Notes to Consolidated Financial Statements
(Unaudited)
($ in thousands, except share and per share amounts)
NOTE 1 - Organization and Basis of Presentation
Nature of Operations - The consolidated financial statements include the accounts of FirstSun Capital Bancorp (“FirstSun” or “Parent Company” and its wholly-owned subsidiaries, Sunflower Bank, N.A. (the “Bank”) and Logia Portfolio Management, LLC, and have been prepared using U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. These entities are collectively referred to as “our”, “us”, “we”, or “the Company”.
These consolidated financial statements in this Quarterly Report on Form 10-Q do not include all of the information and footnotes required by U.S. GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission (“SEC”). These interim financial statements are unaudited, and include, in our opinion, all adjustments necessary for a fair statement of the results for the periods indicated, which are not necessarily indicative of results which may be expected for the full year. These unaudited consolidated financial statements and notes should be read in conjunction with FirstSun’s audited consolidated financial statements and footnotes thereto for the year ended December 31, 2021, included in our Annual Report on Form 10-K filed with the SEC on March 25, 2022 (the “2021 Form 10-K”). Certain prior period amounts have been reclassified to conform to the current period presentation. Reclassifications had no effect on our net income or stockholders’ equity.
Business Combination - On April 1, 2022, FirstSun completed its previously announced Merger with Pioneer Bancshares, Inc. (“Pioneer”). Under the Merger Agreement, a wholly-owned subsidiary of FirstSun, FSCB Merger Subsidiary, Inc., merged with and into Pioneer, with Pioneer continuing as the surviving entity and becoming a wholly-owned subsidiary of FirstSun (the “Merger”). Immediately after the effective time of the Merger (the “Effective Time”), Pioneer was merged with and into FirstSun, with FirstSun continuing as the surviving entity (the “second step Merger”). Immediately following the completion of the second step Merger, Pioneer’s wholly-owned subsidiary, Pioneer Bank, SSB, a Texas state savings bank, was merged with and into the Bank, with the Bank continuing as the surviving bank. Pursuant to the terms of the Merger Agreement, at the Effective Time, each Pioneer shareholder had the right to receive 1.0443 shares of FirstSun common stock, for each share of Pioneer common stock owned by the shareholder, with cash paid in lieu of fractional shares. Each outstanding share of FirstSun common stock remained outstanding and was unaffected by the Merger. Further information is presented in Note 2 - Merger with Pioneer Bancshares, Inc.
Use of Estimates - The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
These estimates are based on historical experience and on various assumptions about the future that are believed to be reasonable based on all available information. Our reported financial position or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information.
Risks and Uncertainties - In the normal course of business, companies in the banking and mortgage industries encounter certain economic and regulatory risks. Economic risks include prepayment risk, market risk, interest rate risk, and credit risk. We are subject to interest rate risk to the extent that in a rising interest rate environment we may experience a decrease in loan production, as well as decreases in the value of mortgage loans held-for-sale and in commitments to originate loans, which may adversely impact our earnings. Credit risk is the risk of default that may result from the borrowers’ inability or unwillingness to make contractually required payments.
We generally sell loans to investors without recourse; therefore, the investors have assumed the risk of loss or default by the borrower. However, we are usually required by these investors to make certain standard representations and warranties relating to credit information, loan documentation, and collateral. To the extent that we do not comply with such representations, or there are early payment defaults, we may be required to repurchase the loans or indemnify these
investors for any losses from borrower defaults. In addition, if loans pay off within a specified time frame, we may be required to refund a portion of the sales proceeds to the investors. We established reserves for potential losses related to these representations and warranties which are recorded within accrued expenses and other liabilities. In assessing the adequacy of the reserves, we evaluate various factors including actual write-offs during the period, historical loss experience, known delinquent and other problem loans, and economic trends and conditions in the industry. Further information is presented in Note 17 - Commitments and Contingencies. Adoption of New Accounting Standards - As an “emerging growth company” under Section 107 of the JOBS Act, we can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, we can delay the adoption of certain accounting standards until those standards would otherwise apply to non-public business entities. We intend to take advantage of the benefits of this extended transition period for an “emerging growth company” for as long as it is available to us. For standards that we have delayed adoption, we may lack comparability to other companies who have adopted such standards. Other than the adoption of ASU 2016-02, Leases (Topic 842), there have been no material developments with respect to newly issued standards from those disclosed in our 2021 Form 10-K.
We are currently executing our implementation plan for ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) under the direction of our Chief Financial Officer and our Chief Credit Officer. As of September 30, 2022, we have performed a preliminary parallel run and completed an external model validation of our modeling framework. A separate model validation related to our probability of default and loss given default internal loan risk rating framework is nearing completion. We continue to design and implement our controls over the new allowance model framework. Based upon our preliminary parallel run we currently expect the adoption of ASU 2016-13 will result in an increase in our allowance for loan losses and our reserves for unfunded commitments. This increase is a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for certain debt securities and other financial assets; however, we do not expect these allowances to be significant. Additionally, the adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios. The ultimate impact of adoption on January 1, 2023 will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of that date, notwithstanding any further refinements to our expected credit loss models.
NOTE 2 - Merger with Pioneer Bancshares, Inc.
As described under the title “Business Combination” in Note 1 - Organization and Basis of Presentation, we completed our Merger with Pioneer on April 1, 2022. We accounted for the Pioneer Merger under the acquisition method in accordance with ASC Topic 805, Business Combinations. Accordingly, the purchase price was allocated to the fair value of the assets acquired, including identifiable intangible assets, and the liabilities assumed as of the closing date of the Merger. Goodwill resulting from the difference between the fair value of the assets acquired and the fair value of the liabilities assumed is not amortizable for book or tax purposes. This goodwill resulted from the combination of expected operational synergies, the increase in our market share in Texas and other factors. Although the Merger was nontaxable, the Merger gave rise to certain temporary differences for which deferred taxes have been recognized. The results of operations for the Pioneer Merger have been included in our consolidated financial results beginning on the April 1, 2022 closing date.
Consideration
Under the terms of the Merger Agreement, each outstanding share of Pioneer common stock was converted into 1.0443 shares of FirstSun common stock (except for shareholders who properly exercised their dissenters’ rights) with cash paid in lieu of fractional shares. Accordingly, we issued 6,467,466 shares of our common stock to Pioneer shareholders in the Merger valued at $230,760 based on a third-party valuation of our common stock in accordance with ASC Topic 820, Fair Value Measurements as of the closing date. We also converted Pioneer stock options into 431,645 options to purchase shares of FirstSun common stock. This conversion was valued at $5,334. We also paid cash to certain Pioneer shareholders of $4,736. Total aggregate consideration paid in the Pioneer Merger was $240,830.
Fair Value
We recorded the estimated fair value of assets acquired and liabilities assumed based on initial valuations at April 1, 2022. The determination of estimated fair value required management to make assumptions related to discount rates, expected future cash flows, market conditions and other future events that are subjective in nature and may require adjustments. Accordingly, these fair value estimates are considered preliminary as of September 30, 2022, and are subject to adjustment during the specified measurement period that ends 12 months from the closing date of the Merger.
Estimated fair values of the assets acquired and liabilities assumed in this transaction are as follows:
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| April 1, 2022 |
Cash and cash equivalents | $ | 449,278 | |
Investment securities | 157,859 | |
Loans held-for-sale | 2,923 | |
Loans | 811,300 | |
Premises and equipment | 39,935 | |
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Bank-owned life insurance | 21,382 | |
Restricted equity securities | 9,320 | |
Core deposits and other intangible assets | 11,771 | |
Accrued interest receivable | 3,947 | |
Deferred tax assets | 19,752 | |
Prepaid expenses and other assets | 7,317 | |
Total assets acquired | 1,534,784 | |
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Deposits | 1,192,081 | |
Federal Home Loan Bank advances | 159,924 | |
Accrued interest payable | 407 | |
Accrued expenses and other liabilities | 1,975 | |
Total liabilities assumed | 1,354,387 | |
Fair value of net assets acquired | 180,397 | |
Purchase price | 240,830 | |
Goodwill | $ | 60,433 | |
Acquired loans and purchased credit impaired loans
Acquired loans were recorded at fair value based on a discounted cash flow valuation methodology that considered, among other things, projected default rates, loss given default rates and recovery rates. No allowance for loan losses was carried over from Pioneer.
We identified certain acquired loans as purchased credit impaired (PCI). PCI loan identification considered payment history and past due status, debt service coverage, loan grading, collateral values and other factors that may be an indication of a deterioration of credit quality since origination. Although we identified certain acquired loans as PCI, the
amount was determined to be insignificant. The following table discloses the fair value and contractual value of loans acquired from Pioneer on April 1, 2022.
