FirstSun Capital Bancorp ($FSUN)

Good morning, and welcome to the FirstSun Capital Bancorp First Quarter 2026 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, 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 commentary around our first quarter results and recent First Foundation acquisition before moving 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 as well as 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. I will now turn the call over to Neal Arnold.

Thank you, Ed, and good morning. Thank you for joining us. It's a busy time right now at FirstSun as we've just recently closed the acquisition of First Foundation. All of our teams are hard at work with the integration of these businesses. We're seeing some great examples of teamwork throughout our business lines on the sales side, as well as across our staff teams. So I'm very encouraged by the progress we've made so far, and Rob will talk about that. I'd like to start with some comments on our performance for the first quarter before circling back to some comments, with regard to the First Foundation acquisition. We're pleased with the momentum we saw in our business to start this year. We believe our relationship-focused, diversified business model and being in some of the largest fast-growing markets in the country continues to be an important driver to our overall performance. For the quarter, we had adjusted net income of $23.7 million, representing an adjusted diluted earnings per share of $0.84 and an adjusted ROA of 1.14%. We saw very robust loan growth of over 16% annualized in the quarter as well as continued expansion of our net interest margin to a strong 4.25%, and we also saw solid revenue mix on the noninterest income side, representing 24.7% of total revenue. On the asset quality side, we had higher provision, as I'm sure you all saw in the quarter due to a combination of factors. First of all, some portfolio downgrades as well as strong loan growth. Loan balances increased by approximately $267 million in the first quarter. We did see 2 loan charge-offs, and we are seeing some deterioration in value realization in the event of loss. But the significant loan growth we saw in the first quarter materially impacted our higher provision expense. As we've noted before, in addition to traditional return measurements, part of our reoccurring performance monitoring focused on what we call our credit adjusted NIM, and we believe our performance there continues to remain strong. Turning to our recently completed First Foundation acquisition. As I mentioned, we're seeing some great energy across the teams since the deal closed on April 1. The sharing of information and knowledge across the combined branch teams across the legacy First Foundation wealth advisory business and our commercial and residential teams is already driving new business opportunity. I believe this teamwork will drive even greater long-term benefits to our future performance. As I said from the beginning of this transaction, our focus is on derisking the acquired balance sheet through a repositioning strategy that will allow us to unlock the core franchise and capitalize on the great market opportunities in the new acquired footprint, particularly in Southern California and in the deposit-rich markets of Southwest Florida. Our second quarter emphasis is on completing the post-acquisition balance sheet repositioning, and we believe we're well underway in execution. I'll let Rob cover some of the details there. Our third quarter emphasis is on completing our main application system conversions and unlocking the rest of the additional cost synergies that are included in that. We believe the acquisition represents a significant step forward in the continued growth and evolution of this franchise. The combination enhances our presence in great attractive high-growth markets, and it further expands our regional footprint and gives us greater scale across our core businesses. Strategically, the expanded branch network will strengthen our ability to serve clients locally while enhancing our deposit gathering capabilities and overall relationship density. In addition, the transaction significantly expands our wealth platform, which will allow us to deliver a more comprehensive suite of advisory and investment solutions to a broader client base. Taken together, we believe these benefits enhance our long-term growth profile and improve the revenue diversification and strengthen the durability of this franchise, so that we drive sustainable long-term value for shareholders. Our near-term focus remains on disciplined, execution of our acquisition-related activities and completing the balance sheet repositioning we talked about, successfully executing our system conversion and realizing the identified cost synergies. As we move through this year, we are confident our execution will drive improved profitability, a stronger funding portfolio and great long-term shareholder value. Overall, I'm really proud of the hard work, all of the teams have been underway on and excited by the momentum across our extended footprint and the opportunities that lie ahead. I'll now pass the call over to Rob for some further color on our financial results, as well as some of the integration activities underway.

