Detailed narrative
Acquisition Integration and Balance Sheet Repositioning
FirstSun Capital Bancorp completed its acquisition of First Foundation on April 1st, immediately initiating a strategic balance sheet repositioning. This involved reducing acquired assets by approximately $3.9 billion, including $1.4 billion in securities and $1.3 billion in loans, and reducing acquired funding by $3.9 billion, primarily from $2.2 billion in broker deposits and $330 million in higher-cost non-relationship deposits. These actions significantly strengthened the balance sheet by improving funding mix, reducing wholesale funding dependency, and enhancing capital and liquidity flexibility, with the wholesale funding ratio now at 6.8%.
Credit Performance and Asset Quality
Q2 results were significantly impacted by two isolated credit events, leading to a net loss of $23 million and $40.4 million in provision expense. These events, involving a fraudulent misrepresentation by a borrower and deterioration in a technology company, accounted for 86% of Q2 loan loss provision and 82% of total charge-offs. Non-performing loans increased to 1.64% of total loans from 0.86% last quarter, with 76% of the increase in criticized loans related to the acquired First Foundation portfolio, which was conservatively regraded. The Allowance for Credit Losses (ACL) increased to 150 basis points from 120 basis points at Q1.
Deposit and Loan Dynamics
Adjusted annualized deposit growth was approximately 5% in Q2, excluding acquired balances net of downsizing, with strong performance in Los Angeles and Orange County markets. Non-interest bearing deposits decreased to 18.1% from 23.1% due to strategic exiting of acquired higher-rate deposits. Core loan balances, excluding acquired loans and net of downsizing, declined 6% annualized in Q2, with new loan fundings down 29% from Q1. However, core loan balance growth for the first six months of the year, excluding acquired loans, was 9.7%.
Net Interest Margin and Funding Costs
Net interest margin (NIM) declined to 3.58% in Q2 from 4.25% in Q1, primarily due to the acquired loan portfolio and higher funding costs. However, NIM improved 29 basis points from April to June, reaching 3.76% by June-end, driven by successful reduction in deposit funding costs. The weighted average stated coupon for loans sold in June was 3.94%. The company expects brokered maturities of $300 million in H2 FY26 (weighted rate 4.77%) and $340 million in FY27 (weighted rate 4.83%), which should provide repricing benefit.
Expense Management and Efficiency
The company is realizing significant cost savings ahead of schedule, with an annualized run rate equivalent to approximately 65% of the original $68 million target achieved in Q2. Adjusted non-interest expenses were up 57% compared to Q1, primarily due to the acquisition. The core system conversion is scheduled for late September, expected to drive further efficiency improvements, with the adjusted efficiency ratio projected to be in the low 60s in Q4 FY26 and high 50s to low 60s in Q1 FY27.
Capital and Shareholder Returns
Tangible book value dilution from the acquisition was approximately 10%, better than the initial 14% estimate, attributed to lower merger-related expenses and better net fair value impacts. Capital ratios remain strong, with CET1 at 11.95%, total risk-based capital at 14.13%, and tier one leverage at 9.47%. The company announced a $150 million share repurchase program targeting the next four quarters, starting in Q3, underscoring a commitment to shareholder value and maintaining an 11% minimum targeted operating level for CET1.