FirstSun Capital Bancorp

Good morning and welcome to the First Son Capital Bank Corp First 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 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, 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 Coferra, 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 gap metrics and non-gap financial measures. Important information about these non-gap financial measures, including reconciliations to comparable gap 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 Neil Arnold.

Thank you, Ed, and good morning. Thank you for joining us. It's a busy time right now at First Son, 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. You know, we're pleased with the momentum we saw in our business to start this year. We believe our relationship focus 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 84 cents and an adjusted ROA of 114. 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 four and a quarter. And we also saw a solid revenue mix on the non-interest 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 two loan charge-offs, and we're 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 focus on what we call our credit adjusted NIN. 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 1st. The sharing of information and knowledge across the combined branch teams, across the legacy Peirce 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've said from the beginning of this transaction, our focus is on de-risking 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 continuing 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, Neil. 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 increase 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 and interest-bearing demand now in 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 non-interest income to total revenue of 24.7%. While non-interest 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 non-interest 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 seven bips from Q4. As Neil 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 two 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 non-performance in the portfolio as a whole, with an average level of non-performers 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 Neil 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 TVV per share improving by 74 cents to 38.57. Next, I'll turn to a few comments on the first foundation acquisition. As Neil 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 de-risk the acquired balance sheet and transform the business to look more like First Son. 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 de-risk the portfolio. Additionally, while our initial targeted balance reduction in the SNCC 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 First Son 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 First Son 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 TBD dilution, perhaps by a couple percentage points, we expect it will also translate into a lesser level of interest rate market creation 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 last year and expect we'll have capacity for some nearer-term share repurchases. Specifically, as noted in our earnings presentation deck, we're expecting CET1 in the 1070s 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 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-reposition 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-reposition and post-marked 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-marked 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 sun NIM run rate, our repositioning work, and the impact from purchase accounting, we'll 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-380s range. However, for the next couple quarters, we expect to see a drop as we complete the downsizing in Q2 2021. And as we work to further remix the acquired base in Q3 forward, with the fourth quarter NIM expected to elevate into the 390s performance range. In terms of revenue mix, we expect our level of non-interest 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 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 and 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 First Son. I will now turn the call back to the moderator to open the line for questions.

Thank you. We will now begin the question and answer session. Your line will remain open for follow-up questions. 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 Woody Lay with KBW. Woody, your line is open. Please go ahead.

Hey, good morning, guys.

Morning, Woody.

Morning. to start on the size of the balance sheet. And as you mentioned, you know, tangible book value dilution with the deal is coming a little bit better than expected because the marks are lower, but that could, you know, have a slight impact on EPS as well. But it also looks like, you know, the repositioning is ahead of schedule and it's about a billion more than what was initially laid out at the merger announcements. But how do you expect the smaller balance sheet to impact that 524 EPS run rate that you initially laid out at deal announcements?

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 developed. 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 and what you see on slide 20 there of 4.4. So in terms of our expectations on a 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 CNI 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 TDD dilution as a result of where marks are coming in, as we're looking at those here preliminarily now in the second quarter. You know, we put some guidance on slide 21 in terms of the level of loan interest rate accretion for 26. You know, 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, you know, it's like I said, it's relatively comparable there. 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.

Yeah, 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 by a tire in 2027 as that remix occurs?

I'm sorry, do we think that remix is what in 2027?

But just given the remix is going to continue on in 2027, I mean, do you think the NEM continues to improve off the 4Q expected base from the three-time range?

Yep. Sorry, my line cut out just slightly there. I missed the last part of yours. So, yeah, 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 390s range. You know, as you look forward into 27, I would expect 4Q. you know, a little bit of an uptick from that level, but it's going to be in that same neighborhood. We feel pretty good about, you know, that as a, as a run rate, as we extend out, you know, looking over the, you know, that kind of near term horizon here and, you know, fourth quarter 26 and for 27.

Got it. Maybe just the last for me, you'll, you'll find a little more incrementally positive on, on, buybacks and being active there. DAT1 is coming slightly above where y'all laid out. Just thoughts on where you'd like to keep DAT1 as a pro forma company, any target you're thinking of?

Yeah, fair question. We have looked at an 11% level for CET1. I think we've 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, You know, we do see the capacity for some near-term share repurchase activity. You know, 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.