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| Acquired Loans | | Contractual Principal Balance |
Commercial | $ | 98,351 | | | $ | 98,752 | |
Commercial real estate | 509,173 | | | 516,341 | |
Residential real estate | 173,094 | | | 174,763 | |
Consumer | 30,682 | | | 31,982 | |
Total fair value | $ | 811,300 | | | $ | 821,838 | |
NOTE 3 - Securities
The amortized cost, gross unrealized gains and losses, and fair values of available-for-sale and held-to-maturity debt securities by type follows as of:
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| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
September 30, 2022 | | | | | | | |
Available-for-sale: | | | | | | | |
U.S. treasury | $ | 62,021 | | | $ | — | | | $ | (5,403) | | | $ | 56,618 | |
U.S. agency | 3,242 | | | — | | | (41) | | | 3,201 | |
Obligations of states and political subdivisions | 29,860 | | | — | | | (4,408) | | | 25,452 | |
Mortgage backed - residential | 134,216 | | | 8 | | | (15,711) | | | 118,513 | |
Collateralized mortgage obligations | 232,970 | | | — | | | (18,940) | | | 214,030 | |
Mortgage backed - commercial | 132,358 | | | — | | | (13,766) | | | 118,592 | |
Other debt | 16,769 | | | — | | | (2,010) | | | 14,759 | |
Total available-for-sale | $ | 611,436 | | | $ | 8 | | | $ | (60,279) | | | $ | 551,165 | |
Held-to-maturity: | | | | | | | |
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Obligations of states and political subdivisions | $ | 25,002 | | | $ | — | | | $ | (4,134) | | | $ | 20,868 | |
Mortgage backed - residential | 9,091 | | | 5 | | | (654) | | | 8,442 | |
Collateralized mortgage obligations | 5,055 | | | — | | | (269) | | | 4,786 | |
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Total held-to-maturity | $ | 39,148 | | | $ | 5 | | | $ | (5,057) | | | $ | 34,096 | |
December 31, 2021 | | | | | | | |
Available-for-sale: | | | | | | | |
U.S. treasury | $ | 35,400 | | | $ | — | | | $ | (215) | | | $ | 35,185 | |
U.S. agency | 6,019 | | | — | | | (100) | | | 5,919 | |
Obligations of states and political subdivisions | 3,979 | | | — | | | (190) | | | 3,789 | |
Mortgage backed - residential | 138,297 | | | 2,018 | | | (1,638) | | | 138,677 | |
Collateralized mortgage obligations | 236,282 | | | 1,441 | | | (1,939) | | | 235,784 | |
Mortgage backed - commercial | 150,322 | | | 3,424 | | | (599) | | | 153,147 | |
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Total available-for-sale | $ | 570,299 | | | $ | 6,883 | | | $ | (4,681) | | | $ | 572,501 | |
Held-to-maturity: | | | | | | | |
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Obligations of states and political subdivisions | $ | 716 | | | $ | 25 | | | $ | — | | | $ | 741 | |
Mortgage backed - residential | 10,750 | | | 390 | | | — | | | 11,140 | |
Collateralized mortgage obligations | 6,541 | | | 177 | | | — | | | 6,718 | |
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Total held-to-maturity | $ | 18,007 | | | $ | 592 | | | $ | — | | | $ | 18,599 | |
As of September 30, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
Certain debt securities that have gross unrealized losses and have been in a continuous unrealized loss position for more than one year follows as of:
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| Less than 12 months | | 12 months or longer | | Total |
| Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | | Number of Securities |
September 30, 2022 | | | | | | | | | | | | | |
Available-for-sale: | | | | | | | | | | | | | |
U.S. treasury | $ | 25,690 | | | $ | (975) | | | $ | 30,928 | | | $ | (4,428) | | | $ | 56,618 | | | $ | (5,403) | | | 10 | |
U.S. agency | — | | | — | | | 3,201 | | | (41) | | | 3,201 | | | (41) | | | 7 | |
Obligations of states and political subdivisions | 22,626 | | | (3,346) | | | 2,357 | | | (1,062) | | | 24,983 | | | (4,408) | | | 18 | |
Mortgage backed - residential | 68,299 | | | (5,512) | | | 49,723 | | | (10,199) | | | 118,022 | | | (15,711) | | | 86 | |
Collateralized mortgage obligations | 148,461 | | | (6,846) | | | 65,569 | | | (12,094) | | | 214,030 | | | (18,940) | | | 67 | |
Mortgage backed - commercial | 88,997 | | | (10,162) | | | 29,595 | | | (3,604) | | | 118,592 | | | (13,766) | | | 22 | |
Other debt | 14,759 | | | (2,010) | | | — | | | — | | | 14,759 | | | (2,010) | | | 9 | |
Total available-for-sale | $ | 368,832 | | | $ | (28,851) | | | $ | 181,373 | | | $ | (31,428) | | | $ | 550,205 | | | $ | (60,279) | | | 219 | |
Held-to-maturity: | | | | | | | | | | | | | |
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Obligations of states and political subdivisions | $ | 20,869 | | | $ | (4,134) | | | $ | — | | | $ | — | | | $ | 20,869 | | | $ | (4,134) | | | 8 |
Mortgage backed - residential | 8,217 | | | (654) | | | — | | | — | | | 8,217 | | | (654) | | | 10 |
Collateralized mortgage obligations | 4,786 | | | (269) | | | — | | | — | | | 4,786 | | | (269) | | | 5 |
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Total held-to-maturity | $ | 33,872 | | | $ | (5,057) | | | $ | — | | | $ | — | | | $ | 33,872 | | | $ | (5,057) | | | 23 |
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| Less than 12 months | | 12 months or longer | | Total |
| Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | | Estimated Fair Value | | Unrealized Losses | | Number of Securities |
December 31, 2021 | | | | | | | | | | | | | |
Available-for-sale: | | | | | | | | | | | | | |
U.S. treasury | $ | 35,185 | | | $ | (215) | | | $ | — | | | $ | — | | | $ | 35,185 | | | $ | (215) | | | 4 | |
U.S. agency | — | | | — | | | 5,919 | | | (100) | | | 5,919 | | | (100) | | | 7 | |
Obligations of states and political subdivisions | 3,232 | | | (190) | | | — | | | — | | | 3,232 | | | (190) | | | 2 | |
Mortgage backed - residential | 51,616 | | | (530) | | | 25,246 | | | (1,108) | | | 76,862 | | | (1,638) | | | 17 | |
Collateralized mortgage obligations | 115,877 | | | (1,938) | | | 193 | | | (1) | | | 116,070 | | | (1,939) | | | 16 | |
Mortgage backed - commercial | 32,872 | | | (581) | | | 24,170 | | | (18) | | | 57,042 | | | (599) | | | 5 | |
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Total available-for-sale | $ | 238,782 | | | $ | (3,454) | | | $ | 55,528 | | | $ | (1,227) | | | $ | 294,310 | | | $ | (4,681) | | | 51 | |
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There were no held-to-maturity securities in an unrealized loss position as of December 31, 2021.
Estimated fair value is less than amortized cost primarily because of the rising interest rate environment and is unrelated to specific conditions of the issuer. At September 30, 2022 and December 31, 2021, management does not believe these securities are other than temporarily impaired for the following reasons: there was no significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the issuer; there was no significant adverse change in the regulatory, economic, or technological environment of the issuer; and there was no significant adverse change in the general market condition of either the geographic area or the industry in which the issuer operates. Management has the ability and intent to hold these securities and it is likely that management will not be required to sell the securities prior to maturity or until such time as the full amount of investment principal will be returned.
The amortized cost and fair value of our debt securities by contractual maturity as of September 30, 2022 are summarized in the following table. Maturities are based on the final contractual payment dates and do not reflect the impact of prepayments or earlier redemptions that may occur.
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| Amortized Cost | | Estimated Fair Value |
Available-for-sale: | | | |
Due within 1 year | $ | 3,533 | | | $ | 3,444 | |
Due after 1 year through 5 years | 45,272 | | | 43,573 | |
Due after 5 years through 10 years | 174,641 | | | 155,456 | |
Due after 10 years | 387,990 | | | 348,692 | |
Total available-for-sale | $ | 611,436 | | | $ | 551,165 | |
Held-to-maturity: | | | |
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Due after 1 year through 5 years | $ | 1,042 | | | $ | 997 | |
Due after 5 years through 10 years | 668 | | | 629 | |
Due after 10 years | 37,438 | | | 32,470 | |
Total held-to-maturity | $ | 39,148 | | | $ | 34,096 | |
Securities with a carrying value of $435,410 and $465,665 were pledged to secure public deposits, securities sold under agreements to repurchase and borrowed funds at September 30, 2022 and December 31, 2021, respectively.
For the three and nine months ended September 30, 2022, there were proceeds from the sale of securities of $81,016. No gain or loss was recognized for the three and nine months ended September 30, 2022 as the securities sold were acquired at fair value on April 1, 2022 in the Pioneer Merger and were sold on April 5, 2022. There were no proceeds from sales and calls of securities for the three and nine months ended September 30, 2021.
NOTE 4 - Loans
Loans held-for-investment consist of the following as of:
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| September 30, 2022 | | December 31, 2021 |
Commercial | $ | 2,742,625 | | | $ | 2,414,787 | |
Commercial real estate | 1,781,791 | | | 1,176,973 | |
Residential real estate | 1,003,699 | | | 437,116 | |
Consumer | 44,358 | | | 17,766 | |
Total loans | 5,572,473 | | | 4,046,642 | |
Deferred costs, fees, premiums, and discounts, net | (15,787) | | | (9,519) | |
Allowance for loan losses | (59,678) | | | (47,547) | |
Total loans, net | $ | 5,497,008 | | | $ | 3,989,576 | |
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. A provision in the CARES Act created the Paycheck Protection Program (PPP), a program administered by the Small Business Administration (“SBA”) to provide loans to small business during the COVID-19 pandemic. As of September 30, 2022 and December 31, 2021, we had $6,086 and $68,401 of PPP loans outstanding and deferred processing fees outstanding of $54 and $1,652, respectively. PPP loans are classified as Commercial loans in the consolidated financial statements. No allowance for loan losses has been recognized for PPP loans as such loans are guaranteed by the SBA.
The following table presents the activity in the allowance for loan losses by portfolio type for the three months ended September 30,:
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| Commercial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
2022 | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | |
Balance, beginning of period | $ | 34,987 | | | $ | 18,053 | | | $ | 2,719 | | | $ | 318 | | | $ | 56,077 | |
Provision for loan losses | 2,286 | | | 1,163 | | | 269 | | | 32 | | | 3,750 | |
Loans charged off | (223) | | | — | | | (24) | | | (53) | | | (300) | |
Recoveries | 112 | | | 2 | | | 1 | | | 36 | | | 151 | |
Balance, end of period | $ | 37,162 | | | $ | 19,218 | | | $ | 2,965 | | | $ | 333 | | | $ | 59,678 | |
2021 | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | |
Balance, beginning of period | $ | 28,173 | | | $ | 13,149 | | | $ | 1,305 | | | $ | 351 | | | $ | 42,978 | |
Provision for (benefit from) loan losses | 3,030 | | | 560 | | | (31) | | | (59) | | | 3,500 | |
Loans charged off | — | | | — | | | — | | | (66) | | | (66) | |
Recoveries | 1,440 | | | — | | | 3 | | | 13 | | | 1,456 | |
Balance, end of period | $ | 32,643 | | | $ | 13,709 | | | $ | 1,277 | | | $ | 239 | | | $ | 47,868 | |
The following table presents the activity in the allowance for loan losses by portfolio type for the nine months ended September 30,:
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| Commercial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
2022 | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | |
Balance, beginning of period | $ | 33,277 | | | $ | 12,899 | | | $ | 1,136 | | | $ | 235 | | | $ | 47,547 | |
Provision for loan losses | 4,223 | | | 6,316 | | | 1,755 | | | 156 | | | 12,450 | |
Loans charged off | (2,173) | | | — | | | (122) | | | (117) | | | (2,412) | |
Recoveries | 1,835 | | | 3 | | | 196 | | | 59 | | | 2,093 | |
Balance, end of period | $ | 37,162 | | | $ | 19,218 | | | $ | 2,965 | | | $ | 333 | | | $ | 59,678 | |
2021 | | | | | | | | | |
Allowance for loan losses: | | | | | | | | | |
Balance, beginning of period | $ | 32,009 | | | $ | 13,863 | | | $ | 1,606 | | | $ | 288 | | | $ | 47,766 | |
Provision for (benefit from) loan losses | 2,210 | | | (163) | | | (350) | | | 53 | | | 1,750 | |
Loans charged off | (3,102) | | | — | | | (2) | | | (138) | | | (3,242) | |
Recoveries | 1,526 | | | 9 | | | 23 | | | 36 | | | 1,594 | |
Balance, end of period | $ | 32,643 | | | $ | 13,709 | | | $ | 1,277 | | | $ | 239 | | | $ | 47,868 | |
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We determine the allowance for loan losses estimate on at least a quarterly basis.
