First Western Financial Inc
NASDAQ:MYFW
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First Western Financial Inc
Earnings Call Analysis
Summary
Q2-2024
In the second quarter, the company focused on conservative loan production and risk management, keeping the balance sheet stable. Net income was $1.1 million, or $0.11 per share, while net interest margin and expense control improved. Despite a $20 million drop in loans held for investment from Q1, June saw loan growth and better asset quality. The company anticipates continued net interest margin expansion and higher profitability in H2 2024, supported by new deposits, efficient expense management, and enhanced asset quality. Challenges remain, but positive underlying trends suggest a strong finish to the year.
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Good day everyone and thank you for standing by. Welcome to First Western Financial Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I will hand the call over to Tony Rossi of Financial Profiles.
Thank you, Carmen. Good morning everyone and thank you for joining us today for First Western Financial's second quarter 2024 earnings call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; Julie Courkamp, Chief Operating Officer; and David Weber, Chief Financial Officer. We will use this slide presentation as part of our discussion this morning. If you have not done so already, please visit the Events and Presentations page of First Western's Investor Relations website to download a copy of the presentation.
Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Western Financial that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements.
These factors are discussed in the company's SEC filings, which are available on the company's website. I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call.
Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release, available on the website, contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.
And with that, I'd like to turn the call over to Scott.
Thanks, Tony, and good morning, everybody. During the second quarter, we continued to prioritize prudent risk management and conservative approach to new loan production, which resulted in our balance sheet remaining relatively flat during the quarter. At the same time, we continued to execute well in our strategic priorities, and had positive trends in a number of key areas. We continued to maintain disciplined expense control, which resulted in non-interest expense declining from the prior quarter. We continued to add new deposit relationships. In our largest non-interest income-generating businesses, wealth management and mortgage banking continued to perform well and make strong contributions to our revenue.
Notably, our performance grew stronger as we moved through the quarter, and in June, we had increases in both loans and deposits, and we saw an increase in our net interest margin. In terms of asset quality, we continued to make progress on resolving our largest non-performing assets and foreclosed on 2 of the properties we have as collateral during the quarter. We experienced a decline in past 2 loans while having net recoveries in the quarter. As we indicated in the past, when we do see a loan move from non-performing status due to specific issues with a particular borrower, it rarely results in a meaningful level of loss due to the strong collateral we require, typically also including multiple forms of repayment and personal guarantees.
Moving to Slide 4, we generated net income of $1.1 million, or about $0.11 per diluted share in the first quarter, and pre-tax, pre-provision net income of $3.7 million. On a pre-tax, pre-provision net income basis, our financial performance was consistent with both the prior quarter and the same period last year. With our prudent balance sheet management, we had a further increase in tangible book value per share this quarter.
Now I'll turn the call over to Julie for some additional discussion on our balance sheet and investment management trends. Julie?
Thank you, Scott. Turning to Slide 5, we'll look at the trends in our loan portfolio. Our loans held for investment decreased $20 million from the end of the prior quarter, but as Scott mentioned, our loans held for investment increased during the month of June. We continue to be conservative and highly selective in our new loan production.
But we did see a higher level of loan production in the second quarter, with total loan production increasing to $50 million, up from $31 million in the prior quarter. Most of our new loan production is coming in the areas of commercial loans and residential mortgages, where we are also getting deposit relationships.
Our level of payoffs were relatively consistent with the prior quarter and higher than our level of loan origination, which resulted in the decline in total loans. We continue to be disciplined and we are maintaining our pricing criteria. This resulted in the average rate on new production being 8.35% in the quarter, which is higher than the average rate of our payoffs, which resulted in the turnover in our loan portfolio being accretive to our average yield on loans.
Moving to Slide 6, we'll take a closer look at our deposit trends. Our total deposits declined during the quarter, as we saw outflows primarily driven by seasonal tax payments, operating account fluctuations, and clients using liquidity for their strategic investments. However, on an average basis, our deposits are up $39 million compared to the second period of 2023, due to our deposit gathering efforts over the past year.
