FIRSTSUN CAPITAL BANCORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF FIRSTSUN
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 is an analysis of our consolidated results of operations for the years endedDecember 31, 2022 , 2021 and 2020, and financial condition for the years endedDecember 31, 2022 and 2021. This discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying footnotes filed with this report in " Part II, Item 8. Financial Statements ." We have omitted discussion of 2020 results where it would be redundant to the discussion previously included in " Management's Discussion and Analysis of Financial Condition and Results of Operations of FirstSun " section of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , 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 ,Kansas ,Colorado ,New Mexico , andArizona 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 23 - Segment Information included in our consolidated financial statements included elsewhere in this report.
Merger with
OnApril 1, 2022 , we completed our merger (the "Merger" or the "Pioneer 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. 55
--------------------------------------------------------------------------------
Table of Contents
Recent Banking Events
There were two significant bank failures in the first part ofMarch 2023 , primarily due to the failed banks' lack of liquidity as depositors sought to withdraw their deposits. Due to rising interest rates, the failed banks were unable to sell investment securities held to meet liquidity needs without realizing substantial losses. As a result of theMarch 2023 bank closures and in an effort to strengthen public confidence in the banking system and protect depositors, regulators have announced that any losses to theDeposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of ourFDIC insurance assessments. Additionally, theFederal Reserve announced the creation of a new Bank Term Funding Program in an effort to minimize the need for banks to sell securities at a loss in times of stress. The future impact of these failures on the economy, financial institutions and their depositors, as well as any governmental regulatory responses or actions resulting from the same, is difficult to predict at this time.
Pandemic Update
Although the impacts of the COVID-19 pandemic to our business are diminishing, 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 including rising interest rates and inflation.
Financial Highlights For 2022
We delivered strong financial results in 2022, which included:
•Net income of$59.2 million ,$2.48 per diluted share (excluding merger costs,$76.2 million ,$3.20 per diluted share, see the section entitled " Non-GAAP Financial Measures and Reconciliations ") •Return on average assets of 0.88% (excluding merger costs, 1.13%, see the section entitled " Non-GAAP Financial Measures and Reconciliations ") •Return on average equity of 8.55% (excluding merger costs, 11.01%, see the section entitled " Non-GAAP Financial Measures and Reconciliations ") •Completed merger withPioneer Bancshares, Inc. , acquiring loans of$0.8 billion , total assets of$1.5 billion , and total deposits of$1.2 billion , net of purchase accounting adjustments •Loan growth, excluding acquired Pioneer loans and PPP loans, 28.4%, see the section entitled " Non-GAAP Financial Measures and Reconciliations ") •27.0% fee revenue to total revenue •Increase in net interest margin of 87 basis points to 3.87% Net income totaled$59.2 million , or$2.48 per diluted share, in 2022, compared to$43.2 million , or$2.30 per diluted share, in 2021. The return on average assets was 0.88% in 2022, compared to 0.79% in 2021, and the return on average equity was 8.55% in 2022, compared to 8.37% 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 in 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 , 0.25%, and 2.46% respectively. The reduction to net income, return on average assets and return on average equity in 2021, resulting from merger-related expenses, were$2.6 million , 0.05%, and 0.50%, respectively. 56
--------------------------------------------------------------------------------
Table of Contents
Financial Highlights
The following table sets forth certain financial highlights of FirstSun as of and for the year ended December 31,:
($ in thousands, except share and per share amounts) 2022 2021 2020 Income Statement: Net interest income $
241,632
5,059 5,755 6,490
Net interest income - fully tax equivalent ("FTE")
basis (non-GAAP) (3) $ 246,691 $ 160,988 $ 142,443
Provision for loan losses $ 18,050 $ 3,000 $ 23,100
Noninterest income $ 89,566 $ 124,244 $ 148,385
Noninterest expense $ 239,126 $ 224,635 $ 204,073
Net income $
59,182
23,838,471 18,770,785 18,475,538
Net income (basic) $ 2.55 $ 2.36 $ 2.60
Net income (diluted) $ 2.48 $ 2.30 $ 2.58
Cash dividends $ - $ - $ -
Dividend payout ratio - % - % - %
Book value $
31.08
$
26.69
0.88 % 0.79 % 1.02 %
Return on average stockholders' equity 8.55 % 8.37 % 10.20 %
Return on tangible common equity (non-GAAP) (3) 9.40 % 9.17 % 11.00 %
Return on average tangible common equity (non-GAAP)
(3) 10.45 % 9.35 % 11.50 %
Net interest margin 3.87 % 3.00 % 3.10 %
Efficiency ratio (1) 72.20 % 80.38 % 71.77 %
Net charge-offs (recoveries) to average loans
outstanding (0.01) % 0.09 % 0.11 %
Allowance for loan losses to loans 1.12 % 1.18 % 1.24 %
Nonperforming loans to total loans (2) 0.69 % 0.86 % 1.07 %
Balance Sheet:
Total loans, excluding loans held-for-sale $ 5,911,832 $ 4,037,123 $ 3,846,357
Total assets $ 7,430,322 $ 5,666,814 $ 4,995,457
Total deposits $
5,765,062
$
724,120
$
774,536
11.99 % 11.76 % 12.19 %
Tier 1 risk-based capital to risk-weighted assets 9.94 % 9.70 % 9.87 %
Common Equity Tier 1 (CET 1) to risk-weighted assets 9.94 % 9.70 % 9.87 %
Tier 1 leverage capital to average assets 9.71 % 8.24 % 8.53 %
Average equity to average assets 10.28 % 9.43 % 10.01 %
Tangible common equity to tangible assets (non-GAAP) (3)
9.09 % 8.58 % 8.95 %
Nonfinancial Data:
Full-time equivalent employees 1,149 1,042 1,059
Banking branches 72 53 56
(1) The efficiency ratio is one measure of profitability in the
