Firstsun Capital Bancorp (FSUN) Q4 2025 Earnings Call Transcript

Good morning and welcome to the First Sun Capital Bank Corp fourth quarter and full year 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 please press star followed by the number two. Also as a reminder this call may be recorded. I'd now like to turn the call over to Ed Jacks, First Sons Director of Investor Relations and Business Development. You may begin.

Ed Jacks Thank you, and good morning. I'm joined today by Neil Arnold, our Chief Executive Officer and President, Rob Kaffera, 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 10k 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 First Sun 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 Neil 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 ROA. 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 non-interest 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 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 CNI nature of our loan portfolio, I've always said that the 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 seven 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 Neil. 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 First Sun on a standalone basis and not reflective of the financial impact of our proposed merger with First Foundation. Starting on the balance sheet side, you know, 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 dropped three 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 Neil 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 count 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, non-interest-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 standalone basis on the loan and deposit side for 26 are much the same, growing at a rateable basis throughout the year with average balance growth in the mid-single digital level. Looking for the P&L side, as Neil noted, we're quite pleased with the fourth quarter EPS performance, as our adjusted diluted EPS of 95 cents 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 be 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 and our net interest income with NIMM remaining stable relative to full year 25 performance. Shifting to the service fee revenue side, we had a really nice quarter with non-interest 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 non-interest 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 non-interest revenue percentage growth in the low double-digit to low teams range. Our total adjusted non-interest 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 non-interest 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 original 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 Neil noted earlier, we saw a nice operating leverage this year. in both the fourth quarter and for the full year. For 2026, we expect to see our adjusted non-interest 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 in the percentage of loans of 1.27%, an increase of 1 BIP 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 non-performing loan balances also decreased from the third quarter by about 13%. As Neil referenced earlier, credit on the CNI side can be lumpy at times. You know, 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 two 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 close out the year with our TBD 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.

Thank you. If you would like 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, good morning, guys. Good morning. I wanted to start on deposit costs, and we saw the deposit data kind of re-accelerate, which was great to see. It 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. Yeah, 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, you know, and we moved rates when macro rates moved and we'll continue to do that. You know, we look at, you know, kind of looking forward, you know, we do look at the environment, You know, it's tougher out there, certainly when you're pushing for growth like we are. And so, we acknowledge that, you know, we do have a lot of flexibility given, you know, the CNI variable nature of the asset side to our sheets. We have a lot more flexibility to engage in some of the, you know, the pricing that's going on out there. And we don't see that changing by and large. You know, I've mentioned, you know, CD pricing and, you know, across a lot of our markets is pretty aggressive. It's, you know, we're seeing it hang pretty high. Now, CDs isn't really where we play, but, you know, we'll continue to be focused on operating account growth through all of our C&I business development efforts across our sales teams. And, you know, certainly on the consumer side with money market account growth and our emphasis there. You know, how does that translate to betas? I think our beta is going to be tracking a little lighter than, you know, it historically has tracked because of all the deposit competition out there. Having said that, you know, I don't expect it to be terribly lighter than it has been in the past. But, you know, we do expect it to be less than, you know, 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 standalone guide. I was just curious sort of what level in that standalone guide is based 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, thank you, Neil.

I would say the opportunity to add to our sales force is probably across the footprint. And, you know, we're seeing more activity in Texas, certainly as a result of merger side. So I would expect us to add to our CNI team in both Texas and Southern Cal, you know, specifically some of the newer markets that First Foundation brings. But I'd say I still think, you know, 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.

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

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

Yeah, fair question. You know, I mean, ultimately, I think, and Jennifer could certainly add to this, Maybe I'll just offer that, you know, we continue to see a little bit of pressure, you know, 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 you know we expect to see some of that interest rate pressure in on the business side abate a bit but you know generally that's a you know a trend that net downgrade trend that we have been seeing throughout the year and particularly on on interest cost Jennifer I suspect you may have something to add there yeah and I think your your comment is spot-on as we've seen that the

interest rate deteriorate 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 mentions it was you know again a lumpy component there primarily you know with one particular name all All right, that's it for me.

Thanks for taking my question.

Thank you.

The next question comes from Matt Olney of Stevens. Your line is now open, please go ahead.

Hey, thanks, good morning. Appreciate you taking my question. Looking for any commentary on loan, good morning. 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, of the next few quarters. Thanks.

Yeah, 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, you know, and certainly credit spreads have some slight differences from one market to to another across our franchise footprint.

But, you know, by and large, credit spreads have been holding in in the spaces that we are focused on have been holding pretty pretty well okay I appreciate that Rob and then I guess as a as a follow-up I just want to ask about the pending acquisition and and any kind of impact you can see on that from the recent industry cuts and potentially I guess the 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 the announcement, what does that mean for the assets and liability repositioning that we've talked about previously? Thanks.

Yeah, absolutely.