Thank you, Neal. Starting with our first quarter performance. On the balance sheet side for the first quarter and on a spot end balance basis, we achieved healthy loan growth of over 16% annualized. Growth was primarily in the C&I portfolio as we continue to see success across the high-growth markets in our footprint. We saw our line utilization increased by 4% from the end of last year. Just as a reminder, recall that our line utilization was down 3% at the end of last year. So that piece is really just a function of timing. New loan fundings totaled $528 million in the first quarter, up 47% from the fourth quarter and 32% from the first quarter of last year. Loan growth was heavier on the back end of the quarter. So while average balances in Q1 saw a lesser growth rate, we see a nice tailwind here heading into Q2 from an NII perspective. I would also note that, our pipelines remain pretty robust as we begin to move through the second quarter. On the deposit side, on both an average balance and period-end basis, our overall deposit balances were down slightly. Aside from general seasonality pressure that exists in the first quarter every year, within a few segments in our deposit customer base, one specific component driving the decline in deposits was on the broker deposit side, where balances declined by approximately $60 million. From a product mix perspective, you'll see the negative influence to balances from the decline in brokered within the CD category as balances were down there in total, mitigated somewhat by average balance growth in interest-bearing demand, now and money market accounts. Turning to the P&L side. We're quite pleased with the first quarter net interest margin, which ended at a strong 4.25%, up 7 bps from the fourth quarter. This is now 14 consecutive quarters we've enjoyed a net interest margin above 4%. The NIM expansion was largely driven by improved funding costs with interest-bearing deposit costs down 14 basis points compared to the prior quarter. All in all, we are very pleased with our margin performance and the corresponding 11% year-over-year net interest income growth. We believe this is a testament to our continued focus on relationship depth across our client base. On the service fee revenue side, we saw a really nice start to the year with noninterest income to total revenue of 24.7%. While noninterest income in total was up slightly compared to Q4, we saw approximately 25% growth over the first quarter of last year, with continued strong performance in our mortgage business. We also saw continued growth in our treasury management service fee revenues in Q1, which continued to be a growth engine for us. Our total adjusted noninterest expense in the first quarter that excludes merger-related expenses, was up from the fourth quarter by approximately $2.8 million, primarily related to increases in salary and employee benefits. Our employee base increased in the first quarter as we continue to invest in our sales force. We do continue to see great opportunity in Texas and Southern California from a growth opportunity perspective. We also saw a bump sequentially speaking, in the annual payroll tax and retirement account contribution, which resets in the first quarter every year. We also saw an increase in overall medical insurance costs. On the asset quality side, provision expense for the first quarter was $8.3 million, and our allowance for credit losses as a percentage of loans was 1.20%, a decrease of 7 bps from Q4. As Neal noted, our provision expense for this quarter was due to a combination of net portfolio downgrades and our strong loan growth. We took a charge-off on a telecom loan that we had partially reserved for last year, and we took a charge-off on an auto finance lender loan that we had fully reserved for last year, both of which were part of our charge-off expectations for 2026. These 2 loans drove the bulk of the $10.5 million in net charge-offs or 63 basis points on an annualized basis. Overall, we are not seeing broad-based credit issues across any particular geography, in our footprint or sector within our portfolio. However, we have seen a relatively consistent level of nonperformance in the portfolio as a whole, with an average level of nonperformers around 1% of the loan portfolio over the last year, although that level did come down slightly to 86 basis points at the end of the first quarter. I'll just underscore what Neal noted earlier, and that is the significant level of loan growth we saw did result in incremental loan loss provisioning for us in the first quarter. Our overall level of credit adjusted NIM, which we reference on Page 15 in our earnings presentation deck, came down slightly as well, but is still above peer averages. On the capital side, we continue to strengthen our position as we ended the first quarter with our TBV per share improving by $0.74 to $38.57. Next, I'll turn to a few comments on the First Foundation acquisition. As Neal noted, there's a lot of momentum on the business side, and all of our integration activities are well underway. Our macro objective again is to derisk the acquired balance sheet and transform the business to look more like FirstSun. I'll start with an overview on our balance sheet repositioning activities, and I'll note that we have some details in the earnings presentation on this topic on Page 20. At the end of the first quarter, before the transaction closed, First Foundation had already made significant progress on the loan downsizing, successfully reducing balances by approximately $1 billion or 44% of the planned $2.3 billion in total loan downsizing. We are now actively working on the remaining $1.3 billion in total loan downsizing. And based on our ongoing work with certain counterparties there, we expect to be completed by the end of the second quarter. Even after the remaining planned repositioning activities are complete in the second quarter, we expect to continue to remix the acquired loan portfolio and specifically expect to continue to bring down the multifamily balances as they naturally hit their scheduled repricing dates over the next several years. We have approximately $310 million in scheduled repricing in the acquired multifamily portfolio over the remainder of 2026 and another approximate $400 million in 2027. Our focus here will be on keeping true relationships rather than where it is simply a credit-only situation. To us, credit only is not a true relationship, and this is where we want to derisk the portfolio. Additionally, while our initial targeted balance reduction in the SNC portfolio is complete, we also expect to strategically continue to reduce the non-relationship balances in this portfolio on a go-forward basis, again, with an emphasis on cultivating true relationships that have deposits and connections into our service revenue businesses, like treasury management and wealth advisory services. Also, we expect to bring down the overall investor CRE concentration level to below 250% of capital by the end of the second quarter. As a reminder, while the legacy FirstSun investor CRE concentration level was less than 120% at the end of the first quarter, the loans acquired from First Foundation did result in that level increasing significantly post acquisition. As to the other components of our repositioning work in the month of April, we completed all of the downsizing in the securities portfolio and have already meaningfully exited some of the higher cost funding, including all of the acquired FHLB term advances totaling $1.4 billion. Similarly, we expect we will utilize the proceeds from all the remaining second quarter repositioning on the asset side to exit funding targeted in Q2, including our initial targeted broker deposit balance exits. I will note that, similar to our continued remix plans on the loan side, we also plan to continue to bring down the broker deposit balances as those remaining maturities occur in future quarters. We do expect we will be on target to bring down the overall wholesale funding ratio to approximately 10% by the end of the second quarter. As a reminder, while the legacy FirstSun wholesale funding ratio was only approximately 6% at the end of the first quarter, the acquired funding mix at First Foundation did result in the level of wholesale funding, increasing significantly post acquisition. We're very pleased with our progress to date on all of our repositioning work, and we believe we will hit our targets by the end of the second quarter. Our most significant application system conversion is scheduled for late September of this year. So while we have already begun to realize cost synergies post closing, and I'd say, we'll be at roughly 65% phased in for the cost synergies at the end of the second quarter, we will not reach a fully phased state until the end of this year, and that is largely related to the timing for our largest system conversion in September and another separate system conversion on the wealth business side scheduled for Q4. On an overall basis, we believe we could actually overachieve a bit on the cost save side once we're fully phased in. Based on all our preliminary work to date, we believe the overall level of fair value marks may come down a bit as compared to our expectations at the time we announced the transaction in October last year. While this means we could see a lesser level of TBV dilution, perhaps by a couple of percentage points, we expect it will also translate into a lesser level of interest rate mark accretion in the go-forward P&L. We also believe we'll see a slightly higher CET1 ratio compared to our expectations at the time we announced the transaction in October of last year, and expect we'll have capacity for some near-term share repurchases. Specifically, as noted in our earnings presentation deck, we are expecting CET1 in the 10.70s range post repositioning, which compares favorably to the 10.5% we referenced when we announced the deal back in October. Finally, I thought I'd make a couple of references to our 2026 full year financial outlook, which we have updated to reflect the acquisition and includes preliminary estimates of purchase accounting adjustments and expectations related to the balance sheet repositioning. You'll see our 2026 outlook in the earnings presentation on Page 21. On the balance sheet side for loans, given our continued focus on the remix of acquired balances, we expect balances to be relatively stable to post repositioned and post-mark balances through the end of the year and then expect to return to a balanced growth mode. While we expect healthy new loan origination levels this year, as I previously noted, we also expect to continue to remix the acquired First Foundation loan portfolio. This means, we will have additional balance runoff and leads to our expectation of relatively stable balances in comparison to the post-repositioned and post-mark starting point considering the acquisition. For deposits, given our continued focus on the remix of acquired balances, we expect balances to be relatively stable to post-repositioned and post-mark balances through the end of the year and then expect to return to a balanced growth mode. On the NIM side, in addition to our strong legacy first NIM run rate, our repositioning work and the impact from purchase accounting will have a significant favorable impact to the most recent First Foundation first quarter NIM of 1.07%. We expect our full year 2026 net interest margin to be in the mid-3.80s range. However, for the next couple of quarters, we expect to see a drop as we complete the downsizing in Q2 and as we work to further remix the acquired base in Q3 forward, with the fourth quarter NIM expected to elevate into the 3.90s performance range. In terms of revenue mix, we expect our level of noninterest income to total revenue to decline into the lower 20s range. In terms of adjusted efficiency ratio, which excludes merger-related expenses, we expect to operate in the mid- to lower 60s range for the next couple of quarters and then drop to an approximate 60% level in the fourth quarter. In terms of net charge-offs to average loans, we expect levels to end the year in the mid-20s in basis points, albeit on a higher average balance base post acquisition. Overall, we're very pleased with the progress we have made with respect to the acquisition to date. We believe the combined earnings profile will quickly take the shape of what you have become accustomed to from legacy FirstSun. I will now turn the call back to the moderator to open the line for questions.