banking industry. This ratio measures the cost of generating
57--------------------------------------------------------------------------------
Table of Contents
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 year endedDecember 31, 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 as of and for the year ended December 31,:
($ in thousands, except share and per share amounts) 2022 2021 2020 Total loan growth, excluding acquired Pioneer loans as ofApril 1, 2022 and PPP loans: Total loans (GAAP) $
5,911,832
(811,300) - -
Less: PPP loans (4,352) (66,749) (251,101)
Total loans, excluding acquired Pioneer loans and
PPP loans (non-GAAP) $
5,096,180
$
1,125,806
28.4 % 10.4 % 16.4 %
Tangible stockholders' equity and tangible book
value per common share:
Total stockholders' equity (GAAP) $ 774,536 $ 524,038 $ 485,787
Less: Goodwill and other intangible assets
Goodwill (93,483) (33,050) (33,050)
Other intangible assets (15,806) (8,250) (9,667)
Tangible stockholders' equity (non-GAAP) $ 665,247 $ 482,738 $ 443,070
Total common shares outstanding 24,920,984 18,346,288 18,321,659
Tangible book value per common share (non-GAAP) $ 26.69 $ 26.31 $ 24.18
Return on tangible stockholders' equity:
Net Income (GAAP) $ 59,182 $ 43,164 $ 47,585
Add: Intangible amortization, net of tax 3,330 1,119 1,173
Tangible net income (non-GAAP) $ 62,512 $ 44,283 $ 48,758
Tangible stockholders' equity (non-GAAP) (see
above) $ 665,247 $ 482,738 $ 443,070
Return on tangible stockholders' equity (non-GAAP) 9.40 % 9.17 % 11.00 %
Return on average tangible stockholders' equity:
Tangible net income (non-GAAP) (see above) $ 62,512 $ 44,283 $ 48,758
Total average stockholders' equity (GAAP) $
692,524
(78,582) (33,050) (33,050)
Average other intangible assets (15,811) (8,964) (9,597)
Total average tangible stockholders' equity
(non-GAAP) $ 598,131 $ 473,759 $ 423,972
Return on average tangible stockholders' equity
(non-GAAP) 10.45 % 9.35 % 11.50 %
Net interest margin - FTE basis:
Net interest income (GAAP) $ 241,632 $ 155,233 $ 135,953
Taxable equivalent adjustment 5,059 5,755 6,490
Net interest income - FTE basis (non-GAAP) $ 246,691 $ 160,988 $ 142,443
Average earning assets $
6,244,221
3.95 % 3.11 % 3.25 %
58--------------------------------------------------------------------------------
Table of Contents
($ in thousands, except share and per share amounts) 2022 2021 2020 Tangible stockholders' equity to tangible assets: Total assets (GAAP) $
7,430,322
(93,483) (33,050) (33,050)
Other intangible assets (15,806) (8,250) (9,667)
Total tangible assets (non-GAAP) $
7,321,033
$ 665,247 $ 482,738 $ 443,070 Tangible stockholders' equity to tangible assets (non-GAAP) 9.09 % 8.58 % 8.95 % Net income excluding merger costs: Net income (GAAP)$ 59,182 $ 43,164 $ 47,585 Add: Merger costs Merger related expenses 18,751 3,085 - Income tax effect on merger related expenses (4,083) (509) -
Provision for loan loss on Pioneer loans marked at a premium
2,884 - -
Income tax effect on provision for loan loss on
Pioneer loans marked at a premium (521) - -
Total merger costs 17,031 2,576 -
Net income excluding merger costs (non-GAAP) $ 76,213 $ 45,740 $ 47,585
Return on average total assets excluding merger
costs:
Return on average total assets (ROAA) (GAAP) 0.88 % 0.79 % 1.02 %
Add: Impact of merger costs, net of tax 0.25 % 0.05 % - %
ROAA excluding merger costs (non-GAAP) 1.13 % 0.84 % 1.02 %
Return on average stockholders' equity excluding
merger costs:
Return on average stockholders' equity (ROAE)
(GAAP) 8.55 % 8.37 % 10.20 %
Add: Impact of merger costs, net of tax 2.46 % 0.50 % - %
ROAE excluding merger costs (non-GAAP) 11.01 % 8.87 % 10.20 %
Efficiency ratio excluding merger related
expenses:
Efficiency ratio (GAAP) 72.20 % 80.38 % 71.77 %
Less: Impact of merger related expenses 5.66 % 1.11 % - %
Efficiency ratio excluding merger related expenses (non-GAAP)
66.54 % 79.27 % 71.77 %
Diluted earnings per share excluding merger costs: Diluted earnings per share (GAAP)
$ 2.48 $ 2.30 $ 2.58 Add: Impact of merger costs, net of tax 0.72 0.14 - Diluted earnings per share excluding merger costs (non-GAAP)$ 3.20 $ 2.44 $ 2.58 Segments Our operations are conducted through two operating segments: Banking and Mortgage Operations. We also allocate certain expenses to Corporate, which is not an operating segment. The operating segments have been determined based on the products and services we offer and reflect the manner in which our financial information is currently 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 2 3 - Segment Information included in our audited consolidated financial statements included elsewhere in this report.
Comparison of fiscal years 2022 and 2021
Banking
Income before income taxes increased$53.7 million to$88.5 million in 2022, from$34.8 million in 2021. The period over period increase was primarily driven by an increase in net interest income and to a lesser extent noninterest income, partially offset by an increase in provision for loan losses and noninterest expense. Net interest income increased$89.3 million to$241.8 million in 2022 compared to$152.5 million 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$28.9 million to$178.8 million in 2022, compared to$149.9 million in 2021. The increase in noninterest expense was primarily due to$18.8 million ($0.62 diluted earnings per share) in merger-related expenses resulting from the Pioneer Merger. Provision for loan losses increased$11.5 million to 59
--------------------------------------------------------------------------------
Table of Contents
$14.8 million in 2022 compared to$3.2 million 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. Due to the premium on certain of the loans, a provision for loan losses was required; however, it was not due to credit deterioration since closing of the Pioneer Merger. Identifiable assets for our Banking segment grew by$1.6 billion to$6.6 billion atDecember 31, 2022 from$5.1 billion atDecember 31, 2021 . The growth in identifiable assets was primarily driven by organic growth in our loan portfolios and the assets acquired in the Pioneer Merger.
