Firstsun Capital Bancorp: Form 10-Q for the period ended Jun 30, 2024

In this section, unless the context suggests otherwise, references to “we,” “us,” and “our” mean the combined business of FirstSun and its wholly-owned subsidiaries, Sunflower Bank, Logia Portfolio Management, LLC, and FEIF Capital Partners, LLC.

The following discussion and analysis of FirstSun’s consolidated financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as our audited consolidated financial statements and footnotes for the year ended December 31, 2023 included in our 2023 Annual Report that we filed with the SEC on March 7, 2024. Historical results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or results of operations for any future periods.

Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” beginning on page 3 of this report.

General Overview

FirstSun Capital Bancorp, headquartered in Denver, Colorado, is the financial holding company for Sunflower Bank, National Association, which is headquartered in Dallas, Texas and operates as Sunflower Bank, First National 1870 and Guardian Mortgage. We conduct a full-service community banking and trust business through our wholly-owned subsidiaries—Sunflower Bank, Logia Portfolio Management, LLC, and FEIF Capital Partners, LLC. Sunflower Bank is currently regulated by the Office of the Comptroller of the Currency. We have filed applications to convert Sunflower Bank to a state chartered bank regulated by the Texas Department of Banking and to seek membership with the Federal Reserve later this year.

We offer a full range of relationship-focused services to meet our clients’ personal, business and wealth management financial objectives, with a branch network in Texas, Kansas, Colorado, New Mexico, and Arizona and mortgage capabilities in 43 states. Our product lines include commercial and industrial loans, commercial real estate loans, residential mortgage, public finance and other consumer loans, and a variety of commercial and consumer deposit products, including noninterest-bearing accounts, interest-bearing demand products, savings accounts, money market accounts and certificates of deposit. We also offer wealth management and trust products including personal trust and agency accounts, employee benefit and retirement related trust and agency accounts, investment management and advisory agency accounts, and foundation and endowment trust and agency accounts. We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs for our customers.

We operate FirstSun through two operating segments: Banking and Mortgage Operations. We also allocate certain expenses to Corporate, which is not an operating segment. The expenses included in Corporate are not deemed to be allocable to our operating segments. The operating segments have been determined based on the products and services we offer and reflect the manner in which our financial information is evaluated by management. Each of the operating segments is complementary to each other and because of the interrelationship of the segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. For additional information on our segments, see Note 14 - Segment Information included in our consolidated financial statements included elsewhere in this report.

Pending Merger with HomeStreet, Inc. and Common Equity Raise

On January 16, 2024, FirstSun and HomeStreet entered into a definitive merger agreement. Under the merger agreement, FirstSun will continue as the surviving entity and Sunflower Bank will continue as the surviving bank. On April 30, 2024, FirstSun and HomeStreet entered into an amendment to the merger agreement that, among other things, increased total capital raised in connection with the merger, revised the share exchange ratio pursuant to which the HomeStreet shareholders will receive FirstSun common stock, and reduced the termination fee payable by HomeStreet in certain circumstances. The amendment was unanimously approved by the Boards of Directors of each of FirstSun and HomeStreet. On June 18, 2024, HomeStreet’s shareholders approved the merger agreement. For more complete information related to the Merger Agreement and Amendment see Proposed Merger with HomeStreet in Note 1 - Organization and Basis of Presentation in our unaudited consolidated financial statements included elsewhere in this report.

The merger is expected to close in the fourth quarter of 2024 and the combined entity is expected to have total assets of approximately $17 billion and 129 branch locations. The combined entity’s expanded footprint includes, FirstSun’s current presence in the Southwest and Midwest together with HomeStreet’s presence in Southern California, Hawaii and the Pacific Northwest.

Concurrently with entry into the HomeStreet merger agreement, FirstSun entered into investment agreements with investors to raise capital to support the merger. These agreements included an initial $80 million investment in FirstSun common stock. Concurrently with the amendment to the merger agreement, FirstSun entered into an amendment to the investment agreements with the investors to increase the amount of investment to support the merger. In June 2024, FirstSun and the investors entered into a Joinder to the Acquisition Finance Securities Purchase Agreement. For additional information related to the agreements to raise additional capital for the merger, including the Joinder, see Investment Agreements in Note 1 - Organization and Basis of Presentation in our unaudited consolidated financial statements included elsewhere in this report.

Financial Summary

Second Quarter 2024 Highlights:

• Net income of $24.6 million, $0.88 per diluted share (excluding merger costs, $25.2 million, $0.90 per diluted share, see the “Non-GAAP Financial Measures and Reconciliations” below)
• Net interest margin of 4.02%
• Return on average total assets of 1.26% (excluding merger costs, 1.29%, see the “Non-GAAP Financial Measures and Reconciliations” below)
• Return on average stockholders’ equity of 10.03% (excluding merger costs, 10.28%, see the “Non-GAAP Financial Measures and Reconciliations” below)
• Loan growth of 3.3% annualized
• Deposit growth of 10.8% annualized
• 24.2% noninterest income to total revenue1

Net income totaled $24.6 million, or $0.88 per diluted share, for the second quarter of 2024, compared to $28.0 million, or $1.11 per diluted share, for the second quarter of 2023. Net income for the second quarter of 2024 was negatively impacted by $0.6 million of merger costs, net of tax, or $0.02 per diluted share. The return on average total assets was 1.26% for the second quarter of 2024, compared to 1.49% for the second quarter of 2023, and the return on average stockholders’ equity was 10.03% for the second quarter of 2024, compared to 13.54% for the second quarter of 2023. Second quarter of 2024 merger costs, net of tax negatively affected return on average total assets by 0.03% and return on average stockholders’ equity by 0.25%.

