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spk03: The conference will begin shortly.
spk04: To raise your hand during Q&A, you can dial star 1-1. Good day, and thank you for standing by.
spk03: Welcome to the First Western Financial's third quarter 2022 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'll need to press star 1-1 on your telephone. You will then hear an automated message advising you your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tony Rossi with Financial Profiles. Please go ahead, sir.
spk05: Thank you, Norma. Good morning, everyone, and thank you for joining us today for First Western Financial's third quarter 22 earnings call. Joining us from First Western's management team are Scott Wiley, Chairman and Chief Executive Officer, and Julie Korkamp, Chief Financial and Chief Operating Officer. We will use a 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. Scott?
spk01: Thanks, Tony, and good morning, everybody. We delivered a very strong financial performance in the third quarter that was driven by our diverse lending platform that we built that enables us to pursue the most attractive lending opportunities at any given point in time. This has become particularly valuable in the current environment as higher rates are having various degrees of impact on loan demand across asset classes. In general, though, we continue to see healthy economic conditions and loan demand across our markets. which resulted in another quarter of strong, well-balanced loan growth. We had increases across most of our major portfolios, leading to 38% annualized loan growth in the quarter. There are many catalysts for our continued strong loan growth, including our stronger commercial banking platform, the new banking talent we've added, and our improved business development capabilities in Wyoming following the Teton acquisition. More recently, the bank has grown both in size and reputation, and we're effectively moving up market and working with clients with larger borrowing needs, which is positively impacting our loan production and loan growth. With the strong loan growth in the third quarter driving an increase in net interest income, expansion in our net interest margin, and a higher level of efficiencies, we were able to generate a substantial increase in net income and earnings per share despite the unfavorable environment that continues to impact our largest fee generating business. And our pre-tax pre-provision income increased by more than 50% from the prior quarter to $10 million. Most importantly, we're generating profitable growth as our return on average assets, return on average equity, and return on average tangible equity were all significantly higher than the prior quarter. We also continue to have exceptional asset quality with both non-performing loans and non-performing assets declining, as well as another quarter of immaterial amount of net charge-offs. Moving to slide four, we generated net income of $6.2 million, or 64 cents per diluted share in the third quarter, or 66 cents per share when acquisition-related costs are excluded. Our strong profitability, along with our effective management of the investment portfolio, has enabled us to continue driving increases in both book value and tangible book value per share. In the third quarter, book value per share increased 2.8% from the prior quarter, and tangible book value per share increased 3.4%. Over the past year, both metrics have increased by more than 13%, reflecting the strong value that we're creating for shareholders. Turning to slide five, we'll look at the trends in our loan portfolio. We had another quarter of strong loan production originating $289 million in loans. While this was down a bit from the prior quarter, the average rate on new production increased by more than 100 basis points, so we're still generating strong production without compromising on pricing. We're also seeing payoffs start to moderate, So more of our loan production is translating into net loan growth, and total loans held for investment increased $205 million from the end of the prior quarter. Our loan production was well diversified. We had increases across most of our major categories with CNI, CRE, construction, and one to four family residential portfolios all up between $30 to $100 million in the quarter. As with the prior quarter, Most of what we're adding to 1 to 4 family residential portfolio are jumbo arms that provide attractive risk-adjusted yields. Our loan production was consistent throughout the quarter, and our end-of-period loans were $114 million higher than our average loans during the quarter. So we have a nice tailwind going into the fourth quarter in terms of driving higher debt interest income. Moving to slide six, we'll take a closer look at our deposit trends. Our total deposits were essentially unchanged from the end of the prior quarter, with minor fluctuations in each category. In general, we've seen increased competition for deposits, which is impacting deposit gathering and the cost of interest-bearing deposits. Turning to trust and investment management on slide seven, our total assets under management increased decreased $359 million from the end of the prior quarter due to market declines, which more than offset the continued inflow we're seeing from new accounts. Now I'll turn the call over to Julie for further discussion of our financial results. Julie?
