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Item 7. Management’s Discussion and Analysis

2024-03-07 compared with 2023-03-16 · 299 added, 233 removed, 501 unchanged (52% of the section changed)

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.

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, Sunflower Bank, Logia Portfolio Management, LLC, and FEIF Capital Partners, LLC.

The following discussion is an analysis of our consolidated results of operations for the years ended December 31, 2023, 2022 and 2021, and financial condition for the years ended December 31, 2023 and 2022.

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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.

FirstSun Capital Bancorp, headquartered in Denver, Colorado, is the financial holding company for Sunflower Bank, National Association, which is headquartered in Dallas, Texas and 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, Logia Portfolio Management, LLC, and FEIF Capital Partners, 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 line includes commercial loans, commercial real estate loans, residential mortgage and other consumer loans, and a variety of commercial and consumer deposit products, including noninterest-bearing accounts, interest-bearing demand products, savings accounts, money market accounts and certificates of deposit.

Our product line includes 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.

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Merger with Pioneer Bancshares, Inc.

On April 1, 2022, we completed our merger (the “Merger” or the “Pioneer Merger”) with Pioneer Bancshares, Inc.

On April 1, 2022, we completed our 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.

The results for Pioneer are reflected in our results of operations and financial condition since 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.

Recent Banking Events

There were two significant bank failures in the first part of March 2023, primarily due to the failed banks’ lack of liquidity as depositors sought to withdraw their deposits.

Due to rising interest rates, the failed banks were unable to sell investment securities held to meet liquidity needs without realizing substantial losses.

As a result of 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.

Pandemic Update

Although the impacts of the COVID-19 pandemic to our business are diminishing, there remains many uncertainties related to COVID-19 including, among other things, the ongoing impact to our customers, employees and vendors;

the impact to the financial services and banking industry;

and the impact to the economy as a whole including rising interest rates and inflation.

Pending Merger with HomeStreet, Inc.

and Common Equity Raise

On January 16, 2024, FirstSun and Seattle-based HomeStreet, Inc.

(“HomeStreet”), the holding company of HomeStreet Bank (“HomeStreet Bank”) entered into a definitive merger agreement (the “merger agreement”).

Under the merger agreement, HomeStreet will merge with and into FirstSun, with FirstSun continuing as the surviving entity.

Immediately following the merger, HomeStreet Bank will merge with and into Sunflower Bank, with Sunflower Bank continuing as the surviving bank.

Subject to the terms and conditions of the merger agreement, at the effective time of the merger, each outstanding share of HomeStreet common stock will be converted into the right to receive 0.4345 of a share of FirstSun common stock.

The combined entity is expected to have total assets of approximately $17 billion and 129 branch locations.

The combined entity’s expanded footprint includes, FirstSun’s current presence in the Southwest and Midwest together with HomeStreet’s presence in Southern California, Hawaii and the Pacific Northwest.

The parties to the merger expect to complete the merger in the middle of 2024, subject to satisfaction of closing conditions, including receipt of customary required regulatory approvals and the approval of the merger agreement by the HomeStreet shareholders.

Concurrently with entry into the HomeStreet merger agreement, FirstSun entered into investment agreements with investors to raise capital to support the merger.

In aggregate, $175 million of common stock will be issued to those investors:

(a) $80 million of which was issued immediately following the merger announcement, and (b) the remaining $95 million of which will be issued substantially concurrently with, and subject to, the closing of the merger.

The proceeds of this equity raise are expected to support the combined entity and result in capital ratios that exceed regulatory requirements.

For additional information on the proposed merger and equity raise, see Note 27 - Subsequent Events included in our consolidated financial statements included elsewhere in this report.

Financial Highlights For 2023

We delivered strong financial results in 2023, which included:

• Net income of $59.2 million, $2.48 per diluted share (excluding merger costs, $76.2 million, $3.20 per diluted share, see the section entitled “ Non-GAAP Financial Measures and Reconciliations ” )

• Return on average assets of 0.88% (excluding merger costs, 1.13%, see the section entitled “ Non-GAAP Financial Measures and Reconciliations ” )

• Return on average equity of 8.55% (excluding merger costs, 11.01%, see the section entitled “ Non-GAAP Financial Measures and Reconciliations ” )

• Completed merger with Pioneer Bancshares, Inc., acquiring loans of $0.8 billion, total assets of $1.5 billion, and total deposits of $1.2 billion, net of purchase accounting adjustments

• Loan growth, excluding acquired Pioneer loans and PPP loans, 28.4%, see the section entitled “ Non-GAAP Financial Measures and Reconciliations ” )

• Net income of $103.5 million, $4.08 per diluted share

• Net interest margin of 4.23%

• Return on average total assets of 1.38%

• Return on average stockholders’ equity of 12.50%

• Loan growth of 6.0%

• Average deposit growth of 9.7%

• 21.2% fee revenue to total revenue 1

• Increase in net interest margin of 87 basis points to 3.87%

Net income totaled $103.5 million, or $4.08 per diluted share, in 2023, compared to $59.2 million, or $2.48 per diluted share, in 2022.

The return on average assets was 0.88% in 2022, compared to 0.79% in 2021, and the return on average equity was 8.55% in 2022, compared to 8.37% in 2021.

Net income, return on average assets and return on average equity were reduced by merger-related expenses and the provision for loan losses related to certain non-impaired loans acquired from Pioneer at a premium upon the closing of the Merger.

The reduction to net income, return on average assets and return on average equity in 2022, resulting from the aggregate of merger-related expenses and the provision for loan losses related to certain non-impaired loans acquired from Pioneer at a premium, were $17.0 million, 0.25%, and 2.46% respectively.

The reduction to net income, return on average assets and return on average equity in 2021, resulting from merger-related expenses, were $2.6 million, 0.05%, and 0.50%, respectively.

Net income in 2022 included merger costs, net of tax, of $17.0 million, or $0.72 per diluted share.

There were no merger costs recorded in 2023.

The return on average total assets was 1.38% in 2023, compared to 0.88% in 2022, and the return on average stockholders’ equity was 12.50% in 2023, compared to 8.55% in 2022.

The unfavorable impact in 2022 of merger costs, net of tax, to return on average total assets was 0.25% and to return on average stockholders’ equity was 2.46%.

1 Total revenue is net interest income plus noninterest income.

Financial Highlights

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Net interest income - fully tax equivalent ("FTE") basis (non-GAAP) (3) $ 298,517 $ 246,691 $ 160,988

Provision for loan losses $ 18,050 $ 3,000 $ 23,100

Provision for credit losses $ 18,247 $ 18,050 $ 3,000

Noninterest income $ 79,092 $ 89,566 $ 124,244

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Book value $ 35.14 $ 31.08 $ 28.56

Tangible common book value (non-GAAP) (3) $ 26.69 $ 26.31 $ 24.18

Tangible book value (non-GAAP) (3) $ 30.96 $ 26.69 $ 26.31

Performance Ratios:

Return on average assets 0.88 % 0.79 % 1.02 %

Return on average total assets 1.38 % 0.88 % 0.79 %

Return on average stockholders' equity 12.50 % 8.55 % 8.37 %

Return on tangible common equity (non-GAAP) (3) 9.40 % 9.17 % 11.00 %

Return on average tangible common equity (non-GAAP) (3) 10.45 % 9.35 % 11.50 %

Return on average tangible common stockholders' equity (non-GAAP) (3) 14.88 % 10.45 % 9.35 %

