FIRSTSUN CAPITAL BANCORP (FSUN) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FIRSTSUN
In this section, unless the context suggests otherwise, references to “we,” “us,” and “our” mean the combined business of FirstSun and its wholly-owned subsidiaries, Logia Portfolio Management, LLC and Sunflower Bank.
The following discussion is an analysis of our consolidated results of operations for the years ended December 31, 2021, 2020 and 2019, and financial condition for the years ended December 31, 2021 and 2020. This discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying footnotes filed with this report in “Part II, Item 8. Financial Statements.” We have omitted discussion of 2019 results where it would be redundant to the discussion previously included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations of FirstSun” section of our Prospectus dated August 10, 2021, filed pursuant to Securities Act Rule 424(b)(3) under the Securities Act on August 12, 2021, relating to FirstSun’s Registration Statement on Form S-4 (File No. 333-258176), in connection with our proposed merger with Pioneer, which discussion is incorporated herein by reference. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or results of operations for any future periods.
Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements.
For additional information regarding our cautionary disclosures, See the “Cautionary Note Regarding Forward-Looking Statements” beginning on page 3 of this report.
General Overview
FirstSun, headquartered in Denver, Colorado, is the financial holding company for Sunflower Bank, which operates as Sunflower Bank, First National 1870 and Guardian Mortgage. We conduct a full service community banking and trust business through Sunflower Bank and Logia.
We offer a full range of relationship-focused services to meet our clients’ personal, business and wealth management financial objectives, with a branch network in Kansas, Colorado, New Mexico, Texas and Arizona and mortgage capabilities in 43 states.
Financial Highlights For 2021
We delivered strong financial results in 2021, which included:
•Net income of $43.2 million, $2.30 per diluted share
•Return on average assets of 0.79%
•Return on average equity of 8.37%
•Loan growth of 5.0% (excluding PPP loan balances (non-GAAP), 10.4%)
•Average deposit balance growth of 20.0%
Net income totaled $43.2 million, or $2.30 per diluted share, during 2021, compared to $47.6 million, or $2.58 per diluted share, in 2020. The return on average assets was 0.79% during 2021, compared to 1.02% in 2020, and the return on average equity was 8.37% during 2021, compared to 10.20% in 2020.
Pending Merger with Pioneer Bancshares, Inc.
On May 11, 2021, FirstSun and Pioneer Bancshares, Inc. (“Pioneer”) entered into an Agreement and Plan of Merger that provides for the merger of Pioneer with and into FirstSun. If the merger is completed, each share of Pioneer common stock will be converted into the right to receive 1.0443 shares of FirstSun common stock plus cash in lieu of any fractional shares. In September 2021, the Pioneer stockholders approved the merger. On March 7, 2022, we received the necessary regulatory approvals to complete the mergers, subject to applicable waiting periods. We expect to close the mergers on April 1, 2022, subject to customary closing conditions. In 2021, we incurred $3.1 million of expenses relating to the proposed transaction and anticipate additional expenses to be incurred in 2022.
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Pandemic Update
The COVID-19 pandemic has created economic and financial disruptions that adversely affected our operations during 2020 and to a lesser extent in 2021. Our historically diligent management of credit risk, diverse loan portfolios, and Southwest-based footprint has helped minimize any adverse impact to us. In addition, the combination of the vaccine rollout, government stimulus payments, and reduced spending during the pandemic are likely contributing factors mitigating the impact of the pandemic on our business, financial condition, results of operations, and our clients as of December 31, 2021. However, there are continuing concerns that indicate a slower return to pre-pandemic routines. Examples of these concerns relate to increases in new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the vaccine along with new strain concerns; supply chain issues remaining unresolved longer than anticipated; unemployment increases while consumer confidence and spending falls; and rising geopolitical tensions. Given the ongoing and dynamic nature of the circumstances surrounding the pandemic, it is difficult to predict the future adverse financial impact to us, although we expect to continue to be impacted by the pandemic in 2022.
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Financial Highlights
The following table sets forth certain financial highlights of FirstSun as of and for the years ended December 31,:
| ($ in thousands, except share and per share amounts) | 2021 | 2020 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Income Statement: | ||||||||||||
| Net interest income | $ | 155,233 | $ | 135,953 | ||||||||
| Taxable equivalent adjustment | 5,755 | 6,490 | ||||||||||
| Net interest income - fully tax equivalent ("FTE") basis (Non-GAAP) | $ | 160,988 | $ | 142,443 | ||||||||
| Provision for loan losses | $ | 3,000 | $ | 23,100 | ||||||||
| Noninterest income | $ | 124,244 | $ | 148,385 | ||||||||
| Noninterest expense | $ | 224,635 | $ | 204,073 | ||||||||
| Net income | $ | 43,164 | $ | 47,585 | ||||||||
| Per Common Share Data: | ||||||||||||
| Weighted average diluted common shares | 18,770,785 | 18,475,538 | ||||||||||
| Net income (basic) | $ | 2.36 | $ | 2.60 | ||||||||
| Net income (diluted) | $ | 2.30 | $ | 2.58 | ||||||||
| Cash dividends | $ | — | $ | — | ||||||||
| Dividend payout ratio | — | % | — | % | ||||||||
| Book value | $ | 28.56 | $ | 26.51 | ||||||||
| Tangible common book value (Non-GAAP) | $ | 26.31 | $ | 24.18 | ||||||||
| Performance Ratios: | ||||||||||||
| Return on average assets | 0.79 | % | 1.02 | % | ||||||||
| Return on average stockholders' equity | 8.37 | % | 10.20 | % | ||||||||
| Return on tangible common equity (Non-GAAP) | 9.17 | % | 11.00 | % | ||||||||
| Return on average tangible common equity (Non-GAAP) | 9.35 | % | 11.50 | % | ||||||||
| Net interest margin | 3.00 | % | 3.10 | % | ||||||||
| Efficiency ratio (1) | 80.38 | % | 71.77 | % | ||||||||
| Net charge-offs to average loans outstanding | 0.09 | % | 0.11 | % | ||||||||
| Allowance for loan losses to loans | 1.18 | % | 1.24 | % | ||||||||
| Nonperforming loans to total loans (2) | 0.86 | % | 1.07 | % | ||||||||
| Balance Sheet: | ||||||||||||
| Total loans, excluding loans held-for-sale | $ | 4,037,123 | $ | 3,846,357 | ||||||||
| Total assets | $ | 5,666,814 | $ | 4,995,457 | ||||||||
| Total deposits | $ | 4,854,948 | $ | 4,153,549 | ||||||||
| Total borrowed funds | $ | 109,458 | $ | 138,773 | ||||||||
| Total stockholders' equity | $ | 524,038 | $ | 485,787 | ||||||||
| Capital Ratios: | ||||||||||||
| Total risk-based capital to risk-weighted assets | 11.76 | % | 12.19 | % | ||||||||
| Tier 1 risk-based capital to risk-weighted assets | 9.70 | % | 9.87 | % | ||||||||
| Common Equity Tier 1 (CET 1) to risk-weighted assets | 9.70 | % | 9.87 | % | ||||||||
| Tier 1 leverage capital to average assets | 8.24 | % | 8.53 | % | ||||||||
| Average equity to average assets | 9.43 | % | 10.01 | % | ||||||||
| Tangible equity to tangible assets (non-GAAP) | 8.58 | % | 8.95 | % | ||||||||
| Nonfinancial Data: | ||||||||||||
| Full-time equivalent employees | 1,042 | 1,059 | ||||||||||
| Banking branches | 53 | 56 | ||||||||||
| (1) The efficiency ratio is one measure of profitability in the banking industry. This ratio measures the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. We calculate this ratio by dividing noninterest expense by the sum of net interest income and noninterest income. | ||||||||||||
| (2) Nonperforming loans include nonaccrual loans, accrual troubled debt restructurings (“TDR”), and accrual loans greater than 90 days past due. |
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Non-GAAP Financial Measures and Reconciliations
The non-GAAP financial measures presented below are used by our management and our Board of Directors on a regular basis in addition to our GAAP results to facilitate the assessment of our financial performance. Management believes these non-GAAP financial measures enhance an investor’s understanding of our financial results by providing a meaningful basis for period-to-period comparisons, assisting in operating results analysis, and predicting future performance. This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a substitute for, our GAAP results. Accordingly, this financial information should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2021, included elsewhere in this report. Non-GAAP financial measures exclude certain items that are included in the financial results presented in accordance with GAAP. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.