We continue to have success in new business development and added $22 million in new deposit relationships during the second quarter. We had the largest growth in time deposits during the quarter, which was primarily related to clients moving money into time deposits from lower yielding deposit accounts, due to their desire to take advantage of the higher for longer interest rate environment that we are in.
Turning to trust and investment management on Slide 7, we had $129 million decrease in our assets under management in the second quarter, driven by asset withdrawals and custody accounts that have minimal impact on trust and investment management fees. However, we have seen an increase in AUM of 8% over the past year.
Now I'll turn the call over to David for further discussion of our financials. David?
Thanks, Julie. Turning to Slide 8, we'll look at our gross revenue. Our gross revenue decreased 2% from the prior quarter, but was up from the average of our prior 3 quarters. We saw positive trends in NIM and mortgage fee income in the quarter.
Now turning to Slide 9, we'll look at the trends in net interest income and margin. Our net interest income decreased 1.9% from the prior quarter, primarily due to lower levels of interest-bearing cash. We continue to see more stability in our NIM, which increased 1 basis point from the prior quarter to 2.35%. As Scott indicated earlier, we saw an increase in our NIM during June, and we expect to see continued expansion in our net interest margin over the second half of the year.
We are seeing an increase in our average yield on interest earning assets, primarily due to new loans coming on the books at higher rates than the loans that are paying off. We added some overnight borrowings to offset the deposit outflows that occurred during the quarter. We plan to reduce these borrowings as deposit balances build back up again.
Now turning to Slide 10, our non-interest income decreased 4.2% from the prior quarter, but was up 29.6% from the average of the last 3 quarters of 2023. Our largest sources of non-interest income, trust and investment management fees and net gains on mortgage loans, continue to make strong contributions, but they were offset by a decrease in bank fees. Our net gain on mortgage loans increased from the prior quarter, due to a higher level of production resulting from the addition of MLOs earlier in the year, as well as an increase in home buying activity that, we are seeing in our markets.
Now turning to Slide 11 and our expenses. Our non-interest expense decreased to $19 million, primarily due to a lower level of professional service fees, as we continue to make progress on the resolution of our non-performing loans. Our efficiency ratio is back trending in the right direction. For the next few quarters, we expect non-interest expense to be relatively consistent, with the main variable being the level of incentive compensation, which will be dependent upon our financial performance.
Now turning to Slide 12, we'll look at our asset quality. Our non-performing assets increased slightly to $49.3 million. The increase was due to the foreclosure on 2 properties held as collateral, which are now held in OREO that more than offset the resulting decrease in non-performing loans, due to a participated balance. We continue to make progress on our large workout relationship, as we had previously discussed. In addition, we had a decline in past due loans, and had a small amount of net recoveries in the quarter. With the decline we had in loans and the provision recorded in the quarter, our level of allowance to adjusted loans increased 12 basis points to 1.12% at June 30.
Now I'll turn it back to Scott. Scott?
Thanks, David. Turning to Slide 13, I'll wrap up with some comments about our outlook. While economic conditions remain uncertain, we'll continue to prioritize prudent risk management and a conservative approach to new loan production. In addition, we continue to make progress on resolving the credits that were placed, on non-performing status over the past few quarters.
Notably, our past due loans have continued to decline over the past 2 consecutive quarters. We'll also continue to focus on maintaining disciplined expense control and developing new deposit relationships. We're benefiting from the strength of the franchise we've built, and as we open new positions in the organization, we're seeing good opportunities to upgrade our banking talent.
These new additions, along with strong execution across our entire organization on our business development initiatives, are positively impacting our pipelines in all areas of the business, including loans, deposits, mortgage banking, and investment management. We're also in the process of reorganizing our investment management business, to improve its performance and business development capabilities.
