Firstsun Capital Bancorp Stock

Thank you. Good morning and welcome to the First Son Capital Bank Corp. Second Quarter 2026 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 this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. 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.

Ed, you may begin. Thank you and good morning. I'm joined today by Neil Arnold, our Chief Executive Officer and President, Rob Kuffera, our Chief Financial Officer, and Jennifer Norse, our Chief Credit Officer. We'll start the call with some brief remarks to highlight commentary around our second 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, MetaMask, and 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 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. 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.

And I'll turn the call over to Neil Arnold. Thanks, Ed. And good morning, and thank you for joining us. The second quarter marks an important milestone for First Son as we completed our acquisition of First Foundation on April 1st and continued the hard work of integrating their businesses. We believe the expanded footprint in the Southern California markets and their premier management platform have added significantly and strengthens our franchise and positions us for future success. The middle market business opportunity in Southern Cal aligns well with our CNI playbook. I would argue that Southern California is the best core deposit market in the United States, as some of you have heard me say. I believe that coupled with adding our Southwest Florida markets to our existing deposit markets across Texas, Kansas, New Mexico, Colorado, and Arizona, well position us to drive future growth.

We're very excited about all the growth opportunities in front of us with this acquisition. Our second quarter financial results were certainly mixed. Bottom line, we reported a net loss of 23 million, which included 44 million in after-tax merger related expenses and included the 30 million in after-tax credit loss provisioning. Earlier this month, we provided a credit update on two larger loan charge-offs totaling $26 million after tax. This significantly contributed to our larger loan loss provisioning in the quarter. While the bottom line performance this quarter was below our expectations, we did see significant progress in several areas. Starting with the balance sheet repositioning, which we've emphasized throughout as a key strategic step in our integration plan for the first foundation business.

I'm very pleased to tell you that we've completed all of the downsizing that was part of our plan in the second quarter. teams executed the plan with discipline and efficiency. The repositioning strategy that we executed upon was a very important strategic step. the risk profile of the balance sheet we acquired. We believe we have a strong balance sheet with less concentration risk, less liquidity risk, less interest rate sensitivity, and a stronger capital profile as a result of these repositioning actions. On the deposit side, we saw adjusted annualized growth of approximately 5%, which excludes the impact of the acquired First Foundation deposits net of the downsizing. notably deposit growth in Southern California drove the adjusted annualized growth rate that we mentioned. Our service fee revenue performance in the second quarter was strong as well, representing 22% of revenues this quarter, further evidencing our diversified business model. We also saw significant progress in the cost save realization in the second quarter, following the closing of our acquisition. As Rob noted in last quarter's call, we believe we'll overachieve the level of cost saves that we deliver in conjunction with fully integrating and converting the first foundation business.

We are also pleased to note that the level of tangible book value dilution related to the acquisition is less than our original estimate we announced last October, with the original or the overall level coming in at only approximately 10%. Our capital position is strong. Yesterday we also announced a share repurchase program totaling up to $150 million with repurchases targeted over the next four quarters and starting here in the third quarter. We see this as an integral component to driving shareholder value and realizing the impact of this transaction. On the asset quality side, we saw an elevated level of losses in the second quarter with two notable larger losses. The first relates to a situation involving what we believe to be a fraudulent misrepresentation by a borrower in the materials distribution business. And the second one, which is unrelated to the first, relates to a technology company that experienced deterioration in financial performance. in the second quarter. The charge-offs on these two loans totaled approximately $35 million pre-tax, and as I said, materially drove the increase in our credit loss provisioning and charge-offs in the second quarter.

While these losses were disappointing, they were driven by borrower-specific situations rather than in our belief an indication in broad-based significant loss content across our portfolio. Further, while the dollar amount of non-performing loans at June 30th increased from the end of the first quarter, we haven't seen a large increase in the number of C&I loans in non-performing status. So again, we don't believe it's an indicator of any broad-based deterioration in our C&I status. loan relationships across our portfolio. Our underwriting processes are thorough and include stress testing. Our loan grading considers the effect of P&I amortization even if a loan is on interest only currently and our reoccurring portfolio review activities emphasize identifying potential risks early. We maintain strong borrower engagement and we work to take timely action to preserve the asset quality of the overall organization. As we've said before, we don't take larger risks within our portfolio.

We have no loans even approaching any of our legal lending limits. Again, we are disappointed in loan losses that we experienced in the past quarter. However, we believe that loan losses and provision at this level is isolated. As I look forward to the third quarter and beyond, I believe we're making significant progress in our franchise buildup. The acquisition has enabled us to enhance our presence in attractive high growth markets and increases our scale across many of our core businesses. Our expanded branch network strengthens our ability to serve clients locally while enhancing our deposit gathering capabilities and overall relationship density. We believe we have enhanced our long-term growth profile and improved our revenue diversification and further strengthened the durability of this franchise.

Our near-term focus is on completing our remaining integration work, including the core system conversion, which is scheduled for this quarter in the late September. And as many of you know, acquisitions involve a fair amount of work beyond just computer conversions. Thank you. And finally, I want to thank all our teammates for their tremendous commitment and hard work through all this integration work. Their dedication to serving our clients and our communities while executing on a large transaction like this has been exceptional. I'm very proud of everything they have contributed. continue to help us accomplish. With that, I'll pass the call over to Rob to review our results in more detail.

Thank you, Neil. I'll start off by underscoring the appreciation Neil just mentioned for all the hard work across all of our teams as we continue to progress with all the business integration efforts. The collaboration and teamwork from everybody has been very inspiring. There's a lot of activity this quarter with the merger closing and all the related significant merger activities, as well as developments on the credit side. We've added information into the earnings presentation we filed, and I'll break out some data to try to provide clarity on these matters, as well as our underlying core operations. On the strategic side, I'm very pleased to say that all the balance sheet repositioning associated with the acquisition that we targeted for the second quarter was indeed completed. This was certainly one of our highest strategic priorities immediately following the closing of the acquisition, and we can now shift our focus to leveraging our business model. model across our expanded geography. In terms of particulars on the downsizing during the second quarter, on the asset side, we successfully reduced acquired assets by approximately $3.9 billion, including $1.4 billion in the acquired securities portfolio and $1.3 billion in the acquired loan portfolio.

The loan portfolio that included approximately 901 million of multifamily loans and approximately 337 million of municipal loans and almost 100 million in SNCC loans. On the liability side, we improved our funding profile with an approximate $3.9 billion total reduction in acquired funding, including $2.2 billion in broker deposits, approximately $330 million in higher-cost non-relationship deposits, and $1.4 billion in non-relationship deposits. and FHLB borrowings. Our wholesale funding ratio was at 6.8% at the end of the quarter. So we accomplished what we set out to do on that side. A wholesale funding ratio in line with our historical legacy F-SUN levels. Through these repositioning actions, we believe we have meaningfully strengthened our balance sheet by improving our funding mix, reducing wholesale funding dependency, lowering loan concentration risk, enhancing capital and liquidity flexibility, and lessening our interest rate sensitivity, which we believe will position the company with a strong stronger foundation to support future profitable growth. Aside from the acquired deposits, net of downsizing in terms of core deposits, we saw approximately 5% adjusted annualized balance growth in the second quarter.

And again, this is excluding the acquired balances net of downsizing. From a deposit mix perspective at the end of the quarter, we see non-interest at 18.1% of the total, down from 23.1% at the end of the first quarter. And we see combined savings in money market balances at 40.4% of the total, up from 38% at the end of the first quarter. And balance growth in our Los Angeles and Orange County markets led the deposit performance during the quarter. I will note that the non-interest bearing deposit balance mix reduction was in large part due to our strategic exiting of acquired higher rate deposits that had an interest cost to it, but it's called customer service expense, which is part of non-interest expenses as opposed to to being an interest expense. These are deposits that are classified as non-interest bearing. These are higher rate deposits when you look at the economic cost, but there's a subtlety here in terms of where this cost resides in the actual P&L.

On the loan side, at the end of the second quarter, excluding the impact of acquired loans and net of downsizing, we saw core loan balances decline 6% on an annualized basis. New loan fundings in the second quarter totaled $377 million, down 29% from first quarter new loan funding. level and line utilization decreased by 4%. While new loan volume in Q2 was more muted, we did see stronger new loan volume in the first quarter and our core loan balance growth through the first six months of this year, excluding the impact of first foundation acquired loans and net of downs, was 9.7%. Coupons on second quarter new loan originations were at 6.76%, very similar to the first quarter level, which was at 6.72%. I will note that these average coupon levels for the new loan originations in both quarters is above the effective coupon being created on the acquired first foundation loans. Shifting over to the P&L side, as Neil mentioned, second quarter results were mixed. Bottom line results reflected a net loss of $23 million, or $0.49 per diluted share, with merger related costs representing $0.94 per share.

Our adjusted pre-tax pre-provision net income or PPNR, which excludes merger related expenses was $70 million or a buck 50 per share. That compares to 37.3 million or $1.32 per share in the first quarter. So we're pleased with the growth in core business per share results. Net interest margin was 3.58% in the second quarter, which is a decline from the 4.25% in the first quarter, with the decline significantly influenced by the acquired loan portfolio and higher funding costs. Several moving pieces on the margin side this quarter. I'll start with the timing across all the repositioning actions. All of the loan downsizing via sales occurred in the month of June.

So net interest margin for the first two months of the quarter saw compression from the lower stated coupons to these acquired loans. The weighted average stated coupon for the loans sold in June was 3.94%. And to be clear, there was no accrued for purchase accounting marks on these sold loans as they were all held for sale. Similarly, while we reduced high cost deposit balances as a result of the 2.5 billion combined reduction in deposits associated with our repositioning activities, the timing was also spread throughout the quarter. Progress in total cost of deposits during the quarter was impactful, as the deposit balance was reduced. for the month of June were 20 basis points lower than the month of April. Further, when we look at what combined deposit costs would have been for the first quarter of this year, assuming First Foundation was part of our company at that time, then we see a reduction in cost of deposits of 35 basis points, comparing June deposits to the first quarter deposit cost. We are quite pleased with bringing down our deposit funding costs in a meaningful fashion like this.

Given the timing of all the repositioning activities throughout the quarter, progress in net interest margin is also pretty impactful as it improved 29 basis points comparing June versus April with June net interest margin of at 376 basis points. I know some folks have a specific interest in the component related to the accretion of the purchase accounting fair value marks. To be clear, the fair value marks are the largest component of the TBD dilution in the deal. And the accretion in net interest income is the mechanism to get the loan values back to contractual par. You will find the netting impact from fair value market creation in that interest income in the earnings debt that we filed with the SEC. On the service fee revenue side, we saw growth of 50.7% compared to the first quarter, and it was primarily related to the impact of the acquisition. We experienced organic growth in mortgage revenues and treasury management revenues, while the growth in trust and investment advisory revenue was acquisition related.

Mortgage revenues and wealth revenues on a combined basis account for 62.3% of total service fee revenues in the second quarter. Adjusted non-interest expenses in the second quarter, which exclude merger related expenses were up 57% compared to the first quarter. And again, we're primarily related to the impact of the acquisition. As Neil indicated, we are already realizing some significant cost savings following the acquisition closing. with an annualized run rate equivalent realized in Q2 of approximately 65% of our original total cost saved target of $68 million estimated at the announcement date for the acquisition. We are pleased with our progress on cost saves as we are ahead of schedule on phasing so far through the end of the second quarter. On the asset quality side, provision expense for the second quarter was $40.4 million and charge-offs were $42.4 million or 145 basis points. Provisioning and charge-offs were significantly impacted by the two credit events we disclosed in the 8K filing from earlier this month.