The following table presents GAAP to non-GAAP reconciliations as of and for the years ended December 31,:
| ($ in thousands, except share and per share amounts) | 2021 | 2020 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loan growth excluding PPP loan balances: | ||||||||||||
| Total loans (GAAP) | $ | 4,037,123 | $ | 3,846,357 | ||||||||
| Less: PPP loans | (66,749) | (251,101) | ||||||||||
| Total loans excluding PPP loans (non-GAAP) | $ | 3,970,374 | $ | 3,595,256 | ||||||||
| Loan growth excluding PPP loan balances in $ | $ | 375,118 | N/A | |||||||||
| Loan growth excluding PPP loan balances | 10.4 | % | N/A | |||||||||
| Tangible common book value: | ||||||||||||
| Total stockholders' equity (GAAP) | $ | 524,038 | $ | 485,787 | ||||||||
| Less: Goodwill and other intangible assets | ||||||||||||
| Goodwill | (33,050) | (33,050) | ||||||||||
| Other intangible assets | (8,250) | (9,667) | ||||||||||
| Total tangible stockholders' equity (non-GAAP) | $ | 482,738 | $ | 443,070 | ||||||||
| Total common shares outstanding | 18,346,288 | 18,321,659 | ||||||||||
| Tangible common book value (non-GAAP) | $ | 26.31 | $ | 24.18 | ||||||||
| Return on tangible common equity: | ||||||||||||
| Net Income (GAAP) | $ | 43,164 | $ | 47,585 | ||||||||
| Add: Intangible amortization, net of tax | 1,119 | 1,173 | ||||||||||
| Tangible net income (non-GAAP) | $ | 44,283 | $ | 48,758 | ||||||||
| Tangible stockholders’ equity (non-GAAP) (see above) | $ | 482,738 | $ | 443,070 | ||||||||
| Return on tangible common equity | 9.17 | % | 11.00 | % | ||||||||
| Return on average tangible common equity: | ||||||||||||
| Tangible net income (non-GAAP) (see above) | $ | 44,283 | $ | 48,758 | ||||||||
| Total average stockholders' equity (GAAP) | $ | 515,773 | $ | 466,619 | ||||||||
| Less: Average goodwill and other intangible assets | ||||||||||||
| Average goodwill | (33,050) | (33,050) | ||||||||||
| Average other intangible assets | (8,964) | (9,597) | ||||||||||
| Total average tangible stockholders' equity (non-GAAP) | $ | 473,759 | $ | 423,972 | ||||||||
| Return on average tangible common equity | 9.35 | % | 11.50 | % | ||||||||
| Net interest margin: | ||||||||||||
| Net interest income (GAAP) | $ | 155,233 | $ | 135,953 | ||||||||
| Taxable equivalent adjustment | 5,755 | 6,490 | ||||||||||
| Net interest income - FTE basis (non-GAAP) | $ | 160,988 | $ | 142,443 | ||||||||
| Average earning assets | $ | 5,180,650 | $ | 4,382,139 | ||||||||
| Net interest margin - FTE basis (non-GAAP) | 3.11 | % | 3.25 | % |
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| ($ in thousands, except share and per share amounts) | 2021 | 2020 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Tangible common equity to tangible assets: | ||||||||||||
| Total assets (GAAP) | $ | 5,666,814 | $ | 4,995,457 | ||||||||
| Less: Goodwill and other intangible assets | ||||||||||||
| Goodwill | (33,050) | (33,050) | ||||||||||
| Other intangible assets | (8,250) | (9,667) | ||||||||||
| Total tangible assets (non-GAAP) | $ | 5,625,514 | $ | 4,952,740 | ||||||||
| Tangible common equity (non-GAAP) (see above) | $ | 482,738 | $ | 443,070 | ||||||||
| Tangible equity to tangible assets (non-GAAP) | 8.58 | % | 8.95 | % |
Comparison of fiscal years 2021 and 2020
Segments
Our operations are conducted through two operating segments: Banking and Mortgage Operations. We also allocate certain expenses to Corporate, which is not an operating segment. The operating segments have been determined based on the products and services we offer and reflect the manner in which our financial information is currently evaluated by management. Each of the operating segments is complementary to each other and because of the interrelationship of the segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. For additional information on our segments, see Note 21 - Segment Information included in our audited consolidated financial statements included elsewhere in this report.
Banking
Identifiable assets for our Banking segment grew by $0.6 billion to $5.1 billion at December 31, 2021 from $4.5 billion for the same period in 2020. The growth in identifiable assets was primarily driven by growth in cash and cash equivalents and our loan portfolio. Income (loss) before taxes increased $36.8 million to $34.8 million for the year ended December 31, 2021, from a loss of $2.0 million for the year ended December 31, 2020. The period over period increase was driven by a $20.1 million decrease in our provision for loan losses, decreasing from a $23.3 million provision in the year ended December 31, 2020 to a $3.2 million provision in the year ended December 31, 2021. This reduction in the provision was due to favorable changes to certain environmental factors as a result of improved economic conditions and the performance of our loan portfolio. Noninterest income increased $11.3 million to $35.4 million in the year ended December 31, 2021, compared to $24.1 million in the same period in 2020, primarily resulting from increases in trust and investment advisory fee income, treasury management service fees, customer accommodation interest rate swap fees and changes in fair value. Noninterest expense increased $15.0 million to $149.9 million for the year ended December 31, 2021 compared to $134.9 million for the year ended December 31, 2020. The increase in noninterest expense was primarily due to our continued growth, including increased salary and employee benefits associated with headcount increases from an expanding sales force, as well as our expanded operations in certain markets, including Arizona and Texas.
Mortgage Operations
Income before income taxes from our Mortgage Operations segment decreased to $25.4 million for the year ended December 31, 2021, compared to $63.8 million for the year ended December 31, 2020, due to a combination of factors including an $8.0 million decline in revenue related to mortgage servicing rights (“MSR”) capitalization and changes in fair value, net of hedging activity, and a $2.9 million increase in noninterest expense. The revenue decline related to our MSRs was primarily the result of changes in market interest rates and our corresponding hedging positions. Additionally, while total loan originations remained steady at $2.3 billion for both the years ended December 31, 2021 and 2020, overall gain on sale margins declined by $30.5 million to $63.5 million for the year ended December 31, 2021 from $94.0 million in the prior year. Noninterest expense for the year ended December 31, 2021 was $71.0 million, compared to $68.0 million for the year ended December 31, 2020. The $2.9 million increase was primarily due to the increased salary and employee benefits expense associated with higher headcount as we continue to invest in our workforce.
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Critical Accounting Estimates
Our consolidated financial statements are prepared based on the application of accounting policies in accordance with U.S. generally accepted accounting principles, and follow general practices within the banking industry.
Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the determination of the allowance for loan losses and fair value measurements to be the accounting areas that require the use of critical accounting estimates as these policies require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Changes in underlying factors, estimates, assumptions or judgements could have a material impact on our future financial condition and results of operations.
These critical accounting estimates and their application are reviewed at least annually by our audit committee. The following is a description of our critical accounting estimates and an explanation of the methods and assumptions underlying their application.
Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred credit losses and represents management's estimate of incurred losses in our loan portfolio as of the balance sheet date.
Management’s estimate of the allowance for loan losses includes both specific and general components. Management estimates the allowance balance required and necessary provision for loan losses expense using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, current economic conditions, and other factors which, in the opinion of management, deserve current recognition. Further information on the allowance for loan losses is presented within “Part II, Item 8. Financial Statements,” Notes 1 and 4 to the consolidated financial statements.
The allowance for loan losses may be materially affected by qualitative factors, especially during periods of economic uncertainty, for items not reflected in the loss calculation, but which are deemed appropriate by management's current assessment of the risks related to the loan portfolio and/or external factors. Such qualitative factors may include changes in our loan portfolio composition and credit concentrations, changes in the balances and/or trends in asset quality and/or loan credit performance, changes in lending underwriting standards, the effect of other external factors such as significant unique events or conditions, and actual change in economic conditions, real estate values, and/or other economic developments. The qualitative factors applied at December 31, 2021, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes to items such as the uncertainty of economic conditions and management's assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of the allowance for loan losses currently calculated by management. The evaluation of qualitative factors is inherently imprecise and requires significant management judgment.
While management utilizes its best judgment and information available, the adequacy of the allowance for loan losses is determined by certain factors outside of our control, such as the performance of our portfolios, changes in the economic environment including economic uncertainty, changes in interest rates, and the view of the regulatory authorities toward classification of assets and the level of allowance for loan losses. Additionally, the level of the allowance for loan losses may fluctuate based on the balance and mix of the loan portfolio. If actual results differ significantly from our assumptions, our allowance for loan losses may not be sufficient to cover incurred losses in our loan portfolio, resulting in additions to our allowance for loan losses and an increase in the provision for loan losses.
Additionally, as an “emerging growth company” under Section 107 of the JOBS Act, we have not been required to adopt ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (CECL). As such, our allowance for loan losses may not be comparable to other public financial institutions that have adopted CECL.
