FirstSun Capital Bancorp (FSUN) Earnings Call Transcript & Summary

Good morning, and welcome to the FirstSun Capital Bancorp Second Quarter 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. You may begin.

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.

Thank you, Ed. We are very pleased with our strong financial results here in the second quarter. Our consistent focus on delivering value-added solutions across the footprint continues to be the driver behind our growth and strong performance. This quarter, we achieved net income of $26.4 million, representing earnings per share of $0.93 and a 1.8% 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%. I'll note that 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. And 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 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 our focus and our continue to 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 C&I credits. One credit of note was in the telecom space with performance challenges ultimately relate to management missteps and another credit was won 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 for a more detailed review of our financial results.

Thank you, Neal. Several highlights to touch on this morning as we look at our results thus far this year, and I'm going to start on the balance sheet side. We saw a 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 noninterest-bearing and interest-bearing transaction accounts, and we enjoyed growth in both consumer as well as our business accounts with total annualized money market and DDA transaction account growth at up 28%. Overall mix improved this quarter with noninterest-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%. And 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% and from the 7% level at the end of last quarter. So we saw great progress on the overall liquidity front within our balance sheet. Our loan and deposit pipelines remained 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 4 basis point increase in earning asset yields in comparison to a 4 basis point increase in interest-bearing liability costs with deposit rates up 5 basis points. In terms of full year guidance for net interest income, we expect -- 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 markets. Our overall '25 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 a 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 noninterest expense was $5.4 million higher than Q1 and largely related to an increase in variable comp, which is mostly driven by the uptick in revenues on the mortgage side. In terms of full year guidance, on the noninterest income side, we are expecting a high single-digit to low double-digit growth rate and we expect noninterest expenses in the mid- to high single-digit growth range compared to the prior year's adjusted noninterest expense. As Neal noted, we're very focused on driving positive operating [indiscernible] there and such will dictate the magnitude of [indiscernible] 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 loss ratio of 1.28%. 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 referenced earlier, we did charge off a couple of 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 provision. 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 and expected charge-offs for the full year is primarily related to 2 key factors. A shorter workout prioritize 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 are nonperforming 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 TBV per share improved 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.

[Operator Instructions] First question comes from Wood Lay of KBW.

I wanted to start on credit and may be specifically charge off this quarter. You called out two specific, one, in the opening comments, I guess how many credits were involved in the charge-off this quarter? And were those loans completely charged off? Or is there still exposure on the balance sheet?

Good question. On the charge-offs here this quarter, as Neal mentioned, the 2 specific credits, that was the primary driver of the 13.5% on the quarter. One of those credits was about 80% of that. And on both of those we charge down to the net value that we anticipate realizing. So these were not full charge-offs.

Got it. And then 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 to last many quarters, was in part due to specific reserves that we had been recognizing on a couple of these classified credits. And so now that we're seeing resolution time frames, we're seeing that roll out of the ACO, I'd tell you, I think the normalized ACO was going to be in the range where we're at now, call it 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 '25, is something that we now see as a triggering event later in '25 and does already have some specific reserving against it.

Got it. That's helpful. And maybe just last for me. Deposit growth has been really strong over the first half of the year, but you maintained 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? And what 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 do expect growth in the second half. There could be an element of conservatism in our overall growth range perhaps. But 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 the sale of a business or some other major event that has driven up temporarily some of their deposit balances. And again, that's just a function of having a pretty diverse depositor base as well. But we could see a little bit of a headwind from some timing items there. But overall, again, very pleased on the deposit front with what we're seeing. We have seen we have seen on the pricing side, deposit growth in this environment on the pricing side also comes with some added costs. But 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. So 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.

The later we get in the year, Rob, is more confident on our forecast.

The next question comes from Michael Rose of Raymond James.

Maybe just wanted to follow up on the deposit question. 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. So I just wanted to get a better sense of what you see kind of further mix shift within the within the deposit book? Or is that a year end? And just how much more potentially pricing leverage, you have absent of rate cuts from here, just given where the loan-to-deposit ratio is?

Yes. 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. So we do expect mix shift to continue favorably there over the course of the next several quarters. 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. So 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 is the way we should think about the margin from here? It seem 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.

Yes, 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. And I think maybe just as a follow-up. Go ahead, Neal.

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. So I think that's been a pleasant surprise in Southern Cal and everybody always sees 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? And then how should we think about kind of in the intermediate term? How some of the announced M&A transactions could potentially be a benefit for you guys?

Yes. 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. So the performance in SoCal continues to be very strong. We expect that for us will continue. And I'd say the activity across our specialty teams, the activity and Dallas, Arizona, has continued to be pretty strong as well. And that's really where we see the bulk of our activity on the 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 an opportunistic relative to any disruption in the market. And I think our sales force team certainly approach it in that fashion. So we look at that as an opportunity.

Okay. Great. And then maybe just opting off that last one for me. Just as we have seen some M&A, you guys clearly have some capital, probably not the stock where you want to be in terms of currency. But just talking about capital priorities, if that's changed at all, would you consider a buyback, just given more capital is? Is it purely meant for organic growth? And then at some point would M&A be of some interest again?