value of real estate can fluctuate significantly in a short period of time. As a result, adverse developmentsaffecting real estate values and the liquidity of real estate in our primary markets could increase the credit risk associatedwith our loan portfolio, and could result in losses that adversely affect credit quality, financial condition and results ofoperations. Negative changes in the economy affecting real estate values and liquidity in our market areas couldsignificantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral uponforeclosure without a loss or additional losses or our ability to sell these loans on the secondary securitization market.Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on such loans.Such declines and losses would have a material adverse effect on our business, financial condition and results of operations.If real estate values decline, it is also more likely that we would be required to increase our allowance for loan and leaselosses (“ALLL”), which would adversely affect our business, financial condition and results of operations. In addition,adverse weather events, including wildfires, flooding, and mudslides, can cause damages to the property pledged as collateralon loans, which could result in additional losses upon a foreclosure.30 Table of ContentsIf we are unable to continue to originate residential real estate loans and sell them into the secondary market for a profit,our earnings could decrease.We derive a portion of our non-interest income from the origination of residential real estate loans and thesubsequent sale of such loans into the secondary market. If we are unable to continue to originate and sell residential realestate loans at historical or greater levels, our residential real estate loan volume would decrease, which could decrease ourearnings. A rising interest rate environment, general economic conditions, market volatility, or other factors beyond ourcontrol could adversely affect our ability to originate residential real estate loans. The financial services industry isexperiencing an increase in regulations and compliance requirements related to mortgage loan originations necessitatingtechnology upgrades and other changes. If new regulations continue to increase and we are unable to make technologyupgrades, our ability to originate mortgage loans will be reduced or eliminated. Additionally, we sell a large portion of ourresidential real estate loans to third-party investors, and rising interest rates could negatively affect our ability to generatesuitable profits on the sale of such loans. If interest rates increase after we originate the loans, our ability to market thoseloans is impaired as the profitability on the loans decreases. These fluctuations can have an adverse effect on the revenue wegenerate from residential real estate loans and in certain instances, could result in a loss on the sale of the loans.Further, for the mortgage loans we sell in the secondary market, the mortgage loan sales contracts containindemnification clauses should the loans default, generally within the first 90 – 120 days, or if documentation is determinednot to be in compliance with regulations. While the Company has had no historic losses as a result of these indemnities, wecould be required to repurchase the mortgage loans or reimburse the purchaser of our loans for losses incurred. Both of thesesituations could have an adverse effect on the profitability of our mortgage loan activities and negatively impact our netincome.Our loan portfolio includes a significant number of commercial loans, which involve risks specific to commercialborrowers.Our loan portfolio includes a significant amount of commercial real estate loans and commercial lines of credit. Ourtypical commercial borrower is a small or medium-sized privately owned Colorado business entity. Our commercial loanstypically have greater credit risks than standard residential mortgage or consumer loans because commercial loans often havelarger balances, and repayment usually depends on the borrowers’ successful business operations. Commercial loans alsoinvolve some additional risk because they generally are not fully repaid over the loan period and thus may requirerefinancing or a large payoff at maturity. If the general economy turns substantially downward, commercial borrowers maynot be able to repay their loans, and the value of their assets, which are usually pledged as collateral, may decrease rapidlyand significantly. Also, when credit markets tighten due to adverse developments in specific markets or the general economy,opportunities for refinancing may become more expensive or unavailable, resulting in loan defaults.We may be subject to claims and litigation pertaining to our fiduciary responsibilities.Some of the services we provide, such as trust and investment services, require us to act as fiduciaries for our clientsand others. From time to time, third parties make claims and take legal action against us pertaining to the performance of ourfiduciary responsibilities. If these claims and legal actions are not resolved in a manner favorable to us, we may be exposed tosignificant financial liability or our reputation could be damaged. Either of these results may adversely impact demand forour products and services or otherwise have a material adverse effect on our business, financial condition or results ofoperations.The market for investment managers and professionals is extremely competitive and the loss of a key investment managercould adversely affect our investment advisory and wealth management business.We believe that investment performance is one of the most important factors that affect the amount of assets underour management and, for that reason, the success of our business is heavily dependent on the quality and experience of oursenior wealth management professionals and their track records in terms of making investment decisions that result inattractive investment returns for our clients. We consider the “chairman” and “president” roles in each of our profit centerteams to be instrumental to executing our business strategy. However, the market for such investment professionals isextremely competitive and is increasingly characterized by frequent movement of these individuals among different31 Table of Contentsfirms. In addition, our individual investment professionals often have direct contact with particular clients, which can lead toa strong client relationship based on the client’s trust in that individual manager. As a result, the loss of a key investmentmanager could jeopardize our relationships with some of our clients and lead to the loss of client accounts, which could havea material adverse effect on our business, financial condition, results of operations and prospects.The fair value of our investment securities can fluctuate due to factors outside of our control.As of December 31, 2018, the fair value of our investment securities portfolio was $44.9 million. Factors beyond ourcontrol can significantly influence and cause adverse changes to occur in the fair values of securities in that portfolio. Thesefactors include, but are not limited to, rating agency actions in respect of the investment securities in our portfolio, defaultsby the issuers of such securities, concerns with respect to the enforceability of the payment or other key terms of suchsecurities, changes in market interest rates and continued instability in the capital markets. Any of these factors, as well asothers, could cause other-than-temporary impairments and realized or unrealized losses in future periods and declines inother comprehensive income, which could materially and adversely affect our business, results of operations, financialcondition and prospects. In addition, the process for determining whether an impairment of a security is other-than-temporaryusually requires complex, subjective judgments, which could subsequently prove to have been wrong, regarding the futurefinancial performance and liquidity of the issuer of the security, the fair value of any collateral underlying the security andwhether and the extent to which the principal of and interest on the security will ultimately be paid in accordance with itspayment terms.We may be adversely affected by the soundness of certain securities brokerage firms.We do not provide custodial services for our clients. Instead, client investment accounts are maintained undercustodial arrangements with large, well established securities brokerage firms or bank institutions that provide custodialservices (collectively, “brokerage firms”), either directly or through arrangements made by us with those firms. As a result, theperformance of, or even rumors or questions about the integrity or performance of, any of those brokerage firms couldadversely affect the confidence of our clients in the services provided by those firms or otherwise adversely impact theircustodial holdings. Such an occurrence could negatively impact our ability to retain existing or attract new clients and, as aresult, could have a material adverse effect on our business, financial condition, results of operations and prospects.The investment management contracts we have with our clients are terminable without cause and on relatively short noticeby our clients, which makes us vulnerable to short-term declines in the performance of the securities under ourmanagement.Like most investment advisory and wealth management businesses, the investment advisory contracts we have withour clients are typically terminable by the client without cause upon less than 30 days’ notice. As a result, even short-termdeclines in the performance of the securities we manage, which can result from factors outside our control, such as adversechanges in market or economic condition or the poor performance of some of the investments we have recommended to ourclients, could lead some of our clients to move assets under our management to other asset classes such as broad index fundsor treasury securities, or to investment advisors which have investment product offerings or investment strategies differentthan ours. Therefore, our operating results are heavily dependent on the financial performance of our investment portfoliosand the investment strategies we employ in our investment advisory businesses and even short-term declines in theperformance of the investment portfolios we manage for our clients, whatever the cause, could result in a decline in assetsunder management and a corresponding decline in investment management fees, which would adversely affect our results ofoperations.Fee revenue represents a significant portion of our consolidated revenue and is subject to decline, among other things, inthe event of a reduction in, or changes to, the level or type of investment activity by our clients.A significant portion of our revenue results from fee-based services related to wealth advisory, private banking,personal trust, investment management, mortgage lending and institutional asset management services to derive revenue.This contrasts with many commercial banks that may rely more heavily on interest-based sources of revenue, such as loans.For the year ended December 31, 2018, non-interest income represented approximately 47.0% of our consolidated grossrevenue. The level of these fees is influenced by several factors, including the mix and volume of our assets under32 Table of Contentscustody and administration and our assets under management, the value and type of securities positions held (with respect toassets under custody) and the volume of portfolio transactions, and the types of products and services used by our clients.In addition, our clients include institutional investors, such as mutual funds, collective investment funds, hedgefunds and other investment pools, corporate and public retirement plans, insurance companies, foundations, endowments andinvestment managers. Economic, market or other factors that reduce the level or rates of savings in or with those institutions,either through reductions in financial asset valuations or through changes in investor preferences, could materially reduceour fee revenue or have a material adverse effect on our consolidated results of operations. These clients also, by their nature,are often able to exert considerable market influence, and this, combined with strong competitive forces in the markets forour services, has resulted in, and may continue to result in, significant pressure to reduce the fees we charge for our services inboth our asset servicing and asset management business lines.The trust wealth management fees we receive may decrease as a result of poor investment performance, in either relative orabsolute terms, which could decrease our revenues and net earnings.We derive a significant amount of our revenues primarily from investment management fees based on assets undermanagement. Our ability to maintain or increase assets under management is subject to a number of factors, includinginvestors’ perception of our past performance, in either relative or absolute terms, market and economic conditions, includingchanges in oil and gas prices, and competition from investment management companies. Financial markets are affected bymany factors, all of which are beyond our control, including general economic conditions, including changes in oil and gasprices; securities market conditions; the level and volatility of interest rates and equity prices; competitive conditions;liquidity of global markets; international and regional political conditions; regulatory and legislative developments;monetary and fiscal policy; investor sentiment; availability and cost of capital; technological changes and events; outcomeof legal proceedings; changes in currency values; inflation; credit ratings; and the size, volume and timing of transactions. Adecline in the fair value of the assets under management, caused by a decline in general economic conditions, woulddecrease our wealth management fee income.Investment performance is one of the most important factors in retaining existing clients and competing for newwealth management clients. Poor investment performance could reduce our revenues and impair our growth in the followingways:·Existing clients may withdraw funds from our wealth management business in favor of better performingproducts; ·Asset-based management fees could decline from a decrease in assets under management; ·Our ability to attract funds from existing and new clients might diminish; and ·Our portfolio managers may depart, to join a competitor or otherwise.Even when market conditions are generally favorable, our investment performance may be adversely affected by theinvestment style of our asset managers and the particular investments that they make. To the extent our future investmentperformance is perceived to be poor in either relative or absolute terms, the revenues and profitability of our wealthmanagement business will likely be reduced and our ability to attract new clients will likely be impaired. As such,fluctuations in the equity and debt markets can have a direct impact upon our net earnings.Changes in interest rates could reduce our net interest margins and net interest income.Interest rates are key drivers of our net interest margin and subject to many factors beyond our control. Income andcash flows from our banking operations depend to a great extent on the difference or “spread” between the interest we earn oninterest-earning assets, such as loans and investment securities, and the rates at which we pay interest on interest-bearingliabilities, such as deposits and borrowings. As interest rates change, net interest income is affected. Rapidly increasinginterest rates in the future could result in interest expense increasing faster than interest income because of a divergence infinancial instrument maturities or competitive pressures. Further, substantially higher interest rates generally33 Table of Contentsreduce loan demand and may result in slower loan growth. Decreases or increases in interest rates could have a negative effecton the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore decreasenet interest income. Also, changes in interest rates might also impact the values of equity and debt securities undermanagement and administration, which may have a negative impact on fee income.Interest rates are highly sensitive to many factors that are beyond our control, including (among others) general andregional and local economic conditions, the monetary policies of the Federal Reserve, bank regulatory requirements,competition from other banks and financial institutions and a change over time in the mix of our loans and investmentsecurities, on the one hand, and on our deposits and other liabilities, on the other hand. Changes in monetary policy will, inparticular, influence the origination and market value of and the yields we can realize on loans and investment securities, andthe interest we pay on deposits. Additionally, sustained low levels of market interest rates, as we have experienced during thepast nine years, could continue to place downward pressure on our net interest margins and, therefore, on our earnings.Our net interest margins and earnings also could be adversely affected if we are unable to adjust our interest rates onloans and deposits on a timely basis in response to changes in economic conditions or monetary policies. For example, if therates of interest we pay on deposits, borrowings and other interest-bearing liabilities increase faster than we are able toincrease the rates of interest we charge on loans or the yields we realize on investments and other interest-earning assets, ournet interest income and, therefore, our earnings will decrease. In particular, the rates of interest we charge on loans may besubject to longer fixed interest periods compared to the interest we must pay on deposits. On the other hand, increasinginterest rates generally lead to increases in net interest income; however, such increases also may result in a reduction in loanoriginations, declines in loan prepayment rates and reductions in the ability of borrowers to repay their current loanobligations, which could result in increased loan defaults and charge-offs and could require increases to our ALLL, therebyoffsetting either partially or totally the increases in net interest income resulting from the increase in interest rates.Additionally, we could be prevented from increasing the interest rates we charge on loans or from reducing the interest rateswe offer on deposits due to “price” competition from other banks and financial institutions with which we compete.Conversely, in a declining interest rate environment, our earnings could be adversely affected if the interest rates we are ableto charge on loans or other investments decline more quickly than those we pay on deposits and borrowings.We may be adversely impacted by the transition from LIBOR as a reference rateIn 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compelbanks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). This announcement indicatesthat the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time,it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation ofLIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable marketbenchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views oralternatives may be on the markets for LIBOR-indexed financial instruments.We have a significant number of loans and borrowings with attributes that are either directly or indirectly dependenton LIBOR. The transition from LIBOR could create considerable costs and additional risk. Since proposed alternative ratesare calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. Thetransition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product designand hedging strategies. Furthermore, failure to adequately manage this transition process with our customers could adverselyimpact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR willbe, failure to adequately manage the transition could have a material adverse effect on our business, financial condition andresults of operations.Our allowance for credit losses may not be adequate to cover actual losses.In accordance with regulatory requirements and GAAP, we maintain an ALLL to provide for incurred loan and leaselosses and a reserve for unfunded loan commitments. Our allowance for credit losses may not be adequate to absorb actualcredit losses, and future provisions for credit losses could materially and adversely affect our operating results. Our allowancefor credit losses is based on prior experience and an evaluation of the risks inherent in our then-current portfolio.34 Table of ContentsThe amount of future losses may also vary depending on changes in economic, operating and other conditions, includingchanges in interest rates that may be beyond our control, and these losses may exceed current estimates. Federal and stateregulators, as an integral part of their examination process, review our loans and leases and allowance for credit losses. Whilewe believe our allowance for credit losses is appropriate for the risk identified in our loan and lease portfolio, we may need toincrease the allowance for credit losses, such increases may not be sufficient to address losses, and regulators may require usto increase this allowance even further. Any of these occurrences could have a material adverse effect on our business,financial condition, results of operations and prospects.Our business and operations may be adversely affected in numerous and complex ways by weak economic conditions andglobal trade.Our businesses and operations, including our private bank and trust services, which primarily consist of lendingmoney to clients in the form of loans, borrowing money from clients in the form of deposits, investing in securities andinvestment management, are sensitive to general business and economic conditions in the United States. If the United Stateseconomy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained.Uncertainty about the federal fiscal policymaking process, the medium- and long-term fiscal outlook of the federalgovernment, and future tax rates is a concern for businesses, consumers and investors in the United States. In addition,economic conditions in foreign countries and weakening global trade due to increased anti-globalization sentiment couldaffect the stability of global financial markets, which could hinder the economic growth of the United States. Weak economicconditions are characterized by deflation, fluctuations in debt and equity capital markets, a lack of liquidity or depressedprices in the secondary market for loans, increased delinquencies on mortgage, consumer and commercial loans, residentialand commercial real estate price declines and lower home sales and commercial activity. The current economic environmentis also characterized by interest rates remaining at historically low levels, which impacts our ability to attract deposits and togenerate attractive earnings through our investment portfolio. Further, a general economic slowdown could decrease thevalue of assets under management and administration by our trust services resulting in lower fee income, and clientspotentially seeking alternative investment opportunities with other providers, which could result in lower fee income to us.All of these factors are detrimental to our business, and the interplay between these factors can be complex andunpredictable. Adverse economic conditions and government policy responses to such conditions could have a materialadverse effect on our business, financial condition, results of operations and prospects. Broad market performance may not befavorable in the future.Our results of operations and financial condition could be materially affected by the enactment of legislationimplementing changes in the U.S. or the adoption of other tax reform policies.On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”) wasenacted, which contains significant changes to U.S. tax law, including, but not limited to, a reduction in the corporate taxrate and a transition to a new territorial system of taxation. The primary impact of the new legislation on our provision forincome taxes was a reduction of the future tax benefits of our deferred tax assets by approximately $1.2 million as a result ofthe reduction in the corporate tax rate for the year ended December 31, 2017. The intended and unintended consequences ofthe Tax Reform Act on our business and on holders of our common stock is uncertain and could be adverse. The Companyanticipates that the impact of the Tax Reform Act may be material to our business, financial condition and results ofoperations.Our business and operations may be adversely affected in numerous and complex ways by external business disruptors inthe financial services industry.The financial services industry is undergoing rapid change, as technology enables non-traditional new entrants tocompete in certain segments of the banking market, in some cases with reduced regulation. New entrants may use newtechnologies, advanced data and analytic tools, lower cost to serve, reduced regulatory burden or faster processes tochallenge traditional banks. For example, new business models have been observed in retail payments, consumer andcommercial lending, foreign exchange and low-cost investment advisory services. While we closely monitor businessdisruptors and seek to adapt to changing technologies, matching the pace of innovation exhibited by new and differentlysituated competitors may require us and policy-makers to adapt at a greater pace.35 Table of ContentsWe have pledged all of the stock of the Bank as collateral for a loan and if the lender forecloses, you could lose yourinvestment.We have pledged all of the stock of the Bank as collateral for a third-party loan. The loan had no balance as ofDecember 31, 2018. If we were to incur indebtedness under this loan and default, the lender of such loan could foreclose onthe Bank’s stock and we would lose our principal asset. In that event, if the value of the Bank’s stock is less than the amountof the indebtedness, you could lose the entire amount of your investment.Liquidity risk could adversely affect our ability to fund operations and hurt our financial condition.Liquidity is essential to our banking business, as we use cash to make loans and purchase investment securities andother interest-earning assets and to fund deposit withdrawals that occur in the ordinary course of our business. Our principalsources of liquidity include earnings, deposits, repayment by clients of loans we have made to them, and the proceeds fromsales by us of our equity securities or from borrowings that we may obtain. Potential alternative sources of liquidity includethe sale of loans, the acquisition of national market non-core deposits, the issuance of additional collateralized borrowingssuch as Federal Home Loan Bank advances, access to the Federal Reserve discount window and the issuance of additionalequity securities. If our ability to obtain funds from these sources becomes limited or the costs of those funds increase,whether due to factors that affect us specifically, including our financial performance, or due to factors that affect thefinancial services industry in general, including weakening economic conditions or negative views and expectations aboutthe prospects for the financial services industry as a whole, then our ability to grow our banking and investment advisory andtrust businesses would be harmed, which could have a material adverse effect on our business, financial condition, results ofoperations and prospects.We may not be able to maintain a strong core deposit base or other low-cost funding sources.We depend on checking and savings deposit account balances and other forms of client deposits as our primarysource of funding for our lending activities. Our future growth will largely depend on our ability to maintain and grow astrong deposit base and our ability to retain our largest trust clients, many of whom are also depositors. We may not be ableto grow and maintain our deposit base. The account and deposit balances can decrease when clients perceive alternativeinvestments, such as the stock market or real estate, as providing a better risk/return tradeoff. If clients, including our trustclients, move money out of bank deposits and into investments (or similar deposit products at other institutions that mayprovide a higher rate of return), we could lose a relatively low cost source of funds, increasing our funding costs and reducingour net interest income and net income. We also have increased risks from losses of bank deposit clients due to the largedeposits we hold from certain clients. For example, as of December 31, 2018, 21.1% and 24.6% of our total depositsconsisted of our 10 largest depositors and allocations to interest-bearing accounts for certain other trust clients deposits wemanage, respectively. Losses of any one of these deposit clients would have an outsized impact on our results of operations.Additionally, any such loss of funds could result in lower loan originations, which could materially negatively impact ourgrowth strategy.We receive substantial deposits and assets under management as a result of referrals by professionals, such as attorneys,accountants, and doctors, and such referrals are dependent upon the continued positive interaction with and financialhealth of those referral sources.Many of our deposit clients and clients of our private trust bank offices are individuals involved in professionalvocations, such as lawyers, accountants, and doctors. These clients are a significant source of referrals for new clients in boththe deposit and wealth management areas. If we fail to adequately serve these professional clients with our deposit services,lending, and wealth management products, this source of referrals may diminish, which could have a negative impact on ourresults. Further, if the economy in the geographic areas that we serve is negatively impacted, the amount of deposits andservices that these professional individuals will utilize and the amount of referrals that they will make may decrease, whichmay have a material and adverse impact on our business, financial condition or results of operations.36 Table of ContentsOur largest trust client accounts for 35.4% of our total assets under management.As of December 31, 2018, our largest trust client accounted for, in the aggregate, 35.4% of our total assets undermanagement and 2.4% of our non-interest income. As a result, a material decrease in the volume of those trust assets by thatclient could materially reduce our assets under management, which would adversely affect our non-interest income and,therefore, our results of operations.The success of our business depends on achieving our strategic objectives, including through acquisitions which may notincrease our profitability and may adversely affect our future operating results.Since we commenced our banking business in 2004, we have grown our banking franchise and now have thirteenlocations in Colorado, Arizona, Wyoming and California, including a centralized operations center in downtown Denver. Weplan to continue to grow our banking business both organically and through acquisitions of other banks and financialservice providers, which may include entry into new markets. However, the implementation of our growth strategy poses anumber of risks for us, including that:·Any newly established offices may not generate revenues in amounts sufficient to cover the start-up costs ofthose offices, which would reduce our earnings; ·Acquisitions we might consummate in the future may prove not to be accretive to or may reduce our earnings ifwe do not realize anticipated cost savings, or if we incur unanticipated costs in integrating the acquiredbusinesses into our operations or if a substantial number of the clients of any of the acquired businesses movetheir business to our competitors; ·Such expansion efforts will divert management time and effort from our existing banking operations, whichcould adversely affect our future financial performance; and ·Additional capital which we may need to support our growth or the issuance of shares in any acquisitions willbe dilutive of the investments that our existing shareholders have in the shares of our common stock that theyown and in their respective percentage ownership interests they have in the Company.We face intense competition from other banks and financial institutions and other wealth and investment managementfirms that could hurt our business.We conduct our business operations in markets where the banking business is highly competitive and is dominatedby large multi-state and in-state banks with operations and offices covering wide geographic areas. We also compete withother financial service businesses, including investment advisory and wealth management firms, mutual fund companies,financial technology companies, and securities brokerage and investment banking firms that offer competitive banking andfinancial products and services as well as products and services that we do not offer. Larger banks and many of those otherfinancial service organizations have greater financial and marketing resources than we do that enable them to conductextensive advertising campaigns and to shift resources to regions or activities of greater potential profitability. They alsohave substantially more capital and higher lending limits than we do, which enable them to attract larger clients and offerfinancial products and services that we are unable to offer, putting us at a disadvantage in competing with them for loans anddeposits and investment management clients. If we are unable to compete effectively with those banking or other financialservices businesses, we could find it more difficult to attract new and retain existing clients and our net interest margins, netinterest income and investment management fees could decline, which would materially adversely affect our business, resultsof operations and prospects, and could cause us to incur losses in the future.In addition, our ability to successfully attract and retain investment advisory and wealth management clients isdependent on our ability to compete with competitors’ investment products, level of investment performance, client servicesand marketing and distribution capabilities. If we are not successful in retaining existing and attracting new investmentmanagement clients, our business, financial condition, results of operations and prospects may be materially and adverselyaffected.37 Table of ContentsWe may not be successful in implementing our internal growth strategy or be able to manage the risks associated with ouranticipated growth through opening new boutique private trust bank offices, which could have a material adverse effect onour business, financial condition and results of operations.Our business strategy includes pursuing organic and internal growth and evaluating strategic opportunities to growthrough opening new boutique private trust bank offices. We believe that banking location expansion has been meaningfulto our growth since inception. We intend to pursue an organic growth strategy in addition to our acquisition strategy, thesuccess of which is dependent on our ability to generate an increasing level of loans, deposits and assets under managementat acceptable risk levels without incurring corresponding increases in non-interest expense. Opening new offices carries withit certain potential risks, including significant startup costs and anticipated initial operating losses; an inability to gainregulatory approval; an inability to secure the services of qualified senior management to operate the new offices andsuccessfully integrate and promote our corporate culture; poor market reception for our new offices established in marketswhere we do not have a preexisting reputation; challenges posed by local economic conditions; challenges associated withsecuring attractive locations at a reasonable cost; and the additional strain on management resources and internal systemsand controls. Further, we may not be successful in our organic growth strategies generally due to, among other factors, delaysin introducing and implementing new products and services and other impediments resulting from regulatory oversight, lackof qualified personnel at existing locations. In addition, the success of our internal growth strategy will depend onmaintaining sufficient regulatory capital levels and on favorable economic conditions in our primary market areas. Failure toadequately manage the risks associated with our anticipated growth, including growth through creating new boutique privatetrust bank offices, could have a material adverse effect on our business and results of operations.Although we plan to grow our business internally, we may expand our business by acquiring other banks and financialservices companies, and we may not be successful in doing so.While a key element of our business plan is to grow our banking franchise and increase our market share throughinternal and organic growth, we intend to take advantage of opportunities to acquire other banks, investment advisors, andother financial services companies as such opportunities present themselves. However, we may not succeed in seizing suchopportunities when they arise. Our ability to execute on acquisition opportunities may require us to raise additional capitaland to increase our capital position to support the growth of our franchise. It will also depend on market conditions; overwhich we have no control. Moreover, any acquisitions may require the approval of our bank regulators and we may not beable to obtain such approvals on acceptable terms, if at all.Acquisitions may subject us to integration risks and other unknown risks.Although we plan to continue to grow our business organically and through opening new boutique private trustbank offices, we also intend to pursue acquisition opportunities that we believe complement our activities and have theability to enhance our profitability and provide attractive risk-adjusted returns. Our acquisition activities could be materialto our business and involve a number of risks, including the failure to: adequately centralize and standardize policies,procedures, products, and processes; combine employee benefit plans and compensation cultures; implement a unifiedinvestment policy and make related adjustments to combined investment portfolios; implement a unified loan policy andconform lending authority; implement a standard loan management system; avoid delays in implementing new policies orprocedures; and apply new policies or procedures.Certain events may arise after the date of an acquisition, or we may learn of certain facts, events or circumstancesafter the closing of an acquisition, that may affect our financial condition or performance or subject us to risk of loss. It ispossible that we could undertake an acquisition that subsequently does not perform in line with our financial or strategicobjectives or expectations. These events include, but are not limited to: retaining key associates and clients, achievinganticipated synergies, meeting expectations and otherwise realizing the undertaking’s anticipated benefits; litigationresulting from circumstances occurring at the acquired entity prior to the date of acquisition; loan downgrades and credit lossprovisions resulting from underwriting of certain acquired loans determined not to meet our credit standards; personnelchanges that cause instability within a department; and other events relating to the performance of our business. In addition,if we determined that the value of an acquired business had decreased and that the related goodwill was impaired, animpairment of goodwill charge to earnings would be recognized.38 Table of ContentsAcquisitions involve inherent uncertainty and we cannot determine all potential events, facts and circumstancesthat could result in loss or increased costs. Our due diligence or mitigation efforts may not be sufficient to protect against anysuch loss or increased costs.We may be required to recognize a significant charge to earnings if our goodwill or other intangible assets becomeimpaired, which could have a material adverse effect on our financial condition and results of operations.Goodwill and purchased intangible assets with indefinite lives are not amortized but are reviewed for impairmentannually and more frequently when events or changes in circumstances indicate that the carrying value of an asset may notbe recoverable. Our annual goodwill impairment assessment date for the Company’s reporting units is October 31. Goodwillimpairment testing includes an assessment of qualitative factors to determine whether certain circumstances or events existthat lead to a determination