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spk02: Good day and thank you for standing by. Welcome to First Western Financial First Quarter 2023 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. 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 of Financial Profiles. Please go ahead.
spk00: Thank you, Amy. Good morning, everyone, and thank you for joining us today for First Western Financial's first quarter 2023 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 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. 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 gap to non-gap measures. And with that, I'd like to turn the call over to Scott. Scott?
spk01: Thanks, Tony. Good morning, everyone. Because of the prudent approach we've always taken to risk management, First Western's been a consistent source of strength and stability for our clients, and that was never more true than over the past couple months. And at the same time, we've never benefited more from the strong relationships we've built with our clients. As part of the ordinary course of business, we're in regular contact with our clients so that we can stay appraised of any changes in their business or personal lives and ensure that we continue to meet their financial needs. So when the recent bank failures occurred, we didn't have to do anything other than what we usually do, which is continue to remain in regular contact with our clients. Our clients know that we're a conservatively managed financial institution, So there was essentially no concern expressed by our clients. And due to the deep relationships we built and the value our clients place on the service and expertise that we provide, the stickiness of the deposit base we built was never more apparent. Earlier in January, earlier in the quarter in January, we had some liquidity events among our clients that resulted in some meaningful but routine deposit outflows. But in both February and March, we had net deposit inflows, which speaks to the stability of the deposit base we've built. In fact, we've been the beneficiary of the recent turmoil in the bank industry, with many new clients coming to First Western as they wanted to move their banking relationship to a stronger financial institution. During March, we added $42 million in new deposit relationships, while only $5 million of deposit relationships left the bank While we saw good stability in the deposit base, we took some balance sheet management actions that had an impact on our level of profitability in the first quarter, but we believe were prudent from a risk management standpoint. This included holding a higher level of cash on the balance sheet. Our level of FHLB borrowings also increased, but this was not related to issues being experienced in the banking industry. We had already decided to increase our borrowings as they provided a less expensive source of funding given the extremely competitive deposit pricing environment that we're seeing. But as I indicated earlier, on a short-term basis, we've chosen to hold most of the increase in borrowings in cash rather than deploy them into loan fundings or some new purchases of investment securities. We also chose to sell some non-relationship loans, most of which were added through acquisitions. These were loans where we had no deposit relationships and they were relatively low yielding. While the sale of these loans did have an impact on our profitability this quarter, we felt that the benefit we would get in terms of capital and liquidity was more important in the current environment while also improving the risk profile of the loan portfolio. Because of our prudent approach to risk management in a conservative manner in which we run the company, the fundamentals of our franchise remain extremely strong. We have $1.5 billion available in liquidity, which is 1.7 times our level of uninsured deposits, which represents just 37% of our total deposits. We have a diverse client base with no meaningful industry concentrations. Our asset quality remains exceptionally strong with an immaterial level of losses, and we have a well-diversified CRE loan portfolio with minimal exposure to non-owner-occupied office properties where there's a broader concern. I'll provide some additional information about our CRE portfolio later in the call. And we also have a relatively small investment portfolio, so we don't have anywhere near the high level of unrealized losses that some banks have experienced. At the end of the first quarter, our held to maturity securities represented just 2.7% of total assets. and unrealized losses were less than 3% of our total shareholder equity. Moving to slide four, we generated net income of $3.8 million, or 39 cents per diluted share in the first quarter, in spite of some significant industry headwinds. While there are small non-operating items every quarter, the combination of the loan fair value mark, severance payments, and the small loss on loans sold add about 6% per share in impact in Q1. Over the past year, we've seen increases in both book value and tangible book value per share, despite the impact to capital resulting from our adoption of CECL at the beginning of the year. Turning to slide five, we'll look at the trends in our loan portfolio. Our total loans were about flat with the prior quarter, but this includes the 41 million of non-relationship loans that we sold in the first quarter. Excluding those loan sales, our total loans would have increased at an annualized rate of about 6%. The largest increase came from our CRE portfolio. Most of those are multifamily properties in markets where there's supply constraints and high demand for housing, and we believe they're very strong credits. Given our more selective approach in light of the economic uncertainty, our total volume of loan production was quite a bit lower than what we had generated in recent quarters. Most of what we're generating now are C&I and residential mortgage loans that we believe present the most attractive risk-adjusted yields in the current environment. With our discipline on loan pricing, we continue to see higher rates on new loan production with the average rate on new loan production increasing by 125 basis points from the prior quarter. Moving to slide 6, we provided some additional information about our CRE loan portfolio. This portfolio is well diversified and conservatively underwritten. Multifamily loans represent the largest percentage of any property type in that portfolio at 16% of total CRE loans and only 5% of total loans. We've never been a big lender for office properties, and as a result, office loans comprised just 11% of the CRE portfolio and only 3% of total loans. Within that office portfolio, we have no exposure to properties in major metropolitan areas, including downtown Denver, no exposure to buildings over seven stories, and the majority of the properties are located in suburban areas with tenants, in recession resistant industries like medical practices our average loan size among the office loans is just 2.3 million over the past 10 years we've not incurred any losses in our office loans and we have been we have a minimal amount that are maturing through the end of 2024. we're also very productive in our approach proactive in our approach to portfolio management and we review current cash flows, vacancy rates, and rental rates at least on an annual basis and more frequently if warranted so that we can identify any deteriorating trends at the earliest possible time. Due to the conservative underwriting and our proactive approach to portfolio management, our CRE portfolio continues to perform very well. At this point, we've not seen any concerning trends. Moving to slide seven, we'll take a closer look at our deposit trends. Our total deposits were down just slightly from the end of the quarter, but we're about 5% higher than the prior quarter on an average basis. As I indicated earlier, the liquidity events experienced by our clients resulted in our total deposits declining 71 million during the month of January, and then we had net inflows in February, March, and again in April. The mix of deposits continues to reflect a trend of clients moving money out of non-interest bearing accounts and into interest bearing accounts in order to get a higher yield on their excess liquidity. We also continue to add some time deposits in order to lock in fixed rate funding that we believe will enable us more effectively to manage our deposit costs going forward. Turning to trust and investment management on slide eight, we indicated in our last earnings call we've allocated some additional resources to business development in trust and investment management. We're seeing the positive impact from these efforts in the combination of inflows for new clients, market performance, which resulted in $275 million increase in assets under management during the first quarter. Notably, we had increases in all five of our product categories. Now I'll turn the call over to Julie for further discussion of our financial results. Julie?
