FirstSun Capital Bancorp Q2 2025 Earnings Call Transcript

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July 29, 2025

Key Takeaways

  • Positive Sentiment: First Sun reported Q2 net income of $26.4 million (EPS $0.93) with a 4.07% net interest margin, 13% annualized deposit growth, and approximately 10% total revenue growth.
  • Positive Sentiment: Service fee revenue rose by over 300 bps to 26% of total revenues, while the efficiency ratio improved to 64.5 and the bank delivered $3.3 million of positive operating leverage year-to-date.
  • Negative Sentiment: Charge-offs were elevated in Q2, driven by a few C&I credits in telecom and public finance, pushing the allowance for credit losses ratio to 1.28% and prompting guidance for net charge-offs of 38–44 bps in 2025.
  • Neutral Sentiment: Balance sheet momentum continued with a 21% QoQ increase in new loan originations, a 91.6% loan-to-deposit ratio, and robust pipelines supporting mid-single-digit full-year growth targets for loans and deposits.
  • Positive Sentiment: Capital metrics strengthened with tangible book value per share at $35.77, CET1 at 13.78%, and Tier 1 leverage at 12.39%, underpinning both organic investments and opportunistic M&A pursuits.
AI Generated. May Contain Errors.
Earnings Conference Call
FirstSun Capital Bancorp Q2 2025
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good morning, and welcome to the First Sun Capital Bancorp Second Quarter twenty twenty five Earnings Also as a reminder, this call may be recorded. I'd now like to turn the call over to Ed Jaks, First Sun's Director of Investor Relations and Business Development. You may begin.

Speaker 1

Thank you, and good morning. I'm joined today by Neil Arnold, our Chief Executive Officer and President Rob Caffera, 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.

Speaker 1

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 ks, which is on file with the SEC. I will now turn the call over to Neil Arnold.

Speaker 2

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 26,400,000.0 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%.

Speaker 2

I'll note that this is our second quarter in a row with double digit deposit growth. We are also very pleased with our service fee revenue performance as we saw our revenue mix up meaningfully by over 300 basis points compared to last quarter and almost 26% of total revenues. Our success is a testament to our focus on relationship based banking across all of our business lines. We achieved revenue growth this quarter while maintaining our efficiency ratio at 64.5, which is slightly lower than the prior quarter. Our focus remains on delivering positive operating leverage and long term sustainable growth.

Speaker 2

We believe we're making the right investments to position us favorably moving forward. And to that end, we've realized $3,300,000 of positive operating leverage so far this year as compared to last year. With our strategic focus on a balanced mix of service fee business offerings, we continue to build upon our portfolio of products and services supporting this banking model. This quarter's service fee income results demonstrate our focus and are continuing 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.

Speaker 2

We see that as somewhat a function of the nature of our customer base. Having said this, we did experience an elevated level of charge offs during the second quarter driven by a small number of C and I 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.

Speaker 2

We're seeing increased opportunities to deepen existing relationships while attracting new clients who value our relationship based approach. Our teams and our approach will continue to be what differentiates us from the competition. While we've seen several shifts in shorter term economic prospects on the macro level this year, we expect a resilient U. S. Economy will prevail.

Speaker 2

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.

Speaker 3

Thank you, Neil. 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 very healthy deposit growth this quarter with total quarter end deposits increasing by approximately $226,000,000 or 13% annualized. Growth was strongest in money market and both non interest bearing and interest bearing transaction accounts.

Speaker 3

And we enjoyed growth in both consumer accounts, with total annualized money market and DDA transaction account growth at up 28%. Overall mix improved this quarter with noninterest bearing deposits also increasing and now representing 24% of our total deposit mix, while CDs decreased to approximately 20% of the total mix. On the loan side, we saw some slight loan growth at quarter end with balances up 1.4% on an annualized basis and ending the quarter at $6,500,000,000 in total. Growth was spread across C and I, residential and multifamily loan categories. Total new loan fundings totaled $484,000,000 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.

Speaker 3

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 last quarter. We also saw improvement in our already low ratio of wholesale borrowings and deposits to total liabilities this quarter, which was down approximately 6% from the 7% level at the end of last quarter. So we saw great progress on the overall liquidity front within our balance sheet.

Speaker 3

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 and L side. As Neil mentioned, our net interest margin continues to remain quite strong at 4.07%. I think we've been above the 4% level for eleven 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%.

Speaker 3

On a year over year basis, net interest income was up almost 8%. Our net interest margin stayed consistent with Q1 with a four basis point increase in earning asset yields in comparison to a four basis point increase in interest bearing liability costs with deposit rates up five basis points. In terms of full year guidance for net interest income, we expect we continue to expect an increase in the mid single digit range. Our expectations are in part based on the forward curve view from earlier this month and include Fed cuts in September and December and impacts from asset repricing and a deposit beta around 40% in the near term. As Neil 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.

