FIRSTSUN CAPITAL BANCORP - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________

FORM 10-Q

__________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 333-258176

__________________________________

FIRSTSUN CAPITAL BANCORP

(Exact name of registrant as specified in its charter)

__________________________________


Delaware						81-4552413
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

1400 16th Street, Suite 250

Denver, Colorado 80202

(303) 831-6704

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

__________________________________

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

As of November 8, 2023, there were approximately 24,958,723 shares of the registrant’s common stock outstanding.

Table of Contents


			Page
Cautionary Note Regarding Forward-Looking Statements			3
Part I - Financial Information (Unaudited)			5
Item 1. Financial Statements			5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			55
Item 3. Quantitative and Qualitative Disclosures About Market Risk			81
Item 4. Controls and Procedures			82
Part II - Other Information			83
Item 1. Legal Proceedings			83
Item 1A. Risk Factors			83




Item 6. Exhibits			84
Signatures			85

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical or current fact nor are they assurances of future performance and generally can be identified by the use of forward-looking terminology, such as “believe,” “expect,” “anticipate,” “intend,” “target,” “estimate,” “continue,” “positions,” “plan,” “predict,” “project,” “forecast,” “guidance,” “goal,” “objective,” “prospects,” “possible” or “potential,” by future conditional verbs such as “assume,” “will,” “would,” “should,” “could” or “may,” or by variations of such words or by similar expressions. These forward-looking statements include, but are not limited to, discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions or events, and statements about our future performance, operations, products and services (including statements related to our expected increase in the cost of funds, our expected decrease in mortgage banking revenues and related income, and our belief that sources of available liquidity are adequate to meet our current and expected liquidity needs). These forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time, are difficult to predict and are generally beyond our control and should be viewed with caution.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

•potential fluctuations or unanticipated changes in the interest rate environment, including interest rate changes made by the Federal Reserve, replacements of LIBOR and replacement or reform of other interest rate benchmarks, as well as cash flow reassessments may reduce net interest margin and/or the volumes and values of loans made or held as well as the value of other financial assets;

•changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Federal Reserve;

•other actions of the Federal Reserve and legislative and regulatory actions and reforms;

•the potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as inflation and recessions, epidemics and pandemics, terrorist activities, wars and other foreign conflicts, essential utility outages, climate change, deterioration in the global economy, instability in the credit markets, disruptions in our customers’ supply chains or disruption in transportation;

•the potential effects of pandemics or public health conditions on the economic and business environments in which we operate, including the impact of actions taken by governmental authorities to address these situations, and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

•changes in legislation, regulation, policies or administrative practices, whether by judicial, governmental or legislative action and other changes pertaining to banking, securities, taxation, rent regulation and housing, financial accounting and reporting, environmental protection and insurance and the ability to comply with such changes in a timely manner;

•the risk that we may be required to make substantial expenditures to keep pace with regulatory initiatives and the rapid technological changes in the financial services market;

•competition from financial institutions and other financial service providers including non-bank financial technology providers and our ability to attract customers from other financial institutions;

•any unanticipated or greater than anticipated adverse conditions in the national or local economies in which we operate;

•our loan concentration in industries or sectors that may experience unanticipated or greater than anticipated adverse conditions than other industries or sectors in the national or local economies in which we operate;

•increased capital requirements, other regulatory requirements or enhanced regulatory supervision;

•cyber-security risks and the vulnerability of our network and online banking portals, and the systems or parties with whom we contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches that could adversely affect our business and financial performance or reputation;

•risks with respect to our ability to identify and complete future mergers or acquisitions as well as our ability to successfully expand and integrate those businesses and operations that we acquire;

•the risks of expansion into new geographic or product markets;

•the inability to manage strategic initiatives and/or organizational changes;

•our ability to attract and retain key employees;

•volatility in the allowance for credit losses resulting from the CECL methodology, either alone or as that may be affected by conditions affecting our business;

•changes in accounting principles, policies, practices or guidelines;

•our reliance on third parties to provide key components of our business infrastructure and services required to operate our business;

•the availability of and access to capital; failures of internal controls and other risk management systems;

•the outcome (including judgments, costs, fines, reputational harm, inability to obtain necessary approvals and/or other negative effects) of pending or threatened litigation or of matters before or involving regulatory agencies, whether currently existing or commencing in the future;

•losses due to fraudulent or negligent conduct of our customers, third-party service providers or employees; and

•limitations on our ability to declare and pay dividends and other distributions from our bank to our holding company, which could affect our holding company’s liquidity, including its ability to pay dividends to shareholders or take other capital actions.

We caution readers that the foregoing list of factors is not exclusive, is not necessarily in order of importance and readers should not place undue reliance on any forward-looking statements. You should also consider the risks, assumptions and uncertainties set forth under “Item 1.A. Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (“SEC”) on March 16, 2023 (the “2022 Annual Report”) as well as any additional factors that might be reported in future filings that we make with the SEC. Further, any forward-looking statement speaks only as of the date on which it is made and we do not intend to and disclaim any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, unless required to do so under the federal securities laws.

Part I - Financial Information

Item 1. Financial Statements (Unaudited)

Index to Consolidated Financial Statements


			Page
Consolidated Balance Sheets			6
Consolidated Statements of Income and Comprehensive Income (Loss)			7
Consolidated Statements of Stockholders' Equity			8
Consolidated Statements of Cash Flows			10
Notes to Consolidated Financial Statements			12
Note 1 - Organization and Basis of Presentation			12
Note 2 - Merger with Pioneer Bancshares, Inc.			17
Note 3 - Securities			20
Note 4 - Loans			24
Note 5 - Mortgage Servicing Rights			32
Note 6 - Derivative Financial Instruments			33
Note 7 - Deposits			36
Note 8 - Securities Sold Under Agreements to Repurchase			37
Note 9 - Debt			37
Note 10 - Earnings Per Share			39
Note 11 - Accumulated Other Comprehensive Income (Loss)			40
Note 12 - Stockholders' Equity			40
Note 13 - Income Taxes			42
Note 14 - Regulatory Capital Matters			42
Note 15 - Fair Value Measurements			44
Note 16 - Segment Information			47
Note 17 - Commitments and Contingencies			52
Note 18 - Lease Commitments			54

FIRSTSUN CAPITAL BANCORP

and Subsidiaries

Consolidated Balance Sheets

As of


	(Unaudited)
(In thousands, except par and share amounts)	September 30, 2023		December 31, 2022
Assets
Cash and cash equivalents	$	443,887	$	343,526
Securities available-for-sale, at fair value	495,992		536,973
Securities held-to-maturity, fair value of $30,792 and $33,218, respectively	37,410		38,901
Loans held-for-sale, at fair value	51,465		57,323
Loans, net of allowance for credit losses of $78,666 and $65,917, respectively	6,100,856		5,845,915
Mortgage servicing rights, at fair value	81,036		74,097
Premises and equipment, net	83,733		87,079
Other real estate owned and foreclosed assets, net	8,395		6,358
Bank-owned life insurance	79,341		77,923
Restricted equity securities	35,396		50,215
Goodwill	93,483		93,483
Core deposits and other intangible assets, net	11,813		15,806
Accrued interest receivable	37,218		28,543
Deferred tax assets, net	50,269		48,355
Prepaid expenses and other assets	146,581		125,825
Total assets	$	7,756,875	$	7,430,322

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing accounts	$	1,610,650	$	1,820,490
Interest-bearing accounts	4,729,197		3,944,572
Total deposits	6,339,847		5,765,062
Securities sold under agreements to repurchase	25,868		36,721
Federal Home Loan Bank advances	330,000		643,885

Convertible notes payable, net	—		5,355
Subordinated debt, net	75,180		74,880
Accrued interest payable	9,862		5,798
Accrued expenses and other liabilities	132,399		124,085
Total liabilities	6,913,156		6,655,786

Commitments and contingencies (Note 17)

Stockholders’ equity:
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, none issued or outstanding, respectively	—		—
Common stock, $0.0001 par value; 50,000,000 shares authorized; 24,942,645 and 24,920,984 shares issued; 24,942,645 and 24,920,984 shares outstanding, respectively	2		2
Additional paid-in capital	462,507		460,720

Retained earnings	433,508		357,797
Accumulated other comprehensive loss, net	(52,298)		(43,983)
Total stockholders’ equity	843,719		774,536
Total liabilities and stockholders’ equity	$	7,756,875	$	7,430,322

The accompanying notes are an integral part of these consolidated financial statements.

FIRSTSUN CAPITAL BANCORP

and Subsidiaries

Consolidated Statements of Income and Comprehensive Income (Loss)

For the three and nine months ended September 30,

(Unaudited)


	Three months ended September 30,				Nine months ended September 30,
(In thousands, except per share amounts)	2023		2022		2023		2022
Interest income:
Interest and fee income on loans:
Taxable	$	94,734	$	63,626	$	269,151	$	154,266
Tax exempt	4,831		4,644		14,335		14,447
Interest and dividend income on securities:
Taxable	4,219		3,639		12,597		9,250
Tax exempt	7		5		20		2
Other interest income	2,984		1,849		7,607		3,687
Total interest income	106,775		73,763		303,710		181,652
Interest expense:
Interest expense on deposits	30,896		3,274		65,804		7,020
Interest expense on securities sold under agreements to repurchase	65		51		163		74
Interest expense on other borrowed funds	2,404		1,952		16,381		6,202
Total interest expense	33,365		5,277		82,348		13,296
Net interest income	73,410		68,486		221,362		168,356
Provision for credit losses	3,890		3,750		11,672		12,450
Net interest income after credit loss expense	69,520		64,736		209,690		155,906
Noninterest income:
Service charges on deposit accounts	5,475		4,807		15,848		13,111
Credit and debit card fees	2,996		3,103		9,034		8,508
Trust and investment advisory fees	1,398		1,552		4,337		5,408
Income from mortgage banking services, net	7,413		13,785		26,501		40,017

(Loss) gain on other real estate owned and foreclosed assets activity, net	(643)		155		(643)		164

Other noninterest income	2,011		1,551		6,794		3,740
Total noninterest income	18,650		24,953		61,871		70,948
Noninterest expense:
Salary and employee benefits	33,968		32,508		103,073		101,981
Occupancy and equipment	8,216		8,216		24,338		22,802

Amortization of intangible assets	899		935		3,993		2,197
Merger related expenses	—		—		—		18,751
Other noninterest expenses	13,093		13,889		39,081		37,952
Total noninterest expense	56,176		55,548		170,485		183,683
Income before income taxes	31,994		34,141		101,076		43,171
Provision for income taxes	6,762		7,628		21,557		8,559
Net income	$	25,232	$	26,513	$	79,519	$	34,612
Other comprehensive income (loss), net of tax:
Loss on securities available-for-sale	(7,089)		(5,107)		(9,909)		(47,306)
Gain on fair value hedges of securities available-for-sale	1,290		1,438		1,594		2,536
Other comprehensive income (loss), net of tax	(5,799)		(3,669)		(8,315)		(44,770)
Comprehensive income (loss)	$	19,433	$	22,844	$	71,204	$	(10,158)

Earnings per share:
Net income available to common stockholders	$	25,232	$	26,513	$	79,519	$	34,612
Basic	$	1.01	$	1.07	$	3.19	$	1.53
Diluted	$	1.00	$	1.04	$	3.13	$	1.49

The accompanying notes are an integral part of these consolidated financial statements.

FIRSTSUN CAPITAL BANCORP

and Subsidiaries

Consolidated Statements of Stockholders’ Equity

For the three months ended September 30,

(Unaudited)


(in thousands, except share amounts)	Issued shares of common stock	Common stock		Additional paid-in capital		Treasury stock		Retained earnings		Accumulated other comprehensive loss		Total stockholders’ equity
2023
Balance, beginning of period	24,941,468	$	2	$	461,856	$	—	$	408,276	$	(46,499)	$	823,635



Issuance of common stock on restricted stock grants (15,007 shares in the second quarter of 2023)	—	—		102		—		—		—		102
Stock option exercises	1,177	—		(9)		—		—		—		(9)
Share-based compensation, net of forfeitures	—	—		558		—		—		—		558
Net income	—	—		—		—		25,232		—		25,232
Other comprehensive loss	—	—		—		—		—		(5,799)		(5,799)

Balance, end of period	24,942,645	$	2	$	462,507	$	—	$	433,508	$	(52,298)	$	843,719

2022
Balance, beginning of period	24,850,954	$	2	$	460,263	$	—	$	306,714	$	(39,437)	$	727,542



Issuance of common stock on restricted stock grants (11,344 shares in the second quarter of 2022)	—	—		102		—		—		—		102
Stock option exercises	55,078	—		(206)		—		—		—		(206)
Share-based compensation, net of forfeitures	—	—		371		—		—		—		371
Net income	—	—		—		—		26,513		—		26,513
Other comprehensive loss	—	—		—		—		—		(3,669)		(3,669)

Balance, end of period	24,906,032	$	2	$	460,530	$	—	$	333,227	$	(43,106)	$	750,653

The accompanying notes are an integral part of these consolidated financial statements.

FIRSTSUN CAPITAL BANCORP

and Subsidiaries

Consolidated Statements of Stockholders’ Equity

For the nine months ended September 30,

(Unaudited)


(in thousands, except share amounts)	Issued shares of common stock	Common stock		Additional paid-in capital		Treasury stock		Retained earnings		Accumulated other comprehensive income (loss)		Total stockholders’ equity
2023
Balance, beginning of period	24,920,984	$	2	$	460,720	$	—	$	357,797	$	(43,983)	$	774,536
Cumulative effect of accounting change (Note 1)	—	—		—		—		(3,808)		—		(3,808)
Adjusted beginning balance	24,920,984	2		460,720		—		353,989		(43,983)		770,728



Issuance of common stock on restricted stock grants	15,007	—		304		—		—		—		304
Stock option exercises	6,654	—		44		—		—		—		44
Share-based compensation, net of forfeitures	—	—		1,439		—		—		—		1,439
Net income	—	—		—		—		79,519		—		79,519
Other comprehensive income	—	—		—		—		—		(8,315)		(8,315)

Balance, end of period	24,942,645	$	2	$	462,507	$	—	$	433,508	$	(52,298)	$	843,719

2022
Balance, beginning of period	19,903,342	$	2	$	261,905	$	(38,148)	$	298,615	$	1,664	$	524,038


Merger with Pioneer Bancshares, Inc. (issuance of treasury stock 1,557,054 shares)	4,910,412	—		197,946		38,148		—		—		236,094
Issuance of common stock on restricted stock grants	11,344	—		169		—		—		—		169
Stock option exercises	80,934	—		(414)		—		—		—		(414)
Share-based compensation, net of forfeitures	—	—		924		—		—		—		924
Net income	—	—		—		—		34,612		—		34,612
Other comprehensive loss	—	—		—		—		—		(44,770)		(44,770)

Balance, end of period	24,906,032	$	2	$	460,530	$	—	$	333,227	$	(43,106)	$	750,653

The accompanying notes are an integral part of these consolidated financial statements.

FIRSTSUN CAPITAL BANCORP

and Subsidiaries

Consolidated Statements of Cash Flows

For the nine months ended September 30,

(Unaudited)


(In thousands)	2023		2022
Cash flows from operating activities:
Net income	$	79,519	$	34,612
Adjustments to reconcile income to net cash provided by operating activities:
Provision for credit losses	11,672		12,450
Depreciation	5,047		5,305
Deferred tax expense	65		671
Amortization of net premium on securities	791		1,737
Accretion of net discount on acquired loans	(2,451)		(1,832)
Net change in deferred loan origination fees and costs	(282)		398
Amortization of core deposits and other intangible assets	3,993		2,197

Amortization of software implementation costs	610		639
Amortization of premium on acquired deposits	(770)		(743)
Accretion of discount on subordinated debt	190		191
Amortization of issuance costs on subordinated debt	110		108
Accretion of discount on convertible notes payable	101		1,093
Accretion of discount (amortization of premium) on Federal Home Loan Bank advances	—		64
Increase in cash surrender value of bank-owned life insurance	(1,418)		(1,222)
Impairment of premises and equipment	—		720
Impairment of other real estate owned and foreclosed assets	285		21
Federal Home Loan Bank stock dividends	(1,372)		(238)
Share-based compensation expense	1,743		1,093
Decrease (increase) in fair value of mortgage servicing rights	695		(14,777)


Net loss on disposal of premises and equipment	34		86
Net (loss) gain on other real estate owned and foreclosed assets activity	643		(164)

Net gain on sales of loans held-for-sale	(2,997)		(10,498)
Origination of loans held-for-sale	(669,412)		(899,200)
Proceeds from sales of loans held-for-sale	670,634		937,343

Changes in operating assets and liabilities:
Lease right-of-use assets	(478)		—
Accrued interest receivable	(8,675)		(6,255)


Prepaid expenses and other assets	(20,428)		(32,474)
Accrued interest payable	4,064		297
Accrued expenses and other liabilities	10,329		10,666
Deferred tax assets	1,944		—
Net cash provided by operating activities	$	84,186	$	42,288

The accompanying notes are an integral part of these consolidated financial statements.

FIRSTSUN CAPITAL BANCORP

and Subsidiaries

Consolidated Statements of Cash Flows (continued)

For the nine months ended September 30,

(Unaudited)


(In thousands)	2023		2022
Cash flows from operating activities: (previous page)	$	84,186	$	42,288

Cash flows from investing activities:
Cash acquired in excess of cash paid in connection with Pioneer Merger	—		444,541

Proceeds from maturities of held-to-maturity securities	1,555		3,027
Purchases of available-for-sale securities	(5,201)		(66,606)
Proceeds from sale or maturities of available-for-sale securities	32,203		157,399
Loan originations, net of repayments	(272,090)		(707,439)


Purchases of premises and equipment	(1,367)		(1,795)
Proceeds from the sale of premises and equipment	—		2

Proceeds from sales of other real estate owned and foreclosed assets	1,101		867


Purchases of restricted equity securities	(33,061)		(18,549)
Proceeds from the sale or redemption of restricted equity securities	49,251		9,471
Purchase of other investments	(1,777)		(388)
Proceeds from the sale or redemption of other investments	158		745
Net cash used in investing activities	(229,228)		(178,725)

Cash flows from financing activities:
Net change in deposits	575,554		(285,868)
Net change in securities sold under agreements to repurchase	(10,854)		(40,837)
Proceeds from Federal Home Loan Bank advances	1,547,000		170,884
Repayments of Federal Home Loan Bank advances	(1,860,885)		(60,000)
Repayments of convertible notes payable	(5,456)		(15,217)


Proceeds from subordinated debt, net	—		24,466

Proceeds from issuance of common stock, net of issuance costs	44		(414)


Net cash provided by (used in) financing activities	245,403		(206,986)
Net increase (decrease) in cash and cash equivalents	100,361		(343,423)
Cash and cash equivalents, beginning of period	343,526		668,462
Cash and cash equivalents, end of period	$	443,887	$	325,039

Supplemental disclosures of cash flow information:
Interest paid on deposits	$	59,999	$	6,726
Interest paid on borrowed funds	$	18,675	$	6,605
Cash paid for income taxes, net	$	23,152	$	10,276
Non-cash investing and financing activities:
Assets acquired from Merger with Pioneer Bancshares, Inc.	$	—	$	1,085,506
Liabilities assumed from Merger with Pioneer Bancshares, Inc.	$	—	$	1,354,387
Net change in unrealized loss on available-for-sale securities and unrealized gain on fair value hedges of securities available-for-sale	$	(13,117)	$	(59,262)
Loan charge-offs	$	4,019	$	2,412
Premises and equipment transferred to other real estate owned and foreclosed assets	$	—	$	338
Loans transferred to other real estate owned and foreclosed assets	$	4,065	$	291
Premises and equipment transferred (from) to other assets	$	387	$	64
Mortgage servicing rights resulting from sale or securitization of mortgage loans	$	7,634	$	11,681

The accompanying notes are an integral part of these consolidated financial statements.