spk07: Thanks, Scott. Turning to slide eight, we'll look at our gross revenue. Our total gross revenue increased $2.4 million, or 8.8%, from the prior quarter. which is entirely driven by higher net interest income, resulting from our strong loan growth. This continues the strong growth trend we are seeing in our commercial and private banking operations. Excluding net gain on sale of mortgages, our gross revenue increased at an annualized rate of 41% from the prior quarter. Turning to slide nine, we'll look at the trends in net interest income and margin. Our net interest income increased 13% from the prior quarter, primarily due to higher average loan balances and an increase in our net interest margin. Our net interest margin increased 40 basis points in the third quarter to 3.75%. Excluding the impact of PPP fees and accretion on acquired loans, our net interest margin increased 47 basis points to 3.77%. Our net interest margin benefited from the increase in total loan balances. On an average basis, loans increased to 92.2% of our total earning assets in the third quarter, up from 83.7% in the prior quarter. We also had a 41 basis point increase in our average loan yields, partially driven by the higher pricing on new loan originations that Scott mentioned. as well as significant increases in the yield on our cash balances held with other financial institutions and the investment securities portfolio. This more than offset the 30 basis point increase we had in our cost of deposits. We also increased our balances of FHLB borrowings to help fund our strong loan production. All of the increase was in overnight borrowings, which is a more attractive funding source in the current environment and gives us the flexibility to quickly adjust our level of borrowings based on deposit flows and loan production. It will likely become more challenging to manage funding costs going forward. And although we expect continued increases in our yield on earning assets, we believe we've likely seen a near-term peak in our net interest margin. As a result, for the near future, we expect our margin to decrease from the level we had in the third quarter. Turning now to slide 10, our non-interest income decreased 7% from the prior quarter, primarily due to lower net gain on mortgage loans. The volume of walks on mortgage loans originated for sale declined 25% from the prior quarter. Approximately 94% of the originations were purchase loans, as we are seeing very little demand for refinancing given the rise in mortgage rates. The decline in net gain on mortgage loans was partially offset by slight increases in bank fees and risk management and insurance fees. Turning to slide 11 and our expenses. Our non-interest expense decreased 6% from the quarter, primarily due to a decrease in salaries and employee benefits driven by higher deferred loan fees resulting from our strong loan production. Lower incentive compensation. and a decline in health insurance and payroll taxes. Another contributor to the overall decline in expenses was the full quarter impact of system conversion and branch consolidation that occurred mid-May related to the Teton acquisition. We have now fully realized all of the cost savings that were projected for this transaction, and we now expect our non-interest expense to range from $20.5 million to $21.5 million in the fourth quarter of 22. Turning to slide 12, we'll look at our asset quality. We continue to see positive trends across the portfolio. Our non-performing loans declined two basis points to 16 basis points of total loans, while our non-performing assets declined three basis points to 14 basis points of total assets. We also had another quarter of minimal losses in the portfolio. We recorded a provision for loan losses of $1.8 million, which was driven by the growth and changes in the mix of the loan portfolio. This put our ALLL to adjusted total loans at 77 basis points, which was relatively consistent with the end of the prior quarter and reflective of our strong credit quality and the low level of losses that we have experienced in the portfolio. Now I'll turn this call back to Scott. Scott?