that the fair value of goodwill is less than the carrying value. This qualitative assessmentincludes various factors that could affect the reporting unit’s fair value as well as mitigating events or conditions. One suchfactor that could impact the assessment are the conditions within the markets that trade the Company’s stock. Theassessment of each reporting unit compares the aggregate fair value to its carrying value, along with several valuationassumptions and methods in order to determine if any impairment was triggered as of the measurement date. As of December31, 2018, the Company’s enterprise market capitalization was trading below book value, which is a factor that could requireus to recognize an impairment charge to our goodwill if the other elements of the impairment assessment aremet. Notwithstanding the foregoing, the results of impairment testing on our intangible assets will have no impact on ourtangible book value or regulatory capital levels. To date, we have not recorded any impairment charges on our goodwill andwe believe our current assessment will not result in an impairment charge, however, there is no guarantee that we may not beforced to recognize impairment charges in the future as operating and economic conditions change. The recognition of asignificant charge to earnings in our consolidated financial statements resulting from any impairment of our goodwill orother intangible assets could have a material adverse effect on our financial condition and results of operations.We are required to make significant estimates and assumptions in the preparation of our financial statements and ourestimates and assumptions may not be accurate.The preparation of our consolidated financial statements in conformity with GAAP requires our management tomake significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income andexpense during the reporting periods. Critical estimates are made by management in determining, among other things, theALLL, amounts of impairment of assets, and valuation of income taxes. If our underlying estimates and assumptions prove tobe incorrect, our financial condition and results of operations may be materially adversely affected.The occurrence of fraudulent activity, breaches of our information security, and cybersecurity attacks could adverselyaffect our ability to conduct our business, manage our exposure to risk or expand our businesses, result in the disclosure ormisuse of confidential or proprietary information, increase our costs to maintain and update our operational and securitysystems and infrastructure, and adversely impact our results of operations, liquidity and financial condition, as well ascause legal or reputational harm.As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us, our clients, or third parties with whom we interact and that may result infinancial losses or increased costs to us or our clients, disclosure or misuse of confidential information belonging to us orpersonal or confidential information belonging to our clients, misappropriation of assets, litigation, or damage to ourreputation. Our industry has seen increases in electronic fraudulent activity, hacking, security breaches, sophisticated socialengineering and cyber-attacks within the financial services industry, including in the commercial banking sector, as cyber-criminals have been targeting commercial bank and brokerage accounts on an increasing basis.Our business is highly dependent on the security and efficacy of our infrastructure, computer and data managementsystems, as well as those of third parties with whom we interact or on whom we rely. Our business relies on the secureprocessing, transmission, storage and retrieval of confidential, proprietary and other information in our computer and datamanagement systems and networks, and in the computer and data management systems and networks of third39 Table of Contentsparties. In addition, to access our network, products and services, our customers and other third parties may use personalmobile devices or computing devices that are outside of our network environment and are subject to their own cybersecurityrisks. All of these factors increase our risks related to cyber-threats and electronic disruptions.In addition to well-known risks related to fraudulent activity, which take many forms, such as check “kiting” orfraud, wire fraud, and other dishonest acts, information security breaches and cybersecurity-related incidents have become amaterial risk in the financial services industry. These threats may include fraudulent or unauthorized access to dataprocessing or data storage systems used by us or by our clients, electronic identity theft, “phishing,” account takeover, denialor degradation of service attacks, and malware or other cyber-attacks. These electronic viruses or malicious code are typicallydesigned to, among other things:·Obtain unauthorized access to confidential information belonging to us or our clients and customers; ·Manipulate or destroy data; ·Disrupt, sabotage or degrade service on a financial institution’s systems; or ·Steal money.In recent periods, several governmental agencies and large corporations, including financial service organizationsand retail companies, have suffered major data breaches, in some cases exposing not only their confidential and proprietarycorporate information, but also sensitive financial and other personal information of their clients or their employees or otherthird parties, and subjecting those agencies and corporations to potential fraudulent activity and their clients, employees andother third parties to identity theft and fraudulent activity in their credit card and banking accounts. Therefore, securitybreaches and cyber-attacks can cause significant increases in operating costs, including the costs of compensating clients andcustomers for any resulting losses they may incur and the costs and capital expenditures required to correct the deficienciesin and strengthen the security of data processing and storage systems.Unfortunately, it is not always possible to anticipate, detect, or recognize these threats to our systems, or toimplement effective preventative measures against all breaches, whether those breaches are malicious or accidental.Cybersecurity risks for banking organizations have significantly increased in recent years and have been difficult to detectbefore they occur because of, among other reasons:·The proliferation of new technologies, and the use of the Internet and telecommunications technologies toconduct financial transactions; ·These threats arising from numerous sources, not all of which are in our control, including among others humanerror, fraud or malice on the part of employees or third parties, accidental technological failure, electrical ortelecommunication outages, failures of computer servers or other damage to our property or assets, naturaldisasters or severe weather conditions, health emergencies or pandemics, or outbreaks of hostilities or terroristacts; ·The techniques used in cyberattacks changing frequently and possibly not being recognized until launched oruntil well after the breach has occurred; ·The increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostileforeign governments, disgruntled employees or vendors, activists and other external parties, including thoseinvolved in corporate espionage;·The vulnerability of systems to third parties seeking to gain access to such systems either directly or usingequipment or security passwords belonging to employees, customers, third-party service providers or other usersof our systems; and 40 Table of Contents·Our frequent transmission of sensitive information to, and storage of such information by, third parties,including our vendors and regulators, and possible weaknesses that go undetected in our data systemsnotwithstanding the testing we conduct of those systems.Although to date we have not experienced any losses or other material consequences relating to technology failure,cyber-attacks or other information, we may suffer such losses or other consequences in the future. While we invest in systemsand processes that are designed to detect and prevent security breaches and cyber-attacks and we conduct periodic tests ofour security systems and processes, we may not succeed in anticipating or adequately protecting against or preventing allsecurity breaches and cyber-attacks from occurring. Even the most advanced internal control environment may be vulnerableto compromise. Targeted social engineering attacks are becoming more sophisticated and are extremely difficult to prevent.Additionally, the existence of cyber-attacks or security breaches at third parties with access to our data, such as vendors, maynot be disclosed to us in a timely manner. While we had insurance against losses related to cyber insurance as of the filingdate of this Form 10-K, we may not be able to insure against losses related to cyber-threats in the future and our insurancemay not insure against all possible losses. As cyber-threats continue to evolve, we may be required to expend significantadditional resources to continue to modify or enhance our protective measures or to investigate and remediate anyinformation security vulnerabilities or incidents.As is the case with non-electronic fraudulent activity, cyber-attacks or other information or security breaches,whether directed at us or third parties, may result in a material loss or have material consequences. Furthermore, the publicperception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage ourreputation with customers and third parties with whom we do business. A successful penetration or circumvention of systemsecurity could cause us negative consequences, including loss of customers and business opportunities, disruption to ouroperations and business, misappropriation or destruction of our confidential information and/or that of our customers, ordamage to our customers’ and/or third parties’ computers or systems, and could expose us to additional regulatory scrutinyand result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties orintervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs,additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition.We rely on communications, information, operating and financial control systems technology and related services fromthird-party service providers and we may suffer an interruption in those systems.We also face indirect technology, cybersecurity and operational risks relating to the third parties with whom we dobusiness or upon whom we rely to facilitate or enable our business activities. In addition to customers and clients, the thirdparties with whom we interact and upon whom we rely include financial counterparties; financial intermediaries such asclearing agents, exchanges and clearing houses; vendors; regulators; providers of critical infrastructure such as internetaccess and electrical power; and other parties for whom we process transactions. Each of these third parties faces the risk ofcyber-attack, information breach or loss, or technology failure. Any such cyber-attack, information breach or loss, ortechnology failure of a third party could, among other things, adversely affect our ability to effect transactions, service ourclients, manage our exposure to risk or expand our businesses. Additionally, interruptions in service and security breachescould damage our reputation, lead existing clients to terminate their business relationships with us, make it more difficult forus to attract new clients and subject us to additional regulatory scrutiny and possibly financial liability, any of which couldhave a material adverse effect on our business, financial condition, results of operations and prospects.We continually encounter technological change, and we may have fewer resources than many of our competitors to investin technological improvements.The financial services industry is undergoing rapid technological changes with frequent introductions of newtechnology-driven products and services. The effective use of technology increases efficiency and enables financialinstitutions to better serve clients and to reduce costs. Our future success will depend, in part, upon our ability to address theneeds of our clients by using technology to provide products and services that will satisfy client demands for convenience, aswell as to create additional efficiencies in our operations. Many national vendors provide turn-key services that allow smallerbanks to compete with institutions that have substantially greater resources to invest in technological41 Table of Contentsimprovements. We may not be able, however, to effectively implement new technology-driven products and services or besuccessful in marketing these products and services to our clients.Our ability to attract and retain clients and key associates could be adversely affected if our reputation is harmed.Our ability to attract and retain clients and key associates could be adversely affected if our reputation is harmed.Any actual or perceived failure to address various issues could cause reputational harm, including a failure to address any ofthe following types of issues: legal and regulatory requirements; the proper maintenance or protection of the privacy of clientand employee financial or other personal information; record keeping deficiencies or errors; money-laundering; andpotential conflicts of interest or ethical issues. Moreover, any failure to appropriately address any issues of this nature couldgive rise to additional regulatory restrictions, and legal risks, which could lead to costly litigation or subject us toenforcement actions, fines, or penalties and cause us to incur related costs and expenses. In addition, our banking, investmentadvisory and wealth management businesses are dependent on the integrity of our banking personnel and our investmentadvisory and wealth managers. Lapses in integrity could cause reputational harm to our businesses that could lead to the lossof existing clients and make it more difficult for us to attract new clients and, therefore, could have a material adverse effecton our business, financial condition, results of operations and prospects.We may incur significant losses due to ineffective risk management processes and strategies.We seek to monitor and control our risk exposures through a risk and control framework encompassing a variety ofseparate but complementary financial, credit, operational and compliance systems, and internal control and managementreview processes. However, those systems and review processes and the judgments that accompany their application may notbe effective and, as a result, we may not anticipate every economic and financial outcome in all market environments or thespecifics and timing of such outcomes, particularly in the event of the kinds of dislocations in market conditions experiencedin recent years, which highlight the limitations inherent in using historical data to manage risk. If those systems and reviewprocesses prove to be ineffective in identifying and managing risks, we could be subjected to increased regulatory scrutinyand regulatory restrictions could be imposed on our business, including on our potential future business lines, as a result ofwhich our business and operating results could be adversely affected.A natural disaster could harm our business.Historically, Colorado, Wyoming, Arizona, and especially California, in which a substantial portion of our businessis located, have been susceptible to natural disasters, such as earthquakes, floods, mudslides, and wild fires. The nature andlevel of natural disasters cannot be predicted. These natural disasters could harm our operations through interference withcommunications, including the interruption or loss of our computer systems, which could prevent or impede us fromgathering deposits, originating loans and processing and controlling our flow of business, as well as through the destructionof facilities and our operational, financial and management information systems. Additionally, natural disasters couldnegatively impact the values of collateral securing our borrowers’ loans and interrupt our borrowers’ abilities to conduct theirbusiness in a manner to support their debt obligations, either of which could result in losses and increased provisions for loanlosses for us.We are exposed to risk of environmental liabilities with respect to real properties that we may acquire.From time to time, in the ordinary course of our business, we acquire, by or in lieu of foreclosure, real propertieswhich collateralize nonperforming loans. As an owner of such properties, we could become subject to environmentalliabilities and incur substantial costs for any property damage, personal injury, investigation and clean-up that may berequired due to any environmental contamination that may be found to exist at any of those properties, even if we did notengage in the activities that led to such contamination and those activities took place prior to our ownership of theproperties. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claimsby third parties seeking damages for environmental contamination emanating from the site. If we were to become subject tosignificant environmental liabilities or costs, our business, financial condition, results of operations and prospects could bematerially and adversely affected.42 Table of ContentsNew lines of business or new products and services may subject us to additional risks.From time to time, we may implement new lines of business or offer new products and services within existing linesof business. There are substantial risks and uncertainties associated with these efforts. We may invest significant time andresources in developing and marketing new lines of business or new products and services. Initial timetables for theintroduction and development of new lines of business or new products or services may not be achieved and price andprofitability targets may not prove feasible or may be dependent on identifying and hiring a qualified person to lead thedivision. In addition, existing management personnel may not have the experience or capacity to provide effective oversightof new lines of business or new products and services.External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, mayalso impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line ofbusiness or new product or service could have a significant impact on the effectiveness of our system of internal controls.Failure to successfully manage these risks in the development and implementation of new lines of business or new productsor services could have a material adverse effect on our business, results of operations, financial condition and prospects.We rely on customer and counterparty information, which subjects us to risks if that information is not accurate or isincomplete.When deciding whether to extend credit or enter into other transactions with customers or counterparties, we mayrely on information provided by or on behalf of those customers and counterparties, including audited financial statementsand other financial information. We may also rely on representations made by customers and counterparties that theinformation they provide is accurate and complete. We conduct appropriate due diligence on such customer information and,where practical and economical, we engage valuation and other experts or sources of information to assist with assessingcollateral and other customer risks. Our financial results could be adversely affected if the financial statements, collateralvalue or other financial information provided by customers or counterparties are incorrect.Risks Related to Our Regulatory EnvironmentThe financial services industry is highly regulated, and legislative or regulatory actions taken now or in the future mayhave a significant adverse effect on our operations.The financial services industry is extensively regulated and supervised under both federal and state laws andregulations that are intended primarily to protect clients, depositors, the FDIC deposit insurance fund, and the bankingsystem as a whole, not our shareholders. We are subject to the regulation and supervision of the Federal Reserve, the FDICand the CDB. The banking laws, regulations and policies applicable to us govern matters ranging from the maintenance ofadequate capital, safety and soundness, mergers and changes in control to the general business operations conducted by us,including permissible types, amounts and terms of loans and investments, the amount of reserves held against deposits,restrictions on dividends, imposition of specific accounting requirements, establishment of new offices and the maximuminterest rate that may be charged on loans.We are subject to changes in federal and state banking statutes, regulations and governmental policies, or theinterpretation or implementation of them, and are subject to changes and increased complexity in regulatory requirements asgovernments and regulators continue reforms intended to strengthen the stability of the financial system and protect keymarkets and participants. Any changes in any federal or state banking statute, regulation or governmental policy, includingchanges which occurred in 2018 and may occur in 2019 and beyond during the current and future administration, couldaffect us in substantial and unpredictable ways, including ways that may adversely affect our business, results of operations,financial condition or prospects. Compliance with laws and regulations can be difficult and costly, and changes to laws andregulations often impose additional compliance costs. In addition, federal and state banking regulators have broad authorityto supervise our banking business and that of our subsidiaries, including the authority to prohibit activities that representunsafe or unsound banking practices or constitute violations of statute, rule, regulation, or administrative order. Failure tocomply with any such laws, regulations or regulatory policies could result in sanctions by regulatory43 Table of Contentsagencies, restrictions on our business activities, civil money penalties or damage to our reputation, all of which couldadversely affect our business, results of operations, financial condition or prospects.Federal and state banking agencies periodically conduct examinations of our business, including compliance with lawsand regulations, and our failure to comply with any supervisory actions which we are, or may become, subject to as a resultof such examinations may adversely affect us.The Federal Reserve, the FDIC, and the CDB may conduct examinations of our business, including for compliancewith applicable laws and regulations. As a result of an examination, regulatory agencies may determine that the financialcondition, capital resources, asset quality, asset concentrations, earnings prospects, management, liquidity, sensitivity tomarket risk, or other aspects of any of our operations are unsatisfactory, or that we or our management are in violation of anylaw, regulation or guideline in effect from time to time. Regulatory agencies may take a number of different remedial actions,including the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditionsresulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increasein our capital, to restrict our growth, to change the composition of our concentrations in portfolio or balance sheet assets, toassess civil monetary penalties against officers or directors, to remove officers and directors and, if such conditions cannot becorrected or there is an imminent risk of loss to depositors, the FDIC may terminate our deposit insurance. A regulatory actionagainst us could have a material adverse effect on our business, results of operations, financial condition and prospects.The Dodd-Frank Act may have a material effect on our operations.The Dodd-Frank Act imposes significant regulatory and compliance changes on financial institutions and non-bankproviders of financial products. The Dodd-Frank Act has had and will continue to have an impact on our business in thefollowing ways:·Changes to regulatory capital requirements; ·Creation of government regulatory agencies (particularly the CFPB, which develops and enforces rules for bankand non-bank providers of consumer financial products); ·Changes to deposit insurance assessments; ·Regulation of debit interchange fees we earn; ·Changes in retail banking regulations, including potential limitations on certain fees we may charge; and ·Changes in the regulation of consumer mortgage loan origination and risk retention.In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor orinvest in private equity or hedge funds. The Dodd-Frank Act also contains provisions designed to limit the ability of insureddepository institutions, their holding companies, and their affiliates to conduct certain swaps and derivatives activities andto take certain principal positions in financial instruments. Some provisions of the Dodd-Frank Act have not been completelyimplemented and future implementation is uncertain in light of the transition of power in the United States federalgovernment to the new administration following the 2016 election. The changes resulting from the Dodd-Frank Act mayimpact the profitability of our business activities or otherwise adversely affect our business. Failure to comply with therequirements may negatively impact our results of operations and financial condition. While we cannot predict what effectany presently contemplated or future changes in the laws or regulations or their interpretations would have on us, thesechanges could be materially adverse to investors in our equity securities.44 Table of ContentsAs a result of the Dodd-Frank Act and associated rulemaking, we have become subject to more stringent capitalrequirements.On July 2, 2013, the Federal Reserve, and on July 9, 2013, the FDIC and the Office of the Comptroller of theCurrency (the “OCC”), adopted a final rule that implements the Basel III changes to the international regulatory capitalframework and revises the U.S. risk-based and leverage capital requirements for U.S. banking organizations to strengthenidentified areas of weakness in capital rules and to address relevant provisions of the Dodd-Frank Act.The final rule established a stricter regulatory capital framework that requires banking organizations to hold moreand higher-quality capital to act as a financial cushion to absorb losses and help banking organizations better withstandperiods of financial stress. The final rule increased capital ratios for all banking organizations and introduced a “capitalconservation buffer” which is in addition to each capital ratio. If a banking organization dips into its capital conservationbuffer, it may be restricted in its ability to pay dividends and discretionary bonus payments to its executive officers. The finalrule assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and tocertain commercial real estate facilities that finance the acquisition, development or construction of real property. The finalrule also required unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposesof calculating regulatory capital requirements unless a one-time opt-out is exercised. We exercised this opt-out right in ourMarch 31, 2015 quarterly financial filing. The final rule also included changes in what constitutes regulatory capital, some ofwhich are subject to a two-year transition period. These changes included the phasing-out of certain instruments asqualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital.Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designatedpercentages of common stock are required to be deducted from capital, subject to a two-year transition period.The final rule became effective for us on January 1, 2015. As of December 31, 2018, we met all of these newrequirements, including the full capital conservation buffer.Although we currently cannot predict the specific impact and long-term effects that Basel III will have on ourCompany and the banking industry more generally, the Company will be required to maintain higher regulatory capitallevels which could impact our operations, net income and ability to grow. Furthermore, the Company’s failure to complywith the minimum capital requirements could result in our regulators taking formal or informal actions against us whichcould restrict our future growth or operations.New and future rulemaking by the CFPB and other regulators, as well as enforcement of existing consumer protectionlaws, may have a material and adverse effect on our operations and operating costs.The CFPB has the authority to implement and enforce a variety of existing federal consumer protection statutes andto issue new regulations but, with respect to institutions of our size, does not have primary examination and enforcementauthority with respect to such laws and regulations. The authority to examine depository institutions with $10.0 billion orless in assets, like us, for compliance with federal consumer laws remains largely with our primary federal regulator, the FDIC.However, the CFPB may participate in examinations of smaller institutions on a “sampling basis” and may refer potentialenforcement actions against such institutions to their primary regulators. In some cases, regulators such as the Federal TradeCommission and the Department of Justice also retain certain rulemaking or enforcement authority, and we also remainsubject to certain state consumer protection laws. As an independent bureau within the Federal Reserve, the CFPB mayimpose requirements more severe than the previous bank regulatory agencies. The CFPB has placed significant emphasis onconsumer complaint management and has established a public consumer complaint database to encourage consumers to filecomplaints they may have against financial institutions. We are expected to monitor and respond to these complaints,including those that we deem frivolous, and doing so may require management to reallocate resources away from moreprofitable endeavors.The level of our commercial real estate loan portfolio may subject us to heightened regulatory scrutiny.The FDIC and the Federal Reserve have promulgated joint guidance on sound risk management practices forfinancial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that45 Table of Contentsis actively involved in commercial real estate lending should perform a risk assessment to identify potential concentrationsin commercial real estate lending. A financial institution may have such a concentration if, among other factors: (i) totaloutstanding loans for construction, land development, and other land represent 100% or more of total risk-based capital(“CRE 1 Concentration”); or (ii) total outstanding loans for construction, land development and other land and loans securedby multifamily and non-owner occupied non-farm, non-residential properties (excluding loans secured by owner-occupiedproperties) represent 300% or more of total risk-based capital (“CRE 2 Concentration”) and the institution’s commercial realestate loan portfolio has increased by 50% or more during the prior 36-month period. In such an instance, managementshould employ heightened risk management practices, including board and management oversight and strategic planning,development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. As ofDecember 31, 2018, our CRE 1 Concentration level was 61.3% and our CRE 2 Concentration level was 196.9%. We may, atsome point, be considered to have a concentration in the future, or our risk management practices may be found to bedeficient, which could result in increased reserves and capital costs as well as potential regulatory enforcement action.We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fairlending laws, and failure to comply with these laws could lead to a wide variety of sanctions.The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lendinglaws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice,the CFPB and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatorychallenge to an institution’s performance under the Community Reinvestment Act or fair lending laws and regulations couldresult in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergersand acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may alsohave the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Any suchactions could have a material adverse effect on our business, financial condition, results of operations and prospects.We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money launderingstatutes and regulations.The federal Bank Secrecy Act, Title III of the USA PATRIOT Act and other laws and regulations require financialinstitutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspiciousactivity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established bythe Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations ofthose requirements and has recently engaged in coordinated enforcement efforts with the individual federal bankingregulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. Thereis also increased scrutiny of compliance with the sanctions rules enforced by the Office of Foreign Assets Control. If ourpolicies, procedures and systems are deemed deficient or the policies, procedures and systems of any financial institutionsthat we may acquire in the future are deemed deficient, we would be subject to liability, including fines and regulatoryactions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed withcertain aspects of our business plan, which would negatively impact our business, financial condition and results ofoperations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing couldalso have serious reputational consequences for us. Any of these results could materially and adversely affect our business,financial condition, results of operations and prospects.Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how wecollect and use personal information and adversely affect our business opportunities.We are subject to various privacy, information security and data protection laws, including requirements concerningsecurity breach notification, and we could be negatively impacted by these laws. For example, our business is subject to theGLB Act which, among other things: (i) imposes certain limitations on our ability to share non-public personal informationabout our clients with non-affiliated third parties; (ii) requires that we provide certain disclosures to clients about ourinformation collection, sharing and security practices and afford clients the right to “opt out” of any information sharing byus with non-affiliated third parties (with certain exceptions); and (iii) requires we develop,46 Table of Contentsimplement and maintain a written comprehensive information security program containing safeguards appropriate based onour size and complexity, the nature and scope of our activities, and the sensitivity of client information we process, as well asplans for responding to data security breaches. Various state and federal banking regulators and states and foreign countrieshave also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory orlaw enforcement notification in certain circumstances in the event of a security breach. Moreover, legislators and regulatorsin the United States and other countries are increasingly adopting or revising privacy, information security and dataprotection laws that potentially could have a significant impact on our current and planned privacy, data protection andinformation security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employeeinformation, and some of our current or planned business activities. This could also increase our costs of compliance andbusiness operations and could reduce income from certain business initiatives. This includes increased privacy-relatedenforcement activity at the federal level, by the Federal Trade Commission, as well as at the state level, such as with regard tomobile applications.Compliance with current or future privacy, data protection and information security laws (including those regardingsecurity breach notification) affecting client or employee data to which we are subject could result in higher compliance andtechnology costs and could restrict our ability to provide certain products and services, which could have a material adverseeffect on our business, financial conditions or results of operations. Our failure to comply with privacy, data protection andinformation security laws could result in potentially significant regulatory or governmental investigations or actions,litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business,financial condition or results of operations.We can be subject to legal and regulatory proceedings, investigations and inquiries related to conduct risk.Such legal and regulatory activities could result in significant penalties and other negative impacts on ourbusinesses and results of operations. At any given time, we can be involved in defending legal and regulatory proceedingsand are subject to numerous governmental and regulatory examinations, investigations and other inquiries. The frequencywith which such proceedings, investigations and inquiries are initiated have increased over the last few years, and the globaljudicial, regulatory and political environment generally remains hostile to financial institutions. For example, the U.S.Department of Justice, or the DOJ, conditions the granting of cooperation credit in civil and criminal investigations ofcorporate wrongdoing on the company involved having provided to investigators all relevant facts relating to theindividuals responsible for the alleged misconduct. The complexity of the federal and state regulatory and enforcementregimes in the U.S., means that a single event or issue may give rise to a large number of overlapping investigations andregulatory proceedings, either by multiple federal and state agencies in the U.S. or by multiple regulators and othergovernmental entities in different jurisdictions. Moreover, U.S. authorities have been increasingly focused on “conduct risk,”a term that is used to describe the risks associated with behavior by employees and agents, including third-party vendors, thatcould harm clients, consumers, investors or the markets, such as failures to safeguard consumers’ and investors’ personalinformation, failures to identify and manage conflicts of interest and improperly creating, selling and marketing products andservices. In addition to increasing compliance risks, this focus on conduct risk could lead to more regulatory or otherenforcement proceedings and litigation, including for practices which historically were acceptable but are now receivinggreater scrutiny. Further, while we take numerous steps to prevent and detect conduct by employees and agents that couldpotentially harm customers, investors or the markets, such behavior may not always be deterred or prevented. Bankingregulators have also focused on the overall culture of financial services firms. In addition to regulatory restrictions orstructural changes that could result from perceived deficiencies in our culture, such focus could also lead to additionalregulatory proceedings.First Western Capital Management Company’s business is highly regulated, and the regulators have the ability to limit orrestrict, and impose fines or other sanctions on, its business.First Western Capital Management Company, our wholly owned registered investment advisor subsidiary(”FWCM”), is registered as an investment adviser with the SEC under the Investment Advisers Act of 1940, as amended (the“Investment Advisers Act”), and its business is highly regulated. The Investment Advisers Act imposes numerous obligationson registered investment advisers, including fiduciary, record keeping, operational and disclosure obligations. Moreover, theInvestment Advisers Act grants broad administrative powers to regulatory agencies such as the SEC to regulate investmentadvisory businesses. If the SEC or other government agencies believe that FWCM has failed to comply47 Table of Contentswith applicable laws or regulations, these agencies have the power to impose fines, suspensions of individual employees orother sanctions, which could include revocation of FWCM’s registration under the Investment Advisers Act. We are alsosubject to the provisions and regulations of ERISA to the extent that we act as a “fiduciary” under ERISA with respect tocertain of our clients. ERISA and the applicable provisions of the federal tax laws, impose a number of duties on persons whoare fiduciaries under ERISA and prohibit certain transactions involving the assets of each ERISA plan which is a client, aswell as certain transactions by the fiduciaries (and certain other related parties) to such plans. Additionally, like otherinvestment advisory and wealth management companies, FWCM