Net interest margin 4.23 % 3.87 % 3.00 %

Net interest margin (on FTE basis) (3) 4.29 % 3.95 % 3.11 %

Efficiency ratio (1) 59.81 % 72.20 % 80.38 %

Net charge-offs (recoveries) to average loans outstanding 0.13 % (0.01) % 0.09 %

Allowance for loan losses to loans 1.12 % 1.18 % 1.24 %

Allowance for credit losses to loans 1.28 % 1.12 % 1.18 %

Nonperforming loans to total loans (2) 1.01 % 0.49 % 0.70 %

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Tier 1 leverage capital to average assets 10.52 % 9.71 % 8.24 %

Average equity to average assets 10.28 % 9.43 % 10.01 %

Tangible common equity to tangible assets (non-GAAP) (3) 9.09 % 8.58 % 8.95 %

Average stockholders' equity to average total assets 11.05 % 10.28 % 9.43 %

Tangible common stockholders' equity to tangible assets (non-GAAP) (3) 9.94 % 9.09 % 8.58 %

Tangible common stockholders’ equity to tangible assets reflecting net unrealized losses on HTM securities, net of tax (non-GAAP) (3) 9.90 % 9.03 % 8.59 %

Nonfinancial Data:

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We calculate this ratio by dividing noninterest expense by the sum of net interest income and noninterest income.

(2) Nonperforming loans include nonaccrual loans, accrual troubled debt restructurings (“TDR”), and accrual loans greater than 90 days past due.

(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.

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2023 2022 2021

Total loan growth, excluding acquired Pioneer loans as of April 1, 2022 and PPP loans:

Total loans (GAAP) $ 5,911,832 $ 4,037,123 $ 3,846,357

Acquired loans at date of merger, net of purchase accounting adjustments (811,300) — —

PPP loans (4,352) (66,749) (251,101)

Total loans, excluding acquired Pioneer loans and PPP loans (non-GAAP) $ 5,096,180 $ 3,970,374 $ 3,595,256

Total loan growth, excluding acquired Pioneer loans and PPP loans (non-GAAP) $ 1,125,806 $ 375,118 $ 506,546

Total loan growth, excluding acquired Pioneer loans and PPP loans (non-GAAP) 28.4 % 10.4 % 16.4 %

Tangible stockholders’ equity and tangible book value per common share:

Total stockholders' equity (GAAP) $ 774,536 $ 524,038 $ 485,787

Tangible common stockholders’ equity and tangible book value per common share:

Total common stockholders' equity (GAAP) $ 877,197 $ 774,536 $ 524,038

Goodwill and other intangible assets

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Other intangible assets (10,984) (15,806) (8,250)

Tangible stockholders' equity (non-GAAP) $ 665,247 $ 482,738 $ 443,070

Tangible common stockholders' equity (non-GAAP) $ 772,730 $ 665,247 $ 482,738

Total common shares outstanding 24,960,639 24,920,984 18,346,288

Tangible book value per common share (non-GAAP) $ 30.96 $ 26.69 $ 26.31

Return on tangible stockholders’ equity:

Tangible net income:

Net Income (GAAP) $ 103,533 $ 59,182 $ 43,164

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Tangible net income (non-GAAP) $ 107,342 $ 62,512 $ 44,283

Tangible stockholders’ equity (non-GAAP) (see above) $ 665,247 $ 482,738 $ 443,070

Return on tangible stockholders’ equity (non-GAAP) 9.40 % 9.17 % 11.00 %

Return on average tangible stockholders’ equity:

Return on average tangible common stockholders’ equity:

Tangible net income (non-GAAP) (see above) $ 107,342 $ 62,512 $ 44,283

Total average stockholders' equity (GAAP) $ 692,524 $ 515,773 $ 466,619

Total average common stockholders' equity (GAAP) $ 828,102 $ 692,524 $ 515,773

Average goodwill and other intangible assets

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Average other intangible assets (13,178) (15,811) (8,964)

Total average tangible stockholders' equity (non-GAAP) $ 598,131 $ 473,759 $ 423,972

Return on average tangible stockholders’ equity (non-GAAP) 10.45 % 9.35 % 11.50 %

Total average tangible common stockholders' equity (non-GAAP) $ 721,441 $ 598,131 $ 473,759

Return on average tangible common stockholders’ equity (non-GAAP) 14.88 % 10.45 % 9.35 %

Net interest margin - FTE basis:

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Net interest margin - FTE basis (non-GAAP) 4.29 % 3.95 % 3.11 %

($ in thousands, except share and per share amounts)

2022 2021 2020

Tangible stockholders’ equity to tangible assets:

Tangible common stockholders’ equity to tangible assets:

Total assets (GAAP) $ 7,879,724 $ 7,430,322 $ 5,666,814

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Total tangible assets (non-GAAP) $ 7,775,257 $ 7,321,033 $ 5,625,514

Tangible stockholders’ equity (non-GAAP) (see above) $ 665,247 $ 482,738 $ 443,070

Tangible stockholders’ equity to tangible assets (non-GAAP) 9.09 % 8.58 % 8.95 %

Tangible common stockholders’ equity (non-GAAP) (see above) $ 772,730 $ 665,247 $ 482,738

Tangible common stockholders’ equity to tangible assets (non-GAAP) 9.94 % 9.09 % 8.58 %

($ in thousands, except share and per share amounts)

2023 2022 2021

Tangible common stockholders’ equity to tangible assets, reflecting net unrealized losses on HTM securities, net of tax:

Total tangible common stockholders' equity (non-GAAP) (see above) $ 772,730 $ 665,247 $ 482,738

Net unrealized losses on HTM securities, net of tax (3,629) (4,295) 447

Total tangible common stockholders’ equity less net unrealized losses on HTM securities, net of tax (non-GAAP) $ 769,101 $ 660,952 $ 483,185

Total tangible assets (non-GAAP) (see above) $ 7,775,257 $ 7,321,033 $ 5,625,514

Net unrealized losses on HTM securities, net of tax (3,629) (4,295) 447

Total tangible assets less net unrealized losses on HTM securities, net of tax (non-GAAP) $ 7,771,628 $ 7,316,738 $ 5,625,961

Tangible common stockholders’ equity to tangible assets (non-GAAP) 9.94 % 9.09 % 8.58 %

Tangible common stockholders’ equity to tangible assets reflecting net unrealized losses on HTM securities, net of tax (non-GAAP) 9.90 % 9.03 % 8.59 %

Net income excluding merger costs:

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Income before income taxes increased $58.6 million to $147.2 million in 2023, from $88.5 million in 2022.

The period over period increase was primarily driven by an increase in net interest income and to a lesser extent noninterest income, partially offset by an increase in provision for loan losses and noninterest expense.

The period over period increase was primarily driven by an increase in net interest income and to a lesser extent noninterest income and a reduction in noninterest expense, partially offset by an increase in provision for credit losses.

Net interest income increased $50.7 million to $292.6 million in 2023 compared to $241.8 million in 2022.

The increase in net interest income was primarily due to organic growth in our loan portfolios, an increase in interest earning assets resulting from the Pioneer Merger, and an increase in net interest margin.

Noninterest expense increased $28.9 million to $178.8 million in 2022, compared to $149.9 million in 2021.

The increase in noninterest expense was primarily due to $18.8 million ($0.62 diluted earnings per share) in merger-related expenses resulting from the Pioneer Merger.

Provision for loan losses increased $11.5 million to

$14.8 million in 2022 compared to $3.2 million in 2021.