spk01: Thanks, Julie. Turning to slide 13, I'll wrap up with some comments about our outlook. While economic conditions remain healthy in our markets, we've always run the bank with a conservative approach. And given the potential for an economic slowdown, we believe it's prudent to make some adjustments in our underwriting and loan pricing to reflect the uncertainty of the economic outlook. We believe this will likely lead to some degree of moderation in our level of loan growth. However, with the diverse loan production platform we've built and the new banking talent we have added in Colorado, Montana, and Arizona starting to make larger contributions, we believe we can continue generating significant loan growth even with more conservative underwriting and pricing. I mentioned in the past that throughout the history of our bank, we've typically not had any problem attracting deposits, and we've typically run the bank with a loan-to-deposit ratio in the low to mid-90s. Over the past few years, we've focused on adding banking talent that can positively impact our loan production. We've been very successful in this regard, and the redeployment of excess liquidity into higher-yielding earning assets has been a key driver of earnings growth and the higher-level returns we're now generating. One of our priorities going forward is to shift some of that business development focus of the organization back to core deposits and so we can have a better balance between loan and deposit growth. This includes making some adjustments to incentive comp to give our bankers and profit centers more opportunities to benefit from bringing in more core deposits. As Julie mentioned, we expect our expense levels to be relatively stable as our near-term market expansion efforts in Colorado, Arizona, and Montana are largely completed. With our continued loan revenue growth, we should continue to realize improved efficiencies and deliver a higher level of financial performance for our shareholders while maintaining strong asset quality and capital levels, even if we see an economic slowdown, as we've consistently done during previous periods of economic stress. And with that, we're happy to take your questions. Norman, please open up the call.
spk03: Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from Brady Gailey with KBW. Your line is now open.
spk00: Hey, thanks. Good morning, guys.
spk01: Morning, Brady.
spk00: I heard the 4Q expense guidance of around $21 million, plus or minus. How do we think about the expense growth rate as we look to next year? All the banks are talking about especially wage inflation. How do we think about what the expense creep could be in 2023?
spk01: I think that's going to be an issue for us, too. We've been able to uh manage expenses pretty well this year i think and we're certainly looking at areas where we can manage expenses into 2023 but you know i think there's going up with the headline inflation numbers that are out there there's going to be a lot of uh wage pressure just built in and then you look on top of that at the competition that we see in our markets that um you know is uh continues to put wage pressure on us in terms of competitive pressure, I think. I think you're right. We're going to have some continued wage pressure next year. We've tried to get ahead of that somewhat by increasing our focus on associate engagement here. We launched this initiative in the middle of last year, so 18 months ago. where our number one business plan theme this year was people first. And so we've done a whole bunch of work on career tracking and training and engagement and associate activities and things just to try and drive more of a sense of belonging here that hopefully insulates us a little bit from pressure, wage pressure. We've also tried to build in some non-wage some more efficient adjustments to help the lower income folks here with the inflation pressures they're experiencing. And we've done some of that with managing benefits costs for them in 2023 and things like that. But overall, I think you're right. We're going to see some wage pressure next year.
spk00: All right. That's good color. And then when I look at how loan growth has outpaced deposit growth, especially the last couple of quarters. I mean, the loan to deposit ratio has had a big move here. It's now up to 109. So how do you think about those dynamics? I know you're guiding the kind of a moderation in loan growth, but how do you think about the loan to deposit ratio? Are you fine to have it at 110 to 115? Are you going to you know, actively work to get that number back to 100 or lower?
spk01: Well, for the short term, we'd like to see that back to 100. You know, for the midterm, you know, we've historically operated in the low to mid-90s, and I think, you know, we're comfortable there. But already, I would tell you, we're very focused on getting that number back to 100 and hopefully below.
spk00: And then finally, from me, you know, another quarter of really nice net interest margin expansion. You know, one theme that we've heard so far through earnings season is just that, you know, it feels like the NIM will expand at a decelerating rate. So how do you think about kind of the outlook from the NIM here? You know, do you think it goes up by a much smaller amount and kind of hits the max level at some point in the first half of next year?