The following table presents the balance in the allowance for loan losses and the recorded investment by portfolio type based on impairment method as of:
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| Commercial | | Commercial Real Estate | | Residential Real Estate | | Consumer | | Total |
September 30, 2022 | | | | | | | | | |
Loans: | | | | | | | | | |
Individually evaluated for impairment | $ | 16,560 | | | $ | 11,108 | | | $ | 14,132 | | | $ | 87 | | | $ | 41,887 | |
Collectively evaluated for impairment | 2,726,065 | | | 1,770,683 | | | 989,567 | | | 44,271 | | | 5,530,586 | |
Total loans | $ | 2,742,625 | | | $ | 1,781,791 | | | $ | 1,003,699 | | | $ | 44,358 | | | $ | 5,572,473 | |
Allowance for loan losses: | | | | | | | | | |
Individually evaluated for impairment | $ | 1,034 | | | $ | 188 | | | $ | 29 | | | $ | 84 | | | $ | 1,335 | |
Collectively evaluated for impairment | 36,128 | | | 19,030 | | | 2,936 | | | 249 | | | 58,343 | |
Total allowance for loan losses | $ | 37,162 | | | $ | 19,218 | | | $ | 2,965 | | | $ | 333 | | | $ | 59,678 | |
December 31, 2021 | | | | | | | | | |
Loans: | | | | | | | | | |
Individually evaluated for impairment | $ | 17,460 | | | $ | 4,781 | | | $ | 11,479 | | | $ | 2 | | | $ | 33,722 | |
Collectively evaluated for impairment | 2,397,327 | | | 1,172,192 | | | 425,637 | | | 17,764 | | | 4,012,920 | |
Total loans | $ | 2,414,787 | | | $ | 1,176,973 | | | $ | 437,116 | | | $ | 17,766 | | | $ | 4,046,642 | |
Allowance for loan losses: | | | | | | | | | |
Individually evaluated for impairment | $ | 2,517 | | | $ | 12 | | | $ | 39 | | | $ | — | | | $ | 2,568 | |
Collectively evaluated for impairment | 30,760 | | | 12,887 | | | 1,097 | | | 235 | | | 44,979 | |
Total allowance for loan losses | $ | 33,277 | | | $ | 12,899 | | | $ | 1,136 | | | $ | 235 | | | $ | 47,547 | |
The following table presents information related to impaired loans by class of loans as of:
| | | | | | | | | | | | | | | | | | | | | | | |
| Unpaid Principal Balance | | Recorded Investment | | Allowance for Loan Losses Allocated | | Average Recorded Investment |
September 30, 2022 | | | | | | | |
With no related allowance recorded: | | | | | | | |
Commercial | $ | 13,937 | | | $ | 13,438 | | | $ | — | | | $ | 9,609 | |
Commercial real estate | 10,693 | | | 10,312 | | | — | | | 5,031 | |
Residential real estate | 13,939 | | | 14,103 | | | — | | | 8,818 | |
Consumer | — | | | — | | | — | | | — | |
Total loans with no related allowance recorded | 38,569 | | | 37,853 | | | — | | | 23,458 | |
With an allowance recorded: | | | | | | | |
Commercial | 3,256 | | | 3,122 | | | 1,034 | | | 2,426 | |
Commercial real estate | 796 | | | 796 | | | 188 | | | 265 | |
Residential real estate | 29 | | | 29 | | | 29 | | | 10 | |
Consumer | 87 | | | 87 | | | 84 | | | 29 | |
Total loans with an allowance recorded | 4,168 | | | 4,034 | | | 1,335 | | | 2,730 | |
Total impaired loans | $ | 42,737 | | | $ | 41,887 | | | $ | 1,335 | | | $ | 26,188 | |
December 31, 2021 | | | | | | | |
With no related allowance recorded: | | | | | | | |
Commercial | $ | 14,619 | | | $ | 13,982 | | | $ | — | | | $ | 10,637 | |
Commercial real estate | 4,795 | | | 4,706 | | | — | | | 3,943 | |
Residential real estate | 10,754 | | | 10,808 | | | — | | | 7,223 | |
Consumer | 3 | | | 2 | | | — | | | 3 | |
Total loans with no related allowance recorded | 30,171 | | | 29,498 | | | — | | | 21,806 | |
With an allowance recorded: | | | | | | | |
Commercial | 3,666 | | | 3,478 | | | 2,517 | | | 2,375 | |
Commercial real estate | 124 | | | 75 | | | 12 | | | 57 | |
Residential real estate | 665 | | | 671 | | | 39 | | | 462 | |
| | | | | | | |
Total loans with an allowance recorded | 4,455 | | | 4,224 | | | 2,568 | | | 2,894 | |
Total impaired loans | $ | 34,626 | | | $ | 33,722 | | | $ | 2,568 | | | $ | 24,700 | |
Interest income recorded on impaired loans was not material for the three and nine months ended September 30, 2022 and 2021.
Credit risk monitoring and management is a continuous process to manage the quality of the loan portfolio. We segment loans into risk categories based on relevant information about the ability of borrowers to service their debt including current financial information, historical payment experience, credit documentation, public information and current economic trends among other factors. The risk rating system is used as a tool to analyze and monitor loan portfolio quality. Risk ratings meeting an internally specified exposure threshold are updated annually, or more frequently upon the occurrence of a circumstance that affects the credit risk of the loan. We use the following definitions for risk ratings:
Substandard - loans are considered “classified” and have a well-defined weakness, or weaknesses, such as loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans are also characterized by the distinct possibility of loss in the future if the deficiencies are not corrected.
Doubtful - loans are considered “classified” and have all the weaknesses inherent in those classified as Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. There were no loans categorized as doubtful as of September 30, 2022 and December 31, 2021.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.
The following table presents the credit risk profile of our loan portfolio based on our rating categories as of:
| | | | | | | | | | | | | | | | | |
| Non-Classified | | Classified | | Total |
September 30, 2022 | | | | | |
Commercial | $ | 2,710,397 | | | $ | 32,228 | | | $ | 2,742,625 | |
Commercial real estate | 1,750,480 | | | 31,311 | | | 1,781,791 | |
Residential real estate | 994,835 | | | 8,864 | | | 1,003,699 | |
Consumer | 44,270 | | | 88 | | | 44,358 | |
Total loans | $ | 5,499,982 | | | $ | 72,491 | | | $ | 5,572,473 | |
December 31, 2021 | | | | | |
Commercial | $ | 2,384,275 | | | $ | 30,512 | | | $ | 2,414,787 | |
Commercial real estate | 1,146,673 | | | 30,300 | | | 1,176,973 | |
Residential real estate | 431,033 | | | 6,083 | | | 437,116 | |
Consumer | 17,762 | | | 4 | | | 17,766 | |
Total loans | $ | 3,979,743 | | | $ | 66,899 | | | $ | 4,046,642 | |
The following table presents our loan portfolio aging analysis as of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans Not Past Due | | Loans 30-59 Days Past Due | | Loans 60-89 Days Past Due | | Loans Greater than 90 Days Past Due, Still Accruing | | Nonaccrual | | Total |
September 30, 2022 | | | | | | | | | | | |
Commercial | $ | 2,720,683 | | | $ | 4,431 | | | $ | 1,505 | | | $ | 261 | | | $ | 15,745 | | | $ | 2,742,625 | |
Commercial real estate | 1,771,809 | | | 681 | | | 365 | | | — | | | 8,936 | | | 1,781,791 | |
Residential real estate | 988,528 | | | 2,027 | | | 4,142 | | | 198 | | | 8,804 | | | 1,003,699 | |
Consumer | 44,230 | | | 41 | | | — | | | — | | | 87 | | | 44,358 | |
Total loans | $ | 5,525,250 | | | $ | 7,180 | | | $ | 6,012 | | | $ | 459 | | | $ | 33,572 | | | $ | 5,572,473 | |
December 31, 2021 | | | | | | | | | | | |
Commercial | $ | 2,392,205 | | | $ | 5,467 | | | $ | 623 | | | $ | — | | | $ | 16,492 | | | $ | 2,414,787 | |
Commercial real estate | 1,160,244 | | | 10,887 | | | — | | | 1,061 | | | 4,781 | | | 1,176,973 | |
Residential real estate | 424,860 | | | 5,794 | | | 410 | | | — | | | 6,052 | | | 437,116 | |
Consumer | 17,719 | | | 45 | | | — | | | — | | | 2 | | | 17,766 | |
Total loans | $ | 3,995,028 | | | $ | 22,193 | | | $ | 1,033 | | | $ | 1,061 | | | $ | 27,327 | | | $ | 4,046,642 | |
As of September 30, 2022 and December 31, 2021, we have a recorded investment in troubled debt restructurings (“TDRs”) of $18,495 and $21,699, respectively. We have no commitments to lend additional amounts on our TDRs at September 30, 2022.
The modification of the terms of the loans performed for the three and nine months ended September 30, 2022 and 2021, included rate modifications, extensions of the maturity dates or a permanent reduction of the recorded investment in the loans.
The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2022 and year ended December 31, 2021:
| | | | | | | | | | | | | | | | | |
| Number of Loans | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
September 30, 2022 | | | | | |
Commercial | 1 | | | $ | 248 | | | $ | 198 | |
| | | | | |
Residential real estate | 1 | | | 126 | | | 126 | |
Consumer | 1 | | | 72 | | | 72 | |
Total | 3 | | | $ | 446 | | | $ | 396 | |
December 31, 2021 | | | | | |
Commercial | 7 | | | $ | 6,969 | | | $ | 6,178 | |
Commercial real estate | 1 | | | 2,295 | | | 2,265 | |
Residential real estate | 4 | | | 1,386 | | | 1,435 | |
| | | | | |
Total | 12 | | | $ | 10,650 | | | $ | 9,878 | |
As of September 30, 2022 and December 31, 2021, the TDRs increased the allowance for loan losses by $797 and $2,326, respectively. There were no amounts charged-off during the three and nine months ended September 30, 2022 and year ended December 31, 2021. For the year ended December 31, 2021, there were loans modified as TDRs totaling $106 for which there was a payment default following the modification.
In order to assess whether a borrower is experiencing financial difficulty, an evaluation is performed to determine the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under our internal underwriting policy.
A loan is generally considered to be in payment default once it is 30 days contractually past due under the modified terms.