Based on the positive trends we're seeing, including the expansion of net interest margin, we expect to generate a higher level of profitability in the second half of the year. We also continue to maintain a very strong balance sheet. With the increases we're seeing in our capital ratios and improvement in our asset quality, we have the ability to consider additional options for capital use. This led to the authorization of the stock repurchase agreement that we announced in June. We did not repurchase any shares during the second quarter, but we do have a 10b5-1 plan in place now. We believe in repurchasing our shares will be in the best interest of shareholders.
With that, we're happy to open the call, to take your questions. Carmen, please open up the call.
[Operator Instructions] And it comes from the line of Woody Lay with KBW.
I wanted to start with credit. As expected, there was some movement from NPL to OREO. Could you just remind us where NPA exposure stands to that 1 larger relationship? And any updated thoughts on timing around potential resolution?
Yes. We have just under $30 million of NPL on that 1 credit, plus a specific reserve of $8.2 million, of which $2.4 million of that was put on in Q2. With respect to the timing of the other property sales, we had said that this was going to play out over the course of 2024, which it is. You know, there's a whole sausage making process here that's well underway, but is nevertheless, full of sausage making.
We started out with 7 properties that we've talked about. We now have 4 remaining. 2 of them are in OREO, and are being listed and sold during the second half of the year, I hope. There's another property that's scheduled to be auctioned off in the first half of August, and that's on track. It's something we've anticipated all along. And then the timing of the sale of the last property is uncertain right now. We're not sure how that's going to play out.
Got it. So have your thoughts on the potential loss content changed at all, given the increased provision, or was this just sort of a move out of -- out of abundance of caution?
Well, 1 of the property, 1 of the 7 properties had a new issue that popped up in Q2 with a clouded title and litigation. And that led us to book a 0 value for that property. And our expectation is that we don't want to take further risk on that, and we will not have a recovery from that. So that was really what drove the specific reserve increase on that relationship.
All right. Maybe shifting over to the net interest margin. Sounds like it saw a little bit of improvement throughout the quarter. Could you just talk through your expectations on the NIM for the back half of the year?
Sure. I'll give it a try. And Julie and David, if you guys want to add extra color, please go ahead. You know, on the 2 sides of the drive NIM on loans and deposits, start with loans. I mean, we're seeing a fair amount of competition on loan pricing. And we still think that there's a possibility of a rate cut in the second half of the year. So we're thinking that our net interest margin will slowly improve. But currently it appears that our return to a more normal NIM is going to take some time, which is, again, I think in line with what we've talked about before. Our loans that we did do in Q2 came on our books at an average rate of 8.3%. Is that the right number, David?
8.35%.
8.35%. So we are getting a nice yield on the new loans that we're booking. Although, we're hearing stories from our front line about, people out there doing 5-year fixed rate commercial real estate loans that start with a 6%, start with a number in the 6% range. So I mean, there's definitely things that we're certainly not going to be doing on the loan side.
On the deposit side, the cost of funds for the quarter was 347, cost of deposits technically was 347. Spot rate for June 30 was 346. So it's not really a big improvement, obviously, but it is an improvement. And I think if you look back now several quarters, you see, kind of a very nice trend line in terms of it slowing, NIM improving, and NIM compression slowing, and then improving now in this quarter, which again is in line with what we had guided to in Q1. David, is anything important there, David or Julie?
No.
No. All fair.
It's from the line of Matthew Clark with Piper Sandler.
This is Adam Kroll on for Matthew Clark. I guess my first question, I was wondering if you happened to have the NIM spot rate for June?
David, do you want to go through that?
Yes, we saw a slight improvement in NIM in June, 236 versus 235 for the quarter.
And then switching to expenses, those came down this quarter. And I know you guys are focused on continued investments in talent and technology. So I was just wondering how we should think about the expense run rate going forward?
We have talked about our expenses being in the $19 million range each quarter this year. And I think that's about where we landed in Q2. We have had quite a bit of success bringing on production new hires. But that's largely by replacing open positions and deficiencies that, we've got on the back office, middle office side and putting that into new production.