[Operator Instructions] Your first question comes from the line of Woody Lay with KBW.

I want to start on the size of the balance sheet. And as you mentioned, tangible book value dilution with the deal is coming a little bit better than expected because the marks are lower, but that could have a slight impact on the EPS as well. But it also looks like the repositioning is ahead of schedule, and it's about $1 billion more than what was initially laid out at the merger announcement. But, how do you expect the smaller balance sheet to impact that $5.24 EPS run rate that you initially laid out at deal announcement?

Thank you, Woody. So yes, we do see a little bit more in repositioning as we outlined on Slide 20 in the earnings deck. That's largely related to, or entirely related to, I should say, a short-term leverage strategy that the First Foundation team deployed for the pendency period. So that's what is driving that. It was entirely wholesale deposit funded. And so that's, if you will, the reconciliation between the original $3.4 billion and what you see on Slide 20 there of $4.4 billion. So in terms of our expectations on an after repositioning balance perspective, they're largely unchanged because that was an incremental leveraging on the balance sheet that was deployed post announcement. So if you will, the balance sheet base, our expectations are largely unchanged from announcement where we were as we look at '26. We do see a lot of healthy opportunity and expect healthy origination in the core C&I space. And we expect that, that will be met with some incremental remix and balance runoff as we continue to work through and get the overall concentration levels down from the acquired balance sheet. So we do, as you referenced, see some slight improvement in the TBV dilution as a result of where marks are coming in as we're looking at those here preliminarily now in the second quarter. We put some guidance on Slide 21 in terms of the level of loan interest rate accretion for '26. It's relatively comparable to what you saw in the investor deck back in October or the announcement deck back in October last year. So it's -- like I said, it's relatively comparable and that relative comparability extends into 2027 as well. So we feel pretty good about that $5-plus level as you just look forward to 2027. That was referenced in that October announcement deck.

Yes, that's extremely helpful. I appreciate you walking through the moving pieces there. Maybe just thinking about the net interest margin. I appreciate the glide path you provided for 2026. But as we think about longer term, there's still some remix initiatives going on behind the scenes. Do you think the NIM is biased higher in 2027 as that remix occurs?

I'm sorry. Do we think that remix is what?

But just given the remix that's going to continue on in 2027, I mean, do you think the NIM continues to improve off that the 4Q expected base from the 3.90s range?

Yes. Sorry, my line cut out just slightly there. I missed the last part of yours. So yes, as I mentioned for the fourth quarter of '26 here and as we referenced in the deck there on Slide 21, we expect 4Q to be in the 3.90s range. As you look forward into '27, I would expect a little bit of an uptick from that level, but it's going to be in that same neighborhood. We feel pretty good about that as a run rate as we extend out looking over that kind of near-term horizon here in fourth quarter '26 and for '27.

Got it. Maybe just last for me. You all sound a little more incrementally positive on buybacks and being active there. CET1 is coming slightly above where you all laid out. Just thoughts on where you'd like to keep CET1 as a pro forma company. Any target you're thinking of?

Yes, fair question. We have looked at an 11% level for CET1. I think we referenced that in the past. And that's a level that internally in our conversations with our Board that we've set as kind of a targeted level for CET1. And as you referenced, we do see the capacity for some near-term share repurchase activity. Those are always active conversations within our boardroom and will continue to be on that side. But we feel really good about our capital positioning.