Acquired Loans and Loan Discounts:
Included in the net loan portfolio as of September 30, 2022 and December 31, 2021 is a net accretable discount related to loans acquired within a business combination in the approximate amounts of $9,768 and $571, respectively. The discount is accreted into income on a level-yield basis over the life of the loans.
Loans acquired with evidence of credit quality deterioration at acquisition, for which it was probable that we would not be able to collect all contractual amounts due, were accounted for as purchased credit impaired (“PCI”) loans. The outstanding balance represents the total amount owed, including accrued but unpaid interest, and any amounts previously charged off. The carrying amount of purchased credit impaired loans was not significant as of September 30, 2022 and December 31, 2021.
NOTE 5 - Mortgage Servicing Rights
We have investments in mortgage servicing rights (“MSRs”) that result from the sale of loans to the secondary market for which we retain the servicing. We account for these MSRs at their fair value. A primary risk associated with MSRs is the potential reduction in fair value as a result of higher than anticipated prepayments due to loan refinancing prompted, in part, by declining interest rates or government intervention. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than anticipated. We utilize derivatives as economic hedges to offset changes in the fair value of the MSRs resulting from the actual or anticipated changes in prepayments stemming from changing interest rate environments.
The unpaid principal loan balance of our servicing portfolio is presented in the following table as of:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Federal National Mortgage Association | $ | 2,499,105 | | | $ | 2,352,981 | |
Federal Home Loan Mortgage Corporation | 1,627,381 | | | 1,512,858 | |
Government National Mortgage Association | 852,490 | | | 759,524 | |
Federal Home Loan Bank | 114,747 | | | 134,616 | |
Other | 1,443 | | | 1,853 | |
Total | $ | 5,095,166 | | | $ | 4,761,832 | |
The activity of MSRs carried at fair value is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Balance, beginning of period | $ | 66,047 | | | $ | 40,844 | | | $ | 47,392 | | | $ | 29,144 | | | | | |
Additions: | | | | | | | | | | | |
| | | | | | | | | | | |
Servicing resulting from transfers of financial assets | 3,489 | | | 5,303 | | | 11,681 | | | 18,533 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Changes in fair value: | | | | | | | | | | | |
Due to changes in valuation inputs or assumptions used in the valuation model | 6,270 | | | 948 | | | 21,142 | | | 5,209 | | | | | |
Changes in fair value due to pay-offs, pay-downs, and runoff | (1,956) | | | (3,124) | | | (6,365) | | | (8,915) | | | | | |
Balance, end of period | $ | 73,850 | | | $ | 43,971 | | | $ | 73,850 | | | $ | 43,971 | | | | | |
The following represents the weighted-average key assumptions used to estimate the fair value of MSRs as of:
| | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 | | September 30, 2021 | | |
Discount rate | 9.34 | % | | 9.22 | % | | 9.22 | % | | |
Total prepayment speeds | 7.43 | % | | 11.52 | % | | 12.15 | % | | |
Cost of servicing each loan | $87/per loan | | $85/per loan | | $86/per loan | | |
Total servicing and ancillary fees earned from the mortgage servicing portfolio is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
| | | | | | | | | | | |
Servicing fees | $ | 4,111 | | | $ | 3,101 | | | $ | 10,807 | | | $ | 8,853 | | | | | |
Late and ancillary fees | 123 | | | 118 | | | 264 | | | 317 | | | | | |
Total | $ | 4,234 | | | $ | 3,219 | | | $ | 11,071 | | | $ | 9,170 | | | | | |
NOTE 6 - Derivative Financial Instruments
Banking Derivative Financial Instruments:
We use fair value hedges to seek to manage our exposure to changes in the fair value of certain recognized assets attributable to changes in a benchmark interest rate, such as SOFR. The fair value hedges were determined to be effective during all periods presented and we expect the hedges to remain effective during their remaining terms.
Derivatives not designated as hedges are not speculative and result from a service we provide to certain customers. We execute interest rate swaps with banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously offset by derivatives that we execute with a third party, such that we minimize our net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
Derivative instruments are measured at fair value and recorded as a component of prepaid expenses and other assets and accrued expenses and other liabilities.
The components of our banking derivative financial instruments consisted of the following as of:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Transactions | | Expiration Dates | | Outstanding Notional | | Estimated Fair Value | | |
September 30, 2022 | | | | | | | | | |
Derivative financial instruments designated as hedging instruments: | | | | | | | | | |
Assets: | | | | | | | | | |
Interest Rate Products | 32 | | 2028-2036 | | $ | 204,216 | | | $ | 16,717 | | | |
| | | | | | | | | |
| | | | | | | | | |
Derivative financial instruments not designated as hedging instruments: | | | | | | | | | |
Assets: | | | | | | | | | |
Interest Rate Products | 41 | | 2024-2037 | | $ | 275,765 | | | $ | 26,642 | | | |
Liabilities: | | | | | | | | | |
Interest Rate Products | 41 | | 2024-2037 | | $ | 275,765 | | | $ | 25,987 | | | |
December 31, 2021 | | | | | | | | | |
Derivative financial instruments designated as hedging instruments: | | | | | | | | | |
Assets: | | | | | | | | | |
Interest Rate Products | 1 | | 2029 | | $ | 20,190 | | | $ | 1,213 | | | |
Liabilities: | | | | | | | | | |
Interest Rate Products | 12 | | 2022-2029 | | $ | 179,431 | | | $ | 7,107 | | | |
Derivative financial instruments not designated as hedging instruments: | | | | | | | | | |
Assets: | | | | | | | | | |
Interest Rate Products | 38 | | 2024-2036 | | $ | 232,849 | | | $ | 6,923 | | | |
Liabilities: | | | | | | | | | |
Interest Rate Products | 38 | | 2024-2036 | | $ | 232,849 | | | $ | 7,366 | | | |
We recorded gains and losses on banking derivative assets and liabilities as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Recorded gain (loss) on banking derivative assets | $ | 15,123 | | | $ | (186) | | | $ | 30,192 | | | $ | (420) | | | | | |
Recorded (loss) gain on banking derivative liabilities | $ | (14,771) | | | $ | 337 | | | $ | (29,095) | | | $ | 926 | | | | | |
For the three months ended September 30, 2022 and 2021, our banking derivative financial instruments not designated as hedging instruments generated fee income of $492 and $246, respectively. For the nine months ended September 30, 2022 and 2021, our banking derivative financial instruments not designated as hedging instruments generated fee income of $1,294 and $1,080, respectively.
The carrying amount of hedged loans receivable as of September 30, 2022 and December 31, 2021 was $144,506 and $205,235, respectively. The cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged loans receivable as of September 30, 2022 and December 31, 2021 was $(13,491) and $5,614, respectively.
The carrying amount of hedged securities available-for-sale as of September 30, 2022 was $36,268. The cumulative amount of fair value hedging adjustment, net of tax included in other comprehensive income (loss) as of September 30, 2022 was $2,536. There were no hedged securities available-for-sale as of December 31, 2021.
Credit-risk-related Contingent Features:
We have agreements with each of our derivative counterparties that contain a provision where if we either default or are capable of being declared in default on any of our indebtedness, then we could also be declared in default on our derivative obligations.
We also have agreements with our derivative counterparties that contain a provision where if we fail to maintain our status as a well-capitalized institution, then our derivative counterparties have the right but not the obligation to terminate existing swaps. As of September 30, 2022 and December 31, 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $26,125 and $14,882, respectively. As of September 30, 2022 and December 31, 2021, we have minimum collateral posting thresholds with our derivative counterparties and have posted collateral of $9,090 and $14,970, respectively. If we had breached any of these provisions at September 30, 2022, we could have been required to settle our obligations under the agreements at their termination value of $26,125.
Mortgage Banking Derivative Financial Instruments:
The components of our mortgage banking derivative financial instruments consisted of the following as of:
| | | | | | | | | | | | | | | | | | | |
| Expiration Dates | | Outstanding Notional | | Estimated Fair Value | | |
September 30, 2022 | | | | | | | |
Derivative financial instruments | | | | | | | |
Assets: | | | | | | | |
Forward MBS trades | 2022 | | $ | 123,000 | | | $ | 5,012 | | | |
| | | | | | | |
| | | | | | | |
Liabilities: | | | | | | | |
Forward MBS trades | 2022 | | $ | 20,300 | | | $ | 845 | | | |
| | | | | | | |
Interest rate lock commitments (IRLC) | 2022 | | $ | 99,368 | | | $ | 1,439 | | | |
December 31, 2021 | | | | | | | |
Derivative financial instruments | | | | | | | |
Assets: | | | | | | | |
Forward MBS trades | 2022 | | $ | 450,600 | | | $ | 1,329 | | | |
Interest rate lock commitments (IRLC) | 2022 | | $ | 142,334 | | | $ | 1,350 | | | |
| | | | | | | |
Liabilities: | | | | | | | |
Forward MBS trades | 2022 | | $ | 16,600 | | | $ | 52 | | | |
| | | | | | | |
| | | | | | | |
We recorded gains and losses on mortgage banking derivative assets and liabilities as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Recorded gain (loss) on mortgage banking derivative assets | $ | 3,277 | | | $ | 9,175 | | | $ | 5,189 | | | $ | (302) | | | | | |
Recorded loss on mortgage banking derivative liabilities | $ | (2,844) | | | $ | (10,241) | | | $ | (16,940) | | | $ | (7,714) | | | | | |
NOTE 7 - Deposits
The composition of our deposits is as follows as of:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Noninterest-bearing demand deposit accounts | $ | 1,946,215 | | | $ | 1,566,113 | |
Interest-bearing deposit accounts: | | | |
Interest-bearing demand accounts | 160,082 | | | 187,712 | |
Savings accounts and money market accounts | 3,008,433 | | | 2,757,882 | |
NOW accounts | 46,128 | | | 19,496 | |
Certificate of deposit accounts: | | | |
Less than $100 | 216,331 | | | 147,386 | |
$100 through $250 | 224,999 | | | 103,082 | |
Greater than $250 | 158,230 | | | 73,277 | |
Total interest-bearing deposit accounts | 3,814,203 | | | 3,288,835 | |
Total deposits | $ | 5,760,418 | | | $ | 4,854,948 | |
The following table summarizes the interest expense incurred on our deposits:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Interest-bearing deposit accounts: | | | | | | | | | | | |
Interest-bearing demand accounts | $ | 449 | | | $ | 89 | | | $ | 733 | | | $ | 300 | | | | | |
Savings accounts and money market accounts | 1,859 | | | 1,155 | | | 4,095 | | | 3,668 | | | | | |
NOW accounts | 46 | | | 50 | | | 115 | | | 336 | | | | | |
Certificate of deposit accounts | 920 | | | 684 | | | 2,077 | | | 2,427 | | | | | |
Total interest-bearing deposit accounts | $ | 3,274 | | | $ | 1,978 | | | $ | 7,020 | | | $ | 6,731 | | | | | |
The remaining maturity on certificate of deposit accounts is as follows as of:
| | | | | |
| September 30, 2022 |
Remainder of 2022 | $ | 1,085 | |
2023 | 382,847 | |
2024 | 119,617 | |
2025 | 71,858 | |
2026 | 13,429 | |
2027 | 7,629 | |
Thereafter | 3,095 | |
Total certificate of deposit accounts | $ | 599,560 | |
NOTE 8 - Securities Sold Under Agreements to Repurchase
Information concerning securities sold under agreements to repurchase is as follows as of and for the periods ended:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Amount outstanding at period-end | $ | 51,256 | | | $ | 92,093 | |
Average daily balance during the period | $ | 59,573 | | | $ | 125,867 | |
Average interest rate during the period | 0.22 | % | | 0.05 | % |
Maximum month-end balance during the period | $ | 70,838 | | | $ | 160,865 | |
Weighted average interest rate at period-end | 0.40 | % | | 0.05 | % |
At September 30, 2022 and December 31, 2021, such agreements were secured by investment and mortgage-related securities with an approximate carrying amount of $58,642 and $108,714, respectively. Pledged securities are maintained by safekeeping agents at the direction of the Bank. Our agreements to repurchase generally mature daily, and are considered to be in an overnight and continuous position.
