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spk06: Good day and thank you for standing by. Welcome to the first Western Financial Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any free assistance, press star 0. I would now like to turn the conference over to the speaker today, Tony Rosi of Financial Profiles. Please go ahead.
spk03: Thank you, Chino. Good morning, everyone, and thank you for joining us today for First Western Financial's second quarter 2021 earnings call. Joining us from First Western's management team are Scott Wiley, Chairman and Chief Executive Officer, and Julie Korkamp, Chief Financial Officer. We will use the 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, including the impact of the COVID-19 pandemic. 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. Scott?
spk00: All right. Thanks, Tony. Good morning, everybody. As I imagine you've seen, yesterday we announced the signing of a merger agreement with Teton Financial Services. On our call today, we'll start with our usual review of the results for the quarter, and then we'll discuss the acquisition in more detail before opening up the call to questions. In the second quarter, we generated net income of $6.3 million, earnings per share of $0.76, an ROA of 1.22%, and an ROE of 15.17%, all of which are an improvement over our first quarter results. While our mortgage segment has underperformed our expectations, largely due to the housing inventory constraints in our markets, we're still delivering earnings growth and a higher level of returns due to the significant growth we generated in our private bank and commercial banking operations. On a year-over-year comparison, excluding our mortgage business, our gross revenue is up 27%, while our non-interest expense is up just 7%. In our non-mortgage segment, diluted pre-tax earnings per share are up 113%. With revenue growth exceeding expense growth by nearly four times, we've reached an inflection point realizing the operating leverage that we expected as we scaled the business, and we're seeing the positive impact in our profitability. Our successful new business development efforts are driving growth in nearly all parts of the business, including trust, wealth management, where fees are up 9% over the prior year, despite the revenue we lost through the sale of the LA fixed income team in the fourth quarter last year. As we indicated on our last call, we began the year with a relatively small loan pipeline, which impacted loan production loan growth in the first quarter. Over the course of the year, our loan pipeline has steadily built And during the second quarter, we returned to a more normalized level of loan production. Excluding PPP loans, which had a significant level of forgiveness in the second quarter, our total loans held for investment increased at an annualized rate of 34%. Notably, loan production was well-balanced across the portfolio with a higher level of loan production in each area than we had in the first quarter. We continue to have strong inflows of new low-cost deposits and a high-level liquidity, which enabled us to fund our loan growth, but we also intensely ran off some of the higher-cost, non-relationship deposit accounts. While this resulted in a decrease in our total deposits during the second quarter, we believe it was a good use of our excess liquidity that will support our net interest margin and net interest income going forward. And we have a strong deposit pipeline that will enable us to continue to fund the loan growth we expect the second half of the year with low-cost deposits. From an asset quality perspective, we continue to see very good trends. We had a decline in non-performing assets and once again had zero net charge-offs, which continues our long history of exceptionally low credit losses. Moving to slide four, our improved financial performance is not only driving earnings growth, but also strong increases in our book value and our tangible book value. In the second quarter, our book value per share increased 3.6%, while our tangible book value per share increased 4.3%. Turning to slide five, we've added a new slide to our deck that shows our pre-tax earnings per share excluding the mortgage segment. This reflects the performance of our private banking, commercial banking, and trust investment management businesses. Obviously, last year was an extraordinary year for the mortgage business, and we don't want that to overshadow the progress we've made in these other important areas. So this slide provides a better sense for the foundation we built that is producing a sustainable path to higher earnings and profitability. Our non-mortgage earnings are up from 28% of pre-tax EPS in Q2 of last year to 85% in Q2 this year. And we're on pace to meet or exceed 2020 EPS totals. In the second quarter, our pre-tax earnings per share in the non-mortgage segment increased 16% from the prior quarter and was the highest level in our history. Turning to slide six, we'll look at the trends in our loan portfolio. On a period and basis, our total loans held for investment increased 26.2 million from the end of the prior quarter, or 113.6 million when PPP loans are excluded. Loan production increased to 137.5 million which is more in line with normalized levels, while net loan payoffs declined significantly from elevated levels we saw in the prior two quarters. Loan production increased throughout the quarter, with June being our highest production month of the year so far, excluding PPP. We had growth across all of our portfolios, with the exception of cash securities and others, which was down due to the runoff of PPP loans. While we had balanced growth this year, As the economy continues to recover and loan demand increases, we expect commercial loans to resume growing at a faster rate than the rest of the portfolio. Moving to slide seven, we'll take a closer look at our deposit trends. Our total deposits decreased 128.8 million from the end of the prior quarter. As I mentioned earlier, we intensely ran off some higher cost public funds that were not relationship-oriented accounts. This accounted for approximately 75 million of the decrease in deposits. The remainder was largely attributable to seasonal outflows, rated tax payments, and runoff of PPP-related deposits. Moving to slide eight, we'll look at our progress in building our commercial banking platform, which is providing more loan diversification and improving our deposit base by adding low-cost transaction deposits. Commercial loans increased $104 million from prior quarter and $190 million from the prior year. Commercial deposits are down $158 million, largely due to the intensive runoff, the tax payments, and the PPP runoff. Turning to trust and investment management on slide 9, our total assets under management increased $276.5 million from the end of the prior quarter. The increase was primarily attributable to contributions to existing accounts and new accounts, as well as improving market conditions, resulting in an increase in the value of the assets under management balances. Our investment agency accounts increased by 111.3 million, or 5.8%, from the first quarter of 2021. During the second quarter, new clients accounted for approximately 28.4 million of our growth in assets under management. Now I'll turn the call over to Julie for further discussion of our financial results. Julie?
