REGULATORY CAPITAL MATTERS

9 Months Ended

Sep. 30, 2021

REGULATORY CAPITAL MATTERS

REGULATORY CAPITAL MATTERS

NOTE 16 - REGULATORY CAPITAL MATTERS

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

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

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

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

The actual capital ratios of First Western and the Bank, along with the applicable regulatory capital requirements as of September 30, 2021, were calculated in accordance with the requirements of Basel III. The final rules of Basel III also established a “capital conservation buffer” of 2.5% above new regulatory minimum capital ratios, which are fully effective following minimum ratios: (i) a CET1 ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. Banks are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that can be utilized for such activities.

As of September 30, 2021 and December 31, 2020, the most recent filings with the FDIC categorized First Western and the Bank as well capitalized under the regulatory guidelines. To be categorized as well capitalized, an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as set forth in the following table. Management believes there are no conditions or events since September 30, 2021, that have changed the categorization of First Western and the Bank as well capitalized. Management believes First Western and the Bank met all capital adequacy requirements to which it was subject as of September 30, 2021 and December 31, 2020.

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

									To be Well Capitalized
									Under Prompt
					Required for Capital				Corrective Action
	Actual				Adequacy Purposes(1)				Regulations
September 30, 2021	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 capital to risk-weighted assets
Bank	$	156,136	11.02	%	$	85,019	6.0	%	$	113,359	8.0	%
Consolidated		151,950	10.66			N/A	N/A			N/A	N/A
CET1 to risk-weighted assets
Bank		156,136	11.02			63,764	4.5			92,104	6.5
Consolidated		151,950	10.66			N/A	N/A			N/A	N/A
Total capital to risk-weighted assets
Bank		169,435	11.96			113,359	8.0			141,699	10.0
Consolidated		204,809	14.37			N/A	N/A			N/A	N/A
Tier 1 capital to average assets
Bank		156,136	8.11			77,047	4.0			96,308	5.0
Consolidated		151,950	7.86			N/A	N/A			N/A	N/A

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

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⁽¹⁾ Does not include capital conservation buffer.