also faces the risks of lawsuits by clients. The outcome ofregulatory proceedings and lawsuits is uncertain and difficult to predict. An adverse resolution of any regulatory proceedingor lawsuit against FWCM could result in substantial costs or reputational harm to FWCM and, therefore, could have anadverse effect on the ability of FWCM to retain key relationship and wealth managers, and to retain existing clients or attractnew clients, any of which could have a material adverse effect on our business, financial condition, results of operations andprospects.Risks Related to Ownership of our Common StockThe market price of our common stock may be subject to substantial fluctuations, which may make it difficult for you tosell your shares at the volume, prices and times desired.The market price of our common stock may be highly volatile, which may make it difficult for you to resell yourshares at the volume, prices and times desired. There are many factors that may affect the market price and trading volume ofour common stock, including, without limitation:·Actual or anticipated fluctuations in our operating results, financial condition or asset quality; ·Changes in economic or business conditions; ·The effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of theFederal Reserve;·Publication of research reports about us, our competitors, or the financial services industry generally, or changesin, or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack ofresearch reports by industry analysts or ceasing of coverage; ·Operating and stock price performance of companies that investors deemed comparable to us; ·Additional or anticipated sales of our common stock or other securities by us or our existing shareholders; ·Additions or departures of key personnel; ·Perceptions in the marketplace regarding our competitors or us; ·Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitmentsby or involving our competitors or us; ·Other economic, competitive, governmental, regulatory and technological factors affecting our operations,pricing, products and services; and ·Other news, announcements or disclosures (whether by us or others) related to us, our competitors, our primarymarkets or the financial services industry.The stock market and, in particular, the market for financial institution stocks have experienced substantialfluctuations in recent years, which in many cases have been unrelated to the operating performance and prospects ofparticular companies. In addition, significant fluctuations in the trading volume in our common stock may cause significant48 Table of Contentsprice variations to occur. Increased market volatility may materially and adversely affect the market price of our commonstock, which could make it difficult to sell your shares at the volume, prices and times desired.The market price of our common stock could decline significantly due to actual or anticipated issuances or sales of ourcommon stock in the future.Actual or anticipated issuances or sales of substantial amounts of our common stock could cause the market price ofour common stock to decline significantly and make it more difficult for us to sell equity or equity-related securities in thefuture at a time and on terms that we deem appropriate. The issuance of any shares of our common stock in the future alsowould, and equity-related securities could, dilute the percentage ownership interest held by shareholders prior to suchissuance.In addition, we may issue shares of our common stock or other securities from time to time as consideration forfuture acquisitions and investments and pursuant to compensation and incentive plans. If any such acquisition or investmentis significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, ofother securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares ofour common stock or other securities in connection with any such acquisitions and investments.We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances andsales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our commonstock (including shares of our common stock issued in connection with an acquisition or under a compensation or incentiveplan), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock andcould impair our ability to raise capital through future sales of our securities.The trading volume in our common stock is less than other larger financial institutions.Although our common stock is listed for trading on the Nasdaq Global Select Market, the trading volume in ourcommon stock is less than that of other, larger financial services companies. A public trading market having the desiredcharacteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers ofour common stock at any given time. This presence depends on the individual decisions of investors and general economicand market conditions over which we have no control. Given the lower trading volume of our common stock, significantsales of our common stock, or the expectation of these sales, could cause the price of our common stock to decline.The obligations associated with being a public company will require significant resources and management attention,which will increase our costs of operations and may divert focus from our business operations.As a public company, we face increased legal, accounting, administrative and other costs and expenses that we didnot incur as a private company, particularly after we no longer qualify as an emerging growth company.We expect to incur substantial costs related to operating as a public company, and these costs may be higher whenwe no longer qualify as an emerging growth company. We are subject to the reporting requirements of the SecuritiesExchange Act of 1934, as amended, or the Exchange Act, which requires that we file annual, quarterly and current reportswith respect to our business and financial condition and proxy and other information statements, and the rules andregulations implemented by the SEC, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Act, thePCAOB and the Nasdaq Global Select Market, each of which imposes additional reporting and other obligations on publiccompanies. As a public company, compliance with these reporting requirements and other SEC and the Nasdaq Global SelectMarket rules makes certain operating activities more time-consuming, and has caused us to incur significant new legal,accounting, insurance and other expenses. Furthermore, the need to establish the corporate infrastructure demanded of apublic company may divert management’s attention from implementing our operating strategy, which could prevent us fromsuccessfully implementing our strategic initiatives and improving our results of operations. We have made, and will continueto make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reportingobligations as a public company. However, we cannot predict or estimate the amount of additional49 Table of Contentscosts we may incur in order to comply with these requirements. We anticipate that these costs will materially increase ourgeneral and administrative expenses and such increases will reduce our profitability.We had a material weakness in internal control over financial reporting relating to the accounting treatment of a non-recurring asset acquisition treated as a business combination in 2017. Failure to implement and maintain effectiveinternal control over financial reporting could result in material misstatements in our financial statements, which couldrequire us to restate financial statements, impair investor confidence in our reported financial information and have anegative effect on the trading price of our common stock.Management is responsible for establishing and maintaining adequate internal control over financial reporting, asdefined in Rule 13a-15(f) under the Exchange Act. For the year ended December 31, 2017, in connection with thepreparation of year-end financial statements, a material weakness was identified in our internal control design over financialreporting for a business combination transaction related to our asset acquisition of EMC Holdings, LLC. The controldesigned to evaluate the accounting for the business combination during 2017 did not operate at a precise level to timelyprevent and detect a misstatement prior to submission to the independent auditor.To address this material weakness, we designed and implemented controls to review the data inputs, and expandedresearch inclusive of the relevant GAAP as well as industry technical guidance and documentation, models, valuations andother processes related to significant and unusual transactions, including business combinations. We will continue toperiodically test and update, as necessary, our internal control systems, including our financial reporting controls. We alsohired additional accounting personnel in connection with our transition from a private company to a public company. Ouractions, however, may not be sufficient to result in an effective internal control environment, and any future failure tomaintain effective internal control over financial reporting could impair the reliability of our financial statements, which inturn could harm our business, impair investor confidence in the accuracy and completeness of our financial reports, impairour access to the capital markets, cause the price of our common stock to decline and subject us to regulatory penalties.Securities analysts may not initiate or continue coverage on us.The trading market for our common stock depends, in part, on the research and reports that securities analystspublish about us and our business. We do not have any control over these securities analysts, and they may not cover us. Ifone or more of these analysts cease to cover us or fail to publish regular reports on us, we could lose visibility in the financialmarkets, which could cause the price or trading volume of our common stock to decline. If we are covered by securitiesanalysts and are the subject of an unfavorable report, the price of our common stock may decline.Our management and board of directors have significant control over our business.As of December 31, 2018, our directors and executive officers beneficially owned an aggregate of 1,993,463 shares,or approximately 24.3% of our shares of common stock. Consequently, our management and board of directors may be ableto significantly affect our affairs and policies, including the outcome of the election of directors and the potential outcome ofother matters submitted to a vote of our shareholders, such as mergers, the sale of substantially all of our assets and otherextraordinary corporate matters. This influence may also have the effect of delaying or preventing changes of control orchanges in management, or limiting the ability of our other shareholders to approve transactions that they may deem to be inthe best interests of our Company. The interests of these insiders could conflict with the interests of our other shareholders,including you.We may issue new debt securities, which would be senior to our common stock and may cause the market price of ourcommon stock to decline.We have issued $6.6 million aggregate principal amount of subordinated notes due 2026. In the future, we mayincrease our capital resources by making offerings of debt or equity securities, which may include senior or additionalsubordinated notes, classes of preferred shares or common shares. Holders of our common stock are not entitled to preemptiverights or other protections against dilution. Preferred shares and debt, if issued, have a preference on liquidating distributionsor a preference on dividend or interest payments that could limit our ability to make a distribution to the50 Table of Contentsholders of our common stock. Future issuances and sales of parity preferred stock, or the perception that such issuances andsales could occur, may also cause prevailing market prices for the series of preferred stock and our common stock to declineand may adversely affect our ability to raise additional capital in the financial markets at times and prices favorable to us.Further issuances of our common stock could be dilutive to holders of our common stock.Our common stock is subordinate to our existing and future indebtedness, and is effectively subordinated to all theindebtedness and other non-common equity claims against our subsidiaries.Shares of our common stock represent equity interests in the Company and do not constitute indebtedness.Accordingly, the shares of our common stock rank junior to all of our indebtedness and to other non-equity claims on theCompany with respect to assets available to satisfy such claims. Additionally, dividends to holders of the Company’scommon stock are subject to the prior dividend and liquidation rights any preferred stock we may issue.The Company’s right to participate in any distribution of assets of any of its subsidiaries upon the subsidiary’sliquidation or otherwise, and thus the ability of the Company’s common shareholders to benefit indirectly from suchdistribution, will be subject to the prior claims of creditors of that subsidiary. As a result, holders of the Company’s commonstock will be effectively subordinated to all existing and future liabilities and obligations of its subsidiaries, includingclaims of depositors.We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us orcould otherwise adversely affect holders of our common stock, which could depress the price of our common stock.Our articles of incorporation authorize us to issue up to 10 million shares of one or more series of preferred stock.Our board of directors has the authority to determine the preferences, limitations and relative rights of shares of preferredstock and to fix the number of shares constituting any series and the designation of such series, without any further vote oraction by our shareholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior tothe rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us,discourage bids for our common stock at a premium over the market price and materially adversely affect the market priceand the voting and other rights of the holders of our common stock.We are dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted.Our primary tangible asset is the stock of the Bank. As such, we depend upon the Bank for cash distributions(through dividends on the Bank’s common stock) that we use to pay our operating expenses, satisfy our obligations(including our preferred dividends, subordinated debentures, notes, and our other debt obligations) and to pay dividends onour common stock. Federal statutes, regulations and policies restrict the Bank’s ability to make cash distributions to us.These statutes and regulations require, among other things, that the Bank maintain certain levels of capital in order to pay adividend. In addition, there are certain restrictions imposed by federal banking laws, regulations and authorities on thepayment of dividends by us and by the Bank. If the Bank is unable to pay dividends to us, we will not be able to satisfy ourobligations or pay dividends on our common stock. Our dividend policy may change without notice, and our future abilityto pay dividends is subject to restrictions.We are a separate and distinct legal entity from the Bank. We receive substantially all of our revenue from dividendspaid to us by the Bank, which we use as the principal source of funds to pay our expenses and to pay dividends to ourshareholders, if any. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay us. Ifthe Bank does not receive regulatory approval or does not maintain a level of capital sufficient to permit it to make dividendpayments to us while maintaining adequate capital levels, our ability to pay our expenses and our business, financialcondition or results of operations could be materially and adversely impacted.As a bank holding company, we are subject to regulation by the Federal Reserve. The Federal Reserve has indicatedthat bank holding companies should carefully review their dividend policy in relation to the organization’s overall assetquality, current and prospective earnings and level, composition and quality of capital. The guidance provides that weinform and consult with the Federal Reserve prior to declaring and paying a dividend that exceeds earnings for the period forwhich the dividend is being paid or that could result in an adverse change to our capital structure, including51 Table of Contentsinterest on the subordinated debentures underlying our trust preferred securities and our other debt obligations. If requiredpayments on our outstanding junior subordinated debentures, held by our unconsolidated subsidiary trusts, or our other debtobligations, are not made or are deferred, or dividends on any preferred stock we may issue are not paid, we will be prohibitedfrom paying dividends on our common stock.Our corporate organizational documents and provisions of federal and state law to which we are subject contain certainprovisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisitionthat you may favor or an attempted replacement of our board of directors or management.Our articles of incorporation and our bylaws may have an anti-takeover effect and may delay, discourage or preventan attempted acquisition or change of control or a replacement of our incumbent board of directors or management. Ourgoverning documents include provisions that:·Empower our board of directors, without shareholder approval, to issue our preferred stock, the terms of which,including voting power, are to be set by our board of directors; ·Provide that directors may only be removed from office for cause; ·Eliminate cumulative voting in elections of directors; ·Permit our board of directors to alter, amend or repeal our amended and restated bylaws or to adopt new bylaws; ·Prohibit shareholder action by less than unanimous written consent, thereby requiring virtually all actions to betaken at a meeting of the shareholders; ·Require shareholders that wish to bring business before annual or special meetings of shareholders, or tonominate candidates for election as directors at our annual meeting of shareholders, to provide timely notice oftheir intent in writing; and ·Enable our board of directors to increase, between annual meetings, the number of persons serving as directorsand to fill the vacancies created as a result of the increase by a majority vote of the directors present at a meetingof directors.Banking laws also impose notice, approval, and ongoing regulatory requirements on any shareholder or other partythat seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or its holding company. Theselaws include the BHC Act and the Change in Bank Control Act, or the CBCA. These laws could delay or prevent anacquisition.Furthermore, our bylaws provide that the state or federal courts located in Denver County, Colorado, the county inwhich the city of Denver is located, will be the exclusive forum for: (i) any actual or purported derivative action orproceeding brought on our behalf; (ii) any action asserting a claim of breach of fiduciary duty by any of our directors orofficers; (iii) any action asserting a claim against us or our directors or officers arising pursuant to the Colorado BusinessCorporations Act, our articles of incorporation, or our bylaws; or (iv) any action asserting a claim against us or our officers ordirectors that is governed by the internal affairs doctrine. By becoming a shareholder of our Company, you will be deemed tohave notice of and have consented to the provisions of our bylaws related to choice of forum. The choice of forum provisionin our bylaws may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us. Alternatively, if acourt were to find the choice of forum provision contained in our bylaws to be inapplicable or unenforceable in an action, wemay incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect ourbusiness, operating results and financial condition.52 Table of ContentsAn investment in our common stock is not an insured deposit and is subject to risk of loss.Our common stock is not a savings accounts, deposits or other obligations of any of our bank or nonbanksubsidiaries and will not be insured or guaranteed by the FDIC or any other government agency. Your investment in ourcommon stock is subject to investment risk, and you must be capable of affording the loss of your entire investment. ITEM 1B: UNRESOLVED STAFF COMMENTSNone. ITEM 2: PROPERTIESOur corporate headquarters is located at 1900 16th Street, Suite 1200, Denver, Colorado 80202. Including ourcorporate headquarters, the Bank operates thirteen profit centers, which consists of nine boutique private trust bank officeswith two locations in Arizona, six locations in Colorado and one location in Wyoming; two loan production offices with onelocation in Ft. Collins, Colorado, and one location in Greenwood Village, Colorado; and two trust offices with one locationin Laramie, Wyoming, and one location in Century City, California which co-locates with our registered investment advisor,FWCM. We lease all of our locations. We believe that our facilities are suitable and adequate to meet our present needs. Thechart below describes our locations, which we believe are strategically located in affluent and high-growth markets inthirteen locations (listed below) across Colorado, Arizona, Wyoming and California:(1)Headquarters and co-location of profit center, product groups and support centers(2)Trust office(3)Co-location of trust office and FWCM(4)Loan production office ITEM 3. LEGAL PROCEEDINGSWe are not currently subject to any material legal proceedings. We are from time to time subject to claims andlitigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegationsof violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as wellas claims or litigation relating to intellectual property, securities, breach of contract and tort. We intend to defend ourselvesvigorously against any pending or future claims and litigation.At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, eitherindividually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial53 Table of Contentscondition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have amaterial adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimateoutcomes, such matters are costly, divert management’s attention and may materially and adversely affect our reputation,even if resolved in our favor. ITEM 4. MINE SAFETY DISCLOSURESNot applicable. PART II ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIESMarket Information for Common StockShares of our common stock, no par value, are traded on the NASDAQ Global Market under the symbol “MYFW”.Holders of RecordAs of March 18, 2019, there were approximately 180 holders of record of our common stock.Dividend PolicyWe have not declared or paid any dividends on our common stock and we do not currently anticipate paying anycash dividends on our common stock in the foreseeable future. Instead, we anticipate that all of our earnings in theforeseeable future will be retained to support our operations and finance the growth and development of our business. Anyfuture determination to pay dividends on our common stock will be made by our board of directors and will depend upon ourresults of operations, financial condition, capital requirements, general economic conditions, regulatory and contractualrestrictions, our business strategy, our ability to service any equity or debt obligations senior to our common stock and otherfactors that our board of directors deems relevant. We are not obligated to pay dividends on our common stock and aresubject to restrictions on paying dividends on our common stock.As a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of theFederal Reserve. See “Supervision and Regulation—Regulation of the Company—Dividends.” In addition, because we are aholding company, we are dependent upon the payment of dividends by the Bank to us as our principal source of funds to paydividends in the future, if any, and to make other payments. The Bank is also subject to various legal, regulatory and otherrestrictions on its ability to pay dividends and make other distributions and payments to us. See “Supervision andRegulation—Regulation of the Bank—Dividends.” The present and future dividend policy of the Bank is subject to thediscretion of the board of directors. The Bank is not obligated to pay us dividends.As a Colorado corporation, we are subject to certain restrictions on distributions under the Colorado BusinessCorporation Act. Generally, a Colorado corporation may not make a distribution to its shareholders if, after giving thedistribution effect: (i) the corporation would not be able to pay its debts as they become due in the usual course of business;or (ii) the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, ifthe corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution ofshareholders whose preferential rights are superior to those receiving the distribution.We are also subject to certain restrictions on our right to pay dividends to our shareholders under the terms of ourcredit agreement with BMO Harris Bank, N.A.54 Table of ContentsSecurities Authorized for Issuance under Equity Compensation PlansThe information concerning the ownership of shares of our common stock by certain beneficial owners andmanagement required by this item is incorporated herein by reference from our definitive proxy statement for our 2019Annual Meeting of Shareholders, a copy of which will be filed with the SEC no later than 120 days after the end of our fiscalyear.The following table sets forth information as of December 31, 2018, regarding our equity compensation plans thatprovide for the award of equity securities or the grant of options to purchase equity securities of the Company to employeesand directors of First Western and its subsidiaries: (A) (B) (C) Number of securities to be Number of securities issued upon exercise of remaining available for future outstanding options or issuance under equity vesting of outstanding Weighted average exercise compensation plans (excludingPlan Category restricted stock grants price of outstanding options securities reflected in column (A))Equity compensation plans approved by shareholders 683,506 $28.84 697,138Equity compensation plans not approved by shareholders — — —Total 683,506 697,138 55 Table of Contents ITEM 6: SELECTED FINANCIAL DATA You should read the following selected historical consolidated financial and other data in conjunction with ourconsolidated financial statements and related notes and the sections entitled “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.” As of and for the Years Ended December 31, (Dollars in thousands, except share and per share data) 2018 2017 2016 2015 2014 Selected Period End Balance Sheet Data: Cash and cash equivalents $73,357 $9,502 $62,685 $79,636 $45,906 Available-for-sale securities 44,901 53,650 97,655 66,064 84,127 Mortgage loans held for sale 14,832 22,940 8,053 19,903 — Loans 893,966 813,689 672,815 610,416 532,537 Allowance for loan losses 7,451 7,287 6,478 5,956 5,960 Promissory notes from related parties — 5,792 10,384 19,254 25,457 Goodwill 24,811 24,811 24,811 24,811 24,811 Other intangible assets, net 402 1,233 1,452 2,198 2,988 Company owned life insurance 14,709 14,316 13,898 10,477 10,130 Other real estate owned, net 658 658 2,836 3,016 4,573 Total assets 1,084,324 969,659 915,998 857,001 752,581 Noninterest-bearing deposits 202,856 198,685 195,460 148,184 161,256 Interest-bearing deposits 734,902 617,432 558,440 561,753 427,587 FHLB Topeka borrowings 15,000 28,563 37,000 25,000 41,000 Convertible subordinated debentures — — 4,749 14,548 20,962 Subordinated notes 6,560 13,435 13,150 7,625 7,625 Credit note payable — — 2,736 3,936 5,036 Preferred stock (liquidation preference) — 24,968 25,468 28,168 28,168 Total shareholders’ equity 116,875 101,846 95,928 87,259 80,367 Selected Income Statement Data: Interest income $38,796 $33,337 $29,520 $26,370 $25,134 Interest expense 8,172 5,761 5,063 3,904 4,422 Net interest income 30,624 27,576 24,457 22,466 20,712 Provision for credit losses 180 788 985 1,071 1,455 Net interest income after provision for credit losses 30,444 26,788 23,472 21,395 19,257 Trust and investment management fees 19,165 19,455 20,167 20,863 20,852 Net mortgage gain 4,560 3,469 6,702 3,549 — Net realized gain (loss) on sale of securities — 81 114 717 321 Other 3,448 4,708 2,939 2,815 2,103 Non-interest income 27,173 27,713 29,922 27,944 23,276 Non-interest expense 50,195 49,494 49,823 45,636 43,502 Income (loss) before income tax 7,422 5,007 3,571 3,703 (969) Income tax expense (benefit) 1,775 2,984 1,269 1,053 (11,959) Net income 5,647 2,023 2,302 2,650 10,990 Preferred dividends paid to preferred shareholders 1,378 2,291 2,840 2,419 2,003 Per Share Data: Earnings (loss) per share, basic $0.64 $(0.05) $(0.11) $0.05 $1.92 Earnings (loss) per share, diluted 0.63 (0.05) (0.11) 0.04 1.68 Book value per share 14.67 13.18 12.74 11.74 11.65 Preferred dividends per share 22.27 37.03 42.47 25.77 21.34 Weighted average outstanding shares, basic 6,712,754 5,586,620 5,120,507 4,863,236 4,688,213 Weighted average outstanding shares, diluted 6,754,258 5,586,620 5,120,507 5,863,236 5,360,498 Common shares outstanding, end of period 7,968,420 5,833,456 5,529,542 5,033,565 4,482,059 Convertible preferred shares outstanding, end of period — 41,000 46,000 73,000 73,000 Preferred shares outstanding, end of period — 20,868 20,868 20,868 20,868 Summary Performance Ratios: Return on average assets 0.55% 0.21% 0.26% 0.35% 1.60%Return on average equity 5.18% 2.02% 2.55% 3.10% 15.42%Net interest margin 3.27% 3.15% 3.06% 3.28% 3.32%Efficiency ratio 85.41% 88.10% 90.25% 88.96% 97.07%Loans to deposits ratio 95.33% 99.70% 89.24% 85.98% 90.44%Interest rate spread 2.97% 2.91% 2.89% 3.15% 3.10%Non-interest income to average assets 2.66% 2.90% 3.34% 3.67% 3.38%Non-interest expense to average assets 4.92% 5.18% 5.57% 6.00% 6.31%Non-interest income to total income before non‑interest expense 47.16% 50.85% 56.04% 56.64% 54.72%Summary Credit Quality Ratios: Nonperforming loans to total loans 2.13% 0.52% 0.54% 1.19% 2.03%Nonperforming assets to total assets 1.82% 0.50% 0.70% 1.20% 2.04%Allowance for loan losses to nonperforming loans 39.11% 172.55% 179.60% 81.69% 55.20%Allowance for loan losses to total loans 0.83% 0.90% 0.96% 0.98% 1.12%Net charge-offs to average loans outstanding —% —% 0.07% 0.19% 0.07%Other Selected Ratios and Data: Total noninterest‑bearing deposits to total deposits 21.63% 24.35% 25.93% 20.87% 27.39%Interest bearing deposits to total deposits 78.37% 75.65% 74.07% 79.13% 72.61%Cost of funds 0.90% 0.67% 0.63% 0.58% 0.72%Loan yield 4.36% 4.11% 4.10% 4.22% 4.54%Total assets under management $5,235,177 $5,374,471 $4,925,939 $4,743,668 $4,842,177 Total assets under management yield 0.37% 0.36% 0.41% 0.44% 0.43%Summary Capital Ratios: Average equity to average assets ratio 10.68% 10.47% 10.10% 11.23% 10.34%Non‑GAAP Ratios: Tangible common equity $91,662 $50,834 $44,197 $32,082 $24,400 Tangible common equity ratio 8.65% 5.39% 4.97% 3.87% 3.37%Tangible book value per common share $11.50 $8.71 $7.99 $6.37 $5.44 Return on tangible common equity 4.66% (0.53)% (1.22)% 0.72% 36.83%Consolidated: CET 1 capital ratio 11.35% 6.56% 6.28% 5.15% — Tier 1 capital ratio 11.35% 8.79% 8.43% 7.80% 10.80%Total risk based capital ratio 13.06% 11.70% 12.07% 9.97% 8.40%Leverage ratio 9.28% 7.41% 7.00% 6.47% 7.30%Bank: CET 1 capital ratio 10.55% 9.81% 9.20% 9.54% — Tier 1 capital ratio 10.55% 9.81% 9.20% 9.54% 10.90%Total risk based capital ratio 11.47% 10.75% 10.16% 10.54% 9.80%Leverage ratio 8.63% 8.27% 7.63% 7.97% 8.30%56 (1)(2)(3)(4)(5)(6)(7)Table of Contents(1)Total loans net of loan fees and costs do not include loans held for sale of $14.8 million, $22.9 million, $8.1 million, $19.9 million, and $0 million at December 31, 2018, 2017, 2016, 2015, and 2014respectively.(2)We calculate book value per share as total shareholders’ equity less preferred stock (liquidation preference), at the end of the relevant period divided by the outstanding number of shares of ourcommon stock at the end of the relevant period.(3)Efficiency ratio is non‑interest expense, less intangible amortization, divided by net interest income plus non‑interest income. See our reconciliation of non‑GAAP financial measures to their mostdirectly comparable GAAP financial measures under the caption “Non‑GAAP Reconciliation and Management Explanation of Non‑GAAP Financial Measures.”(4)Tangible common equity is a non‑GAAP financial measure. We calculate tangible common equity as total shareholders’ equity less preferred stock (liquidation preference), goodwill and otherintangible assets, net, and tangible assets are total assets less goodwill and other intangible assets, net. See our reconciliation of non‑GAAP financial measures to their most directly comparable GAAPfinancial measures under the caption “Non‑GAAP Reconciliation and Management Explanation of Non‑GAAP Financial Measures.”(5)Tangible common equity ratio is a non‑GAAP financial measure. We calculate the tangible common equity ratio as tangible common equity divided by total assets less goodwill and other intangibleassets, net. See our reconciliation of non‑GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Non‑GAAP Reconciliation and ManagementExplanation of Non‑GAAP Financial Measures.”(6)Tangible book value per common share is a non‑GAAP financial measure. We calculate tangible book value per common share as tangible common equity divided by common shares outstanding.See our reconciliation of non‑GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Non-GAAP Reconciliation and Management Explanation ofNon‑GAAP Financial Measures.”(7)Return on tangible common equity is a non‑GAAP financial measure. We calculate return on tangible common equity as net income available to common shareholders (net income less dividends paidon preferred stock) divided by tangible common equity. See our reconciliation of non‑GAAP financial measures to their most directly comparable GAAP financial measures under the caption“Non‑GAAP Reconciliation and Management Explanation of Non‑GAAP Financial Measures.”GAAP Reconciliation and Management Explanation of Non-GAAP Financial MeasuresOur accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry.However, we also evaluate our performance based on certain additional financial measures discussed in this Form 10-K asbeing non‑GAAP financial measures. We classify a financial measure as being a non‑GAAP financial measure if that financialmeasure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts,that are not included or excluded, as the case may be, in the most directly comparable measure calculated and presented inaccordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets orstatements of cash flows. Non‑GAAP financial measures do not include operating and other statistical measures or ratios orstatistical measures calculated using exclusively financial measures calculated in accordance with GAAP.The non‑GAAP financial measures that we discuss in this Form 10-K should not be considered in isolation or as asubstitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, themanner in which we calculate the non‑GAAP financial measures that we discuss in this Form 10-K may differ from that ofother companies, reporting measures with similar names. It is important to understand how other banking organizationscalculate their financial measures with names similar to the non‑GAAP financial measures we have discussed in this Form 10-K when comparing such non‑GAAP financial measures.Efficiency Ratio. We calculate our efficiency ratio as non‑interest expense, less intangible amortization divided bynet interest income (which is pre‑provision), plus non‑interest income. The following table reconciles, as of the dates set forthbelow, non‑interest expense, less intangible amortization (which is a non‑GAAP measure), to non‑interest expense, andpresents the calculation of our efficiency ratios: For the Year Ended December 31, (Dollars in thousands) 2018 2017 2016 2015 2014 Non‑interest expense $50,195 $49,494 $49,823 $45,636 $43,502 Less amortization 831 784 747 790 802 Adjusted non‑interest expense $49,364 $48,710 $49,076 $44,846 $42,700 Net interest income $30,624 $27,576 $24,457 $22,466 $20,712 Non‑interest income 27,173 27,713 29,922 27,944 23,276 $57,797 $55,289 $54,379 $50,410 $43,988 Efficiency ratio 85.41% 88.10% 90.25% 88.96% 97.07% Tangible Common Equity and Tangible Common Equity Ratio. We calculate tangible common equity as totalshareholders’ equity, less preferred stock (liquidation preference), goodwill and other intangible assets, net of accumulated57 Table of Contentsamortization. We calculate tangible assets as total assets less goodwill and other intangible assets, net of accumulatedamortization. We calculate the tangible common equity ratio as tangible common equity divided by tangible assets. Themost directly comparable GAAP financial measure for tangible common equity is total shareholders’ equity and the mostdirectly comparable GAAP financial measure for tangible assets is total assets.We believe the use of tangible common book value has less relevance for high-fee banks and investmentmanagement firms than for most banks, as our goodwill is all associated with highly desirable fee business. We recognize thatthe tangible common book value per common share measure is important to many investors in the marketplace who areinterested in changes from period to period in book value per share exclusive of changes in intangible assets. Goodwill andother intangible assets have the effect of increasing total book value while not increasing our tangible book value.The following table reconciles and presents, as of the dates set forth below, total shareholders’ equity to tangiblecommon equity, total assets to tangible assets and presents the calculation of the tangible common equity ratio: As of December 31, (Dollars in thousands) 2018 2017 2016 2015 2014 Total shareholders’ equity $116,875 $101,846 $95,928 $87,259 $80,367 Less Preferred stock — 24,968 25,468 28,168 28,168 Goodwill 24,811 24,811 24,811 24,811 24,811 Intangibles, net 402 1,233 1,452 2,198 2,988 Tangible common equity $91,662 $50,834 $44,197 $32,082 $24,400 Total assets $1,084,324 $969,659 $915,998 $857,001 $752,581 Less Goodwill 24,811 24,811 24,811 24,811 24,811 Intangibles, net 402 1,233 1,452 2,198 2,988 Tangible assets $1,059,111 $943,615 $889,735 $829,992 $724,782 Tangible common equity ratio 8.65% 5.39% 4.97% 3.87% 3.37% Tangible Book Value per Common Share. We calculate tangible book value per common share as tangible commonequity divided by common shares outstanding as detailed in the table below: As of December 31,(Dollars in thousands, except share and pershare data) 2018 2017 2016 2015 2014Total shareholders’ equity $116,875 $101,846 $95,928 $87,259 $80,367Less Preferred stock — 24,968 25,468 28,168 28,168Goodwill 24,811 24,811 24,811 24,811 24,811Intangibles, net 402 1,233 1,452 2,198 2,988Tangible common equity $91,662 $ 50,834 $44,197 $32,082 $24,400Common shares outstanding, end ofperiod 7,968,420 5,833,456 5,529,542 5,033,565 4,482,059Tangible common book value per share $11.50 $8.71 $7.99 $6.37 $5.44 Return on Tangible Common Equity. We calculate return on tangible common equity as net income available tocommon shareholders (net income less dividends paid on preferred stock) divided by tangible common equity. The mostdirectly comparable GAAP financial measure for tangible common equity is total shareholders’ equity.58 Table of ContentsThe following table reconciles net income to income (loss) available to common shareholders and presents thecalculation of return on tangible common equity: As of and for the Year Ended December 31, (Dollars in thousands) 2018 2017 2016 2015 2014 Net income, as reported $5,647 $2,023 $2,302 $2,650 $10,990 Less preferred stock dividends 1,378 2,291 2,840 2,419 2,003 Income (loss) available to common shareholders $4,269 $(268) $(538) $231 $8,987 Tangible common equity $91,662 $50,834 $44,197 $32,082 $24,400 Return on tangible common equity 4.66% (0.53)% (1.22)% 0.72% 36.83% Pre‑tax, Pre‑Provision Income. Pre‑tax, pre‑provision income is income (loss) before income tax with provision forcredit loss added back. The most directly comparable GAAP financial measure is net income (loss). We believe pre‑tax,pre‑provision income provides the readers of the financial statements information on our performance trends absentfluctuations in credit trends and loan balance changes which both drive provision, and elimination of taxes which providesreaders more insight into our performance without consideration of changes in statutory tax rates.The following table reconciles, as of the dates set forth below, pre‑tax, pre‑provision income to net income: For the Year Ended December 31,(Dollars in thousands) 2018 2017 2016 2015 2014Income (loss) before income tax, as reported $7,422 $5,007 $3,571 $3,703 $(969)Provision for loan losses 180 788 985 1,071 1,455Pre‑tax, pre‑provision income $7,602 $5,795 $4,556 $4,774 $486 Gross Revenue. Gross revenue is our total income before non-interest expense, less gains on securities sold, plusprovision for credit losses. The most directly comparable GAAP financial measure is total income before non-interestexpense. We believe gross revenue provides the readers of the financial statements information on our performance trendsabsent fluctuations in liquidity and credit trends.The following table reconciles, as of the dates set forth below, gross revenue to total income before non-interestexpense: As of December 31,(Dollars in thousands) 2018 2017 2016 2015 2014Total income before non-interest expense $57,617 $54,501 $53,394 $49,339 $42,533Less Net gain on sale of securities — 81 114 717 321Plus Provision for credit losses 180 788 985 1,071 1,455Gross revenue $57,797 $55,208 $54,265 $49,693 $43,66759 Table of Contents ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONSThe following discussion and analysis of our financial condition and results of operations should be read inconjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in thisAnnual Report on Form 10-K. The following discussion contains “forward-looking statements” that reflect our futureplans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions orbeliefs about future events may, and often do, vary from actual results and the differences can be material. See “CautionaryStatement Regarding Forward-Looking Statements.” Also, see the risk factors and other cautionary statements describedunder the heading “Item 1A – Risk Factors” included in Item 1A of this Annual Report on Form 10-K. We do not undertakeany obligation to publicly update any forward-looking statements except as otherwise required by applicable law.Company OverviewWe are a financial holding company founded in 2002 and headquartered in Denver, Colorado. We provide a fullyintegrated suite of wealth management services to our clients including banking, trust and investment management productsand 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 relatedphilanthropic and business organizations, which we refer to as the “Western wealth management client”. We believe that theWestern wealth management client shares our entrepreneurial spirit and values our sophisticated, high-touch wealthmanagement services that are tailored to meet their specific needs. We partner with our clients to solve their unique financialneeds 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 arestrategically 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 theleadership of a local chairman and/or president, are also supported centrally by teams providing management services such asoperations, risk management, credit administration, 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, 2018, we have expanded our footprint intonine full service profit centers, two mortgage loan production offices, two trust offices, and one registered investment advisorlocated across four states. As of and for the year ended December 31, 2018, we had $1.1 billion in total assets, $57.6 millionin total revenues and provided fiduciary and advisory services on $5.2 billion of assets under management (“AUM”).Primary Factors Used to Evaluate the Results of OperationsAs a financial institution, we manage and evaluate various aspects of both our results of operations and our financialcondition. We evaluate the comparative levels and trends of the line items in our consolidated balance sheet and incomestatement as well as various financial ratios that are commonly used in our industry. The primary factors we use to evaluateour results of operations include net interest income, non-interest income and non-interest expense.Net Interest IncomeNet interest income represents interest income less interest expense. We generate interest income on interest-earningassets, primarily loans and available-for-sale securities. We incur interest expense on interest-bearing liabilities, primarilyinterest-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) therates incurred on borrowings and other interest-bearing liabilities; and (iv) the regulatory risk weighting associated with theassets. Interest income is primarily impacted by loan growth and loan repayments, along with changes in interest rates on theloans. Interest expense is primarily impacted by changes in deposit balances 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.60 Table of ContentsNon‑Interest IncomeNon‑interest income primarily consists of the following:·Trust and investment management fees—fees and other sources of income charged to clients for managing theirtrust and investment assets, providing financial planning consulting services, 401(k) and retirement advisoryconsulting services, and other wealth management services. Trust and investment management fees areprimarily impacted by rates charged and increases and decreases in AUM. AUM is primarily impacted byopening and closing of client advisory and trust accounts, contributions and withdrawals, and the fluctuation inmarket values.