Net income totaled $36.9 million, or $1.32 per diluted share, for the six months ended June 30, 2024, compared to $54.3 million, or $2.14 per diluted share, for the same period in 2023. Net income for the six months ended June 30, 2024 were negatively impacted by a $10.6 million provision for credit loss on a specific customer in our C&I loan portfolio, net of tax, or $0.38 per diluted share, and $2.9 million in merger costs, net of tax, or $0.11 per diluted share. The return on average total assets was 0.95% for the six months ended June 30, 2024, compared to 1.46%, for the same period in 2023, and the return on average stockholders’ equity was 7.62% for the six months ended June 30, 2024, compared to 13.46%, for the same period in 2023. For the six months ended June 30, 2024, merger costs, net of tax negatively affected return on average total assets by 0.08% and return on average stockholders’ equity by 0.60%.

1 Total revenue is net interest income plus noninterest income.

The following table sets forth certain summary financial and other information of FirstSun:

($ in thousands, except share and per share amounts)

55

Non-GAAP Financial Measures and Reconciliations

The non-GAAP financial measures presented below are used by our management and our Board of Directors on a regular basis in addition to our GAAP results to facilitate the assessment of our financial performance. Management believes these non-GAAP financial measures enhance an investor’s understanding of our financial results by providing a meaningful basis for period-to-period comparisons, assisting in operating results analysis, and predicting future performance. This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a substitute for, our GAAP results. Accordingly, this financial information should be read in conjunction with our consolidated financial statements and notes thereto for the three and six months ended June 30, 2024, included elsewhere in this report. Non-GAAP financial measures exclude certain items that are included in the financial results presented in accordance with GAAP. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.

The following table presents GAAP to non-GAAP reconciliations:

($ in thousands, except share and per share amounts)

56

($ in thousands, except share and per share amounts)

57

Segments

Banking

Three months ended June 30, 2024 and 2023

Income before income taxes decreased $4.9 million to $32.0 million for the second quarter of 2024, from $36.9 million for the same period in 2023. The period over period decrease was primarily due to a decrease in net interest income and an increase in salary and employee benefits partially offset by a decrease in provision for credit losses. Net interest income decreased $4.0 million to $69.7 million for the second quarter of 2024, compared to $73.6 million for the same period in 2023, primarily due to an increase in the cost of interest-bearing deposits amidst the elevated interest rate environment and a shift in mix to certificate of deposits. Salary and employee benefits increased $4.8 million to $31.0 million for the second quarter of 2024, from $26.2 million for the same period in 2023, primarily due to increased headcount, including the hiring of C&I bankers. Provision for credit losses decreased $3.5 million to $0.2 million for the second quarter of 2024, from $3.6 million for the same period in 2023. Identifiable assets for our Banking segment remained largely unchanged at $6.9 billion at June 30, 2024 and 2023.

Six months ended June 30, 2024 and 2023

Income before income taxes decreased $27.5 million to $48.1 million for the six months ended June 30, 2024, from $75.7 million for the same period in 2023. The period over period decrease was primarily due to a decrease in net interest income, an increase in provision for credit losses, and an increase in salary and employee benefits. Net interest income decreased $8.9 million to $138.2 million for the six months ended June 30, 2024 compared to $147.1 million for the same period in 2023, primarily due to an increase in the cost of interest-bearing deposits amidst the elevated interest rate environment and a shift in mix to certificate of deposits. Provision for credit losses increased $12.0 million to $18.0 million for the six months ended June 30, 2024, compared to $6.1 million for the same period in 2023, primarily due to a $17.4 million charge-off of a specific customer in our C&I portfolio. Salary and employee benefits increased $6.8 million to $60.8 million for the six months ended June 30, 2024, compared to $54.0 million for the same period in 2023, primarily due to increased headcount, including the hiring of C&I bankers.

Mortgage Operations

Three months ended June 30, 2024 and 2023

Income before income taxes increased $0.7 million to $1.7 million for the second quarter of 2024, compared to $1.0 million for the same period in 2023. The period over period increase was primarily due to an increase in net interest income partially offset by an increase in salary and employee benefits. Net interest income increased $3.0 million to $4.5 million for the second quarter of 2024, compared to $1.5 million for the same period in 2023, primarily due to higher average balance and higher average yield on residential real estate loans. Salary and employee benefits increased $1.2 million to $8.4 million for the second quarter of 2024, compared to $7.3 million for the same period in 2023, primarily due to higher levels of variable compensation associated with an increase in mortgage loan originations. Identifiable assets for our Mortgage Operations segment grew by $0.2 billion to $1.0 billion at June 30, 2024 from $0.8 billion at June 30, 2023. The growth in identifiable assets was primarily driven by organic growth in our residential mortgage portfolio.

Six months ended June 30, 2024 and 2023

Income (loss) before income taxes increased $6.2 million to $4.8 million for the six months ended June 30, 2024, compared to a loss of $1.4 million for the same period in 2023. The period over period increase was primarily due to an increase in net interest income and an increase in revenue from mortgage banking services, partially offset by an increase in salary and employee benefits. Net interest income increased $4.6 million to $8.0 million for the six months ended June 30, 2024, compared to $3.4 million for the same period in 2023, primarily due to higher average balance and higher average yield on residential real estate loans. Revenue from mortgage banking services increased $2.0 million to $21.7 million for the six months ended June 30, 2024, compared to $19.7 million for the same period in 2023, primarily due to an increase in revenue related to net sale gains and fees from mortgage loan originations, including fair value changes in the held-for-sale portfolio and hedging activity. Salary and employee benefits increased $1.6 million to $15.6 million for the six months ended June 30, 2024, compared to $14.0 million for the same period in 2023, primarily due to higher levels of variable compensation associated with an increase in mortgage loan originations.