All right. Well, I appreciate you all taking my questions.

Thank you, Woody.

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

Thanks. Got it. Yeah.

Yeah.

Go ahead, Neil.

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 said, you know, both Southern Cal and Texas are leading the way and, you know, we're seeing that across some of those markets. So, I think the remix that we're going to have going on is a multi-year one as we see maturities on the multifamily portfolio. Some of those we'll 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 or 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 you know, we could see a material impact as we continue to improve the mix on the funding side. You know, 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 comment.

Yeah, just to underscore maybe a little bit what Neil was referencing there, Michael, and back to one of the remarks I made in the prepared remarks section. You know, there is scheduled repricing in that multifamily portfolio here, not only in 26, but also in 27 at somewhat elevated levels. So, you know, that's a, 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, you know, to that relatively stable level that we've referenced. You know, and I think there's roughly another 400 million in repricing scheduled. And as Neil referenced, you know, our objective is to, you know, get deposit penetration within that base and, you know, convert to, you know, core relationship. And so that's what will be hard at work at. That's what the team will be hard at work at. and continue to be hard at work at. You know, as we cast forward into 27, I think I referenced, you know, we're turning to a growth mode. We certainly see more of a growth mode as we look out, you know, 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, you know, switch to credit, you know, certainly appreciate the reminder and the color on those two credits that were, you know, kind of the bulk, I think you said, of the charge-offs, you know, this quarter. Obviously, the guidance implies a pretty big step down in kind of the combined charge-off rate as we move forward. Yeah, I guess one of the bigger questions is, you know, you guys have been pretty clear that, you know, just given the C&I mix and how it's higher than peers that, you know, and the average size of your loans being a little bit higher, that, you know, credit is going to be on a ratio basis somewhat lumpy. But I guess, you know, what gives you confidence that you can kind of operate, you know, in that 20 basis point-ish range, you know, 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. Thanks.

Yeah. Oh, I'll kick it off there. I'm sure you'll We'll have something to add there as well. But I think, you know, you're right, Michael, as we've talked about, given our heavier C&I mix, we do see credit coming in some, you know, lumpy fashion at times. And, you know, we've had the onesie-twosie, you know, as we look back over the course of time. 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 CNI business, credit spreads that we're operating with are obviously different than, you know, a CRE heavy, you know, bank-based business mix, i.e. we're 300 plus spreads, you know, as opposed to, you know, 200, 225 kind of spreads. So, you know, we realize that, you know, the credit profile on the CNI side will lead to some lumpiness at times, you know, as we analyze and as the teams work hard constantly on our portfolio and, you know, performance there. We're not seeing, you know, broad-based, you know, structural issues in a sector or in a geography within the portfolio. I mean, it's just the one-off, you know, isolated instances with, you know, 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 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 today. you know, in that territory for, you know, the past many quarters. And, you know, our performance, you know, has been, you know, fairly consistent in terms of the one-offs on the credit side that we've seen. You know, the first quarter on an annualized basis, of course, looks a little elevated because, you know, You know, we did take, you know, those couple charges in the first quarter. They were all part of what we saw coming at us for fiscal 26. You know, the events, you know, metastasized, if you will, in the first quarter and it lost recognition 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, you know, our guidance around, you know, if you will, that mid-20s level on charge-off performance.

Yeah, Michael, I would just add, Michael, I guess what I'd say is we'd 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, you know, if I could plan for events, I certainly would rather not have charge offs in our biggest loan quarter. You know, it's just it is what it is and we don't take it lightly. But I'd also say you know 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.

I totally get it. I appreciate all the color. Maybe just last one for me. If I go back to the slide deck from You know, when you guys announced the deal, you guys talked about a 145 pro forma ROA, about a 13 and a half percent ROTC. Understanding, you know, 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, you know, if we were to kind of exclude the impacts of expected accretion in 27, like what could that, what could those levels look like? Thanks.

