FirstSun Capital Bancorp — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts below are in millions of dollars unless otherwise noted. Comparisons are year over year for income and cash-flow results, and against December 31, 2020 for balance-sheet data.
Business context
FirstSun is the holding company for Sunflower Bank and operates Banking and Mortgage Operations segments, with banking and trust services across several western and southwestern states and mortgage capabilities in 43 states. On May 11, 2021, FirstSun agreed to acquire Pioneer Bancshares in an all-stock transaction; the filing expected closing in Q4 2021, subject to regulatory and Pioneer shareholder approvals.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $36.4 | $32.9 | $74.8 | $64.8 |
| Noninterest income | $32.3 | $44.1 | $66.2 | $66.4 |
| Provision (benefit) for loan losses | $(1.4) | $7.5 | $(1.8) | $10.3 |
| Noninterest expense | $56.6 | $51.7 | $111.8 | $94.8 |
| Net income | $11.3 | $14.4 | $25.6 | $21.6 |
| Diluted EPS | $0.60 | $0.79 | $1.37 | $1.18 |
- Margins and returns: Net interest margin was 2.81% for Q2 (2.98% prior year) and 3.00% for the first half (3.11% prior year). Q2 efficiency ratio was 82.44% versus 67.10%; first-half ratio was 79.30% versus 72.22%. First-half return on average assets was 0.97%; return on average equity was 10.12%.
- Balance sheet at June 30: Assets were $5.56 billion, up from $5.00 billion at year-end. Deposits were $4.75 billion, up from $4.15 billion. Net loans were $3.75 billion, down from $3.80 billion. Stockholders’ equity was $510.6 million, up from $485.8 million.
- Cash flow and liquidity: First-half operating cash flow was $52.5 million, investing cash flow was $22.9 million, and financing cash flow was $563.2 million. Cash and cash equivalents ended at $840.6 million, up from $202.0 million at year-end; management cited higher balances at the Federal Reserve and considered available liquidity adequate. Available-for-sale securities were $509.0 million.
- Debt and capital: June 30 balances included $40.0 million of FHLB advances, $19.1 million of convertible notes (net), and $49.8 million of subordinated debt (net), plus $113.8 million of repurchase agreements. The Bank’s regulatory ratios exceeded well-capitalized thresholds: total risk-based capital 12.62%, CET1 11.61%, and Tier 1 leverage 9.24%.
- Credit quality: Allowance for loan losses was $43.0 million, or 1.13% of loans, versus $47.8 million, or 1.24%, at year-end. Nonperforming assets rose to $47.4 million from $39.4 million; nonperforming loans were 1.14% of loans versus 0.94%. Net charge-offs were $3.0 million in the first half.
Material changes and management commentary
- Q2 net income declined $3.1 million year over year, largely because mortgage banking income fell $15.3 million; higher net interest income after the loan-loss benefit partially offset the decline. First-half net income increased $4.0 million, mainly due to improved net interest income after provision.
- Mortgage banking income was $22.9 million in Q2 versus $38.2 million, reflecting lower origination gains and fees amid a 14.4% decline in quarterly originations to $616.6 million. For the first half, mortgage banking income was $48.0 million versus $54.5 million, despite originations increasing to $1.3 billion; management cited lower gain-on-sale margins and reduced MSR-related revenue.
- Banking segment Q2 pre-tax income improved to $8.2 million from a $4.2 million loss, primarily because loan-loss provisioning shifted to a benefit as economic assumptions improved. Mortgage Operations pre-tax income declined to $8.0 million from $23.2 million.
- Expenses increased, with first-half noninterest expense up $17.0 million. Drivers included higher staffing and compensation, growth-related costs, data processing and merger expenses. Q2 included $1.3 million of merger expenses.
- COVID-19 remains a source of uncertainty. Active payment deferrals were $25.5 million at June 30, down from $65.8 million at year-end. CARES Act modifications covered 18 residential loans totaling $8.0 million. PPP loans outstanding were $207.6 million; the company said it did not expect to fund additional PPP loans and expected SBA forgiveness payments into 2023.
Outlook, risks and contingencies
- Management expected the Pioneer merger to close in Q4 2021; completion depended on regulatory approvals and Pioneer shareholder approval. The exchange ratio was 1.0443 FirstSun shares per Pioneer share, plus cash for fractional shares.
- Key risks include merger approval, timing, integration and realization of expected benefits; COVID-19 and its variants; credit quality and economic conditions; interest-rate and market changes; deposit and borrowing behavior; and mortgage volumes, margins and MSR valuations.
- Legal matters include trust-administration litigation seeking, among other relief, approximately $19.7 million related to prior trust distributions, and two putative class actions alleging improper overdraft or insufficient-funds fees. The Bank disputed the claims; management said it did not expect the matters to have a material adverse effect based on information then available, while noting outcomes remained uncertain.
- Commitments included $726.1 million of fixed- and variable-rate loan commitments and unused credit lines, plus $10.2 million of standby letters of credit. The filing said many commitments may expire undrawn. Additional liquidity included $611.8 million of FHLB borrowing availability and a fully available $10.7 million Federal Reserve line.
- The filing states FirstSun elected the emerging-growth-company extended transition period for certain accounting standards and had deferred adoption of lease and credit-loss standards identified in the notes.
Important facts for investors to verify
- Confirm the status and final terms, approvals, timing, costs and integration plans for the proposed Pioneer merger.
- Track whether the improvement in loan-loss assumptions is supported by subsequent credit performance, given higher nonperforming assets and lower allowance coverage of nonaccrual loans.
- Assess sustainability of mortgage revenue and MSR valuations as refinancing activity, interest rates and gain-on-sale margins change.
- Monitor deposit growth and liquidity, including the persistence of stimulus-related balances and the company’s reliance on available borrowing capacity.
- Review the outcomes and potential financial exposure of the trust and overdraft-fee litigation.
- The cover page checks “No” for having filed all required Exchange Act reports during the preceding 12 months and for having been subject to those requirements for the past 90 days; verify the context and any implications.