Fair Value Measurements - We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with Accounting Standards Codification ("ASC") 820 and ASC 825. We group our financial instruments at fair value in three levels based on the markets in which the instruments are traded and the reliability of the assumptions used to determine fair value, with Level 1 (quoted prices for identical assets in an active market) being considered the most reliable, and Level 3 having the most unobservable inputs and therefore being considered the least reliable. We base our fair values on the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
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Our AFS securities are measured at fair value on a recurring basis. Changes in the fair value of AFS securities, not related to credit loss, are recorded, net of tax, as accumulated other comprehensive income (AOCI) in stockholders' equity. We primarily use prices obtained from third-party pricing services to determine the fair value of our AFS securities. Various modeling techniques are used to determine pricing for our securities, including option pricing, discounted cash flow models, and similar techniques. The inputs to these models may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. All AFS securities are classified as Level 1 or Level 2 in the valuation hierarchy.
Our loans held-for-sale represent mortgage loans originated and intended for sale in the secondary market. These loans are recorded on a recurring fair value basis. The estimated fair value of these loans held-for-sale is generally based on sale, exchange, or dealer market prices and are classified within Level 2 of the valuation hierarchy.
Our mortgage servicing rights (MSRs) are measured at fair value on a recurring basis. We estimate the fair value of our MSRs using a process that utilizes a discounted cash flow model and analysis of current market data to arrive at the estimate. The cash flow assumptions and prepayment assumptions used in the model are based on numerous factors, with the key assumptions being mortgage prepayment speeds, discount rates and cost to service. The change of any of these key assumptions due to market conditions or other factors could materially affect the fair value of our MSR. We also utilize a third party consulting firm to assist us with the valuation. Because of the nature of the valuation inputs, we classify the valuation of our MSR as Level 3 in the valuation hierarchy.
Our derivative financial instruments are measured at fair value on a recurring basis. These derivative instruments are generally valued based on quoted prices for similar assets in an active market with inputs that are observable, exchange prices or dealer market prices and are classified within Level 2 of the valuation hierarchy. Further information on our derivative and hedging activities is presented in “Part II, Item 8. Financial Statements,” Notes 1 and 7 to the consolidated financial statements.
We did not have any other financial instruments that were measured at fair value on a recurring basis at December 31, 2021.
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Results of Operations
Comparison of fiscal years 2021 and 2020
The follow table sets forth our results of operations as of and for the years ended December 31,:
| ($ in thousands, except per share amounts) | 2021 | 2020 | 2019 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net interest income | $ | 155,233 | $ | 135,953 | $ | 127,222 | ||||||||||
| Provision for loan losses | 3,000 | 23,100 | 6,050 | |||||||||||||
| Noninterest income | 124,244 | 148,385 | 70,967 | |||||||||||||
| Noninterest expense | 224,635 | 204,073 | 170,200 | |||||||||||||
| Income before income taxes | 51,842 | 57,165 | 21,939 | |||||||||||||
| Provision for income taxes | 8,678 | 9,580 | 1,436 | |||||||||||||
| Net income | 43,164 | 47,585 | 20,503 | |||||||||||||
| Diluted earnings per share | $ | 2.30 | $ | 2.58 | $ | 1.03 | ||||||||||
| Return on average assets | 0.79 | % | 1.02 | % | 0.52 | % | ||||||||||
| Return on average equity | 8.37 | % | 10.20 | % | 4.62 | % | ||||||||||
| Net interest margin | 3.00 | % | 3.10 | % | 3.45 | % | ||||||||||
| Net interest margin (FTE basis) | 3.11 | % | 3.25 | % | 3.56 | % | ||||||||||
| Efficiency ratio | 80.38 | % | 71.77 | % | 85.88 | % | ||||||||||
| Noninterest income to total revenue | 44.46 | % | 52.19 | % | 35.81 | % |
General
Our results of operations depend significantly on net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of interest income on loans and investment securities and interest expense on interest-bearing liabilities, consisting primarily of deposits and borrowings. Our results of operations are also dependent on our generation of noninterest income, consisting primarily of income from mortgage banking services, service charges on deposit accounts, trust and investment advisory fees and credit and debit card fees. Other factors contributing to our results of operations include our provisions for loan losses, income taxes, and noninterest expenses, such as salaries and employee benefits, occupancy and equipment, amortization of intangible assets and other operating costs.
Net income for the year ended December 31, 2021 was $43.2 million, compared to $47.6 million for the year ended December 31, 2020. The $4.4 million decrease in net income for the year ended December 31, 2021, compared to 2020, was primarily due to a decrease in noninterest income of $24.1 million, due primarily to a decrease in income from mortgage banking services and an increase in noninterest expenses of $20.6 million, partially offset by a $39.4 million increase in net interest income after provision for loan losses.
Net Interest Income
Net interest income, representing interest income less interest expense, is a significant contributor to our revenues and earnings. We generate interest income from interest and dividends on interest-earning assets, which are principally comprised of loans and investment securities. We incur interest expense from interest owed or paid on interest-bearing liabilities, including interest-bearing deposits, FHLB advances and other borrowings. Net interest income and margin are shaped by the characteristics of the underlying products, including volume, term and structure of each product. We measure and monitor yields on our loans and other interest-earning assets, the costs of our deposits and other funding sources, our net interest spread and our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets.
Interest earned on our loan portfolio is the largest component of our interest income. Our loan portfolios are presented at the principal amount outstanding net of deferred origination fees and unamortized discounts and premiums. Interest income is recognized based on the principal balance outstanding and the stated rate of the loan. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan. Loans acquired through acquisition are initially recorded at fair value. Discounts or premiums created when the loans were recorded at their estimated fair values at acquisition are accreted over the remaining term of the loan as an adjustment to the related loan’s yield.
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Our net interest income can be significantly influenced by a variety of factors, including overall loan demand, economic conditions, credit risk, the amount of non-earning assets including nonperforming loans and OREO, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities, exercise of call options on borrowings or securities, a general rise or decline in interest rates, changes in the slope of the yield-curve, and balance sheet growth or contraction.
Our net interest income was $155.2 million for the year ended December 31, 2021, an increase of $19.3 million, or 14.2%, from 2020. This increase was primarily attributable to growth of $254.8 million in average total loans held-for-investment during 2021, driving an increase in interest income on loans of $13.8 million despite the negative impact of declining market interest rates on loan yields. Interest and fee income on PPP loans contributed $3.2 million of the overall increase in interest income on loans for the period. Interest income on investment securities decreased by $2.1 million for the year ended December 31, 2021, compared to 2020. Interest expense from interest-bearing deposits declined by $7.1 million driven by a 28 basis point reduction in the average rate on our interest-bearing deposits.
Average earning assets for the year ended December 31, 2021 were $5.2 billion, an increase of $0.8 billion, or 18.2%, compared to 2020. Total average loans, including loans held-for-sale, grew to $3.9 billion for the year ended December 31, 2021, an increase of $0.3 billion, compared to 2020. The growth in interest income on loans held-for-investment is due to growth in loan balances and a ten basis point increase in the yield on loans in the year ended December 31, 2021, compared to 2020. Interest income from investment securities declined period over period, due to a combination of a 32 basis point decrease in yield due to decreasing market interest rates, as well as a $23.2 million decrease in average balances, year over year.
Average interest-bearing liabilities increased $0.4 billion, or 11.7%, for the year ended December 31, 2021, compared to 2020. Average interest-bearing deposits increased $0.4 billion, or 13.4%, in the year ended December 31, 2021, compared to 2020 and was the primary driver of the growth in average interest-bearing liabilities. We also saw growth in noninterest-bearing deposits of $0.4 billion, or 40.8% for the year ended December 31, 2021, compared to 2020. In addition to growth in our overall commercial and consumer customer base, we saw deposit growth in the year ended December 31, 2021 as a result of funds our customers received from federal stimulus programs related to the COVID-19 pandemic.
Our net interest margin was 3.00% for the year ended December 31, 2021, compared to 3.10% for 2020, a decrease of ten basis points. While our total cost of funds declined by 27 basis points period over period, we also experienced a 31 basis point decline in yield from earning assets over the same period during 2021. Our earning asset yield was also negatively impacted by the $0.6 billion increase in interest bearing cash balances, compared to the prior year period, from the heightened level of overall liquidity in the marketplace.
The following tables set forth information related to our average balance sheet, average yields on assets, and average costs of liabilities for the periods presented. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated.