FIRSTSUN CAPITAL BANCORP and Subsidiaries

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 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. Certain prior period amounts have been reclassified to conform to the current presentation. 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, 2022, included in the 2022 Annual Report.

Business Combination - On April 1, 2022, FirstSun completed its acquisition of Pioneer Bancshares, Inc. (“Pioneer”). Pursuant to the terms of the merger agreement, each Pioneer shareholder received 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 credit risk, interest rate risk, liquidity risk, prepayment risk, and market risk. Credit risk is the risk of default that may result from the borrowers’ inability or unwillingness to make contractually required payments. 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. Rising interest rates may also increase the cost of our borrowings to fund our operations. Risks related to liquidity are heightened in the current environment due to competition for deposits, customers withdrawing deposits in order to maintain maximum levels of deposit insurance and recent bank failures in early 2023.

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.

Reclassification - Certain amounts appearing in the consolidated financial statements and notes thereto for prior periods have been reclassified to conform with the current presentation. The reclassifications had no effect on net income or stockholders' equity as previously reported.

Accounting Pronouncements Recently Adopted - 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.

In June of 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, which significantly changes the way that entities are required to measure credit losses. The new standard requires that the estimated credit loss be based upon an “expected credit loss” approach rather than the “incurred loss” approach previously required. The new approach requires entities to measure all expected credit losses for financial assets over their expected lives based on historical experience, current conditions, and reasonable and supportable forecasts of collectability. The expected credit loss model requires earlier recognition of credit losses than the incurred loss approach. We expect ongoing changes in the allowance for credit losses will be driven primarily by the growth of our loan portfolio, credit quality, and the economic environment and related projections at that time. In addition, the ASU developed a new accounting treatment for purchased financial assets with credit deterioration.

The ASU also modifies the other-than-temporary impairment model for available-for-sale debt securities and held-to-maturity debt securities by requiring companies to record an allowance for credit impairment rather than write-downs of such assets.

Management has reviewed this update and other ASUs that were subsequently issued to further clarify the implementation guidance outlined in ASU 2016-13. We adopted the amendments of these ASUs as of January 1, 2023.

Upon adoption, we recorded an increase to the allowance for credit losses on loans held-for-investment of $5.3 million, a reduction in the allowance for credit losses on unfunded commitments of $0.2 million, an increase to deferred tax assets of $1.2 million, and a corresponding one-time cumulative reduction to retained earnings, net of tax, of $3.8 million in the consolidated balance sheet as of January 1, 2023.

The adoption of this ASU, as it relates to available-for-sale debt securities and held-to-maturity debt securities, did not have a material impact on the consolidated financial statements as of January 1, 2023.

In March of 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses: Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting for troubled debt restructurings by creditors while enhancing the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendment also requires disclosure of gross charge-offs by year of origination for finance receivables. We adopted the amendments in this ASU as of January 1, 2023 prospectively.

As a result of the adoption of ASU 2016-13 and ASU 2022-02, several of our significant accounting policies have changed to reflect the requirements of the new standard. See below for the updated significant accounting policies as of January 1, 2023.

Updates to our Significant Accounting Policies

a.Securities - The Bank classifies debt securities as either available-for-sale or held-to-maturity. Held-to-maturity securities are those which the Bank has the positive intent and ability to hold to maturity. All other debt securities are classified as available-for-sale.

Held-to-maturity securities are recorded at amortized cost. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders’ equity (accumulated other comprehensive income/loss) until realized.

Realized gains and losses on securities classified as available-for-sale are included in earnings and recorded on trade date. The specific identification method is used to determine the cost of the securities sold.

Purchased premiums and discounts on debt securities are amortized or accreted into interest income using the yield-to-maturity method based upon the remaining contractual maturity of the asset, adjusted for any expected prepayments or call features for securities purchased at a premium.

For available-for-sale debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value. Any previously recognized allowance for credit losses (“ACL”) should be written off and the write-down in excess of such ACL would be recorded through a charge to the provision for credit losses. For available-for-sale debt securities that do not meet the aforementioned criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the cash position of the issuer and its cash and capital generation capacity, which could increase or diminish the issuer’s ability to repay its bond obligations, the extent to which the fair value is less than the amortized cost basis, any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information about the financial condition of the issuer, credit ratings, the failure of the issuer to make scheduled principal or interest payments, recent legislation and government actions affecting the issuer’s industry, and actions taken by the issuer to deal with the economic climate. Management also takes into consideration changes in the near-term prospects of the underlying collateral of a security, if any, such as changes in default rates, loss severity given default, and significant changes in prepayment assumptions and the level of cash flow generated from the underlying collateral, if any, supporting the principal and interest payments on the debt securities. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and management records an ACL for the credit loss, limited to the amount by which the fair value is less than the amortized cost basis. Management recognizes in accumulated other comprehensive income/loss (“AOCI”) any impairment that has not been recorded through an ACL, net of tax. Non-credit-related impairments result from other factors, including changes in interest rates.

Management records changes in the ACL as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Management has elected not to measure an ACL on accrued interest related to available-for-sale debt securities, as uncollectible accrued interest receivables are written off on a timely manner.

The ACL on held-to-maturity debt securities is based on an expected loss methodology referred to as current expected credit loss (“CECL”) methodology by major security type. Any expected credit loss is provided through the ACL on held-to-maturity debt securities and is deducted from the amortized cost basis of the security so the statement of financial condition reflects the net amount management expects to collect. For the ACL of held-to-maturity securities, management considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

Management has elected not to measure an ACL on accrued interest related to held-to-maturity debt securities, as uncollectible accrued interest receivables are written off on a timely manner.

Equity securities are carried at fair value, with changes in fair values reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. Equity securities are included as a component of “prepaid expenses and other assets” in our consolidated balance sheets.

b.Loans Receivable - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff, are reported at the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs, and an allowance for credit losses.

Interests on loans receivable is accrued and credited to income based upon the principal amount outstanding using primarily a simple interest calculation. Loan origination fees and related direct loan origination costs for a given loan are offset and only the net amount is deferred and amortized and recognized in interest income over the life of the loan using the interest method without anticipating prepayments. The accrual of interest income on loans is

discontinued when, in management’s judgment, the interest is uncollectible in the normal course of business, and a loan is moved to nonaccrual status in accordance with the Bank’s policy, typically after 90 or 120 days of non-payment, as follows: interest income on consumer, commercial real estate and commercial and industrial loans is typically discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in the process of collection; interest income on residential real estate loans is typically discontinued at the time the loan is 120 days delinquent unless the loan is well-secured and in the process of collection. Consumer and credit card loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest in full is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.

When discontinued, all unpaid interest is reversed. Interest is included in income after the date the loan is placed on nonaccrual status only after all principal has been paid or when the loan is returned to accrual status. The loan is returned to accrual status only when the borrower has brought all past-due principal and interest payments current and, in the opinion of management, has demonstrated the ability to make future payments of principal and interest as scheduled.

Acquired Loans – Loans acquired through a purchase or a business combination are recorded at their fair value as of the acquisition date. Management performs an assessment of acquired loans to first determine if such loans have experienced a more than insignificant deterioration in credit quality since their origination and thus should be classified and accounted for as purchased credit deteriorated (“PCD”) loans. For loans that have not experienced a more than insignificant deterioration in credit quality since origination, referred to as non-PCD loans, management records such loans at fair value, with any resulting discount or premium accreted or amortized into interest income over the remaining life of the loan using the interest method. Additionally, upon the purchase or acquisition of non-PCD loans, management measures and records an ACL based on the Bank’s methodology for determining the ACL. The ACL for non-PCD loans is recorded through a charge to the provision for credit losses in the period in which the loans are purchased or acquired.

Acquired loans that are classified as PCD are recognized at fair value, which includes any premiums or discounts resulting from the difference between the initial amortized cost basis and the par value. Premiums and non-credit loss related discounts are amortized or accreted into interest income over the remaining life of the loan using the interest method. Unlike non-PCD loans, the initial ACL for PCD loans is established through an adjustment to the acquired loan balance and not through a charge to the provision for credit losses in the period in which the loans are acquired. At acquisition, the ACL for PCD loans, which represents the fair value credit discount, is determined using a discounted cash flow method that considers the probability of default and loss-given default used in the Bank’s ACL methodology. Characteristics of PCD loans include the following: delinquency, payment history since origination, credit scores migration and/or other factors the Bank may become aware of through its initial analysis of acquired loans that may indicate there has been a more than insignificant deterioration in credit quality since a loan’s origination.

Subsequent to acquisition, the ACL for both non-PCD and PCD loans is determined pursuant to the Bank ACL methodology in the same manner as all other loans.

c.Allowance for Credit Losses - The ACL for loans held for investment is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans. Loans are charged-off against the allowance when management confirms the loan balance is uncollectible.

Management estimates the allowance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Internal and industry historical credit loss experience is a significant input for the estimation of expected credit losses. Additionally, management’s assessment involves evaluating key factors, which include credit and macroeconomic indicators, such as changes in economic growth levels, unemployment rates, property values, and other relevant factors, to account for current and forecasted market conditions that are likely to cause estimated credit losses over the life of the loans to differ from historical credit losses. Expected credit losses are generally estimated over the contractual term of the loans, adjusted by prepayments when appropriate.

Management estimates the ACL primarily based on a probability of default (“PD”), loss-given default (“LGD”), and exposure at default (“EAD”) modeled approach, or individually for collateral dependent loans. Management

evaluates the need for changes to the ACL by portfolio segments and classes of loans within certain of those portfolio segments. Factors such as the credit risk inherent in a portfolio and how management monitors the related quality, as well as the estimation approach to estimate credit losses, are considered in the determination of such portfolio segments and classes. The Bank believes it has a diversified portfolio across a variety of industries, and the portfolio is generally centered in the states in which the Bank has offices. Management has identified the following portfolio segments:

Commercial and industrial loans include commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment and inventory purchases, and other expansion projects. These loans are made primarily in the Bank’s market areas, are underwritten on the basis of the borrower’s ability to service the debt from revenue, and extended under the Bank’s normal credit standards, controls, and monitoring systems. Collateral is often represented by liens on accounts receivable, inventory, equipment, and other forms of general non-real estate business assets. The Bank often obtains some form of credit enhancement through a personal guaranty of the borrower, principals and/or others. The global cash flow capability of commercial and industrial loan customers is generally evaluated both at underwriting and during the life of the loan. Commercial and industrial loans may involve increased risk due to the expectation that repayments for such loans generally come from the operation of the business activity and those operations may be unsuccessful. A disruption in the operating cash flows from a business, sometimes influenced by events not under the control of the borrower such as changing business environment, changes in regulations and political climate, rising interest rates, unexpected natural events, or competition could also impact the borrower’s capacity to repay the loan. Assets collateralizing commercial and industrial loans may also decline in value more quickly than anticipated. Commercial and industrial loans require increased underwriting and monitoring to offset these risks, for which the Bank’s systems have been designed to provide.

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.

Public finance loans include loans to our charter school and municipal based customers.

Consumer loans include direct consumer installment loans, credit card accounts, overdrafts and other revolving loans.

Other loans consist of loans to nondepository financial institutions, lease financing receivables and loans for agricultural production.

The ACL is measured using a PD/LGD with EAD model that is calculated based on the product of a cumulative PD and LGD. PD and LGD estimates are assigned based upon the periodic completion of credit risk scorecards. Remaining EAD is derived based on inherent loan characteristics and like-kind loan prepayment trends. Under this approach, management calculates losses for each loan for all future periods using the PD and LGD rates derived from the term structure curves applied to the estimated remaining balance of the loans.

For the ACL determination of all portfolios, the expectations for relevant macroeconomic variables consider an initial reasonable and supportable period of four years and a reversion period of one year, utilizing a straight-line approach and reverting back to the historical loss rates.

Management periodically considers the need to make qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to factors such as the following: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions; (ii) organization specific risks such as credit concentrations, collateral specific risks, nature and size of the portfolio and external factors that may ultimately impact credit quality, and (iii) other limitations associated with factors such as changes in underwriting and loan resolution strategies, among others.

Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated pools. Such loans are evaluated for credit losses based on either discounted cash flows or the fair value of collateral. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral, less selling costs. For loans for which foreclosure is not probable, but for which repayment is expected to be provided substantially through the operation or sale of the collateral, management has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of the collateral, with selling costs considered in the event sale of the collateral is expected.

Management has elected not to measure an ACL on accrued interest related to held for investment loans, as uncollectible accrued interest receivables are written off in a timely manner.

Loan credit quality and the adequacy of the allowance are also subject to periodic examination by regulatory agencies. Such agencies may require adjustments to the allowance based upon their judgements about information available at the time of their examination.

Management estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk via a contractual obligation to extend credit unless the obligation is unconditionally cancellable by the Bank. The ACL on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes the consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

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 acquisition of 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 acquisition 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 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.

Estimated fair values of the assets acquired and liabilities assumed in this transaction are as follows:


	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

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

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 credit 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.


	Acquired Loans		Contractual Principal Balance
Commercial and industrial	$	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

Supplemental pro forma information

The following unaudited pro forma summary presents consolidated information of FirstSun as if the business combination had occurred on January 1, 2022.


	(Unaudited) Pro forma for the nine months ended September 30,
	2022
Net interest income	$	178,507
Provision for loan losses	11,600
Net interest income after provision for loan losses	166,907
Noninterest income	72,375
Noninterest expenses	173,864
Income before income taxes	65,418
Provision for income taxes	13,227
Net income	$	52,191
Earnings per share:
Net income available to common stockholders	$	52,191
Basic	$	2.30
Diluted	$	2.24

The unaudited pro forma amounts for these periods includes adjustments for interest income on loans and investment securities acquired, amortization of intangibles arising from the transaction, adjustments for interest expense on deposits and Federal Home Loan bank advances acquired, adjustments for merger related expenses incurred, and the related income tax effects of all these items and the income tax costs or benefits derived from the income or loss before taxes of Pioneer. The unaudited pro forma amounts are not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

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:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
September 30, 2023
Available-for-sale:
U.S. treasury	$	58,478	$	—	$	(5,625)	$	52,853
U.S. agency	2,089		—		(34)		2,055
Obligations of states and political subdivisions	29,941		—		(5,453)		24,488
Mortgage backed - residential	118,975		—		(18,422)		100,553
Collateralized mortgage obligations	208,949		—		(24,492)		184,457
Mortgage backed - commercial	134,990		—		(18,079)		116,911
Other debt	16,787		—		(2,112)		14,675
Total available-for-sale	$	570,209	$	—	$	(74,217)	$	495,992
Held-to-maturity:


Obligations of states and political subdivisions	$	25,500	$	—	$	(5,473)	$	20,027
Mortgage backed - residential	7,859		—		(815)		7,044
Collateralized mortgage obligations	4,051		—		(330)		3,721


Total held-to-maturity	$	37,410	$	—	$	(6,618)	$	30,792
December 31, 2022
Available-for-sale:
U.S. treasury	$	62,010	$	—	$	(5,361)	$	56,649
U.S. agency	2,881		—		(47)		2,834
Obligations of states and political subdivisions	29,897		—		(4,998)		24,899
Mortgage backed - residential	129,955		6		(13,826)		116,135
Collateralized mortgage obligations	225,559		—		(21,294)		204,265
Mortgage backed - commercial	130,997		—		(13,661)		117,336
Other debt	16,774		—		(1,919)		14,855
Total available-for-sale	$	598,073	$	6	$	(61,106)	$	536,973
Held-to-maturity:


Obligations of states and political subdivisions	$	25,378	$	5	$	(4,891)	$	20,492
Mortgage backed - residential	8,705		4		(511)		8,198
Collateralized mortgage obligations	4,818		—		(290)		4,528


Total held-to-maturity	$	38,901	$	9	$	(5,692)	$	33,218

There was no allowance for credit losses related to our investment securities as of September 30, 2023.

As of September 30, 2023 and December 31, 2022, 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.

Fair value and unrealized losses on debt securities by type and length of time in a continuous unrealized loss position without an allowance for credit losses were as follows:


	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, 2023
Available-for-sale:
U.S. treasury	$	—	$	—	$	52,853	$	(5,625)	$	52,853	$	(5,625)	9
U.S. agency	—		—		2,055		(34)		2,055		(34)		7
Obligations of states and political subdivisions	—		—		24,488		(5,453)		24,488		(5,453)		19
Mortgage backed - residential	320		(4)		100,233		(18,418)		100,553		(18,422)		88
Collateralized mortgage obligations	—		—		184,457		(24,492)		184,457		(24,492)		66
Mortgage backed - commercial	5,086		(115)		111,825		(17,964)		116,911		(18,079)		25
Other debt	—		—		14,675		(2,112)		14,675		(2,112)		9
Total available-for-sale	$	5,406	$	(119)	$	490,586	$	(74,098)	$	495,992	$	(74,217)	223
Held-to-maturity:


Obligations of states and political subdivisions	$	329	$	(4)	$	19,698	$	(5,469)	$	20,027	$	(5,473)	9
Mortgage backed - residential	135		—		6,888		(815)		7,023		(815)		13
Collateralized mortgage obligations	—		—		3,721		(330)		3,721		(330)		5


Total held-to-maturity	$	464	$	(4)	$	30,307	$	(6,614)	$	30,771	$	(6,618)	27


	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, 2022
Available-for-sale:
U.S. treasury	$	25,702	$	(967)	$	30,947	$	(4,394)	$	56,649	$	(5,361)	10
U.S. agency	—		—		2,834		(47)		2,834		(47)		7
Obligations of states and political subdivisions	21,676		(3,784)		2,753		(1,214)		24,429		(4,998)		18
Mortgage backed - residential	51,921		(2,939)		63,691		(10,887)		115,612		(13,826)		87
Collateralized mortgage obligations	111,360		(4,631)		92,905		(16,663)		204,265		(21,294)		66
Mortgage backed - commercial	70,710		(6,475)		46,626		(7,186)		117,336		(13,661)		22
Other debt	14,855		(1,919)		—		—		14,855		(1,919)		9
Total available-for-sale	$	296,224	$	(20,715)	$	239,756	$	(40,391)	$	535,980	$	(61,106)	219
Held-to-maturity:


Obligations of states and political subdivisions	$	20,153	$	(4,891)	$	—	$	—	$	20,153	$	(4,891)	8
Mortgage backed - residential	7,993		(511)		—		—		7,993		(511)		10
Collateralized mortgage obligations	4,127		(275)		401		(15)		4,528		(290)		5


Total held-to-maturity	$	32,273	$	(5,677)	$	401	$	(15)	$	32,674	$	(5,692)	23

We do not consider the unrealized losses to be credit-related, as these unrealized losses primarily relate to changes in interest rates and market spreads subsequent to purchase. We do not have plans to sell any of the available-for-sale debt securities with unrealized losses as of September 30, 2023, and we believe it is more likely than not that we would not be required to sell such available-for-sale debt securities before recovery of their amortized cost.

We continue to monitor unrealized loss positions for potential credit impairments. During the nine months ended September 30, 2023, there were no credit impairments related to our investment securities.

The amortized cost and fair value of our debt securities by contractual maturity as of September 30, 2023 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.


	Amortized Cost		Estimated Fair Value
Available-for-sale:
Due within 1 year	$	14,995	$	14,726
Due after 1 year through 5 years	61,708		55,491
Due after 5 years through 10 years	146,294		127,028
Due after 10 years	347,212		298,747
Total available-for-sale	$	570,209	$	495,992
Held-to-maturity:

Due after 1 year through 5 years	$	1,026	$	983
Due after 5 years through 10 years	757		711
Due after 10 years	35,627		29,098
Total held-to-maturity	$	37,410	$	30,792

Securities with a carrying value of $437,724 and $428,721 were pledged to secure public deposits, securities sold under agreements to repurchase and borrowed funds at September 30, 2023 and December 31, 2022, respectively.

There were no proceeds from sales and calls of securities for the three and nine months ended September 30, 2023. There were proceeds from sales and calls of securities for the three and nine months ended September 30, 2022 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.

