FirstSun Capital - Earnings Call - Q2 2025

Executive Summary

• EPS of $0.93 and ROAA of 1.28% with NIM stable at 4.07%; total revenue of $105.6M grew 9.7% q/q as service-fee mix rose to 25.6%.
• EPS beat consensus by ~$0.045, while revenue was modestly below S&P Global’s consensus; 4 covering estimates for EPS and revenue (details in Estimates Context)*.
• Deposits expanded 13.2% annualized and loan balances rose 1.4% annualized; mix shifted away from CDs into savings/MMDA and DDA, supporting lower wholesale reliance and improved LDR to 91.6%.
• Credit costs were elevated on two C&I credits (telecom and public finance), driving net charge-offs to 0.83% annualized; CET1 improved 52 bp to 13.78% and NPL ratio fell 37 bp q/q.
• Management maintained most FY 2025 guidance (NIM stable >4%, mid-single-digit growth), but raised full-year net charge-off outlook to high-30s/low-40s bps; margin likely “pretty consistent” with slight pressure absent rate cuts.

What Went Well and What Went Wrong

What Went Well

• Strong deposit growth and favorable mix shift: deposits +$226M q/q (+13.2% annualized), CDs down and savings/MMDA and DDA up; wholesale reliance down to ~6% of liabilities, LDR improved to 91.6%.
• Fee income strength led total revenue higher: noninterest income +$5.3M q/q (mortgage banking +$4.2M) and service-fee mix to 25.6% of revenue, driving operating leverage.
• CEO tone confident on strategy and deposit momentum: “Performance… highlighted by exceptional deposit growth, a stable net interest margin… and 12.0% EPS growth”.

What Went Wrong

• Elevated credit costs: net charge-offs of $13.5M (0.83% annualized) on two specific C&I/public finance credits; provision increased to $4.5M; ACL-to-loans decreased to 1.28% from 1.42%.
• Deposit pricing pressure persists: CFO noted deposit growth “comes at a price” and limited pricing leverage absent macro rate moves; near-term deposit beta ~40%.
• Margin upside limited: management expects NIM to be “pretty consistent… maybe a little pressure,” staying north of 4% absent additional rate cuts.

Transcript

Speaker 4

Good morning and welcome to the FirstSun Capital Bancorp second quarter 2025 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would 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.

Speaker 2

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.

Speaker 3

Thank you, Ed. We are very pleased with our strong financial results here in the second quarter. Our consistent focus on delivering value-adding solutions across the footprint continues to be the driver behind our growth and strong performance. This quarter, we achieved a net income of $26.4 million, representing earnings per share of $0.93 and a 1.28% ROA. This quarter was highlighted by exceptional deposit growth, with deposits up 13% annualized, a strong net interest margin at 4.07% for the quarter, and total revenue growth approximating 10%. This is our second quarter in a row with double-digit deposit growth. We're also very pleased with our service fee revenue performance as we saw our revenue mix up meaningfully by over 300 basis points compared to last quarter and almost 26% of total revenues. Our success is a testament to our focus on relationship-based banking across all of our business lines.

We achieved revenue growth this quarter while maintaining our efficiency ratio at 64.5%, which is slightly lower than the prior quarter. Our focus remains on delivering positive operating leverage and long-term sustainable growth. We believe we're making the right investments to position us favorably moving forward. To that end, we've realized $3.3 million of positive operating leverage so far this year as compared to last year. With our strategic focus on a balanced mix of service fee and business offerings, we continue to build upon our portfolio of products and services supporting this banking model. This quarter's service fee income results demonstrate that focus and our continued look for opportunities to achieve a stronger mix of revenue on the fee income side in excess of 25%. On the asset quality side, we are not seeing any pervasive credit issues in any particular sector or geography emerging within our loan portfolio.

We see that as somewhat a function of the nature of our customer base. Having said this, we did experience an elevated level of charge-offs during the second quarter, driven by a small number of commercial and industrial (C&I) credits. One credit of note was in the telecom space, with performance challenges ultimately linked to management missteps, and another credit was one in the public finance space, which was a result of declining enrollment trends. Our teams remain diligently focused on the administrative side to ensure we maintain historically strong asset quality performance. I continue to be excited about our significant growth opportunities across all of our Southwestern and Western markets, including our newer California markets. We're seeing increased opportunities to deepen existing relationships while attracting new clients who value our relationship-based approach. Our teams and our approach will continue to be what differentiates us from the competition.