spk09: Thanks, Scott. Turning to slide 10, we have provided an update on our participation in the PPP program and how it impacted various metrics in the second quarter. We had approximately 91.4 million of PPP loans receive forgiveness in the second quarter. During the quarter, we funded an additional 5.4 million in PPP loans and have now submitted over 200 million in forgiveness applications to the SBA. This resulted in 103.1 million of PPP loans remaining on our balance sheet at the end of the quarter and 2.1 million of net fees remaining to be recognized. With increased loan forgiveness by the SBA in the second quarter, we saw a good amount of accelerated fee recognition, which resulted in a positive seven basis points of net interest margin impact. While we have plenty of liquidity resulting from our strong deposit inflows, we have continued to utilize the PPP liquidity facility to fund our PPP loan originations so that we can get the preferred capital treatment on these loans. Now turning to slide 11, we'll look at gross revenue. Our total gross revenue was unchanged from the prior quarter. although the mix of revenue was significantly different. We had a higher level of net interest income and trust and investment management fees, which offset the decline we had in net gains on mortgage loans. Turning to slide 12, we look at the trends in net interest income and margin. Our net interest income increased 9% from the prior quarter. The increase was due to higher PPP-related fee income and higher average balances of non-PPP loans. On a reported basis, our net interest margin increased 11 basis points from the prior quarter to 3.01%. When the impact of PPP loans and purchase accounting adjustments are excluded, our net interest margin was unchanged from the prior quarter. With the runoff at the higher cost deposits, we saw a three basis point reduction in our cost of funds from the prior quarter. With a portion of our excess liquidity utilized to fund the deposit runoff, our loan-to-deposit ratio increased to 94% at the end of the second quarter, up from 85% at the end of the prior quarter. Given the higher loan-to-deposit ratio and our expectation for a higher level of loan growth in the second half of the year, we believe our net interest margins should be flat to slightly higher over the remainder of the year, even though we continue to see some pricing pressure on new loan originations, which are coming on the balance sheet at yields lower than the existing portfolio. Turning to slide 13, our non-interest income declined 10.5% from the prior quarter. This was due to a lower net gain on mortgage loans, which was partially offset by higher trust and investment management fees. As Scott mentioned earlier, trust and investment management fees increased 9% over the prior year, despite the sale of our LA fixed income team during the fourth quarter of 2020. On an apples-to-apples basis, When excluding the fees generated by that team, our trust and investment management fees were up 17% over the prior year. On slide 14, we provided some additional detail on our mortgage operations. Total originations and mortgage locks, which is when the revenue is recognized, declined from the prior quarter due to lower demand for refinancing. And as Scott mentioned, while purchase originations have increased, They haven't met our expectations due to the limited inventory of housing in our markets. With the decline in refinancing, our mix of production is moving back towards the level we have historically seen, which is roughly 70% purchase and 30% refinances. With the lower revenue this quarter, we saw a decline in the pre-tax profit margin in this business to 31%. With lower volumes, we reduced our fixed expenses and our mortgage group on June 30th and expect them to be about 18% or $500,000 lower annualized going forward. Turning to slide 15 and our expenses. Our non-interest expense declined by approximately $108,000 from the prior quarter. The decline was attributed to lower salaries and benefits expense resulting from lower payroll taxes and incentive compensation. With the decline in non-interest expense, our efficiency ratio improved to 65.4% from 66% in the prior quarter. Given investments we are making, including more business development personnel, we expect a small increase in our expense levels to the $16 million to $16.3 million range during the second half of 2021. Turning to slide 16, we'll look at our asset quality. We saw positive trends across the portfolio in the second quarter. Our non-performing assets decreased by approximately 900,000 and declined to 16 basis points of total assets. The provision requirement for our loan growth was largely offset by improvement in asset quality, which resulted in just a 12,000 provision for credit losses in the quarter. This brought our adjusted ALLL, which excludes PPP and acquired loans, to 93 basis points of total loans at the end of the prior quarter. Now I'll turn this call back over to Scott.