Critical Accounting Estimates

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Our accounting and reporting estimates are in accordance with generally accepted accounting principles, or “U.S. GAAP,” and conform to general practices within the banking industry. Estimates that are susceptible to significant changes include accounting for the allowance for credit losses and fair value measurements of MSRs, both of which require significant judgments by management. Actual results could result in material changes to our consolidated financial condition or consolidated results of operations.

Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the determination of the allowance for credit losses and fair value measurements of MSRs to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, we consider these policies to be critical accounting estimates and we discuss them directly with the audit committee of our board of directors at least annually.

The following is a description of our critical accounting estimates and an explanation of the methods and assumptions underlying their application.

Allowance for Credit Losses - Management maintains an ACL for loans based upon management’s estimate of the lifetime expected credit losses in the loan portfolio as of the balance sheet date, excluding loans held for sale. Additionally, management maintains an ACL for held-to-maturity or available-for-sale debt securities, and other off-balance sheet credit exposures (e.g., unfunded loan commitments). For loans and unfunded loan commitments, the estimate of lifetime credit losses includes the use of quantitative models that incorporate forward-looking macroeconomic scenarios that are applied over the contractual lives of the portfolios, adjusted, as appropriate, for prepayments and permitted extension options using historical experience. For purposes of the ACL for lending commitments, such allowance is determined using the same methodology as the ACL for loans, while also taking into consideration the probability of drawdowns or funding, and whether such commitments are cancellable by us. The ACL for held-to-maturity and available-for-sale debt securities is measured using a risk-adjusted discounted cash flow approach that also considers relevant current and forward-looking economic variables and the ACL is limited to the difference between the fair value of the security and its amortized cost. Judgment is specifically applied in the determination of economic assumptions, length of the initial loss forecast period, the reversion of losses beyond the initial forecast period, usage of macroeconomic scenarios, probabilities of default, losses given default, amortization and prepayment rates, and qualitative factors, which may not be adequately captured in the loss model, as further discussed below.

The macroeconomic scenarios utilized by management include variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to, unemployment rates, housing and commercial real estate prices, gross domestic product levels, corporate bond spreads and changes in equity market prices. Management derives the economic forecasts it uses in its ACL model from Moody’s Analytics. The latter has a large team of economics, database managers and operational engineers with a history of producing monthly economic forecasts for over 25 years.

Management has currently set an initial forecast period (“reasonable and supportable period”) of four years and a reversion period of one year, utilizing a straight-line approach and reverting back to the historical macroeconomic mean. After the reversion period, a historical loss forecast period covering the remaining contractual life, adjusted for prepayments, is used based on changes in key historical economic variables during representative historical expansionary and recessionary periods. Changes in economic forecasts impact the probability of default (“PD”), loss-given default (“LGD”), and exposure at default (“EAD”) for each instrument, and therefore influence the amount of future cash flows for each instrument that management does not expect to collect.

Further, management periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not limited to, factors such as the following: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions; (ii) organization specific risks such as credit concentrations, collateral specific risks, nature, and size of the portfolio and external factors that may ultimately impact credit quality, and (iii) other limitations associated with factors such as changes in underwriting and loan resolution strategies, among others. The qualitative factors applied on June 30, 2024, and the importance and levels of the qualitative factors applied, may change in future periods depending on the level of changes to items such as the uncertainty of economic conditions and management’s assessment of the level of credit risk within the loan portfolio as a result of such changes, compared to the amount of ACL calculated by the model. The evaluation of qualitative factors is inherently imprecise and requires significant management judgment.

The ACL can also be impacted by factors outside of management’s control, which include unanticipated changes in asset quality of the portfolio, such as deterioration in borrower delinquencies, or credit scores in our residential real estate and consumer portfolio. Further, the current fair value of collateral is utilized to assess the expected credit losses when a financial asset is considered to be collateral dependent.

Our process for determining the ACL is further discussed in “Note 1 - Basis of Presentation, Description of Business and Summary of Significant Accounting Policies” in our 2023 Annual Report.

Fair Value Measurement of MSRs - Our residential mortgage servicing rights are measured at fair value on a recurring basis. We estimate the fair value of our MSRs using a process that utilizes a discounted cash flow model and analysis of current market data to arrive at the estimate. The cash flow assumptions used in the model are based on numerous factors, with the key assumptions being mortgage prepayment speeds, discount rates and cost to service that management believes are consistent with the assumptions that other similar market participants use in valuing MSRs. The change of any of these key assumptions due to market conditions or other factors could materially affect the fair value of our MSRs. We also utilize a third-party consulting firm to assist us with the valuation. Because of the nature of the valuation inputs, we classify the valuation of our MSRs as Level 3 in the fair value hierarchy. See Note 4 - Mortgage Servicing Rights for our assumptions used in valuing the MSRs. For information concerning the hypothetical sensitivity of the key assumptions under adverse changes on our MSRs, see the table under “Noninterest Income” elsewhere in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report.

Results of Operations

The following table sets forth components of our results of operations:

($ in thousands, except per share amounts)

General

Our results of operations depend significantly on net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of interest income on loans and investment securities and interest expense on interest-bearing liabilities, consisting primarily of deposits and borrowings. Our results of operations are also dependent on our generation of noninterest income, consisting primarily of income from mortgage banking services, service charges on deposit accounts, trust and investment advisory fees and credit and debit card fees. Other factors contributing to our results of operations include our provisions for credit losses, income taxes, and noninterest expenses, such as salaries and employee benefits, occupancy and equipment, amortization of intangible assets and other operating costs.

