FIRSTSUN CAPITAL BANCORP In this section, unless the context suggests otherwise, references to "we,"
"us," and "our" mean the combined business of FirstSun and its wholly-owned
subsidiaries,
The following discussion and analysis of FirstSun's consolidated financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as our audited consolidated financial statements and footnotes for the year endedDecember 31, 2021 included in the 2021 Form 10-K that we filed with theSEC onMarch 25, 2022 . Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or results of operations for any future periods. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the " Cautionary Note Regarding Forward-Looking Statements " beginning on page 3 of this report. General OverviewFirstSun Capital Bancorp , headquartered inDenver, Colorado , is the financial holding company forSunflower Bank, National Association , which operates asSunflower Bank , First National 1870 and Guardian Mortgage. We conduct a full service community banking and trust business through our wholly-owned subsidiaries-Sunflower Bank andLogia Portfolio Management, LLC . We offer a full range of relationship-focused services to meet our clients' personal, business and wealth management financial objectives, with a branch network inTexas ,Colorado ,Arizona ,New Mexico , andKansas and mortgage capabilities in 43 states. Our product line includes commercial loans, commercial real estate loans, residential mortgage and other consumer loans, and a variety of commercial and consumer deposit products, including noninterest-bearing accounts, interest-bearing demand products, savings accounts, money market accounts and certificates of deposit. We also offer wealth management and trust products including personal trust and agency accounts, employee benefit and retirement related trust and agency accounts, investment management and advisory agency accounts, and foundation and endowment trust and agency accounts. We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs for our customers. We operate FirstSun through two operating segments: Banking and Mortgage Operations. We also allocate certain expenses to Corporate, which is not an operating segment. The expenses included in Corporate are not deemed to be allocable to our operating segments. The operating segments have been determined based on the products and services we offer and reflect the manner in which our financial information is evaluated by management. Each of the operating segments is complementary to each other and because of the interrelationship of the segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. For additional information on our segments, see Note 16 - Segment Information included in our consolidated financial statements included elsewhere in this report. 43
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Completion of Merger with
OnApril 1, 2022 , we completed our previously announced Merger withPioneer Bancshares, Inc. ("Pioneer"), pursuant to which Pioneer was merged with and into FirstSun, with FirstSun continuing as the surviving entity, and Pioneer's wholly-owned subsidiary,Pioneer Bank, SSB , aTexas state savings bank, was merged with and intoSunflower Bank , withSunflower Bank continuing as the surviving bank. With the acquisition, we acquired 19 branches inTexas . The results for Pioneer are reflected in our results of operations and financial condition beginningApril 1, 2022 . Further information is presented in Note 2 - Merger withPioneer Bancshares, Inc. included in our consolidated financial statements included elsewhere in this report. For the third quarter of 2022, we incurred no expenses relating to the Merger. For the nine months endedSeptember 30, 2022 , we incurred$18.8 million ($0.63 diluted earnings per share) of expenses relating to the Merger. For the three and nine months endedSeptember 30, 2021 , we incurred$0.7 million and$2.0 million , respectively ($0.04 and$0.09 diluted earnings per share) of expenses relating to the Merger. Pandemic Update Our business has been, and continues to be, impacted by the effects of the COVID-19 pandemic. There remains many uncertainties related to COVID-19 including, among other things, the ongoing impact to our customers, employees and vendors; the impact to the financial services and banking industry; and the impact to the economy as a whole as well as the effect of actions taken, or that may yet be taken, or inaction by governmental authorities to mitigate both the economic and health-related effects of COVID-19.
Financial Summary
Net income totaled$26.5 million , or$1.04 per diluted share, for the third quarter of 2022, compared to$8.7 million , or$0.46 per diluted share, for the third quarter of 2021. The return on average assets was 1.52% for the third quarter of 2022, compared to 0.62% for the third quarter of 2021, and the return on average equity was 14.50% for the third quarter of 2022, compared to 6.68% for the third quarter of 2021. Net income totaled$34.6 million , or$1.49 per diluted share, for the nine months endedSeptember 30, 2022 , compared to$34.3 million , or$1.83 per diluted share, for the same period in 2021. The return on average assets was 0.70% for the nine months endedSeptember 30, 2022 , compared to 0.85% for the same period in 2021, and the return on average equity was 6.90% for the nine months endedSeptember 30, 2022 , compared to 8.95% for the same period in 2021. Net income, return on average assets and return on average equity were reduced by Merger-related expenses and the provision for loan losses related to certain non-impaired loans acquired from Pioneer at a premium upon the closing of the Merger. The reduction to net income, return on average assets and return on average equity for the nine months endedSeptember 30, 2022 , resulting from the aggregate of Merger-related expenses and the provision for loan losses related to certain non-impaired loans acquired from Pioneer at a premium, were$17.0 million , 0.34%, and 3.39% respectively. The reduction to net income, return on average assets and return on average equity for the nine months endedSeptember 30, 2021 , resulting from Merger-related expenses, were$1.7 million , 0.04%, and 0.43%, respectively. The reduction to net income, return on average assets and return on average equity for the third quarter of 2021, resulting from Merger-related expenses, were$0.6 million , 0.04%, and 0.45%, respectively. 44
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The following table sets forth certain summary financial and other information
of FirstSun:
For the three months For the nine months ended For the year ended
ended September 30, September 30, December 31,
($ in thousands, except share and
per share amounts) 2022 2021 2022 2021 2021
Income Statement:
Net interest income $ 68,486 $ 39,965
1,236 924 3,841 4,419 5,755
Net interest income - fully tax
equivalent ("FTE") basis (non-GAAP)
(3) $ 69,722 $ 40,889 $ 172,197 $ 119,201 $ 160,988
Provision for loan losses $ 3,750 $ 3,500 $ 12,450 $ 1,750 $ 3,000
Noninterest income $ 24,953 $ 28,684 $ 70,948 $ 94,848 $ 124,244
Noninterest expense $ 55,548 $ 54,570 $ 183,683 $ 166,374 $ 224,635
Net income $ 26,513 $ 8,728 $ 34,612 $ 34,347 $ 43,164
Per Common Share Data:
Weighted average diluted common
shares 25,494,315 18,770,681 23,281,933 18,762,497 18,770,785
Net income (basic) $ 1.07 $ 0.48 $ 1.53 $ 1.87 $ 2.36
Net income (diluted) $ 1.04 $ 0.46 $ 1.49 $ 1.83 $ 2.30
Cash dividends $ - $ - $ - $ - $ -
Dividend payout ratio - % - % - % - % - %
Book value $ 30.14 $ 28.38 $ 30.14 $ 28.38 $ 28.56
Tangible common book value
(non-GAAP) (3) $ 25.67 $ 26.10 $ 25.67 $ 26.10 $ 26.31
Performance Ratios:
Return on average assets 1.52 % 0.62 % 0.70 % 0.85 % 0.79 %
Return on average stockholders'
equity 14.50 % 6.68 % 6.90 % 8.95 % 8.37 %
Return on tangible common equity
(non-GAAP) (3) 17.05 % 7.53 % 7.58 % 9.81 % 9.17 %
Return on average tangible common
equity (non-GAAP) (3) 17.59 % 7.49 % 8.35 % 9.99 % 9.35 %
Net interest margin 4.26 % 3.01 % 3.66 % 3.00 % 3.34 %
Efficiency ratio (1) 59.45 % 79.49 % 76.76 % 79.37 % 80.38 %
Net charge-offs (recoveries) to
average loans outstanding 0.01 % (0.15) % 0.01 % 0.06 % 0.09 %
Allowance for loan losses to loans 1.07 % 1.26 % 1.07 % 1.26 % 1.18 %
Nonperforming loans to total loans
(2) 0.76 % 0.97 % 0.76 % 0.97 % 0.86 %
Balance Sheet:
Total loans, excluding loans
held-for-sale $ 5,556,686 $ 3,803,981 $ 5,556,686 $ 3,803,981 $ 4,037,123
Total assets $ 7,052,917 $ 5,683,085 $ 7,052,917 $ 5,683,085 $ 5,666,814
Total deposits $ 5,760,418 $ 4,857,985 $ 5,760,418 $ 4,857,985 $ 4,854,948
Total borrowed funds $ 390,969 $ 109,184 $ 519,921 $ 750,653 $ 519,921$ 524,038 Capital Ratios: Total risk-based capital to risk-weighted assets 12.06 % 12.55 % 12.06 % 12.55 % 11.76 % Tier 1 risk-based capital to risk-weighted assets 9.99 % 10.32 % 9.99 % 10.32 % 9.70 % Common Equity Tier 1 (CET 1) to risk-weighted assets 9.99 % 10.32 % 9.99 % 10.32 % 9.70 % Tier 1 leverage capital to average assets 9.55 % 8.19 % 9.55 % 8.19 % 8.24 % Average equity to average assets 10.52 % 9.33 % 10.13 % 9.50 % 9.43 % Tangible common equity to tangible assets (non-GAAP) (3) 9.21 % 8.48 % 9.21 % 8.48 % 8.58 % Nonfinancial Data: Full-time equivalent employees 1,155 1,026 1,155 1,026 1,042 Banking branches 72 52 72 52 53 (1) The efficiency ratio is one measure of profitability in the banking industry. This ratio measures the cost of generatingone dollar of revenue. That is, the ratio is designed to reflect the percentage ofone dollar which must be expended to generate that dollar of revenue. We calculate this ratio by dividing noninterest expense by the sum of net interest income and noninterest income. (2) Nonperforming loans include nonaccrual loans, accrual troubled debt restructurings ("TDR"), and accrual loans greater than 90 days past due. (3) See section entitled "Non-GAAP Financial Measures and Reconciliations" for information regarding these non-GAAP financial measures and a reconciliation to the most comparable GAAP equivalent. 45
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Non-GAAP Financial Measures and Reconciliations
The non-GAAP financial measures presented below are used by our management and our Board of Directors on a regular basis in addition to our GAAP results to facilitate the assessment of our financial performance. Management believes these non-GAAP financial measures enhance an investor's understanding of our financial results by providing a meaningful basis for period-to-period comparisons, assisting in operating results analysis, and predicting future performance. This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a substitute for, our GAAP results. Accordingly, this financial information should be read in conjunction with our consolidated financial statements and notes thereto for the three and nine months endedSeptember 30, 2022 , included elsewhere in this report. Non-GAAP financial measures exclude certain items that are included in the financial results presented in accordance with GAAP. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.