On the provisioning side, the magnitude of those two credits represented 86% of second quarters loan loss provision and 82% of our total Q2 charge-offs. The situation involving what we believe to be fraudulent misrepresentations by a borrower in the materials distribution business. alone represents 75 basis points of the total 145 basis points in annualized charge-off ratio for the second quarter. Aside from the provisioning for these two larger loan losses we've noted, the remaining $5 million in net loan loss provisioning primarily related to net downgrades. Our level of criticized loans and the non-performing component of criticized loans both increased at the end of the second half of this year. in comparison to the end of the first quarter. Criticized loans represent 7.7% of total loans compared to 4.3% at 331. And non-performing loans represent 164 basis points of total loans compared to 86 basis points at 331. terms of activity through the end of the second quarter, I'll note the following. Approximately 76% of the increase in criticized loans relates to the acquired first foundation loan portfolio.

As a reminder, in conjunction with purchase accounting, the entire first foundation loan portfolio was fair valued at the acquisition date, including in terms of the level of loan law The level of loan loss reserve on the entire acquired loan portfolio was assessed at 172 basis points, and the level on just the criticized component was 685 basis points. Considering 76% of the increase in criticized loans relates to the acquired loans, that leaves 24% of the increase in criticized loans relating to legacy sunflower loans or $143 million in balances. Approximately $94 million of that $143 million relates to non-performing loans. And I'll break that down further in a moment. We've provided some industry breakdowns in the earnings debt on pages two and three. 27 and 28 that we filed to highlight the largest drivers of the increase in both criticized loans and the non-performing component of criticized loans. Seven different NAICS categories represent 93 percent of the total increase in criticized loan balances from 331, with the multifamily component alone representing 60% of that increase. He regraded the entire acquired loan portfolio and our grades consider the impact of principal and interest amortization, even if a loan is currently in interest only mode.

We believe we've taken a fairly conservative view on loan grades on the acquired book here. The multifamily component of criticized loans at 630 alone represents 3.1% of total loans or approximately 40% of the criticized total. In general, we believe the LTVs on the multifamily loans support our carrying values. With the weighted loan-to-value, for all multifamily criticized loans being at 68%. On the non-performing side, NPLs increased to 1.64% of total loans, an increase from the 0.86% last quarter. Five different NAICS categories represent 96% of the total increase in non-performing loans at 630, and these same five NAICS categories represented 79% of total NPLs. Looking at these five different NAICS categories for NPLs, the multifamily component is represented by six different relationships.

And on a combined basis, this group has a 600 basis point ACL reserve at June 30th. We have guarantees in place on approximately 94% percent of all of our multifamily criticized loans. So between LTV coverage and guarantees, we believe we have strong support for carrying values. primarily driven by one non-performing loan supported by a property that has experienced a decline in value which has thereby necessitated a specific reserve. Three of the five NAICS categories capture C&I businesses in either the information technology space, the transportation space, or across certain professional and technical fields. The total number of relationships represented for each of these three NAICS categories is small. and it's only nine in total. While these CNI companies are all experiencing varying levels of operating shortfalls, several of the larger exposures are supported by private equity sponsors with meaningful equity investments, and we believe those sponsors have the ability to continue to support the borrowers. We also have one NPL that's fully guaranteed by a well-capitalized and profitable corporate entity.

In terms of meaningful dollars across these three NPL NAICS, we also have the remaining balance of the technology company that we realized in an approximate $12.9 million charge-off in the second quarter. And That loan was charged down to our view of realizable value. So in general, we believe there's stronger sponsor support in many of these cases across these three NAICS categories as companies work through their operating challenges. The other NAICS category in this category in this NPL bucket is the resi-mortgage component. And in general, we believe the LTVs here support our carrying values. I'll summarize the level of NPL increase this quarter as being largely concentrated in several larger credits as opposed to represented by widespread stress across many borrowers, across large companies. loan portfolio. Additionally, we believe we have adequately reserved for potential loan losses through our loss assessments on the legacy sunflower portfolio, wherein we realized a 15 basis point increase in the level of reserve compared to 331 and via the loss assessments completed in conjunction with purchase accounting work on the acquired loan portfolio wherein we did increase the level of reserve by 49 basis points above the level in the legacy first foundation balance sheet at 331.

In total, the level of ACL at 630 was at 150 basis points, and that's up from 120 basis points at 331. On the capital side, TBD per share was $35.16, down almost 9% from 3.31. As we noted in the earnings presentation, dilution from the acquisition was at approximately 10%, down from the estimated 14% at announcement. lesser level of TBD dilution from the acquisition is attributable to a lesser overall level of estimated total merger-related expenses and a better overall level of net fair value impacts compared to original estimates. With the net fair value impact primarily by better performance on the loan downsizing and higher values on resulting tax assets, including the acquired NLLs. Our capital ratios, while down from the higher levels at 331, remain quite strong. The CET1 at 11.95%, total risk-based capital at 14.13%, and tier one leverage at 9.47%. Capital priorities are focused on supporting organic growth, looking forward, as well as supporting share buyback activities.

To that end, and as Neal noted earlier, just yesterday we announced a share repurchase program totaling up to $150 million, with repurchases targeted over the next four quarters starting in August. Our capital priorities are currently based on our company-wide risk assessments and risk attitudes and are calibrated in our plans with maintaining an 11% minimum targeted operating level for CET1. Next, I'd like to make some comments on our full year 2026 financial outlook, including the fourth quarter. You should also refer to page 24 in the earnings presentation deck for more information. key assumptions. On the balance sheet side, for loans, we expect low single-digit balance growth compared to Q2 period end through the end of the year. And then we expect mid-single-digit growth as we look to next year. While we expect healthy new loan origination levels, we also expect to continue to remix the acquired first foundation loan portfolio.

This means we will have additional balance runoff pressure. In terms of the acquired multifamily loan portfolio and near term scheduled repricing, we expect to an estimated 100 million in balance runoff in the second half of this year, and up to an estimated 285 million in balance runoff in 2027. Our focus in the multifamily book will be on keeping true relationships rather than where it's simply a credit-only situation. To us, credit-only is not a valued relationship, and this is where we want to continue to refocus the portfolio. But again, in total, as we look to next year, we expect mid-single-digit balance growth. In terms of deposits, given our continued focus on remix of the acquired balances and scheduled maturities of broker deposits, we also expect low single-digit balance growth through the end of the year compared to Q2 period end, and then expect mid-single-digit growth as we look to next year. year we have approximately 300 million in brokered maturities coming during the second half of this year with a weighted rate of 4.77 percent today on those 300 million in brokered maturities and we have another approximate 340 million in brokered maturities coming in 2027 with a weighted rate of 4.83% on those brokerage maturity. So we believe we will see some repricing benefit ahead in the broker deposits.

In terms of wholesale funding ratio percentage, as I noted earlier at the end of Q2, our ratio was relatively in line. with our historical legacy F-Sun percentage levels. And that's our expectation. On the NIM side, as I noted earlier, the timing of all the repositioning in Q2 had a significant impact on margin, as we saw margin increase 29 basis points from the month of April to the month of June. with the month of June finishing at 376 basis points. Our focus is on continuing to improve our cost of funds, as we believe it will be the primary driver of our margin improvement over the second half of this year. We expect to see margin increasing slightly in the third quarter from our general budget. June margin level with a further increase into the mid 380s in the fourth quarter. expect to see this margin trend continuing into the first quarter of 2027 where we expect to be in the high three eighties range. In terms of revenue mix for both the full year and the fourth quarter of 26, we expect our level of non-interest income to total revenue to be in the low 20s. In terms of adjusted efficiency ratio, which excludes merger related expenses, we expect to operate in the mid to low 60s range, in the second half of 26, with the fourth quarter expected to be in the low 60s.

We expect additional cost savings to be realized in the fourth quarter following our core system conversion scheduled for the end of September, which we expect to result in an efficiency ratio in the first quarter of 2026. 27 in the high 50s to low 60s range. In terms of net charge-offs to average loans, as we noted in our 8K filing earlier this month, we expect the charge-off level for the full year to be in the high 50s range. Looking at the math that translates to an expectation of an annualized charge off level of mid teens for the second half this year to get to that full year level in the high 50s range. Further, we expect the ACL to loans to be in the mid 140s to 150 basis points. point range for the full year. We believe we'll return to a more normalized level of charge-offs to average loans looking forward into 2027, which we'd expect to be in line with the projected 4Q26 level. We are pleased with the significant progress that we've made on integrating the First Foundation business so far, and we believe the combined earnings profile will further emerge in Q3, and then further again in Q4, following the late September core system conversion, as our NIM and efficiency ratios stabilized in the normalized range we expect to operate in. We believe this earnings profile is taking the shape of what you have been accustomed to from Legacy First Son.

I will now turn the call back to the moderator to open the line for questions. We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand.

To draw your question, press star one again. We ask that you pick up your handset when asking the question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Matt Olney with Stevens. Matt, your line is open. Please go ahead.

Hey, thanks, Kimora, and I appreciate you taking my question. You mentioned that much of the downsizing strategy occurred towards the end of the quarter in 2Q. Any more color on the average earning asset outlook for third quarter as it compares to, I think that 2Q number was closer to $16 billion? Any color there?.

Yes, I'd say on that, Matt, that we, you know, in terms of our guidance on low single digit growth from a period end perspective, I guide you to the same on an average basis. On the lower end of low single-digit growth, if you're looking at average versus... the third quarter average versus a Q2 month end. and through the end of the year. So low single-digit growth on both a period end and an average basis compared to the period end of Q2 is your range.

Okay, appreciate that Rob. And then as far as the margin improvement, the back half the year, relative to what that June margin was that you disclosed. I think you mentioned much of that would be on lower cost of funds. any more color on this? Or is it just going to be working down the broker deposit balance and replacing that with core? Or do you plan to just just replace the higher cost brokered with some more current brokered deposits, just any color on that strategy.

Yes, absolutely. And yes, you're right. Given the timing on the downsizing, you know, the margin picture for each of the three months in the second quarter was dramatically different, you know, where we landed at a 376 in the month of June. So, you know, as I referenced, you know, we do see a, you know, looking out to certainly the fourth quarter on the margin side, you know, we do see that margin picking up. And as I mentioned, mid 380s for the fourth quarter, cost of funds is where we see the most outsized potential for continuing to improve that. Certainly bringing down those broker rates where, you know, which are at the 480 level, is going to be a meaningful impact and certainly some remix, if you will, with, you know, call it normal core deposits versus brokered. I think the overall level of wholesale, you know, in terms of wholesale funding ratio, as I mentioned, pretty, where we landed at 6.8% is pretty in line with our historic F-Sun levels. I'd expect that to come down just a little bit, which is a little bit more of that remix, which is going to favorably impact that margin. as you were kind of highlighting in your question, Matt.

Okay, thanks for the color, I'll step back.

Your next question comes from the line of Michael Rose with Raymond James. Michael, your line is open. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. I just wanted to go back to credit. I appreciate all the color that you walked through, Rob. I guess the bigger question is, you know, when I look at slide 28, you know, you did see kind of for First Son or Legacy First Son. CREDIT CITIZEN LOANS INCREASED ABOUT 50% ON A BALANCED BASIS. I CERTAINLY UNDERSTAND THAT YOU EXPLAINED SOME OF THOSE, A GOOD PORTION OF THAT IS MPLs. WHEN I LOOK AT SLIDE 28, ALMOST EVERY CATEGORY EXCEPT FOR ONE WAS UP SEQUENTIALLY.

I GUESS THE REAL QUESTION IS, HOW SHOULD INVESTORS FEEL COMFORT THAT YOU HAVE of kind of the underwriting process under control. You know, we have seen some larger charge offs here over the past couple of years and many others haven't seen similar types of events. You know, have you guys done or started the process of a third party credit review just just trying to get a better appreciation of. You know how investors can be comfortable that you have the portfolio under control that losses will normalize because they have been elevated now, for you know past couple years relative to peers, so I know there's a lot in there, but.

but just looking for some color. Yes, Michael, this is Neil. Appreciate the question, certainly understand it. We don't like losing money any better than anyone else. A couple of things I'd say, you know, We're more of a C&I lender than a lot of peers. So I think we're, we've often said ours is going to be lumpy. Um, and the reality is we have no loans anywhere close to our legal lending limit. And we take, um, concentration seriously.