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As of and for the years ended December 31,:
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | Average Balance | Interest | Average Yield/Rate | Average Balance | Interest | Average Yield/Rate | Average Balance | Interest | Average Yield/Rate | |||||||||||||||||||||||
| Interest Earning Assets | ||||||||||||||||||||||||||||||||
| Loans held-for-sale | $ | 125,808 | $ | 4,051 | 3.22 | % | $ | 121,941 | $ | 3,842 | 3.15 | % | $ | 80,885 | $ | 3,074 | 3.80 | % | ||||||||||||||
| Loans held-for-investment (1) | 3,780,650 | 155,252 | 4.11 | % | 3,525,837 | 141,413 | 4.01 | % | 2,903,876 | 134,539 | 4.63 | % | ||||||||||||||||||||
| Investment securities | 531,803 | 7,979 | 1.50 | % | 555,030 | 10,100 | 1.82 | % | 613,265 | 15,794 | 2.58 | % | ||||||||||||||||||||
| Interest-bearing cash and other assets | 742,389 | 2,072 | 0.28 | % | 179,331 | 1,482 | 0.83 | % | 90,277 | 2,431 | 2.69 | % | ||||||||||||||||||||
| Total earning assets | 5,180,650 | 169,354 | 3.27 | % | 4,382,139 | 156,837 | 3.58 | % | 3,688,303 | 155,838 | 4.23 | % | ||||||||||||||||||||
| Other assets | 288,617 | 279,806 | 285,258 | |||||||||||||||||||||||||||||
| Total assets | $ | 5,469,267 | $ | 4,661,945 | $ | 3,973,561 | ||||||||||||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||||||||||||
| Demand and NOW deposits | $ | 254,679 | $ | 756 | 0.30 | % | $ | 205,557 | $ | 1,019 | 0.50 | % | $ | 82,075 | $ | 603 | 0.73 | % | ||||||||||||||
| Savings deposits | 455,451 | 460 | 0.10 | % | 380,839 | 703 | 0.19 | % | 322,384 | 782 | 0.24 | % | ||||||||||||||||||||
| Money market deposits | 2,208,498 | 4,292 | 0.19 | % | 1,801,809 | 6,635 | 0.37 | % | 1,604,090 | 11,117 | 0.69 | % | ||||||||||||||||||||
| Certificates of deposits | 344,224 | 3,036 | 0.88 | % | 488,575 | 7,285 | 1.49 | % | 559,516 | 10,550 | 1.89 | % | ||||||||||||||||||||
| Total deposits | 3,262,852 | 8,544 | 0.26 | % | 2,876,780 | 15,642 | 0.54 | % | 2,568,065 | 23,052 | 0.90 | % | ||||||||||||||||||||
| Repurchase agreements | 125,867 | 59 | 0.05 | % | 116,074 | 157 | 0.14 | % | 78,314 | 728 | 0.93 | % | ||||||||||||||||||||
| Total deposits and repurchase agreements | 3,388,719 | 8,603 | 0.25 | % | 2,992,854 | 15,799 | 0.53 | % | 2,646,379 | 23,780 | 0.90 | % | ||||||||||||||||||||
| FHLB borrowings | 42,527 | 909 | 2.14 | % | 89,861 | 1,658 | 1.84 | % | 97,267 | 2,300 | 2.36 | % | ||||||||||||||||||||
| Other long-term borrowings | 68,918 | 4,609 | 6.69 | % | 51,091 | 3,427 | 6.71 | % | 30,444 | 2,536 | 8.33 | % | ||||||||||||||||||||
| Total interest-bearing liabilities | 3,500,164 | 14,121 | 0.40 | % | 3,133,806 | 20,884 | 0.67 | % | 2,774,090 | 28,616 | 1.03 | % | ||||||||||||||||||||
| Noninterest-bearing deposits | 1,376,968 | 978,092 | 704,761 | |||||||||||||||||||||||||||||
| Other liabilities | 76,362 | 83,427 | 50,923 | |||||||||||||||||||||||||||||
| Stockholders’ equity | 515,773 | 466,620 | 443,787 | |||||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 5,469,267 | $ | 4,661,945 | $ | 3,973,561 | ||||||||||||||||||||||||||
| Net interest income | $ | 155,233 | $ | 135,953 | $ | 127,222 | ||||||||||||||||||||||||||
| Net interest spread | 2.87 | % | 2.91 | % | 3.19 | % | ||||||||||||||||||||||||||
| Net interest margin | 3.00 | % | 3.10 | % | 3.45 | % | ||||||||||||||||||||||||||
| Net interest margin (on an FTE basis) | 3.11 | % | 3.25 | % | 3.56 | % | ||||||||||||||||||||||||||
| (1) Includes nonaccrual loans |
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Rate-Volume Analysis
The tables below present the effect of volume and rate changes on interest income and expense. Changes in volume are changes in the average balance multiplied by the previous period’s average rate. Changes in rate are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.
| For the year ended December 31, | For the year ended December 31, | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 Versus 2020 Increase (Decrease) Due to: | 2020 Versus 2019 Increase (Decrease) Due to: | |||||||||||||||||||||
| (In thousands) | Rate | Volume | Total | Rate | Volume | Total | ||||||||||||||||
| Interest Earning Assets | ||||||||||||||||||||||
| Loans held-for-sale | $ | 87 | $ | 122 | $ | 209 | $ | (792) | $ | 1,560 | $ | 768 | ||||||||||
| Loans held-for-investment | 3,619 | 10,220 | 13,839 | (21,942) | 28,816 | 6,874 | ||||||||||||||||
| Investment securities | (1,699) | (422) | (2,121) | (4,194) | (1,500) | (5,694) | ||||||||||||||||
| Interest-bearing cash | (4,063) | 4,653 | 590 | (3,347) | 2,398 | (949) | ||||||||||||||||
| Total earning assets | (2,056) | 14,573 | 12,517 | (30,275) | 31,274 | 999 | ||||||||||||||||
| Interest-bearing liabilities | ||||||||||||||||||||||
| Demand and NOW deposits | (506) | 244 | (262) | (492) | 908 | 416 | ||||||||||||||||
| Savings deposits | (418) | 144 | (274) | (190) | 142 | (48) | ||||||||||||||||
| Money market deposits | (3,804) | 1,491 | (2,313) | (5,883) | 1,370 | (4,513) | ||||||||||||||||
| Certificates of deposits | (2,096) | (2,153) | (4,249) | (1,927) | (1,338) | (3,265) | ||||||||||||||||
| Total deposits | (6,824) | (274) | (7,098) | (8,492) | 1,082 | (7,410) | ||||||||||||||||
| Repurchase agreements | (111) | 13 | (98) | (922) | 351 | (571) | ||||||||||||||||
| Total deposits and repurchase agreements | (6,935) | (261) | (7,196) | (9,414) | 1,433 | (7,981) | ||||||||||||||||
| FHLB borrowings | 124 | (873) | (749) | (468) | (174) | (642) | ||||||||||||||||
| Other long-term borrowings | (15) | 1,197 | 1,182 | (829) | 1,720 | 891 | ||||||||||||||||
| Total interest-bearing liabilities | (6,826) | 63 | (6,763) | (10,711) | 2,979 | (7,732) | ||||||||||||||||
| Net interest income | $ | 4,770 | $ | 14,510 | $ | 19,280 | $ | (19,564) | $ | 28,295 | $ | 8,731 |
Provision for Loan Losses
We established an allowance for loan losses through a provision for loan losses charged as an expense in our consolidated statements of income. The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the allowance for loan losses at an adequate level to absorb probable losses incurred in the loan portfolio at the balance sheet date and that, in management’s judgment, is appropriate under GAAP. Our determination of the amount of the allowance for loan losses and corresponding provision for loan losses considers ongoing evaluations of the credit quality and level of credit risk inherent in our loan portfolio, levels of nonperforming loans and charge-offs, statistical trends and economic and other relevant factors. The allowance for loan losses is increased by the provision for loan losses and is decreased by charge-offs, net of recoveries on prior loan charge-offs.
We had a provision for loan losses of $3.0 million for the year ended December 31, 2021, compared to a provision for loan losses of $23.1 million for 2020. The increase in our provision for loan losses during 2020 was primarily due to changes in certain environmental factors that resulted from uncertainty surrounding the COVID-19 pandemic, as well as an increase in loan balances. The decrease in provision recorded during 2021 was primarily due to favorable changes to certain environmental factors as a result of improved economic conditions, partially offset by a $375.1 million increase in loan balances, excluding PPP loan balances during the year ended December 31, 2021.
For a further discussion of the allowance for loan losses, refer to the “Allowance for Loan Losses” section of this financial review.
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Noninterest Income
The following table presents noninterest income for the years ended December 31,:
| (In thousands) | 2021 | 2020 | 2019 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Service charges on deposit accounts | $ | 12,504 | $ | 9,630 | $ | 11,104 | ||||||||
| Credit and debit card fees | 9,596 | 7,994 | 7,785 | |||||||||||
| Trust and investment advisory fees | 7,795 | 5,201 | 3,768 | |||||||||||
| Income from mortgage banking services, net | 86,410 | 122,174 | 42,992 | |||||||||||
| Other | 7,939 | 3,386 | 5,318 | |||||||||||
| Total noninterest income | $ | 124,244 | $ | 148,385 | $ | 70,967 |
Our noninterest income decreased $24.1 million to $124.2 million for the year ended December 31, 2021 from $148.4 million for 2020, primarily due to a decrease in income from mortgage banking services.