The increase in the provision for loan losses was attributed to both organic loan growth and provision recorded on Pioneer loans acquired at a premium.

Due to the premium on certain of the loans, a provision for loan losses was required;

however, it was not due to credit deterioration since closing of the Pioneer Merger.

The increase in net interest income was primarily due to organic growth in our loan portfolios and an increase in net interest margin.

Noninterest expense

decreased $3.1 million to $175.7 million in 2023, compared to $178.8 million in 2022.

The decrease in noninterest expense was primarily the result of the absence of merger costs in 2023 compared to $18.8 million ($0.62 diluted earnings per share) in merger-related expenses incurred in 2022 related to the Pioneer merger, partially offset by an increase in salary and employee benefits of $11.7 million and an increase of $3.1 million in occupancy expenses in 2023.

Provision for credit losses increased $1.0 million to $15.8 million in 2023 compared to $14.8 million in 2022.

The increase in the provision for credit losses was attributed to both organic loan growth and our implementation of a new allowance for credit loss methodology in 2023.

For additional information on our new allowance for credit loss methodology see “Critical Accounting Estimates” below.

Identifiable assets for our Banking segment grew by $0.3 billion to $6.9 billion at December 31, 2023 from $6.6 billion at December 31, 2022.

The growth in identifiable assets was primarily driven by organic growth in our loan portfolios and the assets acquired in the Pioneer Merger.

The growth in identifiable assets was primarily driven by organic growth in our loan portfolios.

Mortgage Operations

Income (loss) before income taxes decreased to $(4.6) million in 2022, compared to income of $25.4 million in 2021, primarily due to a decrease in mortgage banking services revenue, net of $39.5 million, partially offset by a $17.1 million decrease in salary and employee benefits expenses from the decline in mortgage loan originations.

Overall gains on sale of mortgage loans declined as a result of the decline in origination activity, continued margin compression, and a decline in the rate lock pipeline volume and valuation due to rising interest rates.

The increase in income related to our MSRs was primarily the result of changes in market interest rates leading to lower prepayment rates and our corresponding hedging positions.

Loss before income taxes increased to $6.5 million in 2023, compared to a loss of $4.6 million in 2022, primarily due to a $16.3 million decrease in mortgage banking services revenue, net, partially offset by a $13.1 million decrease in salary and employee benefits expenses from the decline in mortgage loan originations and reductions in staffing levels.

MSR capitalization and changes in fair value, net of derivative activity, decreased $10.8 million for the year ended December 31, 2023, compared to 2022.

The decrease in revenue related to our MSRs was primarily the result of market interest rate movement and the impact to fair values and overall origination activity, which led to a year over year decline in the net fair value for MSRs and the related derivative activity of $5.8 million, as the total fair value change for 2023 for MSRs, net of derivative activity, was a loss of $1.1 million.

The year over year decline in capitalized servicing value for MSRs was $5.0 million.

Overall gains on sale of mortgage loans declined by $4.6 million 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.

Total loan originations for sale were $0.8 billion in 2023, a decline of $0.3 billion from $1.1 billion in 2022.

The decline in gains from mortgage loan sales was partially offset by a $0.6 million increase in servicing fee income related to our mortgage servicing rights (“MSRs”), resulting from an increase of $0.2 billion in 2023 of the unpaid principal balance of loans serviced to $5.4 billion, from $5.2 billion in 2022.

Critical Accounting Estimates

Our consolidated financial statements are prepared based on the application of accounting policies in accordance with U.S.

generally accepted accounting principles, and follow general practices within the banking industry.

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 loan losses and fair value measurements to be the accounting areas that require the use of critical accounting estimates as these policies require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates.

Changes in underlying factors, estimates, assumptions or judgements could have a material impact on our future financial condition and results of operations.

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 year ended December 31, 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.

These critical accounting estimates and their application are reviewed at least annually by our audit committee.

The following is a description of our critical accounting estimates and an explanation of the methods and assumptions underlying their application.

Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred credit losses and represents management's estimate of incurred losses in our loan portfolio as of the balance sheet date.

Management’s estimate of the allowance for loan losses includes both specific and general components.

Management estimates the allowance balance required and necessary provision for loan losses expense using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, current economic conditions, and other factors which, in the opinion of management, deserve current recognition.

Further information on the allowance for loan losses is presented within “Part II, Item 8.

Financial Statements,” Notes 1 and 4 to the consolidated financial statements.

The allowance for loan losses may be materially affected by qualitative factors, especially during periods of economic uncertainty, for items not reflected in the loss calculation, but which are deemed appropriate by management's current assessment of the risks related to the loan portfolio and/or external factors.

Such qualitative factors may include changes in our loan portfolio composition and credit concentrations, changes in the balances and/or trends in asset quality and/or loan credit performance, changes in lending underwriting standards, the effect of other external factors such as significant unique events or conditions, and actual change in economic conditions, real estate values, and/or other economic developments.

The qualitative factors applied at December 31, 2022, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes to items such as the uncertainty of economic conditions and management's assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of the allowance for loan losses currently calculated by management.

The evaluation of qualitative factors is inherently imprecise and requires significant management judgment.

While management utilizes its best judgment and information available, the adequacy of the allowance for loan losses is determined by certain factors outside of our control, such as the performance of our portfolios, changes in the economic environment including economic uncertainty, changes in interest rates, and the view of the regulatory authorities toward classification of assets and the level of allowance for loan losses.

Additionally, the level of the allowance for loan losses

may fluctuate based on the balance and mix of the loan portfolio.

If actual results differ significantly from our assumptions, our allowance for loan losses may not be sufficient to cover incurred losses in our loan portfolio, resulting in additions to our allowance for loan losses and an increase in the provision for loan losses.

Additionally, as an “emerging growth company” under Section 107 of the JOBS Act, we have not been required to adopt ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (CECL) .

As such, our allowance for loan losses may not be comparable to other public financial institutions that have adopted CECL.

Fair Value Measurements - We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures in accordance with Accounting Standards Codification (“ASC”) 820 and ASC 825.

We group our financial instruments at fair value in three levels based on the markets in which the instruments are traded and the reliability of the assumptions used to determine fair value, with Level 1 (quoted prices for identical assets in an active market) being considered the most reliable, and Level 3 having the most unobservable inputs and therefore being considered the least reliable.

We base our fair values on the price that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date.

We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Our available-for-sale (“AFS”) securities are measured at fair value on a recurring basis.

Changes in the fair value of AFS securities, not related to credit loss, are recorded, net of tax, as accumulated other comprehensive income (AOCI) in stockholders' equity.

We primarily use prices obtained from third-party pricing services to determine the fair value of our AFS securities.

Various modeling techniques are used to determine pricing for our securities, including option pricing, discounted cash flow models, and similar techniques.

The inputs to these models may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data.

All AFS securities are classified as Level 1 or Level 2 in the valuation hierarchy.

Our loans held-for-sale represent mortgage loans originated and intended for sale in the secondary market.

These loans are recorded on a recurring fair value basis.

The estimated fair value of these loans held-for-sale is generally based on sale, exchange, or dealer market prices and are classified within Level 2 of the valuation hierarchy.

Our mortgage servicing rights (MSRs) are measured at fair value on a recurring basis.

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 December 31, 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 ACL is further discussed in “Note 1- Basis of Presentation, Description of Business and Summary of Significant Accounting Policies” included in Item 8 of this Form 10-K.