·Net gain on mortgage loans sold—gain on originating and selling mortgages, origination fees, and borrowercredits, less commissions to loan originators, lender credits, document review and other costs specific tooriginating and selling the loan. The market adjustments for interest rate lock commitments and gains andlosses incurred on the mandatory trading of loans are also included in this line item. Net mortgage gains areprimarily 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, treasurymanagement fees, bill pay fees, and other banking fees. Banking fees are primarily impacted by the level ofbusiness activities and cash movement activities of our clients.·Risk management and insurance fees—commissions earned on insurance policies we have placed for clientsthrough our client risk management team who incorporate insurance services, primarily life insurance, tosupport our clients' wealth planning needs. Our insurance revenues are primarily impacted by the type andvolume of policies placed for our clients. ·Income on company‑owned life insurance—income earned on the growth of the cash surrender value of lifeinsurance policies we hold on certain key associates. The income on the increase in the cash surrender value isnon-taxable income.Non‑Interest ExpenseNon‑interest expense is comprised primarily of the following:·Salaries and employee benefits—all forms of compensation-related expenses including salary, incentivecompensation, payroll-related taxes, stock-based compensation, benefit plans, health insurance, 401(k) planmatch costs and other benefit-related expenses. Salaries and employee benefit costs are primarily impacted bychanges 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-relatedexpenses. 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 andother outsourcing arrangements. Professional services costs are primarily impacted by corporate activitiesrequiring specialized services. FDIC insurance expense is also included in this line and represents theassessments that we pay to the FDIC for deposit insurance. ·Technology and information systems—costs related to software and information technology services to supportoffice activities and internal networks. Technology and information system costs are primarily impacted by thenumber of locations we occupy, the number of associates we have and the level of service we require from ourthird-party technology vendors.61 Table of Contents·Data processing—costs related to processing fees paid to our third-party data processing system providersrelating to our core private trust banking platform. Data processing costs are primarily impacted by the numberof 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 thelevels 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, includingclient lists and other similar items recognized in connection with acquisitions.·Total loss on sales/provision for other real estate owned—represents the change in the holding value, or in thereserve balance on other real estate owned, or OREO, properties representing a change in the carrying value ofthe asset. ·Other—includes costs related to operational expenses associated with office supplies, postage, travel expenses,meals and entertainment, dues and memberships, costs to maintain or prepare OREO for sale, directorcompensation 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 businessactivities and needs.Operating SegmentsWe measure the overall profitability of operating segments based on income before income tax. We believe this is amore 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 theproducts and services within the wealth management, capital management and mortgage segments. We measure theprofitability of each segment based on a post-allocation basis, as we believe it better approximates the operating cash flowsgenerated by our reportable operating segments. A description of each segment is provided in Note 17 - Segment Reportingof the accompanying Notes to the Consolidated Financial Statements.Primary Factors Used to Evaluate our Balance SheetThe 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 ensurewe have the necessary liquidity and capital to meet the required regulatory capital ratios. Funding needs are evaluated andforecasted by communicating with clients, reviewing loan maturity and draw expectations, and projecting new loanopportunities.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, nonaccrual, non performing orrestructured; 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 financialcondition, the trend and volume of problem assets, our balance sheet risk exposure, the level of deposits as a percentage oftotal loans, the amount of non‑deposit funding used to fund assets, the availability of unused funding sources andoff‑balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount ofcash and liquid securities we hold, and other factors.62 Table of ContentsFinancial institution regulators have established guidelines for minimum capital ratios for banks and bank holdingcompanies. In 2015, we adopted the new Basel III regulatory capital framework as approved by federal banking agencies,within which we are subject to a multi-year phase-in period. The adoption of this framework modified the calculation of thevarious capital ratios, added a new ratio, Common Equity Tier (“CET”) 1, and revised the adequately and well capitalizedthresholds. In addition, Basel III established a new capital conservation buffer of 2.5% of risk-weighted assets, which wasphased in over a four-year period beginning January 1, 2016. At December 31, 2018, our capital ratios exceeded the currentwell capitalized regulatory requirements established under Basel III.Results of OperationsOverviewThe year ended December 31, 2018 compared with the year ended December 31, 2017. Subsequent to payingdividends to preferred shareholders, we reported income available to common shareholders of $4.3 million for the year endedDecember 31, 2018, compared to a loss available to common shareholders for December 31, 2017 of $0.3 million, a $4.5million, or 1,692.9% increase. For the year ended December 31, 2018, our income before income tax was $7.4 million, a $2.4million, or 48.2%, increase from December 31, 2017. For the year ended December 31, 2018, compared to the year endedDecember 31, 2017, income before income tax increased primarily as a result of a $3.0 million, or 11.1%, increase in netinterest income, partially offset by a decrease of $0.5 million, or 1.9%, in non-interest income. The decrease in non-interestincome was primarily the result of a decrease in a one-time legal fee gain on settlement and the remaining components ofnon-interest income partially offset by a $172.0 million increase in mortgage loans funded, which resulted in a $1.1 millionincrease in net gain on mortgage loans sold during the year ended December 31, 2018, compared to December 31, 2017. Forthe year ended December 31, 2018, net income was $5.6 million, which is an increase over 2017 of $3.6 million, or 179.1%.Net Interest IncomeThe year ended December 31, 2018 compared with the year ended December 31, 2017. For the year endedDecember 31, 2018, compared to the year ended December 31, 2017, net interest income, before the provision for loan losses,increased $3.0 million, or 11.1%, to $30.6 million. This increase was partially attributable to a $108.4 million increase inaverage outstanding loan balances compared to December 31, 2017, along with an increase in our average yield on loans to4.36% for the year ended December 31, 2018 from 4.11% for the year ended December 31, 2017. For the year endedDecember 31, 2018, our net interest margin was 3.27% and our net interest spread was 2.97%. For the year endedDecember 31, 2017, our net interest margin was 3.15% and our net interest spread was 2.91%.The increase in average loans outstanding for the year ended December 31, 2018 compared to the same periods in2017 was primarily due to growth in our 1-4 family residential, owner occupied CRE, and commercial and industrial loans.Net interest income is also impacted by changes in the amount and type of interest-earning assets and interest-bearingliabilities. To evaluate net interest income, we measure and monitor the yields on our loans and other interest-earning assetsand the costs of our deposits and other funding sources.Interest income on our available-for-sale securities portfolio decreased as a result of lower average investmentbalances maintained for year ended December 31, 2018 compared to the same periods in 2017. Our average available-for-salesecurities balance during the year ended December 31, 2018 was $49.0 million, a decrease of $45.2 million from ended theyear ended December 31, 2017. The decrease was primarily a result of sales of securities in 2017 to support funding andliquidity needs with the growth in loans outstanding.Interest expense on deposits increased during the year ended December 31, 2018 compared to the same period in2017, driven primarily by a rising rate environment, which resulted in increases in rates on depository accounts, as well as theimpact of an increase in average interest‑bearing deposit accounts of $60.5 million for the year ended December 31, 2018,respectively, when compared to the same period in 2017.63 Table of ContentsThe following tables present an analysis of net interest income and net interest margin for the periods presented,using average balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned orpaid and the average rate earned or paid on those assets or liabilities. As of and For the Year Ended December 31, 2018 2017 Interest Average Interest Average Average Earned / Yield / Average Earned / Yield / (Dollars in thousands) Balance Paid Rate Balance Paid Rate Assets Interest-earning assets: Interest-bearing deposits in other financial institutions $37,518 $689 1.84% $31,791 $314 0.99%Available-for-sale securities 48,963 1,097 2.24% 94,139 2,115 2.25%Loans 849,263 37,010 4.36% 740,903 30,484 4.11%Promissory notes from related parties — — —% 8,079 424 5.25%Interest-earning assets 935,744 38,796 4.15% 874,912 33,337 3.81%Mortgage loans held-for-sale 21,849 908 4.16% 12,652 507 4.01%Total interest-earning assets, plus loans held-for-sale 957,593 39,704 4.15% 887,564 33,844 3.81%Allowance for loan losses (7,163) (6,947) Noninterest-earning assets 70,090 74,154 Total assets $1,020,520 $954,771 Liabilities and Shareholders’ Equity Interest-bearing liabilities: Interest-bearing deposits $634,773 $6,511 1.03% $574,307 $3,778 0.66%Federal Home Loan Bank Topeka borrowings 45,286 868 1.92% 51,237 748 1.46%Convertible subordinated debentures — — —% 2,348 167 7.11%Subordinated notes 10,456 793 7.58% 13,390 1,025 7.65%Credit note — — —% 874 43 4.92%Total interest-bearing liabilities 690,515 8,172 1.18% 642,156 5,761 0.90%Noninterest-bearing liabilities: Noninterest-bearing deposits 212,907 205,603 Other liabilities 8,081 7,024 Total noninterest-bearing liabilities 220,988 212,627 Shareholders’ equity 109,017 99,988 Total liabilities and shareholders’ equity $1,020,520 $954,771 Net interest rate spread 2.97% 2.91%Net interest income $30,624 $27,576 Net interest margin 3.27% 3.15%(1)Average balance represents daily averages, unless otherwise noted.(2)Available‑for‑sale securities represents monthly averages.(3)Non-performing loans are included in the respective average loan balances. Income, if any, on such loans is recognized on a cash basis.(4)Promissory notes from related parties were reclassed to loans during 2018, due to a change in composition of related parties.(5)Tax-equivalent yield adjustments are immaterial.(6)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 soldin the secondary market and are not held for investment purposes, with interest income recognized in the net gain on mortgage loans soldline in the income statement. These balances are excluded from the margin calculations in these tables.(7)Net interest spread is the average yield on interest‑earning assets (excluding mortgage loans held‑for‑sale) minus the average rate oninterest‑bearing liabilities.(8)Net interest income is the difference between income earned on interest-earning assets, which does not include interest earned on mortgageloans held‑for‑sale, and expense paid on interest-bearing liabilities.(9)Net interest margin is equal to net interest income divided by average interest‑earning assets (excluding mortgage loans held‑for‑sale)64 (1)(1)(2)(3)(4)(5)(6)(7)(8)(9)Table of ContentsThe following tables present the dollar amount of changes in interest income and interest expense for the periodspresented, 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 andvolume that cannot be separated have been allocated to volume. Year Ended December 31, 2018 Compared to 2017 Increase (Decrease) Due Total to Change in: Increase(Dollars in thousands) Volume Rate (Decrease)Interest-earning assets: Interest-bearing deposits in other financial institutions $105 $270 $375Available-for-sale securities (1,012) (6) (1,018)Loans 4,721 1,805 6,526Promissory notes from related parties — (424) (424)Total increase (decrease) in interest income $3,814 $1,645 $5,459Interest-bearing liabilities: Interest-bearing deposits 620 2,113 2,733Federal Home Loan Bank Topeka borrowings (114) 234 120Convertible subordinated debentures — (167) (167)Subordinated notes (224) (8) (232)Credit note — (43) (43)Total increase in interest expense $282 $2,129 $2,411Increase (decrease) in net interest income $3,532 $(484) $3,048 Non‑Interest IncomeThe year ended December 31, 2018 compared with the year ended December 31, 2017. For the year endedDecember 31, 2018 compared to the year ended December 31, 2017, non-interest income decreased $0.5 million, or 1.9%, to$27.2 million. The decrease in non-interest income was primarily the result of a decrease in a one-time legal fee gain onsettlement and the remaining components of non-interest income partially offset by a $172.0 million increase in mortgageloans funded, which resulted in a $1.1 million increase in net gain on mortgage loans sold during the year ended December31, 2018 compared to December 31, 2017.The table below presents the significant categories of our non-interest income for the year ended December 31, 2018and 2017. Year Ended December 31, Change (Dollars in thousands) 2018 2017 $ % Non-interest income: Trust and investment management fees $19,165 $19,455 $(290) (1.5)%Net gain on mortgage loans sold 4,560 3,469 1,091 31.4%Bank fees 1,759 2,176 (417) (19.2)%Risk management and insurance fees 1,296 1,289 7 0.5%Income on company-owned life insurance 393 418 (25) (6.0)%Net gain on sale of securities — 81 (81) (100.0)%Gain on legal settlement — 825 (825) (100.0)%Total non-interest income $27,173 $27,713 $(540) (1.9)% Trust and investment management fees— For the year ended December 31, 2018 compared to the same period in2017, our trust and investment management fees within our capital management segment decreased by $1.6 million, or32.9%, while trust and investment management fees in the wealth management segment increased by $1.4 million, or 9.4%.65 Table of ContentsNet gain on mortgage loans sold— For the year ended December 31, 2018 compared to the year endedDecember 31, 2017, our net gain on mortgage loans sold increased by $1.1 million, or 31.4%, to $4.6 million. For the yearended December 31, 2018 and 2017, our average net gain on sale was 94 and 119 basis points, respectively, on loans sold.The net gain on sales of loans will fluctuate with the amount and type of loans sold and market conditions. The increase ingain on mortgage loans sold for the year ended December 31, 2018 compared to 2017 was primarily related to an increase inorigination volume in 2018 compared to 2017. The decline in margin is primarily related to competitive pricing year overyear.Risk management and insurance fees— Risk management fees include fees earned by our risk management productgroup as a result of assisting clients with obtaining life insurance policies, and fees from the trailing annuity revenue streams.During the years ended December 31, 2018 and December 31, 2017, we recognized $1.3 million each year of riskmanagement fees. The size and number of client policies placed was comparable year over year.Provision for Credit LossesFor the year ended December 31, 2018, our provision for credit loss was $0.2 million, as result of an increase to ourspecific reserve, partially offset by a reduction in our loan loss factors applied to our non-individually evaluated loan poolsas a result of lower charge-offs over the corresponding look-back period utilized in our provision calculation. We have adedicated problem loan resolution team comprised of associates from our credit, senior leadership, risk and accounting teamsthat meets frequently to minimize losses by ensuring that watch list and problem credits are identified early and activelyworked in order to identify potential losses in a timely manner and proactively manage the corresponding accounts.Non‑Interest ExpenseThe table below presents the significant categories of our non‑interest expense for the periods noted: Year Ended December 31, Change (Dollars in thousands) 2018 2017 $ % Non-interest expense: Salaries and employee benefits $29,771 $28,663 $1,108 3.9%Occupancy and equipment 5,853 5,884 (31) (0.5)%Professional services 3,451 3,490 (39) (1.1)%Technology and information systems 3,982 3,911 71 1.8%Data processing 2,683 2,436 247 10.1%Marketing 1,253 1,492 (239) (16.0)%Amortization of other intangible assets 831 784 47 6.0%Other 2,371 2,523 (152) (6.0)%Total loss on sales/provision of other real estate owned — 311 (311) (100.0)%Total non-interest expense $50,195 $49,494 $701 1.4% The increase in non-interest expense of 1.4% to $50.2 million for the year ended December 31, 2018, was primarilydue to an increase in expenses related to salaries and employee benefits resulting from the asset purchase of EMC Holdings,LLC, (“EMC”) in September 2017, as well as increases in equity compensation and health insurance premiums.Data processing—The increase in data processing costs is primarily related to third-party data processing andinfrastructure costs driven by loan, deposit, and trust accounts in 2018 compared to 2017.Income TaxDuring the year ended December 31, 2018, the Company recorded an income tax provision of $1.8 million,reflecting an effective tax rate 23.9%. During the year ended December 31, 2017, the Company recorded an income tax66 Table of Contentsprovision of $3.0 million, reflecting an effective tax rate of 59.6%. The decrease in the effective tax rate for the year endedDecember 31, 2018 was primarily due to the change in corporate tax rates in December 2017 as a result of the passing of theTax Cuts and Jobs Act of 2017, (the “Tax Reform Act”).Segment ReportingWe have three reportable operating segments: Wealth Management, Capital Management and Mortgage. OurWealth Management segment consists of operations relating to our fully integrated wealth management business. Servicesprovided by our wealth management segment include deposit, loan, insurance, and trust and investment managementadvisory products and services. Our Capital Management segment consists of operations relating to our institutionalinvestment management services over proprietary fixed income, high yield and equity strategies, including acting as theadvisor of three owned, managed and rated proprietary mutual funds. Capital Management products and services arefinancial in nature, with revenues generally based on a percentage of assets under management or paid premiums. OurMortgage segment consists of operations relating to the origination and sale of residential mortgage loans. Mortgageproducts and services are financial in nature, with gains and fees recognized net of expenses, upon the sale of mortgage loansto third parties. Services provided by our Mortgage segment include soliciting, originating and selling mortgage loans intothe secondary market. Mortgage loans originated and held for investment purposes are recorded in the Wealth Managementsegment, as this segment provides ongoing services to our clients.The following table presents key metrics related to our segments: Year Ended December 31, 2018 Wealth Capital (Dollars in thousands) Management Management Mortgage Consolidated Income $49,640 $3,350 $4,627 $57,617 Income before taxes $9,402 $(738) $(1,242) $7,422 Profit margin 18.9% (22.0)% (26.8)% 12.9% Year Ended December 31, 2017 Wealth Capital (Dollars in thousands) Management Management Mortgage Consolidated Income $45,689 $4,993 $3,819 $54,501 Income before taxes $6,292 $(874) $(411) $5,007 Profit margin 13.8% (17.5)% (10.8)% 9.2%(1)Net interest income plus non‑interest income.The tables below present selected financial metrics of each segment as of and for the periods presented:Wealth Management As of and For the Year EndedDecember 31, (Dollars in thousands) 2018 2017 $ Change % Change Total interest income $38,796 $33,337 $5,459 16.4%Total interest expense 8,172 5,761 2,411 41.9%Provision for loan losses 180 788 (608) (77.2)%Net interest income 30,444 26,788 3,656 13.6%Non-interest income 19,196 18,901 295 1.6%Total income 49,640 45,689 3,951 8.6%Depreciation and amortization expense 1,283 2,339 (1,056) (45.1)%All other non-interest expense 38,955 37,058 1,897 5.1%Income before income tax $9,402 $6,292 $3,110 49.4%Goodwill $15,994 $15,994 $ — —%Identifiable assets $1,059,557 $934,719 $124,838 13.4% The Wealth Management segment reported income before income tax of $9.4 million for the year endedDecember 31, 2018, compared to $6.3 million, for the same period in 2017. The increase is primarily related to increases67 (1)(1)Table of Contentsin the average volume of interest-earning assets and yield for the year ended December 31, 2018 compared to the same periodin 2017. During the year ended December 31, 2018 average loans increased $108.4 million and the yield on total interest-earning assets increased to 4.15% from 3.81% compared to the same period in 2017. The increase in non-interest income of$0.3 million for the year ended December 31, 2018 is primarily due to an increase in trust and investment management feesof $1.4 million, partially offset by a decrease in the remaining components of non-interest income compared to the sameperiod in 2017. The increase in other non-interest expense of $1.9 million during the year ended December 31, 2018,compared to the same period in 2017, is primarily due to an increase in salaries and benefits related to health insurancepremiums in 2018, stock-based compensation expense related to awards granted to associates in 2017 and an increase inaudit and internet technology infrastructure costs in 2018 compared to 2017.Capital Management As of and For the Year EndedDecember 31, (Dollars in thousands) 2018 2017 $ Change % Change Total interest income $ — $ — $ — —%Total interest expense — — — —%Provision for loan losses — — — —%Net interest income — — — —%Non-interest income 3,350 4,993 (1,643) (32.9)%Total income 3,350 4,993 (1,643) (32.9)%Depreciation and amortization expense 524 108 416 385.2%All other non-interest expense 3,564 5,759 (2,195) (38.1)%Income (loss) before income tax (738) (874) 136 (15.6)%Goodwill $8,817 $8,817 $ — —%Identifiable assets $9,935 $12,000 $(2,065) (17.2)% The Capital Management segment reported a loss before income tax of $0.7 million for the year endedDecember 31, 2018, compared to a loss of $0.9 million, for the same period in 2017. The decrease in non-interest income waspartially offset by a gain on legal settlement of $0.8 million recorded in 2017. The decrease in other non-interest expenseduring the year ended December 31, 2018 was the result of a reduction in salaries expense, office capacity, and professionalfees compared to the same period in 2017.Mortgage As of and For the Year EndedDecember 31, (Dollars in thousands) 2018 2017 $ Change % Change Total interest income $ — $ — $ — —%Total interest expense — — — —%Provision for loan losses — — — —%Net interest income — — — —%Non-interest income 4,627 3,819 808 21.2%Total income 4,627 3,819 808 21.2%Depreciation and amortization expense 415 — 415 100.0%All other non-interest expense 5,454 4,230 1,224 28.9%Loss before income tax (1,242) (411) (831) 202.2%Goodwill $ — $ — $ — —%Identifiable assets $14,832 $22,940 $(8,108) (35.3)% The Mortgage segment reported a loss before income tax of $1.2 million for the year ended December 31, 2018,compared to $0.4 million for the same period in 2017. The overall increase in non-interest income and non-interest expenseis related to an increase in the origination of mortgage loans sold and EMC mortgage operations that began in September2017. We continue to work on operational changes to improve profitability in the Mortgage segment. Additionally, during68 Table of Contentsthe year ended December 31, 2018, we incurred $0.3 million of compensation expenses related to the purchase accountingtreatment of the stock and cash consideration paid to the sole member of EMC and we recorded $0.2 million of amortizationexpense related to the sole member’s covenant not to compete for the year ended December 31, 2018, compared to the sameperiod in 2017.Financial ConditionThe table below presents our condensed consolidated balance sheets as of the dates presented: December 31, (Dollars in thousands) 2018 2017 $ Change % Change Balance Sheet Data: Cash and cash equivalents $73,357 $9,502 $63,855 672.0%Investments 44,901 53,650 (8,749) (16.3)%Loans 893,966 813,689 80,277 9.9%Allowance for loan losses (7,451) (7,287) (164) 2.3%Loans, net of allowance 886,515 806,402 80,113 9.9%Mortgage loans held for sale 14,832 22,940 (8,108) (35.3)%Promissory notes from related parties — 5,792 (5,792) (100.0)%Goodwill & intangibles, net 25,213 26,044 (831) (3.2)%Company-owned life insurance 14,709 14,316 393 2.7%Other assets 24,797 31,013 (6,216) (20.0)%Total assets $1,084,324 $969,659 $114,665 11.8%Deposits $937,758 $816,117 $121,641 14.9%Borrowings 21,560 41,998 (20,438) (48.7)%Other liabilities 8,131 9,698 (1,567) (16.2)%Total liabilities 967,449 867,813 99,636 11.5%Total shareholders’ equity 116,875 101,846 15,029 14.8%Total liabilities and shareholders’ equity $1,084,324 $969,659 $114,665 11.8% Cash and cash equivalents increased by $63.9 million, or 672.0%, to $73.4 million at December 31, 2018 comparedto December 31, 2017. During the same period, investments declined by $8.7 million, or 16.3%, to $44.9 million atDecember 31, 2018. The increase in cash and cash equivalents was primarily due to an increase in deposits at December 31,2018 compared to December 31, 2017. We continue to manage our balance sheet in an effort to ensure available cash isactively invested for optimal earnings.Total loans increased by $80.3 million, or 9.9%, to $894.0 million at December 31, 2018 compared toDecember 31, 2017. The increase was primarily due to continued organic growth in our market areas and growth in ourresidential mortgage and construction loans.Mortgage loans held for sale decreased $8.1 million, or 35.3%, to $14.8 million at December 31, 2018 compared toDecember 31, 2017. This was primarily due to an increase in loans sold in 2018 compared to 2017.Promissory notes from related parties decreased $5.8 million at December 31, 2018 compared to December 31, 2017,due to the redemption of one of the notes for $3.7 million in June 2018. The remaining note of $2.1 million was reclassifiedinto the loans, net line item of the consolidated balance sheet, as the borrower is no longer a related party.Goodwill and intangible assets, net decreased by $0.8 million at December 31, 2018 compared toDecember 31, 2017 due to amortization on our intangible assets. Our annual goodwill impairment assessment date for the Company’s reporting units is October 31. Goodwillimpairment testing may begin with an assessment of qualitative factors to determine whether certain circumstances or eventsexist that lead to a determination that the fair value of goodwill is less than the carrying value. This qualitative assessmentincludes various factors that could affect the reporting unit’s fair value as well as mitigating events or conditions. Theassessment of each reporting unit will compare the aggregate fair value to its carrying value, along with69 Table of Contentsseveral valuation assumptions and methods in order to determine if any impairment was triggered as of the measurement date.As of October 31, 2018 and December 31, 2018, the Company’s enterprise market capitalization was trading belowbook value. We completed a "step 1" goodwill impairment test as of these dates and, based on the results of our assessment,we believe there are no reporting units at risk of failing "step 1" of the goodwill impairment test. To estimate the fair value of our reporting units, we use an income approach, specifically a discounted cash flowmethodology, and a market approach. The discounted cash flow methodology includes assumptions for forecasted revenues,growth rates, discount rates, and market multiples, which all require significant judgment and estimates by management andare inherently uncertain. As required, these assumptions, judgments, and estimates are updated during our annual impairmenttesting in October and subsequently in December. If management determines these assumptions, judgments and estimateshave substantially and negatively changed, they may be updated prior to the annual testing date. Other assets decreased by $6.2 million, or 20.0%, to $24.8 million at December 31, 2018 comparedto December 31, 2017. This was primarily related to the settlement of investment security transactions in January 2018 thatwere executed in December 2017.Total deposits increased $121.6 million, or 14.9%, to $937.8 million at December 31, 2018 compared toDecember 31, 2017. Total interest-bearing deposits increased $117.5 million, or 19.0%, to $734.9 million and noninterest-bearing deposits increased $4.2 million, or 2.1%, to $202.9 million, during this period.Money market deposit accounts increased $158.5 million, or 47.9%, to $489.5 million at December 31, 2018compared to December 31, 2017. Time deposit accounts decreased $31.5 million, or 15.0%, to $178.7 million atDecember 31, 2018 compared to December 31, 2017. Negotiable order of withdrawal (“NOW”) accounts decreased $9.4million, or 12.7%, to $64.9 million at December 31, 2018, compared to December 31, 2017. This increase in money marketdeposit accounts was primarily due to transferring cash balances to manage liquidity. The decrease in time deposit accountswas primarily due to the maturity of $35.4 million of public deposits during the year ended December 31, 2018.Total borrowings decreased $20.4 million, or 48.7%, to $21.6 million at December 31, 2018 compared toDecember 31, 2017. The decrease was attributable to a $10.0 million decrease in fixed maturity Federal Home Loan bank(“FHLB”), $3.6 million decrease in our FHLB line of credit, and a $6.9 million decrease due to the redemption of ourSubordinated Notes due 2020 at December 31, 2018 compared to December 31, 2017.Total shareholders' equity increased $15.0 million, or 14.8%, to $116.9 million at December 31, 2018, compared toDecember 31, 2017. The increase is primarily due to the sale of common stock of $34.5 million, $1.9 million of stock-basedcompensation charges, and net income of $5.6 million. These increases were partially offset by the redemption of preferredstock of $25.0 million, payment of $1.4 million of dividends on our preferred stock, a $0.4 million increase in the unrealizedloss on our available-for-sale investments, and $0.2 million of share awards settled.70 Table of ContentsAssets Under Management For the Year Ended December 31, (Dollars in millions) 2018 2017 Managed Trust Balance at Beginning of Period $1,438 $1,213 New relationships 5 35 Closed relationships (10) (24) Contributions 57 62 Withdrawals (148) (110) Market change, net 38 262 Ending Balance $1,380 $1,438 Yield* 0.19% 0.17% Directed Trust Balance at Beginning of Period $714 $652 New relationships 57 7 Closed relationships (40) — Contributions 107 27 Withdrawals (87) (35) Market change, net 38 63 Ending Balance $789 $714 Yield* 0.08% 0.06% Investment Agency Balance at Beginning of Period $2,100 $2,055 New relationships 159 130 Closed relationships (249) (259) Contributions 259 382 Withdrawals (345) (422) Market change, net (78) 214 Ending Balance $1,846 $2,100 Yield* 0.76% 0.70% Custody Balance at Beginning of Period $374 $335 New relationships 2 12 Closed relationships (8) (3) Contributions 143 167 Withdrawals (149) (184) Market change, net (6) 47 Ending Balance $356 $374 Yield* 0.04% 0.04% 401(k)/Retirement Balance at Beginning of Period $748 $671 New relationships 170 46 Closed relationships (39) (95) Contributions 93 70 Withdrawals (62) (48) Market change, net (46) 104 Ending Balance $864 $748 Yield* 0.19% 0.24% Total Assets Under Management at Beginning of Period 5,374 4,926 New relationships 393 230 Closed relationships (346) (381) Contributions 659 708 Withdrawals (791) (799) Market change, net (54) 690 Total Assets Under Management $5,235 $5,374 Yield* 0.37% 0.36%*Trust & investment management fees divided by period-end balance.Assets under management decreased $139.0 million and increased $448.0 million, or 2.6% and 9.1%, to $5.2 billionand $5.4 billion for the year ended December 31, 2018 and 2017, respectively. The decrease in 2018 was primarilyattributable to closed accounts within one profit center due to attrition associated with the relationship of a prior president.The increase in 2017 is primarily due to market gains.Available-for-sale securitiesInvestments we intend to hold for an indefinite period of time, but not necessarily to maturity, are classified asavailable-for-sale and are recorded at fair value using current market information from a pricing service, with unrealized71 Table of Contentsgains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax. All our investments insecurities were classified as available-for-sale for the periods presented below. The carrying values of our investmentsecurities 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 table summarizes the amortized cost and estimated fair value of our investment securities as ofDecember 31, 2018: December 31, 2018 Gross Gross Amortized Unrealized Unrealized Fair(Dollars in thousands) Cost Gains Losses ValueInvestment securities available-for-sale: U.S. Treasury debt $250 $ — $ — $250Government National Mortgage Association (“GNMA”) mortgage-backed securities—residential 35,591 8 (1,597) 34,002Federal National Mortgage Association (“FNMA”) mortgage-backedsecurities—residential 4,076 2 (208) 3,870Securities issued by U.S. government sponsored entities and agencies 4,525 — (223) 4,302Corporate collateralized mortgage obligations ("CMO") and mortgage-backed securities ("MBS") 1,281 1 (11) 1,271Small Business Investment Company 1,206 — — 1,206Total securities available-for-sale $46,929 $11 $(2,039) $44,901 The following table summarizes the amortized cost and estimated fair value of our investment securities as ofDecember 31, 2017: December 31, 2017 Gross Gross Amortized Unrealized Unrealized Fair(Dollars in thousands) Cost Gains Losses ValueInvestment securities available-for-sale: U.S. Treasury debt $250 $ — $(1) $249GNMA mortgage-backed securities—residential 42,001 27 (1,192) 40,836FNMA mortgage-backed securities—residential 4,530 13 (144) 4,399Securities issued by U.S. government sponsored entities and agencies 5,206 — (152) 5,054Corporate CMO and MBS 1,529 — (50) 1,479Small Business Investment Company 930 — — 930Equity mutual funds 750 — (47) 703Total securities available-for-sale $55,196 $40 $(1,586) $53,650 72 Table of ContentsThe following tables represent the book value of our contractual maturities and weighted average yield for ourinvestment securities as of the dates presented. Contractual maturities may differ from expected maturities because issuerscan have the right to call or prepay obligations without penalties. Our investments are taxable securities. Weighted averageyields are not presented on a taxable equivalent basis. Maturity as of December 31, 2018 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 0.01% $ — —% $ — —%GNMA — — — — — — 35,591 1.90%FNMA — — — — — — 4,076 0.25%Securities issued by U.S.government sponsored entities andagencies — — 306 0.02 — — 4,219 0.21%Corporate CMO and MBS — — — — — — 1,281 0.08%Total available-for-sale $ — —% $556 0.03% $ — —% $45,167 2.44% Maturity as of December 31, 2017 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 —% $ — —% $ — —% $ — —%GNMA — — — — — — 42,001 1.88%FNMA — — — — — — 4,530 0.22%Securities issued by U.S.government sponsored entities andagencies — — 679 0.04 — — 4,527 0.19%Corporate CMO and MBS — — — — — — 1,529 0.06%Total available-for-sale $250 —% $679 0.04% $ — —% $52,587 2.35% At December 31, 2018 and December 31, 2017, there were no holdings of securities of any one issuer, other than theU.