FirstSun Capital - Earnings Call - Q1 2025

Executive Summary

• EPS beat but top-line (S&P-defined revenue) missed: diluted EPS was $0.83 vs S&P consensus $0.80 (+4%); S&P “Revenue” was $92.4m vs $99.5m consensus (−7%). Company-reported net interest income (NII) was $74.5m and noninterest income $21.7m (total revenue definition used by the company = $96.2m). Drivers: stable NIM (4.07%), modest sequential NII downtick (day count, lower average loans), and mixed fee income (mortgage/MSR headwinds offset by swap/syndication and treasury management). EPS/Revenue consensus figures marked with * (Values retrieved from S&P Global).
• Balance sheet momentum: loans +6.8% annualized QoQ to $6.48B (C&I +$137m; CRE −$28m), deposits +12.3% annualized to $6.87B; loan-to-deposit ratio improved to 94.3%.
• Credit quality largely benign but one idiosyncratic nonaccrual: net charge-offs 4 bps; NPLs/loans rose to 1.21% due to a single ~$13m C&I credit with cross‑border manufacturing exposure; ACL/loans increased to 1.42%.
• Guidance/tone: maintained mid-single-digit loan/deposit growth; lowered NII guide (average balance dynamics, rate path); lowered expense guide (variable comp tied to lower fee outlook); 2025 efficiency mid‑60s, NCOs high-teens to low‑20s bps; tax rate 20–22%.
• Potential stock catalysts: sustained >4% NIM with improving deposit mix, loan growth outperformance vs peers, and capital strength (CET1 13.26%); offsets include top‑line miss vs S&P “revenue,” higher NPLs from the single credit, and macro/tariff uncertainty.

What Went Well and What Went Wrong

What Went Well

• NIM durability and healthy spread: NIM held at 4.07% (10 straight quarters ≥4% per management), with deposit costs easing and mix improving (noninterest-bearing 22.9%; CDs expected to decline, growth in MMDA/NIB).
• Core growth and liquidity: loans +$108m QoQ (C&I-led) and deposits +$202m QoQ; loan-to-deposit ratio improved to 94.3%; wholesale funding reliance down to ~7%.
• Fee momentum in targeted areas: swap/syndication revenues +~$600k QoQ (+111%); treasury management fees increased, consistent with C&I relationship growth.

Quote: “We’re quite pleased with the start for the year… NIM of 4.07% and solid loan and deposit growth…” — CEO Neal Arnold.

What Went Wrong

• Top-line shortfall vs S&P “revenue”: S&P “Revenue” actual $92.4m vs $99.5m consensus (miss), with sequential NII down ~3% (day count, lower average loans) and mixed service fees (lower consumer deposit fees, card volumes, mortgage MSR capitalization).
• Asset quality optics: NPLs/loans up to 1.21% driven by a single ~$13m C&I credit moved to nonaccrual; management raised full‑year NCO outlook to high‑teens/low‑20s bps (specific reserve established).
• Lowered NII and expense guides: NII trimmed due to back‑end‑loaded Q1 balances and rate‑path timing; expense guide lowered on softer fee outlook (mortgage, interchange) and variable comp.

Transcript

Operator (participant)

Good morning and welcome to the FirstSun Capital Bancorp first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star followed by two. Also, as a reminder, this call may be recorded. I'd now like to turn the call over to Ed Jacques, FirstSun's Director of Investor Relations and Business Development. You may begin.

Ed Jacques (Director of Investor Relations and Business Development)

Thank you and good morning. I'm joined today by Neal Arnold, our Chief Executive Officer and President; Rob Cafera, our Chief Financial Officer; and Jennifer Norris, our Chief Credit Officer. We will start the call with some brief remarks to highlight a few items of interest and then move into questions. Our comments will reference the earnings release and investor presentation, which you will find on our website under the investor relations section. During this call, we may make remarks about future expectations, plans, and prospects for the company that constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our annual report on Form 10-K, which is on file with the SEC.

I will now turn the call over to Neal Arnold.