The following table presents GAAP to non-GAAP reconciliations:
For the three months
ended For the nine months ended For the year ended
September 30, September 30, December 31,
($ in thousands, except share and
per share amounts) 2022 2021 2022 2021 2021
Tangible common book value:
Total stockholders' equity (GAAP) $ 750,653 $ 519,921 $ 750,653 $ 519,921 $ 524,038
Less: Goodwill and other intangible
assets
Goodwill (93,483) (33,050) (93,483) (33,050) (33,050)
Other intangible assets (17,825) (8,605) (17,825) (8,605) (8,250)
Total tangible stockholders' equity
(non-GAAP) $ 639,345 $
478,266
18,321,659 24,906,032 18,321,659 18,346,288
Book value per common share (GAAP)$ 30.14 $ 28.38 $ 30.14 $ 28.38$ 28.56 Tangible common book value (non-GAAP)$ 25.67 $ 26.10 $ 25.67 $ 26.10$ 26.31 Return on tangible common equity: Net Income (GAAP)$ 26,513 $
8,728
739 280 1,736 839 1,119
Tangible net income (non-GAAP) $ 27,252 $
9,008
$ 639,345 $
478,266
17.05 % 7.53 % 7.58 % 9.81 % 9.17 %
Return on average tangible common
equity:
Tangible net income (non-GAAP) (see
above) $ 27,252 $
9,008
$ 731,549 $ 522,909 $ 668,991 $ 511,833$ 515,773 Less: Average goodwill and other intangible assets Average goodwill (93,483) (33,050) (73,560) (33,050)
(33,050)
Average other intangible assets (18,255) (8,803) (15,317) (9,139)
(8,964)
Total average tangible stockholders' equity (non-GAAP)$ 619,811 $ 481,056 $ 580,114 $ 469,644$ 473,759 Return on average tangible common equity 17.59 % 7.49 % 8.35 % 9.99 % 9.35 % Net interest margin: Net interest income (GAAP)$ 68,486 $ 39,965 $ 168,356 $ 114,782$ 155,233 Taxable equivalent adjustment 1,236 924 3,841 4,419 5,755 Net interest income - FTE basis (non-GAAP)$ 69,722 $
40,889
$ 6,434,653 $ 5,319,682 $ 6,127,755 $ 5,101,821 $ 5,180,650 Net interest margin - FTE basis (non-GAAP) 4.31 % 3.10 % 3.75 % 3.11 % 3.11 % 46
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For the three months
ended For the nine months ended For the year ended
September 30, September 30, December 31,
($ in thousands, except share and
per share amounts) 2022 2021 2022 2021 2021
Tangible common equity to tangible
assets:
Total assets (GAAP) $ 7,052,917 $ 5,683,085 $ 7,052,917 $ 5,683,085 $ 5,666,814
Less: Goodwill and other
intangible assets
Goodwill (93,483) (33,050) (93,483) (33,050) (33,050)
Other intangible assets (17,825) (8,605) (17,825) (8,605)
(8,250)
Total tangible assets (non-GAAP)$ 6,941,609 $ 5,641,430 $ 6,941,609 $ 5,641,430 $ 5,625,514 Tangible common equity (non-GAAP) (see above)$ 639,345 $ 478,266 $ 639,345 $ 478,266$ 482,738 Tangible equity to tangible assets (non-GAAP) 9.21 % 8.48 % 9.21 % 8.48 % 8.58 % Segments Banking
Three months ended
Income before income taxes increased$26.8 million to$33.9 million for the third quarter of 2022, from$7.1 million for the same period in 2021. The period over period increase was primarily driven by an increase in net interest income and noninterest income, partially offset by an increase in noninterest expense. Net interest income increased$28.9 million to$68.2 million for the third quarter of 2022, compared to$39.3 million for the same period in 2021. The increase in net interest income was primarily due to organic growth in our loan portfolios, an increase in interest earning assets resulting from the Pioneer Merger, and an increase in net interest margin. Identifiable assets for our Banking segment grew by$1.2 billion to$6.3 billion atSeptember 30, 2022 from$5.1 billion for the same period in 2021. The growth in identifiable assets was primarily driven by organic growth in our loan portfolios and the assets acquired in the Pioneer Merger.
Nine months ended
Income before income taxes increased$24.8 million to$50.7 million for the nine months endedSeptember 30, 2022 , from$25.9 million for the same period in 2021. The period over period increase was primarily driven by an increase in net interest income and noninterest income, partially offset by an increase in provision for loan losses and noninterest expense. Net interest income increased$55.1 million to$167.6 million for the nine months endedSeptember 30, 2022 compared to$112.5 million for the same period in 2021. The increase in net interest income was primarily due to organic growth in our loan portfolios, an increase in interest earning assets resulting from the Pioneer Merger, and an increase in net interest margin. Noninterest expense increased$26.3 million to$136.0 million for the nine months endedSeptember 30, 2022 , compared to$109.7 million for the same period in 2021. The increase in noninterest expense was primarily due to$18.8 million ($0.63 diluted earnings per share) in Merger-related expenses resulting from the Pioneer Merger. Provision for loan losses increased$7.7 million to$9.9 million for the nine months endedSeptember 30, 2022 compared to$2.1 million for the same period in 2021. The increase in the provision for loan losses was attributed to both organic loan growth and provision recorded on Pioneer loans acquired at a premium.