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.Loan PortfolioOur primary source of interest income is derived through interest earned on loans to high net worth individuals andtheir related commercial interests. Our senior lending and credit team consists of seasoned, experienced personnel and webelieve that our officers are well versed in the types of lending in which we are engaged. Underwriting policies and decisionsare managed centrally and the approval process is tiered based on loan size, making the process consistent, efficient andeffective. The management team and credit culture demands prudent, practical, and conservative approaches to all creditrequests 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 weoriginate and sell, servicing-released, whole loans in the secondary market. Our mortgage banking loan sales activities areprimarily directed at originating single family mortgages that are priced and underwritten to conform to previously agreedcriteria before loan funding and are delivered to the investor shortly after funding. The level of future loan originations, loansales and loan repayments depends on overall credit availability, the interest rate environment, the strength of the generaleconomy, local real estate markets and the housing industry, and conditions in the secondary loan sale market. The amountof gain or loss on the sale of loans is primarily driven by market conditions and changes in interest rates, as well as ourpricing and asset liability management strategies. As of December 31, 2018 and December 31, 2017, we had mortgage loansheld for sale of $14.8 million and $22.9 million, respectively, in residential mortgage loans we originated.73 Table of ContentsThe following table summarizes our loan portfolio by type of loan as of the dates indicated, in thousands: As of December 31, 2018 2017 2016 2015 2014 (Dollars in thousands) $ % $ % $ % $ % $ % Cash, Securities and Other $114,165 12.8% $131,756 16.2% $111,966 16.7% $137,523 22.6% $115,805 21.8% Construction and Development 31,897 3.5% 24,914 3.1% 39,702 5.9% 28,632 4.7% 16,618 3.1% 1 - 4 Family Residential 350,852 39.3% 282,014 34.7% 242,221 36.0% 184,477 30.3% 162,672 30.6% Non-Owner Occupied CRE 173,741 19.5% 176,987 21.8% 152,317 22.7% 142,217 23.3% 124,542 23.4% Owner Occupied CRE 108,480 12.2% 92,742 11.4% 62,879 9.4% 62,893 10.3% 51,021 9.6% Commercial and Industrial 113,660 12.7% 104,284 12.8% 62,940 9.3% 54,087 8.8% 61,776 11.5% Total loans held for investment $892,795 100% $812,697 100% $672,025 100% $609,829 100% $532,434 100% Mortgage loans held for sale $14,832 $22,940 $8,053 $19,903 $ — (1)Loans held for investment exclude deferred costs, net of $1.2 million, $1.0 million, $0.8 million, $0.6 million, and $0.1 million as ofDecember 31, 2018, 2017, 2016, 2015, and 2014, respectively.·Cash, Securities and Other—consists of consumer and commercial purpose loans that are primarily secured bysecurities 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 ofeach loan may be unsecured. This segment of our portfolio is affected by a variety of local and nationaleconomic factors affecting borrowers' employment prospects, income levels, and overall economic sentiment.·Construction and Development—consists of loans to finance the construction of residential and non-residentialproperties. These loans are dependent on the strength of the industries of the related borrowers and the risksconsistent with construction projects.·1‑4 Family Residential—consists of loans and home equity lines of credit secured by 1-4 family residentialproperties. These loans typically enable borrowers to purchase or refinance existing homes, most of which serveas the primary residence of the owner. In addition, some borrowers secure a commercial purpose loan with owneroccupied or non-owner occupied 1-4 family residential properties. Loans in this segment are dependent on theindustries tied to these loans as well as the national and local economies, and local residential and commercialreal estate markets. ·Commercial Real Estate, Owner Occupied and Non‑Owner Occupied—consists of commercial loanscollateralized by real estate. These loans may be collateralized by owner occupied or non-owner occupied realestate, as well as multi-family residential real estate. These loans are dependent on the strength of the industriesof the related borrowers and the success of their businesses.·Commercial and Industrial—consists of commercial and industrial loans, including working capital lines ofcredit, permanent working capital term loans, business asset loans, acquisition, expansion and developmentloans, and other loan products, primarily in our target markets. This portfolio primarily consists of term loansand lines of credit which are dependent on the strength of the industries of the related borrowers and the successof their businesses.74 (1)Table of ContentsThe contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floatinginterest rates in each maturity range, excluding deferred loan fees, as of the date indicated are summarized in the followingtables: As of December 31, 2018 One Year One Through After (Dollars in thousands) or Less Five Years Five Years TotalCash, Securities and Other $13,349 $88,544 $12,272 $114,165Construction and Development — 31,162 735 31,8971 - 4 Family Residential 1,217 142,853 206,782 350,852Non-Owner Occupied CRE 1,398 100,486 71,857 173,741Owner Occupied CRE 276 40,584 67,620 108,480Commercial and Industrial 6,583 83,570 23,507 113,660Total loans $22,823 $487,199 $382,773 $892,795Amounts with fixed rates $1,493 $277,418 $162,574 $441,485Amounts with floating rates 21,330 209,781 220,199 451,310Total loans $22,823 $487,199 $382,773 $892,795 As of December 31, 2017 One Year One Through After (Dollars in thousands) or Less Five Years Five Years TotalCash, Securities and Other $1,775 $120,866 $9,115 $131,756Construction and Development 1,959 21,591 1,364 24,9141 - 4 Family Residential 5,926 129,511 146,577 282,014Non-Owner Occupied CRE 750 97,990 78,247 176,987Owner Occupied CRE — 29,152 63,590 92,742Commercial and Industrial 6,728 77,269 20,287 104,284Total loans $17,138 $476,379 $319,180 $812,697Amounts with fixed rates $6,274 $258,233 $169,950 $434,457Amounts with floating rates 10,864 218,146 149,230 378,240Total loans $17,138 $476,379 $319,180 $812,697 Non-Performing AssetsNon-performing assets include non-accrual loans, loans past due 90 days or more and still accruing interest, troubleddebt restructurings (“TDRs”) still accruing interest, and other real estate owned (“OREO”). The accrual of interest on loans isdiscontinued at the time the loan becomes 90 or more days delinquent unless the loan is well secured and in the process ofcollection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual status orcharged 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 byrecent appraisals, with the appraised values adjusted, where applicable, for expected transaction fees likely to be incurredupon sale of the property. We incur recurring expenses relating to OREO in the form of maintenance, taxes, insurance andlegal fees, among others, until the OREO parcel is disposed. While disposition efforts with respect to our OREO are generallyongoing, if these properties are appraised at lower-than-expected values or if we are unable to sell the properties at the pricesfor which we expect to be able to sell them, we may incur additional losses.For the year ended December 31, 2018 and 2017, the amount of lost interest for non-accrual loans was $0.4 millionand $0.1 million, respectively.We had $19.7 million in non-performing assets as of December 31, 2018 compared to $4.9 million as ofDecember 31, 2017. The $14.8 million increase in our non-performing assets was primarily related to an $11.3 million Cash,Securities, and Other loan that was classified as a non-accrual TDR in 2018. The remainder of the increase was75 Table of Contentsrelated to a Commercial and Industrial loan that was classified as a TDR and was still accruing interest at December 31, 2018.The following table presents information regarding non-performing loans as of the dates indicated: As of December 31, (Dollars in thousands) 2018 2017 2016 2015 2014 Non-accrual loans by category Cash, Securities and Other $11,252 $ — $ — $249 $283 Construction and Development — — — — — 1 - 4 Family Residential — 1,171 — 2,325 3,974 Non-Owner Occupied CRE — — — 225 2,448 Owner Occupied CRE — — — — — Commercial and Industrial 1,735 1,835 3,607 4,492 591 Total non-accrual loans 12,987 3,006 3,607 7,291 7,296 TDRs still accruing 4,848 — — — 3,501 Accruing loans 90 or more days past due 1,217 1,217 — — — Total non-performing loans 19,052 4,223 3,607 7,291 10,797 OREO 658 658 2,836 3,016 4,573 Total non-performing assets $19,710 $4,881 $6,443 $10,307 $15,370 Ratio of non-performing loans to total loans 2.13% 0.52% 0.54% 1.19% 2.03% Ratio of non-performing assets to total assets 1.82% 0.50% 0.70% 1.20% 2.04% Allowance as a percentage of non-performing loans 39.11% 172.55% 179.60% 81.69% 55.20% (1)Excludes mortgage loans held for sale of $14.8 million, $22.9 million, $8.1 million, $19.9 million, and $0 million as ofDecember 31, 2018, 2017, 2016, 2015, and 2014, respectively.Potential Problem LoansWe categorize loans into risk categories based on relevant information about the ability of the borrowers to servicetheir 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 aquarterly 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 thatrequire more than the usual amount of management attention. Adverse industry conditions, deteriorating financialconditions, 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 asagreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans inthis risk grade are not considered adversely classified.Substandard—Substandard loans are considered “classified” and are inadequately protected by the current networth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well-definedweakness or weaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility thatthe bank will sustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non-accrualstatus 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 thoseclassified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basisof currently known facts, conditions and values, highly questionable and improbable. However, the amount or certainty ofeventual 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.76 (1)Table of ContentsAs of December 31, 2018 and December 31, 2017 non-performing loans of $19.1 million and $4.2 million,respectively, were included in the substandard category in the table below. The following tables present, by class and bycredit quality indicator, the recorded investment in our loans as of the dates indicated: As of December 31, 2018 As of December 31, 2017 Special Special (Dollars in thousands) Pass Mention Substandard Total Pass Mention Substandard TotalCash, Securities and Other $102,913 $ — $11,252 $114,165 $131,756 $ — $ — $131,756Construction and Development 31,897 — — 31,897 23,756 1,158 — 24,9141 - 4 Family Residential 349,635 — 1,217 350,852 279,424 — 2,590 282,014Non-Owner Occupied CRE 165,164 8,117 460 173,741 174,794 — 2,193 176,987Owner Occupied CRE 108,480 — — 108,480 92,742 — — 92,742Commercial and Industrial 100,929 — 12,731 113,660 93,624 114 10,546 104,284Total $859,018 $8,117 $25,660 $892,795 $796,096 $1,272 $15,329 $812,697 Allowance for Loan LossesThe allowance for loan losses is established through a provision for credit losses, which is a noncash charge toearnings. Loan losses are charged against the allowance when management believes that a loan balance is confirmeduncollectable. 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'speriodic review of the collectability of the loans in light of historical experience, the nature and dollar volume of the loanportfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateraland prevailing economic conditions. Allocations of the allowance may be made for specific loans, but the entire allowance isavailable for any loan that, in management's judgment, should be charged off.The following table presents summary information regarding our allowance for loan losses for the periods indicated: As of and for the Year Ended December 31, (Dollars in thousands) 2018 2017 2016 2015 2014 Average loans outstanding $849,263 $740,903 $647,228 $563,802 $471,743 Gross loans outstanding at end of period $893,966 $813,689 $672,815 $610,416 $532,537 Allowance for loan losses at beginning of period $7,287 $6,478 $5,956 $5,960 $4,839 Provision for (recovery of) loan losses 180 788 985 1,071 1,455 Charge-offs: Cash, Securities and Other 16 — 124 — 94 Construction and Development — — — — — 1 - 4 Family Residential — — — 4 74 Non-Owner Occupied CRE — — — 938 344 Owner Occupied CRE — — — — — Commercial and Industrial — — 687 375 — Total charge-offs 16 — 811 1,317 512 Recoveries: Cash, Securities and Other — 10 17 116 44 Construction and Development — — 163 — 24 1 - 4 Family Residential — 11 33 126 84 Non-Owner Occupied CRE — — 135 — 15 Owner Occupied CRE — — — — — Commercial and Industrial — — — — 11 Total recoveries — 21 348 242 178 Net charge-offs (recoveries) 16 (21) 463 1,075 334 Allowance for loan losses at end of period $7,451 $7,287 $6,478 $5,956 $5,960 Ratio of allowance to end of period loan 0.83% 0.90% 0.96% 0.98% 1.12% Ratio of net charge-offs to average loans —% —% 0.07% 0.19% 0.07% (1)Average balances are average daily balances.77 (1)(2)(3)(1)(4)Table of Contents(2)Excludes average outstanding balances of mortgage loans held for sale of $21.8 million, $12.7 million, $19.0 million, $8.8 million, and $0million for the years ended for December 31, 2018, 2017, 2016, 2015, and 2014, respectively. (3)Excludes mortgage loans held for sale of $14.8 million, $22.9 million, $8.1 million, $19.9 million, and $0 million as ofDecember 31, 2018, 2017, 2016, 2015, and 2014, respectively.(4)The ratio of net charge-offs to average loans is negligible or immaterial.The following tables represent the allocation of the allowance for loan losses among loan categories and othersummary information. The allocation for loan losses by category should neither be interpreted as an indication of futurecharge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicatedproportions. The allocation of a portion of the allowance for loan losses to one category of loans does not preclude itsavailability to absorb losses in other categories. As of December 31, 2018 2017 2016 2015 2014 (Dollars in thousands) Amount % Amount % Amount % Amount % Amount % Cash, Securities and Other $764 12.8% $1,066 16.2% $846 16.7% $1,175 22.6% $1,328 21.8% Construction and development 232 3.5% 202 3.1% 301 5.9% 242 4.7% 150 3.1% 1 - 4 Family Residential 2,552 39.3% 2,283 34.7% 1,833 36.0% 1,539 30.3% 1,434 30.6% Non-Owner Occupied CRE 1,264 19.5% 1,433 21.8% 1,153 22.7% 1,199 23.3% 1,288 23.4% Owner Occupied CRE 789 12.2% 751 11.4% 476 9.4% 531 10.3% 461 9.6% Commercial and Industrial 1,850 12.7% 1,552 12.8% 1,869 9.3% 1,270 8.8% 1,299 11.5% Total allowance for loan losses $7,451 100% $7,287 100% $6,478 100% $5,956 100% $5,960 100% (1)Represents the percentage of loans to total loans in the respective category.Deferred Tax AssetsDeferred tax assets represent the differences in timing of when items are recognized for GAAP purposes as opposedto tax purposes, as well as our net operating losses. As a result of book and tax basis differences, our deferred tax assets for theyear ended December 31, 2018 decreased $1.7 million from December 31, 2017 to $4.3 million.DepositsOur deposit products include money market accounts, time-deposit accounts (typically certificates of deposit), NOWaccounts (checking accounts), and saving accounts. Our accounts are federally insured by the FDIC up to the legal maximum.Total deposits increased by $121.6 million, or 14.9%, to $937.8 million at December 31, 2018 fromDecember 31, 2017. Total average deposits the year ended December 31, 2018 were $847.7 million, an increase of $67.8million, or 8.7%, compared to $779.9 million as of December 31, 2017. The increases are primarily due to our general depositgrowth initiatives, the cross-selling of products, the skills of our sales and service team, as well as additional deposits addedfrom our trust and investment management relationships for which we also provide deposit products. The increase in averagerates in 2018 and 2017 was driven primarily by an increase in market rates and competition.78 (1)(1)(1)(1)(1)Table of ContentsThe following table presents the average balances and average rates paid on deposits for the periods below: As of and For the Twelve Month Period EndingDecember 31, 2018 2017 Average Average Average Average (Dollars in thousands) Balance Rate Balance Rate Deposits Money market deposit accounts $392,619 1.10% $282,968 0.57%Demand deposit accounts 70,364 0.19% 71,921 0.17%Certificates and other time deposits > $250k 83,074 1.45% 86,865 0.77%Certificates and other time deposits < $250k 87,095 0.98% 130,949 1.15%Total time deposits 170,169 1.21% 217,814 0.94%Savings accounts 1,621 0.09% 1,604 0.04%Total interest-bearing deposits 634,773 1.03% 574,307 0.66%Noninterest-bearing accounts 212,907 205,603 Total deposits $847,680 0.77% $779,910 0.48% Average noninterest-bearing deposits to average total deposits was 25.1% and 26.4% for the year endedDecember 31, 2018 and 2017, respectively.Our average cost of funds was 0.90% and 0.67% during the year ended December 31, 2018 and 2017, respectively.The increase in our cost of funds for 2018 from 2017 was primarily due to an increase in average rates on interest-bearingdeposits to 1.03% during the year ended December 31, 2018 compared to 0.66% in 2017. This increase is primarily due tothe impact of a rising rate environment.Total money market accounts as of December 31, 2018 were $489.5 million, an increase of $158.5 million, or47.9%, compared to $331.0 million as of December 31, 2017. This increase was primarily due to transferring cash balances tomanage liquidity.Total time deposits as of December 31, 2018 were $178.7 million, a decrease of $31.5 million, or 15.0%, overDecember 31, 2017. The decrease in time deposit accounts was primarily due to the maturity of $35.4 million of publicdeposits during the year ended December 31, 2018.The following table represents the amount of certificates of deposit by time remaining until maturity as ofDecember 31, 2018: As of December 31, 2018 Maturity Within:(Dollars in thousands) ThreeMonths orLess Three to SixMonths Six to 12Months After 12Months TotalTime, $250,000 and over $16,224 $13,554 $27,736 $26,037 $83,551Other 2,771 39,228 39,994 13,199 95,192Total $18,995 $52,782 $67,730 $39,236 $178,743 BorrowingsWe have short-term and long-term borrowing sources available to supplement deposits and meet our liquidity needs.As of December 31, 2018 and December 31, 2017, borrowings totaled $21.6 million and $42.0 million, respectively. Duringthe year ended December 31, 2018, we redeemed our subordinated notes due 2020 with proceeds79 Table of Contentsfrom our initial public offering. The table below presents balances of each of the borrowing facilities as of the datesindicated: December 31, (Dollars in thousands) 2018 2017Borrowings Federal Home Loan Bank Topeka borrowings $15,000 $28,563Subordinated notes 6,560 13,435 $21,560 $41,998 FHLB Topeka. We have a blanket pledge and security agreement with FHLB Topeka that requires certain loans andsecurities to be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as ofDecember 31, 2018 and December 31, 2017 amounted to $475.4 million and $361.7 million, respectively. Based on thiscollateral and the Company’s holdings of FHLB Topeka stock, the Company was eligible to borrow an additional $305.0million at December 31, 2018. As of and for the Year Ended December 31, (Dollars in thousands) 2018 Short-term borrowings: Maximum outstanding at any month-end during the period $57,068 Balance outstanding at end of period $5,000 Average outstanding during the period $26,985 Average interest rate during the period 1.93%Average interest rate at the end of the period 2.06% As of December 31, 2018 we had three unsecured federal funds lines of credit of $10.0 million, $13.0 million and$25.0 million, respectively, available to us under such federal funds lines. As of December 31, 2017, we had two unsecuredfederal funds lines of credit of $13.0 million and $25.0 million, respectively, available to us under such federal funds lines.As of December 31, 2018 and December 31, 2017, there were no amounts drawn on any of the federal funds lines.Our borrowing facilities include various financial and other covenants, including, but not limited to, a requirementthat the Bank maintains regulatory capital that is deemed "well capitalized" by federal banking agencies. As ofDecember 31, 2018 and December 31, 2017, the Company was in compliance with the covenant requirements.Liquidity and Capital ResourcesLiquidity resources primarily include interest-bearing and noninterest-bearing deposits which primarily contributeto our ability to raise funds to support asset growth, acquisitions, and meet deposit withdrawals and other paymentobligations. Access to purchased funds primarily include the ability to borrow from FHLB Topeka and from correspondentbanks.80 Table of ContentsThe following table illustrates, during the periods presented, the composition of our funding sources and theaverage assets in which those funds are invested as a percentage of average total assets for the period indicated. Average Percentage for the YearEnded December 31, 2018 2017 Sources of Funds: Deposits: Noninterest-bearing 20.86% 21.53%Interest-bearing 62.20% 60.15%FHLB 4.44% 5.37%Convertible subordinated debentures —% 0.25%Subordinated notes 1.03% 1.40%Credit note —% 0.09%Other liabilities 0.79% 0.74%Shareholders’ equity 10.68% 10.47%Total 100% 100.0%Uses of Funds: Total loans 82.52% 77.04%Available-for-sale securities 4.80% 9.79%Mortgage loans held for sale 2.13% 1.32%Promissory notes from related parties —% 0.84% Interest-bearing deposits in other financial institutions 3.68% 3.31%Noninterest-earning assets 6.87% 7.70%Total 100% 100.0%Average noninterest-bearing deposits to average deposits 25.12% 26.36%Average loans to average deposits 100.19% 95.00%Total interest-bearing deposits to total deposits 74.88% 73.64% Our primary source of funds is interest‑bearing and noninterest‑bearing deposits, and our primary use of funds isloans. We do not expect a change in the primary source or use of our funds in the foreseeable future.Capital ResourcesTotal shareholders' equity increased $15.0 million, or 14.8%, to $116.9 million at December 31, 2018 compared toDecember 31, 2017. The increase is primarily due to the sale of common stock of $34.5 million, $1.9 million of stock-basedcompensation charges, and net income of $5.6 million. These increases were partially offset by the redemption of preferredstock of $25.0 million, payment of $1.4 million of dividends on our preferred stock, a $0.4 million increase in the unrealizedloss on our available-for-sale investments, and $0.2 million of share awards settled.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 initiatecertain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a directmaterial effect on our consolidated financial statements. Under capital adequacy guidelines and, additionally for banks, theregulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitativemeasures 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 capitalrelative to the amount and types of assets they hold. As of December 31, 2018 and December 31, 2017, respectively, ourholding company and Bank were in compliance with all applicable regulatory capital requirements, and the Bank wasclassified as "well capitalized," for purposes of the prompt corrective action regulations. As we continue to grow ouroperations and maintain capital requirements, our regulatory capital levels may decrease depending on our level of81 Table of Contentsearnings. We continue to monitor growth and control our capital activities in order to remain in compliance with allapplicable regulatory capital standards.The following table presents our regulatory capital ratios for the dates noted. December 31, December 31, 2018 2017 (Dollars in thousands) Amount Ratio Amount Ratio Common Equity Tier 1(CET1) to risk-weighted assets Bank $87,291 10.55% $77,879 9.81%Consolidated Company 94,335 11.35% 52,703 6.56%Tier 1 capital to risk-weighted assets Bank 87,291 10.55% 77,879 9.81%Consolidated Company 94,335 11.35% 70,573 8.79%Total capital to risk-weighted assets Bank 94,906 11.47% 85,304 10.75%Consolidated Company 108,510 13.06% 93,903 11.70%Tier 1 capital to average assets Bank 87,291 8.63% 77,879 8.27%Consolidated Company 94,335 9.28% 70,573 7.41% Contractual Obligations and Off‑Balance Sheet ArrangementsWe enter into credit-related financial instruments with off-balance sheet risk in the normal course of business tomeet the financing needs of our customers. These financial instruments include commitments to extend credit. Suchcommitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in theconsolidated balance sheets. Commitments may expire without being utilized. Our exposure to credit loss is represented bythe contractual amount of these commitments, although material losses are not anticipated. We follow the same creditpolicies 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(amounts in thousands): As of December 31, 2018 More than More than 1 Year 1 Year but Less 3 Years but Less 5 Years or Less than 3 Years than 5 Years or More TotalFHLB Topeka $5,000 $10,000 $ — $ — $15,000Subordinated notes — — — 6,560 6,560Time deposits 139,507 29,094 10,142 — 178,743Minimum lease payments 3,570 6,189 5,033 3,446 18,238Total $148,077 $45,283 $15,175 $10,006 $218,541(1)Reflects a contractual maturity date of December 31, 2026.The following tables present financial instruments whose contract amounts represent credit risk, as of the datesindicated. December 31, 2018 2017 Fixed Rate Variable Rate Fixed Rate Variable RateUnused lines of credit $33,571 $271,580 $42,971 $218,536Standby letters of credit $40 $23,508 $40 $15,532Commitments to make loans to sell $17,207 $ — $34,045 $ —Commitments to make loans $2,750 $19,762 $4,596 $20,572 We may enter into contracts for services in the conduct of ordinary business operations, which may require paymentfor services to be provided in the future and may contain penalty clauses for early termination of the contracts. We do notbelieve these off-balance sheet arrangements have or are reasonably likely to have a material effect on our82 (1)Table of Contentsfinancial 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 PoliciesOur accounting policies and procedures are described in Note 1 - Organization and Summary of SignificantAccounting Policies in the accompanying Notes to the Consolidated Financial Statements ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKInterest Rate Sensitivity and Market RiskMarket 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 riskinherent in lending, investing and deposit taking activities. To that end, management actively monitors and manages interestrate 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 andliabilities designed to ensure that exposure to interest rate fluctuations is limited within established guidelines of acceptablelevels of risk-taking.Interest rate risk is addressed by our board of directors. The board monitors interest rate risk by analyzing thepotential impact on the net economic value of equity and net interest income from potential changes in interest rates, andconsiders the impact of alternative strategies or changes in balance sheet structure. We manage our balance sheet in part tomaintain the potential impact on economic value of equity and net interest income within acceptable ranges despite changesin interest rates.Our exposure to interest rate risk is reviewed at least quarterly by the board of directors. Interest rate risk exposure ismeasured using interest rate sensitivity analysis to determine the change in economic value of equity in the event ofhypothetical changes in interest rates. If potential changes to net economic value of equity and net interest income resultingfrom hypothetical interest rate changes are not within the limits established by our board of directors, the board of directorsmay direct management to adjust the asset and liability mix to bring interest rate risk within board-approved limits.The following tables summarize the sensitivity in net interest income and fair value of equity as of the datesindicated, using a parallel ramp scenario. As of December 31, 2018 As of December 31, 2017 Percent Change Percent Change Percent Change Percent Change in Net Interest inFair Value of in Net Interest inFair Value of Change in Interest Rates (Basis Points) Income Equity Income Equity 300 (6.61)% (16.14)% 1.95% (2.94)%200 (3.48)% (8.18)% 1.85% 0.56%100 (1.12)% (2.69)% 1.76% 2.16%Base —% —% —% —%−100 2.74% (0.02)% (7.74)% (10.59)% The model simulations as of December 31, 2018 imply that our balance sheet is liability-sensitive, compared to anasset sensitive balance sheet as of December 31, 2017. The change over the period is driven primarily by an increase indeposit betas and a liability mix shift to higher beta products.Although the simulation model is useful in identifying potential exposure to interest rate changes, actual results fornet interest income and economic value of equity may differ. There are a variety of factors that can impact the outcomes suchas timing and magnitude of interest rate changes, asset and liability mix, pre-payment speeds, deposit beta83 Table of Contentsassumptions, and decay rates that differ from our projections. Additionally, the results do not account for actionsimplemented to manage our interest rate risk exposure.Impact of InflationOur consolidated financial statements and related notes included within this Form 10-K have been prepared inaccordance with GAAP, which requires the measurement of financial position and operating results in terms of historicaldollars, 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 significantlyimpact on our performance beyond the general effects of inflation. Interest rates do not necessarily move in the samedirection or magnitude as prices of general goods and services, while other operating expenses can be correlated with theimpact of general levels of inflation.84 Table of Contents ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAOur financial statements and accompanying notes, including the Report of Independent Registered PublicAccounting Firm, are set forth on pages F-1 to F-43 of this Annual Report on Form 10-K.Audited Financial StatementsDescription Page NumberReport of Independent Registered Public Accounting Firm F-1Consolidated Balance Sheets as of December 31, 2018 and 2017 F-2Consolidated Statements of Income for the Years Ended December 31, 2018 and 2017 F-3Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018 and2017 F-4Consolidated Statements of Stockholder’s Equity for the Years Ended December 31, 2018 and 2017 F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 F-6Notes to Consolidated Financial Statements F-7 85 Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and the Board of DirectorsFirst 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 ofDecember 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, shareholders’ equity,and cash flows for each of the years ended December 31, 2018 and 2017, 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 positionof the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the yearsended December 31, 2018 and 2017, in conformity with accounting principles generally accepted in the United States ofAmerica. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinionon the Company's financial statements based on our audits. We are a public accounting firm registered with the PublicCompany Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to theCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities andExchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether dueto error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control overfinancial reporting. As part of our audits we are required to obtain an understanding of internal control over financialreporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control overfinancial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whetherdue to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a testbasis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating theaccounting principles used and significant estimates made by management, as well as evaluating the overall presentation ofthe 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, ColoradoMarch 21, 2019F-1 Table of ContentsFIRST WESTERN FINANCIAL, INC.CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) December 31, December 31, 2018 2017 ASSETS Cash and cash equivalents: Cash and due from banks $1,574 $1,370Interest-bearing deposits in other financial institutions 71,783 8,132Total cash and cash equivalents 73,357 9,502 Available-for-sale securities 44,901 53,650Correspondent bank stock, at cost 2,488 1,555Mortgage loans held for sale 14,832 22,940Loans, net of allowance of $7,451 and $7,287 886,515 806,402Promissory notes from related parties — 5,792Premises and equipment, net 6,100 6,777Accrued interest receivable 2,844 2,421Accounts receivable 4,492 5,592Other receivables 1,391 6,324Other real estate owned, net 658 658Goodwill 24,811 24,811Other intangible assets, net 402 1,233Deferred tax assets, net 4,306 5,987Company-owned life insurance 14,709 14,316Other assets 2,518 1,699Total assets $1,084,324 $969,659 LIABILITIES Deposits: Noninterest-bearing $202,856 $198,685Interest-bearing 734,902 617,432Total deposits 937,758 816,117Borrowings: Federal Home Loan Bank Topeka borrowings 15,000 28,563Subordinated Notes 6,560 13,435Accrued interest payable 231 197Other liabilities 7,900 9,501Total liabilities 967,449 867,813 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY Preferred stock - no par value; 1,000,000 shares authorized; 20,868 issued and outstanding 2017;liquidation preference: $20,868 — —Convertible preferred stock - no par value; 150,000 shares authorized; 41,000 shares issued andoutstanding 2017; liquidation preference: $4,100 — —Common stock - no par value; 10,000,000 shares authorized; 7,968,420 and 5,833,456 sharesissued and outstanding at 2018 and 2017 — —Additional paid-in capital 141,359 130,070Accumulated deficit (23,199) (27,296)Accumulated other comprehensive loss (1,285) (928)Total shareholders’ equity 116,875 101,846Total liabilities and shareholders’ equity $1,084,324 $969,659 See accompanying notes to consolidated financial statements.F-2 Table of ContentsFIRST WESTERN FINANCIAL, INC.CONSOLIDATED STATEMENTS OF INCOME(in thousands, except per share amounts) Year Ended December 31, 2018 2017Interest and dividend income: Loans, including fees $37,010 $30,908Investment securities 1,097 2,115Federal funds sold and other 689 314Total interest and dividend income 38,796 33,337 Interest expense: Deposits 6,511 3,778Other borrowed funds 1,661 1,983Total interest expense 8,172 5,761Net interest income 30,624 27,576Less: Provision for credit losses 180 788Net interest income, after provision for credit losses 30,444 26,788 Non-interest income: Trust and investment management fees 19,165 19,455Net gain on mortgage loans sold 4,560 3,469Bank fees 1,759 2,176Risk management and insurance fees 1,296 1,289Income on company-owned life insurance 393 418Net gain on sale of securities — 81Gain on legal settlement — 825Total non-interest income 27,173 27,713Total income before non-interest expense 57,617 54,501 Non-interest expense: Salaries and employee benefits 29,771 28,663Occupancy and equipment 5,853 5,884Professional services 3,451 3,490Technology and information systems 3,982 3,911Data processing 2,683 2,436Marketing 1,253 1,492Amortization of other intangible assets 831 784Total loss on sales/provision for other real estate owned — 311Other 2,371 2,523Total non-interest expense 50,195 49,494Income before income taxes 7,422 5,007Income tax expense 1,775 2,984Net income 5,647 2,023Preferred stock dividends (1,378) (2,291)Net income (loss) available to common shareholders $4,269 $(268)Earnings (loss) per common share: Basic $0.64 $(0.05)Diluted $0.63 $(0.05) See accompanying notes to consolidated financial statements.F-3 Table of ContentsFIRST WESTERN FINANCIAL, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) Year Ended December 31, 2018 2017Net income $5,647 $2,023Other comprehensive income (loss) items: Net change in unrealized (losses) gains on available-for-sale securities (523) 214Reclassification adjustment for realized gains (losses) included in earnings 41 (81)Total other comprehensive (loss) income items (482) 133 Income tax effects 125 (262)Total other comprehensive (357) (129)Comprehensive income $5,290 $1,894 See accompanying notes to consolidated financial statements.F-4 Table of Contents FIRST WESTERN FINANCIAL, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(in thousands, except share amounts) Shares Accumulated Convertible Additional Other Preferred Preferred Common Paid-In Accumulated Comprehensive Stock Stock Stock Capital Deficit Income (loss) Total Balance at January 1, 2017 20,868 46,000 5,529,542 $123,755 $(27,028) $(799) $95,928 Net income — — — — 2,023 — 2,023Issuance of common stock, net of issuance costs of$46 — — 186,791 5,255 — — 5,255Series D Preferred Stock Conversion — (5,000) 17,500 — — — —Restricted stock awards — — 105,264 — — — —Stock forfeited in connection with legal settlement — — (8,580) (244) — — (244)Other comprehensive loss, net of tax — — — — — (129) (129)Stock-based compensation — — — 1,298 — — 1,298Options exercised — — 2,939 6 — — 6Preferred stock dividends — — — — (2,291) — (2,291) Balance at December 31, 2017 20,868 41,000 5,833,456 $130,070 $(27,296) $(928) $101,846 Net income — — — — 5,647 — 5,647Issuance of common stock, net of issuance costs of$4,411 — — 1,989,017 34,450 — — 34,450Make whole share issuance — — 128,978 — — — —Preferred stock Series A-C redemption (20,868) — — (20,783) (85) — (20,868)Preferred stock Series D redemption — (41,000) — (4,054) (46) — (4,100)Other comprehensive loss, net of tax — — — — — (398) (398)Settlement of share awards — — 16,969 (181) — — (181)Cumulative adjustment of unrealized loss on equitysecurities for adoption of ASU 2016-01 — — — — (41) 41 —Stock-based compensation — — — 1,857 — — 1,857Preferred stock dividends — — — — (1,378) — (1,378) Balance at December 31, 2018 — — 7,968,420 $141,359 $(23,199) $(1,285) $116,875 See accompanying notes to consolidated financial statements.F-5 Table of ContentsFIRST WESTERN FINANCIAL, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year Ended December 31, 2018 2017Cash flows from operating activities Net income $5,647 $2,023Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,222 2,447Gain on disposal of premises and equipment — 150Legal settlement — (244)Deferred income tax expense 1,806 2,671Total loss on sales/provision of other real estate owned — 311Stock-based compensation 1,857 1,298Provision for credit losses 180 788Net amortization of investment securities 178 690Accretion of discounts on convertible subordinated debentures and promissory notes, net — (18)Stock dividends received on correspondent bank stock (136) (139)Increase in cash surrender value of company-owned life insurance (393) (418)Net gain on mortgage loans sold (4,560) (3,469)Net gain on sales of securities — (81)Origination of mortgage loans held for sale (473,956) (301,959)Proceeds from mortgage loans sold 486,473 