Mortgage Operations
Income (loss) before income taxes decreased to$(4.6) million in 2022, compared to income of$25.4 million in 2021, primarily due to a decrease in mortgage banking services revenue, net of$39.5 million , partially offset by a$17.1 million decrease in salary and employee benefits expenses from the decline in mortgage loan originations. 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$1.1 billion in 2022, a decline of$0.7 billion from$1.7 billion in 2021.
Critical Accounting Estimates
Our consolidated financial statements are prepared based on the application of
accounting policies in accordance with
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 use of critical accounting estimates as these policies 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. Changes in underlying factors, estimates, assumptions or judgements could have a material impact on our future financial condition and results of operations. These critical accounting estimates and their application are reviewed at least annually by our audit committee. The following is a description of our critical accounting estimates and an explanation of the methods and assumptions underlying their application.
Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred credit losses and represents management's estimate of incurred losses in our loan portfolio as of the balance sheet date.
Management's estimate of the allowance for loan losses includes both specific and general components. Management estimates the allowance balance required and necessary provision for loan losses expense using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, current economic conditions, and other factors which, in the opinion of management, deserve current recognition. Further information on the allowance for loan losses is presented within "Part II, Item 8. Financial Statements," Notes 1 and 4 to the consolidated financial statements. The allowance for loan losses may be materially affected by qualitative factors, especially during periods of economic uncertainty, for items not reflected in the loss calculation, but which are deemed appropriate by management's current assessment of the risks related to the loan portfolio and/or external factors. Such qualitative factors may include changes in our loan portfolio composition and credit concentrations, changes in the balances and/or trends in asset quality and/or loan credit performance, changes in lending underwriting standards, the effect of other external factors such as significant unique events or conditions, and actual change in economic conditions, real estate values, and/or other economic developments. The qualitative factors applied atDecember 31, 2022 , and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes to items such as the uncertainty of economic conditions and management's assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of the allowance for loan losses currently calculated by management. The evaluation of qualitative factors is inherently imprecise and requires significant management judgment. While management utilizes its best judgment and information available, the adequacy of the allowance for loan losses is determined by certain factors outside of our control, such as the performance of our portfolios, changes in the economic environment including economic uncertainty, changes in interest rates, and the view of the regulatory authorities toward classification of assets and the level of allowance for loan losses. Additionally, the level of the allowance for loan losses 60
--------------------------------------------------------------------------------
Table of Contents
may fluctuate based on the balance and mix of the loan portfolio. If actual
results differ significantly from our assumptions, our allowance for loan losses
may not be sufficient to cover incurred losses in our loan portfolio, resulting
in additions to our allowance for loan losses and an increase in the provision
for loan losses.
Additionally, as an "emerging growth company" under Section 107 of the JOBS Act,
we have not been required to adopt ASU 2016-13, Financial Instruments - Credit
Losses (Topic 326) (CECL). As such, our allowance for loan losses may not be
comparable to other public financial institutions that have adopted CECL.
Fair Value Measurements - We use fair value measurements to record fair value
adjustments to certain financial instruments and to determine fair value
disclosures in accordance with Accounting Standards Codification ("ASC") 820 and
ASC 825. We group our financial instruments at fair value in three levels based
on the markets in which the instruments are traded and the reliability of the
assumptions used to determine fair value, with Level 1 (quoted prices for
identical assets in an active market) being considered the most reliable, and
Level 3 having the most unobservable inputs and therefore being considered the
least reliable. We base our fair values on the price that would be received from
the sale of an asset in an orderly transaction between market participants at
the measurement date. We maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value.
Our available-for-sale ("AFS") securities are measured at fair value on a
recurring basis. Changes in the fair value of AFS securities, not related to
credit loss, are recorded, net of tax, as accumulated other comprehensive income
(AOCI) in stockholders' equity. We primarily use prices obtained from
third-party pricing services to determine the fair value of our AFS securities.
Various modeling techniques are used to determine pricing for our securities,
including option pricing, discounted cash flow models, and similar techniques.
The inputs to these models may include benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and
reference data. All AFS securities are classified as Level 1 or Level 2 in the
valuation hierarchy.
Our loans held-for-sale represent mortgage loans originated and intended for
sale in the secondary market. These loans are recorded on a recurring fair value
basis. The estimated fair value of these loans held-for-sale is generally based
on sale, exchange, or dealer market prices and are classified within Level 2 of
the valuation hierarchy.
Our mortgage servicing rights (MSRs) are measured at fair value on a recurring
basis. We estimate the fair value of our MSRs using a process that utilizes a
discounted cash flow model and analysis of current market data to arrive at the
estimate. The cash flow assumptions and prepayment assumptions used in the model
are based on numerous factors, with the key assumptions being mortgage
prepayment speeds, discount rates and cost to service. The change of any of
these key assumptions due to market conditions or other factors could materially
affect the fair value of our MSRs. We also utilize a third party consulting firm
to assist us with the valuation. Because of the nature of the valuation inputs,
we classify the valuation of our MSRs as Level 3 in the valuation hierarchy.
Our derivative financial instruments are measured at fair value on a recurring
basis. These derivative instruments are generally valued based on quoted prices
for similar assets in an active market with inputs that are observable, exchange
prices or dealer market prices and are classified within Level 2 of the
valuation hierarchy. Further information on our derivative and hedging
activities is presented in "Part II, Item 8. Financial Statements," Notes 1
and 8 to the consolidated financial statements.