spk01: No. I just would start this by saying that it feels to me like an extraordinarily difficult time to predict what's going to happen. The Fed's moving rates at a pace we really haven't seen in my career. of 30-some years. And then, you know, the competitive environment is really kind of strange, too. You know, we were talking right before the call started among the group here in the conference room that we have clients that are telling us that, you know, big national banks are still doing mortgages in the floors today. And when you have that kind of stuff going on, you know, it's just very difficult to predict, you know, the competitive response we're going to have to do to, for example, you know, attract deposits, retain deposits, attract the loan, the borrowers that we want, retain the borrowers that we want. So, you know, I think it's hard to predict. But having said that, just kind of, you know, being in a day-to-day, I think we've seen a lot of NIM growth this year, and we've had a lot of success with that. You know, as you said, we've gone from 80-something percent loan to deposit in Q1 to over 100 in kind of record time. And so if that moderates, which it's going to, we will make sure that that gets back down below 100. And if we continue to be competitive on deposit rates, which we will, I think we're going to see this NIM that we're reporting this quarter at a peak, I don't think we're going back down to where we were a year ago either. So, you know, I think the stronger numbers we're seeing today, we're going to continue to benefit from, but I think we're seeing kind of peak rates for the short term. For the longer term, you know, who knows? But definitely, I think that's going to moderate a little bit in Q4.
spk07: And if my voice holds out here, I can add a little bit extra, which, you know, I would add, Brady, that we don't really manage our NIM to achieve a particular outcome. It's an output of all the rest of the decisions we're making on the balance sheet. So as we think about how to generate appropriate risk-adjusted returns on capital, we're really pulling all of that into account. So looking at the longer-term approach, you know, we're not going to pass up on opportunities to add new client relationships, kind of back to your loan-to-deposit ratio question. even if we have to use some of the higher cost sources of funding in their term to fund the initial loans, and then work on bringing in the relationships over time. And, you know, you've mentioned that we've seen really high loan growth in the last two quarters. And our expectation is we'll be able to fulfill a bigger, broader relationship with those clients, you know, over the kind of midterm here. So I think we have a lot of good opportunities just in our current book to improve that. But overall, you know, we want to continue to be very profitable, bring in long-term clients. So even if that has a near-term negative impact on our NIM, you know, I think we're looking at what's in the best interest of the company for the long term and the shareholders for the long term.
spk01: And drives growing net interest income. Net interest income being the focus. Yeah, I think that's a great comment, Julie.
spk00: Got it. Thanks, guys.
spk03: Thank you. One moment for our next question.
spk04: And our next question comes from Clark Matthew with Piper Sandler.
spk03: Your line is now open.
spk06: I like that. I like the sound of that. I feel bad for asking questions just because I think we all want to save Julie's voice. But I'll try to ask a couple of brief ones for Julie. Do you have the spot rate on deposits, either interest-bearing or total, at the end of September?
spk07: Yeah, at the end of September, and I appreciate that, but I think I'm doing okay. At the end of September, our spot rate for deposits was 99 basis points.
spk06: Okay. Okay. And I guess, have you talked internally about, you know, your thoughts on the cycle beta, assuming we get, you know, 450, 475 of total move in fed funds, you know, where you could shake out. I know it's pretty fluid and pretty competitive, but when you think about last cycle, obviously it's a lot different this time. I would assume we take the over, but any commentary around deposit betas this time around in total?
spk01: Well, we do have something of an advantage in looking at deposit betas because we know that we have a certain amount of our deposit portfolio that has more or less 100% beta on it, like our trust deposits that we have to pay a rate that's competitive with money market mutual funds. And so there's a lag of a month or so before that catches up, but it's typically, you know, pretty much 100%. And then we know, you know, the DDAs and then, you know, the other interest bearing deposits, it's really, you know, competitive pressure. And what we've tried to do this quarter, this past quarter, is get ahead of that a little bit and build in some higher rates. We were feeling like if the clients are seeing the Fed tightening rates and they're still seeing 0.01% on their money market accounts, they're probably not going to be happy with that. And then we're going to have to adjust a lot. So we did a lot of exception pricing in Q2 and Q3. And in the latter part of Q3, we made some adjustments across the board that show up in that. spot rate that you asked about. So, I'm hopeful that we're going to see that third part I described, the deposit beta on the interest-bearing accounts that are not 100% and not interest-bearing, kind of moderate in Q4, but we'll see. That's why I said the competitive pressure is really important, and frankly, I find it hard to predict today. We're a little surprised what some of the competitors are doing.