290,731Net changes in operating assets and liabilities: Accounts receivable 1,100 (907)Accrued interest receivable and other assets (1,051) (817)Accrued interest payable and other liabilities (1,567) 1,513Net cash provided (used) by operating activities 17,800 (5,430)Cash flows from investing activities Activity in available-for-sale securities: Maturities, prepayments, and calls 13,040 12,192Sales — 58,565Purchases (250) (32,803)Purchases of correspondent bank stock (6,609) (6,975)Redemption of correspondent bank stock 5,812 7,328Purchases of premises and equipment (714) (499)Net cash paid for acquisitions — (1,000)Payments received on promissory notes from related parties 3,701 —Proceeds from sales of other real estate owned — 1,867Loan and note receivable originations and principal collections, net (78,051) (140,727)Net cash used in investing activities (63,071) (102,052)Cash flows from financing activities Net change in deposits 121,641 62,217Proceeds from Subordinated Notes issuances, net — 285Proceeds from the exercise of stock options — 6Proceeds from issuance of common stock, net 34,450 5,255Settlement of restricted stock (181) —Payments on Credit Note payable — (2,736)Dividends paid on preferred stock (1,378) (2,291)Payments on Subordinated Notes (6,875) —Redemption of preferred stock Series A-C (20,783) —Redemption of convertible preferred stock Series D (4,054) —Redemption costs (131) —Payments to Federal Home Loan Bank Topeka borrowings (297,866) (347,683)Proceeds from Federal Home Loan Bank Topeka borrowings 284,303 339,246Net cash provided by financing activities 109,126 54,299 Net change in cash and cash equivalents 63,855 (53,183)Cash and cash equivalents, beginning of year 9,502 62,685Cash and cash equivalents, end of period $73,357 $9,502Supplemental cash flow information: Interest paid on deposits and borrowed funds $8,138 $5,615Income tax payment, net of refunds received 439 275Supplemental noncash disclosures: Expiration of convertible subordinated debentures $ — $4,749Reclass of promissory note to loans 2,091 —Available-for-sale-reclass of equity securities 703 —Reclass on equity securities 41 — See accompanying notes to consolidated financial statements. F-6 Table of ContentsFIRST WESTERN FINANCIAL, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBusiness and Basis of Presentation: The consolidated financial statements include the accounts of First WesternFinancial, Inc. (“FWFI”), incorporated in Colorado on July 18, 2002, and its direct and indirect wholly‑owned subsidiarieslisted below (collectively referred to as the “Company”).FWFI is a bank holding company with financial holding company status registered with the Board of Governors ofthe Federal Reserve System. FWFI wholly owns the following subsidiaries: First Western Trust Bank (the “Bank”), FirstWestern Capital Management Company (“FWCM”), and Ryder, Stilwell Inc. (“RSI”). The Bank wholly owns the followingsubsidiaries, which are therefore indirectly wholly‑owned by FWFI: First Western Merger Corporation (“Merger Corp.”), andRRI, LLC (“RRI”). RSI and RRI are not active operating entities.The Company provides a fully‑integrated suite of wealth management services including private banking, personaltrust, investment management, mortgage loans, and institutional asset management services to individual and corporatecustomers principally in Colorado (metro Denver, Aspen, Boulder and Fort Collins), Arizona (Phoenix and Scottsdale),California (Century City, Los Angeles) and Wyoming (Jackson Hole and Laramie). The Company’s revenues are generatedfrom its full range of product offerings as noted above, but principally from net interest income (the interest income earnedon the Bank’s assets net of funding costs), fee‑based wealth advisory, investment management, asset management andpersonal trust services, and net gains earned on selling mortgage loans.The consolidated financial statements have been prepared in conformity with accounting principles generallyaccepted in the United States of America (“GAAP”) for interim financial information and where applicable, reportingpractices prescribed for the banking and investment advisory industries.Consolidation: The Company’s policy is to consolidate all majority‑owned subsidiaries in which it has acontrolling financial interest and variable‑interest entities where the Company is deemed to be the primary beneficiary. Allmaterial intercompany accounts and transactions have been eliminated in consolidation.Use of Estimates: To prepare financial statements in conformity with GAAP, management makes estimates andassumptions based on available information. These estimates and assumptions affect the amounts reported in theconsolidated financial statements and the disclosures provided, and actual results could differ.Concentration of Credit Risk: Most of the Company’s lending activity is to customers located in and aroundDenver, Colorado; Phoenix and Scottsdale, Arizona; and Jackson Hole, Wyoming. The Company does not believe it hassignificant concentrations in any one industry or customer. At December 31, 2018 and December 31, 2017, 73.6% and 73.5%of the Company’s loan portfolio was secured by real estate collateral. Declines in real estate values in the primary markets theCompany operates in could negatively impact the Company.Cash and Cash Equivalent: Cash and cash equivalents include cash on hand, deposits at other financial institutionswith original maturities fewer than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposittransactions, interest bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements.Investment Securities: Investments in debt securities the Company intends 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, with unrealized holdinggains and losses reported in other comprehensive income (loss), net of tax. As of December 31, 2018 and 2017, all investmentsecurities were classified as available-for-sale. As of December 31, 2018, equity mutual funds have been recorded at fair valuewithin the other assets line item in the consolidated balance sheet with changes recorded in the other line item in theconsolidated statement of income (in thousands).F-7 Table of ContentsNet purchase premiums and discounts are recognized in interest income using the interest method over the terms ofthe securities, without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated.Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary arerecorded in earnings as realized losses in noninterest income. Management evaluates securities for other-than-temporary impairment ("OTTI") on a quarterly basis, or morefrequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position,management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects ofthe issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, asecurity in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent orrequirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment throughearnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into twocomponents as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI relatedto other factors, which is recognized in other comprehensive income (loss). The credit loss is defined as the differencebetween the present value of the cash flows expected to be collected and the amortized cost basis. At December 31, 2018 and2017, no securities were determined to be other-than-temporarily impaired. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specificidentification method. Correspondent Bank Stock: Correspondent bank stock includes stock in both the Federal Home Loan Bank ofTopeka ("FHLB Topeka") and Bankers' Bank of the West ("BBW"), which are considered restricted securities because theCompany may be required to hold the stock in order to maintain the correspondent banking relationship with theseinstitutions. No ready market exists for the stock and therefore, no quoted market values exist. For financial reportingpurposes, this stock is carried at cost, classified as a restricted security and periodically evaluated for impairment based onultimate recovery of par value. No provision for impairment was recorded at December 31, 2018 and 2017. Both cash andstock dividends are reported as income when received. Mortgage Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carriedat lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, ifany, are recorded as a valuation allowance and charged to earnings. Servicing rights are released when the associatedmortgage loans are sold. Gains and losses on sales of mortgage loans are based on the difference between the selling priceand the carrying value of the related loan sold. Loans: Loans the Company has the intent and ability to hold for the foreseeable future, until maturity, or untilpayoff are reported at their outstanding unpaid principal balances, adjusted for charge-offs, net of deferred loan fees andcosts, and the allowance for loan losses. Interest income is accrued on unpaid principal balances. Fees received at origination,net of certain direct origination costs for providing loan commitments and letters of credit that result in loans, are deferredand amortized to interest income, using the level yield method without anticipating prepayments, over the life of the relatedloan or until payoff, at which time the remaining unamortized fee is recorded as interest income. Fees net of certain directorigination costs on commitments and letters of credit are amortized to interest income over the commitment period. Past Due Loans: The accrual of interest on loans is discontinued at the time the loan becomes 90 days delinquentunless the loan is well secured and in the process of collection. Past due status is based on the contractual terms of the loan.In all cases, loans are placed on nonaccrual status or charged off if collection of interest or principal is considered doubtful. Interest accrued but not collected is charged off against interest income at the time a loan is placed on non-accrualstatus. The interest collected on non-accrual loans is accounted for on the cash-basis or cost-recovery method, untilqualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance isreduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans can bereturned to accrual status when there is a sustained period of repayment performance (usually six-months or longer) and thecollectability of future payments is reasonably assured.F-8 Table of Contents Troubled Debt Restructurings: A troubled debt restructuring ("TDR") is a loan the Company, for reasons related to aborrower's financial difficulties, grants a concession to the borrower the Company would not otherwise consider. The loan terms which have been modified or restructured due to a borrower's financial difficulty, include but are notlimited to (i) a reduction in the stated interest rate of the loan, (ii) an extension of the maturity date of the loan at an interestrate below market, or (iii) a reduction of the accrued interest. Loan modifications granted by the Company are reviewed on a case-by-case basis to determine if they should beconsidered a restructured loan. Allowance for Loan Losses: The Company's reserve for credit losses is an estimate of the probable incurred creditlosses and is comprised of (i) the allowance for loan losses and (ii) the reserve for unfunded commitments. The reserve forunfunded commitments is included in other liabilities in the accompanying consolidated balance sheets and the loanbalances in the accompanying consolidated balance sheets are reported net of the allowance for loan losses. The allowancefor loan losses is established through a provision for credit losses, which is a noncash charge to earnings. Loan losses arecharged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequentrecoveries, 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'speriodic review of the collectability of the loans in light of historical experience, the nature and dollar volume of the loanportfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateraland prevailing economic conditions. Allocations of the allowance may be made for specific loans, but the entire allowance isavailable for any loan that, in management's judgment, should be charged off. This evaluation is inherently subjective as itrequires estimates that are susceptible to significant revision as more information becomes available. The Company's loanloss policies do not differ by loan segment. A loan is considered impaired when, based on current information and events, it is probable the Company will beunable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loanagreement. TDRs are separately evaluated for impairment and included in the separately identified impairment disclosures. Ifcash flow dependent, TDRs will be measured at the present value of estimated future cash flows using the loan's effective rateat inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of thecollateral. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with theaccounting policy for the allowance for loan losses on loans individually identified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and theprobability of collecting all scheduled principal and interest payments. Loans that experience insignificant payment delaysand payment shortfalls generally are not classified as impaired. Management determines the significance of payment delaysand payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan andthe borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amountof the shortfall in relation to the principal and interest owed. The allowance for loan losses is comprised of specific loan loss reserves and general loan loss reserves. Theimpairment of a specific loan is measured based either on (i) the present value of expected future cash flows discounted at theloan's effective interest rate, or (ii) the fair value of the underlying collateral, less costs to sell, if the repayment is expected tobe provided predominantly by the sale of the underlying collateral. Specific impairments are measured on a loan-by-loanbasis if risk characteristics are unique to an individual borrower. The general loan loss reserve covers non-impaired loans andis established by evaluating the incurred loss on homogenous pools of loans, not specifically reviewed for impairment asnoted above, that have common risk characteristics. The general loan loss reserve is based on historical loss experiencesadjusted for eight qualitative factors. Certain factors are applied to each pool and certain factors are applied to all non-individually reviewed loans. When applicable, the pool of loans reviewed consists of residential andF-9 Table of Contentscommercial mortgage loans, equity lines of credit, commercial lines of credit, and consumer installment loans. The eightqualitative factors the Company considers are: 1.Changes in relevant economic and business conditions and developments that affect the collectability of theportfolio, including the condition of various market segments.2.Levels and trends in net charge-offs.3.The existence and effect of any concentrations of credit and changes in the level of such concentrations.4.Changes in the nature or volume of the loan portfolio and in the terms of loans.5.Changes in the experience, ability, and depth of lending management and other relevant staff.6.Changes in the volume and severity of past due loans.7.Changes in the quality of the loan review system and associated grading changes.8.Change in the level of overdrafts.The following portfolio segments have been identified: ·1-4 Family Residential—consists of loans and home equity lines of credit secured by one to four familyresidential properties. These loans typically enable borrowers to purchase or refinance existing homes, most ofwhich serve as the primary residence of the owner. In addition, some borrowers secure a commercial purposeloan with owner occupied or non-owner occupied one to four family residential properties. Loans in thissegment are dependent on the industries tied to these loans as well as the national and local economies, andlocal residential and commercial real estate markets.·Cash, Securities and Other—consists of consumer and commercial purpose loans that are primarily secured bysecurities managed and under custody with the Company, cash on deposit with the Company or life insurancepolicies. In addition, loans in this portfolio are collateralized with other sources of consumer collateral and aminimal amount may be unsecured. This segment of our portfolio is affected by a variety of local and nationaleconomic factors affecting borrowers' employment prospects, income levels, and overall economic sentiment.·Commercial and Industrial—consists of commercial and industrial loans, including working capital lines ofcredit, permanent working capital term loans, business asset loans, acquisition, expansion and developmentloans, and other loan products, primarily in the Company’s target markets. This portfolio primarily consists ofterm loans and lines of credit which are dependent on the strength of the industries of the related borrowers andthe success of their businesses.·Commercial Real Estate, Owner Occupied and Non-Owner Occupied—consists of commercial loanscollateralized by real estate. These loans may be collateralized by owner occupied or non-owner occupied realestate, as well as multi-family residential real estate. These loans are dependent on the strength of the industriesof the related borrowers and the success of their businesses.·Construction and Development—consists of loans to finance the construction of residential and non-residentialproperties. These loans are dependent on the strength of the industries of the related borrowers and the risksconsistent with construction projects.F-10 Table of ContentsThe reserve for unfunded commitments represents the estimate for probable credit losses inherent in unfundedcommitments to extend credit. Unfunded commitments to extend credit include commercial and standby letters of credit,unused lines of credit, and unfunded loan commitments expected to be funded.The process used to determine the reserve for unfunded commitments is consistent with the process for determiningthe allowance for loan losses, adjusted for estimated funding probabilities. Changes to the level of the reserve for unfundedcommitments are recognized through the provision for credit losses for off-balance sheet credit exposures, included in otheroperational expenses in the accompanying consolidated statements of income.Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets hasbeen relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from theCompany, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledgeor exchange the transferred assets, and the Company does not maintain effective control over the transferred assets throughan agreement to repurchase them before their maturity.Premises and Equipment: Premises and equipment are carried at cost, net of accumulated depreciation, with theexception of artwork, which is carried at cost. Leasehold improvements are depreciated using the straight-line method andrecognized over the shorter of the lease term or estimated useful lives of the assets, ranging from 4 to 15 years.Furniture/equipment and software are depreciated using the straight-line method and recognized over the estimated usefullives of the assets which are 7 years and 3 years, respectively.Goodwill and Other Intangible Assets: Goodwill represents the excess of purchase price over the fair value of netidentifiable tangible and intangible assets acquired in business combinations. The Company has acquired other identifiableintangible assets, primarily consisting of customer relationships, non-competition agreements and recorded goodwill throughits acquisition of financial services companies. Goodwill and other indefinite-lived intangible assets are not amortized, butare tested for impairment at the reporting unit level at least annually by applying a fair value-based test using discountedestimated future net cash flows. The Company has selected October 31 as the date to perform its annual impairment tests.Impairment exists when the carrying amount of the goodwill and other intangible assets exceeds their implied fair values.Impairment losses, if any, are recognized as a charge to non-interest expense and an adjustment to the carrying value of thegoodwill or other intangible assets. Subsequent reversals of impairment charges are prohibited. Goodwill is the onlyintangible asset with an indefinite life on the Company's consolidated balance sheets. Other definite-lived intangible assets,including customer relationship intangibles, are amortized on a straight-line basis over periods representing the estimatedremaining lives of the assets of one to fifteen years, and are evaluated for impairment when events or changes incircumstances indicate the carrying values of such assets may not be recoverable. At December 31, 2018, the Companybelieves the carrying value of its goodwill not to be impaired and other intangible assets to be recoverable.Accounts Receivable: Accounts receivable represents the billed but unpaid fees from trust and investment advisoryservices owed by clients, which are typically calculated as a percentage of average invested balances. The majority of theCompany's investment advisory clients are billed quarterly in arrears based on the daily average balance in the client's trustor investment accounts for that quarter.Other Receivables: Other accounts receivable represents compensation paid to employees that is contingent onfuture employment and recognized in the consolidated statements of income over the estimated service period and sales ofinvestments in which the Company has obtained a firm commitment as of the balance sheet dates.Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initiallyrecorded at fair value, less selling costs, at the date of foreclosure, establishing a new cost basis in the asset. Physicalpossession of residential real estate property collateralizing a residential mortgage loan occurs when legal title is obtainedupon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan throughcompletion of a deed in lieu of foreclosure or through similar legal agreement. Subsequent to foreclosure, valuations areperiodically performed by management, with any subsequent declines in value recorded as a charge to expense through animpairment recorded directly against the other real estate owned assets or to a valuation allowance account. Changes inF-11 Table of Contentsthe valuation allowance are recorded as provision for losses on other real estate owned. Revenue and expenses fromoperations related to other real estate owned are included in other operational expenses.Company-Owned Life Insurance: The Company has purchased life insurance policies on certain current and formerofficers and key employees. Company-owned life insurance is recorded at the amount that can be realized under theinsurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amountsdue that are probable at settlement.Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks and forward deliverycommitments) to be sold in the secondary market for the future delivery of these loans are accounted for as free standingderivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan isexecuted and is adjusted for the expected exercise of the commitment before the loan is funded. In order to hedge the changein interest rates resulting from its commitments to fund the loans, the Company enters into forward commitments for futuredelivery of mortgage loans when interest rate locks are entered into. Fair values of these mortgage derivatives are estimatedbased on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values ofthese derivatives are included in net gains on mortgage loans sold.Stock-Based Compensation: The Company has stock-based compensation plans that provide for the granting ofstock options, restricted stock awards, restricted stock units and performance stock units to associates and non-associatedirectors who perform services for the Company. The Company estimates the fair value of its stock option awards on the dateof grant using the Black-Scholes option-pricing model ("Black-Scholes model"). The Company determines the fair value ofthe restricted and performance stock units as well as restricted stock awards based on the estimated market value of theunderlying shares at the date of grant.Compensation cost is recognized over the required service period, generally defined as the vesting period. Forawards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for theentire award. The Company's policy is to recognize forfeitures as they occur.Income Taxes: Income tax expense is the total of the current year income tax due and the change in the deferred taxassets and liabilities. Deferred income tax assets and liabilities are determined using the liability method. Under this method,the net deferred tax asset or liability is determined based on the tax effects of temporary differences between the book and taxbasis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Avaluation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.The Company recognizes tax benefits from uncertain tax positions when it is more-likely-than-not, based on thetechnical merits of the position, the tax position will be sustained upon examination, including the resolution of any appealsor litigation. Tax benefits recognized in the consolidated financial statements from such a position are measured as thelargest benefit that has a greater than fifty percent likelihood of being realized upon resolution.The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any suchassessments have historically been minimal and immaterial to financial results. The Company classifies interest andpenalties, if any, as a component of income tax expense.Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss).Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale which is alsorecognized as a separate component of equity.Earnings (Loss) per Common Share: The Company had net income in the consolidated statement of income for theyears ended December 31, 2018 and 2017. Due to dividends on preferred stock, the Company reports net income and a netloss available to common shareholders' in those years, respectively. Therefore, earnings per share is positive for the yearended December 31, 2018 and negative for 2017. Earnings (Loss) per common share is computed by dividing net income ornet loss available to common shareholders by the weighted average number of shares outstanding during each period. SeeNote 12 for the common share equivalents that have been included and excluded from the calculation of earnings (loss) percommon share.F-12 Table of ContentsLoss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course ofbusiness, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonablyestimated. Management does not believe there now are such matters that will have a material effect on the consolidatedfinancial statements.Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant marketinformation and other assumptions, as more fully disclosed in Note 16. Fair value estimates involve uncertainties and mattersof significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broadmarkets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet creditinstruments, such as unused lines of credit, commitments to make loans and commercial and standby letters of credit. Theface amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Suchfinancial instruments are recorded when they are funded.Revenue Recognition: In accordance with the Financial Accounting Standards Board (“FASB”), Revenue Contractswith Customers (“Topic 606”), Trust and investment management fees are earned by providing trust and investment servicesto 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 feerate based on the terms of the contract. Performance based incentive fees are earned with respect to investment managementcontracts for the year ended December 31, 2018 are immaterial. Receivables are recorded on the consolidated balance sheetin the accounts receivable line item. Income related to trust and investment management fees, bank fees, and riskmanagement and insurance fees on the consolidated statement of operations for the year ended December 31, 2018 areconsidered in scope of Topic 606.Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatoryreserve and clearing requirements of $15.7 million at December 31, 2018.Reclassifications: Certain items in prior year financial statements were reclassified to conform to the currentpresentation. Such reclassifications had no impact on net income or total shareholders’ equity.Recently issued accounting pronouncements: The following reflect recent accounting pronouncements that havebeen adopted by the Company or pending pronouncements with updates to the expected impact since the end of theCompany’s fiscal year ended December 31, 2018.In February 2016, the FASB issued ASU 2016‑02, Lease Accounting (Topic 842) (“ASU 2016‑02”). Under ASU2016‑02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than twelve months.Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from alease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP,which requires only capital leases to be recognized on the balance sheet. ASU 2016‑02 will require both types of leases to berecognized on the balance sheet. The ASU also will require disclosures to help investors and other financial statement usersbetter understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitativeand quantitative requirements, providing additional information about the amounts recorded in the financial statements.Upon adoption of ASU 2016‑02 with its March 31, 2019 quarterly report on Form 10-Q, the Company expects to recognizeright-of-use asset and related lease liability each between $12.0 million and $17.0 million. We expect to elect the modifiedretrospective transition approach. We also expect to elect and apply the package of practical expedients whereby we will notreassess prior to the effective date (i) whether any expired contracts contain leases, (ii) the lease classification for any existingor expired lease, and (iii) initial direct costs of any existing leases.In February 2016, the FASB issued ASU 2016‑13, Financial Instruments—Credit Losses (Topic 326) (“ASU2016‑13”). ASU 2016‑13 replaces the incurred loss model with an expected loss model, which is referred to as the currentexpected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on the financialassets measured at amortized cost, including loan receivables, held‑to‑maturity debt securities, and reinsurance receivables.F-13 Table of ContentsIt also applies to off‑balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters ofcredit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. For all otherassets within the scope of CECL, a cumulative‑effect adjustment will be recognized in retained earnings as of the beginningof the first reporting period in which the guidance is effective. ASU 2016‑13 will be effective for the Company on January 1,2020. Upon adoption of the amendments within this update, the Company expects to make a cumulative‑effect adjustment tothe opening balance of retained earnings and the allowance for loan losses in the year of adoption. The Company has formeda CECL committee that is currently working through its implementation plan. The Company is evaluating historical loanlevel data requirements and implementing a third-party vendor solution to assist in the application of the model. Thecompany is also evaluating documentation requirements, internal control structure, relevant data sources, and systemconfigurations. Currently, we are unable to estimate the impact the adoption this update will have on the consolidatedfinancial statements and disclosures. However, the Company expects the impact of the adoption will be significantlyinfluenced by the composition and characteristics of its loan portfolios along with economic conditions prevalent as of thedate of adoption.In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014‑9, (Topic 606) (“ASU 2014‑9”). ASU2014‑9 changes recognition of revenue from contracts with customers. The core principle of the guidance is that an entityshould recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the newguidance requires improved disclosures to enable users of financial statements to understand the nature, amount, timing, anduncertainty of revenue and cash flows arising from contracts with customers. The Company’s revenues come from interestincome and other sources, including loans and securities, that are outside the scope fo ASC 606. The Company’s services thatfall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Companysatisfies its obligation to the customer. ASU 2014‑09 was effective for the Company on January 1, 2018 and was adoptedusing the modified retrospective method. The adoption of ASU 2014‑09 did not have a material impact on the Company’sfinancial statements.In January 2016, the FASB issued ASU 2016‑01, Financial Instruments—Overall (Subtopic 825‑10): Recognitionand Measurement of Financial Assets and Financial Liabilities (“ASU 2016‑01”), which amended existing guidance thatrequires equity investments (except those accounted for under the equity method of accounting, or those that result inconsolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. It requirespublic business entities to use the exit price notion when measuring the fair value of financial instruments for disclosurepurposes. It requires separate presentation of financial assets and financial liabilities by measurement category and form offinancial asset (i.e., securities or loans and receivables). It eliminates the requirement for public business entities to disclosethe methods and significant assumptions used to estimate the fair value that is required to be disclosed for financialinstruments measured at amortized cost. The amendments in ASU 2016‑01 were effective for the Company beginningJanuary 1, 2018, and for interim periods within that annual period. The adoption of this guidance did not have a materialimpact on the consolidated financial statements. See Note 16 - Fair Value measurement disclosures.In January 2017, the FASB issued ASU 2017‑01, Business Combinations (Topic 805): Clarifying the Definition of aBusiness (“ASU 2017‑01”), which amended existing guidance to clarify the definition of a business with the objective ofadding guidance to assist entities with evaluation whether transactions should be accounted for as acquisition (or disposals)of assets or businesses. The Company adopted ASU 2017‑01 on January 1, 2018, which did not have a material impact on theconsolidated financial statements and disclosures.In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) ("ASU 2017-08"). ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at apremium. Prior to the issuance of this guidance, premiums were amortized as an adjustment of yield over the contractual lifeof the instrument. ASU 2017-08 requires premiums on purchased callable debt securities that have explicit, non-contingentcall features that are callable at fixed prices to be amortized to the earliest call date. There are no accounting changes forsecurities held at a discount. ASU 2017-08 became effective for the Company beginning January 1, 2019 and did not have asignificant impact on the financial statements and disclosures.In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements toAccounting for Hedging Activities ("ASU 2017-12"), which provided guidance to improve the financial reporting ofF-14 Table of Contentshedging relationships to better portray the economic results of an entity's risk management activities in its financialstatements. ASU 2017-12 was effective for the Company on January 1, 2019 and did not have a significant impact on thefinancial statements and disclosures.In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic220) ("ASU 2018-02"). ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Act fromaccumulated other comprehensive income into retained earnings. ASU 2018-02 was effective for the Company beginningJanuary 1, 2019 and did not have a significant impact on the financial statements and disclosures.In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying theTest for Goodwill Impairment ("ASU 2017-04"), which amended existing guidance to simplify the subsequent measurementof goodwill by eliminating Step 2 from the goodwill impairment test. The amendments require and entity to perform itsannual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount andrecognizing an impairment charge of the amount by which the carrying amount exceeds the reporting unit's fair value, not toexceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for the Company onJanuary 1, 2021, with earlier adoption permitted and is not expected to have a significant impact on the financial statementsand disclosures. NOTE 2 – ACQUISITIONS On August 18, 2017, the Company entered into an Asset Purchase Agreement (the "Mortgage Purchase Agreement")with EMC Holdings, LLC ("EMC") whereby the Company acquired assets related to the mortgage operations of theEnglewood Mortgage Company, a residential mortgage loan origination company. The Company accounted for theacquisition of EMC as a business combination. The purpose of the acquisition was to expand the Company's mortgagecapabilities and enhance the products and services offered within the markets the Company serves. Of the cash paid, $1.0 million was deemed purchase consideration and was allocated to the identifiable tangible andintangible assets acquired pursuant to the Mortgage Purchase Agreement. The tangible assets were not material to theconsolidated financial statements. The intangible assets primarily consist of a non-competition agreement in the amount of$0.6 million and acquired mortgage loans that were locked but not funded as of the acquisition date in the amount of$0.4 million. The non-competition agreement has an estimated economic life of two years, and is recorded in intangibleassets in the accompanying consolidated financial statements, net of amortization. Due to the value of the intangible assetsreceived in the purchase exceeding the consideration of $1.0 million, the Company recorded an immaterial gain on bargainpurchase. F-15 Table of ContentsNOTE 3 - INVESTMENT SECURITIESThe following presents the amortized cost and fair value of securities available‑for‑sale, with gross unrealized gainsand losses recognized in accumulated other comprehensive income as of December 31, 2018 and December 31, 2017 (inthousands): Gross Gross Amortized Unrealized Unrealized FairDecember 31, 2018 Cost Gains Losses ValueInvestment securities available-for-sale: U.S. Treasury debt $250 $ — $ — $250Government National Mortgage Association (“GNMA”)mortgage-backed securities – residential 35,591 8 (1,597) 34,002Federal National Mortgage Association (“FNMA”) mortgage-backed securities – residential 4,076 2 (208) 3,870Securities issued by U.S. government sponsored entities andagencies 4,525 — (223) 4,302Corporate collateralized mortgage obligations ("CMO") andmortgage-backed securities ("MBS") 1,281 1 (11) 1,271Small Business Investment Company 1,206 — — 1,206Total securities available-for-sale $46,929 $11 $(2,039) $44,901 Gross Gross Amortized Unrealized Unrealized FairDecember 31, 2017 Cost Gains Losses ValueInvestment securities available-for-sale: U.S. Treasury debt $250 $ — $(1) $249GNMA mortgage-backed securities – residential 42,001 27 (1,192) 40,836FNMA mortgage-backed securities – residential 4,530 13 (144) 4,399Securities issued by U.S. government sponsored entities andagencies 5,206 — (152) 5,054Corporate CMO and MBS 1,529 — (50) 1,479Small Business Investment Company 930 — — 930Equity mutual funds 750 — (47) 703Total securities available-for-sale $55,196 $40 $(1,586) $53,650 Net amortization of premiums and discounts related to mortgage securities during the years ended December 31,2018 and 2017 was $0.2 million and $0.4 million, which are included with interest income.In 2014 the Company began investing in a small business investment company ("SBIC") fund administered by theSmall Business Administration. During 2018 and 2017, the Company invested $0.3 million and $0.2 million in SBIC. TheCompany may invest up to an additional $1.8 million in SBIC through 2019.At December 31, 2018, the amortized cost and estimated fair value of available‑for‑sale securities, excluding SBIC(“Small Business Investment Company”) have contractual maturity dates shown in the table below (in thousands). Expectedmaturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with orwithout call or prepayment penalties. Securities not due at a single maturity date are shown separately. Amortized FairDecember 31, 2018 Cost ValueDue after one year through five years $250 $251Securities (agency and CMO) 45,473 43,444Total $45,723 $43,695 F-16 Table of ContentsAt December 31, 2018 and December 31, 2017, securities with carrying values totaling $5.4 million and$23.7 million, respectively, were pledged to secure various public deposits and credit facilities of the Company.At December 31, 2018 and December 31, 2017, there were no holdings of securities of any one issuer, other than theU.