While we've seen several shifts in shorter-term economic prospects on the macro level this year, we expect a resilient U.S. economy will prevail. Our strong and diverse balance sheet, our solid capital position, and our sound credit and risk management programs will enable us to continue to deliver responsible growth and strong financial results. Now I'll turn it over to Rob Cafera for a more detailed review of our financial results.

Speaker 0

Thank you, Neal. Several highlights to touch on this morning as we look at our results thus far this year. I'm going to start on the balance sheet side. We saw very healthy deposit growth this quarter, with total quarter-end deposits increasing by approximately $226 million or 13% annualized. Growth was strongest in money market and both non-interest-bearing and interest-bearing transaction accounts. We enjoyed growth in both consumer as well as our business accounts, with total annualized money market and DDA transaction account growth up 28%. Overall mix improved this quarter, with non-interest-bearing deposits also increasing and now representing 24% of our total deposit mix, while CDs decreased to approximately 20% of the total mix. On the loan side, we saw some slight loan growth at quarter-end, with balances up 1.4% on an annualized basis and ending the quarter at $6.5 billion in total.

Growth was spread across C&I, residential, and multifamily loan categories. Total new loan fundings totaled $484 million in Q2, which was up 21% from last quarter and up 29% from the second quarter of last year, a significant increase on either measure. We also saw an uptick in line of credit paydowns near the end of the quarter, which ultimately muted the strong new loan origination activity in the quarter. On the quarter, average loan balances were up 12% on an annualized basis, reflecting again that strong level of originations. Our loan-to-deposit ratio was at 91.6% at the end of the quarter, and that's improved from 94.3% at the end of last quarter. We also saw improvement in our already low ratio of wholesale borrowings and deposits to total liabilities this quarter, which was down to approximately 6% from the 7% level at the end of last quarter.

We saw great progress on the overall liquidity front within our balance sheet. Our loan and deposit pipelines remain pretty robust, and we still expect mid-single-digit growth for both loans and deposits on the full year. Turning to the P&L side, as Neal mentioned, our net interest margin continues to remain quite strong at 4.07%. I think we've been above the 4% level for 11 straight quarters now. Net interest income increased by 5% from the prior quarter, primarily driven by higher average balances, as average loans were up 12% and average total deposits were up 18%. On a year-over-year basis, net interest income was up almost 8%. Our net interest margin stayed consistent with Q1, with a four basis point increase in earning asset yields in comparison to a four basis point increase in interest-bearing liability costs, with deposit rates up five basis points.

In terms of full-year guidance for net interest income, we continue to 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 December and impacts from asset repricing and a deposit beta around 40% in the near term. As Neal mentioned, despite the macro volatility we've seen in the first half this year, we do expect economic growth will prevail, and more so in our vibrant Southwest and Western U.S. markets. Our overall 2025 guidance thoughts are as much based on the vibrant markets we operate in, as well as our focus across all our sales teams on execution. On the service fee revenue side, our performance improved by $5.3 million from the prior quarter, as income from mortgage banking alone jumped $4.2 million.

Our mortgage results were driven by strong origination levels this quarter, with an overall 43% increase over last quarter, offset by some slight margin contraction. Certainly, some seasonality impact here, but I will say our overall level of revenue growth on the mortgage side certainly outpaced the industry, and that's a function of the business development focus across our sales force. Looking across each of our other service fee revenue businesses, we saw fairly consistent to slightly better results when compared to the first quarter. This includes continued growth in our treasury management business, with the revenue growth in Q2 driven by the strong relationship focus across our banker teams, as well as the breadth of our product offerings. Total non-interest expense was $5.4 million higher than Q1 and largely related to an increase in variable compensation, which is mostly driven by the uptick in revenues on the mortgage side.