Service charges on deposit accounts includes overdraft and non-sufficient funds charges, treasury management services provided to our business customers, and other maintenance fees on deposit accounts. For the year ended December 31, 2021, service charges on deposit accounts increased $2.9 million, compared to 2020, primarily due to increased treasury management service fee income which increased by $2.0 million, compared to the prior year.
Credit and debit card fees represent interchange income from credit and debit card activity and referral fees earned from processing fees on card transactions at our business customers. Credit and debit card fees increased $1.6 million for the year ended December 31, 2021 compared to 2020, due primarily to increased card transaction volumes.
Trust and investment advisory fees represent fees we receive in connection with our investment advisory and custodial management services of investment accounts. Trust and investment advisory fees increased by $2.6 million for the year ended December 31, 2021 compared to 2020. The increase is primarily due to our September 2020 acquisition of certain customer relationships of a trust and wealth advisory business based in Arizona which added revenues from late 2020 throughout 2021.
For the year ended December 31, 2021, income from mortgage banking services decreased $35.8 million compared to 2020 primarily due to a decline in revenue related to net gain on sales and fees from loan originations, including fair value changes in the held-for-sale portfolio and hedging activity, which decreased $30.5 million for the year ended December 31, 2021 compared to 2020. Loan originations remained relatively flat at $2.3 billion for the years ended December 31, 2021 and 2020, however, gain on sale margins declined in 2021 as compared to 2020. We retain servicing rights on the majority of mortgage loans that we sell, driving the increase in servicing income of $2.7 million from $9.8 million in 2020 to $12.5 million in 2021. MSR capitalization and changes in fair value, net of derivative activity, declined $8.0 million in the year ended December 31, 2021, compared to 2020. The revenue decline related to our MSRs was primarily the result of changes in market interest rates, mortgage spreads and our corresponding hedge positions. We recognize fair value adjustments to our MSR asset, which includes changes in assumptions to the valuation model and pay-offs and pay-downs of the MSR portfolio. We also maintain a hedging strategy to manage a portion of the risk associated with changes in the fair value of our MSR portfolio. Changes in fair value of the derivative instruments used to economically hedge the MSRs are also included as a component of income from mortgage banking services.
The components of mortgage banking income were as follows for the years ended December 31,:
| (In thousands) | 2021 | 2020 | 2019 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net sale gains and fees from mortgage loan originations including loans held-for-sale changes in fair value and hedging | $ | 63,468 | $ | 94,001 | $ | 31,786 | ||||
| Mortgage servicing income | 12,525 | 9,798 | 7,800 | |||||||
| MSR capitalization and changes in fair value, net of derivative activity | 10,418 | 18,375 | 3,406 | |||||||
| Income from mortgage banking services, net | $ | 86,410 | $ | 122,174 | $ | 42,992 |
Other noninterest income increased $4.6 million for the year ended December 31, 2021 compared to 2020 primarily due to certain loan-related fee income streams such as loan syndication fee income and customer accommodation interest rate swap fees and changes in fair value as well as unused credit line fees. An increase in gains on other real estate sales of $0.6 million also contributed to the increased other noninterest income.
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Noninterest Expense
The following table presents noninterest expense for the years ended December 31,:
| (In thousands) | 2021 | 2020 | 2019 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Salary and employee benefits | $ | 151,926 | $ | 139,980 | $ | 104,699 | ||||||||
| Occupancy and equipment | 26,565 | 26,716 | 23,439 | |||||||||||
| Amortization of intangible assets | 1,417 | 1,485 | 1,896 | |||||||||||
| Merger related expenses | 3,085 | — | — | |||||||||||
| Other | 41,642 | 35,892 | 40,166 | |||||||||||
| Total noninterest expenses | $ | 224,635 | $ | 204,073 | $ | 170,200 |
Our noninterest expense increased $20.6 million to $224.6 million for the year ended December 31, 2021, from $204.1 million for 2020, primarily due to increases of $11.9 million in salary and employee benefits expense and $5.8 million in other expenses in the year ended December 31, 2021.
The increase in our salary and employee benefits expense for the year ended December 31, 2021, compared to 2020, was driven by the increase in commissions paid to our mortgage loan officers related to increased mortgage origination activity earlier in the year as well as an increase in headcount associated with expanding our presence in certain markets, including in Texas and Arizona.
We incurred merger related expenses of $3.1 million for the year ended December 31, 2021, related to our proposed merger with Pioneer. We had no merger related expenses in 2020.
Other noninterest expenses increased $5.8 million for the year ended December 31, 2021, compared to 2020. This increase was primarily caused by a $1.3 million increase in data processing expenses related to an increase in volume and enhanced products and services for our customers and a $1.2 million increase in FDIC insurance costs as the Small Bank FDIC Assessment Credit was fully utilized in 2020.
Income Taxes
We had income tax expense for the year ended December 31, 2021 of $8.7 million, compared to $9.6 million in 2020. The decrease in income tax expense was primarily due to our decreased income during 2021. Our effective tax rate was 16.7% for the year ended December 31, 2021, compared to 16.8% in 2020.
Financial Condition
Balance Sheet
Our total assets were $5.7 billion at December 31, 2021, compared to $5.0 billion at December 31, 2020. Our total loans held-for-investment, net of deferred fees, costs, premiums and discounts were $4.0 billion at December 31, 2021, an increase of $190.8 million from 2020.
Investment Securities
Our securities portfolio is used to make various term investments, maintain a source of liquidity and serve as collateral for certain types of deposits and borrowings. We manage our investment portfolio according to written investment policies approved by our board of directors. Investment in our securities portfolio may change over time based on our funding needs and interest rate risk management objectives. Our liquidity levels take into account anticipated future cash flows and other available sources of funds, and are maintained at levels that we believe are appropriate to provide the necessary flexibility to meet our anticipated funding requirements.
Our investment securities portfolio consists of securities classified as available-for-sale and held-to-maturity. There were no trading securities in our investment portfolio as of December 31, 2021 and 2020. All available-for sale securities are carried at fair value and may be used for liquidity purposes should management consider it to be in our best interest.
Our securities available-for-sale increased by $103.9 million to $572.5 million at December 31, 2021. During 2021, the securities held-to-maturity paid down resulting in a decrease of $14.2 million to $18.0 million.
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The following table is a summary of our investment portfolio as of December 31,:
| 2021 | 2020 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | Carrying Amount | % of Portfolio | Carrying Amount | % of Portfolio | |||||||||
| Available-for-sale: | |||||||||||||
| U.S. treasury | $ | 35,185 | 6.1 | % | $ | — | — | % | |||||
| U.S. agency | 5,919 | 1.0 | % | 8,996 | 1.9 | % | |||||||
| Obligations of states and political subdivisions | 3,789 | 0.7 | % | 3,435 | 0.7 | % | |||||||
| Mortgage backed - residential | 138,677 | 24.2 | % | 119,562 | 25.5 | % | |||||||
| Collateralized mortgage obligations | 235,784 | 41.2 | % | 203,196 | 43.4 | % | |||||||
| Mortgage backed - commercial | 153,147 | 26.8 | % | 133,397 | 28.5 | % | |||||||
| Total available-for-sale | $ | 572,501 | 100 | % | $ | 468,586 | 100.0 | % | |||||
| Held-to-maturity: | |||||||||||||
| U.S. agency | — | — | % | 5,099 | 15.8 | % | |||||||
| Obligations of states and political subdivisions | 716 | 4.0 | % | 730 | 2.3 | % | |||||||
| Mortgage backed - residential | 10,750 | 59.7 | % | 16,050 | 49.9 | % | |||||||
| Collateralized mortgage obligations | 6,541 | 36.3 | % | 10,309 | 32.0 | % | |||||||
| Total held-to-maturity | $ | 18,007 | 100 | % | $ | 32,188 | 100.0 | % |
The following tables show the weighted average yield to average life of each category of investment securities as of December 31, 2021:
| (In thousands) | One year or less | One to five years | Five to ten years | After ten years | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Amount | Average Yield | Carrying Amount | Average Yield | Carrying Amount | Average Yield | Carrying Amount | Average Yield | ||||||||||||||||||||
| Available-for-sale: | |||||||||||||||||||||||||||
| U.S. treasury | $ | — | — | % | $ | — | — | % | $ | 35,185 | 1.29 | % | $ | — | — | % | |||||||||||
| U.S. agency | — | — | % | 3,136 | 1.78 | % | 2,783 | 1.38 | % | — | — | % | |||||||||||||||
| Obligations of states and political subdivisions | — | — | % | — | — | % | 557 | 1.50 | % | 3,232 | 2.10 | % | |||||||||||||||
| Mortgage backed - residential | 951 | 0.77 | % | 77,776 | 1.81 | % | 31,343 | 1.50 | % | 28,607 | 2.03 | % | |||||||||||||||
| Collateralized mortgage obligations | 13,764 | 1.12 | % | 142,227 | 1.10 | % | 64,464 | 1.51 | % | 15,329 | 0.81 | % | |||||||||||||||
| Mortgage backed - commercial | 2,110 | 2.29 | % | 41,314 | 1.52 | % | 94,972 | 1.93 | % | 14,751 | 2.86 | % | |||||||||||||||
| Total available-for-sale | $ | 16,825 | 1.25 | % | $ | 264,453 | 1.38 | % | $ | 229,304 | 1.64 | % | $ | 61,919 | 1.93 | % | |||||||||||
| Held-to-maturity: | |||||||||||||||||||||||||||
| Obligations of states and political subdivisions | — | — | % | 716 | 1.55 | % | — | — | % | — | — | % | |||||||||||||||
| Mortgage backed - residential | — | — | % | 8,403 | 2.24 | % | — | — | % | 2,347 | 3.26 | % | |||||||||||||||
| Collateralized mortgage obligations | 706 | (1.61) | % | 5,835 | 2.09 | % | — | — | % | — | — | % | |||||||||||||||
| Total held-to-maturity | $ | 706 | (1.61) | % | $ | 14,954 | 2.15 | % | $ | — | — | % | $ | 2,347 | 3.26 | % |
We had no securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
Loans
Our loan portfolio represents a broad range of borrowers primarily in our markets in Kansas, Colorado, New Mexico, Texas, and Arizona, comprised of commercial, commercial real estate, residential real estate and consumer financing loans. We have a diversified portfolio across a variety of industries, and the portfolio is generally centered in the states in which we have branch offices.