NOTE 4 - Loans

Loans held-for-investment by portfolio type consist of the following as of:


	September 30, 2023		December 31, 2022
Commercial and industrial	$	2,459,358	$	2,310,929
Commercial real estate:
Non-owner occupied	767,135		779,546
Owner occupied	631,352		636,272
Construction and land	329,433		327,817
Multifamily	114,535		102,068
Total commercial real estate	1,842,455		1,845,703
Residential real estate	1,059,074		1,003,931
Public finance	602,844		590,284
Consumer	37,681		42,588
Other	178,110		118,397
Total loans	$	6,179,522	$	5,911,832
Allowance for credit losses	(78,666)		(65,917)
Loans, net of allowance for credit losses	$	6,100,856	$	5,845,915

As of September 30, 2023 and December 31, 2022, we had net deferred fees, costs, premiums and discounts of $14,474 and $17,101, respectively, on our loan portfolio.

Accrued interest receivable on loans totaled $34,890 and $26,494 at September 30, 2023 and December 31, 2022, respectively, and is included in accrued interest receivable in the accompanying consolidated balance sheets.

The following table presents the activity in the allowance for credit losses by portfolio type for the three months ended September 30,:


	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Public Finance		Consumer		Other		Total
2023
Allowance for credit losses:
Balance, beginning of period	$	33,197	$	21,598	$	14,959	$	5,506	$	854	$	1,248	$	77,362

Provision (benefit) for credit losses	4,252		1,495		(2,429)		135		(28)		175		3,600
Loans charged off	(2,963)		—		—		—		(136)		—		(3,099)
Recoveries	155		9		627		—		12		—		803
Balance, end of period	$	34,641	$	23,102	$	13,157	$	5,641	$	702	$	1,423	$	78,666
2022
Allowance for credit losses:
Balance, beginning of period	$	33,305	$	18,351	$	2,418	$	1,538	$	318	$	147	$	56,077

Provision for (benefit from) credit losses	2,394		1,213		222		(108)		32		(3)		3,750
Loans charged off	(223)		—		(24)		—		(53)		—		(300)
Recoveries	112		2		1		—		36		—		151
Balance, end of period	$	35,588	$	19,566	$	2,617	$	1,430	$	333	$	144	$	59,678

The following table presents the activity in the allowance for credit losses by portfolio type for the nine months ended September 30,:


	Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Public Finance		Consumer		Other		Total
2023
Allowance for credit losses:
Balance, beginning of period	$	40,785	$	19,754	$	2,963	$	1,664	$	352	$	399	$	65,917
Impact of adopting ASC 326	(13,583)		3,867		10,256		3,890		249		577		5,256
Provision (benefit) for credit losses	10,941		(531)		(710)		87		326		447		10,560
Loans charged off	(3,751)		—		—		—		(268)		—		(4,019)
Recoveries	249		12		648		—		43		—		952
Balance, end of period	$	34,641	$	23,102	$	13,157	$	5,641	$	702	$	1,423	$	78,666
2022
Allowance for credit losses:
Balance, beginning of period	$	31,622	$	13,198	$	836	$	1,544	$	235	$	112	$	47,547

Provision (benefit) for credit losses	4,304		6,365		1,707		(114)		156		32		12,450
Loans charged off	(2,173)		—		(122)		—		(117)		—		(2,412)
Recoveries	1,835		3		196		—		59		—		2,093
Balance, end of period	$	35,588	$	19,566	$	2,617	$	1,430	$	333	$	144	$	59,678

We determine the allowance for credit losses estimate on at least a quarterly basis.

As of September 30, 2023 and December 31, 2022, we had an allowance for credit losses on unfunded commitments of $2,209 and $1,313, respectively. For the three months ended September 30, 2023 and 2022 we recorded a provision for credit losses on unfunded commitments of $290 and $350, respectively. For the nine months ended September 30, 2023 and 2022 we recorded a provision for credit losses on unfunded commitments of $1,112 and $475, respectively.

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, 2023
Commercial and industrial	$	2,441,207	$	2,858	$	3,065	$	193	$	12,035	$	2,459,358
Commercial real estate:
Non-owner occupied	762,297		111		545		—		4,182		767,135
Owner occupied	629,542		450		620		—		740		631,352
Construction and land	329,206		39		—		—		188		329,433
Multifamily	114,535		—		—		—		—		114,535
Total commercial real estate	1,835,580		600		1,165		—		5,110		1,842,455
Residential real estate	1,036,230		575		1,697		18		20,554		1,059,074
Public Finance	602,844		—		—		—		—		602,844
Consumer	37,590		90		—		—		1		37,681
Other	175,278		—		—		—		2,832		178,110
Total loans	$	6,128,729	$	4,123	$	5,927	$	211	$	40,532	$	6,179,522
December 31, 2022
Commercial and industrial	$	2,298,207	$	2,409	$	819	$	—	$	9,494	$	2,310,929
Commercial real estate:
Non-owner occupied	773,042		4,356		—		—		2,148		779,546
Owner occupied	630,335		—		—		—		5,937		636,272
Construction and land	324,888		2,632		99		—		198		327,817
Multifamily	102,068		—		—		—		—		102,068
Total commercial real estate	1,830,333		6,988		99		—		8,283		1,845,703
Residential real estate	974,450		17,231		1,524		98		10,628		1,003,931
Public Finance	590,284		—		—		—		—		590,284
Consumer	42,434		58		3		—		93		42,588
Other	117,926		—		—		—		471		118,397
Total loans	$	5,853,634	$	26,686	$	2,445	$	98	$	28,969	$	5,911,832

Interest income recorded on nonperforming loans was not material for the three and nine months ended September 30, 2023 and 2022.

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 borrower risk profile information, including the ability of borrowers to service their debt based on 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 movements in 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:

Pass – Loans classified as Pass have a well-defined primary source of repayment, an acceptable financial position profile (including capitalization), profitability and minimal operating risk.

Pass/Watch – Pass/Watch loans require close attention by bank management and enhanced monitoring due to quantitative or qualitative concerns linked to adverse trends or near-term uncertainty. A covenant default or other type of requirement shortfall may have arisen subsequent to a loan's booking or borrower now shows signs of weakness in the overall base of confirmable financial resources available to repay the loan. However, overall financial capacity & performance are considered sufficient to support an expectation of continued payment performance and / or mitigating factors exist that are expected to limit the risk of near term default and loss.

Special Mention – Special Mention loans have identified potential weaknesses that are of sufficient materiality to require management’s (persistent) close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the bank's credit position under normal business operations. Special Mention loans contain greater than acceptable risk to warrant increases in credit exposure and are thus considered “criticized”, non-pass rated credits. They may contain weaknesses (that have arisen due to deteriorating conditions since origination) and / or underwriting exceptions that are not currently offset by mitigating factors. However, these weaknesses, while sufficient to constitute significantly elevated credit risk, are not sufficient to support a conclusion that the liquidation of the debt is in significant jeopardy.

Substandard - Accruing – Substandard - Accruing loans are inadequately protected by the current sound net worth and paying capacity of the obligor(s). Loans classified as Substandard - Accruing possess one or more well-defined weaknesses that are expected to jeopardize their liquidation but the weaknesses have not progressed to a point where recent late payments on the loan have become more than 90 days past due. These loans are characterized by the distinct possibility that the bank may sustain up to a moderate but not significant level of loss if such weaknesses are not corrected. Losses for Substandard - Accruing loans are moderated by the lower likelihood of ultimate default and the existence of relatively favorable secondary repayment protection. These loans are considered “nonperforming”.

Substandard - Nonaccrual – Substandard - Nonaccrual loans are inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged, if any. Loans classified as Substandard - Nonaccrual possess material, well-defined weaknesses that are expected to jeopardize their liquidation and have progressed to a point where consistently late payments on the loan have become more than 90 or more days past due. These loans are characterized by the distinct possibility that the bank may sustain a material level of loss if such weaknesses are not corrected. Losses for Substandard - Nonaccrual loans are prone to being elevated based on the strong likelihood of the loan remaining in payment default and an undesirable level of secondary repayment protection. These loans are considered “nonperforming”.

Doubtful – Loans classified as Doubtful possess all of the weaknesses inherent in loans classified as Substandard - Nonaccrual with the added characteristic that the weaknesses make collection or liquidation in full highly questionable or improbable based on currently existing facts, conditions and values. A high probability of substantial loss or possible total loss exists. Loans rated as doubtful are not rated as loss because certain events may occur that could salvage at least a portion of the debt. These events include injections of capital, additions of pledged collateral or possible mezzanine debt refinancing options. However, without the occurrence of such events, total loss may be possible. No definite repayment schedule exists for these loans. The Doubtful grade is a temporary grade. If a near term recovery of a portion of the loan balance is indeterminable or unlikely to occur, the remaining balance of the loan should be written off and possible future recoveries may partially offset the full write-off of the loan. These loans are considered “nonperforming”.

Loss – Loans classified as Loss are defaulted loans with limited or immaterial recovery prospects. No loan that has not yet defaulted should be classified at this grade level. This rating level tends to be very short lived as the full balance of the loan tends to be fully written off nearly immediately after a change to this rating level. These loans are considered “nonperforming”.

The following table presents the amortized cost by segment of loans by risk category and origination date as of September 30, 2023 and gross charge-offs by origination date for the nine months ended September 30, 2023:


	2023		2022		2021		2020		2019		Prior		Revolving Loans Converted to Term		Revolving		Total
Commercial and industrial:
Pass	$	300,415	$	480,464	$	388,085	$	154,171	$	45,291	$	48,799	$	26,617	$	803,301	$	2,247,143
Pass/Watch	9,176		2,522		7,001		2,484		1,483		1,626		167		68,825		93,284
Special Mention	3,526		38,881		30,790		1,290		684		1,061		199		7,662		84,093
Substandard - Accruing	630		—		5,648		5,888		1,406		3,680		3,304		2,247		22,803
Substandard - Nonaccrual	—		—		3,180		6,656		796		395		—		96		11,123
Doubtful	—		—		—		—		570		35		250		57		912

Total commercial and industrial	$	313,747	$	521,867	$	434,704	$	170,489	$	50,230	$	55,596	$	30,537	$	882,188	$	2,459,358
Gross charge-offs	$	—	$	—	$	395	$	—	$	—	$	366	$	2,990	$	—	$	3,751

Commercial real estate:
Non-owner occupied:
Pass	$	52,362	$	98,135	$	129,180	$	111,588	$	69,011	$	183,353	$	20,935	$	54,485	$	719,049
Pass/Watch	—		—		—		986		—		23,562		1,300		—		25,848
Special Mention	—		3,542		—		2,857		—		—		—		—		6,399
Substandard - Accruing	—		—		—		1,895		—		9,762		—		—		11,657
Substandard - Nonaccrual	—		—		—		—		—		4,182		—		—		4,182


Total non-owner occupied	$	52,362	$	101,677	$	129,180	$	117,326	$	69,011	$	220,859	$	22,235	$	54,485	$	767,135
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Owner occupied:
Pass	$	60,548	$	85,790	$	118,772	$	117,027	$	67,740	$	127,986	$	2,455	$	6,553	$	586,871
Pass/Watch	605		909		990		1,427		1,457		1,601		—		1,628		8,617
Special Mention	—		495		1,623		1,990		488		4,391		—		—		8,987
Substandard - Accruing	—		463		638		6,805		2,252		15,979		—		—		26,137
Substandard - Nonaccrual	—		—		—		—		—		740		—		—		740


Total owner occupied	$	61,153	$	87,657	$	122,023	$	127,249	$	71,937	$	150,697	$	2,455	$	8,181	$	631,352
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Construction & land:
Pass	$	25,539	$	143,285	$	60,953	$	35,204	$	13,554	$	9,458	$	15,369	$	21,651	$	325,013
Pass/Watch	—		—		—		—		—		16		—		—		16
Special Mention	—		—		1,394		2,256		—		—		—		—		3,650
Substandard - Accruing	—		—		566		—		—		—		—		—		566
Substandard - Nonaccrual	—		—		—		188		—		—		—		—		188


Total construction & land	$	25,539	$	143,285	$	62,913	$	37,648	$	13,554	$	9,474	$	15,369	$	21,651	$	329,433
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Multifamily:
Pass	$	1,362	$	47,809	$	36,731	$	12,973	$	2,723	$	6,060	$	—	$	5,572	$	113,230

Special Mention	—		—		—		—		1,305		—		—		—		1,305




Total multifamily	$	1,362	$	47,809	$	36,731	$	12,973	$	4,028	$	6,060	$	—	$	5,572	$	114,535
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


	2023		2022		2021		2020		2019		Prior		Revolving Loans Converted to Term		Revolving		Total
Total commercial real estate:
Pass	$	139,811	$	375,019	$	345,636	$	276,792	$	153,028	$	326,857	$	38,759	$	88,261	$	1,744,163
Pass/Watch	605		909		990		2,413		1,457		25,179		1,300		1,628		34,481
Special Mention	—		4,037		3,017		7,103		1,793		4,391		—		—		20,341
Substandard - Accruing	—		463		1,204		8,700		2,252		25,741		—		—		38,360
Substandard - Nonaccrual	—		—		—		188		—		4,922		—		—		5,110


Total commercial real estate:	$	140,416	$	380,428	$	350,847	$	295,196	$	158,530	$	387,090	$	40,059	$	89,889	$	1,842,455
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Residential real estate:
Pass	$	88,688	$	572,932	$	118,264	$	38,618	$	38,835	$	152,436	$	1,670	$	14,804	$	1,026,247
Pass/Watch	173		4,881		28		—		350		4,808		179		—		10,419
Special Mention	—		—		—		—		256		1,478		—		—		1,734
Substandard - Accruing	—		—		—		—		—		120		—		—		120
Substandard - Nonaccrual	—		5,706		3,240		2,223		3,942		5,408		—		35		20,554


Total residential real estate	$	88,861	$	583,519	$	121,532	$	40,841	$	43,383	$	164,250	$	1,849	$	14,839	$	1,059,074
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Public Finance:
Pass	$	31,609	$	—	$	43,980	$	178,130	$	203,950	$	137,539	$	—	$	2	$	595,210
Pass/Watch	—		—		—		—		7,634		—		—		—		7,634





Total public finance	$	31,609	$	—	$	43,980	$	178,130	$	211,584	$	137,539	$	—	$	2	$	602,844
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer:
Pass	$	2,387	$	2,590	$	5,646	$	9,846	$	3,674	$	2,760	$	66	$	9,968	$	36,937
Pass/Watch	—		62		119		100		187		159		1		51		679
Special Mention	—		—		14		8		—		—		—		—		22
Substandard - Accruing	5		—		—		—		—		—		37		—		42
Substandard - Nonaccrual	—		—		1		—		—		—		—		—		1


Total consumer	$	2,392	$	2,652	$	5,780	$	9,954	$	3,861	$	2,919	$	104	$	10,019	$	37,681
Gross charge-offs	$	—	$	—	$	12	$	8	$	71	$	32	$	3	$	142	$	268

Other:
Pass	$	7,660	$	7,808	$	13,662	$	6,061	$	441	$	10,244	$	4,935	$	117,017	$	167,828
Pass/Watch	—		—		2,332		—		2,391		—		—		—		4,723

Substandard - Accruing	—		—		2,727		—		—		—		—		—		2,727
Substandard - Nonaccrual	—		—		2,398		—		—		—		434		—		2,832


Total other	$	7,660	$	7,808	$	21,119	$	6,061	$	2,832	$	10,244	$	5,369	$	117,017	$	178,110
Gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


	2023		2022		2021		2020		2019		Prior		Revolving Loans Converted to Term		Revolving		Total
Total loans:
Pass	$	570,570	$	1,438,813	$	915,273	$	663,618	$	445,219	$	678,635	$	72,047	$	1,033,353	$	5,817,528
Pass/Watch	9,954		8,374		10,470		4,997		13,502		31,772		1,647		70,504		151,220
Special Mention	3,526		42,918		33,821		8,401		2,733		6,930		199		7,662		106,190
Substandard - Accruing	635		463		9,579		14,588		3,658		29,541		3,341		2,247		64,052
Substandard - Nonaccrual	—		5,706		8,819		9,067		4,738		10,725		434		131		39,620
Doubtful	—		—		—		—		570		35		250		57		912

Total loans	$	584,685	$	1,496,274	$	977,962	$	700,671	$	470,420	$	757,638	$	77,918	$	1,113,954	$	6,179,522
Gross charge-offs	$	—	$	—	$	407	$	8	$	71	$	398	$	2,993	$	142	$	4,019

The following table presents the credit risk profile of our loan portfolio based on our rating categories as of December 31, 2022, which is prior to the adoption of ASU 2016-13 on January 1, 2023 and continue to be reported under ASC 310, Receivables. For a description of these risk ratings, please see our 2022 Annual Report. Amounts are presented at unpaid principal balance.


	Non-Classified		Classified		Total
Commercial and industrial	$	2,969,786	$	55,288	$	3,025,074
Commercial real estate	1,715,415		37,945		1,753,360
Residential real estate	1,096,108		10,685		1,106,793
Consumer	43,592		114		43,706
Total loans	$	5,824,901	$	104,032	$	5,928,933

The following table presents information about collateral dependent loans that were individually evaluated for purposes of determining the ACL as of:


	Collateral Dependent Loans With Allowance				Collateral Dependent Loans With No Related Allowance		Total Collateral Dependent Loans
	Amortized Cost		Related Allowance		Amortized Cost		Amortized Cost		Related Allowance
September 30, 2023
Commercial & industrial	$	11,991	$	4,794	$	44	$	12,035	$	4,794
Commercial real estate:
Non-owner occupied	96		22		4,086		4,182		22
Owner occupied	614		188		126		740		188
Construction and land	—		—		188		188		—

Total commercial real estate	710		210		4,400		5,110		210
Residential real estate	1,304		74		19,250		20,554		74

Consumer	1		1		—		1		1
Other	—		—		2,832		2,832		—
Total loans	$	14,006	$	5,079	$	26,526	$	40,532	$	5,079
December 31, 2022
Commercial & industrial	$	6,330	$	1,101	$	3,164	$	9,494	$	1,101
Commercial real estate:
Non-owner occupied	115		36		2,033		2,148		36
Owner occupied	681		153		5,256		5,937		153
Construction and land	—		—		198		198		—

Total commercial real estate	796		189		7,487		8,283		189
Residential real estate	836		34		9,779		10,615		34

Consumer	91		88		—		91		88
Other	—		—		475		475		—
Total loans	$	8,053	$	1,412	$	20,905	$	28,958	$	1,412

The allowance related to collateral dependent loans reported in the tables above includes qualitative adjustments applied to the loan portfolio that consider possible changes in circumstances that could ultimately impact credit losses and might not be reflected in historical data or forecasted data incorporated in the quantitative models.

Loan Modifications Made to Borrowers Experiencing Financial Difficulty:

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made at the time of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness that is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. Additionally, the Company may allow a loan to go interest only for a specified period of time.

During the three and nine months ended September 30, 2023, no loans received a material modification based on borrower financial difficulty.