Your next question comes from the line of Michael Rose with Raymond James.

Maybe just following up on some of the loan growth, question and commentary that you provided. So it sounds like there's going to be some ongoing remixing as we get beyond the second quarter in the third and fourth. But I guess my question is, is that largely complete by the time you get to the end of the year? And then I guess with obviously, some of the personnel shifts and changes that I think will happen on the First Foundation side, just an ongoing hiring efforts, how should we think about kind of the pro forma intermediate to longer-term kind of growth rate for the company, just as we're thinking beyond this year as some of those remixing activities kind of run their course?

Got it. Yes. Go ahead, Neal.

I guess, what I'd say, Michael, is that the loan growth we had in the first quarter was surprising to us. And I think as Rob said, both Southern Cal and Texas are leading the way, and we're seeing that across some of those markets. So I think the remix that we're going to have going on is a multiyear one as we see maturities on the multifamily portfolio, some of those will keep as they become deposit clients and other. Some of those will run off. And so the more loan growth we have on the C&I side, I'd say the asset yield step-up will happen. The other thing, I'm pretty bullish on is the focus on core deposits across our franchise. The deposit teams have already kicked off their campaigns. And so we could see a material impact as we continue to improve the mix on the funding side. Obviously, getting rid of wholesale was the immediate priority. But I would say, just remixing the core deposit work, Rob and the teams have been hard at it. Rob, I'll let you add to that color.

Yes, yes. And just to underscore maybe a little bit what Neal was referencing there, Michael, and back to one of the remarks I made in the prepared remarks section, there is scheduled repricing in that multifamily portfolio here, not only in '26, but also in '27, somewhat elevated levels. So that's, if you will, a bit of a headwind relative to from a growth perspective. But again, it's all part of our overall strategy on bringing concentration levels down as we've talked about. And it will mute the overall growth in '26 to that relatively stable level that we've referenced. And I think there's roughly another $400 million in repricing scheduled. And as Neal referenced, our objective is to get deposit penetration within that base and convert to core relationship. And so that's what we'll be hard at work at, and that's what the team will be hard at work at and continue to be hard at work at. As we cast forward into '27, I think I referenced returning to a growth mode. We certainly see more of a growth mode as we look out into 2027 and beyond.

Okay. That's helpful. I won't try and pin you down for a percentage or anything like that for '27. I understand the dynamics. Maybe if we can just switch to credit. Certainly appreciate the reminder and the color on those 2 credits that were kind of the bulk. I think you said of the charge-offs this quarter. Obviously, the guidance implies a pretty big step down in kind of the combined charge-off rate as we move forward. And I guess one of the bigger questions is you guys have been pretty clear that just given the C&I mix and how it's higher than peers and the average size of your loans being a little bit higher that credit is going to be on a ratio basis, somewhat lumpy. But I guess, what gives you confidence that you can kind of operate in that 20 basis point-ish range, not only this year, but as we move forward as growth reaccelerates, because I think that's one of the bigger questions for investors coming off of this quarter's results.

Yes. I'll kick it off there. I'm sure Neal will have something to add there as well. But I think you're right, Michael, as we've talked about, given our heavier C&I mix, we do see credit coming in some lumpy fashion at times. And we've had the onesie-twosie as we look back over the course of the first quarter here in '26 and back into '25. I think one of the things that we intently focus on, of course, is the overall return level within the business and the underlying economics that we're delivering. One of those metrics that we do point to is that credit adjusted NIM level. Given we're in a heavy C&I business, credit spreads that we're operating with are obviously different than a CRE heavy bank-based business mix, i.e., we're 300-plus spreads as opposed to 200, 225 kind of spreads. So we realize that the credit profile on the C&I side will lead to some lumpiness at times. We're -- as we analyze and as the teams work hard constantly on our portfolio and performance there, we're not seeing broad-based structural issues in a sector or in a geography, within the portfolio. I mean, it's just the one-off isolated instances with a company here in this past quarter, a telecom company here, an auto finance lender. And both of those, we had spoken and referenced in the prior year. And we are seeing some elevated realization, loss realization levels there on those exits. But I think it's just the overall performance in the business that we see being able to continue to operate strongly just from an overall return perspective, that credit-adjusted return perspective and the absence of any deep broad-based issues across the portfolio. We've been operating around the 1% NPA level, and that's actually down in Q4 just a little bit. But that's where we've been operating in that territory for the past many quarters. And our performance has been fairly consistent in terms of the one-offs on the credit side that we've seen. The first quarter on an annualized basis, of course, looks a little elevated because we did take those couple of charges in the first quarter. They were all part of what we saw coming at us for fiscal '26. The events metastasized, if you will, in the first quarter and it loss recognition in the first quarter on those was appropriate. But hopefully, that gives you a sense for how we're looking at the business, what we're seeing in the business that ultimately leads us to our guidance around, if you will, that mid-20s level on charge-off performance.

