FirstSun Capital Bancorp — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited. FirstSun is a financial holding company operating community banking, trust and mortgage businesses through Banking and Mortgage Operations segments.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $40.0 million | $34.3 million | $114.8 million | $99.2 million |
| Noninterest income | $28.7 million | $42.7 million | $94.8 million | $109.1 million |
| Net income | $8.7 million | $14.8 million | $34.3 million | $36.3 million |
| Diluted EPS | $0.46 | $0.81 | $1.83 | $1.98 |
| Net interest margin | 3.01% | 3.03% | 3.00% | 3.08% |
At September 30, 2021, assets were $5.68 billion, deposits $4.86 billion, net loans $3.76 billion and stockholders’ equity $519.9 million. Cash and cash equivalents were $949.5 million. Total assets and deposits increased from December 31, 2020 ($5.00 billion and $4.15 billion, respectively), while net loans declined from $3.80 billion.
For the first nine months, operating cash flow was $82.7 million, investing cash outflow $10.9 million, and financing cash inflow $675.7 million; cash increased by $747.6 million to $949.5 million. Deposit growth was the main financing source. Total period-end borrowings included $117.0 million of repurchase agreements, $40.0 million of FHLB advances, $19.3 million of convertible notes and $49.9 million of subordinated debt, net.
FirstSun and Sunflower Bank met applicable capital requirements; the Bank was classified as well-capitalized. FirstSun’s total risk-based capital ratio was 12.55%, and the Bank’s was 12.76%. The company reported $556.5 million of additional FHLB borrowing availability and a fully available $9.4 million Federal Reserve line. Management stated available liquidity was adequate for current and reasonably foreseeable needs.
Changes versus comparable periods
- Q3 net income fell about 41% year over year, chiefly as mortgage banking income declined $15.4 million. Q3 mortgage originations fell 25% to $532.7 million; Banking segment pretax income improved to $7.1 million from $0.3 million, while Mortgage Operations pretax income declined to $5.5 million from $19.2 million.
- Q3 net interest income rose 16%, reflecting loan growth and lower deposit costs. NIM was nearly flat year over year, with lower funding costs offset by lower earning-asset yields and elevated cash balances.
- Nine-month net income declined about 5%. Lower mortgage banking income and higher expenses more than offset stronger net interest income after provision for loan losses.
- The provision for loan losses was $3.5 million in Q3 versus $4.8 million a year earlier, and $1.8 million for the nine months versus $15.1 million. The allowance was $47.9 million, or 1.26% of loans. Nonperforming assets were $36.1 million, 0.63% of assets, versus $39.4 million and 0.79% at year-end 2020.
- Noninterest expense was $54.6 million in Q3, including $0.7 million of merger costs; nine-month expense rose to $166.4 million from $149.1 million, including $2.0 million of merger costs. The reported efficiency ratio increased to 79.49% for Q3 from 70.56%.
Outlook, risks and unusual items
- Pioneer merger: Shareholders approved the proposed merger in September; regulatory approval and other closing conditions remained outstanding. Management expected closing in Q4 2021. Pioneer had $1.6 billion of assets, $1.0 billion of loans and $1.3 billion of deposits; FirstSun said the combined company was expected to exceed $7 billion in assets. No financial guidance was provided.
- Mortgage and interest-rate exposure: Management cited reduced refinance activity, lower gain-on-sale margins and changes in market rates, mortgage spreads and hedges as factors affecting mortgage revenue and mortgage servicing rights. Interest-rate sensitivity modeling showed estimated 12-month net interest income increasing 10.2% under an instantaneous +100-basis-point scenario and declining 1.0% under -100 basis points; these are modeled scenarios, not forecasts.
- COVID-19 and credit: Management said the pandemic’s future effects remained uncertain. Active COVID-related payment deferrals were $21.3 million versus $65.8 million at year-end 2020; nine residential loans totaling $2.5 million remained actively modified under the CARES Act. PPP loans outstanding were $116.5 million, down from $256.3 million; the program had ended, and SBA forgiveness receipts were expected to continue into 2023.
- Legal contingencies: The Bank is defending trust-administration claims involving distributions of approximately $19.7 million and two putative overdraft-fee class actions. Management considered the claims without merit and did not expect the proceedings to have a material adverse effect based on information then available, while acknowledging an unfavorable outcome could affect a future period.
- Other risks include deposit flows, borrower credit quality, liquidity, and merger approval, integration and execution. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Pioneer merger received regulatory approval and closed as anticipated, and its final terms, costs and integration effects.
- Whether the large cash and deposit balances were sustained, including the extent of stimulus-related deposits and the effect on earning-asset yields and NIM.
- Subsequent mortgage production, gain-on-sale margins, MSR valuation and hedging results as refinancing activity changed.
- Loan-quality trends, allowance assumptions, charge-offs, payment deferrals and PPP forgiveness collections.
- Developments and any loss estimates or reserve changes in the trust and overdraft-fee litigation.
- The cover page checks “No” for the question about filing all required reports in the preceding 12 months and being subject to those requirements for the past 90 days; verify the registrant’s reporting history and the reason for that response.