FirstSun Capital Bancorp Common Stock 2026 Q3 Earnings Call

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 about our third quarter results 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 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.

Thanks, Ed. Good morning, and thank you for joining us. The third quarter represented another important milestone for FirstSun as we continue to progress on our strategic priorities and on the integration of the First Foundation businesses acquired. For the quarter, adjusted net income, which excluded merger-related expenses, totaled $48.2 million, or $1.03 per diluted share, with an adjusted return on average assets of 123. In addition to the strong bottom-line performance and continued integration of the acquired business, highlights in the third quarter included our net interest margin expansion to 3.82% over the last quarter and continued strong service fee income revenues, which again accounted for 21.9% of total revenue. We are very pleased with the progress we've made on our balance sheet profile.

We significantly repositioned the acquired balance sheet in the second quarter, and the remix efforts continued into the third quarter as we move away from more rate-sensitive non-relationship deposits and as our loan origination activity continues to be more heavily centered on floating-rate C&I loans versus the fixed-rate CRE loans. Our focus continues on expanding and deepening relationships across our entire customer base. A diversified and strong balance sheet enables us to focus on the growth opportunities across all of our great markets. All our work to reposition the acquired balance sheet, which helped to address the challenges inherent in the rate profile of that acquired balance sheet, was a key driver in the improved net interest margin that we saw in the third quarter. While deposit competition has been very strong, our focus has been on continued improvement in our net interest margin.

We expect the balance sheet repositioning work to drive further incremental improvement in our net interest margin in Q4 and into the first quarter of 2027. Growing our service fee revenue businesses will also continue to be one of our strategic priorities. We believe a diversified revenue management side, but also in treasury management, syndication, and swaps provide a meaningful opportunity to deepen our client relationships and further enhance our overall revenue mix. Our capital position remains very strong and continues to provide us with meaningful flexibility as we execute on our overall strategy. During the third quarter, we repurchased approximately $50 million of common shares under our previously announced $150 million share repurchase program, and we currently expect to complete the remaining $100 million over the next three quarters.

We believe the continued strength of our capital position provides us with the capacity to return capital to stockholders while also supporting our organic growth and maintaining overall balance sheet flexibility. On the asset quality side, we are encouraged by the improvement this quarter across several key measures, including a meaningful reduction in special mention loans of about $23.8 million, as well as a reduction in substandard of nearly $40 million. We continue to take a disciplined approach to underwriting portfolio management, early risk identification, and we believe the improvement this quarter reflects the continued work of our teams to actively manage our loan portfolio. On the integration side, in late September, our team successfully completed the core system conversion of First Foundation. This was another important milestone in our integration plans and certainly resulted from a tremendous amount of hard work across the organization.

We're pleased to have completed this phase of the business integration and look forward to expected additional operating synergies that will result. As we look forward to the next several quarters, we are seeing very strong pipelines in all of our major markets for both loan and deposit relationships. I believe the strong pipelines are the result of our investment that we've made in further building our sales force over the last several years, particularly in Texas and Southern California. I expect this to be a driver of our organic growth going forward in 2027. Our priorities remain very focused, driving disciplined organic growth, deepening our client relationships, growing core deposits, improving service fee revenue, and realizing the benefits from the integration of First Foundation businesses and delivering strong financial results that result in sustained long-term value for our stockholders.

Before turning the call over to Rob, I want to recognize and thank all of our teammates for the extraordinary effort that went into completing the recent core systems conversion. An undertaking of this scale requires significant planning, collaboration, and execution across virtually every area of the company, and our teams delivered while continuing to serve clients throughout the process. I am incredibly proud of the commitment and the teamwork and professionalism demonstrated by our team. It is a true reflection of the strength of our organization and our culture. Financial results. Thank you, Neal.

I would also like to add my thanks to all our teammates for the very hard work that went into completing the recent core system conversion. Very inspiring teamwork shown by everybody involved and definitely a real testament to our culture here. Turning to our third quarter financial results, I will start with the P&L and highlight several key drivers. As Neal noted, we are pleased with our earnings performance in the third quarter, with adjusted earnings per diluted share of $1.03. This excludes merger-related expenses incurred in the third quarter, totaling $9.8 million on an after-tax basis, or the equivalent of $0.21 in EPS. Further, our adjusted pre-tax, pre-provision net income or PPNR, which again excludes merger-related expenses, was $66.4 million or $1.42 per share in Q3, compared to $1.50 per share in Q2 and $1.32 per share in Q1 of this year.

We are pleased with the expansion of our net interest margin in Q3, which increased 24 basis points to 3.82%, compared to the 3.58% we saw in the second quarter. The improvement was largely attributable to both loan yield. We saw loan yields increase by 17 basis points over Q2, due primarily to the sales completed late in the second quarter of lower yielding acquired multifamily and acquired public finance loans. In addition, given the heavier variable rate nature of our loan portfolio, we have also benefited from the recent rising interest rate environment. On the funding side, despite the rising interest rate environment, our funding costs also improved. Of the disposition of acquired higher cost certificates of deposit late in the second quarter and during the third quarter, as well as a favorable mix shift between our non-interest bearing and interest bearing deposits.

We do see the competition for deposits of late intensifying and certainly pricing pressure has resulted. Our objective is to continue to remain disciplined and to seek to balance rates and growth, particularly as we move into the fourth quarter and beyond. Service fee revenue totaled approximately $39.4 million in the third quarter, a decrease of approximately 4% compared to the prior quarter and representing 21.9% of total revenue. The decrease was driven primarily by a decrease in mortgage banking revenues, which was attributable to the slowing impact to origination activity as a result of the rising interest rates we saw during the quarter. Although I will note that mortgage revenues were up in the third quarter this year income.

revenue trend we saw in Q3, we did see some nice improvement in service fee revenues across most of our other service fee revenue business lines, including wealth management, treasury management, consumer banking, and swap and syndication activities for our commercial business customers. Overall, we continue to be very excited about the opportunities we are seeing to further grow and diversify our business mix from our service fee revenues. Turning to expenses. Third quarter adjusted non-interest expenses, which exclude merger related expenses, declined approximately $800,000 from the second quarter, with salaries and employee benefits expenses down approximately $5.4 million, partially offset by a $4.5 million increase in other non-interest expenses, which was primarily driven by higher loan collection expenses.