FirstSun Capital Bancorp — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022; this is an annual report, not a standalone fourth-quarter filing. FirstSun is a regional bank holding company operating primarily in Texas, Kansas, Colorado, New Mexico and Arizona, with mortgage lending in more than 40 states. The audited financial statements received an unqualified opinion from Crowe LLP.
Business context and notable developments
- FirstSun completed its acquisition of Pioneer Bancshares on April 1, 2022, adding 19 Texas branches. The acquired business contributed to results from that date; the purchase consideration was $240.8 million.
- At year-end, FirstSun reported $7.43 billion in assets, $5.85 billion in net loans, $5.77 billion in deposits and $774.5 million in stockholders’ equity.
- Common stock began trading on OTCQX in August 2022. The filing describes the market as thinly traded and reports no cash dividends paid in 2022.
Key financial results
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income | $241.6 million | $155.2 million |
| Noninterest income | $89.6 million | $124.2 million |
| Total revenue (net interest income plus noninterest income) | $331.2 million | $279.5 million |
| Provision for loan losses | $18.1 million | $3.0 million |
| Noninterest expense | $239.1 million | $224.6 million |
| Net income | $59.2 million | $43.2 million |
| Diluted earnings per share | $2.48 | $2.30 |
| Net interest margin | 3.87% | 3.00% |
| Return on average assets | 0.88% | 0.79% |
| Return on average equity | 8.55% | 8.37% |
| Efficiency ratio | 72.20% | 80.38% |
| Operating cash flow | $96.9 million | $113.1 million |
Management’s non-GAAP results excluding merger-related costs and a provision on acquired loans were net income of $76.2 million, diluted EPS of $3.20, return on average assets of 1.13%, return on average equity of 11.01%, and an efficiency ratio of 66.54%. These measures are not substitutes for GAAP results.
Balance sheet, credit, funding and capital
- Total assets rose 31% to $7.43 billion, and total loans increased to $5.91 billion from $4.04 billion, reflecting Pioneer and organic growth. Excluding acquired loans and PPP loans, management reported loan growth of 28.4%.
- Deposits rose to $5.77 billion from $4.85 billion. Year-end cash and cash equivalents were $343.5 million, down from $668.5 million. The filing reports liquid assets of $307.9 million, or 4.1% of assets, using its stated liquidity measure.
- Net loans were 102.5% of customer deposits. Approximately $2.4 billion of deposits were estimated to be uninsured. FirstSun reported $643.9 million of overnight FHLB advances, with $357.0 million of remaining FHLB borrowing availability, plus $330.0 million of unused lines with other financial institutions and a $6.1 million available Federal Reserve discount-window line.
- Year-end total borrowed funds were $724.1 million, including FHLB advances, subordinated debt, convertible notes and repurchase agreements. The parent company separately reported $84.4 million of debt outstanding.
- The allowance for loan losses was $65.9 million, or 1.12% of loans, versus $47.5 million, or 1.18%, a year earlier. Net recoveries were $0.3 million. Nonperforming assets were $47.3 million, or 0.64% of assets, compared with $40.3 million, or 0.71%.
- The Bank’s year-end capital ratios were 11.81% total risk-based capital, 10.84% Tier 1 and CET1, and 10.56% Tier 1 leverage. The Bank was categorized as well-capitalized under prompt corrective action rules.
- Available-for-sale securities had a year-end fair value of $537.0 million and gross unrealized losses of $61.1 million. AOCI ended at a loss of $44.0 million, compared with positive $1.7 million in 2021; the filing attributes the decline principally to rising rates.
Material changes versus 2021
- Net interest income increased 55.7%, supported by higher loan balances, the Pioneer acquisition and a 64-basis-point rise in the average yield on loans held for investment. Net interest margin expanded 87 basis points; management said funding costs were expected to rise in 2023.
- Noninterest income fell 27.9%, mainly because mortgage banking income declined to $46.3 million from $86.4 million. Mortgage originations for sale fell to $1.1 billion from $1.7 billion; Mortgage Operations moved from $25.4 million of pretax income to a $4.6 million pretax loss.
- Noninterest expense increased 6.4%. Merger-related expenses were $18.8 million, compared with $3.1 million. Provision for loan losses rose to $18.1 million, including $2.9 million associated with certain acquired loans recorded at a premium; the filing says that provision was not due to post-acquisition credit deterioration.
- Borrowed funds increased substantially, including FHLB advances rising to $643.9 million from $40.0 million. Total stockholders’ equity increased to $774.5 million, largely due to shares issued in the Pioneer merger and earnings, partly offset by securities-related AOCI losses.
Outlook, risks and unusual items
- The filing provides no formal earnings or financial guidance. Management expected elevated interest rates to weigh on mortgage origination activity and revenue in 2023, while deposit funding costs were expected to increase. It also highlighted potential net interest margin pressure from a flat or inverted yield curve.
- FirstSun adopted the CECL credit-loss standard on January 1, 2023. Management’s latest parallel run indicated the initial balance-sheet effect would not be material; this is an estimate, and actual adoption depends on portfolio composition and economic conditions. The company intended to use the three-year regulatory capital transition provision.
- In March 2023, after the year-end reporting date, U.S. bank failures prompted regulatory actions including the Bank Term Funding Program and a potential special FDIC assessment on banks. FirstSun said the consequences were uncertain; these developments are not 2022 operating results.
- Principal risks include deposit retention and liquidity, rising funding costs and rates, securities valuation and potential realized losses, commercial and real estate credit exposure, mortgage-market contraction, acquisition integration, regulation, cybersecurity and fraud. Commercial real estate loans were 210.1% of risk-based capital; commercial and industrial loans were 49.4% of the loan portfolio.
- Two disclosed lawsuits—the overdraft-fee class action and a dispute over approximately $5.1 million in allegedly unauthorized wire transfers—were not reasonably estimable in outcome. Management believed the matters would not have a material adverse effect, while noting future developments could be material in a reporting period.
- FirstSun does not expect near-term common-stock dividends. Ownership is concentrated, with significant stockholders collectively holding substantial influence; the OTCQX shares have limited liquidity.
Important facts for investors to verify
- Deposit trends, uninsured-deposit concentration, deposit pricing and the availability and cost of contingent funding after the March 2023 banking disruptions.
- Whether the stronger net interest income and margin can persist as deposit costs reprice and loan growth, rates and the yield curve change.
- Mortgage profitability and servicing-rights valuations as originations remain sensitive to interest rates and housing activity.
- Loan quality and allowance adequacy, including commercial real estate exposures, acquired-loan performance and the actual CECL adoption adjustment.
- Unrealized securities losses, capital effects and any need to sell securities or use additional borrowing to meet liquidity needs.
- Pioneer integration, merger-related costs and the status or resolution of the disclosed lawsuits.
- OTCQX trading liquidity, potential shareholder sales or dilution, and the company’s dividend policy.