Neal Arnold (CEO)

Good morning and thank you for joining us, and thank you, Ed. We might be a little rusty. It's been a while since we did earnings calls, but let me start by saying we're quite pleased with the start for the year, certainly here in the first quarter. Our focus on consistently delivering value-added solutions across the footprint continues to drive our growth and our strong financial performance. This quarter, we achieved net income of $23.6 million, representing earnings per share of $0.83 and a 1.20% ROA. This quarter also was highlighted by continued strong net interest margin performance at 4.07% and solid loan and deposit growth, with loans up 7% and deposits up 12% annualized at the end of the quarter.

Our focus on relationship-based banking across our business lines continues to be evidenced by the revenue mix, with our service fee income up slightly over last quarter and representing 22.6% of our total revenues. We also maintained expense at a level flat to last quarter, adjusted for all the growth opportunities in front of us. Our focus remains on delivering positive operating leverage in 2025 and beyond. We believe we are making the right investments to position us favorably as we move forward. Certainly, we all recognize the talk about tariff and potential economic impact is spreading around the industry right now. While it's still early, I think many are exercising more and more caution. We haven't seen pervasive issues emerging within our loan portfolio, and that is somewhat a function of the nature of our customer base and not being overly reliant on any one industry.

Having said that, in the first quarter, we did see one $13 million commercial credit experience and performance challenges that has a cross-border component to it. The credit was moved to non-accrual and did negatively impact our loan loss provision in the first quarter, and I think most of you have heard us say the challenge with C&I is it's lumpy. We don't see any other pervasive issues, however, at this time. We understand we still have a ways to go to really all of our businesses across the franchise. We think we'll continue to deliver strong long-term financial performance, and we still believe that the U.S. economy will be resilient, especially in this region of the country. Overall, I'm excited to share the momentum we've achieved across our markets, and we continue to see success in winning new relationships with our business model.

We are favorably positioned in some of the nicest growth markets in the country, and we believe that our investments will continue to provide excellent growth opportunities. We believe we have plenty of runway for growth in these markets, given our very small market share, and that will continue to be our predominant focus. We benefit from a diverse and strong balance sheet, solid capital position, sound credit, and risk management. I will now pass the call over to Rob Cafera to discuss more of our financial results in the quarter. Rob?

Rob Cafera (CFO)

Thank you, Neal. Several highlights to touch on here this morning as we look at our results thus far this year, and I'll start on the balance sheet side. Loan growth was strong this quarter, at up 7% on an annualized basis, and ending the quarter right at $6.5 billion in total balance. Growth was driven primarily by the C&I portfolio, as we continue to see success in the high-growth markets on our footprint. Growth in the C&I portfolio was partially offset by a decline in our commercial real estate portfolio. To that end, our regulatory CRE to capital ratio now stands at 115%, which we think provides us some nice flexibility. Total new loan fundings totaled $399 million in the first quarter. That's up 48% from last quarter and up 37% from the first quarter last year, so a significant measure, a significant increase on either measure.

We also saw healthy deposit growth this quarter, with total quarter-end deposits increasing by about $200 million, or 12% annualized. Growth was strongest in savings and money market accounts, and we enjoyed growth in both our consumer as well as our business accounts, with total annualized savings and money market growth at up 20%. Overall mix improved in total this quarter, with non-interest-bearing deposits pretty stable and right at 22.9% of our total deposit mix. Our loan-to-deposit ratio was at 94.3% at the end of the quarter, and that is improved from a 95.6% level at the end of last year. We also saw improvement in our already low ratio of wholesale borrowings and deposits to total liabilities this quarter, which was down to approximately 7% from the 8% level at the end of last year. Good progress continued on the liquidity front in our balance sheet.

I will note that our balance sheet growth in the first quarter was back-end loaded. Our average balances on the loan side were actually down slightly, at about 4% on an annualized basis, while our average deposit balances were up slightly, about 1% on an annualized basis. I guess maybe a little tailwind for us as we started off the second quarter here. Our pipelines remain pretty robust, and we still expect mid-single-digit growth for both loans and deposits for the full year. Turning to the P&L side, as Neal mentioned, our net interest margin continues to remain very strong at 4.07%. I think we've been above the 4% level now for 10 straight quarters. Our level of net interest income declined by about 3% from the prior quarter, certainly impacted by day count difference and the average balance topic that I just mentioned.

