KBRA Affirms Ratings for FirstSun Capital Bancorp

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Denver, Colorado-based FirstSun Capital Bancorp (OTCQX: FSUN) ("FirstSun" or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its subsidiary, Sunflower Bank, N.A. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by FSUN’s highly experienced management team that operates a banking franchise with a strong core deposit base that comprises a multi-state branch based footprint. The company’s top quartile deposit base reflects favorable characteristics including lower relative cost, geographic diversification, and limited concentrations. FSUN also maintains a diversified revenue stream with non-spread revenue consistently accounting for 20% - 50% of total revenue. However, mortgage banking remains the largest component of noninterest income, while more stable fee income sources include service charges on deposit accounts, treasury management income, trust and investment advisory services, and interchange fees from both credit and debit transactions. Also, the company’s focus on C&I lending has benefited the earnings profile in the current high interest rate environment driving an adjusted RORWA above 1.5%, which contributes to the company’s ability to organically build capital. Earnings have historically been negatively impacted by FSUN’s comparatively elevated expense base, primarily from above average personnel costs and occupancy expenses, which has been related to the elevated organic investment made by the company to build out its footprint. However, the additional scale of the Pioneer Bancshares, Inc. acquisition in 2022 and absence of merger expenses in 1H23 have contributed to an efficiency ratio in line with peer average. The company has a diverse loan portfolio with limited and manageable industry concentrations. More recently, FSUN has experienced a normalization of credit quality with a jump in NPAs in 2Q23, which we view as attributable to idiosyncratic situations. Moreover, KBRA expects the company to resolve any credit quality issues with limited loss content. Net charge-offs have averaged only 6 bps over the last 5 years, which we believe is reflective of management’s conservative credit culture and locally experienced, relationship-driven management teams. Capital levels declined in early 2022 with the deployment of excess liquidity into risk weighted assets, however, the company has boosted capital by 70 bps through 1H23, and management is committed to continuing to grow capital levels going forward.

Rating Sensitivities

A rating upgrade is not expected in the near term. However, a track record of strong core profitability, without materially increasing credit risk, while maintaining a solid core deposit franchise and healthy capital levels could support positive rating momentum over time. Negative rating pressure could occur if capital is sustained below current levels (10% CET1). Additionally, if asset quality problems increase and weigh on earnings, or if the funding base were to materially weaken, the ratings could be pressured.

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