NOTE 9 - Debt
FHLB advances:
The following is a breakdown of our FHLB advances and other borrowings outstanding as of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| | Amount | | Rate | | Weighted Average Rate | | Amount | | Rate | | Weighted Average Rate |
Variable rate line-of-credit advance | | $ | 170,884 | | | 2.42% - 3.16% | | 3% | | $ | — | | | N/A | | N/A |
Fixed rate term advances | | $ | 139,988 | | | 1.56% - 1.90% | | 1.77% | | $ | 40,000 | | | 0.91% - 2.59% | | 1.49% |
| | $ | 310,872 | | | | | | | $ | 40,000 | | | | | |
The advances were collateralized by $1,546,157 and $1,180,493 of loans pledged to the FHLB as collateral as of September 30, 2022 and December 31, 2021, respectively.
A $50.0 million advance at an interest rate of 1.56% that was scheduled to mature in 2033 was called by the FHLB and repaid in October 2022. A $65.0 million advance at an interest rate of 1.90% that was scheduled to mature in 2033 was called by the FHLB and repaid in November 2022. The remaining fixed rate advance is callable by the FHLB and is due in 2033.
As of September 30, 2022 and December 31, 2021, the Bank had total borrowing capacity with the FHLB that is based on qualified collateral lending values of $954,016 and $597,915, respectively. Our additional borrowing availability with the FHLB at September 30, 2022 was $659,479. These borrowings can be in the form of additional term advances or a line-of-credit.
FRB advances:
We also had a $6,499 line-of-credit with the FRB. The agreement bears interest at the Fed Funds target rate plus 0.50% and is secured by municipal, agency, mortgage-related and corporate securities. The entire line was available at September 30, 2022.
Other borrowings:
We have lines-of-credit with certain other financial institutions totaling $155,000 as of September 30, 2022. No amounts were drawn on these lines-of-credit in 2022.
Convertible Notes Payable:
As of September 30, 2022 and December 31, 2021, we have issued a total of $5,456 and $20,673, respectively, of convertible notes with a maturity date of August 31, 2023. The annual interest rate on these convertible notes is 3.29% with quarterly interest payments. With respect to conversion, each $1 (in thousands) principal amount of the convertible notes can be converted to 15.6717 shares of Parent Company common stock at any time until maturity.
The convertible notes were originally recorded with a discount of $4,682. As of and for the periods ended September 30, 2022 and December 31, 2021, the debt discount on the convertible notes was $139 and $1,231, respectively. The related accretion for the three months ended September 30, 2022 and 2021 was $38 and $186, respectively. The related accretion for the nine months ended September 30, 2022 and 2021 was $1,093 and $559, respectively.
Subordinated Debt:
Subordinated Notes - 2020:
In June and August 2020, we issued a total of $40,000 subordinated notes. The notes pay interest at a fixed rate of 6.00% through June 30, 2025 and subsequently, until maturity, pay interest at a floating rate of three month term SOFR plus 5.89% reset quarterly. Interest is payable on July 1 and January 1 of each year. Such notes are due on July 1, 2030. The notes are not redeemable within the first five years of issuance, except under certain very limited conditions. After five years, we may redeem the notes at our discretion. We incurred and capitalized $933 of costs related to the issuance of the subordinated notes. The amortization associated with the capitalized issuance costs is not significant for the periods presented.
Subordinated Note - 2022 :
On January 13, 2022, we issued a subordinated note totaling $25,000. The note pays interest at a fixed rate of 3.375% through January 15, 2027 and subsequently, until maturity, pays interest at a floating rate of three month term SOFR plus 2.03% reset quarterly. Interest is payable on July 15 and January 15 of each year. Such note is due on January 15, 2032. The note is not redeemable within the first five years of issuance, except under certain very limited conditions. After five years, we may redeem the note at our discretion. We incurred and capitalized $534 of costs related to the issuance of the subordinated note in the first quarter of 2022. The amortization associated with the capitalized issuance costs is not significant for the periods presented.
Trust preferred securities:
We have issued $9,279 in trust preferred securities through a special-purpose trust, New Mexico Banquest Capital Trust I (“NMBCT I”). In addition, we have issued $4,640 in trust preferred securities through a special purpose trust, New Mexico Banquest Capital Trust II (“NMBCT II”, and together with NMBCT I, collectively referred to as “NMBCT Trusts”). Interest is payable quarterly at a rate of three-month LIBOR plus 3.35% (5.60% and 3.50% as of September 30, 2022 and 2021, respectively) for the trust preferred securities issued through NMBCT I and at a rate of three-month LIBOR plus 2.00% (4.96% and 2.15% as of September 30, 2022 and 2021, respectively) for the trust preferred securities issued through NMBCT II.
This subordinated debt of $13,919 was originally recorded at a discount of $4,293. The accretion associated with the fair value discount is not significant for the periods presented.
The Parent Company fully and unconditionally guarantees the obligations of the NMBCT Trusts on a subordinated basis. The trust preferred securities issued through the NMBCT Trusts are mandatorily redeemable upon the maturity of the debentures on December 19, 2032 and November 23, 2034, respectively, and are optionally redeemable, in part or in whole, by the Parent Company at each quarterly interest payment date. The Parent Company owns all of the outstanding common securities of the NMBCT Trusts, which have an aggregate liquidation valuation amount of $419 and is recorded in prepaid expenses and other assets on the consolidated balance sheet. The NMBCT Trusts are considered variable interest entities. Since the Parent Company is not the primary beneficiary of the NMBCT Trusts, the financial statements of the NMBCT Trusts are not included in our consolidated financial statements.
NOTE 10 - Earnings Per Share
Basic earnings per share, excluding dilution, is computed by dividing earnings available to common stockholders’ by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that could then share in our earnings.
The following table sets forth the computation of basic and diluted earnings per share of common stock:
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| For the three months ended September 30, | | For the nine months ended September 30, | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Net income applicable to common stockholders | $ | 26,513 | | | $ | 8,728 | | | $ | 34,612 | | | $ | 34,347 | | | | | |
Weighted Average Shares | | | | | | | | | | | |
Weighted average common shares outstanding | 24,877,607 | | | 18,321,659 | | | 22,685,496 | | | 18,321,659 | | | | | |
Effect of dilutive securities | | | | | | | | | | | |
Stock-based awards | 531,208 | | | 449,022 | | | 596,437 | | | 440,838 | | | | | |
Convertible notes payable | 85,500 | | | — | | | — | | | — | | | | | |
Weighted average diluted common shares | 25,494,315 | | | 18,770,681 | | | 23,281,933 | | | 18,762,497 | | | | | |
Earnings per common share | | | | | | | | | | | |
Basic earnings per common share | $ | 1.07 | | | $ | 0.48 | | | $ | 1.53 | | | $ | 1.87 | | | | | |
Effect of dilutive securities | | | | | | | | | | | |
Stock-based awards | (0.03) | | | (0.02) | | | (0.04) | | | (0.04) | | | | | |
Diluted earnings per common share | $ | 1.04 | | | $ | 0.46 | | | $ | 1.49 | | | $ | 1.83 | | | | | |
Convertible notes payable for 85,500 shares of common stock were not considered in computing diluted earnings per share for the nine months ended September 30, 2022 and for 323,984 shares of common stock for the three and nine months ended September 30, 2021, respectively, because they were antidilutive. Stock-based awards for 845 and 34,828 shares of common stock were not considered in computing diluted earnings per share for the three and nine months ended September 30, 2022, respectively, because they were antidilutive.
NOTE 11 - Accumulated Other Comprehensive Income (Loss)
The following table sets forth the components in accumulated other comprehensive income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Securities available-for-sale: | | | | | | | | | | | |
Balance, beginning of period | $ | (40,535) | | | $ | 7,142 | | | $ | 1,664 | | | $ | 9,119 | | | | | |
Unrealized (loss) gain | (6,613) | | | 349 | | | (62,473) | | | (2,270) | | | | | |
Income tax effect | 1,506 | | | (86) | | | 15,167 | | | 556 | | | | | |
Net unrealized (loss) gain | (5,107) | | | 263 | | | (47,306) | | | (1,714) | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance, end of period | $ | (45,642) | | | $ | 7,405 | | | $ | (45,642) | | | $ | 7,405 | | | | | |
| | | | | | | | | | | |
Fair value hedges of securities available-for-sale: | | | | | | | | | | | |
Balance, beginning of period | $ | 1,098 | | | $ | — | | | $ | — | | | $ | — | | | | | |
Unrealized gain | 1,821 | | | — | | | 3,211 | | | — | | | | | |
Income tax effect | (383) | | | — | | | (675) | | | — | | | | | |
Net unrealized gain | 1,438 | | | — | | | 2,536 | | | — | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance, end of period | $ | 2,536 | | | $ | — | | | $ | 2,536 | | | $ | — | | | | | |
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NOTE 12 - Stockholders’ Equity
Equity Incentive Plans:
We have established the FirstSun Capital Bancorp 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan provides for the grant of stock options, stock appreciation rights, restricted stock and other stock awards to its employees, directors and consultants for up to 1,977,292 shares of FirstSun common stock in the aggregate.