Net interest income was up 5% compared to the first quarter last year. Our net interest margin was down slightly this quarter by about two basis points and impacted by the full quarter effect from the macro rate declines that we saw back in the fourth quarter, with a 13 basis point decline in earning asset yields in comparison to a 16 basis point decline in interest-bearing liabilities, with deposit rates down 12 basis points. In terms of full-year guidance for net interest income, we expect an increase in the mid-single-digit range. Our expectations are in part based on the forward curve view from earlier this month and include Fed cuts in September and November and impacts from asset repricing and a deposit beta around 50% in the near term. We've strayed from consensus slightly in terms of the timing of rate actions for the remainder of 2025.

As Neal mentioned, we acknowledge the prevailing market or macro uncertainty and its likely impact on business and consumer investment and spending, and we expect we'll all continue to see a rapidly evolving environment for the foreseeable future here. Our overall 2025 guidance thoughts are as much based on the vibrant markets we operate in as well as our focus across all of our sales teams on execution. On the service fee revenue side, our performance in total was fairly consistent with the prior quarter. Activity across each of our service revenue businesses was a bit mixed. We saw a notable increase in our swap and syndication revenues, which were up about $600,000, which is about 111%, and really a function of just more activity there in the first quarter.

We also saw growth in our treasury management service revenues to our business customers, which is consistent with our focus on driving C&I relationship growth. Our consumer deposit service revenues were down about 9% and really a function of a lesser level of NSF activity, somewhat impacted by some program changes we implemented late in 2024. We also saw interchange revenues decline slightly as total transaction volumes were down about 8% from the prior quarter, which was a little heavier of a decrease on the interchange side than the seasonal decrease we historically have seen in the first quarter. Our wealth advisory and trust revenues were largely flat as the benefits from new AUM inflow were offset by the impact from market value declines.

Finally, our mortgage revenues also saw a decline compared to the prior quarter, and while we enjoyed a welcome improvement in gain on sale margin, total revenue was down largely related to MSR activity, environment during the quarter, and a slight increase in CPR. Total net interest expense on an adjusted basis was also flat with the fourth quarter.

While compensation expense was up primarily related to the seasonality impact from higher payroll taxes and some, you know, the impact from annual merit, we also saw an improvement in some more discretionary categories like T&E, professional, and marketing expenses, to name a few. In terms of full-year guidance on the non-interest income side, we're expecting a high single-digit to low double-digit growth rate, and we expect non-interest expenses in the mid to high single-digit growth range compared to the prior year's adjusted non-interest expense.

As Neal noted, we're very focused on driving positive operating leverage in 2025 and positioning the bank for continued growth in the future. We will, of course, keep a close eye on the macro environment and any emerging trends there, and such will certainly dictate the magnitude and pace of the investments and growth opportunities that we pursue. Regarding asset quality, our provision expense for the first quarter was $3.8 million, resulting in an allowance for credit loss ratio of 1.42%. We had a couple of moving pieces here this quarter. First, we saw some experience factor benefits, namely upgrades that occurred within the quarter, as well as higher prepayments, which both favorably impacted the model reserve. Second, and in light of recent macroeconomic developments, we added stress to the economic qualitative factors, which unfavorably impacted the model reserve.

We see it likely that there will be additional volatility in the Moody's economic forecast component of the model throughout the rest of this year. Lastly, as Neal referenced earlier, we did see one larger credit fall in the non-accrual status in the first quarter, and it had an associated specific reserve, which was also an unfavorable impact to the model reserve. In total, our non-performing loans as a percent of total loans increased 13 basis points to 1.21% this quarter. While we did see some resolutions in the non-accrual bucket in Q1, the inflow of the one larger credit did lead to the net increase to that 121 basis points at quarter-end. Annualized net charge-offs, as a percentage of average loans, remain very low at 4 basis points for the quarter.