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, 2023		December 31, 2022
Federal National Mortgage Association	$	2,486,363	$	2,517,434
Federal Home Loan Mortgage Corporation	1,720,075		1,630,403
Government National Mortgage Association	1,071,769		916,455
Federal Home Loan Bank	106,410		111,699
Other	1,278		1,413
Total	$	5,385,895	$	5,177,404

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,
	2023		2022		2023		2022
Balance, beginning of period	$	78,390	$	66,047	$	74,097	$	47,392
Additions:

Servicing resulting from transfers of financial assets	2,690		3,489		7,634		11,681


Changes in fair value:
Due to changes in valuation inputs or assumptions used in the valuation model	1,762		6,270		4,440		21,142
Changes in fair value due to pay-offs, pay-downs, and runoff	(1,806)		(1,956)		(5,135)		(6,365)
Balance, end of period	$	81,036	$	73,850	$	81,036	$	73,850

The following represents the weighted-average key assumptions used to estimate the fair value of MSRs as of:


	September 30, 2023		December 31, 2022		September 30, 2022
Discount rate	10.27	%	9.85	%	9.34	%
Total prepayment speeds	7.30	%	7.40	%	7.43	%
Cost of servicing each loan	$90/per loan		$88/per loan		$87/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,
	2023		2022		2023		2022
Servicing fees	$	3,758	$	4,111	$	11,064	$	10,807
Late and ancillary fees	196		123		550		264
Total	$	3,954	$	4,234	$	11,614	$	11,071

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, 2023
Derivative financial instruments designated as hedging instruments:
Assets:
Interest Rate Products	32	2028 - 2036	$	198,424	$	19,246


Derivative financial instruments not designated as hedging instruments:
Assets:
Interest Rate Products	45	2023 - 2037	$	397,422	$	30,938
Other	1	2025	$	14,638	$	4
Liabilities:
Interest Rate Products	45	2023 - 2037	$	397,422	$	30,319
December 31, 2022
Derivative financial instruments designated as hedging instruments:
Assets:
Interest Rate Products	32	2028-2036	$	201,906	$	15,636


Derivative financial instruments not designated as hedging instruments:
Assets:
Interest Rate Products	41	2024-2037	$	338,770	$	24,615
Other	1	2025	$	14,638	$	—
Liabilities:
Interest Rate Products	41	2024-2037	$	338,770	$	24,242

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,
	2023		2022		2023		2022
Recorded gain on banking derivative assets	$	10,700	$	15,123	$	15,745	$	30,192
Recorded loss on banking derivative liabilities	$	(10,263)	$	(14,771)	$	(15,494)	$	(29,095)

For the three months ended September 30, 2023 and 2022, our banking derivative financial instruments not designated as hedging instruments generated fee income of $111 and $492, respectively. For the nine months ended September 30, 2023 and 2022 our banking derivative financial instruments not designated as hedging instruments generated fee income of $1,079, and $1,294, respectively.

The carrying amount of hedged loans receivable as of September 30, 2023 and December 31, 2022 was $182,447 and $181,377, respectively. The cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged loans receivable as of September 30, 2023 and December 31, 2022 was $(14,249) and $(12,752), respectively.

The carrying amount of hedged securities available-for-sale as of September 30, 2023 and December 31, 2022 was $35,449 and $35,869, respectively. The cumulative amount of fair value hedging adjustment, net of tax included in other comprehensive income (loss) as of September 30, 2023 and December 31, 2022 was $3,768, and $2,174, respectively.

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, 2023 and December 31, 2022, 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 $31,061 and $24,677, respectively. As of September 30, 2023 and December 31, 2022, we have minimum collateral posting thresholds with our derivative counterparties and have posted collateral of $10,890 and $8,790, respectively. If we had breached any of these provisions at September 30, 2023, we could have been required to settle our obligations under the agreements at their termination value of $31,061.

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, 2023
Derivative financial instruments
Assets:

Interest rate lock commitments (IRLC)	2023	$	57,868	$	59
Forward MBS trades	2023	$	74,000	$	568
Liabilities:
Futures	2023	$	18,800	$	1,274


December 31, 2022
Derivative financial instruments
Assets:
Forward MBS trades	2023	$	85,000	$	36


Liabilities:
Futures	2023	$	21,800	$	225

Interest rate lock commitments (IRLC)	2023	$	52,533	$	60

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,
	2023		2022		2023		2022
Recorded gain on mortgage banking derivative assets	$	955	$	3,277	$	651	$	5,189
Recorded loss on mortgage banking derivative liabilities	$	(3,459)	$	(2,844)	$	(3,499)	$	(16,940)

NOTE 7 - Deposits

The composition of our deposits is as follows as of:


	September 30, 2023		December 31, 2022
Noninterest-bearing demand deposit accounts	$	1,610,650	$	1,820,490
Interest-bearing deposit accounts:
Interest-bearing demand accounts	440,845		212,357
Savings accounts and money market accounts	2,476,097		2,759,969
NOW accounts	35,686		50,224
Certificate of deposit accounts:
Less than $100	744,026		241,322
$100 through $250	554,307		270,790
Greater than $250	478,236		409,910
Total interest-bearing deposit accounts	4,729,197		3,944,572
Total deposits	$	6,339,847	$	5,765,062

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,
	2023		2022		2023		2022
Interest-bearing deposit accounts:
Interest-bearing demand accounts	$	3,709	$	449	$	6,929	$	733
Savings accounts and money market accounts	8,677		1,859		20,555		4,095
NOW accounts	104		46		242		115
Certificate of deposit accounts	18,406		920		38,078		2,077
Total interest-bearing deposit accounts	$	30,896	$	3,274	$	65,804	$	7,020

The remaining maturity on certificate of deposit accounts is as follows as of:


	September 30, 2023
Remainder of 2023	$	300,939
2024	1,345,270
2025	112,113
2026	9,038
2027	4,081
2028	2,527
Thereafter	2,601
Total certificate of deposit accounts	$	1,776,569

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, 2023			December 31, 2022
Amount outstanding at period-end	$	25,868		$	36,721
Average daily balance during the period	$	29,953		$	54,335
Average interest rate during the period	0.77		%	0.27		%
Maximum month-end balance during the period	$	40,432		$	70,838
Weighted average interest rate at period-end	0.90		%	0.42		%

At September 30, 2023 and December 31, 2022, such agreements were secured by investment and mortgage-related securities with an approximate carrying amount of $30,934 and $48,931, 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, 2023			December 31, 2022
	Amount		Rate		Amount		Rate
Variable rate line-of-credit advance	$	330,000	5.49%		$	643,885	4.48%

The advances were collateralized by $1,659,712 and $1,630,939 of loans pledged to the FHLB as of September 30, 2023 and December 31, 2022, respectively.

As of September 30, 2023 and December 31, 2022, the Bank had total borrowing capacity with the FHLB that is based on qualified collateral lending values of $1,213,992 and $1,139,356, respectively. Our additional borrowing availability with the FHLB at September 30, 2023 was $1,051,446. These borrowings can be in the form of additional term advances or a line-of-credit.

FRB advances

We also had a $1,980,993 line-of-credit with the FRB. The agreement bears interest at the Fed Funds target rate plus 0.50% and is secured by $2,468,593 of investment securities and loans pledged to the FRB as collateral. No amounts were drawn on the line-of-credit as of September 30, 2023.

Other borrowings

We have lines-of-credit with certain other financial institutions totaling $105,000 as of September 30, 2023. No amounts were drawn on these lines-of-credit at September 30, 2023.

Convertible Notes Payable

On August 31, 2023, the convertible notes of $5,456 matured and were repaid in full. As of December 31, 2022, we had outstanding convertible notes of $5,456. The annual interest rate on these convertible notes was 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 conversion feature was not exercised at maturity.

Accretion for the three months ended September 30, 2023 and 2022 was $25 and $38, respectively. Accretion for the nine months ended September 30, 2023 and 2022 was $101 and $1,093, respectively. As of December 31, 2022, the debt discount on the convertible notes was $101.

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. 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 (which was amended to three-month term SOFR as of June 30, 2023) plus 3.35% (8.51% and 5.60% as of September 30, 2023 and 2022, respectively) for the trust preferred securities issued through NMBCT I and at a rate of three-month LIBOR (which was amended to three-month term SOFR as of June 30, 2023) plus 2.00% (7.39% and 4.96% as of September 30, 2023 and 2022, 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:


	For the three months ended September 30,				For the nine months ended September 30,
	2023		2022		2023		2022
Net income applicable to common stockholders	$	25,232	$	26,513	$	79,519	$	34,612
Weighted Average Shares
Weighted average common shares outstanding	24,942,389		24,877,607		24,933,168		22,685,496
Effect of dilutive securities
Stock-based awards	415,418		531,208		432,129		596,437
Convertible notes payable	—		85,500		—		—
Weighted average diluted common shares	25,357,807		25,494,315		25,365,297		23,281,933
Earnings per common share
Basic earnings per common share	$	1.01	$	1.07	$	3.19	$	1.53
Effect of dilutive securities
Stock-based awards	(0.01)		(0.03)		(0.06)		(0.04)
Diluted earnings per common share	$	1.00	$	1.04	$	3.13	$	1.49

Shares of common stock not considered in computing diluted earnings per share because they were antidilutive were as follows:


	For the three months ended September 30,		For the nine months ended September 30,
	2023	2022	2023	2022
Stock-based awards	—	845	—	34,828
Convertible notes payable	—	—	—	85,500

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,
	2023		2022		2023		2022
Securities available-for-sale:
Balance, beginning of period	$	(48,977)	$	(40,535)	$	(46,157)	$	1,664
Unrealized loss	(9,381)		(6,613)		(13,117)		(62,473)
Income tax effect	2,292		1,506		3,208		15,167
Net unrealized loss	(7,089)		(5,107)		(9,909)		(47,306)


Balance, end of period	$	(56,066)	$	(45,642)	$	(56,066)	$	(45,642)

Fair value hedges of securities available-for-sale:
Balance, beginning of period	$	2,478	$	1,098	$	2,174	$	—
Unrealized gain	1,707		1,821		2,110		3,211
Income tax effect	(417)		(383)		(516)		(675)
Net unrealized gain	1,290		1,438		1,594		2,536


Balance, end of period	$	3,768	$	2,536	$	3,768	$	2,536

NOTE 12 - Stockholders’ Equity

Equity Incentive Plans:

2017 Equity Incentive Plan

The 2017 Equity Incentive 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.

The following table presents stock options outstanding at September 30, 2023. There were no exercises, grants or forfeitures during the three or nine months ended September 30, 2023:


	Shares	Weighted-Average Exercise Price, per Share		Weighted-Average Remaining Contractual Term (years)
September 30, 2023




Outstanding, end of period	1,307,915	$	20.23	4.51
Options vested or expected to vest	1,307,915	$	20.23
Options exercisable, end of period	1,261,539	$	20.11	4.42

At September 30, 2023, there was $243 of total unrecognized compensation cost related to non-vested stock options. The unrecognized compensation cost at September 30, 2023 is expected to be recognized over the following two years. At September 30, 2023 and December 31, 2022, the intrinsic value of the stock options was $11,891 and $21,216, respectively.

2021 Equity Incentive Plan

The FirstSun Capital Bancorp 2021 Equity Incentive 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.

In May 2022, we issued 11,344 shares of restricted stock that were fully vested in May 2023. In May 2023, we issued 15,007 shares of restricted stock that will fully vest in May 2024. At September 30, 2023, there was $236 of total unrecognized compensation cost related to the non-vested restricted stock.

In May 2023, we issued performance-based restricted stock under the LTIP that, subject to the achievement of performance conditions, will fully vest in April 2026. At September 30, 2023, we determined it is probable that 100,373 shares will be issued based upon the probability that the performance conditions will be achieved. At September 30, 2023, there was $2,342 of total unrecognized compensation cost related to the non-vested restricted stock granted on these probable shares.

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, 2023, we determined it is probable that 68,881 shares will be issued based upon the probability that the performance conditions will be achieved. At September 30, 2023, there was $1,225 of total unrecognized compensation cost related to the non-vested restricted stock granted on these probable shares.

For the three months ended September 30, 2023 and 2022, we recorded total compensation cost from the 2017 and 2021 Plans of $660 and $473, respectively. For the nine months ended September 30, 2023 and 2022, we recorded total compensation cost from the 2017 and 2021 Plans of $1,743 and $1,093, respectively.

Acquired Equity Incentive Plans

In conjunction with the Pioneer acquisition, 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 option activity:


	For the three months ended September 30, 2023				For the nine months ended September 30, 2023
	Shares	Weighted-Average Exercise Price, per Share		Weighted-Average Remaining Contractual Term (years)	Shares	Weighted-Average Exercise Price, per Share		Weighted-Average Remaining Contractual Term (years)
September 30, 2023
Outstanding, beginning of period	156,095	$	23.67		170,711	$	23.19

Exercised	(22,972)	26.84			(32,107)	24.26

Forfeited	(1,044)	27.30			(6,525)	20.04
Outstanding, vested, and exercisable, end of period	132,079	$	23.09	4.1	132,079	$	23.09	4.1

At September 30, 2023 and December 31, 2022, the intrinsic value of the stock options was $823 and $2,263, respectively.

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,
	2023			2022			2023			2022



Provision for income taxes	$	6,762		$	7,628		$	21,557		$	8,559
Effective tax provision rate	21.1		%	22.3		%	21.3		%	19.8		%

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, 2023, 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, 2023 and December 31, 2022, 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, 2023
Total risk-based capital to risk-weighted assets:	$	925,781	12.93	%	$	572,594	8.00	%	N/A	N/A
Tier 1 risk-based capital to risk-weighted assets:	$	772,583	10.79	%	$	429,446	6.00	%	N/A	N/A
Common Equity Tier 1 (CET 1) to risk-weighted assets:	$	772,583	10.79	%	$	322,084	4.50	%	N/A	N/A
Tier 1 leverage capital to average assets:	$	772,583	10.37	%	$	298,033	4.00	%	N/A	N/A
December 31, 2022
Total risk-based capital to risk-weighted assets:	$	829,712	11.99	%	$	553,440	8.00	%	N/A	N/A
Tier 1 risk-based capital to risk-weighted assets:	$	687,602	9.94	%	$	415,080	6.00	%	N/A	N/A
Common Equity Tier 1 (CET 1) to risk-weighted assets:	$	687,602	9.94	%	$	311,310	4.50	%	N/A	N/A
Tier 1 leverage capital to average assets:	$	687,602	9.71	%	$	283,353	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, 2023
Total risk-based capital to risk-weighted assets:	$	889,647	12.46	%	$	571,423	8.00	%	$	714,279	10.00	%
Tier 1 risk-based capital to risk-weighted assets:	$	811,628	11.36	%	$	428,568	6.00	%	$	571,423	8.00	%
Common Equity Tier 1 (CET 1) to risk-weighted assets:	$	811,628	11.36	%	$	321,426	4.50	%	$	464,281	6.50	%
Tier 1 leverage capital to average assets:	$	811,628	10.89	%	$	298,059	4.00	%	$	372,573	5.00	%
December 31, 2022
Total risk-based capital to risk-weighted assets:	$	815,335	11.81	%	$	552,237	8.00	%	$	690,296	10.00	%
Tier 1 risk-based capital to risk-weighted assets:	$	748,105	10.84	%	$	414,177	6.00	%	$	552,237	8.00	%
Common Equity Tier 1 (CET 1) to risk-weighted assets:	$	748,105	10.84	%	$	310,633	4.50	%	$	448,692	6.50	%
Tier 1 leverage capital to average assets:	$	748,105	10.56	%	$	283,245	4.00	%	$	354,056	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 as of:


	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
September 30, 2023
Available-for-sale securities	$	52,853	$	443,139	$	—	$	495,992
Loans held-for-sale	—		51,465		—		51,465
Mortgage servicing rights	—		—		81,036		81,036
Derivative financial instruments - assets	—		50,815		—		50,815
Derivative financial instruments - liabilities	—		(31,593)		—		(31,593)
Total	$	52,853	$	513,826	$	81,036	$	647,715

December 31, 2022
Available-for-sale securities	$	56,649	$	480,324	$	—	$	536,973
Loans held-for-sale	—		57,323		—		57,323
Mortgage servicing rights	—		—		74,097		74,097
Derivative financial instruments - assets	—		40,287		—		40,287
Derivative financial instruments - liabilities	—		(24,527)		—		(24,527)
Total	$	56,649	$	553,407	$	74,097	$	684,153

For further details on our Level 3 inputs related to MSRs, see Note 5 - Mortgage Servicing Rights.

The following table presents a reconciliation for our Level 3 assets measured at fair value on a recurring basis:


	For the three months ended September 30,				For the nine months ended September 30,
	2023		2022		2023		2022
Balance, beginning of period	$	78,390	$	66,047	$	74,097	$	47,392
Total (losses) gains included in earnings	(44)		4,314		(695)		14,777
Purchases, issuances, sales and settlements:

Issuances	2,690		3,489		7,634		11,681


Balance, end of period	$	81,036	$	73,850	$	81,036	$	73,850

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. Financial assets measured at fair value on a non-recurring basis during the reported periods include certain collateral dependent loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral and other real estate owned and foreclosed assets, which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for credit losses, and subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense. The following table sets forth our assets and liabilities that were measured at fair value on a non-recurring basis as of:


	Level 3
	September 30, 2023		December 31, 2022
Collateral dependent loans:
Commercial and industrial	$	7,197	$	5,229
Commercial real estate	500		607
Residential real estate	1,230		802

Consumer	—		3

Total collateral dependent loans	$	8,927	$	6,641

Other real estate owned and foreclosed assets, net:

Commercial real estate	$	7,428	$	5,391
Residential real estate	967		967

Total other real estate owned and foreclosed assets, net:	$	8,395	$	6,358

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:


			Estimated Fair Value
	Carrying Value		Total		Level 1		Level 2		Level 3
September 30, 2023
Assets:
Cash and cash equivalents	$	443,887	$	443,887	$	443,887	$	—	$	—
Securities held-to-maturity	37,410		30,792		—		30,792		—
Loans (excluding collateral dependent loans at fair value)	6,170,595		6,036,398		—		—		6,036,398
Restricted equity securities	35,396		35,396		—		35,396		—
Accrued interest receivable	37,218		37,218		—		2,328		34,890

Liabilities:
Deposits (excluding demand deposits)	$	4,288,352	$	4,273,238	$	2,511,783	$	1,761,455	$	—
Securities sold under agreements to repurchase	25,868		25,868		—		25,868		—
FHLB advances	330,000		330,000		—		330,000		—


Subordinated debt, net	75,180		70,934		—		70,934		—
Accrued interest payable	9,862		9,862		—		9,862		—
December 31, 2022
Assets:
Cash and cash equivalents	$	343,526	$	343,526	$	343,526	$	—	$	—
Securities held-to-maturity	38,901		33,218		—		33,218		—
Loans (excluding impaired loans)	5,871,274		5,756,197		—		—		5,756,197
Restricted equity securities	50,215		50,215		—		50,215		—
Accrued interest receivable	28,543		28,543		—		2,049		26,494

Liabilities:
Deposits (excluding demand deposits)	$	3,732,215	$	3,696,438	$	—	$	3,696,438	$	—
Securities sold under agreements to repurchase	36,721		36,721		—		36,721		—
FHLB advances	643,885		643,885		—		643,885		—

Convertible notes payable, net	5,355		5,329		—		5,329		—
Subordinated debt, net	74,880		71,618		—		71,618		—
Accrued interest payable	5,798		5,798		—		5,798		—

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 credit losses and noninterest income. Noninterest expenses are allocated to each operating segment. Provision for credit 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,:


	Banking		Mortgage Operations		Corporate		Total Segments
2023
Summary of Operations
Net interest income (loss)	$	73,496	$	1,171	$	(1,257)	$	73,410

Provision (benefit) for credit losses	6,319		(2,429)		—		3,890

Noninterest income:
Service charges on deposit accounts	5,475		—		—		5,475
Credit and debit card fees	2,996		—		—		2,996
Trust and investment advisory fees	1,398		—		—		1,398
Income from mortgage banking services, net	(526)		7,939		—		7,413
Other noninterest income	1,368		—		—		1,368
Total noninterest income	10,711		7,939		—		18,650

Noninterest expense:
Salary and employee benefits	27,701		5,844		423		33,968
Occupancy and equipment	7,449		707		60		8,216
Other noninterest expenses	9,990		3,820		182		13,992
Total noninterest expense	45,140		10,371		665		56,176

Income (loss) before income taxes	$	32,748	$	1,168	$	(1,922)	$	31,994

Other Information
Depreciation expense	$	1,567	$	57	$	—	$	1,624
Identifiable assets	$	6,824,853	$	871,032	$	60,990	$	7,756,875


	Banking		Mortgage Operations		Corporate		Total Segments
2022
Summary of Operations
Net interest income (loss)	$	68,159	$	1,492	$	(1,165)	$	68,486

Provision for credit 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	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

Significant segment totals are reconciled to the financial statements as follows for the nine months ended September 30,:


	Banking		Mortgage Operations		Corporate		Total Segments
2023
Summary of Operations
Net interest income (loss)	$	220,608	$	4,532	$	(3,778)	$	221,362

Provision (benefit) for credit losses	12,382		(710)		—		11,672

Noninterest income:
Service charges on deposit accounts	15,848		—		—		15,848
Credit and debit card fees	9,033		1		—		9,034
Trust and investment advisory fees	4,337		—		—		4,337
Income from mortgage banking services, net	(1,126)		27,627		—		26,501
Other noninterest income	6,151		—		—		6,151
Total noninterest income	34,243		27,628		—		61,871

Noninterest expense:
Salary and employee benefits	81,667		19,868		1,538		103,073
Occupancy and equipment	22,105		2,088		145		24,338
Other noninterest expenses	30,293		11,155		1,626		43,074
Total noninterest expense	134,065		33,111		3,309		170,485

Income (loss) before income taxes	$	108,404	$	(241)	$	(7,087)	$	101,076

Other Information
Depreciation expense	$	4,870	$	177	$	—	$	5,047
Identifiable assets	$	6,824,853	$	871,032	$	60,990	$	7,756,875


	Banking		Mortgage Operations		Corporate		Total Segments
2022
Summary of Operations
Net interest income (loss)	$	167,606	$	5,193	$	(4,443)	$	168,356

Provision for credit 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	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

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.