Additionally, as an “emerging growth company” under Section 107 of the JOBS Act, we did not to adopt ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (CECL) until January 1, 2023.

As such, our allowance for credit losses for years prior to 2023 may not be comparable to other public financial institutions that adopted CECL in an earlier year.

Fair Value Measurement of MSRs - Our residential mortgage servicing rights are measured at fair value on a recurring basis.

We estimate the fair value of our MSRs using a process that utilizes a discounted cash flow model and analysis of current market data to arrive at the estimate.

The cash flow assumptions and prepayment assumptions used in the model are based on numerous factors, with the key assumptions being mortgage prepayment speeds, discount rates and cost to service.

The cash flow assumptions used in the model are based on numerous factors, with the key assumptions being mortgage prepayment speeds, discount rates and cost to service that management believes are consistent with the assumptions that other similar market participants use in valuing MSRs.

The change of any of these key assumptions due to market conditions or other factors could materially affect the fair value of our MSRs.

We also utilize a third-party consulting firm to assist us with the valuation.

Because of the nature of the valuation inputs, we classify the valuation of our MSRs as Level 3 in the valuation hierarchy.

Our derivative financial instruments are measured at fair value on a recurring basis.

These derivative instruments are generally valued based on quoted prices for similar assets in an active market with inputs that are observable, exchange prices or dealer market prices and are classified within Level 2 of the valuation hierarchy.

Further information on our derivative and hedging activities is presented in “Part II, Item 8.

Financial Statements,” Notes 1 and 8 to the consolidated financial statements.

We did not have any other financial instruments that were measured at fair value on a recurring basis at December 31, 2022.

Because of the nature of the valuation inputs, we classify the valuation of our MSRs as Level 3 in the fair value hierarchy.

See Note 5 - Mortgage Servicing Rights included in our audited consolidated financial statements included elsewhere in this report for our assumptions used in valuing the MSRs.

For information concerning the hypothetical sensitivity of the key assumptions under adverse changes on our MSRs, see

the table under “Noninterest Income” elsewhere in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report.

Results of Operations

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Net interest income $ 293,431 $ 241,632 $ 155,233

Provision for loan losses 18,050 3,000 23,100

Provision for credit losses 18,247 18,050 3,000

Noninterest income 79,092 89,566 124,244

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Diluted earnings per share $ 4.08 $ 2.48 $ 2.30

Return on average assets 0.88 % 0.79 % 1.02 %

Return on average total assets 1.38 % 0.88 % 0.79 %

Return on average stockholders' equity 12.50 % 8.55 % 8.37 %

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Efficiency ratio 59.81 % 72.20 % 80.38 %

Fee revenue to total revenue 27.0 % 44.5 % 52.2 %

Noninterest income to total revenue (2) 21.2 % 27.0 % 44.5 %

(1) See section entitled “ Non-GAAP Financial Measures and Reconciliations ” for information regarding these non-GAAP financial measures and a reconciliation to the most comparable GAAP equivalent.

(2) Total revenue is presented net of interest expense.

Our results of operations depend significantly on net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of interest income on loans and investment securities and interest expense on interest-bearing liabilities, consisting primarily of deposits and borrowings.

Our results of operations are also dependent on our generation of noninterest income, consisting primarily of income from mortgage banking services, service charges on deposit accounts, trust and investment advisory fees and credit and debit card fees.

Other factors contributing to our results of operations include our provisions for loan losses, income taxes, and noninterest expenses, such as salaries and employee benefits, occupancy and equipment, amortization of intangible assets and other operating costs.

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

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Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan.

Loans acquired through acquisition are initially recorded at fair value.

Discounts or premiums created when the loans were recorded at their estimated fair values at acquisition are accreted or amortized over the remaining term of the loan as an adjustment to the related loan’s yield.

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

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.

rates at which assets and liabilities reprice, variances in prepayment of loans and securities, exercise of call options on borrowings or securities, a general rise or decline in interest rates, changes in the slope of the yield-curve, and balance sheet growth or contraction.

Our net interest income was $293.4 million for the year ended December 31, 2023, an increase of $51.8 million, or 21.4%, from 2022.

Interest income on loans held-for-investment increased by $89.4 million for the year ended December 31, 2022, from 2021.

Interest income on loans increased by $137.6 million for the year ended December 31, 2023, from 2022.

Interest income on investment securities increased by $3.8 million for the year ended December 31, 2023, from 2022.

Interest expense from total interest-bearing liabilities increased by $95.1 million for the year ended December 31, 2023, from 2022.

Total average loans held-for-investment grew to $5.2 billion at December 31, 2022, an increase of $1.4 billion, compared to December 31, 2021, primarily due to organic growth in our loan portfolios and the Pioneer Merger.

Total average loans, including loans held-for-sale grew to $6.2 billion at December 31, 2023, an increase of $1.0 billion, compared to December 31, 2022, primarily due to organic growth in our loan portfolios.

Yield on loans held-for-investment increased 149 basis points for the year ended December 31, 2023, from 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 $0.6 billion, or 17.9%, for the year ended December 31, 2022, from 2021.

Average interest-bearing deposits increased $0.5 billion, or 15.7%, for the year ended December 31, 2022, from 2021, inclusive of the deposits acquired from the Pioneer Merger, and was the primary driver of the growth in average interest-bearing liabilities.

Our net interest margin was 3.87% for the year ended December 31, 2022, compared to 3.00% in 2021, an increase of 87 basis points.

We experienced a 100 basis points increase in yield from earning assets and our total cost of funds increased by 13 basis points from 2021.

We have not experienced as significant an increase in our cost of funds in this rising interest rate environment as we have seen in growth in earning asset yield, however, we do expect our cost of funds to continue to rise in 2023.

Average interest-bearing liabilities increased $0.7 billion, or 17.5%, for the year ended December 31, 2023, from 2022 primarily to support the growth in our loan portfolio.

Average interest-bearing deposits increased $0.7 billion, or 18.5%, for the year ended December 31, 2023, from 2022, with organic growth as the primary driver.

Total cost of deposits increased by 192 basis points to 2.27% in 2023 compared to 2022, primarily due to increased pricing on our deposit products as a result of the rising interest rate environment.

Average FHLB borrowings increased $54.4 million in 2023, compared to 2022.

The cost of FHLB borrowings increased by 216 basis points to 5.05% in 2023, compared to 2022, also due to the rising interest rate environment.

Our net interest margin was 4.23% for the year ended December 31, 2023, compared to 3.87% for the same period in 2022, an increase of 36 basis points.

We experienced a 169 basis point increase in yield from earning assets and our total cost of funds increased by 187 basis points for the year ended December 31, 2023, compared to the same period in 2022.

While we have experienced a significant increase in our cost of funds in this rising interest rate environment, we do not expect our cost of funds to continue to rise in 2024 at the level of increase experienced in 2023.

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.

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Interest Earning Assets

Loans held-for-sale $ 59,915 $ 3,313 5.53 % $ 125,808 $ 4,051 3.22 % $ 121,941 $ 3,842 3.15 %

Loans held-for-investment (1) 5,156,297 244,675 4.75 % 3,780,650 155,252 4.11 % 3,525,837 141,413 4.01 %

Loans (1) $ 6,178,414 $ 385,637 6.24 % $ 5,216,212 $ 247,988 4.75 % $ 3,906,458 $ 159,303 4.08 %

Investment securities 554,433 17,032 3.07 % 605,119 13,185 2.18 % 531,803 7,979 1.50 %

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Net interest margin (on a FTE basis) (2) 4.29 % 3.95 % 3.11 %

(1) Includes nonaccrual loans.