In terms of full-year guidance, on the non-interest income side, we are 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 each year and positioning the bank for continued growth into the future. We will, of course, keep a close eye on the macro environment and emerging trends there, and such will dictate the magnitude and pace of the investments and growth opportunities we pursue. Regarding asset quality, our provision expense for the second quarter was $4.5 million, resulting in an ending allowance for credit losses ratio of 1.28%. A couple of moving pieces here this quarter.

We did experience some marginal downgrades on a net basis in the portfolio, which drove some of the provisioning through the CECL model. In addition, as Neal Arnold referenced earlier, we did charge off a couple previously classified C&I credits during the second quarter, and overall, we're at a 44 basis point charge-off ratio on a year-to-date basis. We're seeing some market challenges on the valuation side, and that also had an impact to our second quarter loan loss provisioning. As it relates to the full year, we now expect net charge-offs to be in the high 30s to low 40s range in terms of basis points.

This increased range in expected charge-offs for the full year is primarily related to two key factors: a shorter workout period on a specific classified C&I loan, where we now expect a triggering event later in 2025, and overall market pricing deterioration impacting our realizations upon exiting some of our classified credits. I'll also note that in large part, driven by our charge-offs this quarter, our non-performing loans as a percent of total loans decreased 37 basis points. On the capital side, we continue to strengthen our position as we saw our tangible book value per share improve to $35.77, CET1 improved by 52 basis points to 13.78%, and Tier 1 leverage finished at 12.39%. Our priorities on the capital side remain focused on our organic growth plan, as well as opportunistic pursuits to add to our franchise. We continue to look at ways to leverage our strong capital position.

I'll now turn the call back to the moderator to open the line for questions.

Speaker 4

Thank you. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. The first question comes from Woody Lay of KBW. Your line is now open. Please go ahead.

Hey, thanks for taking my question. I wanted to start on credit and maybe specifically the charge-off this quarter. You called out two specific loans in the opening comments. I guess how many credits were involved in the charge-off this quarter? Were those loans completely charged off, or is there still exposure on the balance sheet?

Speaker 0

Yeah, good morning, Woody. Good question. On the charge-offs here this quarter, as Neal mentioned, the two specific credits, that was the primary driver of the $13.5 million on the quarter. One of those credits was about 80% of that. On both of those, we charged down to the net value that we anticipate realizing. These were not full charge-offs.

Got it. You also noted a triggering event that could cause some higher charge-offs over the back half of the year. Just how do you think about reserve levels going forward? Is there a need to build up the reserve in anticipation for that event?

Good question. Our reserving over the course, if you go back the last many quarters, was in part due to specific reserves that we had been recognizing on a couple of these classified credits. Now that we're seeing resolution timeframes, we're seeing that roll out of the allowance for credit losses. I'd tell you, I think the normalized allowance for credit losses was going to be in the range where we're at now, called in the 120s. Like I said, we saw that growing above that level as we were adding some specific reserves over the course of the past many quarters. The other larger credit that we made reference to that we were originally expecting had a longer workout time horizon beyond 2025 is something that we now see as a triggering event later in 2025 and does already have some specific reserving against it.

Got it. That's helpful. Maybe just last for me, deposit growth has been really strong over the first half of the year, but you maintain deposit growth guidance of mid-single digits, which I think would translate to maybe balances being pretty flat over the back half of the year. Is that the right way to think about it? Was the first half growth just a reflection of trying to front-load some of the liquidity for the loan growth?

Fair question. We've been extremely pleased on the deposit side here in the first half, without a doubt, and you know, do expect growth in the second half. There could be an element of conservatism in our overall growth range, perhaps. I'd also tell you, we also recognize that we have a couple of our clients have seen some liquidity events as a result of a sale of a business or some other major event that has driven up temporarily some of their deposit balances. Again, that's just a function of having a pretty diverse depositor base as well. We could see a little bit of a headwind from some timing items there. Overall, again, very pleased on the deposit front with what we're seeing.

We have seen, you know, we have seen on the pricing side, deposit growth in this environment on the pricing side also comes with some added cost. As we're expecting continued ramp-up on the asset side, it's an equation that we've been building in here more on a front-end basis. The pricing on deposit growth in this environment, I don't think is cheap in any way, shape, or form, but certainly something that we continue to be very focused on.

Speaker 3

Rob's more confident. The later we get in the year, Rob's more confident on his forecast.