spk06: Okay. And Julie, that 99 basis points was total or interest-bearing? I'm sorry.
spk07: It was total.
spk06: Okay. Okay. And then the weighted average rate on new loans, I think from the release, is up over 100 basis points. Do you have that rate for the quarter?
spk07: Well, so our pipeline loans for the fourth quarter, when looking at that, they're in the high sixes, low sevens right now, and they're in a float to close situation. So depending on when they close, you know, and when the next rate hike happens, they could go even higher. If you look at our NIM for September alone, it did dip down. 3.61 was what September's standalone NIM was. but that doesn't have the full effect of some of the changes Scott just mentioned in it on deposit pricing that we added later in the month.
spk06: Okay. Got it. Okay. Good. And then just on the borrowings, I think you added in the quarter, I think you may have mentioned there overnight, but it sounds like three, you know, three and a quarter plus on new borrowings. Is that And do you feel like you might add more or do you feel like with the slower loan growth, you know, you might be able to pull in some wholesale deposits and mitigate that?
spk07: Yes, it's overnight. The borrowing basis overnight, you're right, about three and a quarter, just under three for dividend adjusted. But, you know, our whole focus right now is bringing in core deposits. So as we are able to do that, we'll be able to pay down those borrowings and or any of that kind of brokerage. We'll just manage accordingly to what makes the most sense for us. But our core focus is bringing in deposits based on the loans that we just added in.
spk06: Great. Thank you.
spk01: Thank you. Thank you, Matt, unless we have to start calling you Clark now.
spk03: As a reminder, ladies and gentlemen, that's star one to ask your question. One moment for our next question. Our next question comes from Bill DeZelle with Titan Capital. Thank you.
spk02: I had a couple of questions. First of all, relative to the mortgage loans held for sale, it was more than cut in half sequentially at $13 million versus $26 million last quarter. Would you discuss just the dynamics behind the scenes with that? And then secondarily, the construction and development loans were up a fair amount sequentially and
spk01: and provide your thoughts and color on that if you would also please sure well the loans held for sale are you know sort of 30 days of activity more or less of the production of the mortgages that are going to the secondary market so when that drops off a cliff we're going to see the loans held for sale drop so that's um that's all that is um the construction lending You know, with the housing shortage here, we're seeing a lot of interest in that, and we launched a one-close mortgage product, construction product in Q3 that's had a lot of interest in it, and it's a profitable product for us and a good product for playing offense and attracting our type of clients with. So we have seen some growth in that. I think some of the growth that showed up in the numbers in the quarter was actually from construction loans made in prior quarters that are now funding. I think the things that we probably closed in Q3, I don't know that they really would have balances at the end of the quarter, but we have seen some nice growth in our CNI approved credits that are now showing up as funded credits. Great. Thank you. Thank you, Bill.
spk03: Thank you. And I'm currently showing no further questions at this time. I'd like to hand the conference back over to management for any closing remarks.
spk01: Thanks, everybody, for dialing in. And Julie, thanks for powering through your lost voice there. Good job. I'm really proud of the work that the First Western team has done this year. And I think it really shows up in the numbers again in Q3. We've had strong growth in core revenues and core earnings. We brought our legacy RMB team and clients on board and converted them. We converted our core trust investment management system last quarter. onto a new state-of-the-art system that's much more flexible and powerful for internal production and for clients. We've seen nice operating leverage gains with efficiency ratio back in the right trend the way that we had anticipated. We do have some work to do growing our non-interest income and getting our loan deposit backwards would be managing our NIM and expenses. But overall, you know, we're very well positioned with a strong team and strong capital and good earnings outlook for Q4 and into 23. So thanks so much for dialing in. We really appreciate your interest in First Western.
spk03: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
spk04: The conference will begin shortly.
spk03: To raise your hand during Q&A, you can dial star 1 1.
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