Mortgage Operations
Three months ended
Income before income taxes decreased to$2.2 million for the third quarter of 2022, compared to$5.5 million for the same period in 2021, primarily due to a decrease in net sale gains and fees from mortgage loan originations of$11.0 million , partially offset by a$3.6 million increase in income related to mortgage servicing rights ("MSR") capitalization and changes in fair value, net of hedging activity. Overall gains on sale of mortgage loans declined as a result of the decline in origination activity, continued margin compression, and a decline in the rate lock pipeline volume and valuation due to rising interest rates. The increase in income related to our MSRs was primarily the result of changes in market interest rates leading to lower prepayment rates, and our corresponding hedging positions. Total loan originations for sale were$0.3 billion for the third quarter of 2022, a decline of$0.2 billion from$0.5 billion for the same period in 2021. Noninterest expense for the third quarter of 2022 was$13.2 million , compared to$16.9 million for the same period in 2021. The$3.6 million decrease was primarily due to the decreased salary and employee benefits from the decline in mortgage loan originations. 47
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Nine months ended
Income before income taxes decreased to$0.5 million for the nine months endedSeptember 30, 2022 , compared to income of$21.9 million for the same period in 2021, primarily due to a decrease in net sale gains and fees from mortgage loan originations of$35.1 million , partially offset by a$5.1 million increase in income related to mortgage servicing rights ("MSR") capitalization and changes in fair value, net of hedging activity. Overall gains on sale of mortgage loans declined as a result of the decline in origination activity, continued margin compression, and a decline in the rate lock pipeline volume and valuation due to rising interest rates. The increase in income related to our MSRs was primarily the result of changes in market interest rates leading to lower prepayment rates, and our corresponding hedging positions. Total loan originations were$1.4 billion for the nine months endedSeptember 30, 2022 , a decline of$0.4 billion from$1.8 billion for the same period in 2021. Noninterest expense for the nine months endedSeptember 30, 2022 was$44.1 million , compared to$53.8 million for the same period in 2021. The$9.7 million decrease was primarily due to the decreased salary and employee benefits from the decline in mortgage loan originations. Critical Accounting Estimates Our consolidated financial statements are prepared based on the application of accounting policies in accordance with generally accepted accounting principles, or "U.S. GAAP," and follow general practices within the banking industry. These policies require the reliance on estimates, assumptions and judgments, which may prove inaccurate or are subject to variations. Changes in underlying factors, estimates, assumptions or judgements could have a material impact on our future financial condition and results of operations. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the determination of the allowance for loan losses and fair value measurements to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, we consider these policies to be critical accounting estimates and discuss them directly with the Audit Committee of our board of directors. During the three months endedSeptember 30, 2022 , there have been no significant changes to our critical accounting estimates compared with those described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations of FirstSun-Critical Accounting Estimates" and the notes to the audited consolidated financial statements appearing in the 2021 Form 10-K. Our significant accounting policies are presented in "Note 1 - Summary of Significant Accounting Policies" in our audited consolidated financial statements and footnotes for the year endedDecember 31, 2021 included in the 2021 Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Recent accounting pronouncements and standards that have impacted or could potentially affect us are also discussed in "Note 1" of our audited consolidated financial statements. 48
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Results of Operations
The following table sets forth components of our results of operations:
As of and for the
three months ended As of and for the nine months ended
September 30, September 30,
($ in thousands, except per share
amounts) 2022 2021 2022 2021
Net interest income $ 68,486 $ 39,965 $ 168,356 $ 114,782
Provision for loan losses 3,750 3,500 12,450 1,750
Noninterest income 24,953 28,684 70,948 94,848
Noninterest expense 55,548 54,570 183,683 166,374
Income before income taxes 34,141 10,579 43,171 41,506
Provision for income taxes 7,628 1,851 8,559 7,159
Net income 26,513 8,728 34,612 34,347
Diluted earnings per share $ 1.04 $ 0.46 $ 1.49 $ 1.83
Return on average assets 1.52 % 0.62 % 0.70 % 0.85 %
Return on average stockholders' equity 14.50 % 6.68 % 6.90 % 8.95 %
Net interest margin 4.26 % 3.01 % 3.66 % 3.00 %
Net interest margin - FTE basis
(non-GAAP) (1) 4.31 % 3.10 % 3.75 % 3.11 %
Efficiency ratio 59.45 % 79.49 % 76.76 % 79.37 %
Fee revenue to total revenue (2) 26.71 % 41.78 % 29.65 % 45.25 %
(1) See section entitled "Non-GAAP Financial Measures and Reconciliations" for information regarding
non-GAAP financial measures and a reconciliation to the most comparable GAAP equivalent.
(2) Fee revenue to total revenue is defined as "noninterest income / (net interest income + noninterest
income)".
General
Our results of operations depend significantly on net interest income, which is
the difference between interest income on interest-earning assets, consisting
primarily of interest income on loans and investment securities and interest
expense on interest-bearing liabilities, consisting primarily of deposits and
borrowings. Our results of operations are also dependent on our generation of
noninterest income, consisting primarily of income from mortgage banking
services, service charges on deposit accounts, trust and investment advisory
fees and credit and debit card fees. Other factors contributing to our results
of operations include our provisions for loan losses, income taxes, and
noninterest expenses, such as salaries and employee benefits, occupancy and
equipment, amortization of intangible assets and other operating costs.
Net Interest Income
Net interest income, representing interest income less interest expense, is a
significant contributor to our revenues and earnings. We generate interest
income from interest and dividends on interest-earning assets, which are
principally comprised of loans and investment securities. We incur interest
expense from interest owed or paid on interest-bearing liabilities, including
interest-bearing deposits, FHLB advances and other borrowings. Net interest
income and margin are shaped by the characteristics of the underlying products,
including volume, term and structure of each product. We measure and monitor
yields on our loans and other interest-earning assets, the costs of our deposits
and other funding sources, our net interest spread and our net interest margin.
Net interest spread is the difference between rates earned on interest-earning
assets and rates paid on interest-bearing liabilities. Net interest margin is
calculated as the annualized net interest income divided by average
interest-earning assets.
Interest earned on our loan portfolios are the largest component of our interest
income. Our loan portfolios are presented at the principal amount outstanding
net of deferred origination fees and unamortized discounts and premiums.
Interest income is recognized based on the principal balance outstanding and the
stated rate of the loan. Loan origination fees and certain direct origination
costs are capitalized and recognized as an adjustment of the yield on the
related loan. Non-PCI loans acquired are initially recorded at fair value and
the resulting discount or premium are recognized as an adjustment of the yield
on the related loans.
Our net interest income can be significantly influenced by a variety of factors,
including overall loan demand, economic conditions, credit risk, the amount of
non-earning assets including nonperforming loans and OREO, the amounts of and
rates at which assets and liabilities reprice, variances in prepayment of loans
and securities, exercise of call options on borrowings or securities, a general
rise or decline in interest rates, changes in the slope of the yield-curve, and
balance sheet growth or contraction.
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Three months ended
Our net interest income was$68.5 million for the third quarter of 2022, an increase of$28.5 million , or 71.4%, compared to the same period in 2021. Interest income on loans held-for-investment increased by$27.8 million for the third quarter of 2022, compared to the same period in 2021. Interest income on investment securities increased by$1.7 million for the third quarter of 2022, compared to the same period in 2021. Interest expense from total interest-bearing liabilities increased by$2.0 million for the third quarter of 2022, compared to the same period in 2021. Total average loans held-for-investment grew to$5.5 billion atSeptember 30, 2022 , an increase of$1.7 billion or 44.4%, compared toSeptember 30, 2021 , primarily due to organic growth in our loan portfolios and the Pioneer Merger. Yield on loans held-for-investment increased 75 basis points in the third quarter of 2022, compared to the same period in 2021, primarily due to the rising interest rate environment and its impact on variable rate loans in the loan portfolio and higher yields on new originations. Average interest-bearing liabilities increased$0.7 billion , or 19.4%, for the third quarter of 2022, compared to the same period in 2021, primarily as a result of the Pioneer Merger. Average interest-bearing deposits increased$0.6 billion , or 18.9%, in the third quarter of 2022, compared to the same period in 2021, and was the primary driver of the growth in average interest-bearing liabilities. Average FHLB borrowings increased$120.3 million , or 300.8%, in the third quarter of 2022, compared to the same period in 2021, to support organic loan growth. Our net interest margin was 4.26% for the third quarter of 2022, compared to 3.01% for the same period in 2021, an increase of 1.25%. We experienced a 1.34% increase in yield from earning assets while our total cost of funds increased by 13 basis points, for the third quarter of 2022 as compared to the same period in 2021. We have not experienced as significant an increase in our cost of funds in this rising interest rate environment as we have seen in growth in earning asset yield, however, we do expect our cost of funds to continue to rise over the next several quarters.