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Total loans, net of deferred origination fees, as of December 31, 2021 and 2020 were $4.0 billion and $3.8 billion, respectively. The commercial loan portfolio included PPP loans outstanding of $66.7 million and $251.1 million at December 31, 2021 and 2020, respectively.
The following table sets forth the composition of our loan portfolio, as of December 31,:
| 2021 | 2020 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | Amount | % of total loans | Amount | % of total loans | |||||||||
| Commercial | $ | 2,407,888 | 59.6 | % | $ | 2,173,615 | 56.5 | % | |||||
| Commercial real estate | 1,174,242 | 29.1 | % | 1,154,576 | 30.0 | % | |||||||
| Residential real estate | 437,017 | 10.8 | % | 503,697 | 13.1 | % | |||||||
| Consumer | 17,976 | 0.4 | % | 14,469 | 0.4 | % | |||||||
| Total loans | $ | 4,037,123 | 100 | % | $ | 3,846,357 | 100 | % |
Commercial loans include commercial and industrial loans to commercial and agricultural customers for use in normal business operations to finance working capital needs, equipment and inventory purchases, and other expansion projects. Commercial and industrial loans also include our specialty lending verticals such as public finance offerings to our charter school and municipal based customers, asset based lending and structured finance products as well as our healthcare, SBA and other small business lending products. These loans are made primarily in our market areas and are underwritten on the basis of the borrower’s ability to service the debt from revenue, and are generally extended under our normal credit standards, controls and monitoring systems.
Commercial real estate loans include owner occupied and non-owner occupied commercial real estate mortgage loans to operating commercial and agricultural businesses, and include both loans for long-term financing of land and buildings and loans made for the initial development or construction of a commercial real estate project.
Residential real estate loans represent loans to consumers collateralized by a mortgage on a residence and include purchase money, refinancing, secondary mortgages, and home equity loans and lines of credit.
Consumer loans include direct consumer installment loans, credit card accounts, overdrafts and other revolving loans.
The CARES Act created the PPP to provide certain small businesses with liquidity to support their operations during the COVID-19 pandemic. Under the PPP, eligible small businesses could apply to an SBA-approved lender for a loan that does not require collateral or personal guarantees. Entities were required to meet certain eligibility requirements to receive PPP loans, and they must maintain specified levels of payroll and employment to have the loans forgiven. The conditions are subject to audit by the U.S. government, but entities that borrowed less than $2.0 million (together with any affiliates) will be deemed to have made the required certification concerning the necessity of the loan in good faith. However, the SBA does reserve the right to audit any PPP borrower. While the PPP program ended on May 31, 2021, we are now focused on assisting our customers through the loan forgiveness process.
PPP loans issued prior to June 5, 2020 mature in two years unless otherwise modified and loans issued after June 5, 2020 mature in five years. However, PPP loans are eligible for forgiveness (in full or in part, including any accrued interest) under certain conditions. All borrowers are required to retain the supporting documents for six years. For loans (or parts of loans) that are forgiven, the lender will collect the forgiven amount from the U.S. government. The average amount of each of our originated PPP loans was approximately $0.2 million at each of December 31, 2021 and 2020.
The PPP loans have a 1% fixed interest rate and produced an annualized yield for the year ended December 31, 2021 of 5.18%, due to the amortization of net deferred loan fees and the accelerated recognition of loan fees in conjunction with loan forgiveness occurring prior to a scheduled maturity. At December 31, 2021, the remaining amount of unamortized net deferred loan fees on our PPP loans was $1.7 million. Our PPP loans are included in the commercial loans category.
Maturities and Sensitivity of Loans to Changes in Interest Rates
The information in the following tables is based on the contractual maturities of individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of these loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because
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borrowers have the right to prepay obligations with or without prepayment penalties. The following tables summarize the loan maturity distribution by type and related interest rate characteristics as of December 31, 2021:
| (In thousands) | One year or less | After one through five years | After five through 15 years | After 15 years | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Commercial | $ | 216,356 | $ | 1,203,870 | $ | 791,600 | $ | 196,062 | $ | 2,407,888 | ||||||||
| Commercial real estate | 127,348 | 539,356 | 494,657 | 12,881 | 1,174,242 | |||||||||||||
| Residential real estate | 19,504 | 51,863 | 81,068 | 284,582 | 437,017 | |||||||||||||
| Consumer | 7,790 | 9,766 | 420 | — | 17,976 | |||||||||||||
| Total loans | $ | 370,998 | $ | 1,804,855 | $ | 1,367,745 | $ | 493,525 | $ | 4,037,123 |
| (In thousands) | One year or less | After one through five years | After five through 15 years | After 15 years | Total | Total Loans Maturing After 1 Year | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Loans maturing with: | ||||||||||||||||||||||
| Fixed interest rates | ||||||||||||||||||||||
| Commercial | $ | 65,046 | $ | 353,131 | $ | 694,236 | $ | 184,681 | $ | 1,297,094 | $ | 1,232,048 | ||||||||||
| Commercial real estate | 52,343 | 413,019 | 189,471 | 1,300 | 656,133 | 603,790 | ||||||||||||||||
| Residential real estate | 18,540 | 38,584 | 48,354 | 59,270 | 164,748 | 146,208 | ||||||||||||||||
| Consumer | 6,862 | 7,003 | 275 | — | 14,140 | 7,278 | ||||||||||||||||
| Total fixed interest rate loans | $ | 142,791 | $ | 811,737 | $ | 932,336 | $ | 245,251 | $ | 2,132,115 | $ | 1,989,324 | ||||||||||
| Floating or adjustable interest rates | ||||||||||||||||||||||
| Commercial | $ | 151,310 | $ | 850,739 | $ | 97,364 | $ | 11,381 | $ | 1,110,794 | $ | 959,484 | ||||||||||
| Commercial real estate | 75,005 | 126,337 | 305,186 | 11,581 | 518,109 | 443,104 | ||||||||||||||||
| Residential real estate | 964 | 13,279 | 32,714 | 225,312 | 272,269 | 271,305 | ||||||||||||||||
| Consumer | 928 | 2,763 | 145 | — | 3,836 | 2,908 | ||||||||||||||||
| Total floating or adjustable interest rate loans | $ | 228,207 | $ | 993,118 | $ | 435,409 | $ | 248,274 | $ | 1,905,008 | $ | 1,676,801 | ||||||||||
| Total loans | $ | 370,998 | $ | 1,804,855 | $ | 1,367,745 | $ | 493,525 | $ | 4,037,123 | $ | 3,666,125 |
Allowance for Loan Losses
We maintain the allowance for loan losses at a level we believe is sufficient to absorb probable incurred losses in our loan portfolio given the conditions at the time. Events that are not within our control, such as changes in economic factors, could change subsequent to the reporting date and could cause increases or decreases to the allowance. The amount of the allowance is affected by loan charge-offs, which decrease the allowance; recoveries on loans previously charged off, which increase the allowance; and the provision for loan losses charged to earnings, which increases the allowance.