(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 these non-GAAP financial measures and a reconciliation to the most comparable GAAP equivalent.

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Interest Earning Assets

Loans held-for-sale $ 1,384 $ (2,122) $ (738) $ 87 $ 122 $ 209

Loans held-for-investment 32,932 56,491 89,423 3,619 10,220 13,839

Loans (1) $ 86,596 $ 51,053 $ 137,649 $ 34,316 $ 54,369 $ 88,685

Investment securities 4,835 (988) 3,847 4,106 1,100 5,206

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Net interest income $ 21,986 $ 29,813 $ 51,799 $ 38,599 $ 47,800 $ 86,399

Provision for Loan Losses

We established an allowance for loan losses through a provision for loan losses charged as an expense in our consolidated statements of income.

The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the allowance for loan losses at an adequate level to absorb probable losses incurred in the loan portfolio at the balance sheet date and that, in management’s judgment, is appropriate under GAAP.

Our determination of the amount of the allowance for loan losses and corresponding provision for loan losses considers ongoing evaluations of the credit quality and level of credit risk inherent in our loan portfolio, levels of nonperforming loans and charge-offs, statistical trends and economic and other relevant factors.

The allowance for loan losses is increased by the provision for loan losses and is decreased by charge-offs, net of recoveries on prior loan charge-offs.

We had a provision for loan losses of $18.1 million for the year ended December 31, 2022, compared to a provision for loan losses of $3.0 million for 2021.

The increase in the provision for loan losses was due to several factors, including greater organic growth in the loan portfolio, loans acquired in the Pioneer Merger, and a provision required on certain non-impaired loans acquired at a premium upon the closing of the Pioneer Merger.

The provision on the loans acquired at a premium was $2.9 million ($0.10 diluted earnings per share) during the year ended December 31, 2022.

The 2021 provision was impacted by favorable changes in certain environmental factors as a result of improved economic conditions as the impact of the COVID-19 pandemic continued to subside.

For a further discussion of the allowance for loan losses, refer to the “Allowance for Loan Losses” section of this financial review.

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 $18.2 million for the year ended December 31, 2023, compared to a provision for credit losses of $18.1 million for 2022.

During 2022, our provision for credit losses was negatively impacted by $2.9 million for certain non-impaired loans acquired in the Pioneer Merger at a premium valuation.

Upon elimination of the $2.9 million merger related provision for 2022, the adjusted increase in the provision for credit losses is $3.1 million for 2023.

This adjusted increase is primarily due to loan growth and the charge-offs of two specific customer relationships in our loan portfolio.

For a further discussion of the allowance for credit losses, refer to the “Allowance for Credit Losses” section of this financial review.

Noninterest Income

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Total noninterest income $ 79,092 $ 89,566 $ 124,244

Our noninterest income decreased $34.7 million to $89.6 million for the year ended December 31, 2022 from $124.2 million in 2021, primarily due to a decrease in income from mortgage banking services.

Our noninterest income decreased $10.5 million to $79.1 million for the year ended December 31, 2023 from $89.6 million 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 year ended December 31, 2022, service charges on deposit accounts increased $5.7 million, from 2021, primarily due to higher average deposits, changes made in the second half of 2021 to our deposit product offerings as well as increased treasury management service revenue compared to 2021.

For the year ended December 31, 2023, service charges on deposit accounts increased $3.1 million, primarily due to growth in treasury management services provided to our business customers, as compared to 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.

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Trust and investment advisory fees represent fees we receive in connection with our investment advisory and custodial management services of investment accounts.

Trust and investment advisory fees decreased $1.0 million for the year ended December 31, 2022 compared to 2021 as assets under management declined.

The components of income from mortgage banking services were as follows for the year ended December 31,:

Trust and investment advisory fees decreased $1.1 million for the year ended December 31, 2023 compared to 2022 primarily due to lower average assets under management.

The components of income from mortgage banking services, net, were as follows for the year ended December 31,:

(In thousands) 2023 2022 2021

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Income from mortgage banking services, net $ 31,384 $ 46,285 $ 86,410

For the year ended December 31, 2022, income from mortgage banking services decreased $40.1 million, compared to 2021, primarily due to a decline in revenue related to net sale gains and fees from mortgage loan originations, including fair value changes in the held-for-sale portfolio and hedging activity, which decreased $44.5 million for the year ended December 31, 2022, compared to 2021.

For the year ended December 31, 2023, income from mortgage banking services decreased $14.9 million, compared to 2022.

We experienced a decline in revenue related to net sale gains and fees from mortgage loan originations, including fair value changes in the held-for-sale portfolio and hedging activity, which decreased $4.6 million for the year ended December 31, 2023, compared to 2022.

Total loan originations for sale were $0.8 billion for the year ended December 31, 2023, a decline of $0.3 billion from $1.1 billion in 2022.

We retain servicing rights on the majority of mortgage loans that we sell, which drove the increase in servicing income of $0.6 million to $15.7 million for the year ended December 31, 2023, from $15.1 million for 2022.

MSR capitalization and changes in fair value, net of derivative activity, increased $1.9 million for the year ended December 31, 2022, compared to 2021.

The increase in revenue related to our MSRs was primarily the result of changes in market interest rates and our corresponding hedging positions.

MSR capitalization and changes in fair value, net of derivative activity, decreased $10.8 million for the year ended December 31, 2023, compared to 2022.

The year over year decline in capitalized servicing value for MSRs was $5.0 million.

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.

See the impact of changes to our key MSR valuation assumptions in the table below.

The following table shows the hypothetical effect on the fair value of our MSRs when applying certain unfavorable variations of key assumptions to these assets as of December 31, 2023.

(In thousands) 10% 20%

Discount rate $ (3,451) $ (6,265)

Total prepayment speeds (2,982) (5,394)

Cost of servicing each loan (1,324) (2,193)

These hypothetical sensitivities should be evaluated with care.

The effect on fair value of an adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear.

Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant.

In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.

We also maintain a hedging strategy to manage a portion of the risk associated with changes in the fair value of our MSR portfolio.

Changes in fair value of the derivative instruments used to economically hedge the MSRs are also included as a component of income from mortgage banking services.

Due to a number of factors, including rising interest rates, low inventory in the housing market, lower refinance volumes and a decrease in margin on loans sales, we do not expect revenue from mortgage banking activities to continue at levels seen in the prior years, which will reduce the amount of income from mortgage banking services, net recorded in future periods in comparison to prior years.

Other noninterest income decreased $1.2 million for the year ended December 31, 2022 compared to 2021, primarily due to a decrease in the fair value of investments related to our deferred compensation plan.

Due to a number of factors, including the overall elevated level of interest rates, low inventory in the housing market, lower refinance volumes and lower margin on loans sales, we expect revenue from mortgage banking activities to remain at a lesser level as compared to levels we experienced during the lower market rate environment experienced during 2021 and 2020.

Other noninterest income increased $1.9 million for the year ended December 31, 2023 compared to 2022, primarily due to an increase in the fair value of investments related to our deferred compensation plan.

Noninterest Expense

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Merger related expenses — 18,751 3,085

Other 51,292 41,642 35,892

Other ( Note 18 - Other noninterest expenses )

51,314 50,457 40,579

Total noninterest expenses $ 222,793 $ 239,126 $ 224,635

Our noninterest expenses increased $14.5 million to $239.1 million for the year ended December 31, 2022, from $224.6 million for 2021.