Net Interest Income

Net interest income, representing interest income less interest expense, is a significant contributor to our revenues and earnings. We generate interest income from interest and dividends on interest-earning assets, which are principally comprised of loans and investment securities. We incur interest expense from interest owed or paid on interest-bearing liabilities, including interest-bearing deposits, FHLB advances and other borrowings. Net interest income and margin are shaped by the characteristics of the underlying products, including volume, term and structure of each product. We measure and monitor yields on our loans and other interest-earning assets, the costs of our deposits and other funding sources, our net interest spread and our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets.

Interest earned on our loan portfolio is the largest component of our interest income. Our loan portfolios are presented at the principal amount outstanding net of deferred origination fees and unamortized discounts and premiums. Interest income is recognized based on the principal balance outstanding and the stated rate of the loan. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan. Non-PCD loans acquired are initially recorded at fair value and the resulting discount or premium are recognized as an adjustment of the yield on the related loans.

Our net interest income can be significantly influenced by a variety of factors, including overall loan demand, economic conditions, credit risk, the amount of non-earning assets including nonperforming loans and OREO, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities, exercise of call options on borrowings or securities, a general rise or decline in interest rates, changes in the slope of the yield-curve, and balance sheet growth or contraction.

Three months ended June 30, 2024 and 2023

Our net interest income was $72.9 million for the second quarter of 2024, a decrease of $0.9 million, or 1.3%, compared to the same period in 2023. Interest income on loans increased by $9.9 million for the second quarter of 2024, compared to the same period in 2023. Interest income on investment securities increased by $0.5 million for the second quarter of 2024, compared to the same period in 2023. Interest expense from total interest-bearing liabilities increased by $13.4 million for the second quarter of 2024, compared to the same period in 2023.

Total average loans grew to $6.4 billion at June 30, 2024, an increase of $0.2 billion or 2.6%, compared to June 30, 2023, due to organic growth in our loan portfolio. Yield on loans increased 46 basis points for the second quarter of 2024, compared to the same period in 2023, primarily due to the elevated interest rate environment for the second quarter of 2024 as compared to the lower, yet rising interest rate environment for the second quarter of 2023, its impact on variable rate loans, and higher yields on new originations.

Average interest-bearing liabilities increased $0.3 billion, or 6.3%, for the second quarter of 2024, compared to the same period in 2023, primarily to support the growth in our loan portfolio. Average interest-bearing deposits increased $0.7 billion, or 15.7%, for the second quarter of 2024, compared to the same period in 2023. Average FHLB borrowings decreased $0.3 billion, or 72.3%, for the second quarter of 2024, compared to the same period in 2023.

Our net interest margin was 4.02% for the second quarter of 2024, compared to 4.24% for the same period in 2023, a decrease of 22 basis points. We experienced a 45 basis point increase in yield from earning assets while our total cost of funds increased by 90 basis points, for the second quarter of 2024 as compared to the same period in 2023. In the second quarter of 2024, compared to the same period in 2023, we saw the level of increase in our total cost of funds exceed the level of increase in yield from earning assets primarily as a result of the mix shift within our deposit base to certificates of deposits and the overall rising deposit cost across all deposit products.

Six months ended June 30, 2024 and 2023

Our net interest income was $143.7 million for the six months ended June 30, 2024, a decrease of $4.2 million, or 2.9%, compared to the same period in 2023. Interest income on loans increased by $23.5 million for the six months ended June 30, 2024, compared to the same period in 2023. Interest income on investment securities increased by $0.9 million for the six months ended June 30, 2024, compared to the same period in 2023. Interest expense from total interest-bearing liabilities increased by $31.9 million for the six months ended June 30, 2024, compared to the same period in 2023.

Total average loans grew to $6.3 billion at June 30, 2024, an increase of $0.2 billion, compared to June 30, 2023, primarily due to organic growth in our loan portfolios. Yield on loans increased 52 basis points for the six months ended June 30, 2024, compared to the same period in 2023, primarily due to the elevated interest rate environment for the six months ended June 30, 2024 as compared to the lower, yet rising interest rate environment for the same period in 2023, its impact on variable rate loans, and higher yields on new originations.

Average interest-bearing liabilities increased $0.4 billion, or 7.7%, for the six months ended June 30, 2024, compared to the same period in 2023. Average interest-bearing deposits increased $0.7 billion, or 17.4%, for the six months ended June 30, 2024, compared to the same period in 2023. Average FHLB borrowings decreased $0.3 billion, or 73.9%, for the six months ended June 30, 2024, compared to the same period in 2023.

Our net interest margin was 4.00% for the six months ended June 30, 2024, compared to 4.31% for the same period in 2023, a decrease of 31 basis points. We experienced a 52 basis point increase in yield from earning assets and our total cost of funds increased by 110 basis points for the six months ended June 30, 2024, compared to the same period in 2023. In the six months ended June 30, 2024, we saw the level of increase in our total cost of funds exceed the level of increase in yield from earning assets primarily as a result of the mix shift within our deposit base to certificates of deposits and the overall rising deposit cost across all deposit products.

The following tables set forth information related to our average balance sheet, average yields on assets, and average costs of liabilities for the periods presented. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated.

As of and for the three months ended June 30,:

(In thousands)

63

As of and for the six months ended June 30,:

(In thousands)

64

Rate-Volume Analysis

The tables below present the effect of volume and rate changes on interest income and expense. Changes due to volume are changes in the average balance multiplied by the previous period’s average rate. Changes due to rate are changes in the average rate multiplied by the average balance from the prior period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.