In determining the provision for loan losses, management monitors fluctuations in the allowance resulting from actual charge-offs and recoveries and reviews the size and composition of the loan portfolio in light of current and anticipated economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as events change.
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The following table presents, by loan type, the changes in the allowance for loan losses for the years ended December 31,:
| (In thousands) | 2021 | 2020 | 2019 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, beginning of year | $ | 47,766 | $ | 28,546 | $ | 26,399 | ||||||||
| Loan charge-offs: | ||||||||||||||
| Commercial | (4,296) | (4,064) | (4,171) | |||||||||||
| Commercial real estate | (375) | (581) | (325) | |||||||||||
| Residential real estate | (42) | (39) | (272) | |||||||||||
| Consumer | (148) | (216) | (281) | |||||||||||
| Total loan charge-offs | (4,861) | (4,900) | (5,049) | |||||||||||
| Recoveries of loans previously charged-off: | ||||||||||||||
| Commercial | 1,547 | 585 | 635 | |||||||||||
| Commercial real estate | 28 | 272 | 284 | |||||||||||
| Residential real estate | 24 | 115 | 148 | |||||||||||
| Consumer | 43 | 48 | 79 | |||||||||||
| Total loan recoveries | 1,642 | 1,020 | 1,146 | |||||||||||
| Net charge-offs | (3,219) | (3,880) | (3,903) | |||||||||||
| Provision for loan losses | 3,000 | 23,100 | 6,050 | |||||||||||
| Balance, end of year | $ | 47,547 | $ | 47,766 | $ | 28,546 | ||||||||
| Allowance for loan losses to total loans | 1.18 | % | 1.24 | % | 0.92 | % | ||||||||
| Ratio of net charge-offs to average loans outstanding | 0.09 | % | 0.11 | % | 0.13 | % |
The following table presents net charge-offs (recoveries) to average loans outstanding by loan category for the years ended December 31,:
| (In thousands) | 2021 | 2020 | 2019 | |||||
|---|---|---|---|---|---|---|---|---|
| Commercial | 0.12 | % | 0.19 | % | 0.30 | % | ||
| Commercial real estate | 0.03 | % | 0.03 | % | — | % | ||
| Residential real estate | — | % | (0.01) | % | 0.02 | % | ||
| Consumer | 0.65 | % | 1.00 | % | 1.08 | % |
Allocation of Allowance for Loan Losses
The following table presents the allocation of the allowance for loan losses by category and the percentage of the allocation of the allowance for loan losses by category to total loans listed as of December 31,:
| 2021 | 2020 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | Allowance Amount | % of loans in each category to total loans | Allowance Amount | % of loans in each category to total loans | |||||||||
| Commercial | $ | 33,277 | 59.6 | % | $ | 32,009 | 56.5 | % | |||||
| Commercial real estate | 12,899 | 29.1 | % | 13,863 | 30.0 | % | |||||||
| Residential real estate | 1,136 | 10.8 | % | 1,606 | 13.1 | % | |||||||
| Consumer | 235 | 0.4 | % | 288 | 0.4 | % | |||||||
| Total | $ | 47,547 | 100.0 | % | $ | 47,766 | 100.0 | % |
Nonperforming Assets
We have established policies and procedures to guide us in originating, monitoring and maintaining the credit quality of our loan portfolio. These policies and procedures are expected to be followed by our bankers and underwriters and exceptions to these policies require elevated levels of approval and are reported to our board of directors.
Nonperforming assets include all loans categorized as nonaccrual, loans identified as a troubled debt restructuring (“TDR”), accrual loans greater than 90 days past due, and other real estate owned and other repossessed assets. The accrual of interest on loans is discontinued, or the loan is placed on nonaccrual, when the full collection of principal and interest is in doubt. We do not generally accrue interest on loans that are 90 days or more past due. When a loan is placed on nonaccrual, previously accrued but unpaid interest is reversed and charged against interest income and future accruals of
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interest are discontinued. Payments by borrowers for loans on nonaccrual are applied to loan principal. Loans are returned to accrual status when, in our judgment, the borrower’s ability to satisfy principal and interest obligations under the loan agreement has improved sufficiently to reasonably assure recovery of principal and the borrower has demonstrated a sustained period of repayment performance. In general, we require a minimum of six consecutive months of timely payments in accordance with the contractual terms before returning a loan to accrual status.
A loan is identified as a TDR, when we, for economic or legal reasons related to the borrower’s financial difficulties, grant a concession to the borrower. The concessions may be granted in various forms including interest rate reductions, principal forgiveness, extension of maturity date, waiver or deferral of payments and other actions intended to minimize potential losses. A loan that has been restructured in a TDR may not be disclosed as a TDR in years subsequent to the restructuring if certain conditions are met. Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a period of no less than six months to demonstrate that the borrower can meet the restructured terms. However, the borrower’s performance prior to the restructuring or other significant events at the time of restructuring may be considered in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status after a shorter performance period. If the borrower’s performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan.
The CARES Act, as extended by certain provisions of the Consolidated Appropriations Act, 2021, permitted banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that may otherwise be characterized as a TDR and suspended any determination related thereto if (i) the borrower was not more than 30 days past due as of December 31, 2019, (ii) the modifications were related to COVID-19, and (iii) the modification occurred between March 1, 2020 and January 1, 2022. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19.
As of December 31, 2021 and 2020, $0.8 million and $51.8 million, respectively, of restructured loans were exempt from the accounting guidance for TDRs as a result of loans which are included in the COVID-19 related loan payment deferral total.
The following table sets forth our nonperforming assets as of December 31,:
| (In thousands) | 2021 | 2020 | ||||
|---|---|---|---|---|---|---|
| Nonaccrual loans: | ||||||
| Commercial | $ | 16,492 | $ | 22,779 | ||
| Commercial real estate | 4,781 | 2,934 | ||||
| Residential real estate | 6,052 | 9,498 | ||||
| Consumer | 2 | 38 | ||||
| Total nonaccrual loans | 27,327 | 35,249 | ||||
| Accrual TDRs | 6,450 | 5,005 | ||||
| Accrual loans greater than 90 days past due | 1,061 | 777 | ||||
| Total nonperforming loans | 34,838 | 41,031 | ||||
| Other real estate owned and foreclosed assets, net | 5,487 | 3,354 | ||||
| Total nonperforming assets | $ | 40,325 | $ | 44,385 | ||
| Nonaccrual loans to total loans | 0.68 | % | 0.92 | % | ||
| Nonperforming loans to total loans (1) | 0.86 | % | 1.07 | % | ||
| Nonperforming assets to total assets (1) | 0.71 | % | 0.89 | % | ||
| Allowance for loan losses to nonaccrual loans | 173.99 | % | 135.51 | % | ||
| (1) Nonperforming loans include nonaccrual loans, accrual TDR’s, and accrual loans greater than 90 days past due. |
Total nonperforming assets were $40.3 million as of December 31, 2021, compared to $44.4 million at 2020.
Deposits
Deposits represent our primary source of funds. We are focused on growing our core deposits through relationship-based banking with our business and consumer clients. Total deposits increased to $4.9 billion at December 31, 2021, compared to $4.2 billion at December 31, 2020. Deposit growth over this period occurred across all of the states in our footprint including Kansas, New Mexico and Colorado, as well as in our newer markets in Arizona and Texas. In addition, government stimulus efforts in response to the COVID-19 pandemic have contributed to a portion of our deposit growth for both commercial and consumer clients. Noninterest-bearing demand deposits increased on average by $0.4 billion from
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December 31, 2020 to December 31, 2021, primarily driven by our growth in our commercial deposit base. Our certificates of deposit have decreased on average by $0.1 billion from 2020 to 2021 primarily due to the low interest rate environment.
