First Western Financial, Inc.

Good day and thank you for standing by. Welcome to the first Western Financial First Quarter 2025 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. Please go ahead.

Thank you, Daniel. Good morning, everyone, and thank you for joining us today for First Western Financial's First Quarter 2025 earnings call. Joining us from First Western's management team are Scott Wiley, chairman and chief executive officer, Julie Corkamp, chief operating officer, and David Weber, chief financial officer. We'll use a slide presentation as part of our discussion this morning. If you've not done so already, please visit the events and presentations page of First Western 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-GAP measures, which are intended to supplement but not substitute, for the most directly comparable GAP 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, and good morning, everybody. As expected, during the first quarter, we generated a significant improvement in our level of profitability. This was driven by positive trends in many areas, including expansion in our net interest margin, a higher level of non-interest income, partially due to a higher level of mortgage banking income, resulting from lower rates, and the positive impact of the MLOs that we've added in the past few quarters, an increase in -interest-bearing deposits, solid loan production, and well-managed expenses. We continued to maintain a conservative approach to new loan production with our disciplined underwriting and pricing criteria. However, as a result of the additions we've made to our banking team over the past several quarters, we had a solid level of loan production, which was well-diversified across our markets, industries, and property types. We also continued to have success in our deposit-gathering efforts, adding new clients and seeing inflows from existing clients that resulted in an increase in our -interest-bearing deposits in the quarter. In addition, we were able to successfully lower our deposit costs, which contributed to the expansion we saw in our net interest margin. We saw generally positive trends in asset quality during the first quarter, resulting in a decline in our MPAs to total assets. We also had a successful resolution of our two largest Oreo properties, which we sold for a net gain. As a result of our stronger financial performance and balance sheet management strategies, we had a further increase in our tangible book value per share. Moving to slide four, we generated net income of 4.2 million, or 43 cents per diluted share in the quarter, both substantial increases from the prior quarter and continuing the recent positive trend. With our prudent balance sheet management, our tangible book value per share increased by .6% this quarter. Now I'll turn the call over to Julie for some additional discussion of the balance sheet and trust and investment management trends. Julie?

Thank you, Scott. Turning to slide five, we'll look at the trends in our loan portfolio. Our loans held for investment were essentially unchanged from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production, but with the higher level of productivity we are seeing from the additions to our banking team, we have made over the last several quarters, we are seeing a solid level of new loan production. New loan production was 71 million in the first quarter. However, this was offset by 72 million in loan payoffs in the first quarter, resulting in the slight decrease we had in total loans. Most of our new loan production is coming in the areas of commercial loans and residential mortgages where we are also getting deposit relationships. But we continue to see strong CRE loan demand as borrowers are looking to take advantage of lower property valuations. We continue to be disciplined and we are maintaining our pricing criteria. This resulted in the average rate on new loan production being .89% in the quarter, which was higher than the average rate on our loan payoffs and resulted in the turnover in our loan portfolio being accretive to our average yield on loans. Moving to slide six, we'll take a closer look at our deposit trends. Total deposits were up slightly from the end of the prior quarter. We saw inflows of non-interest bearing deposits from existing clients, as well as new relationships that were added in the quarter. This was offset by a decline in time deposits as we have reduced rates on maturing CDs, which resulted in some runoff, which we are replacing with lower cost deposits and driving an improvement in our deposit mix. Given the nature of our client base, we typically see some outflows of deposits during the second quarter, largely related to tax payments. So it's possible that we see flat or lower deposit balances in the second quarter, which then tend to build back up over the second half of the year. Turning to trust and investment management on slide seven, we had a 144 million decrease in our assets under management in the first quarter, which was driven by net withdrawals primarily in fixed fee accounts. Over the past year, our AUM has increased nearly 1%. Now I'll turn the call over to David for further discussion of our financial results. David?

