First Western Financial, Inc.

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.

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?

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?