We did not have any other financial instruments that were measured at fair value
on a recurring basis at
61--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Comparison of fiscal years 2022 and 2021
The follow table sets forth our results of operations as of and for the year ended December 31,:
($ in thousands, except per share amounts) 2022 2021 2020 Net interest income$ 241,632 $ 155,233 $ 135,953 Provision for loan losses 18,050 3,000 23,100 Noninterest income 89,566 124,244 148,385 Noninterest expense 239,126 224,635 204,073 Income before income taxes 74,022 51,842 57,165 Provision for income taxes 14,840 8,678 9,580 Net income 59,182 43,164 47,585 Diluted earnings per share$ 2.48 $ 2.30 $ 2.58 Return on average assets 0.88 % 0.79 % 1.02 % Return on average stockholders' equity 8.55 % 8.37 % 10.20 % Net interest margin 3.87 % 3.00 % 3.10 % Net interest margin (FTE basis) (1) 3.95 % 3.11 % 3.25 % Efficiency ratio 72.20 % 80.38 % 71.77 % Fee revenue to total revenue 27.0 % 44.5 % 52.2 %
(1) 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.
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 net interest income divided by average interest-earning assets.
Interest earned on our loan portfolio is 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. Loans acquired through acquisition are initially recorded at fair
value. Discounts or premiums created when the loans were recorded at their
estimated fair values at acquisition are accreted or amortized over the
remaining term of the loan as an adjustment to the related loan's yield.
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.
62--------------------------------------------------------------------------------
Table of Contents
Our net interest income was$241.6 million for the year endedDecember 31, 2022 , an increase of$86.4 million , or 55.7%, from 2021. Interest income on loans held-for-investment increased by$89.4 million for the year endedDecember 31, 2022 , from 2021. Interest income on investment securities increased by$5.2 million for the year endedDecember 31, 2022 , from 2021. Interest expense from total interest-bearing liabilities increased by$11.1 million for the year endedDecember 31, 2022 , from 2021. Total average loans held-for-investment grew to$5.2 billion atDecember 31, 2022 , an increase of$1.4 billion , compared toDecember 31, 2021 , primarily due to organic growth in our loan portfolios and the Pioneer Merger. Yield on loans held-for-investment increased 64 basis points for the year endedDecember 31, 2022 , from 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$0.6 billion , or 17.9%, for the year endedDecember 31, 2022 , from 2021. Average interest-bearing deposits increased$0.5 billion , or 15.7%, for the year endedDecember 31, 2022 , from 2021, inclusive of the deposits acquired from the Pioneer Merger, and was the primary driver of the growth in average interest-bearing liabilities. Our net interest margin was 3.87% for the year endedDecember 31, 2022 , compared to 3.00% in 2021, an increase of 87 basis points. We experienced a 100 basis points increase in yield from earning assets and our total cost of funds increased by 13 basis points from 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 in 2023. 63
--------------------------------------------------------------------------------
Table of Contents
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 year ended December 31,:
2022 2021 2020
(In thousands) Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate
Interest Earning Assets
Loans held-for-sale $ 59,915 $ 3,313 5.53 % $ 125,808 $ 4,051 3.22 % $ 121,941 $ 3,842 3.15 %
Loans held-for-investment (1) 5,156,297 244,675 4.75 % 3,780,650 155,252 4.11 % 3,525,837 141,413 4.01 %
Investment securities 605,119 13,185 2.18 % 531,803 7,979 1.50 % 555,030 10,100 1.82 %
Interest-bearing cash and other
assets 422,890 5,644 1.33 % 742,389 2,072 0.28 % 179,331 1,482 0.83 %
Total earning assets 6,244,221 266,817 4.27 % 5,180,650 169,354 3.27 % 4,382,139 156,837 3.58 %
Other assets 494,065 288,617 279,806
Total assets $ 6,738,286 $ 5,469,267 $ 4,661,945
Interest-bearing liabilities
Demand and NOW deposits $ 214,516 $ 1,775 0.83 % $ 254,679 $ 756 0.30 % $ 205,557 $ 1,019 0.50 %
Savings deposits 496,131 799 0.16 % 455,451 460 0.10 % 380,839 703 0.19 %
Money market deposits 2,528,308 6,770 0.27 % 2,208,498 4,292 0.19 % 1,801,809 6,635 0.37 %
Certificates of deposits 536,325 3,810 0.71 % 344,224 3,036 0.88 % 488,575 7,285 1.49 %
Total deposits 3,775,280 13,154 0.35 % 3,262,852 8,544 0.26 % 2,876,780 15,642 0.54 %
Repurchase agreements 54,335 119 0.22 % 125,867 59 0.05 % 116,074 157 0.14 %
Total deposits and repurchase
agreements 3,829,615 13,273 0.35 % 3,388,719 8,603 0.25 % 2,992,854 15,799 0.53 %
FHLB borrowings 215,166 6,221 2.89 % 42,527 909 2.14 % 89,861 1,658 1.84 %
Other long-term borrowings 82,111 5,691 6.93 % 68,918 4,609 6.69 % 51,091 3,427 6.71 %
Total interest-bearing liabilities 4,126,892 25,185 0.61 % 3,500,164 14,121 0.40 % 3,133,806 20,884 0.67 %
Noninterest-bearing deposits 1,835,578 1,376,968 978,092
Other liabilities 83,292 76,362 83,427
Stockholders' equity 692,524 515,773 466,620
Total liabilities and stockholders'
equity $ 6,738,286 $ 5,469,267 $ 4,661,945
Net interest income $ 241,632 $ 155,233 $ 135,953
Net interest spread 3.66 % 2.87 % 2.91 %
Net interest margin 3.87 % 3.00 % 3.10 %
Net interest margin (on a FTE basis)
(2) 3.95 % 3.11 % 3.25 %
(1) Includes nonaccrual loans.