Nine months ended
Our net interest income was$168.4 million for the nine months endedSeptember 30, 2022 , an increase of$53.6 million , or 46.7%, compared to the same period in 2021. Interest income on loans held-for-investment increased by$50.6 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. Interest income on investment securities increased by$3.6 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. Interest expense from total interest-bearing liabilities increased by$2.3 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. Total average loans held-for-investment grew to$5.0 billion atSeptember 30, 2022 , an increase of$1.2 billion , compared toSeptember 30, 2021 , primarily due to organic growth in our loan portfolios and the Pioneer Merger. Yield on loans held-for-investment increased 38 basis points for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, primarily due to the rising interest rate environment and its impact on variable rate loans in the loan portfolio and higher yields on new originations. Average interest-bearing liabilities increased$0.5 billion , or 15.6%, for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. Average interest-bearing deposits increased$0.5 billion , or 15.9%, in the nine months endedSeptember 30, 2022 , compared to the same period in 2021, and was the primary driver of the growth in average interest-bearing liabilities. Our net interest margin was 3.66% for the nine months endedSeptember 30, 2022 , compared to 3.00% for the same period in 2021, an increase of 66 basis points. We experienced a 66 basis point increase in yield from earning assets and our total cost of funds increased by two basis points for the period endedSeptember 30, 2022 , compared to the same period in 2021. We have not experienced as significant an increase in our cost of funds in this rising interest rate environment as we have seen in growth in earning asset yield, however, we do expect our cost of funds to continue to rise over the next several quarters. 50
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The following tables set forth information related to our average balance sheet, average yields on assets, and average costs of liabilities for the periods presented. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated.
As of and for the three months ended September 30,:
2022 2021
Average Average
(In thousands) Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate
Interest Earning Assets
Loans held-for-sale $ 56,636 $ 743 5.25 % $ 122,007 $ 986 3.23 %
Loans held-for-investment (1) 5,456,210 67,527 4.95 % 3,779,517 39,710 4.20 %
Investment securities 613,325 3,644 2.38 % 522,870 1,954 1.49 %
Interest-bearing cash and other assets 308,482 1,849 2.40 % 895,288 611 0.27 %
Total earning assets 6,434,653 73,763 4.59 % 5,319,682 43,261 3.25 %
Other assets 519,663 287,323
Total assets $ 6,954,316 $ 5,607,005
Interest-bearing liabilities
Demand and NOW deposits $ 202,290 $ 495 0.98 % $ 241,488 $ 139 0.23 %
Savings deposits 506,548 227 0.18 % 453,687 101 0.09 %
Money market deposits 2,617,452 1,632 0.25 % 2,264,682 1,054 0.19 %
Certificates of deposits 593,479 920 0.62 % 337,906 684 0.81 %
Total deposits 3,919,769 3,274 0.33 % 3,297,763 1,978 0.24 %
Repurchase agreements 51,264 51 0.40 % 120,009 13 0.04 %
Total deposits and repurchase agreements 3,971,033 3,325 0.33 % 3,417,772 1,991 0.23 %
FHLB borrowings 160,310 761 1.90 % 40,000 151 1.51 %
Other long-term borrowings 80,031 1,191 5.95 % 69,028 1,154 6.69 %
Total interest-bearing liabilities 4,211,374 5,277 0.50 % 3,526,800 3,296 0.37 %
Noninterest-bearing deposits 1,924,055 1,483,010
Other liabilities 87,338 74,286
Stockholders' equity 731,549 522,909
Total liabilities and stockholders' equity $ 6,954,316 $ 5,607,005
Net interest income $ 68,486 $ 39,965
Net interest spread 4.09 % 2.88 %
Net interest margin 4.26 % 3.01 %
Net interest margin - FTE basis (non-GAAP)
(2) 4.31 % 3.10 %
(1) Includes nonaccrual loans
(2) See section entitled "Non-GAAP Financial Measures and Reconciliations" for information regarding non-GAAP financial measures and a reconciliation to the most
comparable GAAP equivalent
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As of and for the nine months ended September 30,:
2022 2021
Average Average
(In thousands) Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate
Interest Earning Assets
Loans held-for-sale $ 62,638 $ 2,707 5.76 % $ 135,202 $ 3,257 3.21 %
Loans held-for-investment (1) 4,953,042 166,006 4.47 % 3,761,029 115,423 4.09 %
Investment securities 615,726 9,252 2.00 % 511,757 5,646 1.47 %
Interest-bearing cash and other assets 496,349 3,687 0.99 % 693,833 1,450 0.28 %
Total earning assets 6,127,755 181,652 3.95 % 5,101,821 125,776 3.29 %
Other assets 473,909 287,500
Total assets $ 6,601,664 $ 5,389,321
Interest-bearing liabilities
Demand and NOW deposits $ 214,862 $ 848 0.53 % $ 271,955 $ 636 0.31 %
Savings deposits 497,240 451 0.12 % 454,371 363 0.11 %
Money market deposits 2,567,406 3,644 0.19 % 2,183,473 3,305 0.20 %
Certificates of deposits 498,753 2,077 0.56 % 350,217 2,427 0.92 %
Total deposits 3,778,261 7,020 0.25 % 3,260,016 6,731 0.28 %
Repurchase agreements 59,572 74 0.17 % 131,444 49 0.05 %
Total deposits and repurchase agreements 3,837,833 7,094 0.25 % 3,391,460 6,780 0.27 %
FHLB borrowings 128,654 1,680 1.74 % 43,379 758 2.33 %
Other long-term borrowings 82,768 4,522 7.28 % 68,787 3,456 6.70 %
Total interest-bearing liabilities 4,049,255 13,296 0.44 % 3,503,626 10,994 0.42 %
Noninterest-bearing deposits 1,805,982 1,295,984
Other liabilities 77,436 77,878
Stockholders' equity 668,991 511,833
Total liabilities and stockholders' equity $ 6,601,664 $ 5,389,321
Net interest income $ 168,356 $ 114,782
Net interest spread 3.51 % 2.87 %
Net interest margin 3.66 % 3.00 %
Net interest margin - FTE basis (non-GAAP)
(2) 3.75 % 3.11 %
(1) Includes nonaccrual loans
(2) See section entitled "Non-GAAP Financial Measures and Reconciliations" for information regarding non-GAAP financial measures and a reconciliation to the most comparable
GAAP equivalent
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Rate-Volume Analysis
The tables below present the effect of volume and rate changes on interest
income and expense. Changes due to volume are changes in the average balance
multiplied by the previous period's average rate. Changes due to rate are
changes in the average rate multiplied by the average balance from the current
period. The net changes attributable to the combined impact of both rate and
volume have been allocated proportionately to the changes due to volume and the
changes due to rate.