Thanks, Julie. Turning to slide eight, we'll look at our gross revenue. Our gross revenue increased .4% from the prior quarter as we had increases in both net interest income and non-interest income. Turning to slide nine, we'll look at our trends in net interest income and margin. Our net interest income increased .6% from the prior quarter due to an expansion in our net interest margin. Our NIM increased 16 basis points from the prior quarter to 2.61%. This was due to a reduction in our cost of deposits along with an increase in our average yield on interest earning assets. And our cost of deposits at the end of the quarter was lower than the average rate for the quarter, which will provide a benefit to margin in the second quarter. With the continued reduction we expected to see, we expect to see in our cost of funds along with the redeployment of cash we generated from the sale of the OREO properties into interest earning assets, we expect to see continued growth in net interest income going forward. We will also benefit from $8 million of sub-debt with a cost of .125% that we redeemed on March 31st, which eliminated a high cost of funds going into the second quarter. Now turning to slide 10, our non-interest income increased by approximately 900,000 from the prior quarter in spite of seasonally higher insurance fees in the fourth quarter. This was due to an increase in gain on sale of mortgage loans along with the net gain we recognized on the sale of our two largest OREO properties. Now turning to slide 11 and our expenses. Our non-interest expense decreased 1 million from the prior quarter, which was primarily due to a $1.1 million write down of an OREO property that we recorded in the fourth quarter. All other areas of non-interest expense were relatively consistent with the prior quarter as we continue to tightly manage expenses while also making investments in the business that we believe will positively impact our long-term performance. Although we did see the usual seasonal increase in first quarter salaries and benefits expense due to the reset of accruals for payroll taxes. Now turning to slide 12, we'll look at our asset quality. As Scott indicated earlier, we saw generally stable trends in the loan portfolio in the first quarter with a decline in non-performing assets. We had a small amount of charge-offs in the quarter, which were entirely related to one loan we had from the Main Street Lending Program, which had unique issues and is not reflective of broader trends we are seeing in the portfolio. We also saw a positive shift in the mix in our loan portfolio towards loans with lower historical loss rates, which resulted in a small reduction in our allowance coverage. Now I'll turn it back to

Scott. Scott? Thanks, David. Turning to slide 13, I'll wrap up with some comments about our outlook. While we're generating improved profitability, we're still not satisfied with this level of performance. Over the past couple of years, we focused on improving in a number of areas of the company, and as a result, we're starting to see some solid trends in asset quality, net interest margin, -to-deposit ratio, and overall efficiencies as we improve processes throughout the organization. We expect to see a continuation of the positive trends we're seeing. While we also redeploy the cash from the sale of our two largest oriel properties into interest-earning assets. Our loan pipeline continues to be healthy, and we've not yet seen any impact on loan demand from the tariffs. So we anticipate using most of this cash to fund new loan production. However, given the level of uncertainty regarding the macroeconomic outlook, it's possible loan demand could be impacted later this year, and loan growth for the year could be lower than our initial expectations. We've also made a priority of growing our trust and investment management business. As part of this effort, we've added a new head of wealth planning who joined us from Goldman Sachs, which we expect will help this business make a greater contribution to our future growth and profitability. The positive trends we're seeing in a number of key areas are expected to continue, and we believe should result in steady improvement in our financial performance and further value being created for our shareholders as we move throughout the year. With that said, we're happy to take your questions.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from Matthew Clark with Piper Sandler. Your line is now open.

Hey, good morning. First question, just around your loan yields. They were up link quarter. I know new productions are creative to loan yields, but I assume there was some interest recoveries in there. Can you isolate any interest recoveries on a dollar basis for us?

Yeah, we saw a little bit higher amortized loan fees through the quarter that helped. They can be lumpy, right? So we did see a little bit higher in terms of amortized loan fees through the quarter that really helped kind of push that up a little bit, as you mentioned. I think it was somewhere in the $200,000 range.

Okay, and how does that compare to maybe a more normal quarter just so we can normalize it going forward?

Sorry, that was $200,000 higher than we typically see in the quarter is what I meant.

Okay. Sounds good. And then just on the margin, if you could give us the spot rate on deposits at the end of March and the average margin in the month of March, normalizing for any kind of unusual amount of money. Is that unusual? Maybe the uptick in the... Yeah,

March, we did have... March was a little bit unusual just given those dynamics. So from a cost of deposit standpoint, the spot was $298, cost of funds was roughly $305. From a NIM perspective, Matt, we think NIM will be relatively flat for the second quarter due to expected runoff in the deposit portfolio that we typically see in the second quarter driven by tax payments. So we're thinking NIM will be flattish in the second quarter and then we'll have opportunities for further expansion in the second half of the year, getting us back to that exit NIM that we talked about last quarter.