We've hired 14 additional front office people that are producers here in the first half of the year, adding to our teams in Jackson, Boulder and Fort Collins in particular. We've also added 5 new MLOs so far this year. So I feel like we've done a really nice job of, you know, on 1 hand controlling expense and on the other hand, adding production capability that's really going to pay out, I think, in the second half of the year.
Got it. That's super helpful. I guess my last question is, it looks like there was some ongoing deposit remix this quarter and was just wondering if there was an update on flows you're seeing on the deposit side, and any expectations going forward, particularly within non-interest bearing, and if you're seeing sort of stabilization in your deposit base?
Yes, as we had previewed, we usually see deposit declines in Q2, and we did still see some outflows of non-interest bearing deposits in Q2, as you pointed out in your question. But, with the new production leaders that we've added in several of these markets now, we expect to see an increase in operating company deposits, which should help offset some of the outflow and we're expecting, stable to improving deposit base over the course of the second half of the year.
And it's from the line of Bill Dezellem with Tieton Capital Management.
I'd like to circle back to your recent comment here, you hired 14 new producers this year. Would you please go into a bit more detail about those? What's the net new number and are all of those 14 producers, or some of the support around producers?
If you look at our number of production people that we had, producers, last year, we're up 24% year-to-date versus our total last year. So these are net new producers. Now some of them, and this may be going too far down the rabbit hole, Bill, but some of them are vacancies that we've had, frankly, for years. We promoted our Boulder Market President to be a Regional President, and he's been very effective in that job. That's been a great move for us and for him.
But he's been doing double duty as the Boulder Market President. We were able to attract a very strong Boulder Market President who's 1 of those 14, just as an example, who is a longtime leader in the market that was beating another bank's efforts there. And so, as I said before, I mean, we just have really. We feel really good about these people that, we're bringing in now, including our new Market President. Boulder, and some of these other places where we've added senior people, I think, can really help move the dial for us.
And, Scott, you'd mentioned that some of these positions have been open for a long time. And is it a coincidence that a number of these longtime open positions are now being filled? Is it a culmination of just having worked on these, filling these positions for a long time or is there something loosening in the market with competitors that's leading to it being easier to hire, or those prospective candidates being more interested in making a move?
Yes, that's a great question. And I'm not 100% sure of the answer. I do believe that there is turmoil in our markets today that we really haven't seen over the last couple of years, and that that's creating opportunity to bring new people in. And if you look kind of anecdotally at each of the 14 stories, that seems to bear out. I'm not sure. I can tell you we had our semi-annual day long summit with all of our managers in the company here over the last day and a half.
And there's a very positive tone with those folks, the front office ones in particular. And I think, when I would say I think that there's a lot of turmoil in the market, and this is a good time to be, upgrading our talent, people seem to agree with that. I didn't get any pushback on that. So I do think it's more, in your question, the latter than the former. But we'll have to see how it goes the rest of the year. I mean, I'd love to be, 6 months from now talking about additional talent that we've been able to attract to build, our organic growth story in 2025.
I was just going to add, Bill, that I think First Western has a differentiated story to tell, too. And more and more our name is getting out there with talent, but also clients, prospects, as a place that, has high-quality relationships and that's on both sides of the equation on the client and the associate side. So as an add-on to that comment, I think that we're getting known a little bit more in the market as a great place to work as well.
Great. And then relative to mortgage, you've seen a nice uptick there. And the commentary in the market for the national market. And I recognize that you are not in, across the entire country, but is that the mortgage business is pretty stagnant and a fair amount of disappointment in terms of the numbers. Is what I am seeing with the national numbers just being skewed by, the normal seasonality? Or are you seeing something different in your marketplace, or maybe with specifically your MLOs that's leading to this uptick that you've seen, which kind of on the surface looks like a bit of a rebound for you?
Yes, I would say it's a lot more than -- a little bit of a rebound. It's been a really nice rebound and it's flipped us from, I think we had 6 months last year where we lost $250,000 or more in contribution. Again, we've had really nice earnings, I think $250,000 or more coming out of mortgages over the last 4 months now. So definitely, I mean, again, I'm not sure how much of that is national trends or trends in our market or whatever, but it's certainly happening in our market.
