FirstSun Capital Bancorp — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; comparisons are primarily with FY2020. This is an annual report, not a standalone fourth-quarter report. FirstSun is a Denver-based bank holding company operating Sunflower Bank and wealth-management and mortgage businesses across a multistate footprint. The independent auditor issued an unqualified opinion on the consolidated financial statements.
Financial results and condition
| Metric | FY2021 / year-end | FY2020 / comparison |
|---|---|---|
| Net income | $43.2 million; diluted EPS $2.30 | $47.6 million; diluted EPS $2.58 |
| Net interest income | $155.2 million | $136.0 million |
| Provision for loan losses | $3.0 million | $23.1 million |
| Noninterest income | $124.2 million | $148.4 million |
| Noninterest expense | $224.6 million | $204.1 million |
| Net interest margin | 3.00% (3.11% fully tax-equivalent) | 3.10% (3.25% fully tax-equivalent) |
| Efficiency ratio | 80.38% | 71.77% |
| Assets / net loans / deposits | $5.67 billion / $4.0 billion / $4.85 billion | $5.00 billion / $3.80 billion / $4.15 billion |
| Stockholders’ equity | $524.0 million | $485.8 million |
| Operating cash flow | $113.1 million | $(0.5) million |
Profitability and growth: Net income fell 9.3% year over year. Net interest income increased 14.2%, supported by loan growth and lower deposit funding costs; the lower credit-loss provision also benefited results. Those gains were more than offset by a $24.1 million decline in noninterest income, mainly mortgage banking, and a $20.6 million increase in expenses. Loans grew 5.0% including Paycheck Protection Program (PPP) balances, or 10.4% excluding PPP; average deposits increased 20.0%.
Credit quality and capital: Net charge-offs were 0.09% of average loans, versus 0.11% in 2020. Nonperforming assets were $40.3 million, or 0.71% of assets, down from $44.4 million, or 0.89%. The allowance was $47.5 million, or 1.18% of loans. The Bank reported total risk-based capital of 11.96%, CET1 of 10.95%, and Tier 1 leverage of 9.27%; it was categorized as well-capitalized.
Liquidity and debt: Cash and cash equivalents were $668.5 million, versus $202.0 million. The company also reported $572.5 million of available-for-sale securities and $505.0 million of additional FHLB borrowing capacity. Year-end deposits included approximately $2.5 billion estimated to be uninsured, compared with $1.7 billion in 2020. Borrowed funds were $109.5 million, excluding $92.1 million in repurchase agreements. FirstSun parent-company cash was $11.1 million and parent debt was $74.6 million. The company paid no common dividends and does not expect near-term dividends.
Material changes versus FY2020
- Mortgage banking income declined to $86.4 million from $122.2 million, despite originations remaining about $2.3 billion. Gain-on-sale revenue and fees fell to $63.5 million from $94.0 million, reflecting lower margins; MSR capitalization and fair-value revenue, net of hedging, also declined.
- Banking-segment pretax results improved from a $2.0 million loss to $34.8 million, largely because the credit-loss provision decreased. Mortgage Operations pretax income fell to $25.4 million from $63.8 million.
- Salary and benefits rose $11.9 million, with additional expense from business expansion and mortgage commissions. FirstSun recorded $3.1 million of Pioneer merger costs.
- Available-for-sale securities increased to $572.5 million. Accumulated other comprehensive income declined to $1.7 million from $9.1 million, alongside a $9.9 million pretax unrealized loss on available-for-sale securities during 2021.
Outlook, risks and unusual items
- Pioneer merger: FirstSun expected to close its stock-for-stock merger with Pioneer on April 1, 2022, subject to customary conditions. Regulatory approvals had been received on March 7, 2022; completion and expected benefits remained subject to integration, deposit-retention, cost, personnel and execution risks. Pioneer reported $1.6 billion of assets, $0.9 billion of loans and $1.2 billion of deposits at year-end 2021.
- Mortgage outlook: Management reported a slight slowdown in early-2022 originations as rates rose and expected industrywide origination volume to decline during 2022. Lower mortgage volume or gain-on-sale margins could pressure earnings.
- COVID-19 and credit: Management said the pandemic continued to create uncertainty, including around supply chains, inflation, employment and borrower performance. PPP lending had ended; outstanding loans continued through forgiveness or SBA-guaranty processes. The company expected CECL adoption in 2023 to increase the allowance, but could not quantify the effect.
- Interest-rate exposure: Management cited rate and funding-cost sensitivity, as well as potential changes in loan demand, mortgage revenue and securities values. Its model estimated 12-month net interest income would rise 24.9% under an instantaneous +300-basis-point shock and fall 0.6% under a -100-basis-point shock; these are scenario estimates, not forecasts.
- Legal contingencies: Disclosed matters include a trust-administration claim seeking approximately $19.7 million plus returns and costs, two overdraft-fee class actions seeking unspecified damages, and a wire-transfer suit involving approximately $5.1 million in alleged unauthorized transfers. Management said it intended to defend the matters and did not expect the disclosed cases, individually or together, to materially affect the financial statements, but noted outcomes could be unfavorable; it could not reasonably estimate the wire case outcome.
- Governance and reporting: FirstSun was an emerging growth company and did not provide an auditor attestation on internal control over financial reporting. Management concluded disclosure controls were effective and reported no material change in internal controls. The common stock had no public trading market, and concentrated ownership and planned merger-related governance changes are relevant risks.
Important facts for investors to verify
- Whether the Pioneer merger closed as expected, and subsequent integration results, deposit retention, expenses and realized synergies.
- Whether mortgage origination volume and gain-on-sale margins declined as anticipated in 2022, and how that affected segment earnings.
- Deposit stability and concentration, including the estimated uninsured balance, as well as liquidity and borrowing capacity.
- Loan performance, classified and nonperforming exposures, allowance adequacy, and the eventual CECL impact.
- Developments and any financial exposure from the trust, overdraft-fee and wire-transfer litigation.
- Changes in capital, securities values and interest-rate sensitivity, and the terms and impact of post-year-end debt transactions.