Good morning, and welcome to the FirstSun Capital Bancorp third 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 during this time, simply press star followed by the number one on your phone 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, FirstSun's Director of Investor Relations and Business Development. You may begin.
Thank you, and good morning. I'm joined today by Neal Arnold, our Chief Executive Officer and President, Rob Cafera, our Chief Financial Officer, and Jennifer Norris, our Chief Credit Officer. We will start the call with some brief remarks about our third quarter results before moving into questions. Our comments will reference the earnings release and earnings presentation, which you will find on our website under the Investor Relations section. During this call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix to our earnings presentation and in our earnings release.
During this call, we will make remarks about future expectations, plans, and prospects for the company that constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. Please refer to our earnings presentation as well as our annual report on Form 10-K and our other SEC filings for a further discussion of the company's risk factors and other important information regarding our forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement, except as required by law. I will now turn the call over to Neal Arnold.
Thanks, Ed. Good morning, and thank you for joining us. The third quarter represented another important milestone for FirstSun as we continue to progress on our strategic priorities and on the integration of the First Foundation businesses acquired. For the quarter, adjusted net income, which excluded merger-related expenses, totaled $48.2 million, or $1.03 per diluted share, with an adjusted return on average assets of 123. In addition to the strong bottom-line performance and continued integration of the acquired business, highlights in the third quarter included our net interest margin expansion to 3.82% over the last quarter and continued strong service fee income revenues, which again accounted for 21.9% of total revenue. We are very pleased with the progress we've made on our balance sheet profile.
We significantly repositioned the acquired balance sheet in the second quarter, and the remix efforts continued into the third quarter as we move away from more rate-sensitive non-relationship deposits and as our loan origination activity continues to be more heavily centered on floating-rate C&I loans versus the fixed-rate CRE loans. Our focus continues on expanding and deepening relationships across our entire customer base. A diversified and strong balance sheet enables us to focus on the growth opportunities across all of our great markets. All our work to reposition the acquired balance sheet, which helped to address the challenges inherent in the rate profile of that acquired balance sheet, was a key driver in the improved net interest margin that we saw in the third quarter. While deposit competition has been very strong, our focus has been on continued improvement in our net interest margin.
We expect the balance sheet repositioning work to drive further incremental improvement in our net interest margin in Q4 and into the first quarter of 2027. Growing our service fee revenue businesses will also continue to be one of our strategic priorities. We believe a diversified revenue management side, but also in treasury management, syndication, and swaps provide a meaningful opportunity to deepen our client relationships and further enhance our overall revenue mix. Our capital position remains very strong and continues to provide us with meaningful flexibility as we execute on our overall strategy. During the third quarter, we repurchased approximately $50 million of common shares under our previously announced $150 million share repurchase program, and we currently expect to complete the remaining $100 million over the next three quarters.
We believe the continued strength of our capital position provides us with the capacity to return capital to stockholders while also supporting our organic growth and maintaining overall balance sheet flexibility. On the asset quality side, we are encouraged by the improvement this quarter across several key measures, including a meaningful reduction in special mention loans of about $23.8 million, as well as a reduction in substandard of nearly $40 million. We continue to take a disciplined approach to underwriting portfolio management, early risk identification, and we believe the improvement this quarter reflects the continued work of our teams to actively manage our loan portfolio. On the integration side, in late September, our team successfully completed the core system conversion of First Foundation. This was another important milestone in our integration plans and certainly resulted from a tremendous amount of hard work across the organization.
We're pleased to have completed this phase of the business integration and look forward to expected additional operating synergies that will result. As we look forward to the next several quarters, we are seeing very strong pipelines in all of our major markets for both loan and deposit relationships. I believe the strong pipelines are the result of our investment that we've made in further building our sales force over the last several years, particularly in Texas and Southern California. I expect this to be a driver of our organic growth going forward in 2027. Our priorities remain very focused, driving disciplined organic growth, deepening our client relationships, growing core deposits, improving service fee revenue, and realizing the benefits from the integration of First Foundation businesses and delivering strong financial results that result in sustained long-term value for our stockholders.
Before turning the call over to Rob, I want to recognize and thank all of our teammates for the extraordinary effort that went into completing the recent core systems conversion. An undertaking of this scale requires significant planning, collaboration, and execution across virtually every area of the company, and our teams delivered while continuing to serve clients throughout the process. I am incredibly proud of the commitment and the teamwork and professionalism demonstrated by our team. It is a true reflection of the strength of our organization and our culture. Financial results.