However, as it relates to the full year, we expect net charge-offs to be in the high teens to low 20s range in terms of basis points and certainly linked to how macroeconomic landscape evolves throughout the year. The increase in expected charge-offs for the full year is attributable primarily to the one loan that moved into non-accrual status in the first quarter. We expect losses on that loan would be covered by the specific reserve established in the first quarter. On the capital side, we continue to strengthen our position, and we saw our TBV per share improved to $34.88. We saw our CET1 improved by 8 basis points to 13.26%, and we saw tier one leverage improve 36 basis points to 12.47%. Our priorities on the capital side remain focused on our organic growth plan as well as opportunistic pursuits to add to our franchise.

Certainly, if the stock market and banking sector overall remain at depressed levels, we'll expand our analysis to look at share buyback alternatives. I will now turn the call back to the moderator to open the line for questions.

Operator (participant)

Thank you. The floor is now open for questions. Please press star followed by the number one if you'd like to ask a question and ensure your device is unmuted locally when it's your turn to speak. We kindly ask that you limit yourself to one question and a follow-up. Our first question today comes from Woody Lay with KBW. Please go ahead. Your line's open.

Woody Lay (VP)

Hey, good morning, guys.

Neal Arnold (CEO)

Morning, Woody.

Woody Lay (VP)

Wanted to start on the expense guide. You moved it lower for the full year 2025, and I'd imagine part of that driver is lower variable comp from the adjusted fee income guide, but are there any other drivers behind the lower expense guide?

Rob Cafera (CFO)

Yes, you're right on. The expense and fee income guides are linked, and it's really just the overall macro uncertainty out there. We did see a little bit of a slowdown on the mortgage side, and of course, as you said, that also carries through on the expense side in terms of variable comp. That's a big factor as we're looking forward and just the macro backdrop. Secondly, we did see a little bit of a slowdown in consumer activity with card, debit, and credit, so maybe a little bit of a pullback on expectations just on spending and related interchange there really driving some of the moderation on the fee side.

Woody Lay (VP)

Got it. That's helpful. Maybe for my last question, I just wanted to touch on M&A, and I know during periods of uncertainty in the past, this has opened opportunities for y'all to move on the offensive. How does this environment impact your thoughts around M&A?

Neal Arnold (CEO)

Yeah. I mean, Woody, we always have the posture of being opportunistic, and certainly times of difficulty, we try to be flexible. I guess the thing I'd say is we feel like we're in a good spot with our capital levels. I wouldn't want to be trying to issue a bunch of stock in this environment to fill a hole, but I think we feel pretty good where we're at, and things are moving around. I think we all thought there'd be more activity, but I do think it's still going to continue.

Woody Lay (VP)

Got it. Thanks for taking my questions.

Neal Arnold (CEO)

Thanks, Woody.

Operator (participant)

Our next question comes from Tim Mitchell with Raymond James. Please go ahead.

Tim Mitchell (Senior Equity Research Associate)

Hey, good morning, everyone.

Neal Arnold (CEO)

Morning, Tim.

Tim Mitchell (Senior Equity Research Associate)

Wanted to start out, wanted to start on the loan growth this quarter, which was solid, and kind of in contrast to many of your peers that we've seen report so far. I was just curious if you could kind of give some color around the competition and the rate they're putting new loans on, and then any more color on the pipeline, which it sounds like is still pretty solid.

Rob Cafera (CFO)

Yeah, maybe I'll start off, and I know Neal will have a comment or two as well. Yes, I think overall activity we're seeing continues to be strong in that C&I space. Pricing also remains strong, so we're very pleased with the credit spreads we're still seeing there. Competition's competition. It's always there. Of course, as we noted earlier, I think we did see a little bit of a lag or a pause during the quarter, and then really right at the end of the quarter, we saw more heavier activity. That's continued into pipeline here in Q2, remaining strong. We've seen not as much pause thus far in the second quarter, but we certainly saw some pause in the first quarter there for the first couple of months of the quarter. Neal, I don't know if you would.

Neal Arnold (CEO)

Yeah, the only thing I would add is I think Rob's right. We saw March was stronger than the other months in the quarter, and I think a lot of times during economic uncertainty, some of our stronger clients take advantage of the opportunity, and I think this might be no different where we see some of the people taking advantage of the uncertainty to maybe tackle some things that need the financial strength. I would say more broadly, I think there are sectors that are impacted by all the tariff uncertainty, but there are also ones that are continuing to have strong backlog. It is a bit of a mixed bag at this point. Caution is out there, but we continue to see good activity, and I think pipeline's pretty strong.