All right, thanks, guys.

Speaker 0

Thank you, Woody.

Speaker 4

The next question comes from Michael Rose of Raymond James. Michael, your line is now open. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. Maybe just wanted to follow up on the deposit question. Good morning. Growth has been strong. To your point that you just made, it sounds like some of that is maybe temporary, but we have seen some of the higher cost buckets come down a little bit here. I just wanted to get a better sense of, will you see kind of further mix shift within the deposit book, or is that near an end? Just how much more potentially pricing leverage you have absent of rate cuts from here, just given where the loan-to-deposit ratio is?

Speaker 0

I think, on the pricing leverage and the mix side, I think deposit growth comes at a price in this environment. We're also very focused on the mix shift, meaning out of CD and into more of our MMDA or transaction products. We do expect mix shift to continue favorably there over the course of the next several quarters. We expect to continue to see that trend on that side. Absent macro rate moves, there's probably not a lot of pricing that we're anticipating with pricing change that we're anticipating within the deposit book, but it's certainly something we actively look at on that side.

Okay, on the asset side, assuming, as you noted in the deck, that securities stay roughly flat, you have the growth expectations, the pricing is up, but not as much leverage on the deposit side. How's the way we should think about the margin from here? It seemed like given the NII guide that it would have a little bit of pressure as we move forward absent any rate cuts. Just wanted to walk through kind of the puts and takes. Thanks.

Yeah, absolutely. I think from a margin perspective, we see margin pretty consistent with Q2. Maybe a little pressure there. We don't see margin expansion, if you will, going the other way. Obviously, we're pretty proud of where we are on the margin side, at 4% plus, and would expect to be really hanging out in the neighborhood that we're at right now, maybe with a little pressure, but still north of 4%.

Okay, great. I think maybe just as a follow-up, go ahead, Neal.

Speaker 3

The only thing I would add is I think we've been pleasantly surprised at the mix in some of our newer markets of how much relative deposit growth relative to loans. I think that's been a pleasant surprise in Southern California, and you know, everybody always sees the, you know, lending is easier than the deposit side, but I'd say I think we've been pleased by the balance there.

I appreciate the context, Neal. Maybe just as a follow-up, just on the loan growth side, really appreciate the color around the payoffs this quarter versus the production. It sounds like pipelines are pretty solid. Certainly understand the guide for the year. How much of the growth is coming from some of the newer efforts or newer markets? How should we think about in the intermediate term how some of the announced M&A transactions could potentially be a benefit for you guys? Thanks.

Speaker 0

Maybe I'll start off in terms of our expectations on the loan side. Certainly, newer market contributions there are outsized, given we're starting off of a very low base. The performance in Southern California continues to be very strong. We expect that for us will continue. I'd say the activity across our specialty team, the activity in Dallas and Arizona, has continued to be pretty strong as well. That's really where we'd see the bulk of our activity on the commercial and industrial (C&I) side will really be driven on those fronts. In terms of the macro environment and M&A activity and impacts that we might see there, we always look at ourselves as being opportunistic relative to any disruption in the market. I think our salesforce teams certainly approach it in that fashion. We look at that as an opportunity.

Okay, great. Maybe just dovetailing off that last one for me, just as we have seen some M&A and you guys clearly have some capital, probably not the stock where you want it to be in terms of the currency, just talk to me about, you know, capital priorities. If that's changed at all, would you consider a buyback just given where capital is? Is it purely meant for organic growth? At some point, would M&A be of some interest again? Thanks.

Speaker 3

Maybe I'll take a shot. Clearly, our first priority is continuing the organic growth we've seen. I still would say, while buybacks get considered by our board at least once a year as we look at our plan, I think there are going to be plenty of opportunities still to continue to expand what we're doing. We remain focused on building the company that we've had and trying to leverage what we've done into those opportunities.

All right, I'll step back. Thanks for taking my questions.

Sure.

Speaker 0

Thank you.

Speaker 4

The next question comes from Matthew Clark of Piper Sandler. Matthew, your line is now open. Please go ahead.