Thank you, Neal. I would also like to add my thanks to all our teammates for the very hard work that went into completing the recent core system conversion. Very inspiring teamwork shown by everybody involved and definitely a real testament to our culture here. Turning to our third quarter financial results, I will start with the P&L and highlight several key drivers. As Neal noted, we are pleased with our earnings performance in the third quarter, with adjusted earnings per diluted share of $1.03. This excludes merger-related expenses incurred in the third quarter, totaling $9.8 million on an after-tax basis, or the equivalent of $0.21 in EPS. Further, our adjusted pre-tax, pre-provision net income or PPNR, which again excludes merger-related expenses, was $66.4 million or $1.42 per share in Q3, compared to $1.50 per share in Q2 and $1.32 per share in Q1 of this year.
We are pleased with the expansion of our net interest margin in Q3, which increased 24 basis points to 3.82%, compared to the 3.58% we saw in the second quarter. The improvement was largely attributable to both loan yield. We saw loan yields increase by 17 basis points over Q2, due primarily to the sales completed late in the second quarter of lower yielding acquired multifamily and acquired public finance loans. In addition, given the heavier variable rate nature of our loan portfolio, we have also benefited from the recent rising interest rate environment. On the funding side, despite the rising interest rate environment, our funding costs also improved. Of the disposition of acquired higher cost certificates of deposit late in the second quarter and during the third quarter, as well as a favorable mix shift between our non-interest bearing and interest bearing deposits.
We do see the competition for deposits of late intensifying and certainly pricing pressure has resulted. Our objective is to continue to remain disciplined and to seek to balance rates and growth, particularly as we move into the fourth quarter and beyond. Service fee revenue totaled approximately $39.4 million in the third quarter, a decrease of approximately 4% compared to the prior quarter and representing 21.9% of total revenue. The decrease was driven primarily by a decrease in mortgage banking revenues, which was attributable to the slowing impact to origination activity as a result of the rising interest rates we saw during the quarter. Although I will note that mortgage revenues were up in the third quarter this year income.
Revenue trend we saw in Q3, we did see some nice improvement in service fee revenues across most of our other service fee revenue business lines, including wealth management, treasury management, consumer banking, and swap and syndication activities for our commercial business customers. Overall, we continue to be very excited about the opportunities we are seeing to further grow and diversify our business mix from our service fee revenues. Turning to expenses. Third quarter adjusted non-interest expenses, which exclude merger-related expenses, declined approximately $800,000 from the second quarter, with salaries and employee benefits expenses down approximately $5.4 million, partially offset by a $4.5 million increase in other non-interest expenses, which was primarily driven by higher loan collection expenses.
In terms of realization of operating synergies from the First Foundation acquisition, during the third quarter, we were at an annualized run rate equivalent of approximately 70% of our original total cost save target of $68.8 million. With the core system conversion now complete, we expect to capture the vast majority of the remaining incremental 30% run rate savings in the fourth quarter. We are very pleased with our progress and continue to expect total cost savings to slightly exceed our original dollar target, with additional savings above that original target expected to come in the first quarter next year. Shifting to the balance sheet. On the loan side, balances declined approximately $110 million from the second quarter, or 3.8% annualized. From a portfolio mix perspective, we saw encouraging growth in our C&I business, with balances increasing approximately $84 million from the second quarter, or approximately 9% annualized.
This growth was more than offset by pay downs across our commercial real estate, residential real estate, and public finance portfolios, which collectively declined from the second quarter by approximately $173 million, including a decline of approximately $69 million in the multifamily portfolio. While we did experience a higher overall level of total loan portfolio pay downs this quarter, very similar to the elevated level in the second quarter, the proportional shift to more variable rate C&I loans in the portfolio further improved our overall balance sheet sensitivity profile. $29 million for the quarter.
That is up 14% from $377 million in the second quarter. We also saw improvement in new loan pricing with the average coupon on new loans increasing to 6.91% compared to 6.76% in the second quarter, which exceeded again this quarter the effective coupon being accreted on the acquired First Foundation loans, which was slightly below 6.2%.