The increase is primarily due to increases of $15.7 million in merger related expenses and $9.7 million in other expenses, partially offset by a decrease of $17.6 million in salary and employee benefits.

We incurred merger related expenses of $18.8 million ($0.62 per diluted share) for the year ended December 31, 2022, an increase of $15.7 million, from $3.1 million ($0.14 per diluted share) for 2021, related to our merger with Pioneer that was completed on April 1, 2022.

Other expenses increased $9.7 million for the year ended December 31, 2022, compared to 2021.

This increase was primarily caused by a $1.2 million increase in travel and entertainment expenses as we continue to move away from limitations related to the COVID-19 pandemic, a $1.5 million increase to FDIC insurance costs due to organic growth and growth resulting from the Pioneer Merger and the Small Bank FDIC Assessment Credit was fully utilized in 2021, a $1.6 million increase in data processing expenses primarily due to organic growth and growth resulting from the Pioneer Merger, and a $2.4 million increase in professional services expenses as a result of the Pioneer Merger.

The decrease in our salary and employee benefits expense for the year ended December 31, 2022, compared to 2021, was driven by the decrease in commissions paid to our mortgage loan officers related to decreased mortgage origination activity during 2022.

Our noninterest expenses decreased $16.3 million to $222.8 million for the year ended December 31, 2023, from $239.1 million for 2022.

The decrease is primarily due to the decrease of $18.8 million in merger related expenses.

We incurred no merger related expenses for the year ended December 31, 2023.

Our merger with Pioneer was completed on April 1, 2022.

The decrease of $1.1 million in our salary and employee benefits expense for the year ended December 31, 2023, compared to 2022, was driven by a decrease in commissions paid to our mortgage loan officers related to decreased mortgage origination activity during 2023, partially offset by annual compensation increases occurring in 2023.

Occupancy and equipment increased $2.1 million for the year ended December 31, 2023, compared to 2022.

This increase was primarily due to having a full year of expenses related to the facilities acquired in the Pioneer merger in 2023 compared to only nine months in 2022.

We had income tax expense for the year ended December 31, 2023 of $28.0 million, compared to $14.8 million in 2022.

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Our effective tax rate was 21.3% for the year ended December 31, 2023, compared to 20.0% in 2022.

For additional information on our income taxes, see Note 17 - Income Tax es included in our audited consolidated financial statements included elsewhere in this report.

Financial Condition

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Our total assets were $7.9 billion at December 31, 2023, compared to $7.4 billion at December 31, 2022.

Our total loans held-for-investment, net of deferred fees, costs, premiums and discounts were $5.9 billion at December 31, 2022, an increase of $1.9 billion from 2021, which was due to organic growth and the Pioneer Merger.

Our total loans held-for-investment, net of deferred fees, costs, premiums and discounts were $6.3 billion at December 31, 2023, an increase of $0.4 billion from 2022, which was due to organic growth.

Investment Securities

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Our securities available-for-sale decreased by $20.2 million to $516.8 million at December 31, 2023, compared to December 31, 2022.

The decrease was due to unrealized losses resulting from the rising interest rate environment, partially

offset by securities acquired in the Pioneer Merger.

Securities held-to-maturity increased $20.9 million to $38.9 million at December 31, 2022, compared to December 31, 2021, due to the securities held-to-maturity acquired in the Pioneer Merger.

The decrease was primarily due to amortization of the portfolio and a decrease in fair value due to the rising interest rate environment.

Securities held-to-maturity decreased $1.9 million to $37.0 million at December 31, 2023, compared to December 31, 2022, due to amortization of the portfolio.

The following table is a summary of our investment portfolio as of December 31,:

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Held-to-maturity:

agency — — % — — %

Obligations of states and political subdivisions $ 25,542 69.1 % $ 25,378 65.2 %

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Government and its agencies, in an amount greater than 10% of stockholders’ equity.

Our loan portfolio represents a broad range of borrowers primarily in our markets in Texas, Kansas, Colorado, New Mexico and Arizona, comprised of commercial, commercial real estate, residential real estate and consumer financing 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, public finance and consumer financing loans.

We have a diversified portfolio across a variety of industries, and the portfolio is generally centered in the states in which we have branch offices.

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 December 31, 2023 and 2022 were $6.3 billion and $5.9 billion, respectively.

The commercial loan portfolio included PPP loans outstanding of $4.4 million and $66.7 million at December 31, 2022 and 2021, respectively.

The following table sets forth the composition of our loan portfolio, as of December 31,:

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total loans Amount % of

Commercial $ 3,019,610 51.1 % $ 2,407,888 59.6 %

Commercial and industrial $ 2,467,688 39.4 % $ 2,310,929 39.1 %

Commercial real estate:

Non-owner occupied 812,235 13.0 % 779,546 13.2 %

Owner occupied 635,365 10.2 % 636,272 10.8 %

Construction and land 345,430 5.5 % 327,817 5.5 %

Multifamily 103,066 1.6 % 102,068 1.7 %

Total commercial real estate 1,896,096 30.3 % 1,845,703 31.2 %

Residential real estate 1,110,610 17.7 % 1,003,931 17.0 %

Public finance 602,913 9.6 % 590,284 10.0 %

Consumer 36,371 0.6 % 42,588 0.7 %

Other 153,418 2.4 % 118,397 2.0 %

Total loans $ 6,267,096 100.0 % $ 5,911,832 100.0 %

Commercial loans include commercial and industrial loans to commercial and agricultural customers for use in normal business operations to finance working capital needs, equipment and inventory purchases, and other expansion projects.

Commercial and industrial loans also include our specialty lending verticals such as public finance offerings to our charter school and municipal based customers, asset based lending and structured finance products as well as our healthcare, SBA and other small business lending products.

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 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.

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 85.2% of the Company’s risk-based capital, or 13.0% of total loans as of December 31, 2023.

Non-owner occupied CRE loans associated with office space were $109.3 million, or 1.7% of total loans as of December 31, 2023.

Owner occupied CRE loans associated with office space were $149.4 million, or 2.4% of total loans as of December 31, 2023.

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.

We have originated loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act.

Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments.

The remaining loan balance after forgiveness of any amounts is expected to be fully guaranteed by the SBA.

PPP loans, which are included in our commercial loan portfolio, were $4.4 million and $66.7 million at December 31, 2022 and December 31, 2021, respectively.

For the year ended December 31, 2022, we recognized $1.9 million in PPP loan related deferred processing fees (net of amortization of related deferred origination costs) as a yield adjustment and this amount is included in interest income on loans as compared to $6.2 million in 2021.