For the
three months ended
2022 Versus 2021 Increase (Decrease) Due to:
(In thousands) Rate Volume Total
Interest Earning Assets
Loans held-for-sale $ 286 $ (529) $ (243)
Loans held-for-investment 10,202 17,615 27,817
Investment securities 1,353 337 1,690
Interest-bearing cash 1,636 (398) 1,238
Total earning assets 13,477 17,025 30,502
Interest-bearing liabilities
Demand and NOW deposits 378 (22) 356
Savings deposits 113 13 126
Money market deposits 415 163 578
Certificates of deposits (281) 517 236
Total deposits 625 671 1,296
Repurchase agreements 46 (8) 38
Total deposits and repurchase agreements 671 663 1,334
FHLB borrowings 155 455 610
Other long-term borrowings (147) 184 37
Total interest-bearing liabilities 679 1,302 1,981
Net interest income $ 12,798 $ 15,723 $ 28,521
For
the nine months ended
2022 Versus 2021 Increase (Decrease) Due to:
(In thousands) Rate Volume Total
Interest Earning Assets
Loans held-for-sale $ 1,199 $ (1,749) $ (550)
Loans held-for-investment 14,002 36,581 50,583
Investment securities 2,460 1,146 3,606
Interest-bearing cash 2,649 (412) 2,237
Total earning assets 20,310 35,566 55,876
Interest-bearing liabilities
Demand and NOW deposits 345 (133) 212
Savings deposits 53 35 88
Money market deposits (242) 581 339
Certificates of deposits (1,380) 1,030 (350)
Total deposits (1,224) 1,513 289
Repurchase agreements 52 (27) 25
Total deposits and repurchase agreements (1,172) 1,486 314
FHLB borrowings (568) 1,490 922
Other long-term borrowings 364 702 1,066
Total interest-bearing liabilities (1,376) 3,678 2,302
Net interest income $ 21,686 $ 31,888 $ 53,574
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Provision for Loan Losses
We established an allowance for loan losses through a provision for loan losses charged as an expense in our consolidated statements of income. The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the allowance for loan losses at an adequate level to absorb probable losses incurred in the loan portfolio at the balance sheet date and that, in management's judgment, is appropriate under GAAP. Our determination of the amount of the allowance for loan losses and corresponding provision for loan losses considers ongoing evaluations of the credit quality and level of credit risk inherent in our loan portfolio, levels of nonperforming loans and charge-offs, statistical trends and economic and other relevant factors. The allowance for loan losses is increased by the provision for loan losses and is decreased by charge-offs, net of recoveries on prior loan charge-offs. We had a provision for loan losses of$3.8 million for the third quarter of 2022, compared to$3.5 million for the same period in 2021. The increase in the provision for loan losses was due to several factors, including the provision required for larger organic growth in the loan portfolio for the third quarter of 2022 compared to the same period in 2021. We had a provision for loan losses of$12.5 million for the nine months endedSeptember 30, 2022 , compared to$1.8 million for the same period in 2021. The increase in the provision for loan losses was due to several factors, including larger organic growth in the loan portfolio and a provision required on certain non-impaired loans acquired at a premium upon the closing of the Pioneer Merger. The provision on the loans acquired at a premium was$2.9 million ($0.10 diluted earnings per share) during the nine months endedSeptember 30, 2022 . The 2021 provision was impacted by favorable changes in certain environmental factors as a result of improved economic conditions as the impact of the COVID-19 pandemic continued to subside. Noninterest Income
The following table presents noninterest income:
For the three months ended For the nine months ended
September 30, September 30,
(In thousands) 2022 2021 2022 2021
Service charges on deposit accounts
$ 13,111 $ 8,659 Credit and debit card fees 3,103 2,472 8,508 7,140 Trust and investment advisory fees 1,552 1,974 5,408 5,871 Income from mortgage banking services, net 13,785 20,151 40,017 68,144 Other 1,706 616 3,904 5,034 Total noninterest income$ 24,953 $ 28,684 $ 70,948 $ 94,848
Three months ended
Our noninterest income decreased$3.7 million to$25.0 million for the third quarter of 2022 from$28.7 million for the same period in 2021, primarily due to a decrease in income from mortgage banking services. Service charges on deposit accounts includes overdraft and non-sufficient funds charges, treasury management services provided to our business customers, and other maintenance fees on deposit accounts. For the third quarter of 2022, service charges on deposit accounts increased$1.3 million , compared to the same period in 2021, primarily due to higher average deposits, and increased treasury management service fee income compared to the same period in 2021. Credit and debit card fees represent interchange income from credit and debit card activity and referral fees earned from processing fees on card transactions by our business customers. Credit and debit card fees increased$0.6 million for the third quarter of 2022 compared to the same period in 2021, due primarily to increased card transaction volumes. Trust and investment advisory fees represent fees we receive in connection with our investment advisory and custodial management services of investment accounts. Trust and investment advisory fees were down slightly for the third quarter of 2022 as compared to the same period in 2021. 54
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The components of income from mortgage banking services were as follows:
For the three months ended
September 30,
(In thousands) 2022 2021Net sale gains and fees from mortgage loan originations including loans held-for-sale changes in fair value and hedging
$
3,942
Mortgage servicing income 4,234 3,219
MSR capitalization and changes in fair value, net of derivative activity
5,609 1,994
Income from mortgage banking services, net $
13,785
For the third quarter of 2022, income from mortgage banking services decreased$6.4 million , compared to the same period in 2021, primarily due to a decline in revenue related to net sale gains and fees from mortgage loan originations, including fair value changes in the held-for-sale portfolio and hedging, which decreased$11.0 million for the third quarter of 2022, compared to the same period in 2021. Total loan originations for sale were$0.3 billion for the third quarter of 2022, a decline of$0.2 billion from$0.5 billion for the same period in 2021. We retain servicing rights on the majority of mortgage loans that we sell, which drove an increase in servicing income of$1.0 million to$4.2 million for the third quarter of 2022, compared to$3.2 million for the third quarter of 2021. MSR capitalization and changes in fair value, net of derivative activity, increased$3.6 million in the third quarter of 2022, compared to the same period in 2021. The increase in revenue related to our MSRs was primarily the result of changes in market interest rates and our corresponding hedging positions. We recognize fair value adjustments to our MSR asset, which includes changes in assumptions to the valuation model and pay-offs and pay-downs of the MSR portfolio. We also maintain a hedging strategy to manage a portion of the risk associated with changes in the fair value of our MSR portfolio. Changes in fair value of the derivative instruments used to economically hedge the MSRs are also included as a component of income from mortgage banking services. Due to a number of factors and until we see a change in these factors, including rising interest rates, low inventory in the housing market, lower refinance volumes and a decrease in margin on loans sales, we do not expect revenue from mortgage banking activities to continue at levels seen in the prior year which will reduce the amount of income from mortgage banking services, net recorded in future periods in comparison to prior year periods. Other noninterest income increased$1.1 million for the third quarter of 2022 compared to the same period in 2021, primarily due to certain loan-related fee income streams such as loan syndication fee income and customer accommodation interest rate swap fees and changes in fair value.
Nine months ended
Our noninterest income decreased$23.9 million to$70.9 million for the nine months endedSeptember 30, 2022 from$94.8 million for the same period in 2021, primarily due to a decrease in income from mortgage banking services. For the nine months endedSeptember 30, 2022 , service charges on deposit accounts increased$4.5 million , compared to the same period in 2021, primarily due to higher average deposits, changes made in the second half of 2021 to our deposit product offerings as well as increased treasury management service fee income compared to the same period in 2021.
Credit and debit card fees increased
Trust and investment advisory fees were down slightly for the nine months ended
The components of income from mortgage banking services were as follows:
For the nine months
ended
September 30,
(In thousands) 2022 2021Net sale gains and fees from mortgage loan originations including loans held-for-sale changes in fair value and hedging
Mortgage servicing income 11,071 9,170
MSR capitalization and changes in fair value, net of derivative activity
12,307 7,251
Income from mortgage banking services, net $ 40,017 $ 68,144
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For the nine months endedSeptember 30, 2022 , income from mortgage banking services decreased$28.1 million , compared to the same period in 2021, primarily due to a decline in revenue related to net sale gains and fees from loan originations, including fair value changes in the held-for-sale portfolio and hedging activity, which decreased$35.1 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. Total loan originations for sale were$0.9 billion for the nine months endedSeptember 30, 2022 , a decline of$0.9 billion from$1.7 billion for the same period in 2021. We retain servicing rights on the majority of mortgage loans that we sell, which drove the increase in servicing income of$1.9 million to$11.1 million for the nine months endedSeptember 30, 2022 , from$9.2 million for the nine months endedSeptember 30, 2021 . MSR capitalization and changes in fair value, net of derivative activity, increased$5.1 million in the nine months endedSeptember 30, 2022 , compared to the same period in 2021. The increase in revenue related to our MSRs was primarily the result of changes in market interest rates and our corresponding hedging positions. Other noninterest income decreased$1.1 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021, primarily due to certain loan-related fee income streams such as loan syndication fee income and customer accommodation interest rate swap fees and changes in fair value.
Noninterest Expense
The following table presents noninterest expense:
For the three months ended For the nine months ended
September 30, September 30,
(In thousands) 2022 2021 2022 2021
Salary and employee benefits $ 32,508 $ 36,061 $ 101,981 $ 113,129
Occupancy and equipment 8,216 6,643 22,802 19,867
Amortization of intangible assets 935 354 2,197 1,062
Merger-related expenses - 705 18,751 1,984
Other 13,889 10,807 37,952 30,332
Total noninterest expenses $ 55,548 $
54,570
Three months ended
Our noninterest expenses increased$1.0 million to$55.5 million for the third quarter of 2022, from$54.6 million for the same period in 2021. The increase is primarily due to an increase in other expenses of$3.1 million and an increase in occupancy and equipment of$1.6 million , partially offset by a decrease of$3.6 million in salary and employee benefits. Other expenses increased$3.1 million for the third quarter of 2022, compared to the same period in 2021. This increase was primarily caused by a$0.5 million increase in professional services expenses as well as an increase of$0.4 million inFDIC insurance costs as the Small Bank FDIC Assessment Credit was fully utilized in 2021, and other smaller increases in data processing expenses, office expenses, and deposit expenses and other operational losses. The decrease in our salary and employee benefits expense for the third quarter of 2022, compared to the same period in 2021, was driven primarily by a decrease in commissions paid to our mortgage loan officers related to decreased mortgage origination activity during the third quarter of 2022.