spk00: All right, thanks, Julie. Turning to slide 18, I'm going to discuss the acquisition of Teton Financial Services that we announced yesterday. Teton, the holding company for Rocky Mountain Bank, is a commercial bank with a small wealth management business operating in three branches in western Wyoming. We currently operate two offices in Wyoming, and expanding our presence in the state is a key part of our long-term growth strategy. given the attractive demographics and favorable operating environment for our business model and unique approach to private banking. Our similar business models, core values, client-centric approach makes our two institutions highly compatible, which should make for a smooth integration and strong synergies as we leverage our collective strengths to further expand our presence in Wyoming. We've used acquisitions very effectively throughout our history to grow and diversify the bank. And with the addition of Teton, we'll further increase our scale and further improve our operating leverage while adding more core deposits, more diversification to our loan portfolio, and strengthening our commercial banking capabilities. Teton has built a very attractive franchise built on a low-cost deposit base and a banking team that generates C&I and real estate loans with attractive risk-adjusted yields that will enhance our net interest margin. And although we haven't modeled any revenue synergies, we believe that we will have opportunities to increase lending relationships with our larger scale, cross-sell our larger offering of products and services, particularly in the trust and investment management businesses. It's a transaction with attractive economics, as we expect it to be 5.2% accretive to earnings per share in 2022 and 7.4% accretive once the cost savings are fully phased in. with a very short tangible book value earned back of less than half a year. Turning to slide 19, this will be our 13th acquisition since founding the company in 2002. And this will bring us to 19 total offices, although we'll consolidate our two Jackson Hole offices during 2022. Turning to slide 20, we provided some additional information about Teton. It was founded in 1983 and it's grown to more than 400 million in total assets. Over the last seven years, it's been very effective at building its client base and generated a double-digit compound annual growth rate in both loans and deposits. And with the additional support and resources that we can provide, we believe we can further accelerate their business development and steadily increase our market share in Wyoming in the coming years, particularly as we continue to invest in the market and add more banking talent. Despite their relatively small scale, They're a nicely profitable company, generating an ROA of 1.32% and an ROE of 13.3%. They also have exceptional credit quality with non-performing assets representing just three basis points of total loans in Oreo. Turning to slide 21, we show a breakdown of their loan and deposit composition and how they'll impact our balance sheet. They have a well-diversified loan portfolio that has an average yield of 4.79%. When combined with our current portfolio, this will increase our average loan yield by about 16 basis points. Similar to First Western, they have a low-cost deposit base that will keep our cost of deposits at the same level. But with the higher average loan yield, we should see positive impact on our net interest margin, particularly as we increase loan growth and deploy some of the excess liquidity that they will provide. Turning to slide 22, we'll take a quick look at the transaction structure. The consideration for the transaction is approximately 76% stock and 24% cash. The stock we'll be issuing will provide a meaningful increase in our float. Since coming public with a relatively small float three years ago, one of our objectives has been to increase our float in order to add more liquidity to our stock and to expand the universe of potential investors. but to do it in a matter that's accretive to shareholders. And this transaction certainly does that. We believe the transaction multiples are very reasonable, particularly for a franchise of this quality. And we're expecting to close the transaction in the fourth quarter of 2021 or early in the first quarter of 2022. Turning to slide 23, we'll review some of the transaction assumptions. We're basing the earnings accretion estimates off the current consensus analysts' as well as Teton's forecast for its standalone financial performance. In our current earnings accretion estimates, we're including the impact of a $15 million sub-debt raise that we plan to do prior to the closing to support the acquisition. We're projecting cost saves of approximately 30% of Teton's non-interest expenses, with most of that coming from consolidation of the Jackson Hole locations and vendor and technology contracts. We expect to have 75% of the cost saves in place by the end of 2022 and 100% thereafter. In summary, we believe this is a very positive transaction that will expand our presence in Wyoming, provide increased scale efficiencies, add a talented team of bankers that we believe can steadily increase our client base in Wyoming with additional resources, support, and products that we can provide. It will also further strengthen our private bank and commercial banking operations, positively impact our level of profitability, and move us closer to making First Western a high-performing financial institution built on a foundation of attractive deposit base, exceptional asset quality, and growing sources of stable recurring revenue fee income. Turning to slide 24, I'd like to wrap up with some comments about our outlook. We believe we're well-positioned to live a strong second half for 2021. We continue to see strong in-migration trends into our markets, which is creating more business development opportunities for us. We're also adding more banking talent to help us expand to new markets that have similar demographics to the areas where our value