On the deposit side, we saw total balances decline approximately $447 million at quarter end. While our deposit remixing strategy improved our overall portfolio mix and managed higher rate acquired deposits, we did not generate net balance growth for the quarter due to the combination of intentional runoff and some attrition. In terms of the components of the Q3 balance decline, we saw approximately 80% of the decline related to either targeted runoff or seasonal contraction, with a breakdown of an approximate $40 million decline in broker balances, an approximate $255 million decline in higher rate non-relationship balances, and an approximate $65 million decline due to typical seasonal contraction in the third quarter.
The remaining approximate $85 million decline included some attrition and general balance decline across the customer base, including approximately $50 million in balance outflow involving the deployment by one customer of proceeds from the sale of a business. Our loan-to-deposit ratio was at 88.3% at the end of the quarter, and our wholesale funding ratio was at 6.7%. On the asset quality side, provision expense for the quarter was $4.4 million, primarily due to specific reserves on two CRE loans, and partially offset by a decrease in the loan portfolio. Our allowance for credit losses as a percentage of loans was 1.52%, an increase of 2 basis points from the second quarter. Net charge-offs totaled $3.3 million, or 11 basis points on an annualized basis, and were concentrated primarily in two acquired credits.
As Neal noted, we saw meaningful improvement in both special mention and substandard loans, which declined approximately $23.8 million and $39.9 million respectively compared to the second quarter. Overall, we are encouraged by the improvements in criticized credit rates this quarter and remain focused on our disciplined approach to portfolio management and early risk identification. On the capital side, we continue to strengthen our position as TBV per share improved to $35.60, up from $35.16 at the end of the second quarter. I'll further note, and as Neal referenced earlier, we repurchased approximately $50 million of common shares under our share repurchase program in the third quarter, and we still saw an increase in TBV per share over the second quarter. In terms of our expected financial outlook for the fourth quarter, I will refer everybody to page 19 in the earnings presentation we filed last night.
I'll underscore a few points on our Q4 outlook and key assumptions. Mid-single-digit growth for loans and deposits, excluding broker balances. We are seeing a very strong pipeline for the fourth quarter. Net interest margin in the mid-380s, up slightly from our Q3 performance level. Efficiency ratio in the low 60s, and improved slightly from our Q3 performance level, as we expect to realize further cost synergies in the fourth quarter. Continued common share repurchases. Overall, we're encouraged by our third quarter results and the significant progress we've made on our integration efforts for the acquired First Foundation business. We believe our balance sheet, liquidity, and net interest margin profile, along with synergies on the expense side, position us well as we move into the fourth quarter and will ultimately keep us on track to drive further operating leverage and achieve our target performance for 2027.
With that, 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 withdraw your question, press star one again. We ask that you pick up your handset when asking a 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 Matthew Clark with Piper Sandler. Matthew, your line is now open. Please go ahead.
Hey, good morning, everyone.
Morning.
Just on your reserves, do you have the credit mark on the First Foundation portfolio? So if we were to add that back, what your gross reserve level would be?
The credit mark on the acquired First Foundation is included in the 152.
Okay, got it. Just double-checking.
Yes.
In terms of your overall criticized loans, can you give us the percentage that's from First Foundation, again, that were marked?
Hello, Matthew?
Yeah, I'm here.
Oh, sorry. Our line glitched there. We missed that.
Oh, yeah. Okay. Yeah, part of the call is getting cut out. What percentage of your criticized loans are from First Foundation, assuming they were marked? Roughly.
The percentage of criticized from First Foundation. Let me circle back to you on that one, Matthew. Give me a minute.
Okay. I think, yeah, the broader question really is would you consider selling some of these marked criticized loans to get that percentage down to a more palatable level?
We're not looking at any bulk sales similar to the size that we did in the second quarter. Are we looking at one-off strategies that could involve a sale. We're constantly evaluating strategies on that side, but we're not looking at any bulk sales similar to the size that we did in the second quarter.
Okay. On the cost of deposits being down, assuming you have some more brokered you'd like to run off and assume there's still some other higher cost deposits that you'd like to exit, do you have the spot rate on deposits at the end of September and how we should think about your cost of deposits with the Fed hiking?
Yeah. On the deposit rate side, yeah. Our third quarter interest-bearing deposit rate was at 275. Our equivalent interest-bearing deposit cost at 9/30 was at 282. The rate for the month of September was 278. You can see kind of the progression, total quarter, month of September, and then where we were positioned at the very end of September.