The following table sets forth the average balance amounts and the average rates paid on deposits held by us for the years ended December 31,:
| 2021 | 2020 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | |||||||||||||
| Noninterest-bearing demand deposit accounts | $ | 1,376,968 | — | % | $ | 978,092 | — | % | |||||||||
| Interest-bearing deposit accounts: | |||||||||||||||||
| Interest-bearing demand accounts | 186,432 | 0.20 | % | 127,408 | 0.33 | % | |||||||||||
| Savings accounts and money market accounts | 2,663,949 | 0.18 | % | 2,182,648 | 0.34 | % | |||||||||||
| NOW accounts | 68,247 | 0.55 | % | 78,149 | 0.77 | % | |||||||||||
| Certificate of deposit accounts | 344,224 | 0.88 | % | 488,575 | 1.49 | % | |||||||||||
| Total interest-bearing deposit accounts | 3,262,852 | 0.26 | % | 2,876,780 | 0.54 | % | |||||||||||
| Total deposits | $ | 4,639,820 | 0.18 | % | $ | 3,854,872 | 0.41 | % |
The following table sets forth the average balance amounts and the average rates paid on deposits by customer type held by us for the years ended December 31,:
| 2021 | 2020 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | |||||||||||||
| Consumer | $ | 2,391,550 | 0.25 | % | $ | 2,083,701 | 0.52 | % | |||||||||
| Business Customers | 2,248,270 | 0.11 | % | 1,771,171 | 0.27 | % | |||||||||||
| Total deposits | $ | 4,639,820 | 0.18 | % | $ | 3,854,872 | 0.41 | % |
Maturities of certificates of deposit of $250,000 or more outstanding are summarized as follows as of December 31,:
| (In thousands) | 2021 | 2020 | ||||
|---|---|---|---|---|---|---|
| Three months or less | $ | 14,624 | $ | 10,891 | ||
| Over three months through twelve months | 43,922 | 57,457 | ||||
| Over twelve months through three years | 13,490 | 17,713 | ||||
| Over three years | 1,241 | 2,401 | ||||
| Total | $ | 73,277 | $ | 88,462 |
The following table sets forth the portion of the Bank's time deposits, by account, that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31,:
| (In thousands) | 2021 | |
|---|---|---|
| Three months or less | $ | 11,214 |
| Over three months through twelve months | 42,198 | |
| Over twelve months through three years | 13,460 | |
| Over three years | 2,518 | |
| Total | $ | 69,390 |
As of December 31, 2021 and 2020, approximately $2.5 billion and $1.7 billion, respectively, of our deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.
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Liquidity
Liquidity refers to our ability to maintain cash flow that is adequate to fund operations, support asset growth, maintain reserve requirements and meet present and future obligations of deposit withdrawals, lending obligations and other contractual obligations.
FirstSun (Parent Company)
FirstSun has routine funding requirements consisting primarily of operating expenses, debt service, and funds used for acquisitions. FirstSun can obtain funding to meet its obligations from dividends collected from its subsidiaries, primarily the Bank, and through the issuance of varying forms of debt. At December 31, 2021, FirstSun has cash and cash equivalents of $11.1 million and debt outstanding of $74.6 million. Management believes FirstSun has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short-term and the long-term.
Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. The Bank may declare dividends without prior regulatory approval that do not exceed the total of retained net income for the current year combined with its retained net income for the preceding two years, subject to maintenance of minimum capital requirements. Prior regulatory approval to pay dividends was not required in 2020 or 2021 and is not currently required. At December 31, 2021, the Bank could pay dividends to FirstSun of approximately $100.0 million without prior regulatory approval.
Bank
The Bank’s liquidity management policy and our asset and liability management policy, or ALM policy, provides the framework that we use to seek to maintain adequate liquidity and sources of available liquidity at levels that will enable us to meet all reasonably foreseeable short-term, long-term and strategic liquidity demands. Our Asset and Liability Management Committee, or ALCO, is responsible for oversight of our liquidity risk management activities in accordance with the provisions of our ALM Policy and applicable bank regulatory capital and liquidity laws and regulations. Our liquidity risk management process includes (i) ongoing analysis and monitoring of our funding requirements under various economic and interest rate scenarios, (ii) review and monitoring of lenders, depositors, brokers and other liability holders to ensure appropriate diversification of funding sources and (iii) liquidity contingency planning to address liquidity needs in the event of unforeseen market disruption, including appropriate allocation of funds to a liquid portfolio of marketable securities and investments. We continuously monitor our liquidity position in order for our assets and liabilities to be managed in a manner that we believe will meet our immediate and long-term funding requirements. We seek to manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our stockholders. We also monitor our liquidity requirements in light of interest rate trends, changes in the economy, and the scheduled maturity and interest rate sensitivity of our securities and loan portfolios and deposits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of our investment portfolio is fairly predictable and subject to a high degree of control when we make investment decisions. Net deposit inflows and outflows, however, are far less predictable and are not subject to the same degree of certainty.
Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers and capital expenditures. These liquidity requirements are met primarily through our deposits, FHLB advances and the principal and interest payments we receive on loans and investment securities. Cash, interest-bearing deposits in third party banks, securities available for sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are available to us include the sale of loans we hold for investment, the ability to acquire additional national market non-core deposits, borrowings through the Federal Reserve’s discount window and the issuance of debt or equity securities.
At December 31, 2021, our liquid assets, which consist of cash and amounts due from banks and interest-bearing deposits in other financial institutions, amounted to $583.0 million, or 10.3% of total assets, compared to $144.9 million, or 2.9% of total assets, at December 31, 2020. The increase in our liquid assets was primarily due to an increase in cash held at the Federal Reserve. Our available-for-sale securities at December 31, 2021 were $572.5 million, or 10.1% of total assets, compared to $468.6 million, or 9.4% of total assets, at December 31, 2020. Investment securities with an aggregate carrying value of $465.7 million and $437.2 million at December 31, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and repurchase agreements. The increase in our pledged securities was due to increases in public funds and repurchase agreements.
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The liability portion of our balance sheet serves as a primary source of liquidity. We plan to meet our future cash needs primarily through the generation of deposits. Customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. At December 31, 2021, customer deposits, excluding brokered deposits and certificates of deposit greater than $250,000, were 113.2% of net loans, compared with 98.8% at December 31, 2020. For additional information related to our deposits, see Deposits section above. We are also a member of the FHLB, from which we can borrow for leverage or liquidity purposes. The FHLB requires that securities and qualifying loans be pledged to secure any advances. At December 31, 2021, we had $40.0 million in advances from the FHLB and a remaining credit availability of $505.0 million. In addition, we maintain a $8.5 million line with the Federal Reserve Bank’s discount window that is secured by certain loans from our loan portfolio.
Management believes the Bank has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short-term and the long-term.
Capital
Stockholders’ equity at December 31, 2021 was $524.0 million, compared to $485.8 million at 2020, an increase of $38.3 million, or 7.9%. The increase was primarily driven by net income in 2021.
Capital Adequacy
We are subject to various regulatory capital requirements administered by the federal banking agencies. Management routinely analyzes our capital to ensure an optimized capital structure. For further information on capital adequacy see Note 17 - Regulatory Capital Matters to the consolidated financial statements.
Material Contractual Obligations, Commitments, and Contingent Liabilities
We have entered into contractual obligations in the normal course of business that involve elements of credit risk, interest rate risk and liquidity risk.
The following table summarizes our material contractual obligations as of December 31, 2021. Further discussion of each obligation or commitment is included in the referenced note to the consolidated financial statements.
| (In thousands) | Note Reference | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Deposits: | ||||||||||||||||||||
| Deposits without a stated maturity | 9 | $ | 4,531,203 | $ | 4,531,203 | $ | — | $ | — | $ | — | |||||||||
| Certificates of deposit | 9 | 323,745 | 222,259 | 77,944 | 19,780 | 3,762 | ||||||||||||||
| Securities sold under agreements to repurchase | 10 | 92,093 | 92,093 | — | — | — | ||||||||||||||
| Short-term debt: | ||||||||||||||||||||
| FHLB LOC | 11 | — | — | — | — | — | ||||||||||||||
| Long-term debt: | ||||||||||||||||||||
| FHLB term advances | 11 | 40,000 | 10,000 | — | 20,000 | 10,000 | ||||||||||||||
| Convertible notes payable (1) | 11 | 20,673 | 6,750 | 13,923 | — | — | ||||||||||||||
| Subordinated debt | 11 | 53,919 | — | — | — | 53,919 | ||||||||||||||
| Operating leases | 22 | 39,151 | 6,672 | 13,513 | 10,790 | 8,176 | ||||||||||||||
| (1) On January 21, 2022 , we paid off $6,750 of the convertible notes at par. This payoff is recognized in the less than 1 year column of our commitments table. For further information see Note 11 - Debt. |
We are party to various derivative contracts as a means to manage the balance sheet and our related exposure to changes in interest rates, to manage our residential real estate loan origination and sale activity, and to provide derivative contracts to our clients. Since the derivative liabilities recorded on the balance sheet change frequently and do not represent the amounts that may ultimately be paid under these contracts, these liabilities are not included in the table of contractual obligations presented above. Further discussion of derivative instruments is included in Note 7 - Derivative Financial Instruments to the consolidated financial statements.
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In the normal course of business, various legal actions and proceedings are pending against us and our affiliates which are incidental to the business in which they are engaged. Further discussion of contingent liabilities is included in Note 22 - Commitments and Contingencies to the consolidated financial statements.
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments. Further discussion of contingent liabilities is included in Note 22 - Commitments and Contingencies to the consolidated financial statements.