proposition has already been successful in attracting clients to the bank. We recently built a small team in Bozeman, Montana market. which has similar characteristics to Jackson Hole and has become a popular destination for entrepreneurs and wealthy retirees. As with Wyoming, we believe Bozeman could be another nice growth market for us in the coming years. Our loan pipeline continues to increase and should lead to higher-level loan growth in the second half of the year. We also have a significant amount of unfunded commitments that could create another potential catalyst for future loan growth. We've made good progress in reducing our excess liquidity And with the higher loan growth we're expecting, we believe we hit the trough in our net interest margin in Q2, and it will be higher relative to what we saw in the first half of the year. We also have good momentum in attracting new clients in our wealth management business, which should continue to drive growth in our trust and investment management fees. We expect our mortgage activity to remain relatively constant in the third quarter before likely declining in the seasonally slower fourth quarter. With the revenue growth we're expecting and stable expense levels, we should see further improvement in operating leverage and additional increases in our levels of profitability. Looking a bit further down the road with the acquisition of Teton, we believe we're well positioned to deliver another strong year of organic and acquisition growth in 2022. And with Teton being a relatively small transaction that should have a smooth integration with we still have the ability to evaluate other potential transactions that can add value to our franchise, particularly on the fee income side. With that, we're happy to take your questions. Gino, please open up the call.
spk06: All right, so as a reminder, as a reminder, to ask a question, you will need to press star 1 on your telephone. To resolve your question, press the pound key. Again, that is star 1 on your telephone. Please stand by while we compile the Q&A roster. First question comes from the line of Brett Rabattin from Hub Day Group. You are now live.
spk07: Hey, good morning, guys. This is actually Ben Gerlinger. That's with Brett. Morning, Ben. Hey, I was wondering if we could just start more from just a higher level strategy perspective. I get that Teton is of checks all the boxes for you guys it's it's in market as great credit at the similar loan portfolio structure is there is there anything that they can bring to the table that would further complement uh first western as a whole and then kind of going off of that scott i know you said that you would continue to look for other acquisitions and other partnerships uh does this one need to close first or do you think you could see something teed up for this one actually as late 21, early 22?
spk00: Okay. Well, let's tackle the two-part question in two parts. First of all, strategic rationale. I mean, just a lot of reasons this makes sense, and you highlighted a couple of them. You know, this is a market we're already in, and we really like. We've done well there. Adding additional market share in Jackson, as well as entering these new markets in Pinedale and Rock Springs, where they have a nice, strong market position for are attractive. Of course, this is in a state where the demographics are attractive. Business landscape aligns well with our business model, and they have favorable trust estate tax laws. It improves our loan yields. It improves our cost of deposits. I think building a stronger core deposit base for us is a really attractive part of this. I know that people don't really value surplus core deposits today, but we all know that that goes in cycles, and, you know, I think having a nice, stable core deposit base as part of this is attractive. It's accretive to earnings. It's going to expand our ROA and our return on tangible common equity, and it has a quick earn back. So, you know, it's a really, I think, kind of a perfect deal. The people are really a nice fit with our folks. The cultures are very similar. They have a very client-centric focus, which is a big part of what we do here at First Western, and we have a similar loan mix. So overall, if we could find another one of those, we'd do it in a heartbeat. I think it's a really high-quality franchise, and we're thrilled to be partners with these folks. I think we're going to be able to add a lot of value, as I commented in my prepared remarks, too. In terms of future M&A activity, we have an active corporate development program. We've talked before on these calls that growth for First Western comes in three parts. We do organic growth, where we're trying to grow each office in the double digits every year. And now we're going to have 18 offices that are doing that. We also grow by expansion, so adding a couple offices this year. We talked about the Bozeman opportunity that we're launching in the second half of the year. And then the third thing is acquisition. Of course, we've done 13 of these acquisitions now. The last three in particular with the mortgages, the Simmons deal last year, and then this one I think are particularly dramatic kind of examples of the power of layering strategic acquisitions into our business model. So, you know, we do have an active corporate development program. These things can be lumpy. We have a number of things that we're working on that we hope will come and bear fruit over time. This one here, I met Alan. I called on Alan for the first time, the chairman of Rocky Mountain Bank and Teton, I think five years ago now. So these things take time, and you never know when things are going to happen. I think this is a smooth fit. Our priority is going to be to make sure that this gets done right. But, you know, we are always working on these things and looking for additional opportunities. I do think that we will continue to be active and hopefully find other opportunities for either later this year or next year. Does that answer your question, Brett?