Tim Mitchell (Senior Equity Research Associate)

Great. Thanks for all the color. On the deposit side, I see the outlook for stable NIM, but just given the commentary around expecting CD balances decline and some pretty solid growth in non-interest bearing balances, is it fair to assume, and I know you're baking in some rate cuts in your guide, but even absent any rate cuts, just given those dynamics, that deposit costs could move lower? Secondly, I assume a lot of the core deposit growth there is based on the new branches in Southern California, so if you just give any color to hiring efforts in early days in those markets.

Rob Cafera (CFO)

Yeah, definitely. I would say certainly we always welcome lower rates on the deposit side. It's still pretty competitive out there, both in consumer and in the corporate world. Certainly we expect mixed improvement, but I think we're also seeing and expecting to continue to see it's going to remain pretty tight on the pricing side. I don't think you'll see any outsized movements down over and above what happens with macro rates there. In terms of balance growth, that's really being driven on both the corporate side as well as the consumer side. We've seen very nice reception in our Southern California efforts in those offices and with the teams down there. Very nice reception. We've got a couple hundred million in deposits that we've seen there already. Very strong performance. I think the pipeline for the teams there is also quite strong.

I think we expect to see growth from Southern California as well as from some of our other markets that will drive growth here in 2025.

Tim Mitchell (Senior Equity Research Associate)

Got it. All right. Thanks for taking my questions.

Rob Cafera (CFO)

Thank you.

Operator (participant)

The next question comes from Matthew Clark with Piper Sandler. Please go ahead. Your line's open.

Matthew Clark (Senior Research Analyst)

Hey, good morning. Thanks for the questions.

Neal Arnold (CEO)

Good morning.

Matthew Clark (Senior Research Analyst)

Good morning. Just want to hone in a little bit more on the margin kind of in the near term. Do you have the spot rate on deposits at the end of March and the average margin in the month of March?

Rob Cafera (CFO)

The month of March, I think our margin for the month was, I think we were right around, I think, yeah, we were in the mid four single digit. I think we were 4.07-4.08 range. So we were pretty stable on margin levels and deposit pricing similarly pretty stable through the first several months of the year in the first quarter.

Matthew Clark (Senior Research Analyst)

Okay. Okay. Yeah, spot rate would be helpful on deposits if you had it just to give us some visibility at the end of March if we could follow up. That 4.07-4.08 is non-FTE, right, on an FTE basis?

Rob Cafera (CFO)

That's not FTE. That's correct. Yep, that is not FTE.

Matthew Clark (Senior Research Analyst)

All right. Thanks. On the mortgage revenue line, can you just quantify how much the MSR write-down kind of net hedging was that negatively impacted that number?

Rob Cafera (CFO)

Yeah, and it was more on the MSR side, the fair value net hedging impact was relatively negligible from one quarter to the next, Q4 to Q1. We really saw the impact in what I'm characterizing as kind of the MSR net capitalization, which is the combination of new inflow and amortization on the portfolio as a result of macro rate and what's happening with CPR. That's where we saw more of the impact. I think the MSR net of hedging fair value change was less than $100,000. It was really the pickup in CPR and the impact in overall net capitalization that drove the comparison to the prior quarter. Just on the exponential rate here.

Matthew Clark (Senior Research Analyst)

Go ahead. Sorry.

Rob Cafera (CFO)

I was just going to say I think in total, average life decreased by about three months just to put that CPR in perspective.

Matthew Clark (Senior Research Analyst)

Yep. Okay. Just on the expense run rate in Q2, you had the payroll tax, merit increase, but any—I know you gave the efficiency ratio guide, so we can all kind of back into that, but just wanted to speak more to the expense run rate in Q2. Any color there?

Rob Cafera (CFO)

I mean, I think certainly in total, starting with in total, our expectations for the year on expenses is going to be in that mid to high single digit growth rate level. That translates to it is going to pick up. The pace is going to pick up if all things are aligned with our expectations in order to get to that point on the full year level. Yes, we're expecting Q2 to pick up. Efficiency, we would expect that to tick a little bit higher in Q2 and then start to come down a little bit and then a little bit more in Q4 just as the revenue ramps on that side.

