FirstSun Capital Bancorp — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited consolidated results include Sunflower Bank and Logia Portfolio Management. Dollar amounts below are in millions unless otherwise noted.
Business context and comparability
FirstSun operates community banking, trust and mortgage businesses across Texas, Kansas, Colorado, New Mexico and Arizona, with mortgage capabilities in 43 states. Its Pioneer Bancshares merger closed April 1, 2022; therefore, Q1 2023 includes Pioneer, while Q1 2022 does not. Year-over-year comparisons reflect both business growth and the acquired operations.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net interest income | $74.1 | $41.3 |
| Provision for credit losses | $3.4 | $3.7 |
| Noninterest income | $18.9 | $23.7 |
| Noninterest expense | $56.3 | $52.5 |
| Net income | $26.3 | $7.7 |
| Diluted earnings per share | $1.03 | $0.41 |
| Net interest margin | 4.39% | 3.08% |
| Efficiency ratio | 60.47% | 80.75% |
| Return on average assets / equity | 1.44% / 13.37% | 0.54% / 5.85% |
Net interest income rose 79.5%, helped by loan growth, the Pioneer merger and higher asset yields as rates rose. Interest expense also increased substantially: deposit interest expense was $14.2 million versus $1.6 million, and total interest expense was $20.8 million versus $3.4 million. Management said it expects funding costs to continue rising during 2023.
Noninterest income fell 20.1%, primarily as mortgage banking income declined to $7.4 million from $14.6 million. Mortgage originations for sale were approximately $0.2 billion, down from $0.3 billion. Management expects mortgage banking revenue to remain below prior-year levels amid higher rates, lower refinance volumes, low housing inventory and margin pressure. Noninterest expenses increased 7.2%, reflecting higher professional services, occupancy, staffing and acquired-intangible amortization.
Balance sheet, cash flow and capital
- Assets: $7.61 billion at March 31, up from $7.43 billion at year-end. Loans held for investment were $6.06 billion, up from $5.91 billion; reported loan growth was 10.1% annualized.
- Deposits and liquidity: Deposits were $5.99 billion, up $229.2 million since year-end. Cash and cash equivalents were $388.3 million. Liquid assets were reported as $346.9 million, or 4.6% of assets. Loans equaled 101.1% of customer deposits.
- Uninsured deposits: The company estimated $1.5 billion, or 25.5% of deposits, was uninsured and uncollateralized, versus $2.4 billion, or 41.6%, at year-end.
- Borrowing capacity and debt: FHLB advances were $577.3 million, with $480.4 million of additional FHLB availability. The company also reported an undrawn $6.0 million Federal Reserve line and $330.0 million of unused lines at other financial institutions. Subordinated debt was $75.0 million; convertible notes payable were $5.4 million and mature August 2023.
- Cash flow: Operating activities provided $24.8 million; investing activities used $137.8 million; financing activities provided $157.8 million. Cash increased $44.8 million during the quarter.
- Credit quality: Allowance for credit losses was $74.5 million, or 1.23% of loans, compared with $65.9 million, or 1.12%, at year-end. Nonperforming loans were $32.8 million, or 0.54% of loans, versus $29.1 million, or 0.49%. Net charge-offs were $54,000.
- Securities and capital: Available-for-sale securities totaled $532.7 million and had $58.1 million of gross unrealized losses; held-to-maturity securities had $5.0 million of gross unrealized losses. Management attributed losses mainly to interest rates and market spreads, reported no securities credit impairment, and said it did not expect to need to sell affected AFS securities before recovery. Bank capital ratios included 11.77% total risk-based capital and 10.74% CET1; the Bank was categorized as well-capitalized.
Material changes, outlook and risks
- FirstSun adopted the CECL expected-credit-loss standard on January 1, 2023. Adoption increased the loan allowance by $5.3 million, reduced the unfunded-commitment allowance by $0.2 million, and reduced retained earnings by $3.8 million after tax.
- Management stated that available liquidity sources were adequate for current and expected needs. It also highlighted competition for deposits and uncertainty following bank failures in early 2023; possible higher FDIC assessments were noted.
- Interest-rate changes affect loan yields, funding costs, securities values and mortgage activity. The company’s sensitivity analysis showed that a +300-basis-point shock increased modeled 12-month net interest income by 5.9% but reduced economic value of equity by 10.6%. These are simulations, not forecasts.
- In the check-fraud litigation, the Bank disclosed that it learned on May 5, 2023—after quarter-end—that the court had imposed discovery sanctions of $10,000 per day and entered a default judgment on liability. The Bank estimated the underlying claims at at least $400,000; a damages trial remained to be set, and the final outcome could not be reasonably estimated. Management’s broader statement that the described legal matters were not expected to materially adversely affect the financial statements should be considered alongside this development.
- The wire-transfer lawsuit was settled and dismissed in March 2023 with no material impact to the Bank. The overdraft-fee class action remained pending, with the outcome not reasonably estimable. The filing reported no material change to previously disclosed risk factors and no quantified earnings guidance.
Most important facts for investors to verify
- How much deposit repricing, deposit outflow or reliance on wholesale funding will occur as funding costs rise; review uninsured deposits and available borrowing capacity.
- Whether loan credit quality deteriorates, particularly given higher nonperforming loans and the CECL allowance’s sensitivity to economic assumptions.
- Whether mortgage banking revenue continues to weaken and how that affects consolidated earnings.
- The exposure and subsequent developments in the check-fraud case, including daily sanctions, the liability default judgment and the pending damages determination.
- How the Q1 2022 comparison is affected by Pioneer’s exclusion from that period, and whether reported growth persists on a comparable basis.
- Whether unrealized securities losses, capital levels and liquidity remain manageable if rates, deposit competition or market conditions worsen.