spk07: Yeah, actually, it did. It was very helpful. And then my other question is, it might be more so geared towards Julie. If If you guys have a near-term outlook of slight margin improvement, and that's on an organic basis between loan growth and deposit management, if you add in Teton, which has a higher loan yield and similar deposit structure, which I know that you guys are going to be running off a little bit as you said in your prepared remarks, if you kind of add those two efforts, what you're doing organically, and then also cheat on it. It acts as a bit of a one-two punch for margin improvement. I was curious if you guys had anything modeled out in terms of what that combined lift might be for the first full quarter of integration.
spk09: Yeah, so I think you're absolutely right. With all the things we talked about on the call already regarding our expectations, our margin improvements, should see a little bit of a lift just organically. But then you'll notice in the combined entity with Rocky Mountain Bank, their loan yields are a little bit above ours, kind of on an average basis. And our expectation is for that to fold in nicely and to continue to grow at a little bit of a higher rate. So the combined entity should have a little bit more of a lift than we would see organically in our net interest margin and that interest income overall.
spk00: All right. We said in our prepared remarks, Brett, that with the combined portfolio, it would be about 16 basis point lift in the loan side. So I think that can help you model that.
spk07: Gotcha. So that did include the organic basis, what you're doing pre-deal close as well.
spk08: Yeah.
spk07: Gotcha. Okay. Sorry. That was my confusion. I'll step back in the queue. Thanks.
spk06: All right, next one on the queue is Matthew Clark from Piper Sandler. You are now live.
spk04: Hey, good morning. Morning. Morning. Just first one for me on loan pricing, I think coming out of last quarter, you guys talked about maybe giving in a little bit and getting a little more price competitive on the loan side and just wanted to know kind of weighted average rate on new loans for this quarter? And then follow-up question on growth in a second, but maybe start there.
spk00: Sure. Well, we did provide more flexibility on loan pricing to our front office folks. In reality, it's had only a minor impact on the prices we're realizing. You know, We have tried to be more competitive, but we're seeing competitors being very aggressive, and we're not following them down. We still do get a premium over market rates, and we never have and continue not to just win deals based on being the lowest offer. That's not really our value proposition. Do you have the information that he asked for, Julie, on that? relative loan pricing?
spk09: So on the average rate of the new loan production, quarter over quarter, we saw a little bit of a decline. So it was about 357 last quarter, and it was 346 this quarter. Obviously, there's always going to be a little bit of volatility based on the mix of the loan production. And in the second quarter, we saw one to four family was a little bit of a higher contributor to the mix. So that brought down the average rate. And as we continue to to produce the C&I lending and more of the commercial loans. I would expect that to bounce around a little bit.
spk04: Okay. And then it sounds like the pipeline's building. You spoke about growth stepping up. I assume you're not talking about stepping up from the growth rate on an annualized basis this quarter, but what are your thoughts on kind of overall core loan growth ex-PPP for the year? Are we still looking for kind of mid-double digits or high teens?
spk00: Yeah, I think if we step up too much more, we're going to be in triple digits, and that's probably not a good idea. But, yeah, I think year-to-date we're mid-teens, and I think that's where we expect to be in the second half of the year.
spk04: Okay. Great. And then just on the reserve came down a little bit just from the growth – And I think you're kind of back around pre-pandemic levels, maybe still above it. But what are your thoughts on just the overall reserve coverage and as you migrate to CECL going forward?
spk00: You know, we've seen such strong performance from a credit standpoint over the last 18 months or so that it's just getting hard to justify, you know, a bigger reserve number. We're trying to be conservative with it. And continuing, as you say, we're today up above, just for the PPP loans and the acquisition from the Simmons last year, we're still above where we were pre-pandemic, and the credit numbers are actually significantly better. So I think we're trying to grow into this reserve that we have, the allowance, and I would think that would be a reasonable expectation from what we know right now.