(In thousands)

(In thousands)

65

Provision for Credit Losses

We established an allowance for credit losses through a provision for credit losses charged as an expense in our consolidated statements of income. The provision for credit losses is the amount of expense that, based on our judgment, is required to maintain the allowance for credit losses at an adequate level to absorb expected losses in the loan portfolio at the balance sheet date and that, in management’s judgment, is appropriate under GAAP. Our determination of the amount of the allowance for credit losses and corresponding provision for credit losses considers ongoing evaluations of the credit quality and level of credit risk inherent in our loan portfolio, levels of nonperforming loans and charge-offs, statistical trends and economic and other relevant factors. The allowance for credit losses is increased by the provision for credit losses and is decreased by charge-offs, net of recoveries on prior loan charge-offs.

We had a provision for credit losses of $1.2 million for the second quarter of 2024, compared to $4.4 million for the same period in 2023, primarily due to lesser loan growth and more stable credit quality indicators in the loan portfolio.

We had a provision for credit losses of $17.7 million for the six months ended June 30, 2024, compared to $7.8 million for the same period in 2023. The increase in the provision for credit losses for the six months ended June 30, 2024 was primarily due to a $17.4 million charge-off on a specific customer in our C&I loan portfolio in the first quarter of 2024.

Noninterest Income

The following table presents noninterest income:

(In thousands)

Three months ended June 30, 2024 and 2023

Our noninterest income decreased $1.0 million to $23.3 million for the second quarter of 2024 from $24.3 million for the same period in 2023.

Service charges on deposit accounts includes overdraft and non-sufficient funds charges, treasury management services provided to our business customers, and other maintenance fees on deposit accounts. For the second quarter of 2024, service charges on deposit accounts increased $0.6 million, compared to the same period in 2023, primarily due to increased treasury management service fee income.

Credit and debit card fees represent interchange income from credit and debit card activity and referral fees earned from processing fees on card transactions by our business customers. Credit and debit card fees decreased $0.1 million for the second quarter of 2024 compared to the same period in 2023, as card transaction volumes decreased slightly.

Trust and investment advisory fees represent fees we receive in connection with our investment advisory and custodial management services of investment accounts. Trust and investment advisory fees were largely unchanged for the second quarter of 2024 as compared to the same period in 2023.

The components of income from mortgage banking services were as follows:

(In thousands)

For the second quarter of 2024, income from mortgage banking services decreased $0.6 million, compared to the same period in 2023. Total loan originations sold were $282.5 million for the second quarter of 2024, an increase of $34.8 million from $247.8 million for the same period in 2023. The increase in loan originations sold and higher margins, resulted in the increase in revenue related to net sale gains and fees from loan originations, including fair value changes in the held-for-sale portfolio and hedging activity. MSR capitalization and changes in fair value, net of derivative activity, decreased $1.9 million in the second quarter of 2024, compared to the same period in 2023. The decrease in revenue related to our MSRs was primarily the result of changes in market interest rates and our corresponding hedging positions. We recognize fair value adjustments to our MSR asset, which includes changes in assumptions to the valuation model and pay-offs and pay-downs of the MSR portfolio. We also maintain a hedging strategy to manage a portion of the risk associated with changes in the fair value of our MSR portfolio. Changes in fair value of the derivative instruments used to economically hedge the MSRs are also included as a component of income from mortgage banking services. Due to a number of factors and until we see a change in these factors, including elevated interest rates, low inventory in the housing market and lower refinance volumes, for the immediate future, we do not expect revenue from mortgage banking activities to return to levels seen in prior years which will reduce the amount of income from mortgage banking services, net, recorded in future periods in comparison to prior year periods.

The following table shows the hypothetical effect on the fair value of our MSRs when applying certain unfavorable variations of key assumptions to these assets as of June 30, 2024.

These hypothetical sensitivities should be evaluated with care. The effect on fair value of an adverse change in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.

We also maintain a hedging strategy to manage a portion of the risk associated with changes in the fair value of our MSR portfolio. Changes in fair value of the derivative instruments used to economically hedge the MSRs are also included as a component of income from mortgage banking services.

Other noninterest income decreased $1.0 million for the second quarter of 2024 compared to the same period in 2023, primarily due to a decrease in loan syndication and agency fees.

Six months ended June 30, 2024 and 2023

Our noninterest income increased $2.9 million to $46.1 million for the six months ended June 30, 2024 from $43.2 million for the same period in 2023.

For the six months ended June 30, 2024, service charges on deposit accounts increased $1.3 million, compared to the same period in 2023, primarily due to increased treasury management service fee income.

Credit and debit card fees decreased $0.2 million for the six months ended June 30, 2024 compared to the same period in 2023, as card transaction volumes decreased slightly.

Trust and investment advisory fees were largely unchanged for the six months ended June 30, 2024 as compared to the same period in 2023.

The components of income from mortgage banking services were as follows:

(In thousands)

For the six months ended June 30, 2024, income from mortgage banking services increased $1.5 million, compared to the same period in 2023. Total loan originations for sale were $492.4 million for the six months ended June 30, 2024, an increase of $58.5 million from $433.9 million for the same period in 2023. The increase in loan originations sold and higher margins, resulted in the increase in revenue related to net sale gains and fees from loan originations, including fair value changes in the held-for-sale portfolio and hedging activity. We retain servicing rights on the majority of mortgage loans that we sell, which drove the increase in servicing income of $0.6 million to $8.3 million for the six months ended June 30, 2024, from $7.7 million for the six months ended June 30, 2023. MSR capitalization and changes in fair value, net of derivative activity, decreased $1.6 million in the six months ended June 30, 2024, compared to the same period in 2023. The decrease in revenue related to our MSRs was primarily the result of changes in market interest rates and our corresponding hedging positions.

Other noninterest income increased $0.3 million for the six months ended June 30, 2024 compared to the same period in 2023, primarily due to an increase in income from BOLI.

Noninterest Expense

The following table presents noninterest expense:

(In thousands)

Three months ended June 30, 2024 and 2023

Our noninterest expenses increased $5.8 million to $63.9 million for the second quarter of 2024, from $58.0 million for the same period in 2023.