On October 18, 2021 we established the FirstSun Capital Bancorp 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan provides for the grant of stock options, stock appreciation rights, restricted stock and other stock awards to its employees, directors and consultants for up to 2,476,571 shares of FirstSun common stock in the aggregate. Additionally, we established the FirstSun Capital Bancorp Long-Term Incentive Plan (“LTIP”), which became effective April 1, 2022. The LTIP is intended to qualify as a “top-hat” plan under ERISA that is unfunded and provides benefits only to a select group of management or highly compensated employees of FirstSun or the Bank. The equity component of awards under the LTIP are issued from the 2021 Plan.
The following table presents stock options outstanding under the 2017 Plan at September 30, 2022. There were no grants or forfeitures during the nine months ended September 30, 2022:
| | | | | | | | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price, per Share | | Weighted-Average Remaining Contractual Term (years) |
September 30, 2022 | | | | | |
Outstanding, beginning of period | 1,412,900 | | | $ | 20.19 | | | |
Exercised | (67,976) | | | 19.72 | | | |
| | | | | |
| | | | | |
Outstanding, end of period | 1,344,924 | | | $ | 20.21 | | | 5.49 |
Options vested or expected to vest | 1,412,900 | | | $ | 20.19 | | | |
Options exercisable, end of period | 1,228,041 | | | $ | 20.02 | | | 5.29 |
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At September 30, 2022, there was $720 of total unrecognized compensation cost related to non-vested stock options granted under the 2017 Plan. The unrecognized compensation cost at September 30, 2022 is expected to be recognized over the following three years. At September 30, 2022 and December 31, 2021, the intrinsic value of the stock options was $14,237 and $18,042, respectively.
In May 2022, we issued 11,344 shares of restricted stock from the 2021 Plan that will fully vest in May 2023. At September 30, 2022, there was $2,423 of total unrecognized compensation cost related to the non-vested restricted stock.
In May 2022, we issued performance-based restricted stock under the LTIP that, subject to the achievement of performance conditions, will fully vest in April 2025. At September 30, 2022, we determined it is probable that 81,484 shares will be issued based upon the probability that the performance conditions will be achieved. At September 30, 2022, there was $236 of total unrecognized compensation cost related to the non-vested restricted stock granted under the 2021 Plan.
For the three months ended September 30, 2022 and 2021, we recorded total compensation cost from the 2017 and 2021 Plans of $473 and $348, respectively. For the nine months ended September 30, 2022 and 2021, we recorded total compensation cost from the 2017 and 2021 Plans of $1,093 and $1,501, respectively.
In conjunction with the Pioneer Merger, we assumed certain options that had been granted under Pioneer’s option plans. All assumed options were fully vested and exercisable. No further options will be granted under the Pioneer plans. The following table presents options assumed in the Pioneer Merger and the activity from Merger date through September 30, 2022:
| | | | | | | | | | | | | | | | | |
| Shares | | Weighted-Average Exercise Price, per Share | | Weighted-Average Remaining Contractual Term (years) |
September 30, 2022 | | | | | |
Outstanding, beginning of period | — | | | $ | — | | | |
Options assumed from Pioneer Bancshares, Inc. | 431,645 | | | 23.32 | | | |
Exercised | (255,453) | | | 23.44 | | | |
| | | | | |
| | | | | |
Outstanding, vested, and exercisable, end of period | 176,192 | | | $ | 23.12 | | | 5.61 |
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At September 30, 2022, the intrinsic value of the stock options was $1,346.
NOTE 13 - Income Taxes
The provision for income taxes in interim periods requires us to make a best estimate of the effective tax rate expected to be applicable for the full year, adjusted for any discrete items for the applicable period. This estimated effective tax rate is then applied to interim consolidated pre-tax operating income to determine the interim provision for income taxes.
The provision for income tax is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Provision for income taxes | $ | 7,628 | | | $ | 1,851 | | | $ | 8,559 | | | $ | 7,159 | | | | | |
Effective tax provision rate | 22.3 | % | | 17.5 | % | | 19.8 | % | | 17.2 | % | | | | |
We do not believe that we have any material uncertain tax positions, and do not expect any material changes during the next twelve months.
NOTE 14 - Regulatory Capital Matters
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
Under the Basel III rules, the Parent Company and the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The fully phased in capital conservation buffer is 2.50% for all periods presented.
The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. As of September 30, 2022, both the Parent Company and the Bank met all capital adequacy requirements to which they were subject.
Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of September 30, 2022 and December 31, 2021, the most recent regulatory notifications categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.
Actual and required capital amounts for the Parent Company are as follows as of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | For Capital Adequacy Purposes | | To be Well- Capitalized under Prompt Corrective Action Provisions |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
September 30, 2022 | | | | | | | | | | | |
Total risk-based capital to risk-weighted assets: | $ | 791,066 | | | 12.06 | % | | $ | 524,601 | | | 8.00 | % | | N/A | | N/A |
Tier 1 risk-based capital to risk-weighted assets: | $ | 655,345 | | | 9.99 | % | | $ | 393,451 | | | 6.00 | % | | N/A | | N/A |
Common Equity Tier 1 (CET 1) to risk-weighted assets: | $ | 655,345 | | | 9.99 | % | | $ | 295,088 | | | 4.50 | % | | N/A | | N/A |
Tier 1 leverage capital to average assets: | $ | 655,345 | | | 9.55 | % | | $ | 274,564 | | | 4.00 | % | | N/A | | N/A |
December 31, 2021 | | | | | | | | | | | |
Total risk-based capital to risk-weighted assets: | $ | 563,112 | | | 11.76 | % | | $ | 383,213 | | | 8.00 | % | | N/A | | N/A |
Tier 1 risk-based capital to risk-weighted assets: | $ | 464,761 | | | 9.70 | % | | $ | 287,410 | | | 6.00 | % | | N/A | | N/A |
Common Equity Tier 1 (CET 1) to risk-weighted assets: | $ | 464,761 | | | 9.70 | % | | $ | 215,557 | | | 4.50 | % | | N/A | | N/A |
Tier 1 leverage capital to average assets: | $ | 464,761 | | | 8.24 | % | | $ | 225,736 | | | 4.00 | % | | N/A | | N/A |
Actual and required capital amounts for the Bank are as follows as of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | For Capital Adequacy Purposes | | To be Well- Capitalized under Prompt Corrective Action Provisions |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
September 30, 2022 | | | | | | | | | | | |
Total risk-based capital to risk-weighted assets: | $ | 776,038 | | | 11.86 | % | | $ | 523,395 | | | 8.00 | % | | $ | 654,243 | | | 10.00 | % |
Tier 1 risk-based capital to risk-weighted assets: | $ | 715,097 | | | 10.93 | % | | $ | 392,546 | | | 6.00 | % | | $ | 523,395 | | | 8.00 | % |
Common Equity Tier 1 (CET 1) to risk-weighted assets: | $ | 715,097 | | | 10.93 | % | | $ | 294,409 | | | 4.50 | % | | $ | 425,258 | | | 6.50 | % |
Tier 1 leverage capital to average assets: | $ | 715,097 | | | 10.42 | % | | $ | 274,489 | | | 4.00 | % | | $ | 343,112 | | | 5.00 | % |
December 31, 2021 | | | | | | | | | | | |
Total risk-based capital to risk-weighted assets: | $ | 571,463 | | | 11.96 | % | | $ | 382,106 | | | 8.00 | % | | $ | 477,633 | | | 10.00 | % |
Tier 1 risk-based capital to risk-weighted assets: | $ | 523,128 | | | 10.95 | % | | $ | 286,580 | | | 6.00 | % | | $ | 382,106 | | | 8.00 | % |
Common Equity Tier 1 (CET 1) to risk-weighted assets: | $ | 523,128 | | | 10.95 | % | | $ | 214,935 | | | 4.50 | % | | $ | 310,462 | | | 6.50 | % |
Tier 1 leverage capital to average assets: | $ | 523,128 | | | 9.27 | % | | $ | 225,650 | | | 4.00 | % | | $ | 282,062 | | | 5.00 | % |
NOTE 15 - Fair Value Measurements
We utilize fair value measurements to record or disclose the fair value on certain assets and liabilities. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves or credit spreads. Unobservable inputs may be based on management’s judgement assumptions and estimates related to credit quality, our future earnings, interest rates and other relevant inputs. These valuation methods require considerable judgement and the resulting estimates of fair value can be significantly affected by the assumptions made and the methods used.
ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The hierarchy is based on the transparency of the inputs used in the valuation process with the highest priority given to quoted prices available in active markets and the lowest priority to unobservable inputs where no active market exists. The three levels of inputs that may be used to measure fair value are as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3: Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own beliefs about the assumptions that market participants would use in pricing the assets or liabilities.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the overall fair value measurement. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.
The following table sets forth our assets and liabilities measured at fair value on a recurring basis:
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| Level 1 | | Level 2 | | Level 3 | | |
| Quoted prices in active markets for identical assets | | Significant other observable inputs | | Significant unobservable inputs | | Total Estimated Fair Value |
As of September 30, 2022 | | | | | | | |
Available-for-sale securities | $ | 56,618 | | | $ | 494,547 | | | $ | — | | | $ | 551,165 | |
Loans held-for-sale | — | | | 67,535 | | | — | | | 67,535 | |
Mortgage servicing rights | — | | | — | | | 73,850 | | | 73,850 | |
Derivative financial instruments - assets | — | | | 48,371 | | | — | | | 48,371 | |
Derivative financial instruments - liabilities | — | | | (28,271) | | | — | | | (28,271) | |
Total | $ | 56,618 | | | $ | 582,182 | | | $ | 73,850 | | | $ | 712,650 | |
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As of December 31, 2021 | | | | | | | |
Available-for-sale securities | $ | 35,185 | | | $ | 537,316 | | | $ | — | | | $ | 572,501 | |
Loans held-for-sale | — | | | 103,939 | | | — | | | 103,939 | |
Mortgage servicing rights | — | | | — | | | 47,392 | | | 47,392 | |
Derivative financial instruments - assets | — | | | 10,815 | | | — | | | 10,815 | |
Derivative financial instruments - liabilities | — | | | (14,525) | | | — | | | (14,525) | |
Total | $ | 35,185 | | | $ | 637,545 | | | $ | 47,392 | | | $ | 720,122 | |
The following table presents a reconciliation for our Level 3 assets measured at fair value on a recurring basis:
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| For the three months ended September 30, | | For the nine months ended September 30, | | | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Balance, beginning of period | $ | 66,047 | | | $ | 40,844 | | | $ | 47,392 | | | $ | 29,144 | | | | | |
Total gains (losses) included in earnings | 4,314 | | | (2,176) | | | 14,777 | | | (3,706) | | | | | |
Purchases, issuances, sales and settlements: | | | | | | | | | | | |
| | | | | | | | | | | |
Issuances | 3,489 | | | 5,303 | | | 11,681 | | | 18,533 | | | | | |
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Balance, end of period | $ | 73,850 | | | $ | 43,971 | | | $ | 73,850 | | | $ | 43,971 | | | | | |
Certain financial assets and financial liabilities are regularly measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table sets forth our assets and liabilities that were measured at fair value on a non-recurring basis as of:
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| Level 3 |
| September 30, 2022 | | December 31, 2021 |
Impaired loans: | | | |
Commercial | $ | 2,088 | | | $ | 961 | |
Commercial real estate | 608 | | | 63 | |
Residential real estate | — | | | 632 | |
Consumer | 3 | | | — | |
Total impaired loans | $ | 2,699 | | | $ | 1,656 | |
| | | |
Other real estate owned and foreclosed assets, net: | | | |
| | | |
Commercial real estate | $ | 5,391 | | | $ | 5,067 | |
Residential real estate | — | | | 420 | |
| | | |
Total other real estate owned and foreclosed assets, net: | $ | 5,391 | | | $ | 5,487 | |
The fair value of the financial assets in the table above utilize the market approach valuation technique, with discount adjustments for differences between comparable sales.