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.At December 31, 2018 and December 31, 2017, thirty-three securities and twenty‑eight securities were in anunrealized loss position, with unrealized losses totaling $2.0 million and $1.6 million, respectively. Twenty-six of thesecurities in an unrealized loss position at December 31, 2018 have been in a continuous unrealized loss position for morethan twelve months, the remaining securities in a loss position have been in a continuous unrealized loss position for lessthan 12 months. The unrealized loss positions were caused primarily by interest rate changes and market assumptions aboutprepayments of principal and interest on the underlying mortgages. Because the decline in market value is attributable tomarket conditions, not credit quality, and because the Company has the ability and intent to hold these investments until arecovery of fair value, which may be near or at maturity, the Company does not consider these investments to beother‑than‑temporarily impaired at December 31, 2018.The following table summarizes securities with unrealized losses at December 31, 2018 and December 31, 2017,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 UnrealizedDecember 31, 2018 Value Losses Value Losses Value LossesU.S. Treasury debt $ — $ — $ — $ — $ — $ —GNMA mortgage-backed securities – residential 201 — 32,696 (1,597) 32,897 (1,597)FNMA mortgage-backed securities – residential 436 (3) 3,215 (205) 3,651 (208)Securities issued by U.S. government sponsoredentities and agencies — — 4,302 (223) 4,302 (223)Corporate CMO and MBS 1,145 (9) 63 (2) 1,208 (11)Total $1,782 $(12) $40,276 $(2,027) $42,058 $(2,039) Less than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair UnrealizedDecember 31, 2017 Value Losses Value Losses Value LossesU.S. Treasury debt $ — $ — $249 $(1) $249 $(1)GNMA mortgage-backed securities – residential 11,621 (237) 27,480 (955) 39,101 (1,192)FNMA mortgage-backed securities – residential — — 3,591 (144) 3,591 (144)Securities issued by U.S. government sponsoredentities and agencies 677 (2) 4,377 (150) 5,054 (152)Corporate CMO and MBS — — 1,316 (50) 1,316 (50)Equity mutual funds — — 703 (47) 703 (47)Total $12,298 $(239) $37,716 $(1,347) $50,014 $(1,586) The Company did not sell any securities during the year ended December 31, 2018. The Company sold $58.6million of securities and realized $0.2 million of gains and realized $0.1 million of losses, from the sale of securities usingthe specific identification method for the year ended December 31, 2017. F-17 Table of ContentsNOTE 4 – CORRESPONDENT BANK STOCKThe following presents the Company's investments in correspondent bank stock, at cost, as of the dates noted (inthousands): December 31, 2018 2017FHLB Topeka $2,413 $1,480BBW 75 75Total $2,488 $1,555 NOTE 5 - LOANS AND THE ALLOWANCE FOR LOAN LOSSESThe following presents a summary of the Company’s loans as of the dates noted (in thousands): December 31, December 31, 2018 2017Cash, Securities and Other $114,165 $131,756Construction and Development 31,897 24,9141-4 Family Residential 350,852 282,014Non-Owner Occupied CRE 173,741 176,987Owner Occupied CRE 108,480 92,742Commercial and Industrial 113,660 104,284Total loans 892,795 812,697Deferred costs, net 1,171 992Allowance for loan losses (7,451) (7,287)Loans, net $886,515 $806,402 The following presents, by class, an aging analysis of the recorded investments (excluding accrued interestreceivable, deferred loan fees and deferred costs which are not material) in loans past due as of December 31, 2018 andDecember 31, 2017 (in thousands): 30-59 60-89 90 or Total Total Days Days More Days Loans RecordedDecember 31, 2018 Past Due Past Due Past Due Past Due Current InvestmentCash, Securities and Other $331 $ — $11,252 $11,583 $102,582 $114,165Construction and Development — — — — 31,897 31,8971-4 Family Residential — — 1,217 1,217 349,635 350,852Non-Owner Occupied CRE 567 — — 567 173,174 173,741Owner Occupied CRE — — — — 108,480 108,480Commercial and Industrial — — 1,735 1,735 111,925 113,660Total $898 $ — $14,204 $15,102 $877,693 $892,795 30-59 60-89 90 or Total Total Days Days More Days Loans RecordedDecember 31, 2017 Past Due Past Due Past Due Past Due Current InvestmentCash, Securities and Other $50 $99 $ — $149 $131,607 $131,756Construction and Development — — — — 24,914 24,9141-4 Family Residential 1,250 — 2,388 3,638 278,376 282,014Non-Owner Occupied CRE 750 — — 750 176,237 176,987Owner Occupied CRE — — — — 92,742 92,742Commercial and Industrial 1,614 — 1,835 3,449 100,835 104,284Total $3,664 $99 $4,223 $7,986 $804,711 $812,697 F-18 Table of ContentsAt December 31, 2018 and December 31, 2017, the Company had a 1‑4 family residential loan totaling $1.2 millionwhich is more than 90 days delinquent, accruing interest, and in the process of collection.Non‑Accrual Loans and Troubled Debt Restructurings (“TDR”)The following presents the recorded investment in non‑accrual loans by class as of the dates noted (in thousands): December 31, December 31, 2018 2017Non-accrual loans Cash, Securities and Other $11,252 $ —Construction and Development — —1-4 Family Residential — 1,171Non-Owner Occupied CRE — —Owner Occupied CRE — —Commercial and Industrial 1,735 1,835Total $12,987 $3,006 At December 31, 2018, the non-accrual loans listed above included two loans classified as a TDR with a recordedinvestment totaling $13.0 million. At December 31, 2017, the non‑accrual loans listed above included one loan classified asa TDR with a recorded investment totaling $1.8 million. Non‑accrual loans include both smaller balance homogeneous loansthat are collectively evaluated for impairment and individually classified impaired loans.The following presents a summary of the unpaid principal balance of loans classified as TDRs as of the dates noted(in thousands): December 31, December 31, 2018 2017Cash, Securities, and Other $11,252 $ —Commercial and Industrial 6,583 1,835Total $17,835 $1,835Allowance for loan associated with TDR (940) (722)Net recorded investment $16,895 $1,113 As of December 31, 2018 and December 31, 2017, the Company has not committed any additional funds to aborrower with a loan classified as a TDR.The Company modified two loans into a TDR during the year ended December 31, 2018. The Company modifiedone loan into a TDR during the year ended December 31, 2017.During the year ended December 31, 2018, one loan classified as Cash, Securities, and Other was not makingpayments in accordance with the original contractual terms. The loan was placed on non-accrual and classified as a TDR. Oneloan classified as Commercial and Industrial, which was accruing, was classified as a TDR at December 31, 2018. All loansclassified as TDRs were making payments in accordance with their modified terms during the year ended December 31, 2018.During the year ended December 31, 2017, one loan classified as Commercial and Industrial, which was classified as a TDRstill accruing was not making payments in accordance with the modified terms and was placed on non-accrual status.The modification of two loans in TDR performed during the year ended December 31, 2018 included an extensionof the maturity dates at the same rates as before that the Company would not have otherwise considered as a result of theBorrowers’ financial difficulties. The extensions ranged from 3 months to a year. The modification of the one loan in TDRperformed during the year ended December 31, 2017 included an extension of the maturity date at the same rate as beforethat the Company would not have otherwise considered as a result of the Borrower’s financial difficulties. The extension wasfor a period of one year. F-19 Table of ContentsTDRs are reviewed individually for impairment and are included in the Company’s specific reserves in theallowance for loan losses. If charged off, the amount of the charge off is included in the Company’s charge off factors, whichimpact the Company’s reserves on non‑impaired loans.The following presents the Company’s recorded investment in impaired loans as of the periods presented (inthousands): Recorded Recorded Allowance Unpaid Total Investment Investment for Contractual Average Interest Recorded With No With Loan Principal Recorded IncomeDecember 31, 2018 Investment Allowance Allowance Losses Balance Investment RecognizedCash, Securities, and Other 11,252 11,252 — — 11,252 4,506 —Commercial and Industrial 6,583 4,848 1,735 940 6,583 5,820 34Total $17,835 $16,100 $1,735 $940 $17,835 $10,326 $34 Recorded Recorded Allowance Unpaid Total Investment Investment for Contractual Average Interest Recorded With No With Loan Principal Recorded IncomeDecember 31, 2017 Investment Allowance Allowance Losses Balance Investment RecognizedCommercial and Industrial $1,835 $ — $1,835 $722 $1,835 $1,066 $ —Total $1,835 $ — $1,835 $722 $1,835 $1,066 $ — The recorded investment in loans in the previous tables, excludes accrued interest and deferred loan fees and costsdue to their immateriality. Interest income, if any, was recognized on the cash basis on non-accrual loans.Allowance for Loan LossesAllocation of a portion of the allowance for loan losses to one category of loans does not preclude its availability toabsorb losses in other categories. The following presents the activity in the Company’s allowance for loan losses by portfolioclass for the periods presented (in thousands): Cash, Construction 1-4 Non-Owner Owner Commercial Securities and Family Occupied Occupied and andOther Development Residential CRE CRE Industrial TotalChanges in allowance for loan losses for theyear ended December 31, 2018 Beginning balance $1,066 $202 $2,283 $1,433 $751 $1,552 $7,287Provision for (recovery of) credit losses (286) 30 269 (169) 38 298 180Charge-offs (16) — — — — — (16)Recoveries — — — — — — —Ending balance $764 $232 $2,552 $1,264 $789 $1,850 $7,451 Allowance for loan losses atDecember 31, 2018 allocated to loansevaluated for impairment: Individually $ — $ — $ — $ — $ — $940 $940Collectively 764 232 2,552 1,264 789 910 6,511Ending balance $764 $232 $2,552 $1,264 $789 $1,850 $7,451 Loans at December 31, 2018, evaluated forimpairment: Individually $11,252 $ — $ — $ — $ — $6,583 $17,835Collectively 102,913 31,897 350,852 173,741 108,480 107,077 874,960Ending balance $114,165 $31,897 $350,852 $173,741 $108,480 $113,660 $892,795 F-20 Table of Contents Cash, Construction 1-4 Non-Owner Owner Commercial Securities and Family Occupied Occupied and andOther Development Residential CRE CRE Industrial TotalChanges in allowance for loan losses for theyear ended December 31, 2017 Beginning balance $846 $301 $1,833 $1,153 $476 $1,869 $6,478Provision for (recovery of) credit losses 210 (99) 439 280 275 (317) 788Charge-offs — — — — — — —Recoveries 10 — 11 — — — 21Ending balance $1,066 $202 $2,283 $1,433 $751 $1,552 $7,287 Allowance for loan losses atDecember 31, 2017 allocated to loansevaluated for impairment: Individually $ — $ — $ — $ — $ — $722 $722Collectively 1,066 202 2,283 1,433 751 830 6,565Ending balance $1,066 $202 $2,283 $1,433 $751 $1,552 $7,287 Loans at December 31, 2017, evaluated forimpairment: Individually $ — $ — $ — $ — $ — $1,835 $1,835Collectively 131,756 24,914 282,014 176,987 92,742 102,449 810,862Ending balance $131,756 $24,914 $282,014 $176,987 $92,742 $104,284 $812,697 The Company categorizes loans into risk categories based on relevant information about the ability of the borrowersto service their debt such as: current financial information, historical payment experience, credit documentation, publicinformation, and current economic trends, among other factors. The Company analyzes loans individually by classifying theloans 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 thatrequire more than the usual amount of management attention. Adverse industry conditions, deteriorating financialconditions, 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 asagreed. The asset has potential weaknesses that may result in deteriorating repayment prospects if left uncorrected. Loans inthis risk grade are not considered adversely classified.Substandard—Substandard loans are considered “classified” and are inadequately protected by the current net worthand paying capacity of the obligor or by the collateral pledged, if any. Loans so classified have a well‑defined weakness orweaknesses that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the bank willsustain some loss if the deficiencies are not corrected. Loans in this category may be placed on non‑accrual status and mayindividually be evaluated for impairment if indicators of impairment exist.Doubtful—Loans graded Doubtful are considered “classified” and have all the weaknesses inherent in thoseclassified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basisof currently known facts, conditions and values, highly questionable and improbable. However, the amount of certainty ofeventual loss is not known because of specific pending factors.F-21 Table of ContentsLoans not meeting any of the three criteria above are considered to be pass‑rated loans. The following presents, byclass and by credit quality indicator, the recorded investment in the Company’s loans as of December 31, 2018 andDecember 31, 2017 (in thousands): Special December 31, 2018 Pass Mention Substandard TotalCash, Securities and Other $102,913 $ — $11,252 $114,165Construction and Development 31,897 — — 31,8971-4 Family Residential 349,635 — 1,217 350,852Non-Owner Occupied CRE 165,164 8,117 460 173,741Owner Occupied CRE 108,480 — — 108,480Commercial and Industrial 100,929 — 12,731 113,660Total $859,018 $8,117 $25,660 $892,795 Special December 31, 2017 Pass Mention Substandard TotalCash, Securities and Other $131,756 $ — $ — $131,756Construction and Development 23,756 1,158 — 24,9141-4 Family Residential 279,424 — 2,590 282,014Non-Owner Occupied CRE 174,794 — 2,193 176,987Owner Occupied CRE 92,742 — — 92,742Commercial and Industrial 93,624 114 10,546 104,284Total $796,096 $1,272 $15,329 $812,697 NOTE 6 – PREMISES AND EQUIPMENT, NETThe following presents a summary of the cost and accumulated depreciation of premises and equipment atDecember 31 (in thousands): 2018 2017Leasehold improvements, including artwork $10,026 $9,666Equipment and software 6,916 6,562Gross Premises and equipment 16,942 16,228Less accumulated depreciation (10,842) (9,451)Premises and equipment, net $6,100 $6,777 Depreciation expense for premises and equipment for the years ended December 31, 2018 and 2017 totaled$1.4 million and $1.7 million. The Company leases premises under non-cancelable operating leases. The following presents minimum leasepayments due pursuant to the leases as of December 31, 2018 for the years indicated (in thousands): Year Minimum Payment 2019 $3,5702020 3,3742021 2,8152022 2,6752023 2,358Thereafter 3,446 $18,238 The Company's operating lease agreements generally include renewal options for periods ranging from five to sevenyears. The minimum lease payments due during the option periods are not included above.F-22 Table of Contents Total rent expense for each the years ended December 31, 2018 and 2017 totaled $2.8 million each year and isincluded in occupancy and equipment expense in the accompanying consolidated statements of income. NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETSThe following presents the Company's goodwill, intangible assets and related accumulated amortization as ofDecember 31 (in thousands): 2018 2017Goodwill $24,811 $24,811Other intangibles $9,327 $9,327Less accumulated amortization on other intangibles (8,925) (8,094)Other intangible assets, net $402 $1,233 Amortization expense on definite-lived customer relationship and non-compete intangible assets for the years endedDecember 31, 2018 and 2017 was $0.8 million and $0.8 million. At October 31, 2018 and December 31, 2018, the Company's reporting unit had positive equity and the Companyelected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unitexceeded its carrying value including goodwill. The qualitative assessment indicated that it was more likely than not that thecarrying value of the reporting unit exceeded its fair value. Therefore, the Company proceeded to complete the two-stepimpairment test. 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 unitexceeds its fair value, we are required to perform the second step to the impairment test. Our step 1 goodwill impairment analysis as of October 31, 2018 and December 31, 2018, indicated that the Step 2analysis was unnecessary. The following presents the expected amortization expense on definite-lived intangible assets for the next two yearsrelated to the balance of definite-lived intangible assets existing at December 31, 2018 (in thousands): Year Expense 2019 $3512020 51Total $402 NOTE 8 - DEPOSITSThe following presents the Company’s interest bearing deposits at the dates noted (in thousands): December 31, December 31, 2018 2017Money market deposit accounts $489,506 $331,039Time deposits 178,743 210,292Negotiable order of withdrawal accounts 64,853 74,300Savings accounts 1,800 1,801Total interest bearing deposits $734,902 $617,432Aggregate time deposits of $250,000 or greater $83,550 $136,741 F-23 Table of ContentsOverdraft balances classified as loans totaled $0.3 million and $0.1 million at December 31, 2018 andDecember 31, 2017, respectively.The following presents the scheduled maturities of all time deposits for the next five years ending December 31 (inthousands): Year Ending Time Deposits 2019 $139,5072020 23,3322021 5,7622022 6,9652023 3,177Thereafter —Total $178,743 NOTE 9 - BORROWINGSFHLB Topeka BorrowingsThe Bank has executed a blanket pledge and security agreement with the FHLB Topeka that requires certain loansand securities be pledged as collateral for any outstanding borrowings under the agreement. The collateral pledged as ofDecember 31, 2018 and December 31, 2017 amounted to $475.4 million and $361.7 million, respectively. Based on thiscollateral and the Company’s holdings of FHLB Topeka stock, the Company was eligible to borrow an additional$305.0 million at December 31, 2018. Each advance is payable at its maturity date.The Company had the following borrowings from FHLB Topeka at the dates noted (in thousands): December 31, December 31, Maturity Date Rate % 2018 2017October 31, 2018 (repaid) 1.75 $ — 10,000August 2, 2019 2.65 5,000 8,563August 26, 2020 1.94 10,000 10,000Total $15,000 $28,563 As of December 31, 2018, the Bank had borrowing capacity associated with three unsecured federal funds lines ofcredit up to $10.0 million, $13.0 million, and $25.0 million. As of December 31, 2017, the Bank had borrowing capacityassociated with two unsecured federal funds lines of credit up to $13.0 million and $25.0 million. As of December 31, 2018and December 31, 2017, there were no amounts outstanding on any of the federal funds lines.The Company’s borrowing facilities included various financial and other covenants, including, but not limited to, arequirement that the Bank maintains regulatory capital that is deemed “well capitalized” by federal banking agencies (seeNote 20). As of December 31, 2018 and December 31, 2017, the Company was in compliance with the covenantrequirements.Subordinated Notes As of December 31, 2018 and 2017, subordinated notes (the "2016 Sub Notes") issued to various investors totaled$6.6 million. The 2016 Sub Notes accrue interest at a rate of 7.25% per annum until December 31, 2021, at which time therate will adjust each quarter to the then current 90 day London Interbank Offered Rate ("LIBOR") plus 587 basis points,mature on December 31, 2026, are redeemable at the option of the Company after January 1, 2022, and pay interest quarterly. F-24 Table of ContentsAt December 31, 2017, subordinated notes (the "2012 Sub Notes") issued to various investors totaled $6.9 million.The 2012 Sub Notes, accrued interest at a fixed rate of 8.0% per annum, matured in July 2020, and were redeemable at theoption of the Company after July 2015. Effective July 26, 2018, the Company redeemed all of its subordinated notes due 2020 for an aggregate redemptionprice of $6.9 million, including accrued and unpaid interest. The subordinated notes due 2020 were redeemed using theproceeds from the Company's recently completed initial public offering, which closed on July 23, 2018.For the years ended December 31, 2018 and 2017, the Company recorded $0.8 million and $1.0 million of interestexpense related to the 2016 Sub Notes and 2012 Sub Notes. The 2016 Sub Notes and 2012 Sub Notes are included in Tier 2capital under current regulatory guidelines and interpretations, subject to limitations. Promissory and Credit Note On July 31, 2014, the Company entered into an Amended and Restated Promissory Note (the "Promissory Note")and an Amended and Restated Revolving Credit Note (the "Credit Note") with a correspondent lending partner. ThePromissory Note and Credit Note are secured by stock of the Bank and bear interest at the 30 day LIBOR plus 4.0%. As ofDecember 31, 2018 and December 31, 2017, there were no amounts outstanding on either the Promissory Note or the CreditNote and the borrowing capacity associated with these facilities was $7.2 million. NOTE 10 – COMMITMENTS AND CONTINGENCIESThe Bank is party to credit‑related financial instruments with off‑balance sheet risk in the normal course of businessto meet the financing needs of its customers. These financial instruments include commitments to extend credit. Suchcommitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in theconsolidated balance sheets. Commitments may expire without being utilized. The Bank’s exposure to credit loss isrepresented by the contractual amount of these commitments, although material losses are not anticipated. The Bank followsthe 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 thedates noted (in thousands): December 31, 2018 December 31, 2017 Fixed Rate Variable Rate Fixed Rate Variable RateUnused lines of credit $33,571 $271,580 $42,971 $218,536Standby letters of credit $40 $23,508 $40 $15,532Commitments to make loans to sell $17,207 $ — $34,045 $ —Commitments to make loans $2,750 $19,762 $4,596 $20,572 Unused lines of credit are agreements to lend to a customer as long as there is no violation of any conditionestablished in the contract. Commitments generally have fixed expiration dates or other termination clauses and may requirepayment of a fee. Several of the commitments may expire without being drawn upon. Therefore, the total commitmentamounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessaryby the Bank, is based on management’s credit evaluation of the customer.Unused lines of credit under commercial lines of credit, revolving credit lines and overdraft protection agreementsare commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized andusually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Bank iscommitted.Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of acustomer 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 ofF-25 Table of Contentscredit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral supportingthose commitments if deemed necessary.Commitments to make loans to sell are agreements to sell a loan to an investor in the secondary market for which theinterest rate has been locked with the customer provided there is no violation of any condition within the contract with eitherparty. 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 customer provided there is no violation of any conditionwithin the contract. Commitments to make loans generally have fixed expiration dates or other termination clauses. Sincecommitments may expire without being extended, total commitment amounts may not necessarily represent cashrequirements.Litigation, Claims and SettlementsOn or about September 1, 2016, the Company terminated an associate. The Company filed legal action against theformer associate asserting causes of action against him in connection with his conduct while an employee and post-employment breach of certain surviving provisions of his employment agreement. The former employee then filed an actionagainst the Company alleging wrongful termination, failure to pay all wages upon termination, and failure to payreimbursement. On November 16, 2017, the parties reached a confidential global resolution of the disputes between them andthe action was dismissed, with prejudice. The amounts are reflected in other income within the consolidated statement ofincome for the year ended December 31, 2017.In 2015, a bank in Arizona brought suit against the Company, the Bank, and several individuals formerly employedby the plaintiff and subsequently employed by the Bank, arising from the Company's hiring of multiple former plaintiffemployees engaged in the mortgage lending area. The plaintiff and the Company entered into a confidential settlement withno admission of liability or wrongdoing, and filed a stipulation for the dismissal of the Company from the action, withprejudice, on June 14, 2017. The settlement amount is included within the professional services component of non-interestincome in the consolidated statements of income for the year ended December 31, 2017. The Company is, from time to time, involved in various legal actions arising in the normal course of business. Whilethe ultimate outcome of any such proceedings cannot be predicted with certainty, it is the opinion of management, based onadvice from legal counsel, that no proceedings exist, either individually or in the aggregate, which, if determined adverselyto the Company, would have a material effect on the Company’s consolidated financial statements. NOTE 11 – SHAREHOLDERS EQUITYCommon StockThe Company’s common stock has no par value and each holder of common stock is entitled to one vote for eachshare (though certain voting restrictions may exist on non‑vested restricted stock) held.During the year ended December 31, 2018 and 2017, the Company sold 67,242 and 186,791 shares of its commonstock through two Private Placement Memorandums (“PPM”) resulting in proceeds to the Company of $1.9 million and$5.3 million, respectively (net of issuance costs of $0.1 million and an immaterial amount, respectively).As described in Note 10—Commitments and Contingencies, the Company settled a legal claim and as a result of thesettlement, the Company received 8,580 shares of its common stock with an estimated fair value at the time of settlement of$0.2 million. As of December 31, 2017, the shares received as a result of the settlement are retired.On July 23, 2018, the Company completed its initial public offering of 1,921,775 shares of its common stock at aprice of $19.00 per share, which included 296,250 shares pursuant to the full exercise by the underwriters of their option topurchase additional shares of common stock from the Company, resulting in net proceeds of $32.5 million (net of issuancecosts of $4.4 million).F-26 Table of ContentsEffective July 26, 2018, the Company redeemed at par value all of its outstanding shares of preferred stock, whichconsisted of 8,559 shares of Series A preferred stock, 428 shares of Series B preferred stock, 11,881 shares of Series Cpreferred stock, and 41,000 shares of Series D preferred stock. The aggregate redemption amount for the preferred stock was$25.0 million. The preferred stock was redeemed using the proceeds from the Company's completed initial public offering,which closed on July 23, 2018.Certain of our common stock holders received Make Whole Rights pursuant to an Investor Agreement in connectionwith the conversion of Series D preferred stock into common stock and our private placement conducted from August 2017to February 2018, which entitled the holder of such Make Whole Rights to, among other things, receive additional shares ofour common stock (“Make Whole Shares”), subject to the satisfaction of the conditions of the Investor Agreements. As aresult, the Company issued 128,978 Make Whole Shares on September 10, 2018. The Company’s issuance of the MakeWhole Shares was exempt from the registration statement of the Securities Act pursuant to Section 4(a)(2) thereof.Restricted Stock AwardsIn 2017, the Company issued 105,264 shares of common stock (“Restricted Stock Awards”) with a value of $3.0million to the sole member of EMC Holdings, LLC (“EMC”), subject to forfeiture based on his continued employment withthe Company. Half of the common stock ($1.5 million or 52,632 shares) vests ratably over five-years as long as the solemember is employed with the Company. The remaining $1.5 million, or 52,632 shares, will be earned based on performanceof the mortgage division of the Company.As of December 31, 2018, the Restricted Stock Awards have a weighted-average grant date fair value of $28.50 pershare. During the year ended December 31, 2018 and December 31, 2017, the Company has recognized compensationexpense of $0.3 million and $0.1 million for the Restricted Stock Awards. As of December 31, 2018, the Company has $2.6million of unrecognized stock-based compensation expense related to the shares issued, which is expected to be recognizedover a weighted average period of three and three quarter years. Restricted Stock Awards of 10,526 vested during the yearended December 31, 2018.Stock‑Based Compensation PlansAs of December 31, 2018, there were a total of 697,138 shares available for issuance under the First WesternFinancial, Inc. 2016 Omnibus Incentive Plan (“the 2016 Plan”). As of December 31, 2018, if the 465,947 options outstandingunder the First Western 2008 Stock Incentive Plan (“the 2008 Plan”) are forfeited, cancelled or terminated with noconsideration paid to the Company, those amounts will be transferred to the 2016 Plan and increase the number of shareseligible to be granted under the 2016 Plan to a maximum of 1,163,085 shares.Stock OptionsThe Company did not grant any stock options during the year ended December 31, 2018 and 2017.During the year ended December 31, 2018 and 2017, the Company recognized stock‑based compensation expenseof $0.5 million and $0.8 million. As of December 31, 2018, the Company has $0.6 million of unrecognized stock‑basedcompensation expense related to stock options which are unvested. That cost is expected to be recognized over aweighted‑average period of approximately one and a quarter years.F-27 Table of ContentsThe following summarizes activity for nonqualified stock options for the year ended December 31, 2018: Weighted Weighted Average Number Average Remaining Aggregate of Exercise Contractual Intrinsic Options Price Term ValueOutstanding at beginning of year 592,714 $29.24 Granted — — Exercised — — Forfeited or expired (126,767) $29.91 Outstanding at end of period 465,947 $28.84 4.5 (a)Options fully vested / exercisable at December 31, 2018 402,872 $29.54 4.2 (a)(a)Nonqualified stock options outstanding at the end of the period and those fully vested / exercisable had immaterial aggregate intrinsic values.As of December 31, 2018 and December 31, 2017, there were 402,872 and 458,942 options, respectively, that wereexercisable. Exercise prices are between $20.00 and $40.00 per share, and the options are exercisable for a period of ten yearsfrom the original grant date and expire on various dates between 2022 and 2026.Share AwardsPursuant to the 2016 Plan, the Company can grant associates and non‑associate directors long‑term cash andstock‑based compensation. During the year ended December 31, 2018, the Company granted certain associates restrictedstock units which are earned over time or based on various performance measures and convert to common stock uponvesting, which are summarized here and expanded further below:The following summarizes the activity for the Time Vesting Units, the Financial Performance Units and the MarketPerformance Units for the year ended December 31, 2018: Time Financial Market Vesting Performance Performance Units Units UnitsOutstanding at beginning of year 179,990 20,840 21,467Granted 42,442 250 250Vested (23,282) - -Forfeited (14,781) (5,158) (4,459)Outstanding at end of period 184,369 15,932 17,258 During the year ended December 31, 2018, the Company issued 16,969 shares of common stock upon the settlementof Time Vesting Units. The remaining 6,313 shares were surrendered with a combined market value at the dates of settlementof $0.2 million to cover employee withholding taxes.Time Vesting UnitsThe Time Vesting Units are granted to full‑time associates and board members at the date approved by theCompany’s board of directors. The Company granted Time Vesting Units of 37,942 with a five‑year service period in 2018and vest in equal installments of 50% on the third and fifth anniversaries and the remaining 4,500 Time Vesting Unitsgranted in 2018 require a four year service period and vest in equal installments of 50% on the second and fourthanniversaries of the grant date, assuming continuous employment through the scheduled vesting dates. The Time VestingUnits granted in 2018 have a weighted‑average grant‑date fair value of $21.33 per unit. During the years ended December 31,2018 and December 31, 2017, the Company recognized compensation expense of $1.0 million and $0.4 million for the TimeVesting Units. As of December 31, 2018, there was $3.9 million of unrecognized compensationF-28 Table of Contentsexpense related to the Time Vesting Units, which is expected to be recognized over a weighted‑average period of two and ahalf years.Financial Performance UnitsFinancial Performance Units were granted to certain key associates and are earned based on the Company achievingvarious financial performance metrics beginning on the grant date and ending on December 31, 2020. If the Companyachieves the financial metrics, which include various thresholds from 0% up to 150%, then the Financial Performance Unitswill have a subsequent two year service period vesting requirement ending on December 31, 2021. There were 250 FinancialPerformance Units granted during the year ended December 31, 2018 and have a weighted-average grant date fair value of$21.00 per unit. As of December 31, 2018, the Company is accruing at the maximum threshold for 50% of the awards and thethreshold for the remainder. The maximum shares that can be issued at 150% as of December 31, 2018 was 23,898 shares.During the years ended December 31, 2018 and December 31, 2017, the Company recognized $0.1 million each year ofcompensation expense for the Financial Performance Units. As of December 31, 2018, there was $0.3 million of unrecognizedcompensation expense related to the Financial Performance Units which is expected to be recognized over aweighted‑average period of three years.Market Performance UnitsMarket Performance Units were granted to certain key associates and are earned based on growth in the value of theCompany’s common stock, and were dependent on the Company completing an initial public offering of stock during adefined period of time. If the Company’s common stock is trading at or above certain prices, over a performance periodending on June 30, 2020, the Market Performance Units will be determined to be earned and vest following the completionof a subsequent service period ending on June 30, 2022.On July 23, 2018, the Company completed its initial public offering and the Market Performance Units performancecondition was met. Subsequent to the performance condition there is also a market condition as a vesting requirement for theMarket Performance Units which affects the determination of the grant date fair value. The Company estimated the grant datefair value using various valuation assumptions. During the year ended December 31, 2018, the Company recognized animmaterial amount of compensation expense for the Market Performance Units. As of December 31, 2018, there was animmaterial amount of unrecognized compensation expense related to the Market Performance Units which is expected to berecognized over a weighted‑average period of three and a half years.F-29 Table of ContentsNOTE 12 - EARNINGS PER COMMON SHAREThe table below presents the calculation of basic and diluted earnings per common share for the periods indicated(amounts in thousands, except share and per share amounts): Year Ended December 31, 2018 2017Earnings (loss) per common share - Basic Numerator: Net income $5,647 $2,023Dividends on preferred stock (1,378) (2,291)Net income (loss) available for common shareholders $4,269 $(268) Denominator: Basic weighted average shares 6,712,754 5,586,620Earnings (loss) per common share - basic $0.64 $(0.05) Earnings (loss) per common share - Diluted Numerator: Net income $5,647 $2,023Dividends on preferred stock (1,378) (2,291)Net income (loss) available for common shareholders $4,269 $(268) Denominator: Basic weighted average shares 6,712,754 5,586,620Diluted effect of common stock equivalents: Stock options 15,645 —Time Vesting Units 11,131 —Financial Performance Units 4,879 —Market Performance Units 7,217 —Restricted Stock Awards 2,632 —Total diluted effect of common stock equivalents 41,504 —Diluted weighted average shares 6,754,258 5,586,620Earnings (loss) per common share - diluted $0.63 $(0.05) Diluted earnings per share was computed without consideration to potentially dilutive instruments as their inclusionwould have been anti‑dilutive. For the period ended December 31, 2018 and 2017, potentially dilutive securities excludedfrom the diluted loss per share calculation are as follows: For the Period EndedDecember 31, 2018 2017Stock options 339,199 592,714Convertible Preferred D shares 75,850 151,700Time Vesting Units 88,333 179,990Financial Performance Units 8,069 20,840Market Performance Units — 21,467Restricted Stock Awards 34,642 105,264Maximum number of shares issuable under the Make Whole Right — 95,356Total potentially dilutive securities 546,093 1,167,331 F-30 Table of ContentsNOTE 13 - INCOME TAXESThe components of the Company's income tax (benefit) expense as of December 31 (in thousands): 2018 2017Current: Federal $(118) $140State and local 87 173Total current tax (benefit) expense (31) 313Deferred: Federal $1,567 $1,902Net deferred tax asset remeasurement — 1,179State and local 239 (410)Total deferred taxes 1,806 2,671Income tax expense $1,775 $2,984 On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act (the "2017 Tax Reform") wasenacted. The 2017 Tax Reform significantly revised the U.S. corporate income tax code by, among other things, lowering theU.S. corporate tax rate from 35% to 21% effective January 1, 2018. GAAP requires that the impact of tax legislation berecognized in the period in which the law was enacted. As a result of the 2017 Tax Reform, the Company recorded a taxexpense of $1.2 million due to a remeasurement of deferred tax assets and liabilities. The following is a reconciliation of income taxes reflected on the statements of income for the years endedDecember 31 with income tax expense computed by applying the United States federal income tax rate of 21% and 35%,respectively to income before income taxes (in thousands): 2018 2017 Income tax expense computed at 21% and 35% statutory rate, respectively $1,558 $1,753Statutory rate change from 35% to 21% — 1,179Differences: Permanent differences (89) (114)State taxes, net of federal expense 258 166Other, net 48 —Income tax expense $1,775 $2,984 F-31 Table of ContentsThe following were the principal components of the Company's deferred tax items as of December 31 (in thousands): 2018 2017Deferred tax assets: Net operating loss carryforwards $995 $2,758Allowance for loan losses 1,921 1,911Deferred rent 960 957Stock-based compensation 1,277 1,266Allowance for losses on other real estate owned 461 469Other intangible assets 747 946Unrealized losses on securities 530 405Other 206 -Total deferred tax assets 7,097 8,712Deferred tax liabilities: Goodwill $(1,772) $(1,683)Depreciation (980) (998)Other (39) (44)Total deferred tax liabilities (2,791) (2,725)Net deferred tax asset $4,306 $5,987 The net operating loss ("NOL") carryforwards expire in the years 2028 through 2033. As of December 31, 2018, theCompany has $0.8 million and $0.2 million of California and Colorado NOLs available for utilization. In general, acorporation's ability to utilize its NOL carryforwards may be substantially limited due to ownership changes that haveoccurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the"Code"), as well as similar state provisions. These ownership changes may limit the amount of NOL carryforwards that can beutilized annually to offset future taxable income and tax. In general, an "ownership change," as defined by Section 382 of theCode, results from a transaction or series of transactions over a three-year period resulting in