Firstsun Capital Bancorp (FSUN) 2025 Q2 法說會逐字稿

Good morning and welcome to the FirstSun Capital Bancorp second quarter 2025 earnings conference call. (Operator Instructions)

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 1.28% ROA. This quarter was highlighted by exceptional deposit growth, with deposits up 13% annualized, a strong net interest margin at 4.07% for the quarter, and total revenue growth approximating 10%. 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 a 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 quarters service fee income results demonstrate that our focus and our continued 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 CNI credits. One credit of note was in the telecom space with performance challenges ultimately linked to management missteps and another credit was one in the public finance space, which was a result of declining enrollment trends. Our teams remain diligently focused on the administrative side to ensure we maintain historically strong asset quality performance.

I continue to be excited about our significant growth opportunities across all of our southwestern and western markets, including our newer California markets. We're seeing increased opportunities to deepen existing relationships while attracting new clients who value our relationship-based approach. Our teams and our approach will continue to be what differentiates us from the competition.

While we've seen several shifts in shorter term economic prospects on the macro level this year, we expect a resilient US 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 the money market in both non-interest 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 non-interest bearing deposits also increasing and now representing 24% of our total deposit mix, while CDs decreased to approximately 20% of the total mix.

On the loan side, we saw some slight loan growth at quarter end with balances up 1.4% on an annualized basis and ending the quarter at $6.5 billion in total. Growth was spread across CNI, residential, and multi-family loan categories. Total new loan fundings totaled $484 million in Q2, which was up 21% from last quarter and up 29% from the second quarter of last year, a significant increase on either measure. We also saw an uptick in line of credit paydowns near the end of the quarter, which ultimately muted the strong new loan origination activity in the quarter.

On the quarter, average loan balances were up 12% on an annualized basis reflecting again that strong level of originations. Our loan to deposit ratio was at 91.6% at the end of the quarter, and that's improved from 94.3% at the end of the last quarter.

We also saw improvement in our already low ratio of wholesale borrowings and deposits to total liabilities this quarter, which was down to approximately 6% from the 7% level at the end of the last quarter. So we saw great progress on the overall liquidity front within our balance sheet. Our loan and deposit pipelines remain pretty robust, and we still expect mid single digit growth for both loans and deposits on the full year.

Turning to the P&L side, as Neal mentioned, our net interest margin continues to remain quite strong at 4.07%. I think we've been above the 4% level for 11 straight quarters now. Net interest income increased by 5% from the prior quarter, primarily driven by higher average balances, as average loans were up 12% and average total deposits were up 18%.

On a year-over-year basis, net interest income was up almost 8%. Our net interest margins 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 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 be 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 the last quarter, offset by some slight margin contraction. Certainly some seasonality impact here, but I will say our overall level of revenue growth on the mortgage side certainly outpaced the industry, and that's a function of the business development focus across our sales force.

Looking across each of our other service fee revenue businesses, we saw fairly consistent to slightly better results when compared to the first quarter. This includes continued growth in our treasury management business with the revenue growth in Q2 driven by the strong relationship focused across our banker teams as well as the breadth of our product offerings. Total non-interest expense was $5.4 million higher than Q1 and largely related to an increase in variable comp which is mostly driven by the uptick in revenues on the mortgage side.

In terms of full year guidance on the non-interest income side, we are expecting a high single digit to low double digit growth rate, and we expect non-interest expenses in the mid to high single digit growth range compared to the prior years adjusted non-interest expense. As Neal noted, we're very focused on driving positive operating leverage each year and positioning the bank for continued growth into the future. We will, of course, keep a close eye on the macro environment and emerging trends there, and such will dictate the magnitude and pace of the investments and growth opportunities we pursue.

Regarding asset quality, our provision expense for the second quarter was $4.5 million resulting in an ending allowance for credit loss ratio of 1.28%. A couple of moving pieces here this quarter, we did experience some marginal downgrades on a net basis in the portfolio, which drove some of the provisioning through the CISO model. In addition, as Neal referenced earlier, we did charge off a couple previously classified CNI 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 in expected charge-offs for the full year is primarily related to two-key factors; a shorter workout period on a specific classified CNI loan where we now expect a triggering event later in 2025 and overall market pricing deterioration impacting our realizations upon exiting some of our classified credits.

I'll also note that in large part driven by our charge offs this quarter, our non-performing loans as a percent of total loans decreased 37 basis points. On the capital side, we continue to strengthen our position as we saw our TBV per share improved to $35.77, CET 1 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) Woody Lay of KBW.

Wanted to start on credit and maybe specifically the charge off this quarter, you called out two specific loans in the opening comments. I guess, how many credits were were involved in the charge off this quarter and were those loans completely charged off or is there still exposure on the balance sheet?