Yes. Michael, I would just add -- Michael, I guess what I'd say is we never like losing money. But the hard part with C&I is we don't have an industry concentration, and we're not seeing it out of any one sector or one geography. So it makes it hard to forecast. And if I could plan for events, I certainly rather not have charge-offs in our biggest loan quarter. It's just -- it is what it is, and we don't take it lightly. But I'd also say we're provisioning on the front end for some extraordinary loan growth. And it's just -- we'll still continue to say, we want more C&I opportunity because on a risk-adjusted NIM, it's the best thing we can do.

Totally get it. I appreciate all the color. Maybe just last one for me. If I go back to the slide deck from when you guys announced the deal, you guys talked about a 1.45% pro forma ROA, about a 13.5% ROCE, understanding some of the marks and the rate landscape has certainly changed. Any sort of updates to those targets? I know, you kind of talked about the tangible book value being a little bit less. So I'd expect there to be some change there. So any updates there? And then if we were to kind of exclude the impacts of expected accretion in '27, like what could that, what could those levels look like?

Sure. As you look at returns in the business and comparison to what we return references that were in the announcement deck, given the lesser level of TDD dilution and the linkage on the mark side, there is some lesser level of accretion, not materially. As I mentioned a little bit ago relative to our expectations on a bottom line EPS perspective in '27, we do think we're still in that 5% or excuse me, $5 neighborhood for '27. Returns, as you look at returns kind of casting out into the next year, certainly will be increasing over '26 level returns. I would say, coming down a little bit in relation to what was in the announcement deck, but certainly above the most recent return levels that we delivered in fiscal '25 in the low 1.20s on the ROA side. And on the capital side, we'll continue to look at the right mix of capital given our overall CET1 target levels and coming out a little favorably on that side and having a more near-term capacity for some possible repurchase activity there. So that, I think, can certainly impact favorably on the return on tangible capital levels as well.

The only thing I might add is, I like the flexibility of the new combined balance sheet that we have both the floating rate growth in C&I and the term nature of the multifamily. So I think we -- both on prepay and otherwise, I would not trade our balance sheet for anyone out there.

Your next call comes from the line of Matt Olney with Stephens.

Going back to the reposition efforts -- the repositioning efforts in recent weeks, it sounds like you're getting some pretty good pricing versus original expectations on the loan dispositions. Anything you can disclose or any color you can give us as far as the shared national credits or the multifamily efforts as far as pricing versus original expectations?

Yes. I would say on the SNC side, very successful performance there. That the SNC -- initial targets on the SNC side, First Foundation completed all of the strategic exits there actually prior to 3/31. So actually real strong performance on the SNC side. And on the multifamily side, we're actually seeing -- we're very favorably pleased with our discussions on that side so far. And we continue to work with counterparties on all the remaining loan sales that we believe will conclude and complete here in the second quarter. But yes, Matt, we're very pleased with what we have been talking about, and what we think we'll ultimately realize there, which maybe it's slightly better than our original targets, but yes, very, very pleased.

Okay. And then on the expense side, any more color on expenses of the combined company that we'll see in the near term? I think we can see the disclosure for First Foundation expenses and obviously, FirstSun, should we just add these 2 together initially before we recognize some of these cost savings? Or is there anything more nuanced in the run rate of either side that you want to disclose as we think about our estimates?