So I'd say, if you look at by category, we don't have large dollar exposures to any of people's worry points. We've not changed any of our underwriting approach. We've always been pretty thoughtful about it. you know, things do happen in this size credit space, but I think, but I would say we constantly go back and look by industry and we look at them side by side to try to compare what's going on. You know, once a quarter, we do some deep dives in those categories. It's just... you know, the uncomfortableness is that it's hard to forecast when an operator tips over. Now, is that indicative of a bad process? No, I think it's an indicative as our portfolio has matured. We don't see it coming in one geography.

We don't see it happening in one industry. You know, it's not we did something wrong in a, you know, whether it's SAS or, or data centers or, uh, NDFI, you look at all those categories, we don't come away going, gee, we shouldn't have done that. It's really. borrower driven. We tried to get on top of it and look at it. We constantly challenge ourselves to say, is there something we're missing? Honestly, we've looked hard at this multiple times. And I think we're trying to be as clear on our exposure in areas so that people can look at it. It's not something we run from. We are a big lender and that's the piece of the puzzle that we've been at it.

Like I said, I can't say, hey, we stepped in it here. We in general take smaller size positions than banks of our similar size. We see that constantly, but I think but I think we also have, we've looked top down at concentrations and never came away going, gee, we don't want to lend any more to that segment. I don't know, Jennifer. Yes, and I would just underscore,.

one item there, thank you for the question, Michael, that Neil emphasized earlier, and that is the nature of our business. It is different than a lot of those in our size category. So of course, we're always looking at our credit performance and everything there as Neil described. We also look at, excuse me, what we reference is credit adjusted NIM, which we believe actually adjusts out for difference in mix between CRE and C&I. to give another economic measure. So credit adjusted NIM is something else we look at from a performance standpoint that I would also emphasize is something that we look at from a relativity standpoint. I know our credit adjusted NIM is above. So our charge off has been above, but our credit adjusted NIM is also above.

Above those peer levels. Yes, no, so this is Jennifer. I agree with with obviously what everyone said. We've taken deep dives into look at these in terms of process. You know, the other just of note that Rob mentioned earlier is it's a limited number of makes and a limited number of loans within those. So.

Yes. That would be my point. And obviously in conjunction with the diligence that we both did in the merger, we did have a third party go through our portfolio, you know, as did First Foundation.

OKAY. I APPRECIATE ALL THE COLOR AND DISCUSSION. ROB, MAYBE JUST ONE VERIFICATION GOING BACK TO THE CUSTOMER SERVICE EXPENSE. I WANT TO MAKE SURE I UNDERSTAND. I THINK WHAT HAPPENED HERE IS YOU RAN OFF THOSE DEPOSITS. which resulted in kind of a lower or smaller balance sheet, lower reported NII, but also lower operating costs. So I think those two kind of net out. Is that kind of the way to understand it?.

That's exactly right, Michael. And, you know, we ultimately don't know where some of our, if you will, negotiations are going to go with some of these larger, higher rate depositors. There's certainly First Foundation had some larger, higher rates in this NIB case. category that had economic costs, just like, you know, we see coming through interest expense, but it's down to the customer service and very high rate. And, and you know, we presented, you know, where we would come out on rate and, and, you know, some of those just, you know, aren't going to work out. And so, um, we saw hundreds of millions and that was, you know, part of our high rate runoff. And those are rates above, you know, above overnight set. They're high rates. So, um, you know, it's a good trade, um, But you're right, we took on more shrink in the second quarter. Essentially, I characterize it a little bit as we fast forwarded. some of the activity that we're going to continue to tackle throughout the remainder of 26 in the second quarter.

I mean, obviously we tackled a lot with all the downsizing, but we were of those conversations as well. And so that's ultimately, you know, as you kind of link back up to, you know, where our growth expectations on the balance sheet are through the remainder of the year as well. But yes, on the deposit side, that geography can be get a little overlooked at times by folks in terms of for some of these banks but you know we've never had this customer service aspect buried in our nib but you know there we did acquire some of that and and we've taken a good chunk out of it already.

Okay, very helpful. And then just a last follow-up is, you know, in light of that, and maybe back to Matt's question, how should we think about NII growth in the back half of the year? And then just based on the earlier cost savings, is the $5 plus EPS target for next year still in play?.

Thanks. Got you. Yes. I mean, I think, you know, on the margin side, You know, as I mentioned earlier, you know, we expect to be for the fourth quarter, you know, back to be, you know, in the mid 380s on margin, you know, with with with our projections. on the asset side, low single digit, you know, that's going to get you to fairly stable on an absolute dollar amount in NII as you, it'll be up, you know, slightly in Q4 over Q2. But again, those are, if you will, the math behind those two pieces just.

in terms of our NII expectation there. And I don't think we've changed our guidance on that.

Yes, and in terms of looking forward to 27, I think with the balance sheet growth that we referenced, with the net interest margin that we referenced, and I think as you look at our expectations on credit and efficiency ratio, I actually think, you know, combined with expectations on the share buyback side, I think we're north of a flat five. But yes, we're very optimistic of looking into 2027 and performance there. Yes, I would just say, Michael, certainly the second quarter was plenty.

busy with the hard work of this integration. Obviously this quarter we have the computer conversion so we've got whole teams working on that. We also recognize we're not done on the cleanup of First Foundation and now the credit piece of the story. So I promise, the reality is we know we had work to do when we bought First Foundation and we're not shy about rolling up sleeves and quickly tackling it that's what you can expect us to do and you know I think we're still there's nothing we've discovered that makes us believe that the profile of the underlying franchise is completing the playbook that we've strategically set out to build across the Southwest. We now have a meaningful presence in Southern Cal. We obviously have added a piece in in Southwest Florida, but to us driving core deposits, you know, Some banks get distracted away from that. That's our everyday job. We think the fee income story here is a strong one and getting better.

And so I, I have often said I love the flexibility that this balance sheet and franchise gives us to not only grow organically, but to navigate whatever interest rate or economic profile. I think we're in good shape, recognizing we still have work to.

to do. All right. Thanks. I'll step back. Appreciate all the call.

Absolutely. We have reached the end of the Q&A session. I will now turn the call back to Neil Arnold for closing remarks.

We thank you all for joining us this morning. As always, we appreciate your interest in continuing to follow us. So thank you.

This concludes today's call. Thank you for attending. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Good morning, and welcome to the FirstSun Capital Bancorp First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Also, as a reminder, this call may be recorded.

I'd now like to turn the call over to Ed Jacques, 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 commentary around our first quarter results and recent First Foundation acquisition 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 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 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.

Thank you, Ed, and good morning. Thank you for joining us. It's a busy time right now at FirstSun as we've just recently closed the acquisition of First Foundation. All of our teams are hard at work with the integration of these businesses. We're seeing some great examples of teamwork throughout our business lines on the sales side, as well as across our staff teams. So I'm very encouraged by the progress we've made so far, and Rob will talk about that.

I'd like to start with some comments on our performance for the first quarter before circling back to some comments, with regard to the First Foundation acquisition. We're pleased with the momentum we saw in our business to start this year. We believe our relationship-focused, diversified business model and being in some of the largest fast-growing markets in the country continues to be an important driver to our overall performance.

For the quarter, we had adjusted net income of $23.7 million, representing an adjusted diluted earnings per share of $0.84 and an adjusted ROA of 1.14%. We saw very robust loan growth of over 16% annualized in the quarter as well as continued expansion of our net interest margin to a strong 4.25%, and we also saw solid revenue mix on the noninterest income side, representing 24.7% of total revenue.

On the asset quality side, we had higher provision, as I'm sure you all saw in the quarter due to a combination of factors. First of all, some portfolio downgrades as well as strong loan growth. Loan balances increased by approximately $267 million in the first quarter. We did see 2 loan charge-offs, and we are seeing some deterioration in value realization in the event of loss. But the significant loan growth we saw in the first quarter materially impacted our higher provision expense.

As we've noted before, in addition to traditional return measurements, part of our reoccurring performance monitoring focused on what we call our credit adjusted NIM, and we believe our performance there continues to remain strong.

Turning to our recently completed First Foundation acquisition. As I mentioned, we're seeing some great energy across the teams since the deal closed on April 1. The sharing of information and knowledge across the combined branch teams across the legacy First Foundation wealth advisory business and our commercial and residential teams is already driving new business opportunity. I believe this teamwork will drive even greater long-term benefits to our future performance.

As I said from the beginning of this transaction, our focus is on derisking the acquired balance sheet through a repositioning strategy that will allow us to unlock the core franchise and capitalize on the great market opportunities in the new acquired footprint, particularly in Southern California and in the deposit-rich markets of Southwest Florida.

Our second quarter emphasis is on completing the post-acquisition balance sheet repositioning, and we believe we're well underway in execution. I'll let Rob cover some of the details there.

Our third quarter emphasis is on completing our main application system conversions and unlocking the rest of the additional cost synergies that are included in that. We believe the acquisition represents a significant step forward in the continued growth and evolution of this franchise.

The combination enhances our presence in great attractive high-growth markets, and it further expands our regional footprint and gives us greater scale across our core businesses. Strategically, the expanded branch network will strengthen our ability to serve clients locally while enhancing our deposit gathering capabilities and overall relationship density.

In addition, the transaction significantly expands our wealth platform, which will allow us to deliver a more comprehensive suite of advisory and investment solutions to a broader client base. Taken together, we believe these benefits enhance our long-term growth profile and improve the revenue diversification and strengthen the durability of this franchise, so that we drive sustainable long-term value for shareholders.

Our near-term focus remains on disciplined, execution of our acquisition-related activities and completing the balance sheet repositioning we talked about, successfully executing our system conversion and realizing the identified cost synergies.

As we move through this year, we are confident our execution will drive improved profitability, a stronger funding portfolio and great long-term shareholder value. Overall, I'm really proud of the hard work, all of the teams have been underway on and excited by the momentum across our extended footprint and the opportunities that lie ahead.

I'll now pass the call over to Rob for some further color on our financial results, as well as some of the integration activities underway.

Thank you, Neal. Starting with our first quarter performance. On the balance sheet side for the first quarter and on a spot end balance basis, we achieved healthy loan growth of over 16% annualized. Growth was primarily in the C&I portfolio as we continue to see success across the high-growth markets in our footprint.

We saw our line utilization increased by 4% from the end of last year. Just as a reminder, recall that our line utilization was down 3% at the end of last year. So that piece is really just a function of timing. New loan fundings totaled $528 million in the first quarter, up 47% from the fourth quarter and 32% from the first quarter of last year.

Loan growth was heavier on the back end of the quarter. So while average balances in Q1 saw a lesser growth rate, we see a nice tailwind here heading into Q2 from an NII perspective. I would also note that, our pipelines remain pretty robust as we begin to move through the second quarter.

On the deposit side, on both an average balance and period-end basis, our overall deposit balances were down slightly. Aside from general seasonality pressure that exists in the first quarter every year, within a few segments in our deposit customer base, one specific component driving the decline in deposits was on the broker deposit side, where balances declined by approximately $60 million.

From a product mix perspective, you'll see the negative influence to balances from the decline in brokered within the CD category as balances were down there in total, mitigated somewhat by average balance growth in interest-bearing demand, now and money market accounts.

Turning to the P&L side. We're quite pleased with the first quarter net interest margin, which ended at a strong 4.25%, up 7 bps from the fourth quarter. This is now 14 consecutive quarters we've enjoyed a net interest margin above 4%. The NIM expansion was largely driven by improved funding costs with interest-bearing deposit costs down 14 basis points compared to the prior quarter.

All in all, we are very pleased with our margin performance and the corresponding 11% year-over-year net interest income growth. We believe this is a testament to our continued focus on relationship depth across our client base.

On the service fee revenue side, we saw a really nice start to the year with noninterest income to total revenue of 24.7%. While noninterest income in total was up slightly compared to Q4, we saw approximately 25% growth over the first quarter of last year, with continued strong performance in our mortgage business. We also saw continued growth in our treasury management service fee revenues in Q1, which continued to be a growth engine for us.