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, 2023 and December 31, 2022, commitments included the funding of fixed-rate loans totaling $187,807 and $218,309 and variable-rate loans totaling $1,650,615 and $1,727,246, respectively. The fixed-rate loan commitments have interest rates ranging from 1.00% to 18.00% at September 30, 2023 and December 31, 2022, and maturities ranging from 1 month to 19 years at September 30, 2023 and from 1 month to 15 years at December 31, 2022.

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, 2023 and December 31, 2022, our standby letters of credit commitment totaled $23,977 and $17,426, 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. As of September 30, 2023 and December 31, 2022, 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 has not recorded a liability and offsetting receivable. As of September 30, 2023 and December 31, 2022, the maximum potential amount of future payments that the Bank would have been required to make under the Commitments was $3,783, 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.

Litigation

Overdraft Fee Litigation

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. Plaintiff seeks unspecified restitution, actual and statutory damages, costs, attorneys’ fees, pre-judgment interest, and other relief as the Court deems proper. 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. At this time, the Bank is unable to reasonably estimate the final outcome of this litigation.

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 alleged that the Bank negligently failed to follow contractual, internal, and industry-standard procedures with respect to six wire transfers, totaling approximately $5.1 million, from UGI’s deposit account at the Bank. The Bank denied UGI’s claims and filed various counterclaims against UGI, including negligence. The Bank and UGI consummated a Settlement and Release agreement, resulting in the March 29, 2023 dismissal of all claims in the lawsuit and no material financial impact to the Bank.

Check Fraud Litigation

Rodeo Electrical Services, Inc. and its owner (“RESI”) filed a civil action against the Bank on June 23, 2020 in the Santa Fe County, New Mexico District Court. The Complaint alleges the bank conspired with or otherwise aided a former RESI employee’s embezzlement of approximately $400,000 from RESI. The complaint seeks compensatory, exemplary, statutory, and punitive damages, as well as payment of RESI’s legal fees and expenses. The Bank’s position is that RESI’s claims against the Bank are legally barred by their failure to timely notify the Bank of transaction activity associated with the embezzlement scheme. The Bank’s motion for relief from the May 5, 2023 default judgment is now before the Court of Appeals. The case has been scheduled for a jury trial commencing on January 8, 2024. At this time, the Bank is unable to reasonably estimate the final 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.

NOTE 18 - Lease Commitments

Our leases relate primarily to office space and bank branches with remaining lease terms of generally 1 to 15 years. Certain lease arrangements contain extension options which typically range from 5 to 10 years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. For leases existing during transition from ASC 840 to ASC 842 at January 1, 2022, extension options were not considered in the remaining lease term.


	September 30, 2023			December 31, 2022
ROU asset on leased property, gross	$	37,021		$	35,212
Accumulated amortization	(11,047)			(6,808)
ROU asset, net (included in Prepaid expenses and other assets in our consolidated balance sheets)	$	25,974		$	28,404
Lease liability (Included in Accrued expenses and other liabilities in our consolidated balance sheets)	$	28,360		$	31,267
Weighted Average Remaining Life - Operating Leases	5.63			5.92
Weighted Average Rate - Operating Leases	2.07		%	1.81		%

The following table reconciles future undiscounted lease payments due under non-cancelable operating leases to the aggregate operating lessee lease liability as of September 30, 2023:


Remainder of 2023	$	7,434
2024	6,589
2025	4,789
2026	2,986
2027	2,549
2028	5,604
Thereafter	232
Total undiscounted operating lease liability	30,183
Imputed interest	1,823
Total operating lease liability included in the accompanying balance sheet	$	28,360

Total lease expense for three months ended September 30, 2023 and 2022 was $1,888 and $2,063, respectively. Total lease expense for the nine months ended September 30, 2023 and 2022 was $5,633 and $5,839, respectively. The components of total lease expense for the periods ended September 30, 2023 was as follows:


	For the three months ended September 30,		For the nine months ended September 30,
	2023		2023
Operating leases	$	1,887	$	5,642
Short-term leases	60		160

Sublease income	(59)		(169)
Net lease expense	$	1,888	$	5,633

We do not currently have any significant finance leases in which we are the lessee, material related-party leases, leases containing residual value guarantees or restrictive covenants.

Item 2. 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 “Bank”).

The following discussion and analysis of FirstSun’s consolidated financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as our audited consolidated financial statements and footnotes for the year ended December 31, 2022 included in the 2022 Form 10-K that we filed with the SEC on March 16, 2023. 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 Capital Bancorp, headquartered in Denver, Colorado, is the financial holding company for Sunflower Bank, National Association, which operates as Sunflower Bank, First National 1870 and Guardian Mortgage. We conduct a full service community banking and trust business through our wholly-owned subsidiaries—Sunflower Bank and Logia Portfolio Management, LLC.

We offer a full range of relationship-focused services to meet our clients’ personal, business and wealth management financial objectives, with a branch network in Texas, Kansas, Colorado, New Mexico, and Arizona and mortgage capabilities in 43 states. Our product lines include commercial and industrial loans, commercial real estate loans, residential mortgage, public finance and other consumer loans, and a variety of commercial and consumer deposit products, including noninterest-bearing accounts, interest-bearing demand products, savings accounts, money market accounts and certificates of deposit. We also offer wealth management and trust products including personal trust and agency accounts, employee benefit and retirement related trust and agency accounts, investment management and advisory agency accounts, and foundation and endowment trust and agency accounts. We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs for our customers.

We operate FirstSun through two operating segments: Banking and Mortgage Operations. We also allocate certain expenses to Corporate, which is not an operating segment. The expenses included in Corporate are not deemed to be allocable to our operating segments. The operating segments have been determined based on the products and services we offer and reflect the manner in which our financial information is evaluated by management. Each of the operating segments is complementary to each other and because of the interrelationship of the segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. For additional information on our segments, see Note 16 - Segment Information included in our consolidated financial statements included elsewhere in this report.

Completion of merger with Pioneer Bancshares, Inc.

On April 1, 2022, we completed our previously announced merger with Pioneer Bancshares, Inc. (“Pioneer”), pursuant to which Pioneer was merged with and into FirstSun, with FirstSun continuing as the surviving entity, and Pioneer’s wholly-owned subsidiary, Pioneer Bank, SSB, a Texas state savings bank, was merged with and into Sunflower Bank, with Sunflower Bank continuing as the surviving bank. With the acquisition, we acquired 19 branches in Texas. The results for Pioneer are reflected in our results of operations and financial condition beginning April 1, 2022. Further information is presented in Note 2 - Merger with Pioneer Bancshares, Inc. included in our consolidated financial statements included elsewhere in this report.

Early 2023 Banking Events

There were two significant bank failures in the first part of March 2023 and one in April 2023, primarily due to customer and/or industry concentration issues and the failed banks’ lack of liquidity as depositors sought to withdraw their deposits. Due to rising interest rates, the failed banks were unable to sell investment securities held to meet liquidity needs without realizing substantial losses. As a result of the March 2023 bank closures and in an effort to strengthen public confidence in the banking system and protect depositors, regulators have announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of our FDIC insurance assessments. Additionally, the Federal Reserve announced the creation of a new Bank Term Funding Program in an effort to minimize the need for banks to sell securities at a loss in times of stress. The future impact of these failures on the economy, financial institutions and their depositors, as well as any governmental regulatory responses or actions resulting from the same, is difficult to predict at this time.

Vendor Incident

As disclosed in our Form 8-K filed on July 14, 2023, on or about May 31, 2023, we were informed by a third-party vendor of a zero-day vulnerability in the vendor’s managed file transfer software MOVEit (the “Vendor Incident”). The Bank utilizes MOVEit for securely transferring sensitive and confidential information and other data, including for its First National 1870 and Guardian Mortgage divisions. The costs associated with the Vendor Incident have not had and are not expected to have a material impact on the Company’s financial condition or results of operation.

Financial Summary

Third Quarter 2023 Highlights:

•Net income of $25.2 million, $1.00 per diluted share

•Net interest margin of 4.23%

•Return on average total assets of 1.34%

•Return on average stockholders’ equity of 12.03%

•Average deposit growth of 24.0% annualized

•Loan growth of 1.6% annualized

•20.3% noninterest income to total revenue1

Net income totaled $25.2 million, or $1.00 per diluted share, for the third quarter of 2023, compared to $26.5 million, or $1.04 per diluted share, for the third quarter of 2022. The return on average assets was 1.34% for the third quarter of 2023, compared to 1.52% for the third quarter of 2022, and the return on average equity was 12.03% for the third quarter of 2023, compared to 14.50% for the third quarter of 2022.

Net income totaled $79.5 million, or $3.13 per diluted share, for the nine months ended September 30, 2023, compared to $34.6 million, or $1.49 per diluted share, for the same period in 2022. The return on average assets was 1.42% for the nine months ended September 30, 2023, compared to 0.70% for the same period in 2022, and the return on average equity was 12.97% for the nine months ended September 30, 2023, compared to 6.90% for the same period in 2022.

Net income, return on average assets and return on average equity were reduced in 2022 by merger-related expenses and the provision for loan losses related to certain non-impaired loans acquired from Pioneer at a premium upon the closing of the merger. The reduction to net income, return on average assets and return on average equity for the nine months ended September 30, 2022, resulting from the aggregate of merger-related expenses and the provision for loan losses related to certain non-impaired loans acquired from Pioneer at a premium, were $17.0 million, 0.34%, and 3.39% respectively.

1 Total revenue is net interest income plus noninterest income.

The following table sets forth certain summary financial and other information of FirstSun:


	For the three months ended September 30,			For the nine months ended September 30,						For the year ended December 31,
($ in thousands, except share and per share amounts)	2023			2022			2023			2022			2022
Income Statement:
Net interest income	$	73,410		$	68,486		$	221,362		$	168,356		$	241,632
Taxable equivalent adjustment	1,286			1,236			3,816			3,841			5,059
Net interest income - fully tax equivalent ("FTE") basis (non-GAAP) (3)	$	74,696		$	69,722		$	225,178		$	172,197		$	246,691
Provision for credit losses	$	3,890		$	3,750		$	11,672		$	12,450		$	18,050
Noninterest income	$	18,650		$	24,953		$	61,871		$	70,948		$	89,566
Noninterest expense	$	56,176		$	55,548		$	170,485		$	183,683		$	239,126
Net income	$	25,232		$	26,513		$	79,519		$	34,612		$	59,182
Per Common Share Data:
Weighted average diluted common shares	25,357,807			25,494,315			25,365,297			23,281,933			23,838,471
Net income (basic)	$	1.01		$	1.07		$	3.19		$	1.53		$	2.55
Net income (diluted)	$	1.00		$	1.04		$	3.13		$	1.49		$	2.48
Cash dividends	$	—		$	—		$	—		$	—		$	—
Dividend payout ratio	—		%	—		%	—		%	—		%	—		%
Book value	$	33.83		$	30.14		$	33.83		$	30.14		$	31.08
Tangible common book value (non-GAAP) (3)	$	29.60		$	25.67		$	29.60		$	25.67		$	26.69
Performance Ratios:
Return on average total assets	1.34		%	1.52		%	1.42		%	0.70		%	0.88		%
Return on average stockholders' equity	12.03		%	14.50		%	12.97		%	6.90		%	8.55		%
Return on tangible common stockholders' equity (non-GAAP) (3)	14.05		%	17.05		%	14.93		%	7.58		%	9.40		%
Return on average tangible common stockholders' equity (non-GAAP) (3)	14.15		%	17.59		%	15.51		%	8.35		%	10.45		%
Net interest margin	4.23		%	4.26		%	4.28		%	3.66		%	3.87		%
Efficiency ratio (1)	61.02		%	59.45		%	60.19		%	76.76		%	72.20		%
Net charge-offs (recoveries) to average loans outstanding	0.15		%	0.01		%	0.07		%	0.01		%	(0.01)		%
Allowance for credit losses to loans	1.27		%	1.07		%	1.27		%	1.07		%	1.12		%
Nonperforming loans to total loans (2)	0.66		%	0.61		%	0.66		%	0.61		%	0.49		%
Balance Sheet:
Total loans, excluding loans held-for-sale	$	6,179,522		$	5,556,686		$	6,179,522		$	5,556,686		$	5,911,832
Total assets	$	7,756,875		$	7,052,917		$	7,756,875		$	7,052,917		$	7,430,322
Total deposits	$	6,339,847		$	5,760,418		$	6,339,847		$	5,760,418		$	5,765,062
Total borrowed funds	$	405,180		$	390,969		$	405,180		$	390,969		$	724,120
Total stockholders' equity	$	843,719		$	750,653		$	843,719		$	750,653		$	774,536
Capital Ratios:
Total risk-based capital to risk-weighted assets	12.93		%	12.06		%	12.93		%	12.06		%	11.99		%
Tier 1 risk-based capital to risk-weighted assets	10.79		%	9.99		%	10.79		%	9.99		%	9.94		%
Common Equity Tier 1 (CET 1) to risk-weighted assets	10.79		%	9.99		%	10.79		%	9.99		%	9.94		%
Tier 1 leverage capital to average assets	10.37		%	9.55		%	10.37		%	9.55		%	9.71		%
Average stockholders' equity to average total assets	11.18		%	10.52		%	10.98		%	10.13		%	10.28		%
Tangible common stockholders' equity to tangible assets (non-GAAP) (3)	9.65		%	9.21		%	9.65		%	9.21		%	9.09		%
Tangible common stockholders’ equity to tangible assets reflecting net unrealized losses on HTM securities, net of tax (non-GAAP) (3)	9.59		%	9.16		%	9.59		%	9.16		%	9.03		%
Nonfinancial Data:
Full-time equivalent employees	1,106			1,155			1,106			1,155			1,149
Banking branches	69			72			69			72			72
(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 and accrual loans greater than 90 days past due. On January 1, 2023, we adopted ASU 2022-02, whereby we no longer recognize or account for TDRs. The loans previously classified as accrual TDRs are no longer considered nonperforming. We have adjusted prior periods to reflect this change in accounting.
(3) See section entitled “Non-GAAP Financial Measures and Reconciliations” for information regarding these non-GAAP financial measures and a reconciliation to the most comparable GAAP equivalent.

Non-GAAP Financial Measures and Reconciliations

The non-GAAP financial measures presented below are used by our management and our Board of Directors on a regular basis in addition to our GAAP results to facilitate the assessment of our financial performance. Management believes these non-GAAP financial measures enhance an investor’s understanding of our financial results by providing a meaningful basis for period-to-period comparisons, assisting in operating results analysis, and predicting future performance. This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a substitute for, our GAAP results. Accordingly, this financial information should be read in conjunction with our consolidated financial statements and notes thereto for the three and nine months ended September 30, 2023, included elsewhere in this report. Non-GAAP financial measures exclude certain items that are included in the financial results presented in accordance with GAAP. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.

The following table presents GAAP to non-GAAP reconciliations:


	For the three months ended September 30,			For the nine months ended September 30,						For the year ended December 31,
($ in thousands, except share and per share amounts)	2023			2022			2023			2022			2022






Tangible common stockholders’ equity:
Total common stockholders' equity (GAAP)	$	843,719		$	750,653		$	843,719		$	750,653		$	774,536
Less: Goodwill and other intangible assets
Goodwill	(93,483)			(93,483)			(93,483)			(93,483)			(93,483)
Other intangible assets	(11,813)			(17,825)			(11,813)			(17,825)			(15,806)
Total tangible common stockholders' equity (non-GAAP) (1)	$	738,423		$	639,345		$	738,423		$	639,345		$	665,247
Total common shares outstanding	24,942,645			24,906,032			24,942,645			24,906,032			24,920,984
Book value per common share (GAAP)	$	33.83		$	30.14		$	33.83		$	30.14		$	31.08
Tangible book value per common share (non-GAAP)	$	29.60		$	25.67		$	29.60		$	25.67		$	26.69
Return on tangible common stockholders’ equity:
Net income (GAAP)	$	25,232		$	26,513		$	79,519		$	34,612		$	59,182
Add: Intangible amortization, net of tax	710			739			3,154			1,736			3,330
Tangible net income (non-GAAP)	$	25,942		$	27,252		$	82,673		$	36,348		$	62,512
Tangible common stockholders’ equity (non-GAAP) (1)	$	738,423		$	639,345		$	738,423		$	639,345		$	665,247
Return on common stockholders’ equity (GAAP)	11.96		%	14.13		%	12.57		%	6.15		%	7.64		%
Return on tangible common stockholders’ equity (non-GAAP)	14.05		%	17.05		%	14.93		%	7.58		%	9.40		%
Return on average tangible common stockholders’ equity:
Tangible net income (non-GAAP)	$	25,942		$	27,252		$	82,673		$	36,348		$	62,512
Total average common stockholders' equity (GAAP)	$	839,258		$	731,549		$	817,774		$	668,991		$	692,524
Less: Average goodwill and other intangible assets
Average goodwill	(93,483)			(93,483)			(93,483)			(73,560)			(78,582)
Average other intangible assets	(12,212)			(18,255)			(13,785)			(15,317)			(15,811)
Total average tangible common stockholders' equity (non-GAAP)	$	733,563		$	619,811		$	710,506		$	580,114		$	598,131
Return on average common stockholders’ equity (GAAP)	12.03		%	14.50		%	12.97		%	6.90		%	8.55		%
Return on average tangible common stockholders’ equity (non-GAAP)	14.15		%	17.59		%	15.51		%	8.35		%	10.45		%
Net interest margin - FTE basis:
Net interest income (GAAP)	$	73,410		$	68,486		$	221,362		$	168,356		$	241,632
Taxable equivalent adjustment	1,286			1,236			3,816			3,841			5,059
Net interest income - FTE basis (non-GAAP)	$	74,696		$	69,722		$	225,178		$	172,197		$	246,691
Average earning assets	$	6,947,500		$	6,434,653		$	6,891,380		$	6,127,755		$	6,244,221
Net interest margin (GAAP)	4.23		%	4.26		%	4.28		%	3.66		%	3.87		%
Net interest margin - FTE basis (non-GAAP)	4.30		%	4.31		%	4.36		%	3.75		%	3.95		%
(1) For all periods presented tangible stockholders’ equity is the same as tangible common stockholders’ equity.