Yes. No, thank you for the question there, Matt. You're right. As you look at First Foundation in the first quarter was, call it, a $56 million kind of run rate level. To your point, if you just add that with FirstSun, apply some cost saves. As I mentioned, we think we'll be at about a 65% level on cost saves in the second quarter, but well on our way in total on cost saves actually expect to be slightly above our original targets there. So if you just kind of apply that our original target was 35% of the First Foundation core expense base. So if you just kind of flat that math, yes, that should give you a pretty close approximation for where we'd see Q2, Q3, if you will, the metric referenced there in terms of our expectations on efficiency being in the mid-60s for the next couple of quarters and then dropping into the lower 60s in the fourth quarter.

Yes. Okay. I appreciate that, Rob. And just to follow up on your last point there. I think we talked about that efficiency ratio getting to the 58% range when full cost saves are recognized and definitely appreciate that we don't see that quite in the fourth quarter given the timing of the conversion. So do you still see that efficiency ratio moving to the 58% range in 2027?

We do. So if we're in the low 60s in Q4, as you look forward and kind of go back to back in the October announcement, looking at '27 kind of run rates, we do see improvement over that low 60s in the fourth quarter to get to around that neighborhood. So yes, we do feel real good about our overall projections from an efficiency ratio standpoint.

Your next call comes from the line of Matthew Clark with Piper Sandler.

I want to start on Slide 20, the First Foundation deposits on the right side, they're running off another $2 billion, so call it $6.75 billion after that, how much of that $6.75 billion do you anticipate to be noninterest-bearing, just knowing that some of that might be ECR related?

Fair question. I would -- I think in terms of the total mix of the portfolio on a go-forward basis, I'd probably see, what would that be? Low 20s. I think if you look at where our mix is on a noninterest-bearing to a total base standpoint, we're between 20% and 25%, probably closer to maybe 23%. If you look kind of go forward post acquisition, post repositioning, we'll still be in the 20s, but that's going to drop a couple of percentage points.

Okay. And then on the margin, here in the near term, I think your guide includes the 4.31%, you just put up in the first quarter. So that would suggest a decent step down in the margin here in 2Q. Any thoughts around kind of the cadence of the margin to get to that 3.90%s in the fourth quarter? And do we step down to like a 3.70% here in 2Q and build back?

Fair question. I would say as you look at the overall guidance there for a mid-3.80%s on the year and Q4 in the 3.90%s, how do you kind of get there in the math for Q2 and Q3. Yes, I mean we're going to -- you're going to see 3.60%s, 3.70%s kind of stepping from Q2 into Q3 before you get to the 3.90% neighborhood in Q4.

Okay. And then if you were to strip out the rate cut, the Fed rate cut, what would that do to your margin guidance?

It would have a nominal impact on the margin guidance basis point or 2.

Okay. And then just on the net charge-off guidance of the mid-20s again, assumes a pretty big step down maybe to 20 basis points going forward. I'm assuming that's partly because you're marking First Foundation's balance sheet. So a lot of the portfolio won't have the losses there just because it's been marked upfront. But is that fair? Is that kind of consistent with what you're thinking?

Well, and I guess we are marking the First Foundation balance sheet under the new guidance, we'll have -- or I should -- before we the credit mark would just go straight against the asset. We'll have now the credit mark in ACL. So if ultimately, we do see a loan that we have fully reserved for it in purchase accounting, it's actually fully reserved for in that ACL line. So we actually, if we see something on the First Foundation side, it will actually -- it will still roll through charge-off even though it will have no P&L impact just to -- but -- so it could end up in a charge-off percentage in the charge-off base in '26. But yes, we do see certainly relative to the 63 basis points in Q1, a step down. Again, those 2 credits in Q1 were part of our expectations for full '26. The point of realization became Q1 for both of those. But we do see a step down in activity over the course of the next 3 quarters to get to that overall mid-20s for the full year.

And how much did those 2 credits contribute to the $10.6 million net charge-offs this quarter?

More than $10 million. So when I say bulk, I mean, it truly is bulk.

There are no further questions at this time. I will now turn the call over to CEO, Neal Arnold, for closing remarks. Neal, please go ahead.

Thank you. We appreciate you all joining the call this morning and your continued interest in FirstSun. Thanks. Have a good day.

This concludes today's call. Thank you for attending. You may now disconnect.