(2) 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.
64--------------------------------------------------------------------------------
Table of Contents
Rate-Volume Analysis
The tables below present the effect of volume and rate changes on interest
income and expense. Changes in volume are changes in the average balance
multiplied by the previous period's average rate. Changes in 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 year ended December 31 , For the year ended December 31,
2022 Versus 2021 Increase (Decrease) Due to: 2021 Versus 2020 Increase (Decrease) Due to:(In thousands) Rate Volume Total Rate Volume Total Interest Earning Assets Loans held-for-sale$ 1,384 $ (2,122) $ (738) $ 87$ 122 $ 209 Loans held-for-investment 32,932 56,491
89,423 3,619 10,220 13,839 Investment securities 4,106 1,100 5,206 (1,699) (422) (2,121) Interest-bearing cash 4,464 (892) 3,572 (4,063) 4,653 590 Total earning assets 42,886 54,577 97,463 (2,056) 14,573 12,517 Interest-bearing liabilities Demand and NOW deposits 1,138 (119) 1,019 (506) 244 (262) Savings deposits 298 41 339 (418) 144 (274) Money market deposits 1,857 621 2,478 (3,804) 1,491 (2,313) Certificates of deposits (920) 1,694 774 (2,096) (2,153) (4,249) Total deposits 2,373 2,237 4,610 (6,824) (274) (7,098) Repurchase agreements 93 (33) 60 (111) 13 (98) Total deposits and repurchase agreements 2,466 2,204 4,670 (6,935) (261) (7,196) FHLB borrowings 1,621 3,691 5,312 124 (873) (749) Other long-term borrowings 200 882 1,082 (15) 1,197 1,182 Total interest-bearing liabilities 4,287 6,777 11,064 (6,826) 63 (6,763) Net interest income$ 38,599 $ 47,800 $ 86,399 $ 4,770$ 14,510 $ 19,280
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$18.1 million for the year endedDecember 31, 2022 , compared to a provision for loan losses of$3.0 million for 2021. The increase in the provision for loan losses was due to several factors, including greater organic growth in the loan portfolio, loans acquired in the Pioneer Merger, 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 ($0.10 diluted earnings per share) during the year endedDecember 31, 2022 . The 2021 provision was impacted by favorable changes in certain environmental factors as a result of improved economic conditions as the impact of the COVID-19 pandemic continued to subside.
For a further discussion of the allowance for loan losses, refer to the "Allowance for Loan Losses" section of this financial review.
65--------------------------------------------------------------------------------
Table of Contents
Noninterest Income
The following table presents noninterest income for the year ended December 31,:
(In thousands) 2022 2021 2020 Service charges on deposit accounts$ 18,211 $ 12,504 $ 9,630 Credit and debit card fees 11,511 9,596 7,994 Trust and investment advisory fees 6,806 7,795 5,201 Income from mortgage banking services, net 46,285 86,410 122,174 Other 6,753 7,939 3,386 Total noninterest income$ 89,566 $ 124,244 $ 148,385 Our noninterest income decreased$34.7 million to$89.6 million for the year endedDecember 31, 2022 from$124.2 million 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 year endedDecember 31, 2022 , service charges on deposit accounts increased$5.7 million , from 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 revenue compared to 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$1.9 million for the year endedDecember 31, 2022 compared to 2021, primarily due 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 decreased$1.0 million for the year endedDecember 31, 2022 compared to 2021 as assets under management declined. The components of income from mortgage banking services were as follows for the year endedDecember 31 ,: (In thousands) 2022 2021 2020 Net sale gains and fees from mortgage loan originations including loans held-for-sale changes in fair value and hedging$ 18,924 $ 63,468 $ 94,001 Mortgage servicing income 15,088 12,525 9,798
MSR capitalization and changes in fair value, net of derivative activity
12,273 10,417 18,375
Income from mortgage banking services, net $ 46,285 $
86,410
For the year endedDecember 31, 2022 , income from mortgage banking services decreased$40.1 million , compared to 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 activity, which decreased$44.5 million for the year endedDecember 31, 2022 , compared to 2021. Total loan originations for sale were$1.1 billion for the year endedDecember 31, 2022 , a decline of$0.7 billion from$1.7 billion in 2021. We retain servicing rights on the majority of mortgage loans that we sell, which drove the increase in servicing income of$2.6 million to$15.1 million for the year endedDecember 31, 2022 , from$12.5 million for 2021. MSR capitalization and changes in fair value, net of derivative activity, increased$1.9 million for the year endedDecember 31, 2022 , compared to 2021. The increase in revenue related to our MSRs was primarily the result of changes in market interest rates and our corresponding hedging positions. We recognize fair value adjustments to our MSR asset, which includes changes in assumptions to the valuation model and pay-offs and pay-downs of the MSR portfolio. We also maintain a hedging strategy to manage a portion of the risk associated with changes in the fair value of our MSR portfolio. Changes in fair value of the derivative instruments used to economically hedge the MSRs are also included as a component of income from mortgage banking services. Due to a number of factors, including rising interest rates, low inventory in the housing market, lower refinance volumes and a decrease in margin on loans sales, we do not expect revenue from mortgage banking activities to continue at levels seen in the prior years, which will reduce the amount of income from mortgage banking services, net recorded in future periods in comparison to prior years.
