Business context and reporting period
FirstSun Capital Bancorp’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2022. The company operates Sunflower Bank and provides banking, trust and mortgage services across several western and southwestern states. Comparisons with 2021 are affected by the April 1, 2022 acquisition of Pioneer Bancshares; Pioneer’s results are included only from the closing date.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $58.6 million | $36.4 million | $99.9 million | $74.8 million |
| Net interest margin | 3.56% | 2.81% | 3.34% | 3.00% |
| Noninterest income | $22.3 million | $32.3 million | $46.0 million | $66.2 million |
| Noninterest expense | $75.7 million | $56.6 million | $128.1 million | $111.8 million |
| Provision for (reversal of) loan losses | $5.0 million | $(1.4) million | $8.7 million | $(1.8) million |
| Net income | $0.4 million | $11.3 million | $8.1 million | $25.6 million |
| Diluted EPS | $0.02 | $0.60 | $0.36 | $1.37 |
- Drivers: Higher net interest income reflected acquired and organic loan growth and improved margin. Mortgage banking income fell to $11.7 million in Q2 from $22.9 million; lower mortgage gains and fees, margin compression, and rising rates weighed on results. Q2 merger expenses were $18.4 million; the company also recorded $2.9 million of provision related to certain acquired loans purchased at a premium, which management said was not due to post-acquisition credit deterioration.
- Balance sheet at June 30: Assets were $7.06 billion; loans held for investment, net of deferred fees and discounts, were about $5.39 billion; deposits were $5.93 billion; and stockholders’ equity was $727.5 million. Compared with December 31, 2021, loans rose about $1.35 billion and deposits about $1.08 billion, primarily reflecting Pioneer.
- Credit: Allowance for loan losses was $56.1 million, or 1.04% of loans, versus $47.5 million, or 1.18%, at year-end. Nonperforming loans were $38.3 million (0.71% of loans), up from $34.8 million (0.86%); nonperforming assets were $43.7 million (0.62% of assets).
- Cash flow and liquidity: First-half operating cash flow was $33.4 million, compared with $52.5 million a year earlier. Cash and cash equivalents ended at $510.7 million, down $157.8 million from year-end; the decrease included $113.6 million of net deposit outflows and was offset in part by cash acquired in the merger. Management reported Bank liquid assets of $312.4 million, or 4.4% of assets, and additional FHLB borrowing availability of $765.0 million. It stated that available sources were adequate for expected needs.
- Funding, debt and capital: Borrowed funds totaled about $239.9 million, including $160.0 million of FHLB advances, $74.7 million of subordinated debt and $5.3 million of convertible notes. The Bank’s regulatory capital ratios remained above well-capitalized thresholds: total risk-based capital 11.50%, CET1 10.63%, and Tier 1 leverage 9.83%. Parent-company ratios were 11.60%, 9.59%, and 8.89%, respectively.
- Other notable balance-sheet item: Accumulated other comprehensive loss was $39.4 million at June 30, principally reflecting unrealized losses on available-for-sale securities amid rising rates.
Material changes, outlook and risks
- Pioneer added 19 Texas branches and materially expanded assets, loans, deposits, and the share count. Merger-related costs were $18.8 million for the first half. Purchase-price fair values remained preliminary and subject to adjustment during the measurement period.
- Management said it does not expect mortgage banking revenue to remain at prior-year levels, citing rising rates, lower refinance volumes, housing inventory constraints, and narrower sale margins. The filing provides no quantified earnings or margin guidance.
- Interest-rate sensitivity modeling estimated that a parallel 300-basis-point increase would raise 12-month net interest income by 17.3% but reduce economic value of equity by 1.8%; a 100-basis-point decrease would reduce net interest income by 6.4% and economic value of equity by 1.5%. These are modeled scenarios, not forecasts.
- Key risks include merger integration and realization of expected benefits, credit quality and economic conditions, changing rates and deposit behavior, mortgage market contraction, liquidity and capital needs, cybersecurity and operational disruption, and the transition to CECL in 2023. COVID-19-related economic effects and supply-chain, labor, inflation, and geopolitical uncertainty also remain risks.
- Legal matters include an overdraft-fee class action whose dismissal was appealed, a separate overdraft/insufficient-funds fee case pending decision on a motion to dismiss, and a wire-transfer lawsuit alleging approximately $5.1 million in fraudulent transfers. Management said it could not reasonably estimate the wire case’s outcome but did not expect the described matters, based on available information, to have a material adverse effect; outcomes remain uncertain. A trust-administration matter was settled and dismissed in July 2022.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Its Chief Accounting Officer retired effective August 9, 2022; the CFO was appointed Principal Accounting Officer the following day.
Important facts for investors to verify
- How much of future earnings improvement depends on completing Pioneer integration, achieving expected synergies, and controlling merger-related costs.
- Whether net interest margin gains persist as market rates and deposit costs change, and how actual results compare with the filing’s interest-rate sensitivity scenarios.
- Mortgage origination volumes, sale margins, MSR valuation and hedging results, given management’s expectation of lower mortgage banking revenue.
- Loan quality trends, including criticized/classified exposures, past-due and nonaccrual balances, and the adequacy of the allowance as the portfolio grows.
- Deposit stability and uninsured deposits: the filing estimated approximately $2.5 billion of deposits were uninsured at June 30.
- Progress on the remaining legal proceedings and any updates to preliminary Pioneer purchase accounting or related fair-value estimates.