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

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15 years After 15

Commercial $ 268,257 $ 1,819,543 $ 731,239 $ 200,571 $ 3,019,610

Commercial and industrial $ 365,676 $ 1,758,252 $ 315,581 $ 28,179 $ 2,467,688

Commercial real estate 281,637 1,096,504 457,250 60,705 1,896,096

Residential real estate 130,501 36,257 73,939 869,913 1,110,610

Public finance 5,011 86,345 393,174 118,383 602,913

Consumer 7,973 8,962 19,223 213 36,371

Other 34,258 97,971 17,568 3,621 153,418

Total loans $ 825,056 $ 3,084,291 $ 1,276,735 $ 1,081,014 $ 6,267,096

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Fixed interest rates

Commercial $ 70,190 $ 836,377 $ 628,118 $ 171,808 $ 1,706,493 $ 1,636,303

Commercial and industrial $ 14,997 $ 301,557 $ 204,803 $ 550 $ 521,907 $ 506,910

Commercial real estate 141,231 675,340 96,524 2,665 915,760 774,529

Residential real estate 82,046 20,782 54,700 319,835 477,363 395,317

Public finance 5,011 83,294 389,521 118,383 596,209 591,198

Consumer 6,453 7,685 19,223 — 33,361 26,908

Other 8,992 23,390 17,560 3,621 53,563 44,571

Total fixed interest rate loans $ 258,730 $ 1,112,048 $ 782,331 $ 445,054 $ 2,598,163 $ 2,339,433

Floating or adjustable interest rates

Commercial $ 198,067 $ 983,166 $ 103,121 $ 28,763 $ 1,313,117 $ 1,115,050

Commercial and industrial $ 350,679 $ 1,456,695 $ 110,778 $ 27,629 $ 1,945,781 $ 1,595,102

Commercial real estate 140,406 421,164 360,726 58,040 980,336 839,930

Residential real estate 48,455 15,475 19,239 550,078 633,247 584,792

Public finance — 3,051 3,653 — 6,704 6,704

Consumer 1,520 1,277 — 213 3,010 1,490

Other 25,266 74,581 8 — 99,855 74,589

Total floating or adjustable interest rate loans $ 566,326 $ 1,972,243 $ 494,404 $ 635,960 $ 3,668,933 $ 3,102,607

Total loans $ 825,056 $ 3,084,291 $ 1,276,735 $ 1,081,014 $ 6,267,096 $ 5,442,040

Allowance for Loan Losses

We maintain the allowance for loan losses at a level we believe is sufficient to absorb probable incurred losses in our loan portfolio given the conditions at the time.

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.

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recoveries on loans previously charged off, which increase the allowance;

and the provision for loan losses charged to earnings, which increases the allowance.

In determining the provision for loan losses, management monitors fluctuations in the allowance resulting from actual charge-offs and recoveries and reviews the size and composition of the loan portfolio in light of current and anticipated economic conditions.

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 loan losses for the year ended December 31,:

The following table presents, by loan type, the changes in the allowance for credit losses for the years ended December 31,:

(In thousands) 2023 2022 2021

Balance, beginning of period $ 65,917 $ 47,547 $ 47,766

Impact of adopting ASC 326 5,256 — —

Adjusted beginning balance $ 71,173 $ 47,547 $ 47,766

Loan charge-offs:

Commercial (2,321) (4,296) (4,064)

Commercial and industrial (9,242) (2,321) (4,296)

Commercial real estate (83) — (375)

Residential real estate (13) (122) (42)

Public finance — — —

Consumer (334) (144) (148)

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Recoveries of loans previously charged-off:

Commercial 2,236 1,547 585

Commercial and industrial 1,118 2,236 1,547

Commercial real estate 12 388 28

Residential real estate 682 221 24

Public finance — — —

Consumer 50 62 43

Total loan recoveries 1,862 2,907 1,642

Net recoveries (charge-offs) 320 (3,219) (3,880)

Provision for loan losses 18,050 3,000 23,100

Net (charge-offs) recoveries (7,810) 320 (3,219)

Provision for credit losses (1) 17,035 18,050 3,000

Balance, end of period $ 80,398 $ 65,917 $ 47,547

Allowance for loan losses to total loans 1.12 % 1.18 % 1.24 %

Allowance for credit losses to total loans 1.28 % 1.12 % 1.18 %

Ratio of net charge-offs (recoveries) to average loans outstanding 0.13 % (0.01) % 0.09 %

The following table presents net charge-offs (recoveries) to average loans outstanding by loan category for the year ended December 31,:

(1) For the years ended December 31, 2023, 2022 and 2021 we recorded a provision for credit losses on unfunded commitments of $1,212, $525 and $300, 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 years ended December 31,:

(In thousands) 2023 2022 2021

Commercial — % 0.12 % 0.19 %

Commercial and industrial 0.30 % — % 0.19 %

Commercial real estate — % (0.03) % 0.03 %

Residential real estate (0.07) % (0.01) % — %

Public finance — % — % — %

Consumer 0.70 % 0.21 % 0.65 %

Allocation of Allowance for Loan Losses

The following table presents the allocation of the allowance for loan losses by category and the percentage of the allocation of the allowance for loan losses by category to total loans listed as of December 31,:

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 December 31,:

(In thousands) Allowance

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each category to

Commercial $ 42,847 51.1 % $ 33,277 59.6 %

Commercial and industrial $ 29,523 39.4 % $ 40,785 39.1 %

Commercial real estate 27,546 30.3 % 19,754 31.2 %

Residential real estate 16,345 17.7 % 2,963 17.0 %

Public finance 5,337 9.6 % 1,664 10.0 %

Consumer 717 0.6 % 352 0.7 %

Other 930 2.4 % 399 2.0 %

Total $ 80,398 100.0 % $ 65,917 100.0 %

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These policies and procedures are expected to be followed by our bankers and underwriters and exceptions to these policies require elevated levels of approval and are reported to our board of directors.

Nonperforming assets include all loans categorized as nonaccrual, loans identified as a troubled debt restructuring (“TDR”), accrual loans greater than 90 days past due, and other real estate owned and other repossessed assets.

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.

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.

A loan is identified as a TDR, when we, for economic or legal reasons related to the borrower’s financial difficulties, grant a concession to the borrower.

The concessions may be granted in various forms including interest rate reductions, principal forgiveness, extension of maturity date, waiver or deferral of payments and other actions intended to minimize potential losses.

Generally, a nonaccrual loan that is restructured remains on nonaccrual status for a period of no less than six months to demonstrate that the borrower can meet the restructured terms.

However, the borrower’s performance prior to the restructuring or other significant events at the time of restructuring may be considered in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status after a shorter performance period.

If the borrower’s performance under the new terms is not reasonably assured, the loan remains classified as a nonaccrual loan.

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 December 31,:

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Nonaccrual loans:

Commercial $ 9,965 $ 16,492

Commercial and industrial $ 8,004 $ 9,494

Commercial real estate 4,063 8,283

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Consumer 10 93

Other 2,837 471

Total nonaccrual loans 37,327 28,969

Accrual TDRs 11,843 6,450

Accrual loans greater than 90 days past due (1) 25,816 98

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Nonperforming assets to total assets (3) 0.85 % 0.48 %

Allowance for loan losses to nonaccrual loans 227.54 % 173.99 %

(1) Nonperforming loans include nonaccrual loans, accrual TDR’s, and accrual loans greater than 90 days past due.

Allowance for credit losses to nonaccrual loans 215.39 % 227.54 %

(1) Loans greater than 90 days past due, still accruing at December 31, 2023 relates primarily to one borrower relationship where interest was paid current in February 2024.

Contractual principal payments related to this borrower relationship were deferred until March 15, 2024.

(2) 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) Nonperforming loans include nonaccrual loans and accrual loans greater than 90 days past due.

Deposits represent our primary source of funds.

We are focused on growing our core deposits through relationship-based banking with our business and consumer clients.

Total deposits increased by $0.6 billion to $6.4 billion at December 31, 2023, compared to December 31, 2022.

Deposit growth over this period occurred primarily in our Texas markets, generally due to our acquisition of Pioneer, resulting in $1.2 billion of deposits recorded as of April 1, 2022, net of purchase accounting adjustments.