Other noninterest income decreased
66--------------------------------------------------------------------------------
Table of Contents
Noninterest Expense
The following table presents noninterest expense for the year endedDecember 31 ,: (In thousands) 2022 2021 2020 Salary and employee benefits$ 134,359 $ 151,926 $ 139,980 Occupancy and equipment 30,509 26,565 26,716 Amortization of intangible assets 4,215 1,417 1,485 Merger related expenses 18,751 3,085 - Other 51,292 41,642 35,892 Total noninterest expenses$ 239,126 $ 224,635 $ 204,073 Our noninterest expenses increased$14.5 million to$239.1 million for the year endedDecember 31, 2022 , from$224.6 million for 2021. The increase is primarily due to increases of$15.7 million in merger related expenses and$9.7 million in other expenses, partially offset by a decrease of$17.6 million in salary and employee benefits. We incurred merger related expenses of$18.8 million ($0.62 per diluted share) for the year endedDecember 31, 2022 , an increase of$15.7 million , from$3.1 million ($0.14 per diluted share) for 2021, related to our merger with Pioneer that was completed onApril 1, 2022 . Other expenses increased$9.7 million for the year endedDecember 31, 2022 , compared to 2021. This increase was primarily caused by a$1.2 million increase in travel and entertainment expenses as we continue to move away from limitations related to the COVID-19 pandemic, a$1.5 million increase toFDIC insurance costs due to organic growth and growth resulting from the Pioneer Merger and the Small Bank FDIC Assessment Credit was fully utilized in 2021, a$1.6 million increase in data processing expenses primarily due to organic growth and growth resulting from the Pioneer Merger, and a$2.4 million increase in professional services expenses as a result of the Pioneer Merger. The decrease in our salary and employee benefits expense for the year endedDecember 31, 2022 , compared to 2021, was driven by the decrease in commissions paid to our mortgage loan officers related to decreased mortgage origination activity during 2022. Income Taxes We had income tax expense for the year endedDecember 31, 2022 of$14.8 million , compared to$8.7 million in 2021. The increase in income tax expense was primarily due to our increased income during 2022. Our effective tax rate was 20.0% for the year endedDecember 31, 2022 , compared to 16.7% in 2021.
Financial Condition
Balance Sheet
Our total assets were$7.4 billion atDecember 31, 2022 , compared to$5.7 billion atDecember 31, 2021 . Our total loans held-for-investment, net of deferred fees, costs, premiums and discounts were$5.9 billion atDecember 31, 2022 , an increase of$1.9 billion from 2021, which was due to organic growth and the Pioneer Merger.Investment Securities 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 ofDecember 31, 2022 and 2021. All available-for sale securities are carried at fair value and may be used for liquidity purposes should management consider it to be in our best interest. Our securities available-for-sale decreased by$35.5 million to$537.0 million atDecember 31, 2022 , compared toDecember 31, 2021 . The decrease was due to unrealized losses resulting from the rising interest rate environment, partially 67
--------------------------------------------------------------------------------
Table of Contents
offset by securities acquired in the Pioneer Merger. Securities held-to-maturity
increased
The following table is a summary of our investment portfolio as ofDecember 31 ,: 2022 2021 (In thousands) Carrying Amount % of Portfolio Carrying Amount % of Portfolio
Available-for-sale: U.S. treasury $ 56,649 10.5 % $ 35,185 6.1 % U.S. agency 2,834 0.5 % 5,919 1.0 % Obligations of states and political subdivisions 24,899 4.6 % 3,789 0.7 % Mortgage backed - residential 116,135 21.6 % 138,677 24.2 % Collateralized mortgage obligations 204,265 38.1 % 235,784 41.2 % Mortgage backed - commercial 117,336 21.9 % 153,147 26.8 % Other debt 14,855 2.8 % - - % Total available-for-sale$ 536,973 100 %$ 572,501 100 % Held-to-maturity: U.S. agency - - % - - % Obligations of states and political subdivisions 25,378 65.2 % 716 4.0 % Mortgage backed - residential 8,705 22.4 % 10,750 59.7 % Collateralized mortgage obligations 4,818 12.4 % 6,541 36.3
%
Total held-to-maturity $ 38,901 100 % $ 18,007 100
%
The following tables show 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 $ 3,424 1.34 % $ 22,278 1.89 % $ 30,947 1.29 % $ - - %
U.S. agency - - % 1,677 4.68 % 929 4.21 % 228 5.02 %
Obligations of states and
political subdivisions - - % - - % 6,906 3.29 % 17,993 3.00 %
Mortgage backed -
residential 559 0.03 % 36,994 2.22 % 48,025 1.89 % 30,557 2.32 %
Collateralized mortgage
obligations 2,049 2.43 % 59,357 4.02 % 120,797 2.63 % 22,062 2.41 %
Mortgage backed -
commercial 1,507 2.68 % 39,466 3.49 % 74,449 2.21 % 1,914 2.95 %
Other debt - - % - - % 12,104 2.83 % 2,751 3.78 %
Total available-for-sale $ 7,539 1.80 % $ 159,772 3.18 % $ 294,157 2.29 % $ 75,505 2.59 %
Held-to-maturity:
Obligations of states and
political subdivisions $ - - % $ 1,036 2.05 % $ - - % $ 24,342 3.52 %
Mortgage backed -
residential - - % 5,996 2.45 % 21 5.96 % 2,688 3.21 %Collateralized mortgage obligations - - % 2,547 2.43 % 2,271 3.10 % - - % Total held-to-maturity $ - - %$ 9,579 2.40 %$ 2,292 3.13 %$ 27,030 3.49 %
We had no securities of any one issuer, other than the
68--------------------------------------------------------------------------------
Table of Contents
Loans
Our loan portfolio represents a broad range of borrowers primarily in our markets inTexas ,Kansas ,Colorado ,New Mexico andArizona , 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 ofDecember 31, 2022 and 2021 were$5.9 billion and$4.0 billion , respectively. The commercial loan portfolio included PPP loans outstanding of$4.4 million and$66.7 million atDecember 31, 2022 and 2021, respectively. The following table sets forth the composition of our loan portfolio, as ofDecember 31 ,: 2022 2021 % of % of (In thousands) Amount total loans Amount total loans Commercial$ 3,019,610 51.1 %$ 2,407,888 59.6 % Commercial real estate 1,743,635 29.5 % 1,174,242 29.1 % Residential real estate 1,105,999 18.7 % 437,017 10.8 % Consumer 42,588 0.7 % 17,976 0.5 % Total loans$ 5,911,832 100 %$ 4,037,123 100 % 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$4.4 million and$66.7 million atDecember 31, 2022 andDecember 31, 2021 , respectively. For the year endedDecember 31, 2022 , we recognized$1.9 million 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 as compared to$6.2 million in 2021.