And maybe I'll start off. I know Neil will have some items, some additions here as well. You know, I would just start off by saying, you know, certainly we remain very excited about the prospects ahead of us, you know, post-merger closing as we look forward here in 26. You know, as it relates to macro rates, you know, both balance sheets operate a little differently, as you know. But, you know, all in You know, we're not seeing anything, you know, that is causing us any pause or, you know, having any change in our expectations, you know, as it relates to the downside, you know, the balance sheet repositioning, loan downsizing there, you know, as Neil had mentioned a little bit earlier, you know, 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.

Yeah, 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 we've made.

Thank you. The next question comes from Michael Rose of Raymond James. Your line is now open. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. Maybe we can just, you know, certainly appreciate the prior, good morning, certainly appreciate the prior questions regarding loan and asset betas. How should we think about, you know, obviously excluding the deal, just the trajectory of the margin from here? So obviously not much balance sheet growth this quarter, looks to re-accelerate into next year, given, you know, kind of the guide. Obviously, a fair amount of fixed, or excuse me, floating rate loans. Just walk us through, you know, just kind of the puts and takes on the margin, assuming the two 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 an interest margin to remain relatively stable. So, very pleased with the 11 basis point expansion that we saw in the fourth quarter. But on the deposit pricing side, you know, 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. You know, we have a little room to play with there, given the, you know, 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 two rate cuts, as we had indicated, baked into our expectations, and I think that's largely consensus, so we're not really straying from consensus there. but, you know, we do see, you know, there's going to be quite a bit of price competition on the deposit side, you know, we think, again, here in 26, and, you know, that's going to directionally drive, you know, where we land on an interest margin, but we do feel pretty good about, you know, the standalone legacy Sunflower for Sun franchise operating at a pretty stable level in comparison to what we saw in 25.

Very helpful. And then maybe one for you, Neil. You know, 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 months ago. If you can just kind of square those comments. And as it relates to the expense guide, you know, how much of that is just kind of like normal, you know, kind of inflationary aspects, bonuses, raises, things like that versus, you know, hiring, you know, incremental hiring efforts, both in Texas and in Southern California. Thanks.

Sure. No, thank you. You know, I guess I'd say broadly, our priority of the last year and a half was certainly to build out Southern Cal I think we were 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, you know, solid bankers with good relationships. You know, I think everybody's heard me. Houston's been a priority. We continue to add in Dallas. So I think you'll see us continue to be opportunistic on the HR side. You know, Texas has been white hot on the M&A side. You know, 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. You know, once the deal, you know, 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. You know, 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 can actually be supportive of kind of NIMH 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, absolutely.

Yeah, no, absolutely, Michael. So as you know from our IR deck on the deal, we're certainly very focused on the liquidity equation and that's certainly a big part of the overall balance sheet repositioning. Not only immediately following close and up to close, but also in the several quarters following close, you know, we'll continue to address and reposition as some of the, you know, term funding items continue to hit maturity dates, and by that I mean, you know, higher cost areas. So, we'll continue to look to bring down overall costs, you know, for the pro form a 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. You know, relationships have more than one element, of course. So, you know, 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 a one product. So our focus will be on continuing to build out on the relationship side there. We think that'll have some beneficial impact and 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. You know, I think there's great opportunity, as I've said in the past, in Southern Cal, you know, 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 are sitting on a lot of cash because they're investors, not necessarily just developers, you know, like we sometimes think about on the space. So I think we have, as we've spent more and more time with the First Foundation team, I think there's a robust treasury management opportunity on that multifamily portfolio, not just, you know, property counts, but actual deposit relationships. So, you know, kick-starting that will also be additive, I believe.

Great. Thanks for all the color, guys. I'll step back. Thank you.

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

Hey, good morning. Thanks for the questions. Good morning. Do you happen to have the, good morning, do you happen to have the spot rate on deposits at the end of December to give us some visibility into 1Q?

Yeah, you know, on the deposit side, as we were talking about, certainly very pleased with what we saw in the fourth quarter. You know, I think we were total cost of deposits around $198 for the quarter. At the end of December, you know, we were closer to $190, you know, that neighborhood, Okay. 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?

Yeah, great question. Yeah, I mean, it's very competitive out there, definitely. Certainly, you know, our promo offerings on the MMDA side, and it's, you know, there's always asterisks, you know, there's balance qualifiers, but, you know, at the top tier, we're around the 345 handle on the consumer side for that MMDA product.

Okay, great. And then just on the pro forma, the guidance you gave today or last night was on a standalone basis. But any update on your pro forma guidance relative to, you know, at the time when the deal was announced, whether, you know, plus or minus, whether you think there have been any material changes there? Obviously, you know, put up a better than expected quarter, so that's helpful. But any thoughts there?

Yeah, I mean, we don't have any updates at this time on pro forma projections. You know, we're certainly, as we mentioned, very encouraged about the prospects, you know, looking forward. And you're right, you know, a lot of information in our IR deck around expectations. I mean, there's always some pluses, minuses, but all in all, yeah, we continue to remain extremely excited about the prospects as we look forward on on that side thank you yes thank you we currently have no further questions I'd like to hand back to Neil for closing remarks thank you thank you all for joining our call this morning as always we appreciate your continued interest in math son we hope you all have a great day and thanks for listening this concludes today's call

Thank you all for joining. You may now disconnect your line.