Okay. Fair enough. Thank you.
Thanks.
Your next question comes from the line of Michael Rose with Raymond James. Michael, your line is now open. Please go ahead.
Hey, thank you. Thanks for taking my questions. Hey, guys, I just wanted to kind of circle back to comments that you guys reiterated last quarter around a $5-plus earnings trajectory for next year. It just seems like, given that the balance sheet's a little bit smaller, what you gave for accretion, what you just talked about in terms of deposit costs, putting it all together with probably what I would assume to be is probably a lower run rate of mortgage, just given the higher for longer, particularly if we do get another hike or two. Is there a way to potentially level set that number? Or maybe reiterate it if that's what you're thinking. It just seems from the outside looking in, it's going to be kind of tough to hit that just given some of the dynamics that have developed over the past couple of months. Thanks.
Yeah, sure, Michael, and good morning. I would say on the balance sheet side that as we look at the second half of 2026 here, on the loan side, we are still expecting to be in that low single digit territory. So from a total balance sheet perspective on the asset side, not too far off from where we were expecting to be if I rewind the clock three months ago. On the deposit side, I'd probably put that closer to flat, which you can kind of see inherent in the guide that we have for Q4, where Q4 on the deposit ex brokered were now in that mid-single digit territory as compared to that low single for the second half. So in terms of the, if you will, the annuity base on the balance sheet may be a little bit lower but not appreciably lower.
I think on the margin side, we still feel real good about the margin side. As we mentioned, we continue to be very focused on optimizing margin, and you see that in some of the trades that we're pursuing on the balance sheet, and it's inherent in the components that I highlighted on the deposit side in terms of balance changes. I think as you think into the P&L, there is a little bit of a trade-off on margin and fee income, depending upon the overall rate environment and certainly focused on that mortgage line. I think as Neal mentioned, very encouraged by what we're seeing in the other fee businesses, including wealth, including our loan syndication and swap business on top of is going to see some impact as a result of what's going on in the macro rate environment.
But there's some natural economic hedge that we've always pointed out between spread income for our business and given the position, the profile of our balance sheet and mortgage revenues. Then on the expense side, again, feeling real good about the work we've been able to accomplish on the expense side. We do think we're going to come in ahead of our original projections on total cost saves with that excess coming into play in the first quarter. So we remain feeling good about our target performance there for 2027.
Yeah, I would just underscore. I certainly understand your question. I think given the inherited balance sheet that we acquired, our focus was probably more on margin, get through the conversion, given the rate trajectory. I would just underscore, we're seeing pipelines that they're the strongest I've ever seen here. So across all our markets, we have a lot of activity going on. So I don't think we've thrown in the towel on anything. I think you'll see more robust balance sheet growth, not just margin expansion.
Okay. That's very helpful. I appreciate all the color. Maybe just one follow-up for Rob. If you can just maybe help us level set expenses for the fourth quarter. I know you said the majority of the 30% will come in this quarter, but you continue to invest and grow the business, right? So how should we think about fourth quarter expenses? Should they step down further slightly again? Then as we think about those investments into next year, how should we think about a base level of expense growth for you guys? Thanks.
Yeah, absolutely. Yes, we do expect to see expense declining Q4 versus Q3. That efficiency ratio guide in the low 60s, that's going to get you somewhere around probably a mid-single digit decline just in percentage terms. As you cast forward to 2027, I think, again, following on our guidance on efficiency into the first quarter on the low 60s side, I think that continues to improve modestly from there in terms of that efficiency ratio. So that will kind of get you to our run rate expectations as you cast out from Q4 into 2027.
Okay. I appreciate all the color. Lots of moving pieces here. Thank you guys so much. I'll sit back.
Yes, absolutely. Just one other item, just following up on Matthew's earlier question on the split between criticized. It is roughly 50/50 legacy Sunflower, legacy First Foundation.
Your next question comes from the line of Matt Olney with Stephens. Matt, your line is now open. Please go ahead.
Hey, thanks. Good morning. Just want to follow up on that last discussion around expenses. Rob, there's the other expense, I think it was mentioned in the deck, the higher loan collection expense. Any more color on that line item and what that looks like the next few quarters, and then what the big driver is? Thanks.