spk04: in uh in q3 and then assess where we are for q4 okay um and then just on the run rate of expense you did a good job of controlling expenses this quarter um but you guided up to 16 to 16-3 uh i think for the next couple of quarters did you just give us a sense for what's driving the bump up i assume it's new people but a little more color there would be helpful
spk00: Well, part of it's Julie's conservatism, so let me answer that. Julie, you want to go ahead?
spk09: No, you're exactly right. It's just a little bit added personnel with the added production, increasing incentive compensation accruals. We're looking to add in to our, you know, finally open up a Broomfield office. We've been talking about that and, you know, build out of that is occurring soon. and we should be in that rent space in the second half of the year. So there's a few of those expenses that are coming in that's just very slightly increasing that quarterly rate.
spk00: Future revenue drivers, all those things you listed.
spk04: Yep. Okay. And then just last one on the remaining PPP net fees left to be realized there.
spk09: $2.1 million.
spk04: Okay. Thank you.
spk00: Thank you, Matt.
spk06: All right, next one on the queue is Brady Gailey from KVW. You are now live.
spk02: Thank you. So I wanted to start with the acquisition. It looks like a perfect fit for you guys. How does it change, if it does change at all, the overall growth profile of the company? I know you guys are growing well into the double digits. Does Teton either pull that back or push that forward at all?
spk00: Well, You know, I think they have been growing in the mid-teens, and, you know, they know these three markets quite well. We're very familiar with the Jackson market and have seen nice growth there. So I don't really see any scenario where that slows down. You know, I think in our modeling that we've done for this, we've incorporated, you know, sort of their continued organic growth with our organic growth plus our the cost saves, or I guess minus the cost saves, make for some really great numbers here. And then, you know, I think there's a lot of revenue synergies here. You know, we have a number of capabilities. You know, we're going to be $7.2 billion in assets under management, and that just, you know, brings a whole bunch of products and services, bigger toolkit for our Wyoming folks to be able to sell in these three markets. And I think once, you know, once we get the – transaction completed and the conversion done and the transition completed, I think there's going to be more opportunity to grow in Wyoming beyond this. There's an interesting connection, and those of us that have lived on the East Coast, it's hard to believe, but Bozeman and Jackson are five hours apart, but culturally they actually have a lot of shared interests. There are many Jackson people that go to Bozeman or have moved to Bozeman. You know, there's a lot of cultural affinity between those two markets, and frankly, to Denver as well. So, you know, having a stronger presence in western Wyoming makes that jump into Montana as our fifth state, I think, a lot easier and lower risk. And frankly, you know, I think we'll accelerate our growth profile in both of those markets.
spk02: Okay. And then, Scott, you know, you talk about kind of continued operating leverage and profitability improvement from here. I mean, your ROA is already, you know, pretty nicely improved. I think your core ROA was about 80 basis points back in 2019. It's now running about 120 basis points. How much higher do you think you can get the ROA or, you know, is 120, you know, First half of the year, you did 120 basis points. Is that the right level, or how much higher could it possibly go?
spk00: I don't know, Brady. You know, we've seen historically the high-fee banks produce really high ROAs, and there's a reason for that, which is that you don't need capital to support those businesses. You need expertise, and we have paid for that expertise in our product groups, and frankly, we continue to build on that And there's just a ton of operating leverage with that. And when we went public three years ago, you only had 10 offices. Now we have 18 with this acquisition. You know, as you continue to leverage more of this expertise for generating fee income across more offices that are actually producing organic growth, I mean, there's just a lot of operating leverage built into that. And we said that at the IPO three years ago, and, you know, many of you on this call said, were supportive of that at that time, and frankly, you know, it was a little hard to see at that time, but many of you supported us on that, and I think it's really panned out exactly like we said. I don't see any reason it can't continue. Obviously, it's not going to continue forever at the rates that we've seen, you know, the 4X multiple that we've seen in the non-mortgage operating leverage improvement over the last 12 months, but I think it can continue in the two or three times range for the foreseeable future.
spk02: And, you know, we started to see mortgage, you know, normalized in the second quarter. You know, you're now a little under $4 million, you know, per quarter in fees in the second quarter. You know, how much more of a step down do you think we could see on the mortgage front? Or, you know, are we close to a, you know, kind of new run rate?
