FirstSun Capital Bancorp Q2 Earnings Call Highlights

Key Points

• FirstSun reported a $23 million second-quarter net loss, or $0.49 per diluted share, driven by $44 million in after-tax merger expenses and $30 million in after-tax credit-loss provisions following its acquisition of First Foundation.
• The company completed approximately $3.9 billion in balance-sheet reductions, including acquired loans, securities, brokered deposits and Federal Home Loan Bank borrowings, lowering risk and improving funding flexibility. Management expects continued margin improvement after June’s 3.76% net interest margin.
• Credit losses were concentrated in two loans, accounting for most of the quarter’s provisions and charge-offs, but nonperforming and criticized loans increased. FirstSun authorized up to $150 million in share repurchases and expects low-double-digit loan growth for the remainder of 2026.

FirstSun Capital Bancorp NASDAQ: FSUN reported a second-quarter net loss of $23 million, or $0.49 per diluted share, as merger-related expenses and elevated credit provisions weighed on results following its April 1 acquisition of First Foundation.

Chief Executive Officer Neal Arnold said the quarter marked an important stage in the company’s integration of First Foundation, which expanded FirstSun’s presence in Southern California and added a wealth management platform. He said the company completed its planned balance-sheet downsizing during the quarter and is focused on completing its core-system conversion in late September.

The quarterly loss included $44 million in after-tax merger-related expenses and $30 million in after-tax credit-loss provisioning, Arnold said. Chief Financial Officer Rob Cafera said adjusted pre-tax, pre-provision net income, excluding merger costs, rose to $70 million, or $1.50 per share, from $37.3 million, or $1.32 per share, in the first quarter.

Balance-sheet repositioning completed

Cafera said FirstSun reduced acquired assets by about $3.9 billion during the second quarter, including $1.4 billion of acquired securities and $1.3 billion of acquired loans. Loan reductions included about $901 million of multifamily loans, $337 million of municipal loans and nearly $100 million of shared national credits.

On the funding side, the company reduced acquired funding by about $3.9 billion, including $2.2 billion in brokered deposits, about $330 million in higher-cost non-relationship deposits and $1.4 billion in Federal Home Loan Bank borrowings. FirstSun’s wholesale funding ratio ended the quarter at 6.8%.

Management said the actions reduced concentration, liquidity and interest-rate risks while improving capital flexibility. Excluding acquired First Foundation deposits net of downsizing, core deposits grew at an adjusted annualized rate of about 5%, led by the Los Angeles and Orange County markets.

Core loan balances, excluding acquired loans and net of downsizing, declined at a 6% annualized rate in the second quarter. New loan fundings totaled $377 million, down 29% from the first quarter, while line utilization fell 4%. However, Cafera said core loan balance growth for the first six months of 2026 was 9.7% on the same adjusted basis.

Margin pressure eased late in the quarter

Net interest margin was 3.58% in the second quarter, compared with 4.25% in the first quarter. Cafera said the decline reflected the acquired loan portfolio’s lower stated coupons, higher funding costs and the timing of repositioning actions, as loan sales were completed in June.

Still, the company said its net interest margin improved by 29 basis points from April to June, reaching 3.76% in June. Deposit costs in June were 20 basis points lower than in April, according to Cafera.

FirstSun expects cost-of-funds reductions, including lower brokered-deposit costs and additional funding remixing, to support further margin improvement. Management expects net interest margin to increase slightly in the third quarter from June’s level, reach the mid-3.80% range in the fourth quarter, and move into the high-3.80% range in the first quarter of 2027.

Service-fee revenue increased 50.7% from the first quarter, primarily because of the acquisition. The company also reported organic growth in mortgage and treasury-management revenue. Mortgage and wealth-management revenue combined accounted for 62.3% of second-quarter service-fee revenue, while total service-fee revenue represented 22% of company revenue.

Credit losses tied to two larger loans

Provision expense totaled $40.4 million in the second quarter and net charge-offs were $42.4 million, or 145 basis points of average loans on an annualized basis. Two loan events accounted for 86% of the quarter’s provision expense and 82% of charge-offs, Cafera said.

The first involved what management described as fraudulent misrepresentations by a borrower in the materials-distribution business. The second involved a technology company whose financial performance deteriorated during the quarter. The two loans generated approximately $35 million in pre-tax charge-offs, Arnold said.

Management said the losses were borrower-specific and not indicative of broad-based deterioration in the commercial and industrial portfolio. Nonperforming loans increased to 1.64% of total loans at June 30, from 0.86% at March 31, while criticized loans rose to 7.7% of loans from 4.3%.

Cafera said about 76% of the increase in criticized loans was related to the acquired First Foundation portfolio. Multifamily loans represented 60% of the increase in criticized balances. Management said weighted loan-to-value for criticized multifamily loans was 68%, and guarantees covered approximately 94% of those loans.

The allowance for credit losses stood at 150 basis points of loans at June 30, up from 120 basis points at the end of the first quarter. FirstSun expects full-year net charge-offs to average in the high-50-basis-point range and anticipates a more normalized charge-off level in 2027.

Capital and outlook

Tangible book value per share was $35.16, down almost 9% from March 31. The company said acquisition-related tangible book value dilution was approximately 10%, lower than its original 14% estimate, reflecting lower expected merger expenses and more favorable net fair-value effects.

FirstSun reported a common equity Tier 1 capital ratio of 11.95%, total risk-based capital of 14.13% and a Tier 1 leverage ratio of 9.47%. The company also announced a share-repurchase authorization of up to $150 million, with purchases targeted over the next four quarters beginning in the third quarter.

For the remainder of 2026, management expects low-double-digit loan growth from the second-quarter period-end level and low-single-digit deposit growth. It expects mid-single-digit loan and deposit growth in 2027. The company expects its adjusted efficiency ratio to improve to the low-60% range in the fourth quarter as further cost savings are realized after the planned September systems conversion.

About FirstSun Capital Bancorp (NASDAQ:FSUN)

FirstSun Capital Bancorp engages in the provision of commercial banking services. It operates through the following segments: Banking, Mortgage Operations, and Corporate. The Banking segment consists of loans and provides deposits and fee-based services to consumer, business, and mortgage lending customers. The Mortgage Operations segment originates, sells, services, and manages market risk from changes in interest rates on one-to-four family residential mortgage loans to sell and hold. The company is founded on November 9, 1981 headquartered in Denver, CO.

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