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
69--------------------------------------------------------------------------------
Table of Contents
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 of
After one After five
One year through through After 15
(In thousands) or less five years 15 years years Total
Commercial $ 268,257 $ 1,819,543 $ 731,239 $ 200,571 $ 3,019,610
Commercial real estate 149,045 971,420 556,751 66,419 1,743,635
Residential real estate 104,335 134,870 121,337 745,457 1,105,999
Consumer 9,582 9,210 23,495 301 42,588
Total loans $ 531,219 $ 2,935,043 $ 1,432,822 $ 1,012,748 $ 5,911,832
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 $ 70,190 $ 836,377 $
628,118
591,380 172,113 1,300 844,852 764,793
Residential real estate 71,417 95,150 79,174 328,010 573,751 502,334
Consumer 6,472 8,251 23,495 - 38,218 31,746
Total fixed interest rate
loans $ 228,138 $ 1,531,158 $ 902,900 $ 501,118 $ 3,163,314 $ 2,935,176
Floating or adjustable
interest rates
Commercial $ 198,067 $ 983,166 $
103,121
380,040 384,638 65,119 898,783 829,797
Residential real estate 32,918 39,720 42,163 417,447 532,248 499,330
Consumer 3,110 959 - 301 4,370 1,260
Total floating or
adjustable interest rate
loans $ 303,081 $ 1,403,885 $ 529,922 $ 511,630 $ 2,748,518 $ 2,445,437
Total loans $ 531,219 $ 2,935,043 $ 1,432,822 $ 1,012,748 $ 5,911,832 $ 5,380,613 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.
70--------------------------------------------------------------------------------
Table of Contents
The following table presents, by loan type, the changes in the allowance for loan losses for the year ended December 31,:
(In thousands) 2022 2021 2020 Balance, beginning of period$ 47,547 $ 47,766 $ 28,546 Loan charge-offs: Commercial (2,321) (4,296) (4,064) Commercial real estate - (375) (581) Residential real estate (122) (42) (39) Consumer (144) (148) (216) Total loan charge-offs (2,587) (4,861) (4,900) Recoveries of loans previously charged-off: Commercial 2,236 1,547 585 Commercial real estate 388 28 272 Residential real estate 221 24 115 Consumer 62 43 48 Total loan recoveries 2,907 1,642 1,020 Net recoveries (charge-offs) 320 (3,219) (3,880) Provision for loan losses 18,050 3,000 23,100 Balance, end of period$ 65,917 $ 47,547 $ 47,766 Allowance for loan losses to total loans 1.12 % 1.18 % 1.24 % Ratio of net charge-offs (recoveries) to average loans outstanding (0.01) % 0.09 % 0.11 %
The following table presents net charge-offs (recoveries) to average loans outstanding by loan category for the year ended December 31,:
(In thousands) 2022 2021 2020 Commercial - % 0.12 % 0.19 % Commercial real estate (0.03) % 0.03 % 0.03 % Residential real estate (0.01) % - % (0.01) % Consumer 0.21 % 0.65 % 1.00 %
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 ofDecember 31 ,: 2022 2021 % of loans in % of loans in Allowance each category to Allowance each category to (In thousands) Amount total loans Amount total loans Commercial$ 42,847 51.1 %$ 33,277 59.6 % Commercial real estate 19,369 29.5 % 12,899 29.1 % Residential real estate 3,349 18.7 % 1,136 10.8 % Consumer 352 0.7 % 235 0.5 % Total$ 65,917 100 %$ 47,547 100 % 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
71--------------------------------------------------------------------------------
Table of Contents
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. 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 December 31,:
(In thousands) 2022 2021 Nonaccrual loans: Commercial$ 9,965 $ 16,492 Commercial real estate 8,283 4,781 Residential real estate 10,628 6,052 Consumer 93 2 Total nonaccrual loans 28,969 27,327 Accrual TDRs 11,843 6,450 Accrual loans greater than 90 days past due 98 1,061 Total nonperforming loans 40,910 34,838 Other real estate owned and foreclosed assets, net 6,358 5,487 Total nonperforming assets$ 47,268 $ 40,325 Nonaccrual loans to total loans 0.49 % 0.68 % Nonperforming loans to total loans (1) 0.69 % 0.86 % Nonperforming assets to total assets (1) 0.64 % 0.71 % Allowance for loan losses to nonaccrual loans 227.54 % 173.99 %
(1) Nonperforming loans include nonaccrual loans, accrual TDR's, and accrual loans greater than 90 days past due.
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 atDecember 31, 2022 , compared toDecember 31, 2021 . Deposit growth over this period occurred primarily in ourTexas markets, generally due to our acquisition of Pioneer, resulting in$1.2 billion of deposits recorded as ofApril 1, 2022 , net of purchase accounting adjustments.