spk03: Thank you, Scott. Turning to slide nine, we'll look at our gross revenue. Our gross revenue declined 10% from the prior quarter due to lower levels of both net interest income and non-interest income. However, due to the higher average asset yields and the growth we have had in our balance sheet, On a year-over-year basis, our interest income increased 74.6%, but our net interest income increased 5.8% compared to the first quarter of 2022. Turning to slide 10, we'll look at the trends in net interest income and margin. Our net interest income decreased 10% from the prior quarter due to an increase in interest expense resulting from a higher average cost of deposits, as well as the impact of holding higher cash balances in March. Our net interest margin decreased 37 basis points to 2.93% due to the higher average cost of deposits and excess liquidity we carried in the quarter. Much of the funding we have added is in the form of borrowings and time deposits, are short-term and or callable, which gives us the flexibility to quickly make adjustments in our funding mix as market conditions change. Turning to slide 11. Our non-interest income decreased 11% from the prior quarter, primarily due to lower bank fees and risk management and insurance fees. The lower bank fees were partially attributed to a decrease in prepayment penalty fees, while the decline in risk management and insurance fees primarily is typical following the seasonal bump we see in the fourth quarter. The decline in these areas offset a 6% increase in trust and investment management fees and higher net gain on mortgage loans. The increase in net gain on mortgage loans is primarily attributed to the increased loan production we are seeing from our expanded team in Arizona, which more than offset the seasonality we typically see in first quarter production in Colorado. The volume of locks on mortgage loans originated for sale increased 41% from the prior quarter, with 96% of the originations being for purchase loans. Turning to slide 12 and our expenses. Our net interest expense increased 3% from the prior quarter, primarily due to the seasonal impact of higher payroll taxes, as well as lower deferred compensation due to the decline in loan originations. In addition, the higher FDIC assessment rate now in place contributed to the increase in non-interest expense. These increases were partially offset by a decline in technology and marketing expense. As part of our regular review of expenses, we have recently made some adjustments throughout the organization in areas such as staffing, software spending, and real estate, all of which reflect the changing nature of our business and areas we no longer focus on growing. A portion of the cost savings from these adjustments will be reinvested into other areas of the company. Overall, these adjustments will help us to maintain expense control and should result in our non-interest expense being in the range of $19 million to $20 million per quarter for the remainder of 2023. Turning to slide 13, we'll look at our asset quality. On a broad basis, the loan portfolio continues to perform very well as our non-performing assets were essentially unchanged from the end of the prior quarter. And we had another quarter of minimal losses. Following the adoption of CECL at the beginning of the year, our allowance for credit losses stood at 81 basis points at March 31st. This is down three basis points from our CECL day one coverage as we had a small reserve release during the quarter due to changes in loan volumes and the mix in the portfolio. Now I will turn it back to Scott.
spk01: Thanks, Julie. Turning to slide 14, I want to take a moment and review our strong track record of value creation for our shareholders. This slide shows our trend in tangible book value per share since our IPO in 2018. As you can see, we've consistently increased our tangible book value per share throughout a variety of economic and estate cycles, including the pandemic and then the higher rate high inflation environment we've seen over the last year. We believe this reflects our strong execution on our strategies for generating profitable growth while prudently managing our balance sheet, as well as our commitment to protecting shareholder value by not doing capital raises that are dilutive to shareholders and being disciplined in our acquisition pricing. As you may recall, our acquisition of Teton Financial Services was immediately accretive to tangible book value per share. Our core wealth management earnings have also shown great progress in recent years, although they too have come under pressure in the last two quarters. Turning to slide 15, I'll wrap up with some comments about our near-term outlook. While the banking system remains under stress, and there's a high degree of economic uncertainty, we're going to continue to prioritize prudent risk management, even if that impacts our level of profitability in the short term. We'll also continue to focus on discipline expense control so that we can realize more operating leverage as we continue to grow our balance sheet. We recently completed a review of operating expenses and made adjustments that will reduce our non-interest expense by approximately 6.9% or $1.4 million per quarter from the level expense we had in the first quarter. When we started the year, we knew it was going to be a challenging year to forecast, and it's only gotten more difficult since. In particular, loan growth is particularly hard to forecast in the current environment, given that we're being very selective in the new credits that we originate, and overall demand is lower due to higher interest rates, and we see more clients reconsidering investments they were planning to make. We believe that we'll have some level of loan growth this year, but there's now a wider range of possible outcomes.
spk04: Please stand by momentarily. And momentarily your call will begin very shortly.
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