an ownership change of morethan 50 percent of the capital (as defined) of a company by certain stockholders or public groups.The Company identified no material uncertain tax positions for which it is reasonably possible the total amount ofunrecognized tax benefits will significantly increase or decrease within 12 months. The Company and its subsidiaries file taxreturns for the United States and for multiple states and localities. The United States federal income tax returns of theCompany are eligible to be examined for the years 2015 and forward. There are no federal or state tax examinations currentlyin progress. NOTE 14 – EMPLOYEE BENEFIT PLANSThe Company sponsors a 401(k) Plan, which is a defined contribution plan, in which substantially all associates areeligible to participate in and associates may contribute up to 100% of their compensation subject to certain limits based onfederal tax laws. The Company may elect to make matching contributions as defined by the plan. For the years endedDecember 31, 2018 and 2017, the Company expensed matching contributions to the plan totaling $0.6 million each year.The Company did not pay any expenses attributable to the plan during the years ended December 31, 2018 and 2017.NOTE 15 – RELATED‑PARTY TRANSACTIONSThe Company granted loans to principal officers and directors and their affiliates, all of whom are deemed relatedparties. At December 31, 2018 and December 31, 2017, there were no delinquent or non‑performing loans to any officerF-32 Table of Contentsor director of the Company. The following presents a summary of related‑party loan activity as of the dates noted(in thousands): December 31, 2018 December 31, 2017Balance, beginning of year $14,077 $10,268Funded loans 1,466 8,119Payments collected (9,386) (4,310)Changes in related parties (3,498) —Balance, end of year $2,659 $14,077 Deposits from related parties held by the Bank at December 31, 2018 and December 31, 2017 totaled $36.7 millionand $53.1 million, respectively.The Company leases office space from an entity controlled by one of the Company’s board members. During theyear ended December 31, 2018 and 2017, the Company incurred $0.1 million each year, of expense related to this lease.The Company earned trust and investment management fees of $0.1 million from related parties each year duringthe years ended December 31, 2018 and 2017. Assets under management for those related parties totaled $89.3 million and$74.8 million at December 31, 2018 and 2017, respectively.Effective July 23, 2018, the Company redeemed its subordinated notes due 2020. A director of the Company was asubscription holder of such notes. Upon redemption, the Company incurred a principal and interest payment of $0.1 million.The Company had a note receivable from a former executive officer of $2.1 million and as of December 31, 2018,the former executive officer is no longer a related party. The note receivable from the former executive officer was reclassifiedfrom Promissory notes from related parties to the Loans, net line item on the consolidated balance sheet, during the yearended December 31, 2018.The Company had a note receivable from an executive officer and former executive officer totaling $5.8 million, inthe aggregate, as of December 31, 2017. These amounts are included in the promissory notes from related parties on theaccompanying consolidated balance sheet as of December 31, 2017. The amounts paid for the year ended December 31, 2018are included in the payments collected in the table above. NOTE 16 - FAIR VALUEFair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in theprincipal or most advantageous market for the asset or liability in an orderly transaction between market participants on themeasurement 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 toaccess 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 byobservable market data. Level 3:Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that marketparticipants would use in pricing an asset or liability. There were no transfers between levels during 2018 or 2017. The Company used the following methods andsignificant assumptions to estimate fair value:F-33 Table of ContentsInvestment 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 similarsecurities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values arecalculated using discounted cash flows or other market indicators (Level 3).Interest Rate Locks and Forward Delivery Commitments: Fair values of these mortgage derivatives are estimatedbased on changes in mortgage interest rates from the date the commitment related to the loan is locked. The fair valueestimate is based on valuation models using market data from secondary market loan sales and direct contacts with thirdparty investors as of the measurement date (Level 3).Derivative instruments are carried at fair value in the Company’s financial statements. Changes in the fair value of aderivative instrument are accounted for within the consolidated statements of income.The following presents assets measured on a recurring basis at December 31, 2018 and December 31, 2017 (inthousands): Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs ReportedDecember 31, 2018 (Level 1) (Level 2) (Level 3) BalanceInvestment securities available-for-sale: U.S. Treasury debt $250 $ — $ — $250GNMA mortgage-backed securities – residential — 34,002 — 34,002FNMA mortgage-backed securities – residential — 3,870 — 3,870Securities issued by U.S. government sponsored entitiesand agencies — 4,302 — 4,302 Corporate CMO and MBS — 1,271 — 1,271 SBIC — 1,206 — 1,206Total securities available-for-sale $250 $44,651 $ — $44,901Equity securities not available-for-sale $693 $ — $ — $693Interest rate lock and forward delivery commitments $ — $890 $ — $890 Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs ReportedDecember 31, 2017 (Level 1) (Level 2) (Level 3) BalanceInvestment securities available-for-sale: U.S. Treasury debt $249 $ — $ — $249GNMA mortgage-backed securities – residential — 40,836 — 40,836FNMA mortgage-backed securities – residential — 4,399 — 4,399Securities issued by U.S. government sponsored entitiesand agencies — 5,054 — 5,054 Corporate CMO and MBS — 1,479 — 1,479 SBIC — 930 — 930 Equity mutual fund 703 — — 703Total securities available-for-sale $952 $52,698 $ — $53,650Interest rate lock and forward delivery commitments $ — $665 $ — $665 Mutual funds and U.S. Treasury debt are reported at fair value utilizing Level 1 inputs. The remaining portfolio ofsecurities are reported at fair value with Level 2 inputs provided by a pricing service. As of December 31, 2018 andDecember 31, 2017, the majority of the securities had credit support provided by the Federal Home Loan MortgageF-34 Table of ContentsCorporation, GNMA, the Federal National Mortgage Association or the Small Business Administration. Factors used to valuethe securities by the pricing service include: benchmark yields, reported trades, interest spreads, prepayments, and othermarket research. In addition, ratings and collateral quality are considered.Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair valueless costs to sell when acquired, establishing a new cost basis. They are subsequently accounted for at lower of cost or fairvalue less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no lessfrequently than on an annual basis. Appraisals may utilize a single valuation approach or a combination of approachesincluding comparable sales and the income approach. Adjustments are routinely made in the appraisal process by theindependent appraisers to adjust for differences between comparable sales and income data available. Such adjustments canbe significant and typically result in Level 3 classifications of the inputs for determining fair value. Other real estate owned isevaluated monthly for additional impairment and adjusted accordingly.Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses isgenerally based on recent appraisals. These appraisals may utilize a single valuation approach or a combination ofapproaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process bythe independent appraisers to adjust for differences between the comparable sales and income data available. Suchadjustments can be significant and typically result in Level 3 classifications of the inputs for determining fair value. Impairedloans are evaluated monthly for additional impairment and adjusted accordingly.Appraisals for both collateral‑dependent impaired loans and other real estate owned are performed by certifiedgeneral appraisers (for commercial properties) or certified residential appraisers (for residential properties) whosequalifications and licenses have been reviewed and verified by the Company. Once received, the Company reviews theassumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison withindependent data sources such as recent market data or industry‑wide statistics.The following presents assets measured on a nonrecurring basis as of December 31, 2018 and December 31, 2017 (inthousands): Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs ReportedDecember 31, 2018 (Level 1) (Level 2) (Level 3) BalanceOther real estate owned: Commercial properties $ — $ — $658 $658Total other real estate owned $ — $ — $658 $658 Total impaired loans: Commercial and industrial — — 795 795Total impaired loans $ — $ — $795 $795 F-35 Table of Contents Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs ReportedDecember 31, 2017 (Level 1) (Level 2) (Level 3) BalanceOther real estate owned: Commercial properties $ — $ — $658 $658Total other real estate owned $ — $ — $658 $658 Total impaired loans: Commercial and industrial $ — $ — $1,113 $1,113Total impaired loans $ — $ — $1,113 $1,113 The sales comparison approach was utilized for estimating the fair value of non‑recurring assets.At December 31, 2018, other real estate owned remained unchanged from December 31, 2017. As ofDecember 31, 2017, other real estate owned at fair value had a carrying amount of $0.7 million, which is the cost basis of$2.4 million net of a valuation allowance of $1.7 million.At December 31, 2018, total impaired loans at the fair value of the collateral for collateral dependent loans hadcarrying values of $1.7 million with valuation allowances of $0.9 million and were classified as Level 3. As ofDecember 31, 2017, impaired loans measured for impairment using the fair value of the collateral for collateral dependentloans had carrying values of $1.8 million with valuation allowances of $0.7 million and were classified as Level 3. Impairedloans valued using a discounted cash flow analyses were not deemed to be at fair value at December 31, 2018 andDecember 31, 2017.Impaired loans accounted for provisions for loan losses of $0.2 million and $0.7 million for the years endedDecember 31, 2018 and December 31, 2017.For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring, the significant unobservableinputs used in the fair value measurements were as follows (in thousands): Quantitative Information about Level 3 Fair Value Measurements at December 31, 2018 Valuation Significant Range Fair Value Technique Unobservable Input (WeightedAverage)Other real estate owned: Commercial properties $658 Appraisal Value Discount 50% (50%) Commission and Cost toSell 1% - 10% (7%)Total impaired loans: Commercial and industrial $795 Discounted CashFlow Discount Rate 9% (9%) Quantitative Information about Level 3 Fair Value Measurements at December 31, 2017 Valuation Significant Range Fair Value Technique Unobservable Input (WeightedAverage)Other real estate owned: Commercial properties $658 Appraisal Value Discount 50% (50%) Commission and Cost toSell 1% - 10% (7%)Total impaired loans: Commercial and industrial $1,113 Discounted CashFlow Discount Rate 9% (9%) F-36 Table of ContentsThe following presents carrying amounts and estimated fair values for financial instruments as ofDecember 31, 2018 and December 31, 2017 (in thousands): Carrying Fair Value Measurements Using:December 31, 2018 Amount Level 1 Level 2 Level 3Assets: Cash and cash equivalents $73,357 $73,357 $ — $ —Securities available-for-sale 44,901 250 44,651 —Loans, net 886,515 — — 868,828Mortgage loans held for sale 14,832 — 14,832 —Accrued interest receivable 2,844 — 2,844 —Other assets 693 693 — —Liabilities: Deposits $937,758 $ — $940,039 $ —Borrowings: FHLB Topeka Borrowings – fixed rate 15,000 — 14,833 —2016 Subordinated notes – fixed-to-floating rate 6,560 — — 6,434Accrued interest payable 231 — 231 — Carrying Fair Value Measurements Using:December 31, 2017 Amount Level 1 Level 2 Level 3Assets: Cash and cash equivalents $9,502 $9,502 $ — $ —Securities available-for-sale 53,650 952 52,698 —Loans, net 806,402 — — 822,392Mortgage loans held for sale 22,940 — 22,940 —Correspondent bank stock 1,555 N/A N/A N/AAccrued interest receivable 2,421 — 2,421 —Promissory notes, net 5,792 — — 5,792Liabilities: Deposits $816,117 $ — $821,059 $ —Borrowings: FHLB Topeka Borrowings – fixed rate 28,563 — 29,108 —2016 Subordinated notes – fixed-to-floating rate 6,560 — — 6,8932012 Subordinated notes – fixed rate 6,875 — — 7,129Accrued interest payable 197 — 197 — The fair value estimates presented and discussed above are based on pertinent information available to managementas of the dates specified. The estimated fair value amounts are based on the exit price notion set forth by ASU 2016‑01effective January 1, 2018 on a prospective basis. The estimated fair values carried at cost at December 31, 2017 were basedon an entry price notion. Although management is not aware of any factors that would significantly affect the estimated fairvalues, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements sincethe 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 restrictedcash approximate fair values as maturities are less than 90 days and balances are generally in accounts bearing current marketinterest rates. Loans, net: The fair values for all fixed-rate and variable-rate performing loans were estimated by discounting theprojected cash flows of such loans at December 31, 2018 and 2017. Principal and interest cash flows were projected based onthe contractual terms of the loans, including maturity, contractual amortization and adjustments for prepaymentsF-37 Table of Contentsand expected losses, where appropriate. A discount rate was developed based on the relative risk of the cash flows, takinginto account the loan type, maturity and a required return on capital. Mortgage Loans Held for Sale: The fair value of mortgage loans held for sale is estimated based upon bindingcontracts and quotes from third party investors resulting in a Level 2 classification. Correspondent Bank Stock: The fair value of FHLB stock and Bankers' Bank of the West stock due to restrictionsplaced on their transferability is not readily determinable. Accrued Interest Receivable and Payable: The carrying amounts of accrued interest approximate fair value due totheir short-term nature. Deposits: The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings,and certain types of money market accounts) are, by definition, equal to the amounts payable on demand at the reportingdate (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificatesof deposit approximate their fair values at the reporting dates. Fair values for fixed-rate certificates of deposit are estimatedusing a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule ofaggregated expected monthly maturities on time deposits.Borrowings: Variable Rate Borrowings: The carrying amounts of borrowings with variable rates approximate their fair valuessince the interest rates change to reflect current market borrowing rates for similar instruments and borrowers with similarcredit ratings. Fixed Rate Borrowings: Borrowings with fixed rates are valued using inputs such as discounted cash flows andcurrent interest rates for similar instruments and borrowers with similar credit ratings. NOTE 17 - SEGMENT REPORTINGThe Company’s reportable segments consist of Wealth Management, Capital Management, and Mortgage. The chiefoperating decision maker (“CODM”) is the Chief Executive Officer. The measure of profit or loss used by the CODM toidentify and measure the Company’s reportable segments is income before income tax.The Wealth Management segment consists of operations relative to the Company’s fully integrated wealthmanagement products and services. Services provided include deposit, loan, insurance, and trust and investmentmanagement advisory products and services.kThe Capital Management segment consists of operations relative to the Company’s institutional investmentmanagement services over proprietary fixed income, high yield, and equity strategies, including the advisor of three owned,managed, and rated mutual funds. Capital management products and services are financial in nature for which revenues arebased on a percentage of assets under management or paid premiums.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 ofmortgage loans to third parties.F-38 Table of ContentsThe tables below present the financial information for each segment that is specifically identifiable or based onallocations using internal methods for the years ended December 31, 2018 and 2017 (in thousands):Year Ended December 31, 2018 WealthManagement CapitalManagement Mortgage ConsolidatedIncome Statement Total interest income $38,796 $ — $ — $38,796Total interest expense 8,172 — — 8,172Provision for loan losses 180 — — 180Net-interest income 30,444 — — 30,444Non-interest income 19,196 3,350 4,627 27,173Total income 49,640 3,350 4,627 57,617Depreciation and amortization expense 1,283 524 415 2,222All other non-interest expense 38,955 3,564 5,454 47,973Income before income tax $9,402 $(738) $(1,242) $7,422 Goodwill $15,994 $8,817 $ — $24,811Total assets $1,059,557 $9,935 $14,832 $1,084,324 Year Ended December 31, 2017 WealthManagement CapitalManagement Mortgage ConsolidatedIncome Statement Total interest income $33,337 $ — $ — $33,337Total interest expense 5,761 — — 5,761Provision for loan losses 788 — — 788Net-interest income 26,788 — — 26,788Non-interest income 18,901 4,993 3,819 27,713Total income 45,689 4,993 3,819 54,501Depreciation and amortization expense 2,339 108 — 2,447All other non-interest expense 37,058 5,759 4,230 47,047Income before income tax $6,292 $(874) $(411) $5,007 Goodwill $15,994 $8,817 $ — $24,811Total assets $934,719 $12,000 $22,940 $969,659 F-39 Table of ContentsNOTE 18 – CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANYThe tables below present condensed financial statements pertaining only to FWFI (in thousands). Investments insubsidiaries are stated using the equity method of accounting. December 31, Condensed Balance Sheets 2018 2017ASSETS Cash and cash equivalents: $9,669 $6,935Investment in subsidiaries 110,675 103,457Promissory notes, net of discount - 5,792Loans, net 2,091 -Other assets 1,081 2,361Total assets $123,516 $118,545LIABILITIES Borrowings: Subordinated Notes $6,560 $13,435Other liabilities 81 3,264Total liabilities 6,641 16,699SHAREHOLDERS’ EQUITY Total shareholders’ equity 116,875 101,846Total liabilities and shareholders’ equity $123,516 $118,545 Year Ended December 31, Condensed Statements of Income 2018 2017Income Interest income $178 $423Total income 178 423Expense Interest expense 791 1,235Non-interest expense 173 203Total expense 964 1,438Loss Before Income Tax and Equity in Undistributed Income of Subsidiaries (786) (1,015)Income Tax Benefit 101 1,492(Loss) Income Before Equity in Undistributed Income of Subsidiaries (685) 477Equity in Undistributed Income to Subsidiaries 6,332 1,546Net income $5,647 $2,023 F-40 Table of Contents Year Ended December 31, Condensed Statements of Cash Flows 2018 2017Cash flows from operating activities Net income $5,647 $2,023Adjustments: Deferred income tax expense 911 1,439Stock-based compensation 1,857 1,298Gain on legal settlement — (244)Accretion of discounts on convertible subordinated debentures and promissory notes,net — (18)Depreciation — (62)Loss on sale of fixed assets — 104Undistributed equity in subsidiaries (6,332) (1,546)Change in other assets 369 (282)Change in other liabilities (3,183) 4,635Net cash provided by operating activities (731) 7,347Cash flows from investing activities Payments received on promissory notes from related parties 3,701 —Investment in subsidiaries (1,284) (10,500)Net cash used in investing activities 2,417 (10,500)Cash flows from financing activities Proceeds from issuance of Subordinated Notes — 285Payment on redemption of Subordinated Notes (6,875) —Proceeds from issuance of common stock, net 34,450 5,255Redemption of preferred stock Series A-C (20,783) —Redemption of convertible preferred stock Series D (4,054) —Redemption costs (131) —Proceeds from the issuance of stock options — 6Settlement of restricted stock (181) —Payments on Credit note — (2,736)Dividends paid on preferred stock (1,378) (2,291)Net cash provided by financing activities 1,048 519 Net change in cash and cash equivalents 2,734 (2,634)Cash and cash equivalents, beginning of year 6,935 9,569Cash and cash equivalents, end of year $9,669 $6,935 Supplemental noncash disclosures: Reclass of promissory note to loans $2,091 $ —Expiration of convertible subordinated debentures $ — $4,749 F-41 Table of ContentsNOTE 19 - SUPPLEMENTAL FINANCIAL DATAOther non‑interest expense as shown in the consolidated statements of income is detailed in the following scheduleto the extent the components exceed one percent of the aggregate of total interest income and other income (in thousands). Year Ended December 31, Other non-interest expense 2018 2017Corporate development and related $1,249 $1,384Loan and deposit related 717 645Office supplies and deliveries 209 250Other 196 244Total Other non-interest expense $2,371 $2,523 NOTE 20 - REGULATORY CAPITAL MATTERSThe Bank is subject to various regulatory capital adequacy requirements administered by federal banking agencies.Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actionsby 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, theBank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certainoff‑balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification isalso subject to qualitative judgments by the regulators regarding components, risk weightings and other factors. The finalrules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) becameeffective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over amulti‑year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on available‑for‑sale securities isnot included in computing regulatory capital.Prompt corrective action regulations for the Bank provide five classifications: well capitalized, adequatelycapitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are notused to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokereddeposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plansare required.The standard ratios established by the Bank’s primary regulators to measure capital require the Bank to maintainminimum amounts and ratios, set forth in the following table. These ratios are common equity Tier 1 capital (“CET 1”), Tier 1capital and total capital (as defined in the regulations) to risk‑weighted assets (as defined), and Tier 1 capital (as defined) toaverage assets (as defined).Actual capital ratios of the Bank, along with the applicable regulatory capital requirements as ofDecember 31, 2018, which were calculated in accordance with the requirements of Basel III, became effective January 1,2015. The final rules of Basel III also established a “capital conservation buffer” of 2.5% above new regulatory minimumcapital ratios, and when fully effective in 2019, will result in the following minimum ratios: (i) a CET 1 ratio of 7.0%; (ii) aTier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement beganphasing in, in January 2016 at 0.625% of risk‑weighted assets and will increase each year until fully implemented inJanuary 2019. Banks are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionarybonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligibleretained income that can be utilized for such activities. At December 31, 2018, required ratios including the capitalconservation buffer were (i) CET 1 of 6.375%; (ii) a Tier 1 capital ratio of 7.875%; and (iii) a total capital ratio of 9.875%.As of December 31, 2018, the most recent filings with the Federal Deposit Insurance Corporation (“FDIC”)categorized the Bank as well capitalized under the regulatory guidelines. To be categorized as well capitalized, an institutionmust maintain minimum CET 1 risk‑based, Tier 1 risk‑based, total risk‑based, and Tier 1 leverage ratios as set forth in thefollowing table. Management believes there are no conditions or events since December 31, 2018 that haveF-42 Table of Contentschanged the categorization of the Bank as well capitalized. Management believes the Bank met all capital adequacyrequirements to which it is subject as of December 31, 2018 and December 31, 2017.The following presents the actual and required capital amounts and ratios as of December 31, 2018 andDecember 31, 2017 (in thousands): To be Well Capitalized Under Prompt Required for Capital Corrective Action Actual Adequacy Purposes Regulations December 31, 2018 Amount Ratio Amount Ratio Amount Ratio Common Equity Tier 1(CET1) to risk-weightedassets Bank $87,291 10.55% $37,240 4.5% $53,791 6.5%Consolidated 94,335 11.35 N/A N/A N/A N/A Tier 1 capital to risk-weighted assets Bank 87,291 10.55 49,653 6.0 66,204 8.0 Consolidated 94,335 11.35 N/A N/A N/A N/A Total capital to risk-weighted assets Bank 94,906 11.47 66,204 8.0 82,755 10.0 Consolidated 108,510 13.06 N/A N/A N/A N/A Tier 1 capital to average assets Bank 87,291 8.63 40,459 4.0 50,574 5.0 Consolidated 94,335 9.28 N/A N/A N/A N/A To be Well Capitalized Under Prompt Required for Capital Corrective Action Actual Adequacy Purposes Regulations December 31, 2017 Amount Ratio Amount Ratio Amount Ratio Common Equity Tier 1(CET1) to risk-weightedassets Bank $77,879 9.81% $35,719 4.5% $51,595 6.5%Consolidated 52,703 6.56 N/A N/A N/A N/A Tier 1 capital to risk-weighted assets Bank 77,879 9.81 47,626 6.0 63,501 8.0 Consolidated 70,573 8.79 N/A N/A N/A N/A Total capital to risk-weighted assets Bank 85,304 10.75 63,501 8.0 79,377 10.0 Consolidated 93,903 11.70 N/A N/A N/A N/A Tier 1 capital to average assets Bank 77,879 8.27 37,659 4.0 47,073 5.0 Consolidated 70,573 7.41 N/A N/A N/A N/A ***** F-43 Table of Contents Item 9: Changes in and Disagreements With Accountants on Accounting and Financial DisclosureNone. Item 9A: Controls and ProceduresEvaluation of Internal Control over Financial ReportingThis Annual Report on Form 10-K does not include a report of management’s assessment regarding internal controlover financial reporting or an attestation report of the Company’s independent registered public accounting firm due to atransition period established by rules of the Securities and Exchange Commission for newly public companies.The Company’s management, including our Chairman, Chief Executive Officer and President and our ChiefFinancial Officer and Treasurer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as of the end of the period covered by this report. Based onsuch evaluation, our Chairman, Chief Executive Officer and President and our Chief Financial Officer and Treasurer haveconcluded that, as of the end of the period covered by the Annual Report on Form 10-K, the Company’s disclosure controlsand procedures were effective to provide reasonable assurance that the information required to be disclosed by the Companyin the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the SEC and is accumulated and communicated to the Company’s management,including our Chairman, Chief Executive Officer and President and our Chief Financial Officer and Treasurer, as appropriate,to allow timely decisions regarding required disclosure.As previously reported, we had a material weakness in internal control over financial reporting relating to theaccounting treatment of a non-recurring asset acquisition treated as a business combination as of December 31, 2017. Toaddress this material weakness, we designed and implemented controls to review the data inputs, and expanded researchinclusive of the relevant GAAP as well as industry technical guidance and documentation, models, valuations and otherprocesses related to significant and unusual transactions, including business combinations. We also hired additionalaccounting personnel in connection with our transition from a private company to a public company. Because no businesscombinations occurred in the year ended December 31, 2018, the controls related to such business combinations have notbeen tested for remediation as of December 31, 2018. Management assessed, as of December 31, 2018, the severity of thecontrol deficiency related to business combinations. Based on this assessment, management concluded that no materialweakness related to business combinations existed as of December 31, 2018.Changes in Internal Control over Financial ReportingThere was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) underthe Exchange Act) during the quarter ended December 31, 2018, that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting. The design of any system of controls andprocedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance thatany design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Item 9B. Other InformationNone.94 Table of Contents PART III Item 10: Directors, Executive Officers and Corporate GovernanceThe information required by this item is hereby incorporated by reference from our Definitive Proxy Statementrelating to the 2019 Annual Meeting of Shareholders, or the 2019 Proxy Statement, to be filed with the SEC within 120 daysof the end of the fiscal year ended December 31, 2018.Our board of directors has adopted a Code of Business Conduct and Ethics that applies to all of our employees,officers and directors, including our Chief Executive Officer, Chief Financial Officer and other executive officers. The fulltext of our Code of Business Conduct and Ethics is posted on the investor relations page of our website which is locatedhttps://myfw.gcs-web.com/investor-relations. We will post any amendments to our Code of Business Conduct and Ethics, orwaivers of its requirements, on our website. Item 11: Executive CompensationThe information required by this item is hereby incorporated by reference from the 2019 Proxy Statement, to be filedwith the SEC within 120 days of the end of the fiscal year ended December 31, 2018. Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Shareholder MattersThe information required by this item is hereby incorporated by reference from the 2019 Proxy Statement, to be filedwith the SEC within 120 days of the end of the fiscal year ended December 31, 2018.Information relating to securities authorized for issuance under our equity compensation plans is included in Part IIof this Annual Report on Form 10-K under “Item 5 – Market for Registrant’s Common Equity, Related Shareholder Mattersand Issuer Purchases of Equity Securities.” Item 13: Certain Relationships and Related Transactions, and Director IndependenceThe information required by this item is hereby incorporated by reference from the 2019 Proxy Statement, to be filedwith the SEC within 120 days of the end of the fiscal year ended December 31, 2018. Item 14: Principal Accounting Fees and ServicesThe information required by this item is hereby incorporated by reference from the 2019 Proxy Statement, to be filedwith the SEC within 120 days of the end of the fiscal year ended December 31, 2018.95 Table of Contents PART IV Item 15.Exhibits, Financial Statement Schedules(a)(1)Financial Statements See Index to Consolidated Financial Statements on page 85 (2)Financial Statement Schedules All financial statement schedules are omitted because they are either not applicable or not required, orbecause the required information is included in the Consolidated Financial Statements or the Notes theretoincluded in Part II, Item 8.(b)(3)Exhibits The exhibits are filed as part of this report and exhibits incorporated by reference to other documents are asfollows: ExhibitNo. Description 3.1 Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’sForm S-1 filed with the SEC on July 3, 2018, File No. 333-225719) 3.2 Amended and Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Form S-1 filed with theSEC on July 3, 2018, File No. 333-225719) 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Form S-1 filedwith the SEC on June 19, 2018, File No. 333-225719) 4.2 Certain instruments defining the rights of holders of long-term debt securities of the registrant and itssubsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The registrant hereby undertakes tofurnish to the SEC, upon request, copies of any such instruments. 4.3 Form of Note Purchase Agreement for 7.25% Fixed-to-Floating Rate Subordinated Notes due 2026(incorporated by reference to Exhibit 4.6 to the Company’s Form S-1 filed with the SEC on June 19, 2018,File No. 333-225719) 10.1† First Western Financial, Inc. 2008 Stock Incentive Plan, as amended (incorporated by reference to Exhibit10.1 to the Company’s Form S-1 filed with the SEC on June 19, 2018, File No. 333-225719) 10.2† First Western Financial, Inc. 2016 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.2 to theCompany’s Form S-1 filed with the SEC on June 19, 2018, File No. 333-225719) 10.3† Employment Agreement, dated January 1, 2017, between Scott Wylie and First Western Financial, Inc.(incorporated by reference to Exhibit 10.3 to the Company’s Form S-1 filed with the SEC on June 19, 2018,File No. 333-225719) 10.4† Amended and Restated Employment Agreement, dated March 5, 2018, between Julie Courkamp and FirstWestern Financial, Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Form S-1 filed with theSEC on June 19, 2018, File No. 333-225719) 10.5 Business Loan Agreement, dated October 31, 2009, between First Western Financial, Inc., as borrower, andBMO Harris Bank N.A. (successor by merger to M&I Marshall & Ilsley Bank), as lender, as amended(incorporated by reference to Exhibit 10.5 to the Company’s Form S-1 filed with the SEC on June 19, 2018,File No. 333-225719) 96 Table of Contents10.6 Asset Purchase Agreement, dated August 18, 2017, among EMC Holdings, LLC, WHMC, LLC, Alan Schrumand First Western Trust Bank (incorporated by reference to Exhibit 10.6 to the Company’s Form S-1 filed withthe SEC on June 19, 2018, File No. 333-225719) 10.7† Form of Indemnification Agreement between First Western Financial, Inc. and its directors and certain officers(incorporated by reference to Exhibit 10.7 to the Company’s Form S-1 filed with the SEC on June 19, 2018,File No. 333-225719) 10.8† First Western Financial, Inc. NEO Discretionary Incentive Compensation Plan (incorporated by reference toExhibit 10.10 to the Company’s Form S-1 filed with the SEC on June 19, 2018, File No. 333-225719) 21.1* Subsidiaries of First Western Financial, Inc. 23.1* Consent of Crowe LLP 24.1* Powers of attorney (included on signature page to the Annual Report on Form 10-K) 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuantto 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 pursuantto 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 Section906 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 Section906 of the Sarbanes-Oxley Act of 2002. 101.INS* XBRL Instance Document. 101.SCH* XBRL Taxonomy Extension Schema Document. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB* XBRL Taxonomy Extension Label Linkbase Document. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.* Filed herewith.** These exhibits are furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subjectto the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or theExchange Act.† Indicates a management contract or compensatory plan. Item 16.Form 10-K SummaryNone.97 Table of Contents SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. First Western Financial, Inc. March 21, 2019 By:/s/ Scott C. WylieDate Scott C. Wylie Chairman, Chief Executive Officer and President POWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutesand appoints Scott C. Wylie and Julie A. Courkamp, with full power to act without the other, his or her true and lawfulattorney-in-fact and agent, with full and several powers of substitution, for him or her and in his or her name, place and stead,in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with allexhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and herebygrants to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every actand thing requisite and necessary to be done, as fully as to all intents and purposes as each of the undersigned might or coulddo in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or hissubstitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrantin the capacities and on the dates indicated.Signature Title Date /s/ Scott C. Wylie Chairman, Chief Executive Officer and President(principal executive officer) March 21, 2019Scott C. Wylie /s/ Julie A. Courkamp Chief Financial Officer and Treasurer (principalfinancial and accounting officer) March 21, 2019Julie A. Courkamp /s/ Julie A. Caponi Director March 21, 2019Julie A. Caponi /s/ David R. Duncan Director March 21, 2019David R. Duncan /s/ Thomas A. Gart Director March 21, 2019Thomas A. Gart /s/ Patrick H. Hamill Director March 21, 2019Patrick H. Hamill /s/ Luke A. Latimer Director March 21, 2019Luke A. Latimer /s/ Eric D. Sipf Director March 21, 2019Eric D. Sipf /s/ Mark L. Smith Director March 21, 2019Mark L. Smith /s/ Joseph C. Zimlich Director March 21, 2019Joseph C. Zimlich 98Exhibit 21.1 First Western Financial, Inc. Subsidiaries Entity Name State of IncorporationFirst Western Trust BankColorado, U.S.A.First Western Capital Management CompanyColorado, U.S.A. Exhibit 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement No. 333-227402 on Form S-8 of First Western Financial, Inc. ofour report, dated March 21, 2019, relating to the financial statements appearing in this Annual Report on Form 10-K of First WesternFinancial, Inc. for the year ended December 31, 2018. /s/Crowe LLP Denver, Colorado March 21, 2019 EXHIBIT 31.1 CERTIFICATION I, Scott C. Wylie, certify that: 1.I have reviewed this annual report on Form 10-K of First Western Financial, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly presentin all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this report isbeing prepared; (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by thisreport based on such evaluation; and (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and reportfinancial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. Date: March 21, 2019 /s/ Scott C. Wylie Scott C. Wylie Chairman, Chief Executive Officer and President (Principal Executive Officer) 1EXHIBIT 31.2 CERTIFICATION I, Julie A. Courkamp, certify that: 1.I have reviewed this annual report on Form 10-K of First Western Financial, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly presentin all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, theperiods presented in this report; 4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularly during the period in which this report isbeing prepared; (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by thisreport based on such evaluation; and (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred duringthe registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that hasmaterially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (orpersons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and reportfinancial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant’s internal control over financial reporting. Date: March 21, 2019 /s/ Julie A. Courkamp Julie A. Courkamp Chief Financial Officer and Treasurer (Principal Financial Officer) 1EXHIBIT 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) In connection with the Annual Report of First Western Financial, Inc. (the “Company”) on Form 10-K for the period endedDecember 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott C.Wylie, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: 1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and resultsof operations of the Company. Dated: March 21, 2019/s/ Scott C. Wylie Scott C. Wylie Chairman, Chief Executive Officer and President 1EXHIBIT 32.2 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) In connection with the Annual Report of First Western Financial, Inc. (the “Company”) on Form 10-K for the period endedDecember 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Julie A.Courkamp, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: 1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and resultsof operations of the Company. Dated: March 21, 2019/s/ Julie A. Courkamp Julie A. Courkamp Chief Financial Officer and Treasurer 1

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