The following table sets forth the average balance amounts and the average rates paid on deposits held by us for the year ended December 31,:
2022 2021
Average Average Average Average
(Dollars in thousands) Balance Rate Paid Balance Rate Paid
Noninterest-bearing demand deposit accounts$ 1,835,578 - %$ 1,376,968 - % Interest-bearing deposit accounts: Interest-bearing demand accounts 171,009 0.96 % 186,432 0.20 % Savings accounts and money market accounts 3,024,439 0.25 % 2,663,949 0.18 % NOW accounts 43,507 0.32 % 68,247 0.55 % Certificate of deposit accounts 536,325 0.71 % 344,224 0.88 % Total interest-bearing deposit accounts 3,775,280 0.35 % 3,262,852 0.26 % Total deposits$ 5,610,858 0.23 %$ 4,639,820 0.18 % 72
--------------------------------------------------------------------------------
Table of Contents
The following table sets forth the average balance amounts and the average rates paid on deposits by customer type held by us for the year endedDecember 31 ,: 2022 2021 Average Average Average Average (Dollars in thousands) Balance Rate Paid Balance Rate Paid Consumer$ 2,928,706 0.27 %$ 2,391,550 0.25 % Business Customers 2,682,152 0.20 % 2,248,270 0.11 % Total deposits$ 5,610,858 0.23 %$ 4,639,820 0.18 %
Maturities of certificates of deposit of
(In thousands) 2022 2021 Three months or less$ 22,451 $ 14,624
Over three months through twelve months 310,694 43,922 Over twelve months through three years 75,804 13,490 Over three years
961 1,241
Total $ 409,910 $ 73,277 The following table sets forth the portion of the Bank's time deposits, by
account, that are in excess of the
(In thousands) 2022 Three months or less$ 9,362
Over three months through twelve months 69,895 Over twelve months through three years 80,572 Over three years
2,529
Total $ 162,358
As of December 31, 2022 and 2021, approximately $2.4 billion and $2.5 billion ,
respectively, of our deposit portfolio was uninsured. The uninsured amounts are
estimates based on the methodologies and assumptions used for the Bank's
regulatory reporting requirements.
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 cash needs 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. AtDecember 31, 2022 , FirstSun has cash and cash equivalents of$17.3 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. AtDecember 31, 2022 , the Bank could pay dividends to FirstSun of approximately$107.0 million without prior regulatory approval. During the year endedDecember 31, 2022 , the Bank paid a dividend of$8.0 million to FirstSun. During the year endedDecember 31, 2022 , Logia paid a dividend of$0.7 million to FirstSun. 73
--------------------------------------------------------------------------------
Table of Contents
Bank
The Bank's liquidity management policy and our asset and liability management policy, or ALM policy, provides the framework that we use to seek to maintain adequate liquidity and sources of available liquidity at levels that will enable us to meet all reasonably foreseeable short-term, long-term and strategic liquidity demands. OurAsset and Liability Management Committee , or ALCO, is responsible for oversight of our liquidity risk management activities in accordance with the provisions of our ALM Policy and applicable bank regulatory capital and liquidity laws and regulations. Our liquidity risk management process includes (i) ongoing analysis and monitoring of our funding requirements under various economic and interest rate scenarios, (ii) review and monitoring of lenders, depositors, brokers and other liability holders to ensure appropriate diversification of funding sources and (iii) liquidity contingency planning to address liquidity needs in the event of unforeseen market disruption, including appropriate allocation of funds to a liquid portfolio of marketable securities and investments. We continuously monitor our liquidity position in order for our assets and liabilities to be managed in a manner that we believe will meet our immediate and long-term funding requirements. We seek to manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our stockholders. We also monitor our liquidity requirements in light of interest rate trends, changes in the economy, and the scheduled maturity and interest rate sensitivity of our securities and loan portfolios and deposits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control when we make investment decisions. Net deposit inflows and outflows, however, are far less predictable and are not subject to the same degree of certainty. Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers and capital expenditures. These liquidity requirements are met primarily through our deposits, FHLB advances and the principal and interest payments we receive on loans and investment securities. Cash, interest-bearing deposits in third party banks, securities available for sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are available to us include the sale of loans we hold for investment, the ability to acquire additional national market non-core deposits, borrowings through theFederal Reserve's discount window and the issuance of debt or equity securities. AtDecember 31, 2022 , our liquid assets, which consist of cash and amounts due from banks and interest-bearing deposits in other financial institutions, amounted to$307.9 million , or 4.1% 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 atDecember 31, 2022 were$537.0 million , or 7.2% 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$428.7 million and$465.7 million atDecember 31, 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. AtDecember 31, 2022 , net loans as a percentage of customer deposits were 102.5%, compared with 83.2% atDecember 31, 2021 . For additional information related to our deposits, see 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. AtDecember 31, 2022 , we had$643.9 million in advances from the FHLB and a remaining credit availability of$357.0 million . In addition, we maintain a$6.1 million line with theFederal Reserve Bank's discount window that is secured by certain loans from our loan portfolio, and have unused lines-of-credit with certain other financial institutions totaling$330.0 million as ofDecember 31, 2022 .
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 atDecember 31, 2022 was$774.5 million , compared to$524.0 million at 2021, an increase of$250.5 million , or 47.8%. 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 year endedDecember 31, 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. 74
--------------------------------------------------------------------------------
Table of Contents
Capital Adequacy
We are subject to various regulatory capital requirements administered by the federal banking agencies. Management routinely analyzes our capital to ensure an optimized capital structure. For further information on capital adequacy see Note 1 9 - 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 10 $ 4,843,040 $ 4,843,040 $ - $ - $ -
Certificates of deposit 10 922,022 639,438 264,141 15,614 2,829
Securities sold under agreements
to repurchase 11 36,721 36,721 - - -
Short-term debt:
FHLB LOC 12 643,885 643,885 - - -
Long-term debt:
FHLB term advances 12 - - - - -
Convertible notes payable 12 5,456 5,456 - - -
Subordinated debt 12 78,919 - - - 78,919
Operating leases 25 33,094 7,517 12,366 6,323 6,888
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 obligations presented above. Further discussion of
derivative instruments is included in Note 8 - 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 24 - 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 24 - Commitments and
Contingencies to the consolidated financial statements.
75--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