Nine months ended
Our noninterest expenses increased
We incurred Merger related expenses of$18.8 million ($0.63 per diluted share) for the nine months endedSeptember 30, 2022 , an increase of$16.8 million , from$2.0 million ($0.09 per diluted share) for the same period in 2021, related to our Merger with Pioneer that was completed onApril 1, 2022 . Other expenses increased$7.6 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. This increase was primarily caused by a$1.0 million increase in travel and entertainment expenses as we continue to move away from limitations related to the COVID-19 pandemic, a$1.3 million increase inFDIC insurance costs as the Small Bank FDIC Assessment Credit was fully utilized in 2021, and a$1.8 million increase in professional services expenses. 56
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The decrease in our salary and employee benefits expense for the nine months endedSeptember 30, 2022 , compared to the same period in 2021, was driven by the decrease in commissions paid to our mortgage loan officers related to decreased mortgage origination activity during the period endedSeptember 30, 2022 .
Income Taxes
Three months ended
We had income tax expense for the third quarter of 2022 of$7.6 million , compared to income tax expense of$1.9 million for the same period in 2021. The increase in income tax expense was due to our increased income during the third quarter of 2022. Our effective tax rate was 22.3% for the third quarter of 2022, compared to 17.5% for the same period in 2021.
Nine months ended
We had income tax expense for the nine months endedSeptember 30, 2022 of$8.6 million , compared to$7.2 million for the same period in 2021. The increase in income tax expense was primarily due to our increased income during the period endedSeptember 30, 2022 . Our effective tax rate was 19.8% for the nine months endedSeptember 30, 2022 , compared to 17.2% for the same period in 2021.
Financial Condition
Balance Sheet
Our total assets were$7.1 billion and$5.7 billion atSeptember 30, 2022 andDecember 31, 2021 , respectively. Our total loans held-for-investment, net of deferred fees, costs, premiums and discounts were$5.6 billion atSeptember 30, 2022 , an increase of$1.5 billion fromDecember 31, 2021 , which was due to organic growth and the Pioneer Merger.
Our securities portfolio is used to make various term investments, maintain a source of liquidity and serve as collateral for certain types of deposits and borrowings. We manage our investment portfolio according to written investment policies approved by our board of directors. Investment in our securities portfolio may change over time based on our funding needs and interest rate risk management objectives. Our liquidity levels take into account anticipated future cash flows and other available sources of funds, and are maintained at levels that we believe are appropriate to provide the necessary flexibility to meet our anticipated funding requirements.
Our investment securities portfolio consists of securities classified as
available-for-sale and held-to-maturity. There were no trading securities in our
investment portfolio as of
Our securities available-for-sale decreased by$21.3 million to$551.2 million atSeptember 30, 2022 , compared toDecember 31, 2021 . The decrease was due to unrealized losses resulting from the rising interest rate environment, partially offset by securities acquired in the Pioneer Merger. During the period endedSeptember 30, 2022 , the securities held-to-maturity increased$21.1 million to$39.1 million due to the securities held-to-maturity acquired in the Pioneer Merger. 57
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The following table is a summary of our investment portfolio as of:
September 30, 2022 December 31, 2021
Carrying
(In thousands) Amount % of Portfolio Carrying Amount % of PortfolioAvailable-for-sale: U.S. treasury$ 56,618 10.3 % $ 35,185 6.1 % U.S. agency 3,201 0.6 % 5,919 1.0 % Obligations of states and political subdivisions 25,452 4.6 % 3,789 0.7 % Mortgage backed - residential 118,513 21.5 % 138,677 24.2 % Collateralized mortgage obligations 214,030 38.8 % 235,784 41.2 % Mortgage backed - commercial 118,592 21.5 % 153,147 26.8 % Other debt 14,759 2.7 % - - % Total available-for-sale$ 551,165 100.0 %$ 572,501 100.0 % Held-to-maturity: Obligations of states and political subdivisions$ 25,002 63.9 % $ 716 4.0 % Mortgage backed - residential 9,091 23.2 % 10,750 59.7 % Collateralized mortgage obligations 5,055 12.9 % 6,541 36.3 % Total held-to-maturity$ 39,148 100.0 % $ 18,007 100.0 %
The following table shows the weighted average yield to average life of each
category of investment securities as of
(In thousands) One year or less One to five years Five to ten years After ten years
Carrying Carrying Carrying
Amount Average Yield Amount Average Yield Amount Average Yield Carrying Amount Average Yield
Available-for-sale:
U.S. treasury $ 3,412 - % $ 22,278 1.89 % $ 30,928 1.29 % $ - - %
U.S. agency - - % 1,981 3.28 % 1,220 2.89 % - - %
Obligations of states and
political subdivisions - - % - - % 7,094 3.20 % 18,358 3.00 %
Mortgage backed -
residential 164 3.99 % 39,931 2.21 % 36,820 1.88 % 41,598 2.18 %
Collateralized mortgage
obligations 2,344 2.32 % 86,119 2.77 % 106,355 2.30 % 19,212 2.10 %
Mortgage backed -
commercial 1,526 2.86 % 36,024 2.74 % 66,981 2.14 % 14,061 2.88 %
Other debt - - % - - % 12,014 2.83 % 2,745 3.78 %
Total available-for-sale $ 7,446 1.40 % $ 186,333 2.54 % $ 261,412 2.13 % $ 95,974 2.47 %
Held-to-maturity:
Obligations of states and
political subdivisions - - % 705 1.55 % - - % 24,297 3.52 %
Mortgage backed -
residential - - % 5,629 2.54 % 22 5.80 % 3,440 3.24 %
Collateralized mortgage
obligations 461 1.40 % 3,071 2.52 % 1,523 2.96 % - - %
Total held-to-maturity $ 461 1.40 % $ 9,405 2.46 % $ 1,545 3.00 % $ 27,737 3.49 %
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Loans
Our loan portfolio represents a broad range of borrowers primarily in our markets inTexas ,Colorado ,Kansas ,Arizona , andNew Mexico , comprised of commercial, commercial real estate, residential real estate and consumer financing loans. We have a diversified portfolio across a variety of industries, and the portfolio is generally centered in the states in which we have branch offices. Total loans, net of deferred origination fees, premiums, and discounts as ofSeptember 30, 2022 andDecember 31, 2021 were$5.6 billion and$4.0 billion , respectively. The increase in total loans was due to organic growth and our acquisition of Pioneer onApril 1, 2022 , which resulted in$811.3 million of loans recorded, net of purchase accounting adjustments. The following table sets forth the composition of our loan portfolio, as of: September 30, 2022 December 31, 2021 % of % of (In thousands) Amount total loans Amount total loans Commercial$ 2,738,068 49.3 %$ 2,407,888 59.6 % Commercial real estate 1,772,315 31.9 % 1,174,242 29.1 % Residential real estate 1,003,157 18.0 % 437,017 10.8 % Consumer 43,146 0.8 % 17,976 0.5 % Total loans$ 5,556,686 100.0 %$ 4,037,123 100.0 % Commercial loans include commercial and industrial loans to commercial and agricultural customers for use in normal business operations to finance working capital needs, equipment and inventory purchases, and other expansion projects. Commercial and industrial loans also include our specialty lending verticals such as public finance offerings to our charter school and municipal based customers, asset based lending and structured finance products as well as our healthcare, SBA and other small business lending products. These loans are made primarily in our market areas and are underwritten on the basis of the borrower's ability to service the debt from revenue, and are generally extended under our normal credit standards, controls and monitoring systems. Commercial real estate loans include owner occupied and non-owner occupied commercial real estate mortgage loans to operating commercial and agricultural businesses, and include both loans for long-term financing of land and buildings and loans made for the initial development or construction of a commercial real estate project.