Matthew Clark (Senior Research Analyst)

Okay. Got it. Just back to the M&A question, just to close out the conversation, can you just give us a sense for maybe your wish list or maybe top three in terms of where you prioritize, where you'd like to enhance your presence? I assume Southern California, but just trying to get a better sense of if you had your choice from a geographic and size perspective, where would that be?

Rob Cafera (CFO)

Why don't you?

Neal Arnold (CEO)

Yeah, that's Neal. Yeah. I guess I'd say the thought is predominantly in footprint, continuing to add. With being opportunistic, we don't always dictate the who and where. I would just say we're going to stay focused within our footprint as we look to add. I don't have any ticker symbols for you, but I think our thought is to continue what we've always done.

Matthew Clark (Senior Research Analyst)

Fair enough. Thanks again.

Rob Cafera (CFO)

Thank you.

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question, press star then the number one on your telephone keypad. Our next question comes from Matt Olney with Stephens. Please go ahead. Your line's open.

Matt Olney (Managing Director)

Hey, great. Thanks. Good morning, everybody.

Neal Arnold (CEO)

Good morning.

Matt Olney (Managing Director)

Good morning. Sticking with that M&A discussion, Neal, I'm sure you saw the distressed deal announced last week in Texas. In many respects, that deal checked a lot of the boxes of your M&A strategy. Good deposit base, but obviously some near-term challenges. Did you get a look at that deal, and is this the profile of something that you would consider?

Neal Arnold (CEO)

Yeah, I think in fairness, industry got looked at by everybody in Texas that I'm aware of. It was certainly a challenging situation. Solid deposit franchise with a horrific mark-to-market on the asset side. It took a pretty large institution to be able to swallow that. Those numbers are not insignificant. At the end of the day, certainly fit a lot of the pieces, but we're not going to put our shareholders at risk with a big hole that has volatility in this market.

Matt Olney (Managing Director)

Sure. I understand. I guess switching gears over to the guidance and some of the moving parts there. You maintain the guidance around the loan growth and the deposit growth, and you mentioned you lower the guidance around the net interest income. It sounds like that was driven partially by the timing of the Fed cuts that you're assuming. Just any more color on that incremental change from a lower guidance?

Rob Cafera (CFO)

Yeah, absolutely, Matt. I would tell you a chunk of that relates certainly to the experience in the first quarter where we actually had average balance declination, which was a little different than our original expectations because of that back-end loaded loan growth. That had a larger impact on the overall guidance that we're expecting on the NII side. Certainly, the potential for continued or an increase in competitiveness on deposit pricing will play a role, but the experience in the first quarter is the biggest factor.

Matt Olney (Managing Director)

Thanks for that, Rob. Just remind us of your overall interest rate sensitivity as you see it today.

Rob Cafera (CFO)

Yeah. I mean, I like to say we're relatively neutral. We're actually slightly asset sensitive in that, but relatively neutral. That is what we would expect in a down or an up scenario.

Matt Olney (Managing Director)

Okay. As far as the higher non-accrual loan that was mentioned in prepared remarks, any more color on this loan? I think you mentioned cross-border exposure. Any specific industry?

Rob Cafera (CFO)

There was a little cross-border element to it, and that was just with their manufacturing. I'd put it in that space for you. As Neal mentioned, I mean, we're going to see lumpiness on occasion, and we're seeing a little bit of that. That was the real driver on our NPA experience this quarter. We did see some outflow, but as Neal mentioned, that was about a $13 million size credit that we saw on the inflow side.

Matt Olney (Managing Director)

Okay. Thanks. Thank you for my questions.

Rob Cafera (CFO)

Thank you.

Neal Arnold (CEO)

Thank you.

Operator (participant)

That completes our Q&A session. I'll now turn the conference back over to Neal Arnold for closing remarks.

Neal Arnold (CEO)

Thank you all for joining our call this morning. As always, we appreciate your continued interest in FirstSun. Have a great day. Thank you.

Operator (participant)

This concludes today's conference call. Thank you for your participation. Your line will now be disconnected.