Salary and employee benefits increased $5.8 million to $39.8 million for the second quarter of 2024, from $34.1 million for the same period in 2023, primarily due to increased headcount, including the hiring of C&I bankers, and higher variable compensation due to an increase in mortgage loan originations.

Amortization of intangible assets decreased $1.4 million to $0.7 million for the second quarter of 2024, primarily due to accelerated amortization in the second quarter of 2023 of our core deposit intangible asset recognized in conjunction with a prior acquisition.

Noninterest expense for the second quarter of 2024 included $1.0 million in merger related expenses. There were no merger related expenses for the same period in 2023.

Six months ended June 30, 2024 and 2023

Our noninterest expenses increased $11.4 million to $125.7 million for the six months ended June 30, 2024, from $114.3 million for the same period in 2023.

Salary and employee benefits increased $8.1 million to $77.2 million for the six months ended June 30, 2024, from $69.1 million for the same period in 2023, primarily due to increased headcount, including the hiring of C&I bankers, and higher variable compensation due to an increase in mortgage loan originations.

Amortization of intangible assets decreased $1.6 million to $1.5 million for the six months ended June 30, 2024, from $3.1 million for the same period in 2023, primarily due to accelerated amortization in the second quarter of 2023 of our core deposit intangible asset recognized in conjunction with a prior acquisition.

Merger related expenses for the six months ended June 30, 2024 were $3.5 million. There were no merger related expenses during the same period in 2023.

Income Taxes

Three months ended June 30, 2024 and 2023

We had income tax expense for the second quarter of 2024 of $6.5 million, compared to income tax expense of $7.7 million for the same period in 2023. The decrease in income tax expense was due to our decreased income during the second quarter of 2024. Our effective tax rate was 21.0% for the second quarter of 2024, compared to 21.5% for the same period in 2023.

Six months ended June 30, 2024 and 2023

We had income tax expense for the six months ended June 30, 2024 of $9.5 million, compared to $14.8 million for the same period in 2023. The decrease in income tax expense was primarily due to our decreased income during the period ended June 30, 2024. Our effective tax rate was 20.5% for the six months ended June 30, 2024, compared to 21.4% for the same period in 2023.

Financial Condition

Balance Sheet

Our total assets were $8.0 billion and $7.9 billion, total liabilities were $7.0 billion and $7.0 billion, and total stockholders’ equity was $1.0 billion and $0.9 billion at June 30, 2024 and December 31, 2023, respectively.

Investment Securities

Our securities portfolio is used to make various term investments, maintain a source of liquidity and serve as collateral for certain types of deposits and borrowings. We manage our investment portfolio according to written investment policies approved by our board of directors. Investment in our securities portfolio may change over time based on our funding needs and interest rate risk management objectives. Our liquidity levels take into account anticipated future cash flows and other available sources of funds, and are maintained at levels that we believe are appropriate to provide the necessary flexibility to meet our anticipated funding requirements.

Our investment securities portfolio consists of securities classified as available-for-sale and held-to-maturity. There were no trading securities in our investment portfolio as of June 30, 2024 and December 31, 2023. All available-for sale securities are carried at fair value and may be used for liquidity purposes should management consider it to be in our best interest.

Our securities available-for-sale decreased by $25.1 million to $491.6 million at June 30, 2024, compared to December 31, 2023. The decrease was primarily due to amortization of the portfolio. During the period ended June 30, 2024, the securities held-to-maturity decreased $0.7 million to $36.3 million.

The following table is a summary of our investment portfolio as of:

(In thousands)

The following table shows the weighted average yield to average life of each category of investment securities as of June 30, 2024:

(In thousands)

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Loans

Our loan portfolio represents a broad range of borrowers primarily in our markets in Texas, Kansas, Colorado, New Mexico, and Arizona, primarily comprised of commercial and industrial, commercial real estate, residential real estate, and public finance loans. We have a diversified portfolio across a variety of industries, and the portfolio is generally centered in the states in which we have branch offices. Our lending focus continues to be on operating companies, including commercial and industrial loans and lines-of-credit, as well as owner occupied commercial real estate loans.

Total loans held-for-investment, net of deferred fees, costs, premiums and discounts were $6.3 billion at June 30, 2024 and December 31, 2023.

The following table sets forth the composition of our loan portfolio, as of:

(In thousands)

Commercial and industrial loans include loans to commercial customers for use in normal business operations to finance working capital needs, equipment and inventory purchases, and other expansion projects. These loans are made primarily in our market areas and are underwritten on the basis of the borrower’s ability to service the debt from revenue, and are generally extended under our normal credit standards, controls and monitoring systems.

Commercial real estate (“CRE”) loans include owner occupied and non-owner occupied commercial real estate mortgage loans to operating commercial and agricultural businesses, and include both loans for long-term financing of land and buildings and loans made for the initial development or construction of a commercial real estate project. Non-owner occupied CRE loans were 80.9% of the Company’s risk-based capital, or 13.7% of total loans as of June 30, 2024. Non-owner occupied CRE loans associated with office space were $103.7 million, or 1.6% of total loans as of June 30, 2024. Owner occupied CRE loans associated with office space were $184.0 million, or 2.9% of total loans as of June 30, 2024.

Residential real estate loans represent loans to consumers collateralized by a mortgage on a residence and include purchase money, refinancing, secondary mortgages, and home equity loans and lines of credit.

Public finance loans include loans to our charter school and municipal based customers.

Consumer loans include direct consumer installment loans, credit card accounts, overdrafts and other revolving loans.

Other loans consist of loans to nondepository financial institutions, lease financing receivables and loans for agricultural production.