Our total adjusted noninterest expense in the first quarter that excludes merger-related expenses, was up from the fourth quarter by approximately $2.8 million, primarily related to increases in salary and employee benefits. Our employee base increased in the first quarter as we continue to invest in our sales force. We do continue to see great opportunity in Texas and Southern California from a growth opportunity perspective.

We also saw a bump sequentially speaking, in the annual payroll tax and retirement account contribution, which resets in the first quarter every year. We also saw an increase in overall medical insurance costs.

On the asset quality side, provision expense for the first quarter was $8.3 million, and our allowance for credit losses as a percentage of loans was 1.20%, a decrease of 7 bps from Q4. As Neal noted, our provision expense for this quarter was due to a combination of net portfolio downgrades and our strong loan growth.

We took a charge-off on a telecom loan that we had partially reserved for last year, and we took a charge-off on an auto finance lender loan that we had fully reserved for last year, both of which were part of our charge-off expectations for 2026. These 2 loans drove the bulk of the $10.5 million in net charge-offs or 63 basis points on an annualized basis.

Overall, we are not seeing broad-based credit issues across any particular geography, in our footprint or sector within our portfolio. However, we have seen a relatively consistent level of nonperformance in the portfolio as a whole, with an average level of nonperformers around 1% of the loan portfolio over the last year, although that level did come down slightly to 86 basis points at the end of the first quarter.

I'll just underscore what Neal noted earlier, and that is the significant level of loan growth we saw did result in incremental loan loss provisioning for us in the first quarter. Our overall level of credit adjusted NIM, which we reference on Page 15 in our earnings presentation deck, came down slightly as well, but is still above peer averages.

On the capital side, we continue to strengthen our position as we ended the first quarter with our TBV per share improving by $0.74 to $38.57.

Next, I'll turn to a few comments on the First Foundation acquisition. As Neal noted, there's a lot of momentum on the business side, and all of our integration activities are well underway. Our macro objective again is to derisk the acquired balance sheet and transform the business to look more like FirstSun.

I'll start with an overview on our balance sheet repositioning activities, and I'll note that we have some details in the earnings presentation on this topic on Page 20. At the end of the first quarter, before the transaction closed, First Foundation had already made significant progress on the loan downsizing, successfully reducing balances by approximately $1 billion or 44% of the planned $2.3 billion in total loan downsizing. We are now actively working on the remaining $1.3 billion in total loan downsizing. And based on our ongoing work with certain counterparties there, we expect to be completed by the end of the second quarter.

Even after the remaining planned repositioning activities are complete in the second quarter, we expect to continue to remix the acquired loan portfolio and specifically expect to continue to bring down the multifamily balances as they naturally hit their scheduled repricing dates over the next several years.

We have approximately $310 million in scheduled repricing in the acquired multifamily portfolio over the remainder of 2026 and another approximate $400 million in 2027. Our focus here will be on keeping true relationships rather than where it is simply a credit-only situation.

To us, credit only is not a true relationship, and this is where we want to derisk the portfolio. Additionally, while our initial targeted balance reduction in the SNC portfolio is complete, we also expect to strategically continue to reduce the non-relationship balances in this portfolio on a go-forward basis, again, with an emphasis on cultivating true relationships that have deposits and connections into our service revenue businesses, like treasury management and wealth advisory services.

Also, we expect to bring down the overall investor CRE concentration level to below 250% of capital by the end of the second quarter. As a reminder, while the legacy FirstSun investor CRE concentration level was less than 120% at the end of the first quarter, the loans acquired from First Foundation did result in that level increasing significantly post acquisition.

As to the other components of our repositioning work in the month of April, we completed all of the downsizing in the securities portfolio and have already meaningfully exited some of the higher cost funding, including all of the acquired FHLB term advances totaling $1.4 billion. Similarly, we expect we will utilize the proceeds from all the remaining second quarter repositioning on the asset side to exit funding targeted in Q2, including our initial targeted broker deposit balance exits.

I will note that, similar to our continued remix plans on the loan side, we also plan to continue to bring down the broker deposit balances as those remaining maturities occur in future quarters. We do expect we will be on target to bring down the overall wholesale funding ratio to approximately 10% by the end of the second quarter.

As a reminder, while the legacy FirstSun wholesale funding ratio was only approximately 6% at the end of the first quarter, the acquired funding mix at First Foundation did result in the level of wholesale funding, increasing significantly post acquisition.

We're very pleased with our progress to date on all of our repositioning work, and we believe we will hit our targets by the end of the second quarter. Our most significant application system conversion is scheduled for late September of this year.

So while we have already begun to realize cost synergies post closing, and I'd say, we'll be at roughly 65% phased in for the cost synergies at the end of the second quarter, we will not reach a fully phased state until the end of this year, and that is largely related to the timing for our largest system conversion in September and another separate system conversion on the wealth business side scheduled for Q4.

On an overall basis, we believe we could actually overachieve a bit on the cost save side once we're fully phased in. Based on all our preliminary work to date, we believe the overall level of fair value marks may come down a bit as compared to our expectations at the time we announced the transaction in October last year. While this means we could see a lesser level of TBV dilution, perhaps by a couple of percentage points, we expect it will also translate into a lesser level of interest rate mark accretion in the go-forward P&L.

We also believe we'll see a slightly higher CET1 ratio compared to our expectations at the time we announced the transaction in October of last year, and expect we'll have capacity for some near-term share repurchases. Specifically, as noted in our earnings presentation deck, we are expecting CET1 in the 10.70s range post repositioning, which compares favorably to the 10.5% we referenced when we announced the deal back in October.

Finally, I thought I'd make a couple of references to our 2026 full year financial outlook, which we have updated to reflect the acquisition and includes preliminary estimates of purchase accounting adjustments and expectations related to the balance sheet repositioning. You'll see our 2026 outlook in the earnings presentation on Page 21.

On the balance sheet side for loans, given our continued focus on the remix of acquired balances, we expect balances to be relatively stable to post repositioned and post-mark balances through the end of the year and then expect to return to a balanced growth mode. While we expect healthy new loan origination levels this year, as I previously noted, we also expect to continue to remix the acquired First Foundation loan portfolio. This means, we will have additional balance runoff and leads to our expectation of relatively stable balances in comparison to the post-repositioned and post-mark starting point considering the acquisition.

For deposits, given our continued focus on the remix of acquired balances, we expect balances to be relatively stable to post-repositioned and post-mark balances through the end of the year and then expect to return to a balanced growth mode.

On the NIM side, in addition to our strong legacy first NIM run rate, our repositioning work and the impact from purchase accounting will have a significant favorable impact to the most recent First Foundation first quarter NIM of 1.07%. We expect our full year 2026 net interest margin to be in the mid-3.80s range. However, for the next couple of quarters, we expect to see a drop as we complete the downsizing in Q2 and as we work to further remix the acquired base in Q3 forward, with the fourth quarter NIM expected to elevate into the 3.90s performance range.

In terms of revenue mix, we expect our level of noninterest income to total revenue to decline into the lower 20s range. In terms of adjusted efficiency ratio, which excludes merger-related expenses, we expect to operate in the mid- to lower 60s range for the next couple of quarters and then drop to an approximate 60% level in the fourth quarter.

In terms of net charge-offs to average loans, we expect levels to end the year in the mid-20s in basis points, albeit on a higher average balance base post acquisition.

Overall, we're very pleased with the progress we have made with respect to the acquisition to date. We believe the combined earnings profile will quickly take the shape of what you have become accustomed to from legacy FirstSun.

I will now turn the call back to the moderator to open the line for questions.

[Operator Instructions] Your first question comes from the line of Woody Lay with KBW.

I want to start on the size of the balance sheet. And as you mentioned, tangible book value dilution with the deal is coming a little bit better than expected because the marks are lower, but that could have a slight impact on the EPS as well. But it also looks like the repositioning is ahead of schedule, and it's about $1 billion more than what was initially laid out at the merger announcement. But, how do you expect the smaller balance sheet to impact that $5.24 EPS run rate that you initially laid out at deal announcement?

Thank you, Woody. So yes, we do see a little bit more in repositioning as we outlined on Slide 20 in the earnings deck. That's largely related to, or entirely related to, I should say, a short-term leverage strategy that the First Foundation team deployed for the pendency period. So that's what is driving that. It was entirely wholesale deposit funded. And so that's, if you will, the reconciliation between the original $3.4 billion and what you see on Slide 20 there of $4.4 billion.

So in terms of our expectations on an after repositioning balance perspective, they're largely unchanged because that was an incremental leveraging on the balance sheet that was deployed post announcement. So if you will, the balance sheet base, our expectations are largely unchanged from announcement where we were as we look at '26. We do see a lot of healthy opportunity and expect healthy origination in the core C&I space. And we expect that, that will be met with some incremental remix and balance runoff as we continue to work through and get the overall concentration levels down from the acquired balance sheet.

So we do, as you referenced, see some slight improvement in the TBV dilution as a result of where marks are coming in as we're looking at those here preliminarily now in the second quarter. We put some guidance on Slide 21 in terms of the level of loan interest rate accretion for '26. It's relatively comparable to what you saw in the investor deck back in October or the announcement deck back in October last year. So it's -- like I said, it's relatively comparable and that relative comparability extends into 2027 as well. So we feel pretty good about that $5-plus level as you just look forward to 2027. That was referenced in that October announcement deck.

Yes, that's extremely helpful. I appreciate you walking through the moving pieces there. Maybe just thinking about the net interest margin. I appreciate the glide path you provided for 2026. But as we think about longer term, there's still some remix initiatives going on behind the scenes. Do you think the NIM is biased higher in 2027 as that remix occurs?

I'm sorry. Do we think that remix is what?

But just given the remix that's going to continue on in 2027, I mean, do you think the NIM continues to improve off that the 4Q expected base from the 3.90s range?

Yes. Sorry, my line cut out just slightly there. I missed the last part of yours. So yes, as I mentioned for the fourth quarter of '26 here and as we referenced in the deck there on Slide 21, we expect 4Q to be in the 3.90s range. As you look forward into '27, I would expect a little bit of an uptick from that level, but it's going to be in that same neighborhood. We feel pretty good about that as a run rate as we extend out looking over that kind of near-term horizon here in fourth quarter '26 and for '27.

Got it. Maybe just last for me. You all sound a little more incrementally positive on buybacks and being active there. CET1 is coming slightly above where you all laid out. Just thoughts on where you'd like to keep CET1 as a pro forma company. Any target you're thinking of?

Yes, fair question. We have looked at an 11% level for CET1. I think we referenced that in the past. And that's a level that internally in our conversations with our Board that we've set as kind of a targeted level for CET1. And as you referenced, we do see the capacity for some near-term share repurchase activity. Those are always active conversations within our boardroom and will continue to be on that side. But we feel really good about our capital positioning.

Your next question comes from the line of Michael Rose with Raymond James.

Maybe just following up on some of the loan growth, question and commentary that you provided. So it sounds like there's going to be some ongoing remixing as we get beyond the second quarter in the third and fourth. But I guess my question is, is that largely complete by the time you get to the end of the year? And then I guess with obviously, some of the personnel shifts and changes that I think will happen on the First Foundation side, just an ongoing hiring efforts, how should we think about kind of the pro forma intermediate to longer-term kind of growth rate for the company, just as we're thinking beyond this year as some of those remixing activities kind of run their course?

Got it. Yes. Go ahead, Neal.

I guess, what I'd say, Michael, is that the loan growth we had in the first quarter was surprising to us. And I think as Rob said, both Southern Cal and Texas are leading the way, and we're seeing that across some of those markets. So I think the remix that we're going to have going on is a multiyear one as we see maturities on the multifamily portfolio, some of those will keep as they become deposit clients and other. Some of those will run off. And so the more loan growth we have on the C&I side, I'd say the asset yield step-up will happen.