Residential real estate loans represent loans to consumers collateralized by a mortgage on a residence and include purchase money, refinancing, secondary mortgages, and home equity loans and lines of credit.
Consumer loans include direct consumer installment loans, credit card accounts, overdrafts and other revolving loans.
We have originated loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is expected to be fully guaranteed by the SBA. PPP loans, which are included in our commercial loan portfolio, were$6.0 million and$66.7 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. Refer to the 2021 Form 10-K for additional details. During the three and nine months endedSeptember 30, 2022 , we recognized$0.3 million and$1.8 million , respectively, in PPP loan related deferred processing fees (net of amortization of related deferred origination costs) as a yield adjustment and this amount is included in interest income on loans. During the three and nine months endedSeptember 30, 2021 , we recognized approximately$2.1 million and$7.7 million , respectively, in PPP loan related deferred net processing fees. 59
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Maturities and Sensitivity of Loans to Changes in Interest Rates
The information in the following tables is based on the contractual maturities of individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of these loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties. The following tables summarize the loan maturity distribution by type and related interest rate characteristics as ofSeptember 30, 2022 : After one After five One year through through After 15 (In thousands) or less five years 15 years years Total Commercial$ 235,637 $ 1,546,433 $ 753,750 $ 202,248 $ 2,738,068 Commercial real estate 147,361 993,026 557,822 74,106 1,772,315 Residential real estate 94,447 95,406 131,834 681,470 1,003,157 Consumer 8,355 9,962 24,503 326 43,146 Total loans$ 485,800 $ 2,644,827 $ 1,467,909 $ 958,150 $ 5,556,686 After one After five Total Loans One year through through After 15 Maturing After 1 (In thousands) or less five years 15 years years Total Year Loans maturing with: Fixed interest rates Commercial$ 45,630 $ 699,528 $
657,031
609,858 166,160 1,300 843,469 777,318
Residential real estate 56,324 70,220 93,060 315,062 534,666 478,342
Consumer 5,896 8,817 24,375 - 39,088 33,192
Total fixed interest rate
loans $ 174,001 $ 1,388,423 $ 940,626 $ 490,107 $ 2,993,157 $ 2,819,156
Floating or adjustable
interest rates
Commercial $ 190,007 $ 846,905 $
96,719
383,168 391,662 72,806 928,846 847,636
Residential real estate 38,123 25,186 38,774 366,408 468,491 430,368
Consumer 2,459 1,145 128 326 4,058 1,599
Total floating or
adjustable interest rate
loans $ 311,799 $ 1,256,404 $ 527,283 $ 468,043 $ 2,563,529 $ 2,251,730
Total loans $ 485,800 $ 2,644,827 $ 1,467,909 $ 958,150 $ 5,556,686 $ 5,070,886 Allowance for Loan Losses
We maintain the allowance for loan losses at a level we believe is sufficient to
absorb probable incurred losses in our loan portfolio given the conditions at
the time. Events that are not within our control, such as changes in economic
factors, could change subsequent to the reporting date and could cause increases
or decreases to the allowance. The amount of the allowance is affected by loan
charge-offs, which decrease the allowance; recoveries on loans previously
charged off, which increase the allowance; and the provision for loan losses
charged to earnings, which increases the allowance.
In determining the provision for loan losses, management monitors fluctuations
in the allowance resulting from actual charge-offs and recoveries and reviews
the size and composition of the loan portfolio in light of current and
anticipated economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more
information becomes available or as events change.
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The following table presents, by loan type, the changes in the allowance for
loan losses:
For the year
For the three months ended For the nine months ended ended
September 30, September 30, December 31,
(In thousands) 2022 2021 2022 2021 2021
Balance, beginning of period $ 56,077 $ 42,978 $ 47,547 $ 47,766 $ 47,766
Loan charge-offs:
Commercial (223) - (2,173) (3,102) (4,296)
Commercial real estate - - - - (375)
Residential real estate (24) - (122) (2) (42)
Consumer (53) (66) (117) (138) (148)
Total loan charge-offs (300) (66) (2,412) (3,242) (4,861)
Recoveries of loans previously
charged-off:
Commercial 112 1,440 1,835 1,526 1,547
Commercial real estate 2 - 3 9 28
Residential real estate 1 3 196 23 24
Consumer 36 13 59 36 43
Total loan recoveries 151 1,456 2,093 1,594 1,642
Net recoveries (charge-offs) (149) 1,390 (319) (1,648) (3,219)
Provision for loan losses 3,750 3,500 12,450 1,750 3,000
Balance, end of period $ 59,678 $ 47,868 $ 59,678 $ 47,868 $ 47,547
Allowance for loan losses to
total loans 1.07 % 1.26 % 1.07 % 1.26 % 1.18 %
Ratio of net charge-offs
(recoveries) to average loans
outstanding 0.01 % (0.15) % 0.01 % 0.06 % 0.09 %
The following table presents net charge-offs (recoveries) to average loans
outstanding by loan category:
For the three months ended For the nine months ended
September 30, September 30,
(In thousands) 2022 2021 2022 2021
Commercial 0.02 % (0.25) % 0.02 % 0.10 %
Commercial real estate - % - % - % - %
Residential real estate 0.01 % - % (0.02) % (0.01) %
Consumer 0.15 % 1.20 % 0.21 % 0.86 %
Allocation of Allowance for Loan Losses
The following table presents the allocation of the allowance for loan losses by
category and the percentage of the allocation of the allowance for loan losses
by category to total loans listed as of:
September 30, 2022 December 31, 2021
% of loans in % of loans in
Allowance each category to Allowance each category to
(In thousands) Amount total loans Amount total loans
Commercial $ 37,162 49.3 % $ 33,277 59.6 %
Commercial real estate 19,218 31.9 % 12,899 29.1 %
Residential real estate 2,965 18.0 % 1,136 10.8 %
Consumer 333 0.8 % 235 0.5 %
Total $ 59,678 100.0 % $ 47,547 100.0 %
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Nonperforming Assets
We have established policies and procedures to guide us in originating, monitoring and maintaining the credit quality of our loan portfolio. These policies and procedures are expected to be followed by our bankers and underwriters and exceptions to these policies require elevated levels of approval and are reported to our board of directors.
Nonperforming assets include all loans categorized as nonaccrual, loans
identified as a troubled debt restructuring ("TDR"), accrual loans greater than
90 days past due, and other real estate owned and other repossessed assets. The
accrual of interest on loans is discontinued, or the loan is placed on
nonaccrual, when the full collection of principal and interest is in doubt. We
do not generally accrue interest on loans that are 90 days or more past due.
When a loan is placed on nonaccrual, previously accrued but unpaid interest is
reversed and charged against interest income and future accruals of interest are
discontinued. Payments by borrowers for loans on nonaccrual are applied to loan
principal. Loans are returned to accrual status when, in our judgment, the
borrower's ability to satisfy principal and interest obligations under the loan
agreement has improved sufficiently to reasonably assure recovery of principal
and the borrower has demonstrated a sustained period of repayment performance.
In general, we require a minimum of six consecutive months of timely payments in
accordance with the contractual terms before returning a loan to accrual status.
A loan is identified as a TDR, when we, for economic or legal reasons related to
the borrower's financial difficulties, grant a concession to the borrower. The
concessions may be granted in various forms including interest rate reductions,
principal forgiveness, extension of maturity date, waiver or deferral of
payments and other actions intended to minimize potential losses. Generally, a
nonaccrual loan that is restructured remains on nonaccrual status for a period
of no less than six months to demonstrate that the borrower can meet the
restructured terms. However, the borrower's performance prior to the
restructuring or other significant events at the time of restructuring may be
considered in assessing whether the borrower can meet the new terms and may
result in the loan being returned to accrual status after a shorter performance
period. If the borrower's performance under the new terms is not reasonably
assured, the loan remains classified as a nonaccrual loan.