Speaker 3

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 $5,300,000 from the prior quarter as income from mortgage banking alone jumped $4,200,000 Our mortgage results were driven by strong origination levels this quarter with an overall 43% increase over last quarter, offset by some slight margin contraction. Certainly, some seasonality impact here, but I will say our overall level of revenue growth on the mortgage side certainly outpaced the industry, and that's a function of the business development focus across our sales force. Looking across each of our other service fee revenue businesses, we saw fairly consistent to slightly better results when compared to the first quarter. This includes continued growth in our treasury management business with the revenue growth in Q2 driven by the strong relationship focus across our banker teams as well as the breadth of our product offerings.

Speaker 3

Total noninterest expense was $5,400,000 higher than Q1 and largely related to an increase in variable comp, which is mostly driven by the uptick in revenues on the mortgage side. In terms of full year guidance, on the noninterest income side, we are expecting a high single digit to low double digit growth rate, and we expect noninterest expenses in the mid to high single digit growth range compared to the prior year's adjusted noninterest expense. As Neil 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 $4,500,000 resulting in an ending allowance for credit loss ratio of 1.28.

Speaker 3

Couple of moving pieces here this quarter. We did experience some marginal downgrades on a net basis in the portfolio, which drove some of the provisioning through the CECL model. In addition, as Neil referenced earlier, we did charge off a couple of previously classified C and I credits during the second quarter. And overall, we're at a 44 basis point charge off ratio on a year to date basis. We're seeing some market challenges on the valuation side, and that also had an impact to our second quarter loan loss provision.

Speaker 3

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 C and I loan, where we now expect a triggering event later in 2025 and overall market pricing deterioration impacting our realizations upon exiting some of our classified credits. I'll also note that in large part driven by our charge offs this quarter, our nonperforming loans as a percent of total loans decreased 37 basis points. On the capital side, we continue to strengthen our position as we saw our TBV per share improved to $35.77 CET1 improved by 52 basis points to 13.78% and Tier one 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.

Speaker 3

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

Thank The first question comes from Woody Lay of KBW. Your line is now open. Please go ahead.

Speaker 4

Hey, thanks for taking my question. Wanted to start on credit and maybe specifically the charge off this quarter. You called out two specific ones in the opening comments. I guess how many credits were involved in the charge off this quarter? And were those loans completely charged off?

Speaker 4

Or is there still exposure on the balance sheet?

Speaker 3

Morning, Woody. Good question. On the charge offs here this quarter, as Neil mentioned, the two specific credits, that was the primary driver of the 13.5% on the quarter. One of those credits was about 80% of that. And on both of those, we charge down to the net value that we anticipate realizing.

Speaker 3

So these were not full charge offs.

Speaker 4

Got it. And then you also noted a triggering event that could cause some higher charge offs over the back half of the year. Just how do you think about reserve levels going forward? Is there a need to build up the reserve anticipation for that event?

Speaker 3

Good question. 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'd tell you, I think the normalized ACL was going to be in the range of where we're at now, call it, in the 120s. And like I said, we saw that growing above that level as we were adding some specific reserves over the course of the past many quarters.

Speaker 3

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.

Speaker 4

Got it. That's helpful. And then maybe just last for me. Deposit growth has been really strong over the first half of the year, but you maintained deposit growth guidance of mid single digits, which I think would translate to maybe balances being pretty flat over the back half of the year. Is that the right way to think about it?

Speaker 4

And was the first half growth just a reflection of trying to front load some of the liquidity for the loan growth?

Speaker 3

Fair question. We've been extremely pleased on the deposit side here in the first half without a doubt and do expect growth in the second half. There could be an element of conservatism in our overall growth range perhaps. But I'd also tell 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.

Speaker 3

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 costs. But as we're expecting continued ramp up on the asset side, it's an equation that we've been building in here more on a front end basis. So the pricing on deposit growth in this environment, I don't think is cheap in any way, shape or form, but certainly something that we continue to be very focused on.

Speaker 5

Rob,

Speaker 2

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

Speaker 4

All right. Thanks, guys.

Speaker 6

Thank you, Woody.

Operator

The next question comes from Michael Rose of Raymond James. Michael, your line is now open. Please go ahead.

Speaker 7

Hey, good morning, guys. Thanks for taking my questions. Maybe just wanted to follow-up on deposit question. Good morning. Growth has been strong.

Speaker 7

You know, to your point that you just made, it sounds like some of that is maybe, you know, temporary, but we have seen, you know, some of the, you know, higher cost buckets come down a little bit here. So just wanted to get a better sense of, you know, what you see kind of further mix shift within the within the deposit book or or is that near end? And and just how much more, you know, potentially pricing leverage, you have absent of of rate cuts from from here just given where the loan to deposit ratio is?

Speaker 3

Yes. 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 mix shift, meaning out of CD and into more of our MMDA or transaction products. So we do expect mix shift to continue favorably there over the course of the next several quarters. Expect to continue to see that trend on that side.

Speaker 3

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.

Speaker 7

Okay. So on the asset side, assuming, as you noted in the deck, the 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?

Speaker 7

It would seem like given the NII guide that it would have a little bit of pressure as we move forward absent any rate cuts. Just wanted to walk through kind of the puts and takes. Thanks.