The other thing, I'm pretty bullish on is the focus on core deposits across our franchise. The deposit teams have already kicked off their campaigns. And so we could see a material impact as we continue to improve the mix on the funding side. Obviously, getting rid of wholesale was the immediate priority. But I would say, just remixing the core deposit work, Rob and the teams have been hard at it. Rob, I'll let you add to that color.

Yes, yes. And just to underscore maybe a little bit what Neal was referencing there, Michael, and back to one of the remarks I made in the prepared remarks section, there is scheduled repricing in that multifamily portfolio here, not only in '26, but also in '27, somewhat elevated levels. So that's, if you will, a bit of a headwind relative to from a growth perspective. But again, it's all part of our overall strategy on bringing concentration levels down as we've talked about. And it will mute the overall growth in '26 to that relatively stable level that we've referenced.

And I think there's roughly another $400 million in repricing scheduled. And as Neal referenced, our objective is to get deposit penetration within that base and convert to core relationship. And so that's what we'll be hard at work at, and that's what the team will be hard at work at and continue to be hard at work at. As we cast forward into '27, I think I referenced returning to a growth mode. We certainly see more of a growth mode as we look out into 2027 and beyond.

Okay. That's helpful. I won't try and pin you down for a percentage or anything like that for '27. I understand the dynamics. Maybe if we can just switch to credit. Certainly appreciate the reminder and the color on those 2 credits that were kind of the bulk. I think you said of the charge-offs this quarter. Obviously, the guidance implies a pretty big step down in kind of the combined charge-off rate as we move forward. And I guess one of the bigger questions is you guys have been pretty clear that just given the C&I mix and how it's higher than peers and the average size of your loans being a little bit higher that credit is going to be on a ratio basis, somewhat lumpy. But I guess, what gives you confidence that you can kind of operate in that 20 basis point-ish range, not only this year, but as we move forward as growth reaccelerates, because I think that's one of the bigger questions for investors coming off of this quarter's results.

Yes. I'll kick it off there. I'm sure Neal will have something to add there as well. But I think you're right, Michael, as we've talked about, given our heavier C&I mix, we do see credit coming in some lumpy fashion at times. And we've had the onesie-twosie as we look back over the course of the first quarter here in '26 and back into '25.

I think one of the things that we intently focus on, of course, is the overall return level within the business and the underlying economics that we're delivering. One of those metrics that we do point to is that credit adjusted NIM level. Given we're in a heavy C&I business, credit spreads that we're operating with are obviously different than a CRE heavy bank-based business mix, i.e., we're 300-plus spreads as opposed to 200, 225 kind of spreads. So we realize that the credit profile on the C&I side will lead to some lumpiness at times.

We're -- as we analyze and as the teams work hard constantly on our portfolio and performance there, we're not seeing broad-based structural issues in a sector or in a geography, within the portfolio. I mean, it's just the one-off isolated instances with a company here in this past quarter, a telecom company here, an auto finance lender. And both of those, we had spoken and referenced in the prior year. And we are seeing some elevated realization, loss realization levels there on those exits.

But I think it's just the overall performance in the business that we see being able to continue to operate strongly just from an overall return perspective, that credit-adjusted return perspective and the absence of any deep broad-based issues across the portfolio. We've been operating around the 1% NPA level, and that's actually down in Q4 just a little bit. But that's where we've been operating in that territory for the past many quarters. And our performance has been fairly consistent in terms of the one-offs on the credit side that we've seen.

The first quarter on an annualized basis, of course, looks a little elevated because we did take those couple of charges in the first quarter. They were all part of what we saw coming at us for fiscal '26. The events metastasized, if you will, in the first quarter and it loss recognition in the first quarter on those was appropriate. But hopefully, that gives you a sense for how we're looking at the business, what we're seeing in the business that ultimately leads us to our guidance around, if you will, that mid-20s level on charge-off performance.

Yes. Michael, I would just add -- Michael, I guess what I'd say is we never like losing money. But the hard part with C&I is we don't have an industry concentration, and we're not seeing it out of any one sector or one geography. So it makes it hard to forecast. And if I could plan for events, I certainly rather not have charge-offs in our biggest loan quarter. It's just -- it is what it is, and we don't take it lightly. But I'd also say we're provisioning on the front end for some extraordinary loan growth. And it's just -- we'll still continue to say, we want more C&I opportunity because on a risk-adjusted NIM, it's the best thing we can do.

Totally get it. I appreciate all the color. Maybe just last one for me. If I go back to the slide deck from when you guys announced the deal, you guys talked about a 1.45% pro forma ROA, about a 13.5% ROCE, understanding some of the marks and the rate landscape has certainly changed. Any sort of updates to those targets? I know, you kind of talked about the tangible book value being a little bit less. So I'd expect there to be some change there. So any updates there? And then if we were to kind of exclude the impacts of expected accretion in '27, like what could that, what could those levels look like?

Sure. As you look at returns in the business and comparison to what we return references that were in the announcement deck, given the lesser level of TDD dilution and the linkage on the mark side, there is some lesser level of accretion, not materially. As I mentioned a little bit ago relative to our expectations on a bottom line EPS perspective in '27, we do think we're still in that 5% or excuse me, $5 neighborhood for '27.

Returns, as you look at returns kind of casting out into the next year, certainly will be increasing over '26 level returns. I would say, coming down a little bit in relation to what was in the announcement deck, but certainly above the most recent return levels that we delivered in fiscal '25 in the low 1.20s on the ROA side.

And on the capital side, we'll continue to look at the right mix of capital given our overall CET1 target levels and coming out a little favorably on that side and having a more near-term capacity for some possible repurchase activity there. So that, I think, can certainly impact favorably on the return on tangible capital levels as well.

The only thing I might add is, I like the flexibility of the new combined balance sheet that we have both the floating rate growth in C&I and the term nature of the multifamily. So I think we -- both on prepay and otherwise, I would not trade our balance sheet for anyone out there.

Your next call comes from the line of Matt Olney with Stephens.

Going back to the reposition efforts -- the repositioning efforts in recent weeks, it sounds like you're getting some pretty good pricing versus original expectations on the loan dispositions. Anything you can disclose or any color you can give us as far as the shared national credits or the multifamily efforts as far as pricing versus original expectations?

Yes. I would say on the SNC side, very successful performance there. That the SNC -- initial targets on the SNC side, First Foundation completed all of the strategic exits there actually prior to 3/31. So actually real strong performance on the SNC side. And on the multifamily side, we're actually seeing -- we're very favorably pleased with our discussions on that side so far. And we continue to work with counterparties on all the remaining loan sales that we believe will conclude and complete here in the second quarter. But yes, Matt, we're very pleased with what we have been talking about, and what we think we'll ultimately realize there, which maybe it's slightly better than our original targets, but yes, very, very pleased.

Okay. And then on the expense side, any more color on expenses of the combined company that we'll see in the near term? I think we can see the disclosure for First Foundation expenses and obviously, FirstSun, should we just add these 2 together initially before we recognize some of these cost savings? Or is there anything more nuanced in the run rate of either side that you want to disclose as we think about our estimates?

Yes. No, thank you for the question there, Matt. You're right. As you look at First Foundation in the first quarter was, call it, a $56 million kind of run rate level. To your point, if you just add that with FirstSun, apply some cost saves. As I mentioned, we think we'll be at about a 65% level on cost saves in the second quarter, but well on our way in total on cost saves actually expect to be slightly above our original targets there.

So if you just kind of apply that our original target was 35% of the First Foundation core expense base. So if you just kind of flat that math, yes, that should give you a pretty close approximation for where we'd see Q2, Q3, if you will, the metric referenced there in terms of our expectations on efficiency being in the mid-60s for the next couple of quarters and then dropping into the lower 60s in the fourth quarter.

Yes. Okay. I appreciate that, Rob. And just to follow up on your last point there. I think we talked about that efficiency ratio getting to the 58% range when full cost saves are recognized and definitely appreciate that we don't see that quite in the fourth quarter given the timing of the conversion. So do you still see that efficiency ratio moving to the 58% range in 2027?

We do. So if we're in the low 60s in Q4, as you look forward and kind of go back to back in the October announcement, looking at '27 kind of run rates, we do see improvement over that low 60s in the fourth quarter to get to around that neighborhood. So yes, we do feel real good about our overall projections from an efficiency ratio standpoint.

Your next call comes from the line of Matthew Clark with Piper Sandler.

I want to start on Slide 20, the First Foundation deposits on the right side, they're running off another $2 billion, so call it $6.75 billion after that, how much of that $6.75 billion do you anticipate to be noninterest-bearing, just knowing that some of that might be ECR related?

Fair question. I would -- I think in terms of the total mix of the portfolio on a go-forward basis, I'd probably see, what would that be? Low 20s. I think if you look at where our mix is on a noninterest-bearing to a total base standpoint, we're between 20% and 25%, probably closer to maybe 23%. If you look kind of go forward post acquisition, post repositioning, we'll still be in the 20s, but that's going to drop a couple of percentage points.

Okay. And then on the margin, here in the near term, I think your guide includes the 4.31%, you just put up in the first quarter. So that would suggest a decent step down in the margin here in 2Q. Any thoughts around kind of the cadence of the margin to get to that 3.90%s in the fourth quarter? And do we step down to like a 3.70% here in 2Q and build back?

Fair question. I would say as you look at the overall guidance there for a mid-3.80%s on the year and Q4 in the 3.90%s, how do you kind of get there in the math for Q2 and Q3. Yes, I mean we're going to -- you're going to see 3.60%s, 3.70%s kind of stepping from Q2 into Q3 before you get to the 3.90% neighborhood in Q4.

Okay. And then if you were to strip out the rate cut, the Fed rate cut, what would that do to your margin guidance?

It would have a nominal impact on the margin guidance basis point or 2.

Okay. And then just on the net charge-off guidance of the mid-20s again, assumes a pretty big step down maybe to 20 basis points going forward. I'm assuming that's partly because you're marking First Foundation's balance sheet. So a lot of the portfolio won't have the losses there just because it's been marked upfront. But is that fair? Is that kind of consistent with what you're thinking?

Well, and I guess we are marking the First Foundation balance sheet under the new guidance, we'll have -- or I should -- before we the credit mark would just go straight against the asset. We'll have now the credit mark in ACL. So if ultimately, we do see a loan that we have fully reserved for it in purchase accounting, it's actually fully reserved for in that ACL line. So we actually, if we see something on the First Foundation side, it will actually -- it will still roll through charge-off even though it will have no P&L impact just to -- but -- so it could end up in a charge-off percentage in the charge-off base in '26. But yes, we do see certainly relative to the 63 basis points in Q1, a step down. Again, those 2 credits in Q1 were part of our expectations for full '26. The point of realization became Q1 for both of those. But we do see a step down in activity over the course of the next 3 quarters to get to that overall mid-20s for the full year.

And how much did those 2 credits contribute to the $10.6 million net charge-offs this quarter?

More than $10 million. So when I say bulk, I mean, it truly is bulk.

There are no further questions at this time. I will now turn the call over to CEO, Neal Arnold, for closing remarks. Neal, please go ahead.

Thank you. We appreciate you all joining the call this morning and your continued interest in FirstSun. Thanks. Have a good day.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, and welcome to the FirstSun Capital Bancorp Fourth Quarter and Full Year 2025 Earnings Conference Call. Also, as a reminder, this call may be recorded. 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 Neil 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 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 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.

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 Neal 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 noninterest 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 of 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 C&I nature of our loan portfolio, I've always said that at 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 7 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, Neal. 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 stand-alone basis and not reflective of the financial impact of our proposed merger with First Foundation. Starting on the balance sheet side. 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 drop 3 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 remedy, 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 account 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, noninterest-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 stand-alone basis on the loan and deposit side for '26 are much the same, growing at a ratable basis throughout the year with average balance growth in the mid-single-digit level.