	For the three months ended September 30,			For the nine months ended September 30,						For the year ended December 31,
($ in thousands, except share and per share amounts)	2023			2022			2023			2022			2022


Tangible common stockholders’ equity to tangible assets:
Total assets (GAAP)	$	7,756,875		$	7,052,917		$	7,756,875		$	7,052,917		$	7,430,322
Less: Goodwill and other intangible assets
Goodwill	(93,483)			(93,483)			(93,483)			(93,483)			(93,483)
Other intangible assets	(11,813)			(17,825)			(11,813)			(17,825)			(15,806)
Total tangible assets (non-GAAP)	$	7,651,579		$	6,941,609		$	7,651,579		$	6,941,609		$	7,321,033
Tangible common stockholders’ equity (non-GAAP) (1)	$	738,423		$	639,345		$	738,423		$	639,345		$	665,247
Common stockholders' equity to total assets (GAAP)	10.88		%	10.64		%	10.88		%	10.64		%	10.42		%

Tangible common stockholders’ equity to tangible assets (non-GAAP)	9.65		%	9.21		%	9.65		%	9.21		%	9.09		%
Tangible common stockholders’ equity to tangible assets, reflecting net unrealized losses on HTM securities, net of tax:
Total tangible common stockholders' equity (non-GAAP)	$	738,423		$	639,345		$	738,423		$	639,345		$	665,247
Less: Net unrealized losses on HTM securities, net of tax	(5,001)			(3,810)			(5,001)			(3,810)			(4,295)
Total tangible common stockholders’ equity less net unrealized losses on HTM securities, net of tax (non-GAAP)	$	733,422		$	635,535		$	733,422		$	635,535		$	660,952
Total tangible assets (non-GAAP)	$	7,651,579		$	6,941,609		$	7,651,579		$	6,941,609		$	7,321,033
Less: Net unrealized losses on HTM securities, net of tax	(5,001)			(3,810)			(5,001)			(3,810)			(4,295)
Total tangible assets less net unrealized losses on HTM securities, net of tax (non-GAAP)	$	7,646,578		$	6,937,799		$	7,646,578		$	6,937,799		$	7,316,738
Tangible common stockholders’ equity to tangible assets (non-GAAP)	9.65		%	9.21		%	9.65		%	9.21		%	9.09		%

Tangible common stockholders’ equity to tangible assets reflecting net unrealized losses on HTM securities, net of tax (non-GAAP)	9.59		%	9.16		%	9.59		%	9.16		%	9.03		%
Net income excluding merger costs:
Net income (GAAP)	$	25,232		$	26,513		$	79,519		$	34,612		$	59,182
Add: Merger costs
Merger related expenses	—			—			—			18,751			18,751
Income tax effect on merger related expenses	—			—			—			(4,083)			(4,083)
Provision for loan loss on Pioneer loans marked at a premium	—			—			—			2,884			2,884
Income tax effect on provision for loan loss on Pioneer loans marked at a premium	—			—			—			(521)			(521)
Total merger costs	—			—			—			17,031			17,031
Net income excluding merger costs (non-GAAP)	$	25,232		$	26,513		$	79,519		$	51,643		$	76,213
Return on average total assets excluding merger costs:
Return on average total assets (ROAA) (GAAP)	1.34		%	1.52		%	1.42		%	0.70		%	0.88		%
Add: Impact of merger costs, net of tax	—		%	—		%	—		%	0.34		%	0.25		%
ROAA excluding merger costs (non-GAAP)	1.34		%	1.52		%	1.42		%	1.04		%	1.13		%
Return on average stockholders’ equity excluding merger costs:
Return on average stockholders' equity (ROAE) (GAAP)	12.03		%	14.50		%	12.97		%	6.90		%	8.55		%
Add: Impact of merger costs, net of tax	—		%	—		%	—		%	3.39		%	2.46		%
ROAE excluding merger costs (non-GAAP)	12.03		%	14.50		%	12.97		%	10.29		%	11.01		%
Efficiency ratio excluding merger related expenses:
Efficiency ratio (GAAP)	61.02		%	59.45		%	60.19		%	76.76		%	72.20		%
Less: Impact of merger related expenses	—		%	—		%	—		%	(7.84)		%	(5.66)		%
Efficiency ratio excluding merger related expenses (non-GAAP)	61.02		%	59.45		%	60.19		%	68.92		%	66.54		%
Diluted earnings per share excluding merger costs:
Diluted earnings per share (GAAP)	$	1.00		$	1.04		$	3.13		$	1.49		$	2.48
Add: Impact of merger costs, net of tax	—			—			—			0.73			0.72
Diluted earnings per share excluding merger costs (non-GAAP)	$	1.00		$	1.04		$	3.13		$	2.22		$	3.20
(1) For all periods presented tangible stockholders’ equity is the same as tangible common stockholders’ equity.

Segments

Banking

Three months ended September 30, 2023 and 2022

Income before income taxes decreased $1.1 million to $32.7 million for the third quarter of 2023, from $33.9 million for the same period in 2022. The period over period decrease was primarily driven by an increase in provision for credit losses and salary and employee benefits partially offset by an increase in net interest income. Net interest income increased $5.3 million to $73.5 million for the third quarter of 2023, compared to $68.2 million for the same period in 2022. The increase in net interest income was primarily due to organic growth in our loan portfolio. Provision for credit losses increased $3.1 million to $6.3 million for the third quarter of 2023, from $3.2 million for the same period in 2022 as a result of organic loan growth and a $2.9 million charge-off on a certain exited customer relationship. Salary and employee benefits increased $4.5 million to $27.7 million for the third quarter of 2023, from $23.2 million for the same period in 2022 on increased headcount, annual compensation increases, and higher incentive compensation resulting from increased year-to-date profitability. Identifiable assets for our Banking segment grew by $0.5 billion to $6.8 billion at September 30, 2023 from $6.3 billion for the same period in 2022. The growth in identifiable assets was primarily driven by organic growth in our loan portfolios.

Nine months ended September 30, 2023 and 2022

Income before income taxes increased $57.7 million to $108.4 million for the nine months ended September 30, 2023, from $50.7 million for the same period in 2022. The period over period increase was primarily driven by an increase in net interest income and a decrease in other noninterest expenses. Net interest income increased $53.0 million to $220.6 million for the nine months ended September 30, 2023 compared to $167.6 million for the same period in 2022. The increase in net interest income was primarily due to organic growth in our loan portfolio, an increase in interest earning assets resulting from the Pioneer merger, and an increase in net interest margin. The decrease in other noninterest expenses of $15.9 million was primarily due to merger-related expenses incurred during the nine months ended September 30, 2022, which was partially offset by an increase in salary and employee benefits of $11.8 million. The increase to salary and employee benefits was due to increased headcount, annual compensation increases occurring early in 2023, and higher incentive compensation resulting from increased profitability.

Mortgage Operations

Three months ended September 30, 2023 and 2022

Income before income taxes decreased $1.1 million to $1.2 million for the third quarter of 2023, compared to $2.2 million for the same period in 2022, primarily due to a decrease in revenue from mortgage banking services. Revenue from mortgage banking services decreased $6.5 million to $7.9 million for the third quarter of 2023, compared to $14.5 million for the same period in 2022, primarily due to lesser fair value gains on our mortgage servicing rights portfolio, net of derivative activity. Total loan originations for sale were $0.2 billion for the third quarter of 2023, a decline of $0.1 billion from $0.3 billion for the same period in 2022. Identifiable assets for our Mortgage Operations segment grew by $0.2 billion to $0.9 billion at September 30, 2023 from $0.7 billion for the same period in 2022. The growth in identifiable assets was primarily driven by organic growth in our residential mortgage portfolio.

Nine months ended September 30, 2023 and 2022

Income (loss) before income taxes decreased $0.7 million to $(0.2) million for the nine months ended September 30, 2023, compared to $0.5 million for the same period in 2022, primarily due to a decrease of $14.4 million in revenue from mortgage banking services partially offset by a decrease in salary and employee benefits of $11.0 million. Overall gains on sale of mortgage loans declined as a result of the decline in origination activity, continued margin compression, and a decline in the rate lock pipeline volume and valuation due to rising interest rates. The decrease in income related to our MSRs was primarily due to lesser fair value gains on our mortgage servicing rights portfolio, net of derivative activity. Total loan originations for sale were $0.6 billion for the nine months ended September 30, 2023, a decline of $0.3 billion from $0.9 billion for the same period in 2022.

Critical Accounting Estimates

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Our accounting and reporting estimates are in accordance with generally accepted accounting principles, or “U.S. GAAP,” and conform to general practices within the banking industry. Estimates that are susceptible to significant changes include accounting for the allowance for credit losses and fair value measurements, both of which require significant judgments by management. Actual results could result in material changes to our consolidated financial condition or consolidated results of operations.

Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the determination of the allowance for credit losses and fair value measurements to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, we consider these policies to be critical accounting estimates and discuss them directly with the Audit Committee of our board of directors. During the nine months ended September 30, 2023, we adopted ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments which required a change to our estimate of the allowance for credit losses.

There have been no significant changes to our fair value measurements critical accounting estimate described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations of FirstSun—Critical Accounting Estimates” and the notes to the audited consolidated financial statements appearing in the 2022 Form 10-K.

Our significant accounting policies are presented in “Note 1 - Summary of Significant Accounting Policies” in our audited consolidated financial statements and footnotes for the year ended December 31, 2022 included in the 2022 Form 10-K other than those policies revised for our adoption of ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments and ASU 2022-02, Financial Instruments - Credit Losses: Troubled Debt Restructurings and Vintage Disclosures included with “Note 1 - Organization and Basis of Presentation” included in Item 1 of this Form 10-Q. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Recent accounting pronouncements and standards that have impacted or could potentially affect us are also discussed in “Note 1” of our audited consolidated financial statements.

Allowance for Credit Losses - Management maintains an ACL for loans based upon management’s estimate of the lifetime expected credit losses in the loan portfolio, as of the balance sheet date, excluding loans held for sale. Additionally, management maintains an ACL for held-to-maturity or available-for-sale debt securities, and other off-balance sheet credit exposures (e.g., unfunded loan commitments). For loans and unfunded loan commitments, the estimate of lifetime credit losses includes the use of quantitative models that incorporate forward-looking macroeconomic scenarios that are applied over the contractual lives of the portfolios, adjusted, as appropriate, for prepayments and permitted extension options using historical experience. For purposes of the ACL for lending commitments, such allowance is determined using the same methodology as the ACL for loans, while also taking into consideration the probability of drawdowns or funding, and whether such commitments are cancellable by us. The ACL for held-to-maturity and available-for-sale debt securities is measured using a risk-adjusted discounted cash flow approach that also considers relevant current and forward-looking economic variables and the ACL is limited to the difference between the fair value of the security and its amortized cost. Judgment is specifically applied in the determination of economic assumptions, length of the initial loss forecast period, the reversion of losses beyond the initial forecast period, usage of macroeconomic scenarios, probabilities of default, losses given default, amortization and prepayment rates, and qualitative factors, which may not be adequately captured in the loss model, as further discussed below.

The macroeconomic scenarios utilized by management include variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to, unemployment rates, housing and commercial real estate prices, gross domestic product levels, corporate bond spreads and changes in equity market prices. Management derives the economic forecasts it uses in its ACL model from Moody’s Analytics. The latter has a large team of economics, database managers and operational engineers with a history of producing monthly economic forecasts for over 25 years.

Management has currently set an initial forecast period (“reasonable and supportable period”) of four years and a reversion period of one year, utilizing a straight-line approach and reverting back to the historical macroeconomic mean. After the

reversion period, a historical loss forecast period covering the remaining contractual life, adjusted for prepayments, is used based on changes in key historical economic variables during representative historical expansionary and recessionary periods. Changes in economic forecasts impact the probability of default (“PD”), loss-given default (“LGD”), and exposure at default (“EAD”) for each instrument, and therefore influence the amount of future cash flows for each instrument that management does not expect to collect.

Further, management periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not limited to, factors such as the following: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions; (ii) organization specific risks such as credit concentrations, collateral specific risks, nature, and size of the portfolio and external factors that may ultimately impact credit quality, and (iii) other limitations associated with factors such as changes in underwriting and loan resolution strategies, among others. The qualitative factors applied on January 1, 2023, and September 30, 2023, 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 ACL calculated by the model. The evaluation of qualitative factors is inherently imprecise and requires significant management judgement.

The ACL can also be impacted by factors outside of management’s control, which include unanticipated changes in asset quality of the portfolio, such as deterioration in borrower delinquencies, or credit scores in our residential real estate and consumer portfolio. Further, the current fair value of collateral is utilized to assess the expected credit losses when a financial asset is considered to be collateral dependent.

Our process for determining the ACL is further discussed in “Note 1 – Organization and Basis of Presentation”, included in Item 1 of this Form 10-Q.

Results of Operations

The following table sets forth components of our results of operations:


	As of and for the three months ended September 30,			As of and for the nine months ended September 30,
($ in thousands, except per share amounts)	2023			2022			2023			2022
Net interest income	$	73,410		$	68,486		$	221,362		$	168,356
Provision for credit losses	3,890			3,750			11,672			12,450
Noninterest income	18,650			24,953			61,871			70,948
Noninterest expense	56,176			55,548			170,485			183,683
Income before income taxes	31,994			34,141			101,076			43,171
Provision for income taxes	6,762			7,628			21,557			8,559
Net income	25,232			26,513			79,519			34,612

Diluted earnings per share	$	1.00		$	1.04		$	3.13		$	1.49
Return on average total assets	1.34		%	1.52		%	1.42		%	0.70		%
Return on average stockholders' equity	12.03		%	14.50		%	12.97		%	6.90		%
Net interest margin	4.23		%	4.26		%	4.28		%	3.66		%
Net interest margin - FTE basis (non-GAAP) (1)	4.30		%	4.31		%	4.36		%	3.75		%
Efficiency ratio	61.02		%	59.45		%	60.19		%	76.76		%
Noninterest income to total revenue (2)	20.26		%	26.71		%	21.84		%	29.65		%
(1) See section entitled “Non-GAAP Financial Measures and Reconciliations” for information regarding non-GAAP financial measures and a reconciliation to the most comparable GAAP equivalent.
(2) Total revenue is net interest income plus noninterest income.

General

Our results of operations depend significantly on net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of interest income on loans and investment securities and interest expense on interest-bearing liabilities, consisting primarily of deposits and borrowings. Our results of operations are also dependent on our generation of noninterest income, consisting primarily of income from mortgage banking services, service charges on deposit accounts, trust and investment advisory fees and credit and debit card fees. Other factors contributing to our results

of operations include our provisions for credit losses, income taxes, and noninterest expenses, such as salaries and employee benefits, occupancy and equipment, amortization of intangible assets and other operating costs.

Net Interest Income

Net interest income, representing interest income less interest expense, is a significant contributor to our revenues and earnings. We generate interest income from interest and dividends on interest-earning assets, which are principally comprised of loans and investment securities. We incur interest expense from interest owed or paid on interest-bearing liabilities, including interest-bearing deposits, FHLB advances and other borrowings. Net interest income and margin are shaped by the characteristics of the underlying products, including volume, term and structure of each product. We measure and monitor yields on our loans and other interest-earning assets, the costs of our deposits and other funding sources, our net interest spread and our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets.

Interest earned on our loan portfolios 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. Non-PCD loans acquired are initially recorded at fair value and the resulting discount or premium are recognized as an adjustment of the yield on the related loans.

Our net interest income can be significantly influenced by a variety of factors, including overall loan demand, economic conditions, credit risk, the amount of non-earning assets including nonperforming loans and OREO, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities, exercise of call options on borrowings or securities, a general rise or decline in interest rates, changes in the slope of the yield-curve, and balance sheet growth or contraction.

Three months ended September 30, 2023 and 2022

Our net interest income was $73.4 million for the third quarter of 2023, an increase of $4.9 million, or 7.2%, compared to the same period in 2022. Interest income on loans increased by $31.3 million for the third quarter of 2023, compared to the same period in 2022. Interest income on investment securities increased by $0.6 million for the third quarter of 2023, compared to the same period in 2022. Interest expense from total interest-bearing liabilities increased by $28.1 million for the third quarter of 2023, compared to the same period in 2022.

Total average loans grew to $6.2 billion at September 30, 2023, an increase of $0.7 billion or 12.1%, compared to September 30, 2022, due to organic growth in our loan portfolios. Yield on loans increased 149 basis points in the third quarter of 2023, compared to the same period in 2022, primarily due to the rising interest rate environment and its impact on variable rate loans in the loan portfolio and higher yields on new originations.

Average interest-bearing liabilities increased $0.7 billion, or 15.6%, for the third quarter of 2023, compared to the same period in 2022, primarily to support the growth in our loan portfolio. Average interest-bearing deposits increased $0.8 billion, or 19.4%, in the third quarter of 2023, compared to the same period in 2022. Average FHLB borrowings decreased $0.1 billion, or 47.4%, in the third quarter of 2023, compared to the same period in 2022.

Our net interest margin was 4.23% for the third quarter of 2023, compared to 4.26% for the same period in 2022, a decrease of 3 basis points. We experienced a 156 basis points increase in yield from earning assets while our total cost of funds increased by 224 basis points, for the third quarter of 2023 as compared to the same period in 2022. In the third quarter of 2023, we saw the level of increase in our total cost of funds exceed the level of increase in yield from earning assets primarily as a result of the mix shift within our deposit base in certificates of deposits. While we expect our cost of funds to continue to rise in the fourth quarter of 2023, we anticipate the magnitude of increase in our cost of funds to be less than the level experienced in the third quarter of 2023.

Nine months ended September 30, 2023 and 2022

Our net interest income was $221.4 million for the nine months ended September 30, 2023, an increase of $53.0 million, or 31.5%, compared to the same period in 2022. Interest income on loans increased by $114.8 million for the nine months ended September 30, 2023, compared to the same period in 2022. Interest income on investment securities increased by $3.4 million for the nine months ended September 30, 2023, compared to the same period in 2022. Interest expense from

total interest-bearing liabilities increased by $69.1 million for the nine months ended September 30, 2023, compared to the same period in 2022.

Total average loans grew to $6.1 billion at September 30, 2023, an increase of $1.1 billion, compared to September 30, 2022, primarily due to organic growth in our loan portfolios and the Pioneer merger. Yield on loans increased 167 basis points for the nine months ended September 30, 2023, compared to the same period in 2022, primarily due to the rising interest rate environment and its impact on variable rate loans in the loan portfolio and higher yields on new originations.

Average interest-bearing liabilities increased $0.7 billion, or 18.3%, for the nine months ended September 30, 2023, compared to the same period in 2022. Average interest-bearing deposits increased $0.6 billion, or 15.0%, for the nine months ended September 30, 2023, compared to the same period in 2022. Average FHLB borrowings increased $0.2 billion, or 160.8%, for the nine months ended September 30, 2023, compared to the same period in 2022.

Our net interest margin was 4.28% for the nine months ended September 30, 2023, compared to 3.66% for the same period in 2022, an increase of 62 basis points. We experienced a 193 basis point increase in yield from earning assets and our total cost of funds increased by 185 basis point for the nine months ended September 30, 2023, compared to the same period in 2022.

The following tables set forth information related to our average balance sheet, average yields on assets, and average costs of liabilities for the periods presented. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated.