Yes, certainly, Matt. The loan collection expense that I was referring to, we just saw some elevated loan collection expenses with a few of the workouts in place. We saw that as more unique to the third quarter as opposed to that we expect from a step down there, what I call from kind of a normal run rate. We just saw some elevation in Q3 there. The combination with, if you will, the remaining 30% on our original cost save targets gets you to our expectations for the fourth quarter. Again, low 60s on efficiency and call it a mid-single digit decline from Q3 levels.
Okay. Appreciate that, Rob. Then going back to the loan growth discussion. Lots of discussion on the call about the stronger loan growth and the stronger loan pipelines you're seeing at this point. Are there any numbers you can put behind the pipelines now versus a few months ago?
Fair question. Certainly, our expectations around mid-single digit growth on the loan side in the fourth quarter are fueled by the very strong pipeline as Neal was referencing earlier. I think the pipeline we're seeing in percentage terms is 30%-40% higher than we've seen it earlier in the year. Now, some of that is a little bit of timing. The second and the third quarter were a little slower for us, although third quarter, as I mentioned, certainly was up relative to the second quarter. So there's a little timing in there. But we're very pleased with just overall what we're seeing in the pipeline. Certainly, we think a reflection on investments that we've made in some of the markets here over the past couple of years. And that seasoning takes a little bit of time, as you know.
Yeah, really happy with what we're seeing, Matt, on the loan pipeline and deposit pipeline, frankly.
I think one of the slides in the deck showed the higher last two quarter of payoffs. Given the rise in rates, we would expect that to be a little muted as well. Do not have a great handle yet, but could expect that not to be the headwind it has been.
Okay guys, thanks for your help. That is all for me.
Thanks, Matt.
Thank you, Matt.
Your next question comes from the line of Woody Lay with KBW. Woody, your line is now open. Please go ahead.
Hey, guys. Wanted to start on broker deposits and just get an idea of how much broker deposit runoff your forward guide is assuming.
On the broker deposit side, we did take that down a little bit in Q4. I think we're between 6% and 7% still. Our overall objective on brokered has been to keep that below 10%. I don't see significant decline. I think you're going to see brokered, we're going to keep it below 10%. That's really our focus. We did exit out of a little bit in Q3.
Okay, got it. Then maybe a follow-up on the NIM. Just any idea, could you walk us through how sensitive the forward margin is to rate hikes? Either if we don't get the rate hike later in the year, what that can mean for the margin, or if we get incremental rate hikes next year, what that can mean?
Sure. Our overall IRR profile is, I'd call it slightly asset sensitive. We have one rate increase in the fourth quarter, December specifically, in our expectations. We don't have anything factored in in 2027. I know there's some varying thoughts macroly on that, but we don't have anything factored in there in terms of 2027. And I think it's just really the hard work, the time we've spent on our balance sheet profile that's really continuing to drive us to that slightly asset sensitive position. So if rates were to come back down, still slightly asset sensitive. And if rates go up, still slightly asset sensitive. We provided a view on that in the Q2 deck. We always provide a view in the 10-Q, but in the Q2 earnings deck, we provided a view. It hasn't materially changed from there.
How we're managing the betas on the deposit side with the portfolio that remains post kind of remix and the downsizing leads us to a much better beta and managed outcome on the deposit side. And of course our loan portfolio is roughly 70% of the portfolio is variable rate. A good chunk of that reprices in the first 30 days. So we do have some pretty good responsiveness on the asset side.
All right. That's really helpful color . I guess just last for me, it's great to hear you all a little bit more optimistic about the loan pipeline potentially seeing a growth inflection. The rate backdrop's a little volatile. Macro is always varying. If growth does come below your stated guidance, would you look to use that allocated capital and shift it to the buyback? Or would you operate at higher capital levels knowing the growth might just be pushed back?
Great question. Our contention all along is our biggest driver is less the macroeconomic environment and more our execution because we're a smaller institution, and it's been our investment in the sales force and building that. Certainly, uncertainty is not your friend, but I think we, at least in our region of the country, we don't see any slowdown in the businesses we're working with.
Got it. All right. Well, that is all for me. Thanks for taking my questions.
Absolutely.
Thank you.
Thanks, Woody.
We have reached the end of the Q&A session. I will now turn the call back to Neal Arnold for closing remarks.
Thank you for joining our call this morning, and as always, we appreciate your continued interest in FirstSun. Have a great day.
This concludes today's call. Thank you for attending. You may now disconnect.