The following table sets forth our nonperforming assets as of:
September 30, December 31,
(In thousands) 2022 2021
Nonaccrual loans:
Commercial $ 15,745 $ 16,492
Commercial real estate 8,936 4,781
Residential real estate 8,804 6,052
Consumer 87 2
Total nonaccrual loans 33,572 27,327
Accrual TDRs 8,429 6,450
Accrual loans greater than 90 days past due 459 1,061
Total nonperforming loans 42,460 34,838
Other real estate owned and foreclosed assets, net 5,391 5,487
Total nonperforming assets $ 47,851 $ 40,325
Nonaccrual loans to total loans 0.60 % 0.68 %
Nonperforming loans to total loans (1) 0.76 % 0.86 %
Nonperforming assets to total assets (1) 0.68 % 0.71 %
Allowance for loan losses to nonaccrual loans 177.76 % 173.99 %
(1) Nonperforming loans include nonaccrual loans, accrual TDR's, and accrual loans greater than 90 days past due.
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Deposits
Deposits represent our primary source of funds. We are focused on growing our core deposits through relationship-based banking with our business and consumer clients. Total deposits increased by$0.9 billion to$5.8 billion atSeptember 30, 2022 , compared toDecember 31, 2021 . Deposit growth over this period occurred primarily in ourTexas markets, generally due to our acquisition of Pioneer, resulting in$1.2 billion of deposits recorded, net of purchase accounting adjustments. The following table sets forth the average balance amounts and the average rates paid on deposits held by us: For the three months ended For
the nine months ended
2022 2021 2022 2021
Average Average Average Average Average Average Average Average
(Dollars in thousands) Balance Rate Paid Balance Rate Paid Balance Rate Paid Balance Rate Paid
Noninterest-bearing demand
deposit accounts $ 1,924,055 - % $ 1,483,010 - % $ 1,805,982 - % $ 1,295,984 - %
Interest-bearing deposit
accounts:
Interest-bearing demand accounts 159,905 1.12 % 188,897 0.19 % 169,191 0.58 % 193,756 0.21 %
Savings accounts and money
market accounts 3,124,000 0.24 % 2,718,369 0.17 % 3,064,646 0.18 % 2,637,844 0.19 %
NOW accounts 42,385 0.43 % 52,591 0.38 % 45,671 0.34 % 78,199 0.57 %
Certificate of deposit accounts 593,479 0.62 % 337,906 0.81 % 498,753 0.56 % 350,217 0.92 %
Total interest-bearing deposit
accounts 3,919,769 0.33 % 3,297,763 0.24 % 3,778,261 0.25 % 3,260,016 0.28 %
Total deposits $ 5,843,824 0.22 % $ 4,780,773 0.17 % $ 5,584,243 0.17 % $ 4,556,000 0.20 %
As of
Liquidity
Liquidity refers to our ability to maintain cash flow that is adequate to fund operations, support asset growth, maintain reserve requirements and meet present and future obligations of deposit withdrawals, lending obligations and other contractual obligations. FirstSun (Parent Company) FirstSun has routine funding requirements consisting primarily of operating expenses, debt service, and funds used for acquisitions. FirstSun can obtain funding to meet its obligations from dividends collected from its subsidiaries, primarily the Bank, and through the issuance of varying forms of debt. AtSeptember 30, 2022 , FirstSun had cash and cash equivalents of$17.7 million and debt outstanding of$84.4 million . Management believes FirstSun has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short-term and the long-term. Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. The Bank may declare dividends without prior regulatory approval that do not exceed the total of retained net income for the current year combined with its retained net income for the preceding two years, subject to maintenance of minimum capital requirements. Prior regulatory approval to pay dividends was not required in 2021 or 2022 and is not currently required. AtSeptember 30, 2022 , the Bank could pay dividends to FirstSun of approximately$132.1 million without prior regulatory approval. During the three and nine months endedSeptember 30, 2022 , the Bank paid a dividend of$8.0 million to FirstSun. During the three and nine months endedSeptember 30, 2022 , Logia paid a dividend of$0.4 million to FirstSun.
Bank
As more fully discussed in our 2021 Form 10-K, we continuously monitor our liquidity position and make adjustments to the balance between sources and uses of funds as we deem appropriate. AtSeptember 30, 2022 , our liquid assets, which consist of cash and amounts due from banks and interest-bearing deposits in other financial institutions, amounted to$149.1 million , or 2.1% of total assets, compared to$583.0 million , or 10.3% of total assets, atDecember 31, 2021 . The decrease in our liquid assets was primarily due to a decrease in cash held at theFederal Reserve . Our available-for-sale securities atSeptember 30, 2022 were$551.2 million , or 7.8% of total assets, compared to$572.5 million , or 10.1% of total assets, atDecember 31, 2021 . Investment securities with an aggregate carrying value of$435.4 million and$465.7 63
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million atSeptember 30, 2022 andDecember 31, 2021 , respectively, were pledged to secure public deposits and repurchase agreements. The decrease in our pledged securities was primarily due to changes in public deposits and repurchase agreements. The liability portion of our balance sheet serves as a primary source of liquidity. We plan to meet our future cash needs primarily through the generation of deposits. Customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. AtSeptember 30, 2022 , customer deposits, excluding brokered deposits and certificates of deposit greater than$250,000 , were 97.6% of net loans, compared with 113.2% atDecember 31, 2021 . For additional information related to our deposits, see the Deposits section above. We are also a member of the FHLB, from which we can borrow for leverage or liquidity purposes. The FHLB requires that securities and qualifying loans be pledged to secure any advances. AtSeptember 30, 2022 , we had$310.9 million in advances from the FHLB and a remaining credit availability of$659.5 million . In addition, we maintain a$6.5 million line with theFederal Reserve Bank's discount window that is secured by certain loans from our loan portfolio.
Management believes the Bank has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short-term and the long-term.
Capital
Stockholders' equity atSeptember 30, 2022 was$750.7 million , compared to$524.0 million atDecember 31, 2021 , an increase of$226.6 million , or 43.2%. The increase in stockholders' equity relates primarily to the value of the common shares issued to the Pioneer shareholders in our Merger with Pioneer onApril 1, 2022 , and net income for the nine months endedSeptember 30, 2022 , partially offset by a decline in accumulated other comprehensive income (loss), net, for unrealized losses in our available-for-sale securities portfolio resulting from the rising interest rate environment.
Capital Adequacy
We are subject to various regulatory capital requirements administered by the federal banking agencies. Management routinely analyzes our capital to seek to ensure an optimized capital structure. For further information on capital adequacy see Note 14 - Regulatory Capital Matters to the consolidated financial statements.
Material Contractual Obligations, Commitments, and Contingent Liabilities
We have entered into contractual obligations in the normal course of business that involve elements of credit risk, interest rate risk and liquidity risk.
The following table summarizes our material contractual obligations as of
Note Less than 1 - 3 3 - 5 More than
(In thousands) Reference Total 1 Year Years Years 5 Years
Deposits:
Deposits without a stated
maturity 7 $
5,160,858
$ - Certificates of deposit 7 599,560 381,184 194,356 20,925
3,095
Securities sold under agreements to repurchase 8 51,256 51,256 - - - Short-term debt: FHLB LOC 9 170,884 170,884 - - - Long-term debt: FHLB term advances (1) 9 140,000 140,000 - - - Convertible notes payable 9 5,456 5,456 - - - Subordinated debt 9 78,919 - - - 78,919 Operating leases 17 34,148 2,428 14,594 10,028 7,098
(1) Due to the increasing interest rate environment, we believe all of our FHLB term advances will be called upon the next due date, resulting in their repayment within the next year. For further information see Note 9 - Debt
to the consolidated financial statements.
We are party to various derivative contracts as a means to manage the balance
sheet and our related exposure to changes in interest rates, to manage our
residential real estate loan origination and sale activity, and to provide
derivative contracts to our clients. Since the derivative liabilities recorded
on the balance sheet change frequently and do not represent the amounts that may
ultimately be paid under these contracts, these liabilities are not included in
the table of contractual
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obligations presented above. Further discussion of derivative instruments is included in Note 6 - Derivative Financial Instruments to the consolidated financial statements. In the normal course of business, various legal actions and proceedings are pending against us and our affiliates which are incidental to the business in which they are engaged. Further discussion of contingent liabilities is included in Note 17 - Commitments and Contingencies to the consolidated financial statements. We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments. Further discussion of contingent liabilities is included in Note 17 - Commitments and Contingencies to the consolidated financial statements.
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