Sure. You know, as you look at, you know, returns in the business and, you know, comparison to what we, you know, return references that were in the announcement deck, you know, given the lesser level of TBD dilution, you know, and the linkage on the mark side, there is some lesser level of accretion, you know, not materially, as I mentioned previously, a little bit ago relative to our expectations on the bottom line, EPS perspective in, in, in 27, you know, we do think we're still in that 5% or excuse me, $5, uh, neighborhood, um, you know, for 427. You know, returns, you know, as you look at returns kind of casting out into, you know, the next year, certainly will be increasing over 26 level returns. you know, I would say coming down a little bit in relation to what was in the announcement deck, but certainly above the, you know, the most recent return levels that, you know, we delivered in fiscal 25 at, you know, in the low 120s on the ROA side. And You know, on the capital side, you know, we'll continue to look at, you know, the right mix of capital given, you know, our overall CET1 target levels and, you know, coming out a little favorably on that side and, you know, and you know having a you know a a more near term capacity for uh you know some some possible repurchase activity there so you know that i think can certainly impact favorably on on the the return on tangible uh capital levels as well yeah the only thing i might add the only thing i might add is i

I like the flexibility of the new combined balance sheet, you know, that we have both the floating rate growth in CNI 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.

All right, I'll step back. Thanks for taking my question, guys.

Thanks. Your next call comes from the line of Matt Olney with Stevens. Matt, your line is open. Please go ahead.

Thanks, and good morning, everybody. Going back to the repositioning efforts. Good morning. 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 call you can give us as far as the shared national credits or the multifamily efforts as far as pricing versus original expectations?

Yeah, I would say, you know, on the SNCC side, you know, very successful performance there. You know, the SNCC, our initial targets on the SNCC side, First Foundation, completed all of the strategic exits there actually prior to 331. So actually real strong performance on the SNCC side. And on the multifamily side, we're actually seeing that 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 and what we think we'll ultimately realize there, which, you know, maybe it's, you know, slightly better than our original targets, but yeah, very, very pleased.

Okay. Thanks for that, Rob. And then on the expense side, any more color on expenses at the combined company that we'll see in the near term? I think we can see the disclosure for For foundation expenses, and obviously first on, should we just add these two 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?

Yep. No, thank you for the question there, Matt. You're right. You know, as you look at, you know, first foundation in the first quarter was, you know, call it a 56 million kind of run rate level. You know, if, to your point, if you just add that with first son apply some cost saves, you know, as I mentioned, you know, we think we'll be at about a 65% level on cost saves in, in the second quarter, but well on our way in total on cost saves actually, you know, you know, expect to be slightly above our original targets there. So, you know, if you just kind of apply that, you know, our original target was 35% of the first foundation core expense base. So if you just kind of slap that math, yeah, that should give you, you know, a pretty close approximation for where we'd see Q2, Q3, you know, the, if you will, the metric um reference there in terms of our expectations on efficiency you know being in in the mid 60s for the next couple quarters um and then dropping um into the low lower 60s um in in the fourth quarter yep okay appreciate that robin 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?

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

Okay. Thank you guys.

Thank you.

Your next call comes from a line of Matthew Clark with Piper Sandler. Matthew, your line is open. Please go ahead.

Thanks. Good morning, everyone. Good morning. 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?

A fair question. Um, I would, I think in terms of the total mix of the portfolio, um, on a go forward basis, you know, I'd probably see, what would that be? Um, Low 20s, I think if you look at where our mix is on a non-interest 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 percentage points.

Okay. Okay. And then on the margin here in the near term, I think your guide, you know, includes the 431 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 3Q?

90s in the fourth quarter and do we step down to like a 370 here in 2q and build back fair question um you know i would i would say you know as you look at the overall guidance there for a you know for a mid 380s on the year and and you know a q4 in the 390s You know, how do you kind of get there in the math for a Q2 and a Q3? Yeah, I mean, you're going to see 360s, 370s, you know, kind of stepping from Q2 into Q3 before you get to the 390 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 two.

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 up front. 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, 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 actually, if we see something on the first foundation side, it'll still roll through, charge off, even though it will have no P&L impact. 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 two credits in Q1 were – part of our expectations for full 26, you know, the point real, the point of realization became Q1 for both of those, but we do see a step down in activity, you know, over the course of the next three quarters to get to that overall mid twenties for the full year.

And how much did those two credits contribute to the 10.6 million net charge house this quarter?

more than 10. So when I say bulk, I mean, it truly is bulk. Understood. Okay, thank you. Yep, thank you.

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

Thank you. We appreciate you all joining the call this morning. and their continued interest and their funds. Thanks for today.

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