If you look at the reasons why, though, it's not just, manna from heaven here. This is, part of a concerted effort by us, to support our mortgage team and then build our mortgage team. And we've added 5 more MLOs, mortgage loan officers, in the first half of the year, which are bringing additional production. And that's going to accelerate in the second half of the year. Right when they're new, it takes them a little time.
And we also have just opened 2 new MLO loan production officers' in the last week or 2, I think now. 1 in northern Colorado, 1 in Southeast Wyoming that I think are going to be very helpful to those new folks in building their production. So I think it is a combination, Bill, of a little bit lower rates, a little bit better activity in mortgages. I think some nice work by the mortgage team here under Julie's leadership and then also, hiring these new MLOs.
Which we're continuing to do. That was one of the reasons for the office [indiscernible] attracting more MLOs.
And relative to your pipeline of new MLOs, do you anticipate being able to hire an equal number or more in the second half, so 5 or more?
It's hard to forecast and tell, but we have plans. Our goals are that, to do the same amount of new hires in the second half of the year. So we'll see how that plays out.
Great. Since we're talking about the pipeline of humans, let's jump to the 14 new producers on the non-mortgage side of the business. Do you think you can repeat that in the second half?
I don't know the answer to that. I think that, as I said, we've had this meeting here last day and a half of all the senior people. And I have definitely tasked our senior leaders to look for the top town in the market, and let them know we're open for business. I think a lot of banks are being cautious right now. And I think there's a lot of turmoil in our markets.
We have some new acquirers that have come to town that are going to have their deals approved, I think, over the next 6 months or something like that. And that just creates a lot of opportunity, with clients and top talent to be unsettled. And I want our people to be focused on that. And if that brings some more new people here, that would be terrific.
Our next question comes from the line of Ross Haberman with RLH Investments.
Just a couple of quick questions. I got on a bit late. I'm sorry if you mentioned this. The additions to your non-performers, these 2 pieces of collateral that you took back, did you say you think you're pretty well secured against those?
The 2 pieces of collateral, yes, is the short answer. The 2 piece of collateral is the same stuff we've been talking about for a year or however long it's been. And having them as collateral is a plus, because now you can control it and we can sell it. And so we control it. We're going to sell them.
I got it. Anything else in the criticalized or delinquent that you're concerned about today that you're losing sleep about or basically what we did, these are the main items which you laid out here?
Yes, so that's a great question. We talked a little bit about it in our prepared remarks and in the deck. But I think the headlines to me on that are that the top line number of whichever one you want to use, NPL or NPA, is not a number we're happy about. But it really is driven by the 1 credit that we've been talking about. We've been talking about of these 2 credits now for the last 6 quarters.
And 1 was written off. So any further news on that one is going to be positive, because it's going to be a recovery if there's news. And so, now we're down to 1. And that 1 we said was going to be a workout project. And it is a workout project. And it's proceeding more or less like we thought. And I would say that with a little luck we'll be out of that by the end of the year. And if not, maybe it spills a little bit into next year.
But generally I think that that is showing up in the numbers with a declining NPA trend. That went backwards in Q2, for the reason we talked about, where the value of the OREO that we brought on was higher than the loan balance. So that had the effect of increasing NPAs. But that's sort of a good problem in a way. And we'll sell that and the NPAs will come down and the NPLs will continue to come down as we work out that loan. Excuse me, Ross, 1 more point. All the other credit metrics that we follow are showing positive trends. So I think that was the other half of your question.
Could you tell me how much expense was incurred in terms of dealing with all these non-performing assets as part of the non-interest expense number for the quarter?
I don't know the total of that, but maybe Julie or David do. It's a non-0 number of time and effort that it takes on expense. And frankly, as we went through the second quarter, I think that did come down. As we go through the year, I think that will continue to come down. It's interesting, if you look at criticized and -- well we're looking where, I'll give you more data on the positive trends.