Fair value of financial instruments not carried at fair value:
The carrying amounts and estimated fair values of financial instruments not carried at fair value are as follows as of:
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| | | Estimated Fair Value |
| Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 |
September 30, 2022 | | | | | | | | | |
Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 325,039 | | | $ | 325,039 | | | $ | 325,039 | | | $ | — | | | $ | — | |
Securities held-to-maturity | 39,148 | | | 34,096 | | | — | | | 34,096 | | | — | |
Loans (excluding impaired loans) | 5,515,103 | | | 5,375,203 | | | — | | | — | | | 5,375,203 | |
Restricted equity securities | 34,877 | | | 34,877 | | | — | | | 34,877 | | | — | |
Accrued interest receivable | 24,964 | | | 24,964 | | | — | | | 2,415 | | | 22,549 | |
| | | | | | | | | |
Liabilities: | | | | | | | | | |
Deposits (excluding demand deposits) | $ | 3,654,121 | | | $ | 3,614,346 | | | $ | — | | | $ | 3,614,346 | | | $ | — | |
Securities sold under agreements to repurchase | 51,256 | | | 51,256 | | | — | | | 51,256 | | | — | |
FHLB advances | 310,872 | | | 310,872 | | | — | | | 310,872 | | | — | |
| | | | | | | | | |
Convertible notes payable, net | 5,317 | | | 5,340 | | | — | | | 5,340 | | | — | |
Subordinated debt, net | 74,780 | | | 83,795 | | | — | | | 83,795 | | | — | |
Accrued interest payable | 3,073 | | | 3,073 | | | — | | | 3,073 | | | — | |
| | | | | | | | | |
December 31, 2021 | | | | | | | | | |
Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 668,462 | | | $ | 668,462 | | | $ | 668,462 | | | $ | — | | | $ | — | |
Securities held-to-maturity | 18,007 | | | 18,599 | | | — | | | 18,599 | | | — | |
Loans (excluding impaired loans) | 4,003,712 | | | 3,949,719 | | | — | | | — | | | 3,949,719 | |
Restricted equity securities | 16,239 | | | 16,239 | | | — | | | 16,239 | | | — | |
Accrued interest receivable | 14,761 | | | 14,761 | | | — | | | 1,131 | | | 13,630 | |
| | | | | | | | | |
Liabilities: | | | | | | | | | |
Deposits (excluding demand deposits) | $ | 3,101,123 | | | $ | 3,106,464 | | | $ | — | | | $ | 3,106,464 | | | $ | — | |
Securities sold under agreements to repurchase | 92,093 | | | 92,093 | | | — | | | 92,093 | | | — | |
FHLB advances | 40,000 | | | 41,514 | | | — | | | 41,514 | | | — | |
| | | | | | | | | |
Convertible notes payable, net | 19,442 | | | 21,564 | | | — | | | 21,564 | | | — | |
Subordinated debt, net | 50,016 | | | 52,264 | | | — | | | 52,264 | | | — | |
Accrued interest payable | 2,369 | | | 2,369 | | | — | | | 2,369 | | | — | |
NOTE 16 - Segment Information
Our operations are conducted through two operating segments: Banking and Mortgage Operations. Corporate represents costs not allocated to the operating segments. Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses are incurred for which discrete financial information is available that is evaluated regularly by executive management in deciding how to allocate resources and in assessing performance. Operating segments have been determined based on the products and services offered and reflect the manner in which financial information is currently evaluated by management. Each segment operates under the same banking charter, but is reported on a segmented basis for this report. 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.
The Banking segment originates loans and provides deposits and fee based services to consumer, business, and mortgage lending customers. Products offered include a full range of commercial and consumer banking and financial services. The interest income on loans held-for-investment is recognized in the Banking segment, excluding newly originated residential first mortgages within the Mortgage Operations segment.
The Mortgage Operations segment originates, sells, services, and manages market risk from changes in interest rates on one-to-four family residential mortgage loans to sell or hold on our balance sheet. Loans originated-to-sell comprise the majority of the lending activity. The Mortgage Operations segment recognizes interest income on loans that are held-for-sale and newly originated residential mortgages held-for-investment, the gains from one to four family residential mortgage sales, and revenue for servicing loans and other ancillary fees following a sales transaction. Revenue from servicing activities is earned on a contractual fee basis. The Mortgage Operations segment services loans for the held-for-investment portfolio, for which it earns revenue via an intercompany service fee allocation which appears as a cost to Banking in mortgage fees. Forward traded loan purchases and sales settlements as well as mortgage servicing rights and related fair value adjustments are reported in this segment.
Corporate represents miscellaneous other expenses of a corporate nature as well as revenue and expenses not directly assigned or allocated to the Banking or Mortgage Operations segments. The majority of executive management’s time is spent managing operating segments; related costs have been allocated between the operating segments and Corporate.
Revenues are comprised of net interest income before the provision (benefit) for loan losses and noninterest income. Noninterest expenses are allocated to each operating segment. Provision for loan losses is primarily allocated to the Banking segment. Allocation methodologies may be subject to periodic adjustment as management systems evolve and/or the business or product lines within the segments change.
Significant segment totals are reconciled to the financial statements as follows for the three months ended September 30,
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| Banking | | Mortgage Operations | | Corporate | | Total Segments |
2022 | | | | | | | |
Summary of Operations | | | | | | | |
Net interest income | $ | 68,159 | | | $ | 1,492 | | | $ | (1,165) | | | $ | 68,486 | |
| | | | | | | |
Provision for loan losses | 3,223 | | | 527 | | | — | | | 3,750 | |
| | | | | | | |
Noninterest income: | | | | | | | |
Service charges on deposit accounts | 4,807 | | | — | | | — | | | 4,807 | |
Credit and debit card fees | 3,103 | | | — | | | — | | | 3,103 | |
Trust and investment advisory fees | 1,552 | | | — | | | — | | | 1,552 | |
Income from mortgage banking services, net | (701) | | | 14,486 | | | — | | | 13,785 | |
Other noninterest income | 1,706 | | | — | | | — | | | 1,706 | |
Total noninterest income | 10,467 | | | 14,486 | | | — | | | 24,953 | |
| | | | | | | |
Noninterest expense: | | | | | | | |
Salary and employee benefits | 23,210 | | | 8,922 | | | 376 | | | 32,508 | |
Occupancy and equipment | 7,190 | | | 988 | | | 38 | | | 8,216 | |
Other noninterest expenses | 11,146 | | | 3,314 | | | 364 | | | 14,824 | |
Total noninterest expense | 41,546 | | | 13,224 | | | 778 | | | 55,548 | |
| | | | | | | |
Income (loss) before income taxes | $ | 33,857 | | | $ | 2,227 | | | $ | (1,943) | | | $ | 34,141 | |
| | | | | | | |
Other Information | | | | | | | |
Depreciation expense | $ | 1,839 | | | $ | 81 | | | $ | — | | | $ | 1,920 | |
Identifiable assets | $ | 6,315,984 | | | $ | 693,473 | | | $ | 43,460 | | | $ | 7,052,917 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Banking | | Mortgage Operations | | Corporate | | Total Segments |
2021 | | | | | | | |
Summary of Operations | | | | | | | |
Net interest income | $ | 39,297 | | | $ | 1,810 | | | $ | (1,142) | | | $ | 39,965 | |
| | | | | | | |
Provision for (benefit from) loan losses | 3,543 | | | (43) | | | — | | | 3,500 | |
| | | | | | | |
Noninterest income: | | | | | | | |
Service charges on deposit accounts | 3,471 | | | — | | | — | | | 3,471 | |
Credit and debit card fees | 2,472 | | | — | | | — | | | 2,472 | |
Trust and investment advisory fees | 1,974 | | | — | | | — | | | 1,974 | |
Income from mortgage banking services, net | (406) | | | 20,557 | | | — | | | 20,151 | |
Other noninterest income | 616 | | | — | | | — | | | 616 | |
Total noninterest income | 8,127 | | | 20,557 | | | — | | | 28,684 | |
| | | | | | | |
Noninterest expense: | | | | | | | |
Salary and employee benefits | 22,604 | | | 13,166 | | | 291 | | | 36,061 | |
Occupancy | 5,854 | | | 787 | | | 2 | | | 6,643 | |
Other noninterest expenses | 8,361 | | | 2,915 | | | 590 | | | 11,866 | |
Total noninterest expense | 36,819 | | | 16,868 | | | 883 | | | 54,570 | |
| | | | | | | |
Income (loss) before income taxes | $ | 7,062 | | | $ | 5,542 | | | $ | (2,025) | | | $ | 10,579 | |
| | | | | | | |
Other Information | | | | | | | |
Depreciation expense | $ | 1,516 | | | $ | 21 | | | $ | — | | | $ | 1,537 | |
Identifiable assets | $ | 5,070,287 | | | $ | 578,475 | | | $ | 34,323 | | | $ | 5,683,085 | |
Significant segment totals are reconciled to the financial statements as follows for the nine months ended September 30,:
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| Banking | | Mortgage Operations | | Corporate | | Total Segments |
2022 | | | | | | | |
Summary of Operations | | | | | | | |
Net interest income | $ | 167,606 | | | $ | 5,193 | | | $ | (4,443) | | | $ | 168,356 | |
| | | | | | | |
Provision for loan losses | 9,853 | | | 2,597 | | | — | | | 12,450 | |
| | | | | | | |
Noninterest income: | | | | | | | |
Service charges on deposit accounts | 13,111 | | | — | | | — | | | 13,111 | |
Credit and debit card fees | 8,508 | | | — | | | — | | | 8,508 | |
Trust and investment advisory fees | 5,408 | | | — | | | — | | | 5,408 | |
Income from mortgage banking services, net | (1,972) | | | 41,989 | | | — | | | 40,017 | |
Other noninterest income | 3,913 | | | (9) | | | — | | | 3,904 | |
Total noninterest income | 28,968 | | | 41,980 | | | — | | | 70,948 | |
| | | | | | | |
Noninterest expense: | | | | | | | |
Salary and employee benefits | 69,880 | | | 30,854 | | | 1,247 | | | 101,981 | |
Occupancy and equipment | 19,937 | | | 2,826 | | | 39 | | | 22,802 | |
Other noninterest expenses | 46,203 | | | 10,439 | | | 2,258 | | | 58,900 | |
Total noninterest expense | 136,020 | | | 44,119 | | | 3,544 | | | 183,683 | |
| | | | | | | |
Income (loss) before income taxes | $ | 50,701 | | | $ | 457 | | | $ | (7,987) | | | $ | 43,171 | |
| | | | | | | |
Other Information | | | | | | | |
Depreciation expense | $ | 5,011 | | | $ | 294 | | | $ | — | | | $ | 5,305 | |
Identifiable assets | $ | 6,315,984 | | | $ | 693,473 | | | $ | 43,460 | | | $ | 7,052,917 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Banking | | Mortgage Operations | | Corporate | | Total Segments |
2021 | | | | | | | |
Summary of Operations | | | | | | | |
Net interest income | $ | 112,517 | | | $ | 5,674 | | | $ | (3,409) | | | $ | 114,782 | |
| | | | | | | |
Provision for (benefit from) loan losses | 2,124 | | | (374) | | | — | | | 1,750 | |
| | | | | | | |
Noninterest income: | | | | | | | |
Service charges on deposit accounts | 8,659 | | | — | | | — | | | 8,659 | |
Credit and debit card fees | 7,140 | | | — | | | — | | | 7,140 | |
Trust and investment advisory fees | 5,871 | | | — | | | — | | | 5,871 | |