Speaker 3

Yes, absolutely. I think from a margin perspective, we see margin pretty consistent with Q2, maybe a little pressure there. We don't see margin expansion, if you will, going the other way. Obviously, we're pretty proud of where we are on the margin side, at 4% plus and would expect to be really hanging out in the neighborhood that we're at right now, maybe with a little pressure, but still north of 4%.

Speaker 7

Okay, great. And I think maybe just as a follow-up. Go ahead, Neil.

Speaker 2

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.

Speaker 7

Appreciate the context, Neil. Maybe just as a follow-up, just on on the loan growth side. Really appreciate the color around the the, you know, the the payoff this quarter versus the production. It sounds like pipelines are are pretty solid. Certainly understand, the guide for the year.

Speaker 7

How much of the growth is coming from some of the newer efforts or newer markets? And then how should we think about kind of in the intermediate term, how some of the announced M and A transactions could potentially be a benefit for you guys? Thanks.

Speaker 3

Yes. Maybe I'll start off. In terms of our expectations on the loan side, certainly, newer market contributions there are outsized given we're starting off of a very low base. So the performance in SoCal continues to be very strong. We expect that for us will continue.

Speaker 3

And 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 C and I side will really be driven on those fronts. In terms of the macro environment and M and A activity and impacts that we might see there. We always look at ourselves as being opportunistic relative to any disruption in the market. And I think our sales force team certainly approach it in that fashion.

Speaker 3

So we look at that as an opportunity.

Speaker 7

Okay. Great. And then maybe just dovetailing off that last one for me. Just as we have seen some M and A, you guys clearly have some some capital, probably not the the stock where you want it to be in terms of a a currency. But just just talk to me about, you know, capital priorities.

Speaker 7

If that's changed at all. Would you consider a buyback just given where capital is? Is it purely meant for organic growth? And then at some point, would M and A be of some interest again? Yes.

Speaker 2

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 on building the company that that we've had and trying to leverage what we've done into into those opportunities.

Speaker 7

Alright. I'll step back. Thanks for taking my questions.

Speaker 6

Sure. Thank you.

Operator

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

Speaker 5

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

Speaker 3

Yes, absolutely. 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 $215,000,000 And the if you just looked at the very end of the month of June, it was one 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.

Speaker 5

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

Speaker 3

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

Speaker 5

Okay. 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?

Speaker 2

Your version of?

Speaker 3

Sorry, Matthew.

Speaker 5

Oh, I was asking about the Southern California initiative and where those footing stand from a loan and deposit perspective at the end of 2Q and how that

Speaker 3

compared to the prior quarter? Got you. Okay. Yes. Sorry, it wasn't I don't know what happened there.

Speaker 3

The first time you came through, it was a little garbled, 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 $200,000,000 now in SoCal on the deposit side.

Speaker 3

And similarly, we saw a similar growth rate on the loan side, and we're right at about $200,000,000 there as well. The nice thing, it effectively is self funded given we're right at about the $200,000,000 level on both loans and deposits there. So continued nice progression across the teams.

Speaker 5

Okay. Great. And then last one for me just on M and A. It sounds like you remain opportunistic. But how have those conversations with potential targets changed over the last three months?

Speaker 5

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.

Speaker 2

I would say we're focused throughout the Southwest. Certainly, you know, that's been where we've enjoyed the most growth. And so, you know, suffice it to say, we look at most everything. And, you know, we've had conversations ongoing, but, you know, 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 any easier.

Speaker 2

My own view is there will be more deals, but you're going to have to be selective.

Speaker 5

Got it. Thanks again.

Speaker 6

Thank you.

Operator

The final question comes from Matt Olney of Stephens. Matt, your line is now open. Please go ahead.

Speaker 6

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

Speaker 8

Sure. Thank you. This is Jennifer Norid. So the reference there was really related to the valuation. So when we started a process and we took our initial write down in specific reserve, prices were at a level that we believed we would be at about the midpoint on.

Speaker 8

And then as we worked through our workout process at the end of that, the valuation had actually come down to a a fair amount. So that was the reference being made there, and that specific industry within the telecom industry that Neil had referenced earlier.

Speaker 6

Okay. Thanks for the clarification on that. Sure. 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.

Speaker 6

Anything else within that $13,200,000 that was unusual in nature besides the seasonality? Any MSR sales? Any other noncash write ups? Anything just unusual? No,

Speaker 3

absolutely. And answer to your question is no. It was just it's all origination gain on sale activity. No MSR sales that we did in the second quarter at all there. And the net change in MSR on the quarter was pretty nominal.

Speaker 3

I think maybe it was $300,000 net of hedge. So just strong origination gain on sale activity.

Speaker 6

Okay. All right. That's all for me. Thanks, guys.

Speaker 3

Thank you.

Operator

You. We further questions. So I'll hand back to Neil Arnold for any closing remarks.

Speaker 2

Jumped again. Sorry. Thank you for joining our call this morning. As always, we appreciate your continued interest in First Sun. I hope you all have a great day.

Speaker 2

Thanks.

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