Flipping to the P&L side, as Neil noted, we're quite pleased with the fourth quarter EPS performance as our adjusted diluted EPS of $0.95 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 we 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 in our net interest income with NIM remaining stable relative to full year '25 performance. Shifting to the service fee revenue side. We had a really nice quarter with noninterest 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 noninterest 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 noninterest revenue percentage growth in the low double-digit to low teens range. Our total adjusted noninterest 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 noninterest 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 OREO 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 nice operating leverage this year in both the fourth quarter and for the full year. For 2026, we expect to see our adjusted noninterest 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 as a percentage of loans of 1.27%, an increase of 1 bp 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 nonperforming loan balances also decreased from the third quarter by about 13%.

As Neal referenced earlier, credit on the C&I side can be lumpy at times. 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 2 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 closed out the year with our TBV 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.

The first question comes from Woody Lay of KBW.

I wanted to start on deposit costs. And we saw the deposit betas kind of reaccelerate which was great to see. I 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. Yes, 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. And we moved rates when macro rates moved, and we'll continue to do that. We look at kind of looking forward, we do look at the environment, it's tougher out there, certainly when you're pushing for growth like we are. And so we acknowledge that we do have a lot of flexibility given the C&I variable nature of the asset side to our sheet. So we have a lot more flexibility to engage in some of the pricing that's going on out there.

And we don't see that changing by and large. I've mentioned CD pricing across a lot of our markets is pretty aggressive. We're seeing it hang pretty high. CDs isn't really where we play. But we'll continue to be focused on operating account growth through all of our C&I business development efforts across our sales teams, and certainly, on the consumer side with money market account growth and our emphasis there. How does that translate to betas, I think our beta is going to be tracking a little lighter than it historically has tracked because of all the deposit competition out there.

Having said that, I don't expect it to be terribly lighter than it has been in the past, but we do expect it to be less than 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 stand-alone guide. I was just curious sort of what level on that stand-alone guide is baked 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. I would say the opportunity to add to our sales force is probably across the footprint, and we're seeing more activity in Texas certainly as a result of merger side. So I would expect us to add to our C&I team in both Texas and Southern Cal, specifically some of the newer markets that First Foundation brings. But I'd say I still think 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.

Yes. And I would just add to Neal's comment to say, aside from the sales force would be in your question, our cost save synergy disclosures in our investor presentation, all took into consideration the infrastructure needs for the combined company. So we don't expect that there's anything else on the infrastructure side.

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

Yes, fair question. I mean ultimately, I think -- and Jennifer can certainly add to this, maybe I'll just offer that we continue to see a little bit of pressure 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.

We expect to see some of that interest rate pressure in -- on the business side abate a bit. But generally, that's a trend that net downgrade trend that we have been seeing the year and particularly on interest costs. Jennifer, suspect you may have something to add there.

Yes. And I think you're your comment is spot on as we've seen the interest rate -- well, the interest rates play out for a longer period of time. There were certainly, as I said multiple times, pervasive themes and the increase in special mention, it was, again, a lumpy component there primarily with one particular name.

The next question comes from Matt Olney of Stephens.

Looking for any commentary on loan -- any commentary on loan pricing? Or are C&I spreads holding in? Or is competition come in more aggressively, just trying to forecast loan betas, I guess, over the next few quarters.

Yes. 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 and certainly, credit spreads have some slight differences from one market to another across our franchise footprint. By and large, credit spreads have been holding in the spaces that we are focused on have been holding pretty well.

Okay. I appreciate that, Rob. And then I guess as a follow-up, I just want to ask about the pending acquisition. And any kind of impact you can see on that from the recent interest rate cuts and potentially, I guess, additional rate cuts until closing. 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 the assets and liability repositioning that we've talked about previously.

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

Yes, I'd say in general, I think people understand that First Foundation's balance sheet is 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.

The next question comes from Michael Rose of Raymond James.

Maybe we can certainly appreciate the part -- certainly, appreciate prior questions regarding loan and asset betas. How should we think about, obviously, excluding the deal, just the trajectory of the margin from here. So obviously, not much balance sheet growth this quarter looks to be accelerate into next year, given kind of the guide. Obviously, a fair amount of fixed -- or excuse me, floating rate loans. Just walk us through just kind of the puts and takes on the margin, assuming the 2 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 net interest margin to remain relatively stable. Very pleased with the 11 basis point expansion that we saw in the fourth quarter. But on the deposit pricing side, 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, we have a little room to play with there given the -- 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 2 rate cuts as we had indicated baked into our expectations, and I think that's largely consensus. So we're not really strange from consensus there. But we do see there's going to be quite a bit of price competition on the deposit side. We think, again, here in '26 and that's going to directionally drive where we land on an interest margin. But we do feel pretty good about the stand-alone legacy Sunflower FERC Sun franchise, operating at a pretty stable level in comparison to what we saw in '25.

Very helpful. And then maybe 1 for you, Neil. 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 up a month ago. If you can just kind of square those comments as it relates to the expense guide, how much of that is just kind of like normal kind of inflationary aspects, bonuses, raises, things like that versus hiring -- incremental hiring efforts, both in Texas and in Southern California.

Sure. No, thank you. I guess I'd say broadly, our priority in the last 1.5 years was certainly to build out Southern Cal. I think we are 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 solid bankers with good relationships. I think everybody's heard me, Houston has been a priority, we continue to add in Dallas. So I think you'll see us continue to be opportunistic on the HR side. Texas has been life out on the M&A side. 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. Once the deal hopefully close this year by the end of the 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. At that point, is 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 could actually be supportive of kind of NIM 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. Yes. No, absolutely, Michael. As you know, from our IR deck on the deal we're certainly very focused on the liquidity equation and that's certainly part of -- 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, we'll continue to address and reposition as some of the term funding items continue to hit maturity dates and by that, I mean in higher cost areas. So we'll continue to look to bring down overall cost for the pro forma 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.

Relationships have more than one element, of course. So we know it's competitive out there. So we expect competition on pricing, but we also expect to balance through the relationship and it being more than just a -- one bottom. So our focus will be on continuing to build out on the relationship side there. We think I will have some beneficial impact in 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. I think there's great opportunity. As I've said in the past, in Southern Cal, 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, like we sometimes think about on the space.

So I think we have -- as we spend more and more time with First Foundation team, I think there's a robust treasury management opportunity on that multifamily portfolio, not just property counts but actual deposit relationships. So kickstarting that we'll also be additive, I believe.

The next question comes from Matthew Clark of Piper Sandler.

Do you happen to have the spot rate on deposits at the end of December to give us some visibility into 1Q.

Yes. On the deposit side, as we were talking about, certainly very pleased with what we saw in the fourth quarter. I think we were -- total cost of deposits around 198 for the quarter. At the end of December, we were closer to 190 that neighborhood, Matthew.

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?

Yes, great question. Yes, I mean, it's very competitive out there. Definitely, our promo offerings on the MDA side. And it's -- there's always Asterix there's balance qualifiers. But the top tier were around 3.45 handle on the consumer side for that MMDA product.

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

Yes. I mean we don't have any updates at this time on pro forma projections. We're certainly, as we mentioned, very encouraged about the prospects looking forward. And you're right, a lot of information in our IR back around expectations. I mean there's always some pluses and minuses. But all in all, yes, we continue to remain extremely excited about the prospects as we look forward on that side.

We currently have no further questions. I'd like to hand back to Neal for closing remarks.

Thank you. Thank you all for joining our call this morning. As always, we appreciate your continued interest in FirstSun. 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 lines.

Good morning, and welcome to the FirstSun Capital Bancorp conference call to discuss the company's announced merger with the Foundation and its third quarter 2025 financial results. [Operator Instructions] Also, as a reminder, this call may be recorded. I'd now like to turn the call over to Ed Jacques, Director of Investor Relations and Business Development. You may begin.

Thank you, and good morning, everyone. Following the market close yesterday, we issued a joint press release to announce a merger between FirstSun and First Foundation. On the call today, we will discuss the merger announcement, and then we will take some Q&A. Simultaneously, we released our third quarter earnings and are happy to answer any questions on those results as well. First Foundation has also provided a summary of its third quarter earnings and expects to file a full earnings release and presentation on its scheduled release date of October 30.

Today's presentation slides have been posted on each company's Investor Relations website. Before we begin our remarks, I want to remind you that the comments made by the management teams of both FirstSun and First Foundation may include forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbor rules. Please review the disclaimers and safe harbor language in the press release and presentation for more information about risks and uncertainties, which may affect us. I will now introduce FirstSun's President and CEO, Neal Arnold.

Thank you, Ed, and thank you all for joining this call. I'd like to hit a couple of highlights from our merger announcement and introduce you to Tom Shafer and then turn the call over to Rob Cafera, our CFO. Let me start by saying we realize this is not a straightforward stock-for-stock Monday merger announcement. But when you spend a moment to understand the underlying franchise and the work we are doing together to unlock this, we believe it will make more sense. We've known First Foundation for over 3 years. We tried to get a deal done back then and could not work it out. Since their recapitalization, we revisited this idea in April of this year.

So we have lots of history and have spent a considerable amount of time on both sides, making sure the diligence and the structuring makes sense for all parties. This was not a quick shotgun marriage. From my perspective, there are 3 compelling reasons why this deal makes sense. Number one, most of you all know we like to tackle unloved companies in this industry. Why? Because we believe there's less investment risk when you do the full due diligence. They tend to be priced at lower prices and have lower projections, which means for all of us, there's a higher probability to have upside, and I'm sure that doesn't surprise any of you who've known us over the years.

We believe Southern Cal branch franchise network gives our team that's already on the ground here a significant opportunity and will be our largest metropolitan region team and branch network in the system. We also think that First Foundation significantly changes the profile of our fee income given their wealth management platform. Also, we like their multifamily portfolio. And as you know, not all commercial real estate is created the same, and not all multifamily is the same. We like the workforce housing nature and rent security in these kinds of properties. Tom and his team have made considerable progress since his arrival to fix a number of their issue. We just believe that we get to accelerate that together pretty dramatically.

So number two, we believe First Foundation is one of the companies in this industry who have an attractive underlying franchise that's been hidden by some poor balance sheet management decisions. What is unique here is that the fix to these issues is rather straightforward and the ability to solve them can happen quite rapidly. One of the lessons I believe we learned in tackling these kinds of banks, and we've taken to heart are 3 things: One, we need to move quickly to transform them. Number two, we need to make those changes quickly and significantly by and around closing.

And we want to be clear with everyone what we intend to do. That includes investors, our partners, regulators and each of our teams. As you all know, we've had a team here in Southern Cal for the past 15 months, and our initial success in this region has really heartened our thoughts about what might be possible. I can tell you in my 40-year career, I've never seen an LPO self-fund through the first 15 months of this kind of opportunity. So with that, let me introduce Tom and have him share some of his perspective, and then I'll take it back.

Thank you. Since the recap in 2024, we've been proactively reducing the risk in all aspects of our organization. We've downsized the balance sheet in the last year significantly. And our -- the business plan that we have would consider -- would continue doing that. What this merger does is allow us to dramatically accelerate the business plan that we put in place and allow us to focus on the opportunity within Southern California of accelerating some hires and focusing the organization on growth in one of the best marketplaces in the country.

I come from a C&I background. I've spent a lot of time with the FirstSun management team taking a look at their playbooks for both commercial and retail, and it's a perfect fit for what we have within Southern California and Florida. When I think about the C&I growth they have, their focus on TM, retail deposits and fee income, adding our wealth team to that organization makes a significant organization for Southern California and Florida, which we're very excited about. The synergies that we're talking about will make this really a top-tier organization, top quartile organization from the day we started. So our team is looking very much forward to helping and getting this started.

Thank you, Tom. I can tell you, it's been great getting to know Tom better, and our confidence is certainly impacted in this deal by having his leadership and his background. So we look forward to working together. I'd like to make a couple of additional points that I think matter with regard to this transaction. First of all, I'd like to say that we believe Southern California and the whole West Coast for that matter, has a better, lower cost mix of deposits than anywhere else in the country. And so to us, most of you know, we care a lot about the opportunity on the core deposit side. So adding.