If you look at criticized and classified during the second quarter, they were below the prior 3 quarter ends and trending down. It was about $80 million total in 331 and about $60 million total in 630. So I think that, as I said, the underlying trends are strong. We talked in prepared comments about our past dues being down significantly over the last couple of years.
I was just wondering if that ongoing sort of expense is material. That's sort of what I'm getting at?
Yes, between our legal fees and other workout costs that come with those efforts, it was about $300,000 for the quarter.
It was down from Q1, David.
Absolutely.
That doesn't include the opportunity costs once you get off those non-earning, interest earning assets off the books and can deploy those into interest earning. So that's not a material number either. These are things that we're working heavily to get off the books, because of the, inherent costs of them.
It's actually a surprising number when Julie first pointed that out 6 months ago or something. If you get -- all those NPAs turned into interest bearing assets, it's a meaningful EPS uptick.
You had some, I think it was some new office or lending offices in Bozeman and in Arizona. How are they faring?
So they're full service offices. Bozeman office is making really nice progress. I mean, that market continues to be full of opportunity. Our Market President up there was here yesterday, for those meetings that I mentioned, and has a very positive outlook on the opportunity there. So that's going well. Arizona, it's really retooled the staff there over the last, what, Julie, 12 to 18 months, something like that.
And they're fully staffed in both of our locations there now with really strong people. Part of this new production hiring that we've talked about is in Arizona. And I think, the folks that are working on that here internally, the Regional President, the Market Presidents, the local producers seem very positive on the outlook. So Arizona's making money and it has for a long time.
So I mean, that's fine. We'd like to see it do a lot better. I always like to remind our leaders there that if we had the same market share in Arizona, actually in the Phoenix MSA that we have in our largest market share market, which is Fort Collins MSA, we'd be $4 billion bigger. So I do think that there's a lot of opportunity in Arizona for us, and I feel like we're building a team there that can realize that.
And just 1 last question. Any large expenditures expected in the next quarter or 2, I guess, besides the workout expenses for the non-performing assets?
I think the answer to that is no, but I can't resist the slow pitch here. And, Julie, I'll start and if you want to jump in and explain it better, please feel free. We have decided that our tech platform, is due for a pretty big rebuild. And that we can probably save money in the process, and after the process of doing that. So that involves changing -- the way our tech platform is hosted. And changing our use of the core, and modernizing the whole thing into the cloud, and using FinTech solutions. And to do that, we had to rebuild the foundation and that's 80% done, something like that, Julie?
The foundational build, yes.
The foundational build. And I think we're beginning to implement the middleware piece of it now, and we'll implement the bells and whistles part of it after that, which will be Q4 early next year, something like that. That'll start.
So I think, in future calls, we'll be talking about some of the efficiency gains there, and those will actually be definitely gains in terms of the efficiency, and effectiveness that we're delivering, to associates internally and to clients, but also I think some nice overall cost saves as well. Shaking her head, nothing to add.
And as I don't see any further questions in the queue, I will conclude the Q&A session and pass the call back to Scott for final comments.
All right, Carmen. Well, thank you and thanks for everybody for joining today. Just in terms of concluding comments, I would say, some of the headline numbers are challenging here. We're not happy with the EPS and efficiency ratio, the asset quality numbers, but the year is progressing largely as we had expected and indicated earlier and in line with our prior guidance.
In addition to the things we talked about, I mean, there's just a number of very positive underlying trends that we are seeing for the second half of the year. Certainly saw it in Q2. We saw it in June and we're seeing it so far in July as well, which we think are going to help us in Q3, Q4, and ultimately in 2025. And these include, some of the things we've talked about, expense control.
This includes new deposit relationships, improving fee income, asset quality improvements, better NAM outlook, new producers on board, favorable efficiency ratio trend, and bigger pipelines throughout the organization. So I think there is a positive story going forward. And we really thank everybody for dialing in today, for your interest and for your support for First Western. Thanks again. Have a great rest of your day.
And thank you all for participating in today's conference. You may now disconnect.