FirstSun Capital Bancorp — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited consolidated results. FirstSun is a bank holding company whose subsidiary, Sunflower Bank, operates community banking and mortgage businesses. Unless otherwise noted, dollar figures below are in millions.
Financial performance and position
| Metric | Q1 2024 | Comparable period / prior date |
|---|---|---|
| Net interest income | $70.8 | $74.1 in Q1 2023 |
| Noninterest income | $22.8 | $18.9 in Q1 2023 |
| Provision for credit losses | $16.5 | $3.4 in Q1 2023 |
| Noninterest expense | $61.8 | $56.3 in Q1 2023; includes $2.5 merger-related expense |
| Net income / diluted EPS | $12.3 / $0.45 | $26.3 / $1.03 in Q1 2023 |
| Net interest margin | 3.99% | 4.39% in Q1 2023 |
| Efficiency ratio | 66.05% | 60.47% in Q1 2023 |
| Operating cash flow | $27.1 | $24.8 in Q1 2023 |
| Total assets | $7,781.6 | $7,879.7 at Dec. 31, 2023 |
| Loans held for investment | $6,284.9 | $6,267.1 at Dec. 31, 2023 |
| Total deposits | $6,445.4 | $6,374.1 at Dec. 31, 2023 |
| Borrowed funds | $220.3 | $464.8 at Dec. 31, 2023 |
| Stockholders’ equity | $964.7 | $877.2 at Dec. 31, 2023 |
Quarter-end cash and cash equivalents were $383.6 million, down from $479.4 million at year-end. The bank reported $3.14 billion of immediate funding availability, including FHLB capacity, Federal Reserve lines and other bank lines. The Bank’s CET1 ratio was 12.05% and total risk-based capital ratio was 13.18%; it remained categorized as well-capitalized. FirstSun reported no common dividends for the quarter.
Material changes and drivers
- Net income fell year over year as higher funding costs compressed net interest income and a specific commercial-and-industrial customer exposure drove a $17.4 million loan charge-off. Management said Q1 earnings were also reduced by $2.3 million of after-tax merger costs. Excluding those costs, management reported non-GAAP net income of $14.6 million and diluted EPS of $0.53.
- Interest income increased, including from higher loan yields, but interest expense rose more: deposit interest expense was $36.4 million versus $14.2 million in Q1 2023. Management cited deposit repricing and a shift toward certificates of deposit as key margin pressures.
- Noninterest income grew to $22.8 million, mainly from mortgage banking. Mortgage Operations reported $3.1 million of pretax income, versus a $2.4 million loss a year earlier; Banking pretax income declined to $16.1 million from $38.8 million.
- Loan balances increased modestly from year-end; management reported annualized Q1 loan growth of 1.1% and deposit growth of 4.5%. The allowance for credit losses was $79.8 million, or 1.27% of loans, compared with $80.4 million, or 1.28%, at year-end.
- Nonperforming loans were $57.6 million, or 0.92% of loans, compared with $63.1 million, or 1.01%, at year-end. Nonaccrual loans increased to $57.5 million from $37.3 million, while loans more than 90 days past due and still accruing declined to $0.1 million from $25.8 million.
- Available-for-sale securities declined to $499.1 million. The portfolio had $68.0 million of gross unrealized losses, which management attributed primarily to interest rates and market spreads, not credit impairment; the company reported no securities credit impairment.
Outlook, merger, risks and contingencies
- FirstSun expected the HomeStreet merger to close in Q4 2024, subject to regulatory approvals and other closing conditions. The April 30, 2024 amendment, disclosed as a subsequent event, revised the exchange ratio to 0.3867 FirstSun shares per HomeStreet share and increased the planned merger-related equity raise to as much as $235 million. It also provides for $48.5 million of subordinated debt at closing and HomeStreet’s disposition of approximately $300 million of certain CRE loans.
- The company issued 2.46 million shares to Wellington-related funds for $80 million in January. Additional merger financing and warrants are contingent on closing. The amendment also changes the planned bank structure and charter; execution, approvals, financing, integration, dilution and potential costs remain material uncertainties.
- Management said mortgage banking revenue is not expected to return to prior-year levels in the immediate future, citing rising rates, low housing inventory, lower refinance volumes and reduced loan-sale margins.
- Funding and market risks include deposit competition, interest-rate sensitivity and uninsured deposits. Approximately 32.0% of deposits were estimated uninsured at quarter-end; 25.2% were estimated uninsured and uncollateralized. Management reported adequate liquidity and described its liquidity sources, but cash declined during the quarter.
- Legal matters include a putative overdraft-fee class action now in discovery, for which the Bank could not reasonably estimate the outcome, and a check-fraud case with a jury award of approximately $2.1 million plus potential legal fees. Management believes insurance will cover the latter judgment and that the matters will not materially adversely affect the financial statements, while noting outcomes remain uncertain.
- Management identified credit-loss estimation, fair-value measurements and interest-rate exposure as important judgment and risk areas. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Track the specific C&I borrower charge-off, subsequent credit performance, nonaccrual trends and whether the allowance remains adequate.
- Monitor deposit costs, deposit mix and uninsured balances alongside net interest margin and liquidity levels.
- Verify HomeStreet merger approvals, closing timetable, final financing terms, share issuance and dilution, planned subordinated debt, and the CRE loan disposition.
- Assess mortgage banking results against management’s stated near-term outlook and the sensitivity of mortgage servicing rights to valuation assumptions.
- Follow the overdraft-fee litigation and the final judgment and insurance recovery in the check-fraud case.