Tom's branch network into our strategy here is going to be an important part of continuing to build the core franchise. The next point I'd like to make is that we believe that the opportunity here is to migrate more of First Foundation's balance sheet to our business model, as Tom said, it's not just a strategy of clipping fair value coupons. And we believe that, that's going to enhance the profitability profile of the entire organization. Let me highlight a couple. We believe that the deposit side mix will change markedly, and Rob will talk more about that, more from the C&I middle market client base, but even from the multifamily treasury management opportunities.

We believe we'll have significant improvement in the mix on asset yields as we migrate more and more to our kind of clients. And also, we have better mix on the fee income side from a lot more expanded wealth platform, so as Tom mentioned. Sort of my final comment would be when I step back and look at this transaction, it's not often that you can double the size of your company while simultaneously reducing the credit risk profile, improving the rate sensitivity of the combined organization and significantly reducing the liquidity risk. I take that as an operator any time in a potential acquisition. So I believe that this transaction does a lot for both parties.

With that, I'd like to turn it over to Rob and let him walk through some of the slides and the financial pieces of the deal.

Thank you, Neal. I think the opportunity here to further leverage our successful business model is also one of the most compelling strategic aspects to this deal. There's a terrific geographic footprint here to drive organic growth. We'll be in 8 of the top 10 largest MSAs in the Central and Western regions of the U.S. and in 5 of the top 10 fastest-growing markets in the entire U.S.

And the deposit opportunity, gaining 30 total branches with 16 in Southern California will provide us with even more avenues to grow deposits. We will be able to further diversify our fee business mix with a sizable wealth platform here as well. It has a little over $5.3 billion in AUM here recently. And the revenue synergies on the fee business side with treasury management and our residential mortgage expertise are very meaningful, and we don't have anything factored into the deal economics in terms of revenue synergies.

As Neal mentioned, it all starts with completing the play and unlocking the First Foundation franchise via the downsizing actions. We have a very detailed plan in place to accomplish this concurrent with closing of the deal. And we'll cover our plan here on several of the pages in the deck, but I'll point to folks to Page 14, where we walk through all the pieces. And it entails $3.4 billion in total downsizing focused on lowering the level of non-relationship rate-sensitive elements on both sides of the balance sheet. This plan will significantly reduce risk in 3 key areas: liquidity, interest rate and credit risk.

On the liquidity front, our plan will position the pro forma company at an approximate 10% wholesale funding level, which is a dramatic improvement from the historical levels at First Foundation. On the interest rate front, we improved the sensitivity profile and combined with layering in some hedging post closing, we believe we'll be able to position the sensitivity profile at much closer to a neutral to slightly asset-sensitive level. And certainly, as we move forward and we're able to further remix the loan book and the deposit book, this profile will look more like FirstSun does today.

And on the credit front, we're focused on improving the profile through downsizing non-relationship credits, specifically in the shared national credit book, exiting primarily some larger unit complex loans on the multifamily side and reducing some of the longer-dated municipal loan book. We expect the pro forma post closing to have a regulatory CRE concentration ratio at approximately 238%, a significant improvement from the level at First Foundation today and certainly a very comfortable operating level. And our CET1 capital level pro forma after closing is projected at a strong 10.5% and there's no new capital required as part of the deal as we outlined in the deck.

We see this as a very thoughtful utilization of FirstSun's capital position. And further, we see a significant level of ongoing flexibility on the capital side given our projected earnings levels immediately post closing. These actions will enable us to position the pro forma to immediately grow on an organic basis post closing. There's not an extended workout time frame here. So the key is we'll be on offense. We know this playbook and have run it successfully many times in past deals.

The repositioning is going to accelerate how we remix the balance sheet. Simply put, we're going to make the First Foundation balance sheet historical look more like FirstSun, an emphasis on core funding, both commercial via treasury management emphasis and our consumer playbook, the fee income piece and of course, our emphasis in the C&I space. Page 16 of the deck highlights the resulting math behind this between the repositioning, purchase accounting and deploying our playbook.

This is a unique opportunity to take a company with a recent run rate NIM in the 160s area and bring it up to a nearly 4% level. In line with our NIM and driving a combined projected ROA of approximately 145 basis points as we look out to 2027, the first full year of operations. So we're excited about the pro forma operating profile here, driving an approximate 30% level of accretion in '27 and off the roughly 14% TBV dilution, we see a fully loaded TBV earn-back of slightly in excess of 3 years. Page 28 in the deck provides a sort of projected performance scorecard.

And we love scorecards here in our bank. And when you look at our performance metrics on a pro forma basis here, I think the pro forma paints a pretty compelling picture in terms of profitability and mix. And in terms of trading multiples, I think Neal said it before, at 7.7 roughly times pro forma '27 run rate earnings, I think there's significant upside. With that, I'm going to turn it back to Neal for some final remarks, and then we'll open it up for the Q&A.

Thank you, Rob. As we said, there are lots of moving parts here, but we believe that this transaction quickly reduces the risk profile of the resulting company and gives us the upside both for growth and risk profile to continue to propel our franchise forward in the attractive markets of the Southwest and throughout the footprint of the combined organization. We'd be happy now to take any questions from the audience.

[Operator Instructions]

The first question comes from Matt Olney of Stephens.

Just a few questions on the acquisition, specifically the repositioning plan that you outlined on Slide 14. I definitely appreciate you're paying down the $3.4 billion of liabilities and running off some of the assets. Can you just walk us through the mechanics of this and the timing of when you expect these to take place relative to the closing date? It just seems like there is going to be some risk in executing this. So I just want to make sure I understand just the mechanics behind all this.

Sure, Matt. Thank you for joining today. And we're very focused on continuing to play that Tom and his team have deployed. So I'd tell you on the timing side, Tom and his team already have some plans in place. We're just upsizing the overall magnitude. So in Q4 and Q1, we expect some progress just based on the existing plans that Tom and his team have. And then over and above that, we'll be layering on the additional activity. So in terms of the mechanics, we'll be pursuing some bulk sales.

We may look at securitization, but there will be bulk activity. We expect some -- just some natural declination in the overall portfolio here as, again, as Tom and his team have looked at what opportunities they have in front of them already. But we expect for the entire repositioning to be accomplished right around closing, shortly after closing, but certainly well in advance of any -- the first reporting point that we would have post closing. And we're projecting an early Q2 closing date here.

And I would just add, Matt, that there are hedges that are put in place with regard to the market risk on the execution as well.

Okay. Great. Appreciate that. And it sounds like even beyond the repositioning that you guys highlight, it seems like there could be more of this in the future. In other words, more remixing, repositioning even beyond the $3.4 billion. Can you just kind of provide some commentary about other opportunities beyond the $3.4 billion that we could see following closing in the coming months after the deal closing?

Yes. I think one of the last couple of slides that we talk about is a little bit of our history on repositioning that's happened on deals historically. So I would just say our thought process will continue to migrate to higher yields on the asset side and to more core deposits. I wish I could wave a magic wand, but I would tell you, the core deposit piece, I would expect to happen over the next 4 to 6 quarters where you'll see a much better mix around it, and we're seeing that already in these markets. So yes, I would expect that's going to continue to happen just quite naturally.

But we'll be comfortably in our risk profile, as Rob pointed out. I think, Neal, also, in terms of the remix, part of this is our plan to be offensive in terms of bringing in some additional C&I-focused teams, certainly in the Southern California market, but honestly, in some of our other markets as well. And so there is some natural scheduled repricing within the First Foundation portfolio. And so that's part of the remix that will also be occurring here on the asset side.

Okay. Okay. That's helpful. If I could just sneak one more question on capital. looks like we're closing with a CET1 ratio around 10.5%. But based on some of the projections, it's going to build pretty quickly. I think the 2027 projections call for that to be around 12.7%. Can you just speak to the normalized level of capital you see at the bank kind of longer term and how you expect to manage that?

Yes, absolutely. And thank you for the questions, Matt. And we've talked in the past about kind of our capital strategy. And I'd maybe just start off there by saying we've always had a very intentional approach as it relates to capital. And that starts with we have operating thresholds that we want to operate above. We're always very focused on supporting the organic growth opportunities in the business. That will continue. That's the first threshold. And of course, we always look at opportunities on the M&A side, and we want to be able to support those.

Hence, the deal we're talking about today, right? Our expectation, as you've noted appropriately is that we expect to be accreting a significant amount of capital, and that's going to provide us a lot of flexibility. You were referencing the view in the IR deck that kind of tracks our projections on a CET1 level. And we do expect to see CET1 leveling off. as you get out beyond 2027. So we do -- that translates to -- we do expect some future capital management strategies being employed that we haven't historically employed at FirstSun.

The next question comes from Wood Lay of KBW.

I wanted to start on assumptions behind the EPS accretion. It looks like internal projections were used for both companies. And I was just wondering if you could give any visibility on how those projections compared to Street estimates for both companies? And is there a potential upside you see to consensus?

Yes, absolutely. I'll kick it off there. So we did kind of walk through some waterfall thoughts in the deck in terms of how we see the pieces. I'll start on the First Foundation side and maybe just kind of start from a Q3 '25 perspective, just from a run rate standpoint. And I think it's actually Page 16 in the IR deck that shows trailing 12 months is roughly at about a $10 million, Q3 of '25 is roughly at a flat level. And so as you cast forward to '26, we see some major shifts in the First Foundation business.

On the NII side, we see improvement of, I'd call it, low teens in NII, and that's going to be driven on the funding side. Our rate curve assumption that both companies have been operating with that weren't fully reflected in recent consensus estimates was for a down additional 100 basis points. And so that's going to driven, given the liability sensitivity on the First Foundation side, a lot of accretion opportunity for them on the NII side. So we see in '26 relative to where they are and recent run rate, roughly a 13% improvement in NII, and that's going to be driven mostly on funding costs.

There's a little bit of asset repricing in there, but it's driven by funding. And we think that alone will drive NIM up 20-ish basis points. We also see expense improvement, call it, mid- to high single digits from recent run rate on the expense side. And that's going to be driven by customer service expenses. Customer service expenses are another type of deposit interest costs for them. We don't have those at FirstSun, as you all know. But the customer service costs, again, another type of deposit interest cost, that's actually down in operating expenses.

And so based on some actions that First Foundation have already taken with regard to some of what used to be historical customers in that set, those costs are coming down. So we expect improvement on the expense side, driven by customer service costs, some reduction in professional expenses. And so between expenses and NII, that's roughly an improvement from the breakeven level of Q3 of '25 to roughly about $28 million. That's pre-loan loss provision, loan loss provision, that's about $23 million all in.

So that's kind of the improvement that we see recent run rate into '26. And '27, it's just going to continue in terms of NII improvement, again, driven by funding cost improvement, again, some scheduled asset repricing within mostly the multifamily book, driving some further NIM improvement. again, anywhere from that 20 -- mid-20s in terms of basis points in NIM improvement. And then in '27, we actually see also fee income improvement, particularly in the expansion that we would anticipate in the wealth business.

Conservatively, we didn't build as much into '26 on the wealth side. But we see the sky is the limit on that in terms of integration within not only the existing customer base on First Foundation side, but also the FirstSun side. So that's how we see that legacy run rate on First Foundation extending into our pro formas.

And I might just add, because of the amount of balance sheet restructure here, we built the First Foundation P&L from the bottoms up to get our arms around what we thought was the go-forward run rate. It was not based off of the general ledger, if you will. But I'd also say we made a very conscious decision to reduce risk, not just carry a bigger balance sheet. And we think that positions the company to play better offense, not just limp. We've seen too many companies in some of these kinds of transactions just not really drive good organic earnings growth going forward. And so to us, we've positioned the company and the balance sheet to do that.

That's really helpful color. I appreciate that. Maybe on the derisking part, you went through a similar type announced transaction over a year ago, went through the regulatory process. and ultimately terminated that transaction. It feels like there was some lessons learned on the way this deal is structured. But what gives you the confidence on the regulatory side this go around?