The following table sets forth the average balance amounts and the average rates paid on deposits held by us for the year ended December 31,:

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 December 31,:

($ in thousands) December 31,

2023 December 31, 2022

Noninterest bearing deposit accounts $ 360,168 $ 416,709

Interest-bearing deposit accounts:

Demand and NOW deposits 36,162 25,940

Savings deposits 343,291 418,101

Money market deposits 1,196,645 1,375,671

Certificates of deposits 1,437,537 662,831

Total interest-bearing deposit accounts 3,013,635 2,482,543

Total consumer deposits $ 3,373,803 $ 2,899,252

Noninterest bearing deposit accounts $ 1,170,338 $ 1,403,781

Interest-bearing deposit accounts:

Demand and NOW deposits 555,197 236,641

Savings deposits 80,802 33,753

Money market deposits 825,811 907,379

Certificates of deposits 87,407 40,874

Total interest-bearing deposit accounts 1,549,217 1,218,647

Total business deposits $ 2,719,555 $ 2,622,428

Wholesale deposits (1) $ 280,745 $ 243,382

Total deposits $ 6,374,103 $ 5,765,062

(1) Wholesale deposits consist of brokered deposits included in our consolidated balance sheets within interest-bearing accounts and in Note 10 - Deposits within certificates of deposits and savings and money market accounts.

(Dollars in thousands) Average

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Total deposits $ 6,152,366 1.65 % $ 5,610,858 0.23 %

The following table sets forth the average balance amounts and the average rates paid on deposits by customer type held by us for the year ended December 31,:

(Dollars in thousands) Average

Balance Average

Rate Paid Average

Balance Average

Consumer $ 2,928,706 0.27 % $ 2,391,550 0.25 %

Business Customers 2,682,152 0.20 % 2,248,270 0.11 %

Total deposits $ 5,610,858 0.23 % $ 4,639,820 0.18 %

Maturities of certificates of deposit of $250,000 or more outstanding are summarized as follows as of December 31,:

As of December 31, 2023 and December 31, 2022, approximately $2.0 billion or 31.2% and $2.4 billion or 41.6%, respectively, of our deposit portfolio was uninsured.

As of December 31, 2023 and December 31, 2022, approximately $1.6 billion or 25.1% 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 $0.6 billion, or 9.2% of all deposits as of December 31, 2023, and $0.2 billion, or 4.1% of all deposits as of December 31, 2022.

Maturities of certificates of deposit that are in excess of the FDIC insurance limit of $250,000, by remaining time to maturity are summarized as follows as of December 31,:

(In thousands) 2023 2022

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Three months or less $ 54,875

Over three months through twelve months 69,895

Over three months through six months 30,141

Over six through twelve months 173,642

Over twelve months through three years 20,957

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Total $ 280,054

As of December 31, 2022 and 2021, approximately $2.4 billion and $2.5 billion, respectively, of our deposit portfolio was uninsured.

The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.

Liquidity refers to our ability to maintain cash flow that is adequate to fund operations, support asset growth, maintain reserve requirements and meet present and future obligations of deposit withdrawals, lending obligations and other contractual obligations.

FirstSun (Parent Company)

FirstSun has routine cash needs consisting primarily of operating expenses, debt service, and funds used for acquisitions.

FirstSun has routine funding requirements consisting primarily of operating expenses, debt service, and funds used for acquisitions.

FirstSun can obtain funding to meet its obligations from dividends collected from its subsidiaries, primarily the Bank, and through the issuance of varying forms of debt.

At December 31, 2022, FirstSun has cash and cash equivalents of $17.3 million and debt outstanding of $84.4 million.

At December 31, 2023, FirstSun had available cash and cash equivalents of $34.1 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.

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At December 31, 2023, the Bank could pay dividends to FirstSun of approximately $199.0 million without prior regulatory approval.

During the year ended December 31, 2022, the Bank paid a dividend of $8.0 million to FirstSun.

During the year ended December 31, 2022, Logia paid a dividend of $0.7 million to FirstSun.

During the year ended December 31, 2023, the Bank paid dividends totaling $26.0 million to FirstSun.

During the year ended December 31, 2023, Logia paid dividends totaling $0.6 million to FirstSun.

The Bank’s liquidity management policy and our asset and liability management policy, or ALM policy, provides the framework that we use to seek to maintain adequate liquidity and sources of available liquidity at levels that will enable us to meet all reasonably foreseeable short-term, long-term and strategic liquidity demands.

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At December 31, 2023, our liquid assets, which consist of cash and amounts due from banks and interest-bearing deposits in other financial institutions, amounted to $473.0 million, or 6.0% of total assets, compared to $307.9 million, or 4.1% of total assets, at December 31, 2022.

The decrease in our liquid assets was primarily due to a decrease in cash held at the Federal Reserve.

Our available-for-sale securities at December 31, 2022 were $537.0 million, or 7.2% of total assets, compared to $572.5 million, or 10.1% of total assets, at December 31, 2021.

Investment securities with an aggregate carrying value of $428.7 million and $465.7 million at December 31, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and repurchase agreements.

The decrease in our pledged securities was primarily due to changes in public deposits and repurchase agreements.

The increase in our liquid assets was primarily due to an increase in cash held at the Federal Reserve.

At December 31, 2023, approximately 85% of the investment securities portfolio was pledged as collateral to secure public deposits and repurchase agreements.

Our unencumbered available-for-sale securities at December 31, 2023 were $81.5 million, or 1.0% 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.

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Customer deposits have historically provided a sizeable source of relatively stable and low-cost funds.

At December 31, 2022, net loans as a percentage of customer deposits were 102.5%, compared with 83.2% at December 31, 2021.

At December 31, 2023, loans as a percentage of customer deposits were 98.3%, 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, from which we can borrow for leverage or liquidity purposes.

The FHLB requires that securities and qualifying loans be pledged to secure any advances.

At December 31, 2022, we had $643.9 million in advances from the FHLB and a remaining credit availability of $357.0 million.

In addition, we maintain a $6.1 million line with the Federal Reserve Bank’s discount window that is secured by certain loans from our loan portfolio, and have unused lines-of-credit with certain other financial institutions totaling $330.0 million as of December 31, 2022.

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 December 31, 2023, are as follows:

FHLB borrowings available $ 706,367

Fed Funds lines 2,028,410

Unused lines with other financial institutions 309,917

Immediate funding availability $ 3,044,694

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.

Stockholders’ equity at December 31, 2023 was $877.2 million, compared to $774.5 million at 2022, an increase of $102.7 million, or 13.3%.

The increase in stockholders’ equity relates primarily to the value of the common shares issued to the Pioneer shareholders in our Merger with Pioneer on April 1, 2022, and net income for the year ended December 31, 2022, partially offset by a decline in accumulated other comprehensive income (loss), net, for unrealized losses in our available-for-sale securities portfolio resulting from the rising interest rate environment.

The increase in stockholders’ equity relates primarily to net income for the year ended December 31, 2023.

We did not pay a dividend to our common shareholders during the years ended December 31, 2023 or 2022.

Capital Adequacy

We are subject to various regulatory capital requirements administered by the federal banking agencies.

Management routinely analyzes our capital to ensure an optimized capital structure.

Management routinely analyzes our capital to seek to ensure an optimized capital structure.

For further information on capital adequacy see Note 19 - Regulatory Capital Matters to the consolidated financial statements.

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Long-term debt:

FHLB term advances 12 — — — — —

Convertible notes payable 12 5,456 5,456 — — —

Subordinated debt 12 78,919 — — — 78,919

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis