FSUN - NASDAQ

Good morning, and welcome to the FirstSun Capital Bancorp Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] 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.

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 commentary around the fourth quarter and full year results and then move into questions. Our comments will reference the earnings release and earnings presentation, which you will find on our website under the Investor Relations section. During this call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix to our earnings presentation and in our earnings release. During this call, we will also 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. Please refer to our earnings presentation, our annual report on Form 10-K and our other SEC filings for a further discussion of the company's risk factors and other important information regarding our forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement, except as required by law. During our comments today, we will also discuss our pending merger with First Foundation. In connection with the proposed merger, we filed a definitive joint proxy statement and prospectus with the SEC on January 15, 2026, which we urge you to read. Information regarding the persons who may, under the rules of the SEC, be considered participants in the solicitation of FirstSun and First Foundation stockholders in connection with that proposed transaction is set forth in such definitive joint proxy statement and prospectus. I will now turn the call over to Neal Arnold.

Thank you, Ed, and thank you all for joining us this morning. We are pleased with our strong operating results in the fourth quarter. For the quarter, we achieved adjusted net income of $26.9 million, representing adjusted diluted EPS of $0.95 and a 1.27% adjusted ROAA. This quarter was highlighted by strong revenue growth, which was up 10.8% annualized over last quarter and the growth in our net interest margin to a very strong 4.18%. We also achieved healthy average loan growth of 8.5% annualized while maintaining a strong revenue mix with noninterest income to total revenue of 24.3%. Overall, this performance underscores our emphasis on relationship-based banking across all our businesses. In addition, we've continued our focus on reinvesting in the franchise, and it has positioned us well and resulted in $11.5 million of positive adjusted operating leverage for the full year. We plan to continue to invest in our growth markets and add to our portfolio of products and services to support our relationship-based model with a continued focus on generating operating leverage and maintaining a healthy revenue mix. On the asset quality side, we took a charge on a telecom loan, which we partially charged off in prior quarters, which resulted in the biggest driver of our total charge-offs in the fourth quarter. While we have not seen pervasive credit issues in any sector or geography within our portfolio, we do continue to monitor carefully the credit conditions of our portfolio. Given our heavy C&I nature of our loan portfolio, I've always said that at times, credit will be lumpy. But all in all, we remain focused on driving healthy returns for our shareholders as we have this year. Overall, I'm very encouraged by our performance this year. Given our franchise footprint in 7 of the 10 fastest-growing MSAs in the Southwest, we believe we're well positioned to continue to grow our customer base. We see great growth potential across all markets and believe we have the right team to continue to drive our long-term growth and profitability in these markets. Touching briefly on the pending merger with First Foundation, we are encouraged by the progress our teams are making on all the integration planning, the balance sheet optimization, and we look forward to working together in the year ahead. I want to thank our entire team for their relentless focus on our businesses and our clients. Our teams remain focused on building a best-in-class bank while delivering value-added solutions to all of our clients throughout our footprint. I'll now pass the call over to Rob for a more detailed review of our financial results.

Thank you, Neal. I will touch on several highlights this morning in regards to our fourth quarter and full year results. In addition, please note that when I refer to our financial outlook for the full year '26, I'm referencing FirstSun on a stand-alone basis and not reflective of the financial impact of our proposed merger with First Foundation. Starting on the balance sheet side. For the fourth quarter, on an average balance basis, we achieved healthy loan growth of 8.5% annualized. New loan fundings totaled approximately $350 million in the fourth quarter. And while this has historically been our seasonally slowest quarter for new loan fundings each year, this year's new funding level was up 30% over the fourth quarter of last year. While we saw healthy average balance growth, period-end loan balances were flat given some late quarter paydowns and as we saw overall line utilization drop 3 percentage points. For the full year, we saw net balance growth of approximately $300 million or almost 5% with the bulk of that growth in our C&I portfolio. As Neal noted, we plan to continue to invest in our franchise, including adding to our C&I teams in several of our higher-growth markets in ''26. On the deposit side, for the fourth quarter, on both an average balance and period-end basis, balances were relatively flat. Although not exactly the outcome we were looking for on the deposit side, we continue to be focused on mix and we remain pleased with our trending there. We saw average balance growth in transaction products and period-end growth in our money market accounts with a noticeable decline in consumer CD balances. Rates in many of our markets on the CD side seem to be staying higher, and that isn't our focus. We will remain focused on operating account and money market account growth across our customer base. For the full year, we saw total deposits increase over $400 million or approximately 6.5% with strong overall growth in our money market, noninterest-bearing and interest-bearing accounts, partially offset by a drop in consumer CDs. We finished the year with an approximate 93.9% loan-to-deposit ratio, a slight improvement from the third quarter. Overall, for loans and deposits, we finished the year roughly where we expected to be on a growth basis and our growth expectations on a stand-alone basis on the loan and deposit side for '26 are much the same, growing at a ratable basis throughout the year with average balance growth in the mid-single-digit level. Flipping to the P&L side, as Neal noted, we're quite pleased with the fourth quarter EPS performance as our adjusted diluted EPS of $0.95 was our best EPS quarter of the year. Our net interest margin in the fourth quarter was quite strong at 4.18%, up 11 basis points from the third quarter and has now been above 4% for the last 13 consecutive quarters. Overall, net interest margin and net interest income trending in the fourth quarter was largely driven by improved funding costs with interest-bearing deposit costs down 21 bps and wholesale borrowing costs favorably impacted by a sub debt payoff we completed at the very beginning of the quarter. All in all, we're pretty pleased with our margin performance and 7% NII growth on the full year. It's a testament to our focus on our loan and deposit product and business mix. Looking ahead to the full year '26, we expect mid-single-digit growth in our net interest income with NIM remaining stable relative to full year '25 performance. Shifting to the service fee revenue side, we had a really nice quarter with noninterest revenue totaling $26.7 million or roughly $400,000 more than Q3 and up almost 24% over the fourth quarter of '24. The sequential growth in the fourth quarter of '25 was largely driven by our loan syndication and swap revenue streams, partially offset by a nominal decline in our mortgage revenues, which certainly showed strong given the season. We also saw growth in our treasury management and interchange service fee revenues in the fourth quarter. For the full year, we saw growth of approximately $12.1 million over '24 or approximately 13%, driven mostly by service fee revenues in our mortgage and treasury management lines of business, which were up 21% and 18%, respectively. Our results on the noninterest revenue side really highlight the diversity across all our fee businesses, contributing to our achieving the 13% full year growth in '25. For '26, we expect noninterest revenue percentage growth in the low double-digit to low teens range. Our total adjusted noninterest expense in the fourth quarter, which excludes merger-related expenses, was up from the third quarter by approximately $1 million, primarily related to increases in other noninterest expenses. The increase there was primarily the result of the write-off of the remaining deferred expenses associated with the sub debt redemption at the beginning of the fourth quarter as well as some maintenance expenses related to some OREO properties. That said, the adjusted efficiency ratio for the quarter was slightly down from the prior quarter at 63.36%, resulting from the net revenue growth for the quarter. As Neal noted earlier, we saw nice operating leverage this year in both the fourth quarter and for the full year. For 2026, we expect to see our adjusted noninterest expense percentage growth in the mid- to high single-digit range. On the asset quality side, provision expense for the fourth quarter was $6.2 million, resulting in an ending allowance for credit loss as a percentage of loans of 1.27%, an increase of 1 bp from Q3. Our provisioning this quarter was due primarily to impacts from net portfolio downgrades. Our classified loan balances were down about 5% from the prior quarter, while nonperforming loan balances also decreased from the third quarter by about 13%. As Neal referenced earlier, credit on the C&I side can be lumpy at times. We finished the year with an approximate 43 basis point charge-off ratio on the full year with approximately 75% of the charge-off dollars related to 2 loans in our C&I portfolio, the telecom credit and the cross-border credit that we've referenced earlier in the year. For 2026, we expect our allowance for credit losses to loans to stay in the mid- to high 120s in basis points with a net charge-off ratio in the mid- to high 20s in basis points. On the capital side, we continue to strengthen our position as we closed out the year with our TBV per share improving by $3.89 or roughly 11.5% over 2024 year-end to $37.83 and CET1 ratio ending at 14.12%. I will now turn the call back to the moderator to open the line for questions.

[Operator Instructions] The first question comes from Woody Lay of KBW.

I wanted to start on deposit costs, and we saw the deposit betas kind of reaccelerate, which was great to see. I was just looking for some -- maybe some additional color on the deposit pricing strategy in the quarter? And then how do you think about betas from here?

Thank you, Woody. Yes, we certainly saw favorable movement as I commented on earlier with overall interest-bearing costs going down by about 21 basis points. Certainly pleased with that. And we moved rates when macro rates moved, and we'll continue to do that. We look at -- kind of looking forward, we do look at the environment. It's tougher out there, certainly when you're pushing for growth like we are. And so we acknowledge that we do have a lot of flexibility given the C&I variable nature of the asset side to our sheet. So we have a lot more flexibility to engage in some of the pricing that's going on out there. And we don't see that changing by and large. I've mentioned CD pricing across a lot of our markets is pretty aggressive. We're seeing it hang pretty high. Now CDs isn't really where we play. But we'll continue to be focused on operating account growth through all of our C&I business development efforts across our sales teams and certainly on the consumer side with money market account growth and our emphasis there. How does that translate to betas? I think our beta is going to be tracking a little lighter than it historically has tracked because of all the deposit competition out there. Having said that, I don't expect it to be terribly lighter than it has been in the past, but we do expect it to be less than the 40% plus betas that we've been able to enjoy historically.

Got it. That's helpful color. Next, I wanted to shift over to expenses, and I appreciate the stand-alone guide. I was just curious sort of what level in that stand-alone guide is baked into investments in the West Coast, knowing you've been kind of doing that independently? And then once the deal closes, how are you thinking about sort of the incremental expense investment needed?

Yes, good -- yes, thank you Neal.

I would say we -- the opportunity to add to our sales force is probably across the footprint, and we're seeing more activity in Texas, certainly as a result of the merger side. So I would expect us to add to our C&I team in both Texas and Southern Cal, specifically some of the newer markets that First Foundation brings. But I'd say I still think we, by and large, built a lot of what we're trying to do ahead of the merger. So with that, I'll turn it over to Rob.

Yes. And I would just add to Neal's comment to say, aside from the sales force, Woody, in your question, our cost save synergy disclosures in our investor presentation, all took into consideration the infrastructure needs for the combined company. So we don't expect that there's anything else on the infrastructure side.

All right. I appreciate that. And then last for me, just real quick. Any color on what drove the special mention increase in the quarter?

Yes. Fair question. I mean, ultimately, I think -- and Jennifer could certainly add to this, maybe I'll just offer that we continue to see a little bit of pressure just from macro interest rates and how that's reverberating in the portfolio. And that's the general trend that we've seen throughout '25. Of course, we do expect, given how interest rates have come down towards the latter half of '25, we do expect to see as we get financial statements through the end of the year, we expect to see some of that interest rate pressure on the business side abate a bit. But generally, that's a trend that -- net downgrade trend that we have been seeing throughout the year and particularly on interest costs. Jennifer, I suspect you may have something to add there.

Yes. And I think your comment is spot on as we've seen the interest rate -- well, the interest rates play out for a longer period of time. There were certainly, as it's been said multiple times, no pervasive themes in the increase in special mention. It was, again, a lumpy component there, primarily with one particular name.

The next question comes from Matt Olney of Stephens.

I was looking for any commentary on loan pricing? Are C&I spreads holding in? Or is competition coming in more aggressively? Just trying to forecast loan betas, I guess, over the next few quarters.

Yes. Maybe I'll kick it off there. I mean, pretty consistent really, Matt. I mean, no material changes in what we're seeing in terms of trends on credit spreads. And certainly, credit spreads have some slight differences from one market to another across our franchise footprint. But by and large, credit spreads have been holding in the spaces that we are focused on have been holding pretty well.

Okay. I appreciate that, Rob. And then I guess as a follow-up, I just want to ask about the pending acquisition and any kind of impact you can see on that from the recent interest rate cuts and potentially, I guess, additional rate cuts until closing. Will any of those rate changes over the last few months impact the financial metrics of the acquisition? And then maybe just strategically, as we get more rate cuts since deal announcement, what does that mean for the asset and liability repositioning that we've talked about previously?

Yes, absolutely. And maybe I'll start off. I know Neal will have some items -- some additions here as well. I would just start off by saying, certainly, we remain very excited about the prospects ahead of us post-merger closing as we look forward here in '26. As it relates to macro rates, both balance sheets operate a little differently, as you know. But all in all, we're not seeing anything that is causing us any pause or having any change in our expectations. As it relates to the balance sheet repositioning, loan downsizing there, as Neal had mentioned a little bit earlier, we're making great progress on -- well, actually all integration planning efforts, including the balance sheet repositioning. So certainly, macro rates have moved around a little bit. But as it relates to the balance sheet repositioning, we think we're right on schedule for our execution plan.

Yes. I'd say in general, I think people understand that First Foundation's balance sheet is a term asset, short-funded kind of structure. We're certainly taking action to reduce some of that. But I think as Rob said, we -- both with hedging and with the activity that we're working on together, I think we feel good about the progress being made.

The next question comes from Michael Rose of Raymond James.

Maybe we can just start -- certainly appreciate the prior questions regarding loan and asset betas. How should we think about, obviously, excluding the deal, just the trajectory of the margin from here. So obviously, not much balance sheet growth this quarter, looks to reaccelerate into next year given kind of the guide. Obviously, a fair amount of fixed -- or excuse me, floating rate loans. Just walk us through just kind of the puts and takes on the margin, assuming the 2 cuts and then if we don't get any.

Yes, absolutely, Michael. Maybe I'll kick off on this one. I mean, all in all, we do expect net interest margin to remain relatively stable. Very pleased with the 11 basis point expansion that we saw in the fourth quarter. But on the deposit pricing side, we see the environment tightening up. And so as I mentioned earlier, we do see or we are expecting that some of the deposit pricing is going to get a little tougher. We have a little room to play with there given the -- that we are a little bit stronger on the asset side. But we think we're going to be able to maintain margins with the contributions on both sides. We do have 2 rate cuts as we had indicated baked into our expectations, and I think that's largely consensus. So we're not really strained from consensus there. But we do see -- there's going to be quite a bit of price competition on the deposit side, we think, again, here in '26. And that's going to directionally drive where we land on net interest margin. But we do feel pretty good about the stand-alone legacy Sunflower, FirstSun franchise operating at a pretty stable level in comparison to what we saw in '25.

Very helpful. And then maybe one for you, Neal. I think in prior calls, you've kind of talked about the opportunity being a little bit larger or maybe much larger in the Southern California market relative to Texas. It seems like maybe there's -- if I'm reading your comments earlier correctly that there may be a little bit more in terms of opportunity in Texas than maybe you might have thought a couple of months ago. If you can just kind of square those comments and as it relates to the expense guide, how much of that is just kind of like normal kind of inflationary aspects, bonuses, raises, things like that versus hiring -- incremental hiring efforts, both in Texas and in Southern California?

Sure. No, thank you. I guess I'd say broadly, our priority in the last 1.5 years was certainly to build out Southern Cal. I think we are ahead of the curve. I think we have a couple of, I'll call it, minor holes that we'd add as the First Foundation acquisition comes together. I would say, given all the M&A activity in Texas, we have seen more opportunity than we originally thought to pick up solid bankers with good relationships. I think everybody has heard me, Houston has been a priority. We continue to add in Dallas. So I think you'll see us continue to be opportunistic on the HR side. Texas has been [indiscernible] on the M&A side. We aren't going to use our currency to play on the M&A side in Texas. So our opportunity is really to grow by building teams.

All right. Very helpful. And then maybe if I can just squeeze one last one in. Once the deal hopefully closes here by the end of the second quarter, it looks like the loan-to-deposit ratio will come down into kind of the mid-ish 80s range, which will give you a little bit more flexibility. At that point, does the deposit narrative or beta narrative change insofar that you might have a little bit of flexibility to maybe let some of those higher cost deposits go, and that could actually be supportive of kind of NIM expansion on a combined basis. And if it's too early to answer, I certainly understand, but that was my read.

No, I'll let Rob...

No, absolute -- Yes. No, absolutely, Michael. As you know from our IR deck on the deal, we're certainly very focused on the liquidity equation, and that's certainly part of -- a big part of the overall balance sheet repositioning, not only immediately following close and up too close, but also in the several quarters following close. We'll continue to address and reposition as some of the term funding items continue to hit maturity dates. And by that, I mean in higher cost areas. So we'll continue to look to bring down overall costs for the pro forma company as we get there. From an overall beta perspective, I mean, our interest is always in relationships. That's what we're looking to drive. Relationships have more than one element, of course. So we know it's competitive out there. So we expect competition on pricing, but we also expect the balance through the relationship and it being more than just an one product. So our focus will be on continuing to build out on the relationship side there. We think that will have some beneficial impact in margin as we think of things not only for legacy, but looking into the future, but that's how we would be attacking it.

Michael, the only thing I would add to your question because I think it is important, we look forward to running our retail strategy play in Southern Cal in their branches. I think there's great opportunity, as I've said in the past, in Southern Cal, running our play. I think it's a very robust deposit opportunity. And secondarily, as we've got into the multifamily portfolio, a lot of these clients have -- are sitting on a lot of cash because they're investors, not necessarily just developers, like we sometimes think about on the space. So I think we have -- as we've spent more and more time with First Foundation team, I think there's a robust treasury management opportunity on that multifamily portfolio, not just property counts, but actual deposit relationships. So kickstarting that will also be additive, I believe.

The next question comes from Matthew Clark of Piper Sandler.

Do you happen to have the spot rate on deposits at the end of December to give us some visibility into 1Q?

Yes. On the deposit side, as we were talking about, certainly very pleased with what we saw in the fourth quarter. I think we were -- total cost of deposits around 1.98% for the quarter. At the end of December, we were closer to 1.90%, that neighborhood, Matthew.

Okay. That's helpful. And just on the money market side, I mean, is there -- I guess, what is your current offering there? It may be customized to some degree, but I guess what's kind of the range that people are getting these days? And do you feel like there's pressure to potentially increase that rate? Or do you feel like it's just not going to come down as much as you'd like?

Yes. Great question. Yes, I mean, it's very competitive out there, definitely. Our promo offerings on the MMDA side, and it's -- there's always asterisks, there's balance qualifiers. But at the top tier, we're around the [indiscernible] handle on the consumer side for that MMDA product.

And then just on the pro forma -- the guidance you gave today or last night was on a stand-alone basis. But any update on your pro forma guidance relative to at the time when the deal was announced, whether -- plus or minus, whether or not you think there have been any material changes there. Obviously, put up a better-than-expected quarter, so that's helpful. But any thoughts there?

Yes. I mean we don't have any updates at this time on pro forma projections. We're certainly, as we mentioned, very encouraged about the prospects looking forward. And you're right, a lot of information in our IR deck around expectations. I mean there's always some pluses and minuses. But all in all, yes, we continue to remain extremely excited about the prospects as we look forward on that side.

We currently have no further questions. So I'd like to hand back to Neal for closing remarks.

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