Okay, that was 273-ish, I think.

Yeah, yeah, getting back into the 270s, yep.

Okay, okay. And then just on the non-performers that are left on the balance sheet, call it 70 basis points of loans in Oreo. Can you give us a sense for what might be resolved here shortly, just kind of your updated thoughts on the resolution process of those non-performers this year?

I think there's one Oreo left and we expect to sell that over the course of this year sometime. I think that that's what is typically the seasonal market in Aspen, notwithstanding the grand sale in Q1, but I think selling that over the course of the summer would be a reasonable expectation at this point. And then of the MPLs, there's really one substantial one in there that we've talked about before, which is a wealthy guy that's stopped paying us and is well-secured and working through the process with the courts and fully expect to collect on that with the sale, the collateral, if nothing else. So hard to predict timing on that. I can tell you we are paying a lot of attention to it and focus, but we're a little bit at the mercy of the court on the timing. So I think sometime in 2025, but hard to predict at this point.

Okay, great, thank you. Thank you. Our next question comes from Will Jones with KBW. Your line is now open.

Yeah, hey, thanks guys. Good afternoon. Tepanen here for Woody Lay. I wanted to circle back on the margin discussion. I appreciate all the kind of commentary and color of that. It feels like direction, we have a pretty good idea of where that's gonna run and trend the rest of the year, but maybe we'll have to see. Maybe just more of a thematic question. I know, especially following some of these Oreo sales that excess liquidity is in a higher position than it's really been in the past. But Scott, just to the extent that maybe loan growth doesn't quite play out how we all would hope for it this year or to the extent maybe we do see any kind of demand reduction from tariffs, what would you ever anticipate maybe leaning a little more into the bond book just as a way to deploy some of that cash in the near term?

Yeah, that's certainly an option. I'd say our primary focus remains on growing our banking relationships, existing and new. But yeah, that's certainly an option from a deploying liquidity standpoint.

Yeah, got it. And then just over two expenses, I mean that really continues to be a fairly nice story. I guess A, if you could just direction help us guide to where you may see expenses, kind of carry through the balance of the year. Or I'll stop there and then follow up with that in just a minute.

We previously have said that we're targeting keeping our expenses under $20 million a quarter and we did that effectively in the first quarter in spite of the seasonal increase that we see from the extra payroll tax hit that we take in Q1 that David mentioned in his comments. So I think as far as we know, that's still reasonable guidance. You know, the scenario where it goes above that, I think is really if we outperform our performance expectation, we have higher incentive comp accruals. But I think that would be a happy scenario for investors. So I think the 19 and a half to $20 million guidance we've given before seems reasonable from what we know today.

Okay, that's helpful. Thanks for that. And then just kind of lastly for me, Scott, you kind of mentioned in your closing remarks there that this is still a pretty distasteful level of profitability for you guys, especially relatives where you've historically been. It does feel like there's a lot of tailwinds that are kind of moving in your favor right now, especially with the margin and expansion that we could see over the rest of the year, as well as your ability to kind of maintain costs here. Do you have like a reasonable guide post or fence post, what you'd like to see, you know, kind of our way trend, maybe over the next year or two, just as you kind of can get back to a more normalized level of operation?

Yeah, I think our target for now is to get back to 1%. I think, you know, if you go back three years ago, we were producing really good returns, which, you know, when we went public, we said we thought there was a lot of operating leverage in our business, and if we could grow the balance sheet with the capital we raised, which we did, we've tripled the balance sheet since then in 2018. So, you know, I think as we get back on a growth path here, and as our NIM improves and as our P-income improves, I think all those things are gonna add up to really nice operating leverage, which would drive higher ROA and ROE. And I don't think it stops at 1%, but that's kind of where we're focused for now, to get back there.

Yeah, okay. That's all really helpful, and congrats on getting this Oreo behind you, and congrats on this quarter.

Yeah, thanks, Will.

Thank you. Thank you. Our next question comes from Bill Dizelle with Titan Capital Management. Your line is now open.