As of and for the three months ended September 30,:


	2023							2022
(In thousands)	Average Balance		Interest			Average Yield/Rate		Average Balance		Interest			Average Yield/Rate
Interest Earning Assets

Loans (1)	6,180,684		99,565			6.44	%	5,512,846		68,270			4.95	%
Investment securities	545,257		4,226			3.10	%	613,325		3,644			2.38	%
Interest-bearing cash and other assets	221,559		2,984			5.39	%	308,482		1,849			2.40	%
Total earning assets	6,947,500		106,775			6.15	%	6,434,653		73,763			4.59	%
Other assets	557,988							519,663
Total assets	$	7,505,488						$	6,954,316

Interest-bearing liabilities
Demand and NOW deposits	$	466,837	$	3,813		3.27	%	$	202,290	$	495		0.98	%
Savings deposits	439,172		680			0.62	%	506,548		227			0.18	%
Money market deposits	2,026,028		7,997			1.58	%	2,617,452		1,632			0.25	%
Certificates of deposits	1,748,515		18,406			4.21	%	593,479		920			0.62	%
Total deposits	4,680,552		30,896			2.64	%	3,919,769		3,274			0.33	%
Repurchase agreements	26,549		65			0.98	%	51,264		51			0.40	%
Total deposits and repurchase agreements	4,707,101		30,961			2.63	%	3,971,033		3,325			0.33	%
FHLB borrowings	84,332		1,139			5.40	%	160,310		761			1.90	%
Other long-term borrowings	78,680		1,265			6.44	%	80,031		1,191			5.95	%
Total interest-bearing liabilities	4,870,113		33,365			2.74	%	4,211,374		5,277			0.50	%
Noninterest-bearing deposits	1,654,090							1,924,055
Other liabilities	142,027							87,338
Stockholders' equity	839,258							731,549
Total liabilities and stockholders' equity	$	7,505,488						$	6,954,316

Net interest income			$	73,410						$	68,486
Net interest spread			3.41		%					4.09		%
Net interest margin			4.23		%					4.26		%
Net interest margin - FTE basis (non-GAAP) (2)			4.30		%					4.31		%
(1) Includes loans held-for-investment, including nonaccrual loans, and loans held-for-sale.
(2) See section entitled “Non-GAAP Financial Measures and Reconciliations” for information regarding non-GAAP financial measures and a reconciliation to the most comparable GAAP equivalent

As of and for the nine months ended September 30,:


	2023							2022
(In thousands)	Average Balance		Interest			Average Yield/Rate		Average Balance		Interest			Average Yield/Rate
Interest Earning Assets

Loans (1)	6,144,057		283,486			6.15	%	5,015,680		168,713			4.48	%
Investment securities	559,855		12,617			3.00	%	615,726		9,252			2.00	%
Interest-bearing cash and other assets	187,468		7,607			5.41	%	496,349		3,687			0.99	%
Total earning assets	6,891,380		303,710			5.88	%	6,127,755		181,652			3.95	%
Other assets	553,628							473,909
Total assets	$	7,445,008						$	6,601,664

Interest-bearing liabilities
Demand and NOW deposits	$	343,112	$	7,171		2.79	%	$	214,862	$	848		0.53	%
Savings deposits	452,298		1,616			0.48	%	497,240		451			0.12	%
Money market deposits	2,142,301		18,939			1.18	%	2,567,406		3,644			0.19	%
Certificates of deposits	1,407,264		38,078			3.61	%	498,753		2,077			0.56	%
Total deposits	4,344,975		65,804			2.02	%	3,778,261		7,020			0.25	%
Repurchase agreements	29,953		163			0.73	%	59,572		74			0.17	%
Total deposits and repurchase agreements	4,374,928		65,967			2.01	%	3,837,833		7,094			0.25	%
FHLB borrowings	335,485		12,576			5.00	%	128,654		1,680			1.74	%
Other long-term borrowings	79,801		3,805			6.36	%	82,768		4,522			7.28	%
Total interest-bearing liabilities	4,790,214		82,348			2.29	%	4,049,255		13,296			0.44	%
Noninterest-bearing deposits	1,705,392							1,805,982
Other liabilities	131,628							77,436
Stockholders’ equity	817,774							668,991
Total liabilities and stockholders’ equity	$	7,445,008						$	6,601,664

Net interest income			$	221,362						$	168,356
Net interest spread			3.59		%					3.51		%
Net interest margin			4.28		%					3.66		%
Net interest margin - FTE basis (non-GAAP) (2)			4.36		%					3.75		%
(1) Includes loans held-for-investment, including nonaccrual loans, and loans held-for-sale.
(2) See section entitled “Non-GAAP Financial Measures and Reconciliations” for information regarding non-GAAP financial measures and a reconciliation to the most comparable GAAP equivalent

Rate-Volume Analysis

The tables below present the effect of volume and rate changes on interest income and expense. Changes due to volume are changes in the average balance multiplied by the previous period’s average rate. Changes due to rate are changes in the average rate multiplied by the average balance from the prior period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.


	For the three months ended September 30,
	2023 Versus 2022 Increase (Decrease) Due to:
(In thousands)	Rate		Volume		Total
Interest Earning Assets

Loans (1)	$	22,310	$	8,985	$	31,295
Investment securities	916		(334)		582
Interest-bearing cash	1,476		(341)		1,135
Total earning assets	24,702		8,310		33,012
Interest-bearing liabilities
Demand and NOW deposits	2,129		1,189		3,318
Savings deposits	479		(26)		453
Money market deposits	6,647		(282)		6,365
Certificates of deposits	13,086		4,400		17,486
Total deposits	22,341		5,281		27,622
Repurchase agreements	21		(7)		14
Total deposits and repurchase agreements	22,362		5,274		27,636
FHLB borrowings	509		(131)		378
Other long-term borrowings	94		(20)		74
Total interest-bearing liabilities	22,965		5,123		28,088
Net interest income	$	1,737	$	3,187	$	4,924
(1) Includes loans held-for-investment, including nonaccrual loans, and loans held-for-sale.


	For the nine months ended September 30,
	2023 Versus 2022 Increase (Decrease) Due to:
(In thousands)	Rate		Volume		Total
Interest Earning Assets

Loans (1)	$	71,498	$	43,275	$	114,773
Investment securities	4,111		(746)		3,365
Interest-bearing cash	4,555		(635)		3,920
Total earning assets	80,164		41,894		122,058

Interest-bearing liabilities
Demand and NOW deposits	5,552		771		6,323
Savings deposits	1,202		(37)		1,165
Money market deposits	15,795		(500)		15,295
Certificates of deposits	27,040		8,961		36,001
Total deposits	49,589		9,195		58,784
Repurchase agreements	104		(15)		89
Total deposits and repurchase agreements	49,693		9,180		58,873
FHLB borrowings	5,859		5,037		10,896
Other long-term borrowings	(559)		(158)		(717)
Total interest-bearing liabilities	54,993		14,059		69,052

Net interest income	$	25,171	$	27,835	$	53,006
(1) Includes loans held-for-investment, including nonaccrual loans, and loans held-for-sale.

Provision for Credit Losses

We established an allowance for credit losses through a provision for credit losses charged as an expense in our consolidated statements of income. The provision for credit losses is the amount of expense that, based on our judgment, is required to maintain the allowance for credit losses at an adequate level to absorb expected losses 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 credit losses and corresponding provision for credit 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 credit losses is increased by the provision for credit losses and is decreased by charge-offs, net of recoveries on prior loan charge-offs.

We had a provision for credit losses of $3.9 million for the third quarter of 2023, compared to $3.8 million for the same period in 2022. Included in the provision for credit losses for the third quarter of 2023 was $0.3 million of provision for credit losses on unfunded commitments, which was recorded in other noninterest expense for the same period in 2022.

We had a provision for credit losses of $11.7 million for the nine months ended September 30, 2023, compared to $12.5 million for the same period in 2022. Included in the provision for credit losses for the nine months ended September 30, 2023 was $1.1 million of provision for credit losses on unfunded commitments, which was recorded in other noninterest expense for the same period in 2022. Included in the provision for credit losses for the nine months ended September 30, 2022 was a provision required on certain non-impaired loans acquired at a premium upon the closing of the Pioneer merger and the provision required for organic growth in the loan portfolio. The premium on certain of the loans acquired in our merger with Pioneer was due to higher contractual interest rates on such loans, compared to market interest rates on the closing date of the merger. The provision on the loans acquired at a premium was $2.9 million ($0.10 diluted earnings per share) during the nine months ended September 30, 2022. This provision, however, was not due to credit deterioration on these loans since the closing date of the merger.

Noninterest Income

The following table presents noninterest income:


	For the three months ended September 30,				For the nine months ended September 30,
(In thousands)	2023		2022		2023		2022
Service charges on deposit accounts	$	5,475	$	4,807	$	15,848	$	13,111
Credit and debit card fees	2,996		3,103		9,034		8,508
Trust and investment advisory fees	1,398		1,552		4,337		5,408
Income from mortgage banking services, net	7,413		13,785		26,501		40,017
Other	1,368		1,706		6,151		3,904
Total noninterest income	$	18,650	$	24,953	$	61,871	$	70,948

Three months ended September 30, 2023 and 2022

Our noninterest income decreased $6.3 million to $18.7 million for the third quarter of 2023 from $25.0 million for the same period in 2022, primarily due to a decrease in income from mortgage banking services, net.

Service charges on deposit accounts includes overdraft and non-sufficient funds charges, treasury management services provided to our business customers, and other maintenance fees on deposit accounts. For the third quarter of 2023, service charges on deposit accounts increased $0.7 million, compared to the same period in 2022, primarily due to increased treasury management service fee income compared to the same period in 2022.

Credit and debit card fees represent interchange income from credit and debit card activity and referral fees earned from processing fees on card transactions by our business customers. Credit and debit card fees decreased $0.1 million for the third quarter of 2023 compared to the same period in 2022, as card transaction volumes were similar.

Trust and investment advisory fees represent fees we receive in connection with our investment advisory and custodial management services of investment accounts. Trust and investment advisory fees decreased $0.2 million for the third quarter of 2023 as compared to the same period in 2022.

The components of income from mortgage banking services were as follows:


	For the three months ended September 30,
(In thousands)	2023		2022
Net sale gains and fees from mortgage loan originations including loans held-for-sale changes in fair value and hedging	$	3,689	$	3,942

Mortgage servicing income	3,954		4,234
MSR capitalization and changes in fair value, net of derivative activity	(230)		5,609


Income from mortgage banking services, net	$	7,413	$	13,785

For the third quarter of 2023, income from mortgage banking services decreased $6.4 million, compared to the same period in 2022. Total loan originations for sale were $200.1 million for the third quarter of 2023, a decline of $71.5 million from $271.6 million for the same period in 2022 leading to the decline in revenue related to net sale gains and fees from loan originations, including fair value changes in the held-for-sale portfolio and hedging activity. MSR capitalization and changes in fair value, net of derivative activity, decreased $5.8 million in the third quarter of 2023, compared to the same period in 2022. The decrease in revenue related to our MSRs was primarily the result of changes in market interest rates and our corresponding hedging positions. We recognize fair value adjustments to our MSR asset, which includes changes in assumptions to the valuation model and pay-offs and pay-downs of the MSR portfolio. We also maintain a hedging strategy to manage a portion of the risk associated with changes in the fair value of our MSR portfolio. Changes in fair value of the derivative instruments used to economically hedge the MSRs are also included as a component of income from mortgage banking services. Due to a number of factors and until we see a change in these factors, including rising interest rates, low inventory in the housing market, lower refinance volumes and a decrease in margin on loans sales, for the immediate future, we do not expect revenue from mortgage banking activities to return to levels seen in prior years which will reduce the amount of income from mortgage banking services, net, recorded in future periods in comparison to prior year periods.

Other noninterest income decreased $0.3 million for the third quarter of 2023 compared to the same period in 2022, primarily due to a write-down of an other real estate owned property.

Nine months ended September 30, 2023 and 2022

Our noninterest income decreased $9.1 million to $61.9 million for the nine months ended September 30, 2023 from $70.9 million for the same period in 2022, primarily due to a decrease in income from mortgage banking services, net.

For the nine months ended September 30, 2023, service charges on deposit accounts increased $2.7 million, compared to the same period in 2022, primarily due to increased treasury management service fee income compared to the same period in 2022.

Credit and debit card fees increased $0.5 million for the nine months ended September 30, 2023 compared to the same period in 2022, due primarily to increased card transaction volumes.

Trust and investment advisory fees decreased $1.1 million for the nine months ended September 30, 2023 as compared to the same period in 2022, primarily due to lower average assets under management.

The components of income from mortgage banking services were as follows:


	For the nine months ended September 30,
(In thousands)		2023		2022
Net sale gains and fees from mortgage loan originations including loans held-for-sale changes in fair value and hedging		$	11,446	$	16,639

Mortgage servicing income		11,614		11,071
MSR capitalization and changes in fair value, net of derivative activity		3,441		12,307


Income from mortgage banking services, net		$	26,501	$	40,017

For the nine months ended September 30, 2023, income from mortgage banking services decreased $13.5 million, compared to the same period in 2022. Total loan originations for sale were $634.0 million for the nine months ended September 30, 2023, a decline of $262.9 million from $896.9 million for the same period in 2022. We retain servicing rights on the majority of mortgage loans that we sell, which drove the increase in servicing income of $0.5 million to $11.6

million for the nine months ended September 30, 2023, from $11.1 million for the nine months ended September 30, 2022. MSR capitalization and changes in fair value, net of derivative activity, decreased $8.9 million in the nine months ended September 30, 2023, compared to the same period in 2022. The decrease in income related to our MSRs was primarily the result of lower relative increases in market interest rates used in estimating the fair value of MSRs, and our corresponding hedging positions.

Other noninterest income increased $2.2 million for the nine months ended September 30, 2023 compared to the same period in 2022, primarily due to an increase in the fair value of investments related to our deferred compensation plan.

Noninterest Expense

The following table presents noninterest expense:


	For the three months ended September 30,				For the nine months ended September 30,
(In thousands)	2023		2022		2023		2022
Salary and employee benefits	$	33,968	$	32,508	$	103,073	$	101,981
Occupancy and equipment	8,216		8,216		24,338		22,802
Amortization of intangible assets	899		935		3,993		2,197
Merger-related expenses	—		—		—		18,751
Other	13,093		13,889		39,081		37,952
Total noninterest expenses	$	56,176	$	55,548	$	170,485	$	183,683

Three months ended September 30, 2023 and 2022

Our noninterest expenses increased $0.6 million to $56.2 million for the third quarter of 2023, from $55.5 million for the same period in 2022.

Salary and employee benefits increased $1.5 million to $34.0 million for the third quarter of 2023, from $32.5 million for the same period in 2022. The increase is primarily due to annual compensation increases occurring earlier in 2023, partially offset by lower commissions related to our mortgage operations.

Other noninterest expenses decreased $0.8 million to $13.1 million for the third quarter of 2023, from $13.9 million for the same period in 2022, primarily due to lower data processing expenses.

Nine months ended September 30, 2023 and 2022

Our noninterest expenses decreased $13.2 million to $170.5 million for the nine months ended September 30, 2023, from $183.7 million for the same period in 2022. The decrease is primarily due to the merger-related expenses of $18.8 million ($0.63 per diluted share) incurred for the nine months ended September 30, 2022 related to our merger with Pioneer that was completed on April 1, 2022.

Amortization of intangible assets increased $1.8 million to $4.0 million for the nine months ended September 30, 2023, from $2.2 million for the same period in 2022, primarily due to accelerated amortization of the core deposit intangible asset recognized in conjunction with the merger with Pioneer. We periodically monitor intangible assets and goodwill for impairment.

Income Taxes

Three months ended September 30, 2023 and 2022

We had income tax expense for the third quarter of 2023 of $6.8 million, compared to income tax expense of $7.6 million for the same period in 2022. The decrease in income tax expense was due to our decreased income during the third quarter of 2023. Our effective tax rate was 21.1% for the third quarter of 2023, compared to 22.3% for the same period in 2022.

Nine months ended September 30, 2023 and 2022

We had income tax expense for the nine months ended September 30, 2023 of $21.6 million, compared to $8.6 million for the same period in 2022. The increase in income tax expense was primarily due to our increased income during the period

ended September 30, 2023. Our effective tax rate was 21.3% for the nine months ended September 30, 2023, compared to 19.8% for the same period in 2022.

Financial Condition

Balance Sheet

Our total assets were $7.8 billion and $7.4 billion at September 30, 2023 and December 31, 2022, respectively. Our total loans held-for-investment, net of deferred fees, costs, premiums and discounts were $6.2 billion at September 30, 2023, an increase of $0.3 billion from December 31, 2022, which was due to organic growth.

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 September 30, 2023 and December 31, 2022. All available-for sale securities are carried at fair value and may be used for liquidity purposes should management consider it to be in our best interest.

Our securities available-for-sale decreased by $41.0 million to $496.0 million at September 30, 2023, compared to December 31, 2022. The decrease was primarily due to amortization of the portfolio and a decrease in fair value due to the rising interest rate environment. During the period ended September 30, 2023, the securities held-to-maturity decreased $1.5 million to $37.4 million.

The following table is a summary of our investment portfolio as of:


	September 30, 2023				December 31, 2022
(In thousands)	Carrying Amount		% of Portfolio		Carrying Amount		% of Portfolio
Available-for-sale:
U.S. treasury	$	52,853	10.7	%	$	56,649	10.5	%
U.S. agency	2,055		0.3	%	2,834		0.5	%
Obligations of states and political subdivisions	24,488		4.9	%	24,899		4.6	%
Mortgage backed - residential	100,553		20.3	%	116,135		21.6	%
Collateralized mortgage obligations	184,457		37.2	%	204,265		38.1	%
Mortgage backed - commercial	116,911		23.6	%	117,336		21.9	%
Other debt	14,675		3.0	%	14,855		2.8	%
Total available-for-sale	$	495,992	100.0	%	$	536,973	100.0	%
Held-to-maturity:


Obligations of states and political subdivisions	$	25,500	68.2	%	$	25,378	65.2	%
Mortgage backed - residential	7,859		21.0	%	8,705		22.4	%
Collateralized mortgage obligations	4,051		10.8	%	4,818		12.4	%


Total held-to-maturity	$	37,410	100.0	%	$	38,901	100.0	%

The following table shows the weighted average yield to average life of each category of investment securities as of September 30, 2023:


(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	$	14,726	2.22	%	$	25,354	1.28	%	$	12,773	1.29	%	$	—	—	%
U.S. agency	—		—	%	1,190		6.58	%	865		6.24	%	—		—	%
Obligations of states and political subdivisions	—		—	%	—		—	%	10,721		3.18	%	13,767		2.96	%
Mortgage backed - residential	118		4.77	%	34,458		2.38	%	41,868		1.81	%	24,109		2.46	%
Collateralized mortgage obligations	3,463		2.68	%	31,773		3.92	%	139,254		3.62	%	9,967		1.77	%
Mortgage backed - commercial	1,456		4.38	%	34,612		3.97	%	80,843		2.52	%	—		—	%
Other debt	—		—	%	—		—	%	11,990		2.82	%	2,685		3.78	%
Total available-for-sale	$	19,763	2.48	%	$	127,387	3.02	%	$	298,314	2.93	%	$	50,528	2.53	%
Held-to-maturity:


Obligations of states and political subdivisions	$	—	—	%	$	1,023	2.05	%	$	—	—	%	$	24,477	3.52	%
Mortgage backed - residential	—		—	%	4,795		2.55	%	681		3.13	%	2,383		3.22	%
Collateralized mortgage obligations	261		2.00	%	3,790		2.71	%	—		—	%	—		—	%


Total held-to-maturity	$	261	2.00	%	$	9,608	2.56	%	$	681	3.13	%	$	26,860	3.50	%

Loans

Our loan portfolio represents a broad range of borrowers primarily in our markets in Texas, Kansas, Colorado, New Mexico, and Arizona, primarily comprised of commercial and industrial, commercial real estate, residential real estate, and public finance 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. Our lending focus continues to be on operating companies, including commercial and industrial loans and lines-of-credit, as well as owner occupied commercial real estate loans.

Total loans, net of deferred origination fees, premiums, and discounts as of September 30, 2023 and December 31, 2022 were $6.2 billion and $5.9 billion, respectively.

The following table sets forth the composition of our loan portfolio, as of:


	September 30, 2023				December 31, 2022
(In thousands)	Amount		% of total loans		Amount		% of total loans
Commercial and industrial	$	2,459,358	39.8	%	$	2,310,929	39.1	%
Commercial real estate:
Non-owner occupied	767,135		12.4	%	779,546		13.2	%
Owner occupied	631,352		10.2	%	636,272		10.8	%
Construction and land	329,433		5.3	%	327,817		5.5	%
Multifamily	114,535		1.9	%	102,068		1.7	%
Total commercial real estate	1,842,455		29.8	%	1,845,703		31.2	%
Residential real estate	1,059,074		17.1	%	1,003,931		17.0	%
Public finance	602,844		9.8	%	590,284		10.0	%
Consumer	37,681		0.6	%	42,588		0.7	%
Other	178,110		2.9	%	118,397		2.0	%
Total loans	$	6,179,522	100.0	%	$	5,911,832	100.0	%

Commercial and industrial loans include loans to commercial customers for use in normal business operations to finance working capital needs, equipment and inventory purchases, and other expansion projects. 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 (“CRE”) 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. Non-owner occupied CRE loans were 82.9% of the Company’s risk based capital, or 12.4% of total loans as of September 30, 2023. Non-owner occupied CRE loans associated with office space were $101.8 million, or 1.6% of total loans as of September 30, 2023. Owner occupied CRE loans associated with office space were $139.7 million, or 2.3% of total loans as of September 30, 2023.

Public finance loans include loans to our charter school and municipal based customers.

Consumer loans include direct consumer installment loans, credit card accounts, overdrafts and other revolving loans.

Other loans consist of loans to nondepository financial institutions, lease financing receivables and loans for agricultural production.

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following tables is based on the contractual maturities of individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of these loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties. The following tables summarize the loan maturity distribution by type and related interest rate characteristics as of September 30, 2023:


(In thousands)	One year or less		After one through five years		After five through 15 years		After 15 years		Total
Commercial and industrial	$	305,811	$	1,785,639	$	338,542	$	29,366	$	2,459,358
Commercial real estate	221,682		1,080,597		477,310		62,866		1,842,455
Residential real estate	134,958		30,447		75,084		818,585		1,059,074
Public finance	—		80,434		363,655		158,755		602,844
Consumer	7,390		9,971		20,118		202		37,681
Other	31,211		125,479		15,408		6,012		178,110
Total loans	$	701,052	$	3,112,567	$	1,290,117	$	1,075,786	$	6,179,522


(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 and industrial	$	6,536	$	296,773	$	224,723	$	555	$	528,587	$	522,051
Commercial real estate	108,909		711,214		232,678		2,673		1,055,474		946,565
Residential real estate	98,924		22,248		56,354		321,627		499,153		400,229
Public finance	—		80,432		360,003		158,755		599,190		599,190
Consumer	5,570		7,419		20,118		—		33,107		27,537
Other	4,118		26,235		15,400		6,012		51,765		47,647
Total fixed interest rate loans	$	224,057	$	1,144,321	$	909,276	$	489,622	$	2,767,276	$	2,543,219
Floating or adjustable interest rates
Commercial and industrial	$	299,275	$	1,488,866	$	113,819	$	28,811	$	1,930,771	$	1,631,496
Commercial real estate	112,773		369,383		244,632		60,193		786,981		674,208
Residential real estate	36,034		8,199		18,730		496,958		559,921		523,887
Public finance	—		2		3,652		—		3,654		3,654
Consumer	1,820		2,552		—		202		4,574		2,754
Other	27,093		99,244		8		—		126,345		99,252
Total floating or adjustable interest rate loans	$	476,995	$	1,968,246	$	380,841	$	586,164	$	3,412,246	$	2,935,251
Total loans	$	701,052	$	3,112,567	$	1,290,117	$	1,075,786	$	6,179,522	$	5,478,470

Allowance for Credit Losses

We maintain the allowance for credit losses at a level we believe is sufficient to absorb expected losses in our loan portfolio given the conditions at the time and our estimates of future economic conditions. 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 credit losses charged to earnings, which increases the allowance.

In determining the provision for credit 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.

The following table presents, by loan type, the changes in the allowance for credit losses:


	For the three months ended September 30,						For the nine months ended September 30,						For the year ended December 31,
(In thousands)	2023			2022			2023			2022			2022
Balance, beginning of period	$	77,362		$	56,077		$	65,917		$	47,547		$	47,547
Impact of adopting ASC 326	—			—			5,256			—			—
Adjusted beginning balance	$	77,362		$	56,077		$	71,173		$	47,547		$	47,547
Loan charge-offs:
Commercial and industrial	(2,963)			(223)			(3,751)			(2,173)			(2,321)
Commercial real estate	—			—			—			—			—
Residential real estate	—			(24)			—			(122)			(122)
Public finance	—			—			—			—			—
Consumer	(136)			(53)			(268)			(117)			(144)
Other	—			—			—			—			—
Total loan charge-offs	(3,099)			(300)			(4,019)			(2,412)			(2,587)
Recoveries of loans previously charged-off:
Commercial and industrial	155			112			249			1,835			2,236
Commercial real estate	9			2			12			3			388
Residential real estate	627			1			648			196			221
Public finance	—			—			—			—			—
Consumer	12			36			43			59			62
Other	—			—			—			—			—
Total loan recoveries	803			151			952			2,093			2,907
Net (charge-offs) recoveries	(2,296)			(149)			(3,067)			(319)			320
Provision for credit losses (1)	3,600			3,750			10,560			12,450			18,050
Balance, end of period	$	78,666		$	59,678		$	78,666		$	59,678		$	65,917
Allowance for credit losses to total loans	1.27		%	1.07		%	1.27		%	1.07		%	1.12		%
Ratio of net charge-offs (recoveries) to average loans outstanding	0.15		%	0.01		%	0.07		%	0.01		%	(0.01)		%
(1) For the three months ended September 30, 2023 we recorded a provision for credit losses on unfunded commitments of $290; there was $350 provision for credit losses on unfunded commitments for the three months ended September 30, 2022. For the nine months ended September 30, 2023 and 2022 we recorded a provision for credit losses on unfunded commitments of $1,112 and $475, respectively. For further information, see Note 4 - Loans.

The following table presents net charge-offs (recoveries) to average loans outstanding by loan category:


	For the three months ended September 30,				For the nine months ended September 30,
(In thousands)	2023		2022		2023		2022
Commercial and industrial	0.42	%	0.02	%	0.17	%	0.02	%
Commercial real estate	—	%	—	%	—	%	—	%
Residential real estate	(0.27)	%	0.01	%	(0.09)	%	(0.02)	%
Public finance	—	%	—	%	—	%	—	%
Consumer	1.23	%	0.15	%	0.73	%	0.21	%
Other	—	%	—	%	—	%	—	%

Allocation of Allowance for Credit Losses

The following table presents the allocation of the allowance for credit losses by category and the percentage of the allocation of the allowance for credit losses by category to total loans listed as of:


	September 30, 2023				December 31, 2022
(In thousands)	Allowance Amount		% of loans in each category to total loans		Allowance Amount		% of loans in each category to total loans
Commercial and industrial	$	34,641	39.8	%	$	40,785	39.1	%
Commercial real estate	23,102		29.8	%	19,754		31.2	%
Residential real estate	13,157		17.1	%	2,963		17.0	%
Public finance	5,641		9.8	%	1,664		10.0	%
Consumer	702		0.6	%	352		0.7	%
Other	1,423		2.9	%	399		2.0	%
Total	$	78,666	100.0	%	$	65,917	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, accrual loans greater than 90 days past due, and other real estate owned and other repossessed assets. The accrual of interest on loans is discontinued, or the loan is placed on nonaccrual, when the full collection of principal and interest is in doubt. We do not generally accrue interest on loans that are 90 days or more past due. When a loan is placed on nonaccrual, previously accrued but unpaid interest is reversed and charged against interest income and future accruals of interest are discontinued. Payments by borrowers for loans on nonaccrual are applied to loan principal. Loans are returned to accrual status when, in our judgment, the borrower’s ability to satisfy principal and interest obligations under the loan agreement has improved sufficiently to reasonably assure recovery of principal and the borrower has demonstrated a sustained period of repayment performance. In general, we require a minimum of six consecutive months of timely payments in accordance with the contractual terms before returning a loan to accrual status.

The following table sets forth our nonperforming assets as of:


(In thousands)	September 30, 2023			December 31, 2022
Nonaccrual loans:
Commercial and industrial	$	12,035		$	9,494
Commercial real estate	5,110			8,283
Residential real estate	20,554			10,628

Consumer	1			93
Other	2,832			471
Total nonaccrual loans	40,532			28,969

Accrual loans greater than 90 days past due	211			98
Total nonperforming loans (1)	40,743			29,067
Other real estate owned and foreclosed assets, net	8,395			6,358
Total nonperforming assets	$	49,138		$	35,425
Nonaccrual loans to total loans	0.66		%	0.49		%
Nonperforming loans to total loans (2)	0.66		%	0.49		%
Nonperforming assets to total assets (2)	0.63		%	0.48		%
Allowance for credit losses to nonaccrual loans	194.08		%	227.54		%
(1) On January 1, 2023, we adopted ASU 2022-02, whereby we no longer recognize or account for TDRs. The loans previously classified as accrual TDRs are no longer considered nonperforming. We have adjusted prior periods to reflect this change in accounting. (2) Nonperforming loans include nonaccrual loans and accrual loans greater than 90 days past due.

Deposits

Deposits represent our primary source of funds. Total deposits increased by $0.6 billion to $6.3 billion at September 30, 2023, compared to December 31, 2022.

We are focused on growing our core deposits through relationship-based banking with our business and consumer clients. The following table presents our deposits by customer type as of:


($ in thousands)	September 30, 2023		December 31, 2022
Consumer
Noninterest bearing deposit accounts	$	366,366	$	416,709
Interest-bearing deposit accounts:
Demand and NOW deposits	33,340		25,940
Savings deposits	356,890		418,101
Money market deposits	1,149,365		1,375,671
Certificates of deposits	1,366,255		662,831
Total interest-bearing deposit accounts	2,905,850		2,482,543
Total consumer deposits	$	3,272,216	$	2,899,252
Business
Noninterest bearing deposit accounts	$	1,244,284	$	1,403,781
Interest-bearing deposit accounts:
Demand and NOW deposits	443,191		236,641
Savings deposits	85,234		33,753
Money market deposits	859,516		907,379
Certificates of deposits	77,228		40,874
Total interest-bearing deposit accounts	1,465,169		1,218,647
Total business deposits	$	2,709,453	$	2,622,428
Wholesale deposits (1)	$	358,178	$	243,382
Total deposits	$	6,339,847	$	5,765,062
(1) Wholesale deposits consist of brokered deposits included in our consolidated balance sheets within interest-bearing accounts and in Note 7 - Deposits within certificates of deposits and savings and money market accounts.

The following table sets forth the average balance amounts and the average rates paid on deposits held by us:


	For the three months ended September 30,								For the nine months ended September 30,
	2023				2022				2023				2022
(Dollars in thousands)	Average Balance		Average Rate Paid		Average Balance		Average Rate Paid		Average Balance		Average Rate Paid		Average Balance		Average Rate Paid
Noninterest-bearing demand deposit accounts	$	1,654,090	—	%	$	1,924,055	—	%	$	1,705,392	—	%	$	1,805,982	—	%
Interest-bearing deposit accounts:
Interest-bearing demand accounts	428,471		3.47	%	159,905		1.12	%	300,674		3.08	%	169,191		0.58	%
Savings accounts and money market accounts	2,465,200		1.41	%	3,124,000		0.24	%	2,594,599		1.06	%	3,064,646		0.18	%
NOW accounts	38,366		1.08	%	42,385		0.43	%	42,438		0.76	%	45,671		0.34	%
Certificate of deposit accounts	1,748,515		4.21	%	593,479		0.62	%	1,407,264		3.61	%	498,753		0.56	%
Total interest-bearing deposit accounts	4,680,552		2.64	%	3,919,769		0.33	%	4,344,975		2.02	%	3,778,261		0.25	%
Total deposits	$	6,334,642	1.95	%	$	5,843,824	0.22	%	$	6,050,367	1.45	%	$	5,584,243	0.17	%

As of September 30, 2023 and December 31, 2022, approximately $2.0 billion or 32.0% and $2.4 billion or 41.6%, respectively, of our deposit portfolio was uninsured. As of September 30, 2023 and December 31, 2022, approximately $1.6 billion or 25.4% and $1.7 billion or 28.7%, respectively, of our deposit portfolio was uninsured and uncollateralized. The uninsured and uninsured and uncollateralized amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.

We actively participate in the IntraFi Cash Service (“ICS”) / Certificate of Deposit Account Registry Service (“CDARS”) program which provides FDIC insurance coverage for clients that maintain larger deposit balances. Deposits in the ICS /

CDARS program totaled $0.5 billion, or 8.1% of all deposits as of September 30, 2023, and $0.2 billion, or 4.1% of all deposits as of December 31, 2022.

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 September 30,:


(In thousands)	2023
Three months or less	$	41,374
Over three months through six months	51,135
Over six through twelve months	87,301
Over twelve months through three years	74,610
Over three years	664
Total	$	255,084

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 September 30, 2023, FirstSun had available cash and cash equivalents of $34.9 million and debt outstanding of $78.9 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 2022 or 2023 and is not currently required. At September 30, 2023, the Bank could pay dividends to FirstSun of approximately $165.5 million without prior regulatory approval. During the nine months ended September 30, 2023, the Bank paid dividends totaling $26.0 million to FirstSun.

Bank

As more fully discussed in our 2022 Form 10-K, we regularly monitor our liquidity position and make adjustments to the balance between sources and uses of funds as we deem appropriate. At September 30, 2023, our liquid assets, which consist of cash and amounts due from banks and interest-bearing deposits in other financial institutions, amounted to $435.6 million, or 5.6% of total assets, compared to $307.9 million, or 4.1% of total assets, at December 31, 2022. The increase in our liquid assets was primarily due to an increase in cash held at the Federal Reserve. At September 30, 2023, approximately 82% of the investment securities portfolio was pledged as collateral to secure public deposits and repurchase agreements. Our unencumbered available-for-sale securities at September 30, 2023 were $91.4 million, or 1.2% of total assets, compared to $120.4 million, or 1.6% of total assets, at December 31, 2022.

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 September 30, 2023, loans as a percentage of customer deposits were 97.5%, compared with 102.5% at December 31, 2022. For additional information related to our deposits, see Deposits section above. We are also a member of the FHLB and FRB, from which we can borrow for leverage or liquidity purposes. The FHLB and FRB requires that securities and qualifying loans be pledged to secure any advances. Liquidity sources available to us for immediate funding at September 30, 2023, are as follows:


FHLB borrowings available	$	1,051,446
Fed Funds lines	1,980,993

Unused lines with other financial institutions	279,908
Immediate funding availability	$	3,312,347

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 September 30, 2023 was $843.7 million, compared to $774.5 million at December 31, 2022, an increase of $69.2 million, or 8.9%. The increase in stockholders’ equity relates primarily to net income for the nine months ended September 30, 2023. We did not pay a dividend to our common shareholders for the three or nine months ended September 30, 2023 and 2022.

Capital Adequacy

We are subject to various regulatory capital requirements administered by the federal banking agencies. Management routinely analyzes our capital to seek to ensure an optimized capital structure. For further information on capital adequacy see Note 14 - Regulatory Capital Matters to the consolidated financial statements.

Material Contractual Obligations, Commitments, and Contingent Liabilities

We have entered into contractual obligations in the normal course of business that involve elements of credit risk, interest rate risk and liquidity risk.

The following table summarizes our material contractual obligations as of September 30, 2023. 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	7	$	4,563,278	$	4,563,278	$	—	$	—	$	—
Certificates of deposit	7	1,776,569		1,347,310		418,262		8,038		2,959
Securities sold under agreements to repurchase	8	25,868		25,868		—		—		—
Short-term debt:
FHLB LOC	9	330,000		330,000		—		—		—
Long-term debt:


Subordinated debt	9	78,919		—		—		—		78,919
Operating leases	17	30,183		14,023		7,775		8,153		232

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 6 - Derivative Financial Instruments to the consolidated financial statements.

In the normal course of business, various legal actions and proceedings are pending against us and our affiliates which are incidental to the business in which they are engaged. Further discussion of contingent liabilities is included in Note 17 - Commitments and Contingencies to the consolidated financial statements.

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments. Further discussion of contingent liabilities is included in Note 17 - Commitments and Contingencies to the consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Refer to the discussion of market risks included in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the 2022 Form 10-K. There has been no material change in the types of market risks we face since December 31, 2022.

Management uses a simulation model to analyze the sensitivity of net interest income to changes in interest rates across various interest rate scenarios, which seeks to demonstrate the level of interest rate risk inherent in the existing balance sheet. The analysis holds the current balance sheet values constant and does not take into account management intervention.

Additionally our simulation model incorporates various key assumptions, which we believe are reasonable, but may have an impact on the results such as: (1) we assume certain correlation rates, often referred to as “deposit beta,” for interest-bearing deposits, wherein the rates paid to customers change relative to changes in benchmark interest rates, (2) cash flows and maturities of interest sensitive assets and liabilities, (3) re-pricing characteristics for market rate sensitive instruments, (4) prepayment rates and product mix of assets and liabilities, and (5) simulations do not contemplate any actions management may undertake in response to changes in interest rates. Because of limitations in any approach used to measure interest rate risk, simulation results are not intended to forecast actual results driven by the effect of a change in market rates but to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.

The primary impact of inflation on operations is reflected in increasing operating costs and non-interest expense. Our interest bearing assets and liabilities are monetary in nature and changes in interest rates will impact our performance on net interest margin more than changes in the general rate of inflation.

The effect on net interest income over a 12-month time horizon due to hypothetical changes in market interest rates is presented in the table below. In this interest rate shock simulation, as of the periods presented, interest rates have been adjusted by instantaneous parallel changes rather than in a ramp simulation, which applies interest rate changes over time. All rates, short-term and long-term, are changed by the same amount (e.g., plus or minus 100 basis points) resulting in the shape of the yield curve remaining unchanged.


	% Change in Net Interest Income As of September 30,					% Change in Economic Value of Equity As of September 30,
Changes in Interest Rate (Basis Points)	2023		2022			2023		2022

+300	6.8	%	14.1	%		(12.7)	%	(7.5)	%
+200	4.5	%	9.4	%		(8.6)	%	(4.7)	%
+100	2.2	%	4.6	%		(4.5)	%	(2.2)	%
Base	—	%	—	%		—	%	—	%
-100	—	%	(3.5)	%		3.6	%	1.6	%
-200	(0.8)	%	N/A		(1)	6.2	%	N/A		(1)
-300	(4.6)	%	N/A		(1)	7.3	%	N/A		(1)
(1) Given the level of market interest rates, these scenarios were not considered to be meaningful as of September 30, 2022.

Item 4. Controls and Procedures

a.Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as such term is defined in Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934) as of September 30, 2023. Based on that evaluation, we concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

b.Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended September 30, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

FirstSun and its subsidiaries are from time to time subject to claims and litigation arising in the ordinary course of business. For further information regarding legal proceedings, see Note 17 - Commitments and Contingencies under the subheading “Litigation” in our unaudited consolidated financial statements contained in this report. One or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in the section titled “Risk Factors” included in the 2022 Annual Report.

Item 6. Exhibits


Exhibit No.						Description

3.1						Amended and Restated Certificate of Incorporation of FirstSun Capital Bancorp, as amended (incorporated by reference to Exhibit 3.1 to the proxy statement/prospectus contained in the Registration Statement on Form S-4 (File No. 333-258176) filed with the SEC on July 26, 2021).

3.2						Certificate of Amendment dated November 3, 2021 to the Amended and Restated Certificate of Incorporation of FirstSun (incorporated by reference to Exhibit 3.2 of the Company’s Form 10-Q for the Quarter Ended September 30, 2021).

3.3						Bylaws of FirstSun Capital Bancorp as amended and restated through October 29, 2021 (incorporated by reference to Exhibit 3.3 of the Company’s Form 10-Q for the Quarter Ended September 30, 2021).

31.1						Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).

31.2						Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).

32.1						Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101						The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, were formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income and Comprehensive Income (Loss), (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, (v) Notes to Consolidated Financial Statements.

104						Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		FIRSTSUN CAPITAL BANCORP
		(Registrant)
		/s/ Neal E. Arnold


Date:	November 9, 2023
		Neal E. Arnold
		President and Chief Executive Officer
		(Principal Executive Officer)
		/s/ Robert A. Cafera, Jr.


Date:	November 9, 2023
		Robert A. Cafera, Jr.
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)