Yes, certainly a fair question. I'd say 2 things. We've noticed Washington is a little different today. But I'd say we've had extensive conversations with both the OCC and the Fed with regard to this transaction. And I think we took to heart some of the lessons such as, as I said at the outset, -- our restructuring of this balance sheet is bigger, faster, clearer. That's been our biggest lesson, and we walked through that with the regulators. We're well inside the CRE. We're well above the capital ratios.

So I think all the touch points in addition to the magnitude of the risk reduction on asset quality, liquidity and interest rate sensitivity have all positioned this to go well. And we're highly confident that it will. And they see this the way we'd hoped they would in the past. But we've tried to take to heart all those conversations. They have to do their process. We certainly respect that. But we've been very clear, and they have been very clear back to us.

Yes. Maybe just the last for me. Looking at legacy First on third quarter, I was just helpful to get any color on sort of the moving pieces on the credit side and sort of expectations for charge-offs going forward?

Sure, absolutely. We had about a $10 million provision expense in the third quarter. That included a specific reserve related to a C&I loan in the auto finance industry. our provisioning was also driven by -- we had 11% loan growth. So that, of course, is going to drive provisioning. So we were very strong on that side. We had some net downgrades. We did charge off 2 C&I loans, and that represented the bulk of the $9 million in charge-offs that we had in Q3. That translates to about 55 basis points in charge-off ratio. Those charge-off balances were fully reserved for prior to Q3.

The largest of those 2 was the loan with cross-border exposure that we've talked about in prior quarters, and it's been in nonperforming status actually dating back to '24. And so classified loan balances were down about 5%. Nonperforming balances did track back up in the third quarter. We're at about 104 basis points, which with the exception of Q2, we've been operating with nonperforming loan balances in that 1% -- very low 1% neighborhood for most of this year and the last year.

So that's an overview of some of the moving pieces there. I think we've said that in the earnings deck that we expect charge-offs to be in the low 40s in terms of basis points for '25 here. And we have seen some general deterioration in the market from a valuation and pricing standpoint that has resulted in some additional loss to us on some of the credits that we've been exiting.

Yes. The only thing I would add is we never like losing money on credit. And I promise you, we look hard at it. But we've said all along, C&I credit is lumpy, and you can't predict it. We're very careful with our concentration limits across the organization. And I'd say, generally, in talking with our clients, their balance sheets are still healthy. They still have very strong profit margins, maybe better than I've seen in many decades. The challenge has been just some of the disruption and higher debt financing costs have impacted it.

But I do think it's mitigating. But the hard thing is we can't predict one-off sort of losses, and I wish that were possible. We'd certainly do things to avoid it. But we still very seriously evaluate our portfolio with a lot of rigor. Those that know us know that. But I'd just say we still don't take lightly credit losses.

The next question comes from Michael Rose of Raymond James.

Just a couple of follow-ups here. The slide deck talks about just some of the significant revenue synergies that are out there. Just trying to better appreciate what is going to be kind of the nearer-term focus versus what could take maybe a little bit longer? And then do you kind of have a target fee versus spread revenue mix? And then just separately, also kind of related, you also talked about the $3 billion plus deposit growth opportunity. What does that involve to kind of get there? Is it hiring more people? Is it different products and services? Just trying to get better understanding there.

Thanks, Michael, and funny headline. Thank you. The thing I would say is, from our perspective, retail branch running our playbook on the retail side, I wish it could happen overnight, but that's probably an 18-month to 2-year transition. But our team is good at that. We've done that in the past. So I'm highly confident that play will transform. And that's the longest tail, if you will. I think the rest of the sort of asset remix will continue to tackle. If you look at our history in Pioneer, you look at our history in SGB, we had higher CRE.

And we believe if you look at the core run rate of originations in that business, they're much better even on a risk-adjusted basis in C&I. So we'll continue to work on that. I would say the speed by which this operation on a combined basis will look like the history of FirstSun is nothing I've ever seen and didn't go into it expecting how quickly we thought we could transform this. So it helps to have a team already on the ground here in Southern Cal.

We don't have to wait until integration, then begin hiring, going through a process. We, in essence, are 2 years ahead of time by already having a team on the ground. So our goal is to leverage that and really improve that piece of the puzzle. And I'll let Rob add any color if you want.

Yes, absolutely. I think our business mix also, Michael, gives us some added flexibility. We see the branch footprint, particularly in Southern California on the First Foundation side is being underutilized -- and we have more flexibility than they've been able to operate with. So -- and what I mean by that is, given the mix of our business, we've got a higher margin. We're certainly on the higher side than most. That gives us some flexibility in terms of how we run some of the plays.

So as Neal mentioned, this is a daily business for us on the branch side. It's a maniacal managerial approach to daily activity. But we mix in, I think, a pretty darn good product set, promotions that we can bring to bear, again, given the flexibility that we have with margin and that we can do with rate side. So we feel really good about being able to roll out our playbook there with the branch side. And as we look at our success here, over a longer time horizon in 2025. I mean, I think year-to-date, deposits are up about 9% for us in total. I think that's probably on the higher side than most. So it's just -- this is -- we talk about this internally in the halls of FirstSun every day. Deposits are critical. Everybody knows it, and that's not changing.

I might let Tom or ask Tom to share being a Michigan C&I banker, having spent a year here in Southern Cal, seeing the opportunity in middle market out here. Maybe you want to share some of your perspective as you looked at this market.

Yes. So this creates a moment where we can get really excited because we can lean forward in doing this. We do -- we've got good distribution, but the scale of the market is shocking. I spent my -- the vast majority of my career in the Midwest kind of no growth, limited growth marketplaces that's filled with industrial complexes.

My happy findings when I got here was the depth and breadth and diversification of the Southern California economy is staggering. And the jobs that we have here, the value of the jobs, the diversification of the industries that we have and the resiliency of this economy is far greater than I ever expected. And so that's one of the real bright spots -- many bright spot, but that's one of the bright spots of operating in this marketplace.

Yes. The only thing I would add is disruption in this market has been much greater than I ever expected. Sometimes you win because a great market. Sometimes you win because the other guy has issues going on or their own merger activity. And so we've always had an opportunity in those kind of markets throughout our footprint.

So to us, that's an element I really underanticipated as we started to build teams, went out and called on clients. People don't love large banks in middle market. They feel like they're ignored. They don't tend to get the personal touch. And so to us, we believe the best franchise in banking is still in middle market clients who need good bankers. And we're in that business.

And Michael, you asked about revenue synergies there as well. We -- I think all 3 of us have mentioned the wealth opportunity here, probably put that at the top of the list. It's a wonderful opportunity certainly across the FirstSun middle market client base, but I believe Tom has always seen the opportunity within his own First Foundation legacy business. So I think wonderful opportunity for expansion on the wealth side.

Treasury management on the commercial side is always a big emphasis for us. So we see a real nice opportunity not only with the existing base, but again, the opportunity in Southern California with the expanded reach that we will soon have is wonderful. And that extends on to the residential mortgage side. With the branch footprint coming online for us, as Neal mentioned, in terms of a major metro, it will be our biggest branch footprint.

So a wonderful opportunity to deploy our resi mortgage playbook into the market here. We have a very successful franchise on the resi side. And so we're really excited about being able to roll that out across Southern California here. And of course, we've talked about just the overall remixing within the loan and the deposit base. I mean there is inherent opportunity on that side. And I think even in the multifamily book, we talked about some enhancement to the multifamily strategy with some flow sale aspect layering on. So our emphasis there tends to be more off balance sheet than on balance sheet. And so that's another opportunity for us. So we see a lot of opportunities.

Yes. I would just add that in the multifamily space, most of you know, I've not been a current new construction multifan throughout our footprint. That's not the product I tend to care about because it tend to have higher risk, lower value and less deposits. But when you look in this market, a lot of our even new FirstSun clients have significant personal investment portfolios in the multifamily space. They aren't just developers. They have some real broad-based portfolios with great treasury management. So to me, the multifamily expansion in this way is intriguing to us, and I've always liked workforce housing.

I appreciate all the color to my 5-part question there. Maybe just one quick follow-up. I think one of the pushbacks I got last night is just on the price paid. If I look at Slide 47, it's way in the back, but the adjusted First Foundation tangible equity, 606, given the purchase price, it's about $125 million of intangible. What would you guys say to that? Because I think there's a lot of strategic merits here, but that is one of the pushbacks I got last night.

No, certainly fair. Here's what I'd say. There aren't as many properties. I think we're all seeing the opportunity set shrink. I would always be willing to pay less. But sometimes in these negotiations, we look at the opportunity to have the franchise in the biggest middle market client base as a unique one.

And as we spend time getting to know the potential properties here, we felt like this was the right one for us. And we think that -- like I said, we could show better numbers by carrying a bigger balance sheet. We made a conscious decision to reduce risk because we think it does 2 things. It positions us better for solid organic growth, not just carry.

And I would say, if you have a client, that's one thing. If you have a wholesale balance sheet structure, we made a decision to try to reduce it as much as possible. And that was a decision both sides landed on. So I do think that we're going to be in a better position than most who tackle some of these kind of properties to really move forward with our organic playbook, and that's what we care about.

The next question comes from Matthew Clark of Piper Sandler.

Just to clarify, the $3.4 billion of repositioning, is that all expected to get done by the time the deal closes? Just because it looks like on the funding side, there's some tail to reducing the wholesale funding. So I wasn't sure if that was part of the $3 billion or that was on top of the $3.4 billion.

Yes. So we do expect roughly concurrent with closing to have the full play completed. And we're estimating early Q2 for a closing time frame. So that would be our expectation.

There is some you're right on the wholesale funding side, particularly wholesale deposits. There are some term maturities built into that book. And so we won't be able to roll those down until we hit some of those maturities.

So there is some extended, and that's part of the remix that we have been referring to on the funding side that will continue to occur post closing. But that's over and above that $3.4 billion of total funding paydown concurrent with close.

Got it. Okay. And then just on the 35% cost saves, can you give us a sense for where you expect that to come from just because there is some limited overlap. You have a small presence in SoCal and Florida is new.

But just the source of the cost saves and the confidence in being able to achieve that number.

Yes, we feel pretty good about the opportunity on the cost save side. I think probably 70% of that will be on the people side. There's some FDIC element here that actually is going to be a bigger piece. And professional, I'll just put it under the header of professional services is a bigger piece.

So across those 3 kind of are the biggest opportunities on the cost save side. Certainly, we expect some, I'll call it, noncustomer-facing back office facility opportunities. So there's always opportunities like that in deals that will fill out some of the cost save equation. But those would be the categories where we see the biggest opportunity. And I think we also think there's probably even a little bit more upside there on the cost saves, but feel very comfortable with the level that we've indicated.

Yes. And I'd say there are whole groups that will be unimpacted. Certainly, the branches, the wealth management, we're going to see that as leveraging the business dramatically. But cost saves are a part of any of these kinds of transactions. We tend not to be overly optimistic on our projections. So our goal is to always overachieve.

Okay. And then just last one for me on the NDFI exposure. It looks like that's going to be part of the $3.4 billion that you're going to reduce. Can you just let us know what's going to be left in terms of the subsegments? How much of that might be mortgage warehouse and capital call lines relative to maybe some of the perceived riskier areas like private credit?

Yes. I think you're right. I think we've identified in the [ SNC ] book somewhere around $450 million, $460 million that fits in the NDFI space. I think First Foundation starting point is somewhere around 11% of the book. We're -- our book is less than 6%. I think on a combined basis, we would expect to be down in that 5%, 6-ish area on a combined basis. So that's our overall expectation on that side. And the composition is going to be in the buckets, consumer credit, there will be some mortgage credit, business credit intermediaries. So it will be spread out pretty evenly across those buckets.

We currently have no further questions. I'd like to hand back to Neal Arnold for any closing remarks.

Thank you. We appreciate all of you joining us. Happy to answer any follow-up to the extent that you have them, and we look forward to getting to work. So thank you all.

This concludes today's call. Thank you all for joining. You may now disconnect your lines.