FirstSun Capital Bancorp — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results include Pioneer Bancshares from its April 1, 2022 acquisition; comparisons with 2021 are therefore affected by the acquisition. FirstSun operates banking and mortgage businesses across several southwestern states.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $68.5m | $40.0m | $168.4m | $114.8m |
| Provision for loan losses | $3.8m | $3.5m | $12.5m | $1.8m |
| Noninterest income | $25.0m | $28.7m | $70.9m | $94.8m |
| Noninterest expense | $55.5m | $54.6m | $183.7m | $166.4m |
| Net income | $26.5m | $8.7m | $34.6m | $34.3m |
| Diluted EPS | $1.04 | $0.46 | $1.49 | $1.83 |
| Net interest margin | 4.26% | 3.01% | 3.66% | 3.00% |
| Efficiency ratio | 59.45% | 79.49% | 76.76% | 79.37% |
Q3 earnings growth reflected higher net interest income, benefiting from loan growth, Pioneer and higher yields. For the nine-month period, net income was nearly flat while diluted EPS declined, in part reflecting more shares outstanding after the merger. The nine-month results included $18.8m of merger-related expenses ($0.63 per diluted share) and $2.9m of provision associated with certain acquired loans.
Mortgage banking income fell to $13.8m in Q3 from $20.2m, and to $40.0m for nine months from $68.1m. Lower mortgage originations, sale gains and margins were partly offset by higher servicing and mortgage servicing rights (MSR) income. The nine-month efficiency ratio improved modestly, but remained elevated at 76.76%.
Financial position, cash flow and capital
- Balance sheet: Assets were $7.05bn at September 30, versus $5.67bn at year-end 2021. Net loans were $5.50bn, up from $3.99bn; deposits were $5.76bn, up from $4.85bn. Growth reflects both organic activity and Pioneer, which brought $1.19bn of deposits and $811m of loans at acquisition-date fair value.
- Liquidity and funding: Cash and cash equivalents were $325m. The Bank reported liquid assets of $149m, or 2.1% of assets, compared with $583m, or 10.3%, at year-end. Nine-month operating cash flow was $42m; investing used $179m and financing used $207m. Net deposits declined $286m in financing cash flows, notwithstanding the acquisition-related increase in reported deposits. Additional FHLB borrowing availability was $659m; a $6.5m Federal Reserve line and $155m of other undrawn lines were also disclosed. Approximately $2.4bn of deposits were estimated to be uninsured.
- Debt: FHLB advances were $311m, repurchase agreements $51m, convertible notes net $5m, and subordinated debt net $75m. Certain FHLB term advances were called and repaid in October and November 2022, after the reporting date.
- Credit: Allowance for loan losses was $59.7m, or 1.07% of loans, versus $47.5m, or 1.18%, at year-end. Nonperforming loans were 0.76% of loans, compared with 0.86% at year-end; nonperforming assets were 0.68% of assets. Nine-month net charge-offs were $0.3m.
- Capital and securities: Stockholders’ equity was $751m. The Bank’s CET1 ratio was 10.93% and it was categorized as well-capitalized. Available-for-sale securities had $60.3m of gross unrealized losses; nine-month other comprehensive loss, net of tax, was $44.8m. Management attributed the securities marks primarily to rising rates and said it did not expect to need to sell the securities before recovery of principal.
Management outlook, risks and contingencies
- Management expected funding costs to continue rising over the next several quarters. Its rate-shock simulation estimated that a 300-basis-point increase would raise 12-month net interest income by 14.1%, while reducing economic value of equity by 7.5%; these are modeled sensitivities, not forecasts.
- Management did not expect mortgage banking revenue to continue at prior-year levels, citing higher rates, lower refinancing volumes, low housing inventory and mortgage-sale margin pressure.
- The company expected adoption of CECL on January 1, 2023 to increase the loan-loss allowance and reserves for unfunded commitments; it did not expect a significant effect on regulatory capital. The ultimate effect would depend on portfolio conditions and economic forecasts at adoption.
- Management cited uncertainty from inflation, supply-chain and labor pressures, COVID-19 effects, economic conditions and interest rates. It also identified merger integration, credit quality, deposit retention, cybersecurity and operational controls among material risks.
- Legal matters included overdraft-fee litigation, with one matter subject to a confidential settlement, and a disputed $5.1m wire-transfer claim. Management said it could not reasonably estimate the wire case outcome, but did not believe the disclosed matters would, based on information then available, have a material adverse effect on the financial statements.
Most important facts for investors to verify
- Whether Pioneer integration delivers expected operating benefits and whether preliminary purchase-accounting valuations change during the measurement period.
- Deposit trends, funding costs and the composition and stability of the estimated $2.4bn in uninsured deposits.
- Credit quality and allowance adequacy as loan growth continues and CECL is adopted.
- Realized or further changes in securities values, liquidity and the ability to avoid selling securities at a loss.
- Mortgage origination, gain-on-sale and MSR trends, alongside the impact of higher rates on earnings and economic value of equity.
- Developments in the wire-transfer and overdraft litigation, and the repayment of called FHLB advances after quarter-end.