Thank you. You had referenced the loan payoffs essentially matched originations this quarter. Would you discuss your view of the payoffs on a go-forward basis relative to what you are seeing that seems possible going forward,

please? Yeah, you know, our payoff history has been, to me, kind of amazingly consistent at about $100 million a quarter, and in Q1 it was about $70 million, as Julie mentioned in her comments and in the presentation. I would expect in a relatively stable world, if that's what we're in, that that would be, you know, $100 million a quarter would be a reasonable expectation. You know, buried in the numbers, Bill, that you don't, I don't think, you can't really see from the quarterly report. We actually saw downward pressure on the balance sheet. We shrank in January and February, and then saw a nice recovery in March. And so our feeling going into Q2 is that that momentum for March should continue. The pipelines look good. The growth looks good. So even if we have higher payoffs in March, or in Q2, I mean, which I would expect, I think that we can still produce some net growth in Q2, but, you know, it's just hard to predict today. You know, I think the economic uncertainty out there and the impact of the tariff noise is, you know, hard to predict what the clients are gonna do.

And so this origination pipeline that you're referencing, does this circle back to the significant increase in bankers that you had last year that I think we talked about on previous calls?

That's certainly a factor. I don't know that I can tell you that it's, you know, 50% of the results or whatever. I don't really have a clear picture of how much of that's related to new folks becoming productive, but I would tell you, we did have some really strong new hires last year that are contributing. We've got some more that we've done this year, or that we have in the pipeline for this year, people that have accepted jobs that will be starting the second quarter. So I think attracting the kind of talent that we're attracting these days should really be beneficial in terms of supporting the balance sheet growth we'd like to see this year.

And then one additional question following up on your last comment. If you take those new hires in Q1 and those who have accepted in Q2, what percentage increase would that create based off of your 1231 base?

12.3? I'm not sure. Are you getting at like the percent of people, Bill, that were,

so?

Yes,

yes. So as an example, if you had 20 bankers and you added one in the first quarter, one in the second quarter, that's a total of two. Two on 20 is 10%.

Yeah. So we don't really look at it that way. If we have somebody that's underperforming that we replaced with somebody strong, I'm not sure how you would count that exactly. Also, these new hires are not all created equal. Like I think two of the best hires we made last year were market presidents in two of our larger markets and both of those people have really had a positive impact on the overall balance sheet and on that team that they're leading in their respective markets. And so when I've been up in those markets, visiting with clients and prospects, you know, it's clearly a new energy and a new kind of prospects that they're bringing in, partially from their prior experience and leadership roles in the markets, but partially because of just the new energy that they bring and the expertise they bring. So I think looking forward, we've recruited a very high profile person in one market that's been pretty flat for us. That's starting, I think, May 1st, I believe. And so I think that that's gonna have a big impact in that market. That'll be a positive thing when we can announce that here shortly. We've got another one that we're very close to in another really kind of flat market for us where we think that that person will have a big impact. One of the things we really haven't talked about on the call today, I mentioned it in my closing, my comments on that last slide, is we've really decided that our PTEM function, Planning Trust and Investment Management, that really hasn't shown any growth since the IPO in terms of fees needed a fresh look. And so we've been working on that for the past few months and we have brought in a couple of new leaders for that. One with a deep background and expertise from Schwab. He actually joined us six or five months ago, something like that. And then a new one that just joined us on March 31st from Goldman Sachs. And he was a Senior VP at Goldman in the wealth planning area, and a Senior Executive on, I think his title was Wellness, Investment Management and Financial Planning. And he's brought a lot of good ideas. Typically we see these guys taking, these folks taking some time for a ramp up and this latest hires got lots of good ideas. I think he's gonna have an impact here in the short term that's very positive. We also hired a new head of retirement services last fall to lead up that business. So all these folks I think are gonna have a really positive impact, build on driving fundamental growth across the platform.

Great, thank you and congratulations on those hires.

Yeah, thanks.

Thank you. Our next question comes from Ross Haberman with RLH Investments. Your line is now open.

Good afternoon guys, how are you? I just wanna follow up with what you were saying, you hire all these people. Could you go sort of market by market and is there one market that's sort of much softer in terms of loan originations or business that you sort of need to augment you might say, because you're in pretty good markets. I know with all the uncertainty in DC, it's holding everyone back from making significant moves, but could you just go market by market and is there one market that's really much softer that you're focusing on more today, thanks.