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following tables is based on the contractual maturities of individual loans, including loans that may be subject to renewal at their contractual maturity. Renewal of these loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties. The following tables summarize the loan maturity distribution by type and related interest rate characteristics as of June 30, 2024:

(In thousands)

(In thousands)

Allowance for Credit Losses

We maintain the allowance for credit losses at a level we believe is sufficient to absorb expected losses in our loan portfolio given the conditions at the time and our estimates of future economic conditions. Events that are not within our control, such as changes in economic factors, could change subsequent to the reporting date and could cause increases or decreases to the allowance. The amount of the allowance is affected by loan charge-offs, which decrease the allowance; recoveries on loans previously charged off, which increase the allowance; and the provision for credit losses charged to earnings, which increases the allowance.

In determining the provision for credit losses, management monitors fluctuations in the allowance resulting from actual charge-offs and recoveries and reviews the size and composition of the loan portfolio in light of current and anticipated economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as events change.

The following table presents, by loan type, the changes in the allowance for credit losses:

(In thousands)

The following table presents net charge-offs (recoveries) to average loans outstanding by loan category:

(In thousands)

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Allocation of Allowance for Credit Losses

The following table presents the allocation of the allowance for credit losses by category and the percentage of the allocation of the allowance for credit losses by category to total loans listed as of:

(In thousands)

Nonperforming Assets

We have established policies and procedures to guide us in originating, monitoring and maintaining the credit quality of our loan portfolio. These policies and procedures are expected to be followed by our bankers and underwriters and exceptions to these policies require elevated levels of approval and are reported to our board of directors.

Nonperforming assets include all loans categorized as nonaccrual, accrual loans greater than 90 days past due, and other real estate owned and other repossessed assets. The accrual of interest on loans is discontinued, or the loan is placed on nonaccrual, when the full collection of principal and interest is in doubt. We do not generally accrue interest on loans that are 90 days or more past due. When a loan is placed on nonaccrual, previously accrued but unpaid interest is reversed and charged against interest income and future accruals of interest are discontinued. Payments by borrowers for loans on nonaccrual are applied to loan principal. Loans are returned to accrual status when, in our judgment, the borrower’s ability to satisfy principal and interest obligations under the loan agreement has improved sufficiently to reasonably assure recovery of principal and the borrower has demonstrated a sustained period of repayment performance. In general, we require a minimum of six consecutive months of timely payments in accordance with the contractual terms before returning a loan to accrual status.

The following table sets forth our nonperforming assets as of:

(In thousands)

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Deposits

Deposits represent our primary source of funds. Total deposits increased by $0.2 billion to $6.6 billion at June 30, 2024, compared to December 31, 2023.

We are focused on growing our core deposits through relationship-based banking with our business and consumer clients. The following table presents our deposits by customer type as of:

($ in thousands)

The following table sets forth the average balance amounts and the average rates paid on deposits held by us:

(Dollars in thousands)

As of June 30, 2024 and December 31, 2023, approximately $2.1 billion or 32.1% and $2.0 billion or 31.2%, respectively, of our deposit portfolio was uninsured. As of June 30, 2024 and December 31, 2023, approximately $1.7 billion or 25.5% and $1.6 billion or 25.1%, respectively, of our deposit portfolio was uninsured and uncollateralized. The uninsured and uninsured and uncollateralized amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.

We actively participate in the IntraFi Cash Service (“ICS”) / Certificate of Deposit Account Registry Service (“CDARS”) program which provides FDIC insurance coverage for clients that maintain larger deposit balances. Deposits in the ICS /

CDARS program totaled $0.6 billion, or 8.9% of all deposits as of June 30, 2024, and $0.6 billion, or 9.2% of all deposits as of December 31, 2023.

The following table sets forth the portion of the Bank's time deposits, by account, that are in excess of the FDIC insurance limit, by remaining time until maturity, as of June 30,:

(In thousands)

Liquidity

Liquidity refers to our ability to maintain cash flow that is adequate to fund operations, support asset growth, maintain reserve requirements and meet present and future obligations of deposit withdrawals, lending obligations and other contractual obligations.

FirstSun (Parent Company)

FirstSun has routine funding requirements consisting primarily of operating expenses, debt service, and funds used for acquisitions. FirstSun can obtain funding to meet its obligations from dividends collected from its subsidiaries, primarily the Bank, and through the issuance of varying forms of debt. At June 30, 2024, FirstSun had available cash and cash equivalents of $109.9 million and debt outstanding of $78.9 million. Management believes FirstSun has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short-term and the long-term.

Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. The Bank may declare dividends without prior regulatory approval that do not exceed the total of retained net income for the current year combined with its retained net income for the preceding two years, subject to maintenance of minimum capital requirements. Prior regulatory approval to pay dividends was not required in 2023 and is not currently required. At June 30, 2024, the Bank could pay dividends to FirstSun of approximately $183.4 million without prior regulatory approval. During the six months ended June 30, 2024, the Bank did not pay dividends to FirstSun. Upon conversion to a Texas state chartered bank with membership with the Federal Reserve, regulations related to dividends will change, including the amount of dividends available to be paid without prior regulatory approval.

Bank

As more fully discussed in our 2023 Annual Report, we regularly monitor our liquidity position and make adjustments to the balance between sources and uses of funds as we deem appropriate. At June 30, 2024, our liquid assets, which consist of cash and amounts due from banks and interest-bearing deposits in other financial institutions, amounted to $527.6 million, or 6.6% of total assets, compared to $473.0 million, or 6.0% of total assets, at December 31, 2023. The increase in our liquid assets was primarily due to an increase in cash held at the Federal Reserve. At June 30, 2024, approximately 85% of the investment securities portfolio was pledged as collateral to secure public deposits and repurchase agreements. Our unencumbered available-for-sale securities at June 30, 2024 were $74.2 million, or 0.9% of total assets, compared to $81.5 million, or 1.0% of total assets, at December 31, 2023.