spk00: Yeah, we've been talking for, I feel like forever, I think it's probably been five or six quarters now, about our desire to expand our mortgage platform into our other markets outside of Metro Denver more successfully. And Arizona is a particular one that we focused on. And with the boom going on, as it has been for the last year or so, it's just hard to get people to move. we put as a priority this year to track some new purchase-oriented MLOs into our structure, and we're actually seeing some results there. I think we saw one new hire in Q2. We've got another one that I think is joining us here in Q3. We've got a number of other leads that we're working on possibly expanding into Arizona in a bigger way. So, you know, I hate to promise that because I feel like we've been talking about it a lot, but... But that's how we're thinking about it, Brady, is we'd like to replace a lot of those refi fees that we saw last year with purchase money fees. We continue to think this is a strategically important business for private banking. The really good private banks have strong mortgage operations that produce consistent purchase money revenues and create cross-selling opportunities, and we think that's a real advantage. opportunity for us that we continue to work on, notwithstanding the challenges of getting good people to move over the last 15 months or so.
spk02: Okay, got it. Thanks for the color and congrats on the deal. Yep, thank you.
spk06: Next one on the queue is Bill Desalem from Titan Capital. You are now live.
spk05: Thank you. Scott, you've referenced the housing shortage is causing troubles. with the ability to grow the mortgage business. Would you talk through how you anticipate this shortage ultimately being resolved and to what degree you will be able to benefit or not from that resolution?
spk00: Well, you know, I think that if you step back from the current situation, you know, 10 years ago, Denver and the other markets that we're in were relatively attractive from a price standpoint to a lot of other markets around the country. And so you had, you know, desirable quality of life here and relatively desirable cost of living. And that just isn't like that anymore, right? Denver and Fort Collins and resort markets we're in, Phoenix, Scottsdale, all gotten a lot more expensive as folks have – have realized the benefits of being here. So I think, you know, that's going to just economics 101, right, that's going to slow the in-migration and take some pressure off. You know, certainly it's interesting. I talked about the connection between Jackson and Bozeman. What we're seeing right now is lots of kind of the middle wealth, not the ultra-high wealth in Jackson, selling and moving to Bozeman. I personally know a handful of people that are doing that. One of them called me last night to congratulate us on this Rocky Mountain Bank deal, and she said, you know, I just sold my big house with great views in Jackson, and I'm buying another one, building another one in Bozeman with the great views and a similar style house. So, I mean, it's just interesting how, you know, economics really play out and people do that. So I think, Bill, that's ultimately what's going to happen here is I think where we're slow the immigration because it's going to be more expensive, and then obviously, you know, it takes a little time for builders and whatnot, developers, to fill the demand. So, you know, we'll see that all normalize here over time. Our focus, you know, I can't control a lot of that. What we can control is the team and what they're focusing on. And as I mentioned, you know, I think for us, bringing in high-producing, well-connected, purchase-oriented MLOs is the game and will allow us to not only continue to build our mortgage business, but provide that strategic benefit that I think is really important to us. And, you know, that isn't going to happen overnight, but it will happen over time, and we're seeing that.
spk05: And, Scott, taking your comment one step further, using that Bozeman example, which is characterized as a burgeoning, low-cost market, even though probably the people who live in Bozeman or have for 20 years would disagree with the statement. Do you see multiple markets throughout the West that would be Bozeman equivalent that historically haven't been on the radar but will be as some of your previously primary markets become more expensive and you see a shift to this next level of new markets?
spk00: Yes. I actually don't really, when you ask the question, I can't think of one that isn't. Like, you know, I think there's a ton of opportunity for us in Boise and, you know, Coeur d'Alene and over there going, you know, south into Utah from, you know, the Montana, Wyoming, Idaho area, I think makes a lot of sense for us. I mean, I think that, you know, We need to continue to build in our current markets, and then we can grow kind of incrementally into some of these other markets like we're doing. And I think that's a really nice, low-risk way for us to continue to build our franchise and reach further scale profitability. Great. Thank you. Yep. Thank you, Bill.
spk06: Again, if you would like to ask a question, please press star 1 on your telephone. Next one on the queue is Ross Haberman from RLH Investments. You are now live.
spk01: Scott, nice quarter, nice acquisition. I just have a couple of quick questions. A numbers question on the allowance, which was touched upon earlier. I think you were at 90 some odd basis points in total. Give me a sense of why you think that's adequate as opposed to something north of 100 or 120 basis points given your mix of loans today. Thanks.