Yeah, thanks for that question Ross. We are, I think we have 19 offices now. So if I actually went through each of the 19, I think that might be a little much for this call. You can go general

geography,

just general type

geography, the top three or four or five geographies. Yeah,

it's still a really good question Ross. The front range of Colorado where we have the proponents of our business is still healthy and growing. I think that the economic uncertainty from the tariff situation in the kind of economic turmoil that that's causing seems to be impacting our clients one of three ways. And I've been out talking to clients quite a bit over the last couple of weeks to try and assess what they're thinking. So the folks that are directly affected by this like manufacturers or agriculture, obviously very concerned, but fortunately that's a very small number for us. We have minimal exposure in manufacturing and even less in agriculture. So I don't think that that's gonna be a big impact on us, at least from a credit standpoint, a current portfolio. But the three things that I've been hearing is, number one, some folks seem to think that this is noise for now and they're just kind of going on with what they were doing anyway. There's a second group, which I would say is probably the largest of the three, that's just kind of pausing and taking a wait and see. We don't really need to jump into this until the dust settles a little bit. And then the third group would be folks that are already working on something or have something underway and they're actually trying to accelerate to get ahead of any cost increases. And I think for the short term, some of that third effect may offset any slowdown from the second effect. But overall, I think most people are assuming this is noise and business as usual. So if you look in the front range, I think that's kind of the dynamic that's driving it. In the resort communities, which would be, you know, Bayle, Aspen, Jackson, you know, we're seeing continued interest in those markets. We're seeing good activity. I think that those will continue to be nice growth markets for us. We have relatively small offices there and high performing folks. So I think that that should do well here. Bozeman is a newer market for us, as you know. Bozeman market continues to be very hot and we think that that's gonna be a really good market for us. And then in Arizona, you know, I think that we've got a nice, profitable, stable business there that we'd like to see growing much faster and we're working on some initiatives there to drive some growth. So I think, you know, this opportunity to cross our platform, we don't have any concerns today in any of these different regions and I think we've got good people in place and to the extent that we can add talent, we're doing it.

And just one follow-up regarding all the new personnel you brought on. Will we see a significant increase in expense the next quarter or two and how quickly do you think these new people should be accretive for the bottom line in general in two or three quarters out or how quickly do you expect them to? Thanks, that's my last question.

Well, one of them was explaining to me earlier this week how he thinks he can have an impact this quarter and, you know, my experience is it takes a while and so I love the enthusiasm but, you know, I do think that it takes a little while for them to kind of get settled and figure out what they're gonna be able to get done here and how quickly that can close, those sorts of things. But I think over the next two or three quarters, you're gonna see continued impact from these folks. You know, we've said that we think expenses are gonna be pretty flat this year and we think that we're gonna be able to grow the balance sheet and produce some really nice operating leverage and if you look at that, one page in the deck that shows the net income, I think it's page four or five. Over the last four quarters, you see that happening and I think that that's gonna continue here and I'm optimistic that that's what we'll see going forward in 2025.

Thank you very much, the best of luck.

Thank you,

Ross. Thank you, I'm showing no further questions at this time. I would now like to turn it back to management for closing remarks.

Great, thank you, Daniel. Well, for several quarters, we've talked about disappointing headline numbers but solid underlying trends and I think this quarter was more evident than prior ones that this is happening and it's gonna continue through 2025, as I just said. Some of these trends are becoming more obvious today, asset quality, NIM, our loan to deposit ratio, our operating efficiency, but with more to come and I think with the sales and marketing changes we've talked about, our tech rebuild that we've done, the data management initiative, our process work and our PTEM initiatives, these all are gonna play out significantly as we head into the back half of 25 and into 26. First Western has a strong post IPO history of good organic growth with really nice operating leverage driving strong profitability and we expect that to continue to recover as the economic and financial conditions normalize here. In the meantime, we really appreciate everybody's interest and support, thank you so much for taking the time to dial in today and for the questions. We really appreciate your interest. Thanks everybody and have a great Friday.

This concludes today's conference call. Thank you for participating, you may now disconnect.