FirstSun Capital Bancorp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results include FirstSun and its banking and mortgage subsidiaries. Dollar amounts below are in millions unless noted.
Business and period context
FirstSun is a Denver-based bank holding company operating Sunflower Bank, N.A. and mortgage and wealth-management businesses, with banking markets in Texas, Kansas, Colorado, New Mexico and Arizona. Comparisons with 2022 are affected by the April 1, 2022 Pioneer Bancshares acquisition: 2022 results include Pioneer only from the acquisition date and include substantial merger expenses.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $73.8 | $58.6 | $148.0 | $99.9 |
| Provision for credit losses | $4.4 | $5.0 | $7.8 | $8.7 |
| Noninterest income | $24.3 | $22.3 | $43.2 | $46.0 |
| Noninterest expense | $58.0 | $75.7 | $114.3 | $128.1 |
| Net income | $28.0 | $0.4 | $54.3 | $8.1 |
| Diluted EPS | $1.11 | $0.02 | $2.14 | $0.36 |
- Q2 net interest margin was 4.24%, up from 3.56%; six-month margin was 4.31%, up from 3.34%. Management attributed the improvement to higher loan yields and earning-asset growth, while funding costs also rose.
- Q2 return on average assets was 1.49% and return on average equity was 13.54%. The efficiency ratio was 59.15%.
- Mortgage banking income was $11.7 in Q2, essentially flat year over year, but fell to $19.1 for the first half from $26.2. First-half mortgage originations for sale declined to $0.4 billion from $0.6 billion.
- Six-month cash flow: $65.5 provided by operating activities, $225.1 used in investing, and $308.8 provided by financing. Cash and cash equivalents rose $149.2 to $492.7.
Financial position, liquidity and capital
- Total assets were $7.80 billion at June 30, up from $7.43 billion at year-end. Loans held for investment were $6.16 billion, up from $5.91 billion; deposits were $6.15 billion, up from $5.77 billion.
- Deposit mix shifted: noninterest-bearing deposits declined to $1.67 billion from $1.82 billion, while interest-bearing deposits rose to $4.48 billion from $3.94 billion. Deposit interest expense was $20.7 in Q2 versus $2.2 a year earlier.
- Borrowed funds totaled $651.1, including $570.6 of FHLB advances. The FHLB line had $525.4 of additional availability; a $2.77 billion Federal Reserve line and $280 million of other credit lines were undrawn.
- Management reported bank liquid assets of $485.6, or 6.2% of assets. Loans were 100.1% of customer deposits. Estimated uninsured deposits were $2.0 billion, or 32.5% of deposits; $1.5 billion was uninsured and uncollateralized.
- Stockholders’ equity was $823.6, versus $774.5 at year-end. The Bank was categorized as well-capitalized; its CET1 ratio was 10.97% and total risk-based capital ratio was 12.04%. No cash dividends were reported for the periods presented.
- Available-for-sale securities had a $515.96 carrying value and $64.84 of gross unrealized losses at quarter-end. Management said losses primarily reflected interest rates and market spreads, not credit impairment, and reported no plan or expected requirement to sell before recovery.
Material changes, outlook and risks
- Year-over-year earnings improved substantially, partly because Q2 2022 included $18.4 of Pioneer merger expenses and a $2.9 provision related to acquired loans marked at a premium. Management reported no merger-related expenses in the first half of 2023.
- Management expects funding costs to continue rising over the remainder of 2023. It also does not expect mortgage banking revenue to sustain prior-year levels, citing higher rates, low housing inventory, lower refinancing activity and narrower sale margins.
- Credit quality warrants attention: nonperforming loans increased to $67.8 from $29.0 at year-end, and the nonperforming-loan ratio rose to 1.10% from 0.49%. Management linked the increase primarily to deterioration in one customer relationship. The allowance for credit losses was $77.4, or 1.26% of loans; first-half net charge-offs were $0.8.
- FirstSun adopted CECL on January 1, 2023, increasing the loan allowance by $5.3 million and reducing retained earnings by $3.8 million net of tax. The filing identifies allowance estimates and fair-value measurements as areas involving significant judgment.
- Management believes liquidity is adequate, but notes deposit competition, customer withdrawals and uncertainty following 2023 bank failures. Interest-rate sensitivity modeling showed estimated 12-month net interest income up 8.8% under a +300 basis-point shock and down 9.9% under a -300 basis-point shock; modeled economic value of equity fell 10.2% under +300 basis points.
- The MOVEit vendor vulnerability was disclosed in July 2023. The company was still assessing its scope and expected no material impact on future consolidated financial statements.
- Legal matters include a pending overdraft-fee class action and a check-fraud case with a motion to set aside a default judgment pending and trial scheduled for January 2024. The company says outcomes cannot be reasonably estimated, while management does not currently expect a material adverse effect overall. A separate wire-transfer case was settled and dismissed in March 2023 without material financial impact.
Important facts for investors to verify
- Whether deposit pricing, deposit mix and uninsured deposit balances continue to pressure funding costs and liquidity.
- Whether the increase in nonaccrual loans reflects isolated borrower deterioration or broader portfolio stress, and whether reserve levels remain adequate.
- How mortgage production, sale margins, servicing income and MSR valuations develop as rates and housing-market conditions change.
- Whether the expected rise in funding costs and modeled interest-rate sensitivity alter future net interest margin and earnings.
- Updates on the MOVEit incident, the pending litigation, and the timing and repayment or conversion of the $5.46 million convertible notes due August 31, 2023.