spk00: Well, there's a short answer to that and a long answer. I mean, I think the short answer is that we look at our credit quality and the credit losses which are zero over the last several years and then we have to kind of scale the allowance to that and so short answer is I think the allowance is actually up and the credit statistics, every credit statistic you look at here is improving from already really good levels so I think that's the high level answer. The more detailed answer I'll take a crack at and Julie can can explain in more detail if you like. But for me, you know, you want to show a consistent approach to calculating allowance over time. And so, you know, we have this whole complex methodology that we go through with the credit team and the finance team, the accounting team, and the board. And, you know, we look at economic factors and we look at, you know, performance factors for the portfolio and all this other stuff. And that generates a number at the end of – what the allowance needs to be. As I said, we're kind of struggling to keep it where it is, to be honest with you. The analytics that we do suggest that we're very conservatively provided for in allowance today. Julie, is there other color you'd add in terms of how we calculate?
spk09: Specifically, we have the various factors that we look at. Obviously, we're pre-CECL still and won't be having that impact us for another year or two. But from a factors perspective, we take a hard look at those and the factors and economic environmental conditions that we are operating within in the markets and adjust those as we see fit and based on what's going on in our own portfolio. So all of those things come into play and we feel like the level of our allowance is appropriate for where we're at.
spk01: Okay. Just two other quick questions. Julie, on the PPP fees for the quarter, did I understand that slide right? I think it was slide 13 or 14. You earned $1.5 million in this quarter from the PPP forgiveness fees. Is that correct?
spk09: Forgiveness, net of interest, and the fees and the loan, PPP LF. funding costs, we had a net interest income impact of $1.5 million in the quarter.
spk01: Okay. And just on an apples-to-apples basis, there's $2.1 million more to go over the next couple quarters.
spk09: That's right. The 2.1 is apples-to-apples to the number on that slide. That's the amortization of fee income and deferred expense of 1.2. We don't try to predict the interest income from PPP in the funding cost, that net $300,000 that we had in the quarter. So apples to apples, we had 1.2 in quarter two, and then we have 2.1 remaining.
spk01: And just for Scott, just one or two more. Scott, in the Jackson acquisition, could you ramp up their loan growth quicker, one, because they can make bigger loans, and is there opportunity to open up additional offices there, or really, you're going to just keep what you have there, and Bozeman's going to be the next sort of stop in terms of the loan office or full-service office expansion?
spk00: Well, you're right. The borrowers that they're dealing with in Rocky Mountain Bank today, and certainly that we deal with in our office there, have borrowing needs that are higher than the legal lending limit of Rocky Mountain Bank. So that's going to create opportunity just by itself, again, not factored into our modeling for the acquisition purpose. But I can tell you, I've talked to the senior lenders there in Rocky Mountain Bank, and they're excited about the additional capacity that we bring for their existing clients, let alone new clients, as we go out and compete as a combined entity. In terms of the expansion, we have two offices in Jackson at closing. One, the Rocky Mountain Bank has a really great building right at the corner of 1st and Main, so we'll be moving our office, which is just a few blocks down the street, over to there after closing is our plan at the moment. So we'll go from two offices in Jackson to one, and I don't think we would want to add a second office in Jackson at I do think there are other markets in Wyoming that will be of interest, and our team there has extensive experience, actually not only in Wyoming but also in Montana. So I think that this is going to be a really nice bridge into further growth in Wyoming and our expansion into Montana.
spk01: And just one final question for Julie. Going back to your 5% accretion or maybe as much as 7.4%, what dollar per share – based to you starting from 22 with that number?
spk00: So we're using the analyst estimates for 22. That's why we didn't give you a 23 number in case analysts revise for 23 after our strong Q2 core growth. So the 5% is assuming 75% cost saves. And if we got the total 100% cost savings in 2022, it would be, I think, 7.4 or 7.5, yeah.
spk01: And that's based on a base of, what, about 250 a share or something around, starting from?
spk00: Analysts, I think the analysts are 299 for 22.
spk01: 22, so you're building the 5% off of that base, you're saying?
spk00: That's what that 5% is referring to, yeah.
spk01: I got it. Okay. Thanks, guys. Best of luck.
spk00: Yeah, thank you, Ross.
spk01: Thank you. All right.
spk06: I show no further questions and would like to turn it back to management for any closing remarks.
spk00: All right. Well, I would like to thank everybody for joining us today. Hopefully you see that we're making really great progress in our core business and also with this new acquisition and the merger partners that we'll have In West Wyoming, I think it's really an exciting time at First Western. So thanks again for dialing in. We look forward to speaking to everybody again next quarter.
spk06: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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