Good morning, everyone. On the deposit cost, can you give us a sense for what the weighted average cost was on incremental deposit growth? Just trying to get a sense for the kind of incremental pressure there. If you had the spot rate on deposits at the end of June, that would be helpful to give us some visibility into 3Q.

Speaker 0

Yeah, absolutely. As I mentioned, we are seeing the cost of deposit growth coming at a higher level than what our weighted average overall cost is. I think our cost on the quarter was at $2.15, and if you just looked at the very end of the month of June, it was one basis point less than that level. To just kind of frame up for you the particulars there, that's what we're seeing on deposit pricing.

Okay, great. On the deposit growth, you mentioned a couple of deposits that might be temporary or transitory. Was a lot of that in non-interest bearing, or was it elsewhere? Just trying to get a sense for whether or not those NIB balances are somewhat sustainable.

Fair question. I mean, we do see our NIB still on a net basis growing as we finish off the year. We did see, as I mentioned, some balances at the end of the second quarter that were probably more transitionary and episodic in some part for a couple of clients. We certainly do still envision growth in our non-interest-bearing DDA as we finish off the year on that side.

Okay. On the Southern California initiative, can you remind us or just update us where your footings are there, both from a loan and deposit perspective, and how that compares to the prior quarter?

Speaker 3

You're breaking up.

Speaker 0

Sorry, Matthew?

I was asking about the Southern California initiative and where those footings stand from a loan and deposit perspective at the end of 2Q, and how that compared to the prior quarter.

Oh, gotcha. Okay. Sorry. It wasn't, I don't know what happened there. The first time you came through, it was a little garbled, but I heard you the second time. Thank you for repeating your question there. You know, for Southern California, as I mentioned, we've seen some, we continue to see nice growth there. I think on the deposit side, we saw, I don't know, about 40% growth on the deposit side in the second quarter. I think in total, we're right around $200 million now in Southern California on the deposit side. You know, similarly, we saw similar growth rates on the loan side, and we're right at about $200 million there as well. The nice thing, it effectively is self-funded, given we're right at about the $200 million level on both loans and deposits there. Continued nice progression across the teams.

Okay, great. Last one for me, just on M&A. Sounds like you remain opportunistic, but how have those conversations with potential targets changed over the last three months? Can you remind us, if you had your wish list, what would be in terms of geography, what would it be? I'm assuming it's Southern California, but if you could just update us there.

Speaker 3

I would say we're focused throughout the Southwest. Certainly, that's been where we've enjoyed the most growth. Suffice it to say, we look at most everything. We've had conversations ongoing, but the hard part is I think we went through a spell where everybody thought the prices were going up. I'm not sure that the resolutions are any easier. My own view is there will be more deals, but you're going to have to be selective.

Got it. Thanks again.

Speaker 0

Thank you.

Speaker 4

The final question comes from Matt Olney of Stephens. Matt, your line is now open. Please go ahead.

Speaker 0

Thanks for taking the question. Going back to credit, there was a discussion earlier about part of the reason for higher charge-off guidance is I think you coined it the market price deterioration. I was hoping you could expand on that comment, and then in any specific industry you're speaking to with that comment.

Speaker 1

Thank you. This is Jennifer Norris. The reference there was really related to the valuation. When we started a process and we took our initial write-down in specific reserve, prices were at a level that we believed we would be at about the midpoint on. As we worked through our workout process at the end of that, the valuation had actually come down a fair amount. That was the reference being made there. That's a specific industry within the telecom industry that Neal had referenced earlier.

Speaker 0

Okay. Thanks for the clarification on that. On the non-interest income side, the mortgage looks really strong this quarter. I think, Rob, you mentioned some seasonality, of course, that was a portion of that. Anything else within that $13.2 million that was unusual in nature besides the seasonality? Any MSR sales, any other non-cash write-ups, anything just unusual? Thanks. Absolutely. To answer your question, no. It was just, it's all origination, gain on sale activity, no MSR sales that we did in the second quarter at all there. The net change in MSR on the quarter was pretty nominal. I think maybe it was $300,000 net of hedge. It was just strong origination, gain on sale activity.

Okay. All right. That's all for me. Thanks, guys.

Thank you.

Speaker 4

We currently have no further questions, so I will hand back to Neal Arnold for any closing remarks.

Speaker 3

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