The liability portion of our balance sheet serves as a primary source of liquidity. We plan to meet our future cash needs primarily through the generation of deposits. Customer deposits have historically provided a sizeable source of relatively stable and low-cost funds. At June 30, 2024, loans as a percentage of customer deposits were 95.7%, compared with 98.3% at December 31, 2023. For additional information related to our deposits, see Deposits section above. We are also a member of the FHLB and FRB, from which we can borrow for leverage or liquidity purposes. The FHLB and FRB requires that securities and qualifying loans be pledged to secure any advances. Liquidity sources available to us for immediate funding at June 30, 2024, are as follows:

Management believes the Bank has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short-term and the long-term.

Capital

Stockholders’ equity at June 30, 2024 was $996.6 million, compared to $877.2 million at December 31, 2023, an increase of $119.4 million, or 13.6%. As previously announced, concurrent with the entry into the merger agreement with HomeStreet on January 16, 2024, we entered into an upfront securities purchase agreement with certain funds managed by Wellington Management Company, LLP, pursuant to which we issued 2.46 million shares of our common stock in a private placement for $80.0 million that closed on January 17, 2024.

We did not pay a dividend to our common shareholders for the three or six months ended June 30, 2024 and 2023.

Capital Adequacy

We are subject to various regulatory capital requirements administered by the federal banking agencies. Management routinely analyzes our capital to seek to ensure an optimized capital structure. For further information on capital adequacy see Note 12 - Regulatory Capital Matters to the consolidated financial statements.

Material Contractual Obligations, Commitments, and Contingent Liabilities

We have entered into contractual obligations in the normal course of business that involve elements of credit risk, interest rate risk and liquidity risk.

The following table summarizes our material contractual obligations as of June 30, 2024. Further discussion of each obligation or commitment is included in the referenced note to the consolidated financial statements.

(In thousands)

We are party to various derivative contracts as a means to manage the balance sheet and our related exposure to changes in interest rates, to manage our residential real estate loan origination and sale activity, and to provide derivative contracts to our clients. Since the derivative liabilities recorded on the balance sheet change frequently and do not represent the amounts that may ultimately be paid under these contracts, these liabilities are not included in the table of contractual obligations presented above. Further discussion of derivative instruments is included in Note 5 - Derivative Financial Instruments to the consolidated financial statements.

In the normal course of business, various legal actions and proceedings are pending against us and our affiliates which are incidental to the business in which they are engaged. Further discussion of contingent liabilities is included in Note 15 - Commitments and Contingencies to the consolidated financial statements.

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments. Further discussion of contingent liabilities is included in Note 15 - Commitments and Contingencies to the consolidated financial statements.

Market risk is the risk of reduced earnings and/or declines in the net market value of the balance sheet due to changes in market rates. Our primary market risk is interest rate risk which impacts our net interest income, fee income related to interest sensitive activities such as mortgage origination and servicing income and loan and deposit demand.

We are subject to interest rate risk due to:

• the maturity or repricing of assets and liabilities at different times or for different amounts;
• differences in short-term and long-term market interest rate changes; and
• the remaining maturity of various assets or liabilities may shorten or lengthen as interest rates change.

Our Asset Liability Committee, or ALCO, which is composed of our executive officers and certain other members of management, monitors interest rate risk on an ongoing basis in accordance with policies approved by our board of directors. The ALCO reviews interest rate positions and considers the impact projected interest rate scenarios have on earnings, liquidity, business strategies and other factors. However, management has the latitude to change interest rate positions within certain limits if, in management’s judgment, the change will enhance profitability or minimize risk.

To assess and manage interest rate risk, sensitivity analysis is used to determine the impact on earnings and the net market value of the balance sheet across various interest rate scenarios, balance sheet trends, and strategies.

Management uses a simulation model to analyze the sensitivity of net interest income to changes in interest rates across various interest rate scenarios, which seeks to demonstrate the level of interest rate risk inherent in the existing balance sheet. The analysis holds the current balance sheet values constant and does not take into account management intervention.

Additionally our simulation model incorporates various key assumptions, which we believe are reasonable, but may have an impact on the results such as: (1) we assume certain correlation rates, often referred to as “deposit beta,” for interest-bearing deposits, wherein the rates paid to customers change relative to changes in benchmark interest rates, (2) cash flows and maturities of interest sensitive assets and liabilities, (3) re-pricing characteristics for market rate sensitive instruments, (4) prepayment rates and product mix of assets and liabilities, and (5) simulations do not contemplate any actions management may undertake in response to changes in interest rates. Because of limitations in any approach used to measure interest rate risk, simulation results are not intended to forecast actual results driven by the effect of a change in market rates but to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.

The primary impact of inflation on operations is reflected in increasing operating costs and non-interest expense. Our interest-bearing assets and liabilities are monetary in nature and changes in interest rates will impact our performance on net interest margin more than changes in the general rate of inflation.

The effect on net interest income over a 12-month time horizon due to hypothetical changes in market interest rates is presented in the table below. In this interest rate shock simulation, as of the periods presented, interest rates have been adjusted by instantaneous parallel changes rather than in a ramp simulation, which applies interest rate changes over time. All rates, short-term and long-term, are changed by the same amount (e.g., plus or minus 100 basis points) resulting in the shape of the yield curve remaining unchanged.

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a. Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as such term is defined in Rule 15d-15(e) promulgated under the Securities and Exchange Act of 1934) as of June 30, 2024. Based on that evaluation, we concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

b. Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended June 30, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors set forth in the section titled “Risk Factors” included in our 2023 Annual Report.