Income from mortgage banking services, net | (1,516) | | | 69,660 | | | — | | | 68,144 | |
Other noninterest income | 5,041 | | | (7) | | | — | | | 5,034 | |
Total noninterest income | 25,195 | | | 69,653 | | | — | | | 94,848 | |
| | | | | | | |
Noninterest expense: | | | | | | | |
Salary and employee benefits | 70,111 | | | 42,238 | | | 780 | | | 113,129 | |
Occupancy | 17,535 | | | 2,329 | | | 3 | | | 19,867 | |
Other noninterest expenses | 22,072 | | | 9,237 | | | 2,069 | | | 33,378 | |
Total noninterest expense | 109,718 | | | 53,804 | | | 2,852 | | | 166,374 | |
| | | | | | | |
Income (loss) before income taxes | $ | 25,870 | | | $ | 21,897 | | | $ | (6,261) | | | $ | 41,506 | |
| | | | | | | |
Other Information | | | | | | | |
Depreciation expense | $ | 4,428 | | | $ | 288 | | | $ | — | | | $ | 4,716 | |
Identifiable assets | $ | 5,070,287 | | | $ | 578,475 | | | $ | 34,323 | | | $ | 5,683,085 | |
NOTE 17 - Commitments and Contingencies
Commitments:
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 loan commitments, standby letters of credit, and documentary letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Our exposure to credit loss in the event of nonperformance by the other party of these loan commitments and standby letters of credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet financial instruments.
Operating leases:
We lease certain facilities and equipment under non-cancelable operating leases. Operating lease amounts exclude renewal option periods, property taxes, insurance, and maintenance expenses on leased properties. Our facility leases typically provide for rental adjustments for increases in base rent (up to specific limits), property taxes, insurance, and general property maintenance that would be recorded in rent expense. Rent expense was $2,063 and $1,641 for the three months ended September 30, 2022 and 2021, respectively. Rent expense was $5,839 and $4,955 for the nine months ended September 30, 2022 and 2021, respectively.
Undistributed portion of committed loans and unused lines of credit:
Loan commitments are agreements to lend to a customer as long as there is no customer violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. As of September 30, 2022 and December 31, 2021, commitments included the funding of fixed-rate loans totaling $215,851 and $144,701 and variable-rate loans totaling $1,676,927 and $987,584, respectively. The fixed-rate loan commitments have interest rates ranging from 1.00% to 18.00% at September 30, 2022 and 0.85% to 18.00% at December 31, 2021, and maturities ranging from 1 month to 15 years at September 30, 2022 and from 1 month to 26 years at December 31, 2021.
Standby letters of credit:
Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since many of the loan commitments and letters of credit expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, owner-occupied real estate, and/or income-producing commercial properties. As of September 30, 2022 and December 31, 2021, our standby letters of credit commitment totaled $17,950 and $11,729, respectively.
MPF Master Commitments:
The Bank has previously executed MPF Master Commitments (Commitments) with the FHLB to deliver mortgage loans and to guarantee the payment of any realized losses that exceed the FHLB’s first loss account for mortgages delivered under the Commitments. The Bank receives credit enhancement fees from the FHLB for providing this guarantee and continuing to manage the credit risk of the MPF Program mortgage loans. We entered into a new agreement in the third quarter of 2022. As of September 30, 2022 and December 31, 2021, the Bank considered the amount of any of its liability for the present value of the credit enhancement fees less any expected losses in the mortgages delivered under the Commitments to be immaterial, and had not recorded a liability and offsetting receivable. As of September 30, 2022 and December 31, 2021, the maximum potential amount of future payments that the Bank would have been required to make under the Commitments was $12,884 and $12,870, respectively. Under the Commitments, the Bank agrees to service the loans and therefore, is responsible for any necessary foreclosure proceedings. Any future recoveries on any losses would not be paid by the FHLB under the Commitments. The Bank has not experienced any material losses under these guarantees.
Contingencies:
We generally sell loans to investors without recourse; therefore, the investors have assumed the risk of loss or default by the borrower. However, we are usually required by these investors to make certain standard representations and warranties relating to credit information, loan documentation, and collateral. To the extent that we do not comply with such representations, we may be required to repurchase the loans or indemnify these investors for any losses from borrower defaults. We establish reserves for potential losses related to these representations and warranties if deemed appropriate and such reserves would be recorded within accrued expenses and other liabilities. In assessing the adequacy of the
reserve, we evaluate various factors including actual write-offs during the period, historical loss experience, known delinquent and other problem loans, and economic trends and conditions in the industry.
From time to time, we are a defendant in various claims, legal actions, and complaints arising in the ordinary course of business. We periodically review all outstanding pending or threatened legal proceedings and determine if such matters will have an adverse effect on our business, financial condition, results of operations or cash flows.
Overdraft Fee Litigation:
On September 10, 2021, Karen McCollam filed a putative class action amended complaint against the Bank in the United States District Court for the District of Colorado. The amended complaint alleged that the Bank improperly charged overdraft fees where a transaction was initially authorized on sufficient funds but later settled negative due to intervening transactions. The complaint asserted a claim for breach of contract, which incorporated the implied duty of good faith and fair dealing, and a claim for violations of the Colorado Consumer Protection Act. Plaintiff sought to represent a proposed class of all the Bank’s checking account customers who were allegedly charged overdraft fees on transactions that did not overdraw their checking account. Plaintiff sought unspecified restitution, actual and statutory damages, costs, attorneys’ fees, pre-judgment interest, and other relief as the Court deemed proper for herself and the putative class. On September 24, 2021, the Bank filed a motion to dismiss the amended complaint. The Bank’s motion to dismiss was granted on April 15, 2022. Plaintiff filed a notice of appeal on May 16, 2022. The parties thereafter reached agreement on a confidential settlement that will result in the case being dismissed with prejudice.
On September 13, 2021, Samantha Besser filed a putative class action amended complaint against the Bank in the United States District Court for the District of Colorado. The amended complaint alleges that the Bank improperly charged multiple insufficient funds or overdraft fees when a merchant resubmits a rejected payment request. The complaint asserts claims for breach of contract, which incorporates the implied duty of good faith and fair dealing. Plaintiff seeks to represent a proposed class of all the Bank’s checking account customers who were charged multiple insufficient funds or overdraft fees on resubmitted payment requests. Plaintiff seeks unspecified restitution, actual and statutory damages, costs, attorneys’ fees, pre-judgment interest, and other relief as the Court deems proper for herself and the purported class. On September 27, 2021, the Bank filed a motion to dismiss the amended complaint. The motion to dismiss has been fully pled and is before the Court for decision. The Bank believes that the lawsuit is without merit, and it intends to vigorously defend against all claims asserted.
Wire Transfer Litigation:
On November 5, 2021, urban-gro, Inc. (“UGI”) filed a complaint against the Bank in the Boulder County, Colorado District Court. The complaint alleges that the Bank failed to follow contractual, internal, and industry-standard procedures with respect to six purportedly fraudulent and unauthorized wire transfers, totaling approximately $5.1 million, from UGI’s deposit account at the Bank to domestic third-party beneficiaries (“Transactions”). UGI seeks actual damages, statutory damages for civil theft, costs, attorneys’ fees, pre- and post-judgment interest, and other relief as the Court deems proper.
On November 18, 2021, the Bank filed responsive pleadings (“Answer”) setting forth its position that: 1) the Transactions were duly authorized by UGI; 2) the Bank upheld the contractual security procedures with UGI for wire transfers, and followed its own industry-standard internal processes and procedures in carrying out those security procedures; 3) UGI is solely liable for any fraud that might have been perpetrated due to an e-mail account compromise of one or more of its employees; 4) UGI breached its contractual obligations with the Bank by failing to timely discover and report any impropriety as to the Transactions to the Bank; and 5) the Bank, therefore, is not liable for the unrecovered balance.
The Bank believes that UGI’s claims are without merit and it intends to vigorously defend against all claims asserted. At this time, the Bank is unable to reasonably estimate the outcome of this litigation.
We establish reserves for contingencies, including legal proceedings, when potential losses become probable and can be reasonably estimated. While the ultimate resolution of any legal proceedings, including the matters described above, cannot be determined at this time, based on information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in these above legal proceedings, either individually or in the aggregate, will not have a material adverse effect on our financial statements. It is possible, however, that future developments could result in an unfavorable outcome for or resolution of any of these proceedings, which may be material to our results of operations for a given fiscal period.
Pandemic:
The impact of the coronavirus (COVID-19) pandemic is fluid and continues to evolve, adversely affecting many of our clients. While vaccine availability and uptake has increased, the longer-term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will
depend on various developments and other factors, including increases in new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the vaccines along with concerns related to new strains of the virus; supply chain issues remaining unresolved longer than anticipated; labor shortages; decreases in consumer confidence and spending; and rising geopolitical tensions.