On the charge offs here this quarter, as Neal mentioned, the two specific credits that was the primary driver of the $13.5 million on the quarter. One of those credits was about 80% of that, and on both of those, we charged down to the net value that we anticipate realizing, so these were not full charge offs.

And then, you also noted a triggering event that could cause a 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?

Our reserving over the course, if you go back the last many quarters, was in part due to specific reserves that we had been recognizing on a couple of these classified credits. And so now that we're seeing resolution time frames, we're seeing that roll out of the ACL. I tell you, I think that normalized ACL is going to be in the range where we're at now called in the 120s. Like I said, we saw that growing above that level as we're 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.

And maybe just last for me. Deposit growth has been really strong over the over the first half of the year, but you maintain deposit growth guidance of mid single digits, which I think would translate to, maybe balances being pretty flat over the back half of the year. Is that the right way to think about it? And was the first half growth just a reflection of trying to frontload some of the liquidity for the loan growth?

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 on the pricing side, deposit growth in this environment on the pricing side also comes with some added cost, 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 is cheap in any way, shape or form, but certainly something that we continue to be very focused on.

All right. Thanks for taking my questions.

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

Michael Rose, Raymond James.

Maybe just wanted to follow up on the deposit question. Growth has been strong to your point that you just made, 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 just wanted to get a better sense of what you see kind of further mixed shift within the deposit book or is that near an 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.

Yeah, I think on the pricing leverage in the mix side, I think deposit growth comes at a price in this environment, we're also very focused on the next 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's the way we should think about the margin from here? Would seem like giving the NII guide that it would have a little bit of pressure as we move forward absent any rate cuts. Just wanted to walkthrough the puts and takes. Thanks.

Yeah, absolutely. I think from a margin perspective, we see margin pretty consistent with Q2, maybe a little pressure there. We don't see margin expansion, if you will go on 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%.

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.

Maybe just as a follow up, just on the loan growth side. Really appreciate the color around the payoffs this quarter versus the production, 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 in the intermediate term how some of the announced M&A transactions could potentially be a benefit for you guys. Thanks.

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, we'll continue.

I'd say, the activity across our specialty teams, the activity in Dallas and Arizona has continued to be pretty strong as well, and that's really where we'd see the bulk of our activity on the CNI 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 teams certainly approach it in that fashion, so we look at that as an opportunity.

And then maybe just dovetailing 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 it to be in terms of currency. But just talk to me about capital priorities if that's changed at all, would you consider a buyback just get more capital as is purely meant for organic growth, and then at some point, would M&A be of some interest again? Thanks.

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

Matthew Clark, Piper Sandler.

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

As I mentioned, we are seeing the cost of deposit growth at coming at a higher level than what our weighted average overall cost is. I think our cost on the quarter was at $2.15 million and if you just looked at the very end of the of the month of June, it was 1 basis point less than that level. So to just kind of frame up for you the particulars there, that's what we're seeing on deposit pricing.

And then on the deposit growth, you mentioned a couple of deposits that might be temporary or transitory. I mean, was a lot of that in non-interest bearing or was it elsewhere just trying to get a sense for whether or not that NIB, those NIB balances are somewhat sustainable?

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

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

You're breaking up.

Sorry, Matthew.

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

Sorry, it wasn't -- I don't know what happened there. The first time you came through, it was a little garble, but I heard you the second time. Thank you for repeating your question there.

For SoCal, as I mentioned, we've seen some -- we continue to see nice growth there. I think on the deposit side, I think we saw, I don't know, about 40% growth on the deposit side in the second quarter, I think in total we're right around $200 million now in SoCal on the deposit side and similarly, we saw similar growth rate on the loan side and we're right at about $200 million there as well. The nice thing, it effectively is self-funded, given we're right at about the $200 million level on both loans and deposits there, so continued nice progression across the teams.

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

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

Matt Olney, Stephens.

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

This is Jennifer Norris. So the reference there was really related to the valuation. So when we started a process and we took our initial write down and specific reserve, prices were at a level that we believed we would see at about the midpoint on, and then as we worked through our workout process at the end of that, the valuation had actually come down at a fair amount. So that was the reference being made there and that specific industry within the telecom industry that Neal had referenced earlier.

And then on the non-interest income side, the mortgage looks really strong this quarter. I think Rob, you mentioned some seasonality, of course, that was a portion of that. Anything else within that $13.2 million that was unusual nature besides the seasonality? Any MSR sales? Any other non-cash write ups? Anything just unusual? Thanks.

Absolutely. And the answer to your question is no. It's all origination, gain on sale activity, no MSR sales that that we did in the second quarter at all there and the net change in MSR on the quarter was pretty nominal. I think maybe it was $300,000 net of hedge, so it was just strong origination gain on sale activity.

I'll hand back to Neal Arnold for any closing remarks.

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

This concludes today's call. Thank you for joining. You may now --