First Western Financial, Inc.

Thank you for standing by and welcome to First Western Financial's second quarter 2026 earnings conference call. Currently, 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. To remove yourself from the queue, you may press star 1-1 again. I would now like to hand the call over to Lisa Fortuna, Investor Relations. Please go ahead.

Thank you and good morning, everyone. Thanks for joining us today for First Western Financial's second quarter 2026 earnings call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer, Julie Courkamp, Chief Operating Officer, and David Weber, Chief Financial 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 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. With that, I'd like to turn the call over to Scott.

Thanks, Lisa, and good morning, everybody. We executed well in the second quarter and saw positive trends in many areas, including deposit growth, net interest margin expansion, well-managed expenses, and stable asset quality. This resulted in another quarter of solid profitability. We continue to maintain prudent risk management and conservative new loan production practices. Supported by the banking talent over the last several years and good economic activity across our markets, We achieved healthy loan production that was diversified across markets, industries, and loan categories. As a result of our financial performance and the balance sheet management strategies, we further strengthened our tangible book value per share this quarter. Moving to slide four, we generated net income of $6.7 million or $0.57 per diluted share in the second quarter 129% and 119% higher, respectively, than the year-ago period. With our prudent balance sheet management, our tangible book value per share increased by 2.6% this quarter to $25.53. Now I'll turn the call over to Julie for some additional discussion on our balance sheet and trust 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 increased $23 million from the end of the prior quarter, marking the fifth consecutive quarterly increase. On a year-over-year basis, total loans increased 7%. We remain conservative and disciplined in our new loan production, and the higher productivity of the bankers added over the last several quarters is supporting a stable pace of loan origination. New loan production was $115 million in the second quarter and was diversified across various markets and loan types with a focus on relationship-based lending. We continue to be disciplined with respect to pricing, which resulted in the average rate on new production of 6.37% in the quarter, which was six basis points higher on a quarter-over-quarter basis and higher than the average rate of loan payoff of 5.89% in the quarter. Now moving to slide six, we'll take a closer look at our deposit trends. Our total deposits increased from the end of the prior quarter with growth in money market accounts partially offset by a decrease in time deposit accounts. On a year over year basis, total deposits increased 12.6%. Average non-interest bearing deposits increased 18 million or 5.1% in the quarter. Turning to trust and investment management slot on slide seven, We had a $41 million increase in our asset center management in the second quarter, primarily attributing to improving market conditions. Investment agency AUM increased $91 million in the quarter and $122 million on a year-over-year basis, which is our highest fee category. As David will cover shortly, our trust and investment management fees have increased 5.1% from the second quarter of 2025. as we have restructured that team for growth. Now I'll turn the call over to David for further discussion of our financial results.

Thanks, Julie. Turning to slide eight, we'll look at our gross revenue. Our gross revenue increased 1.8% from the prior quarter, primarily due to an increase in net interest income partially offset by a decrease in non-interest income. Our gross revenue has increased 16% from the second quarter of 2025. Now turning to slide nine, we'll look at the trends in our net interest income and margin. Our net interest income increased 4.3% from the prior quarter due to an increase in net interest margin and an increase in day count. Our net interest margin increased nine basis points from the prior quarter to 2.9%. This was primarily due to a decrease in cost of funds combined with an improved mix shift in average interest earning assets. The yield on interest earning assets increased four basis points, driven by a favorable shift toward higher yielding loans, while the cost of funds declined four basis points due to an improved funding mix and lower rates on time deposits. Our net interest income increased 21.7% from the second quarter of 2025 due to a 23 basis point increase in net interest margin and an increase in average interest earning assets. Now turning to slide 10, our non-interest income decreased by $0.3 million from the prior quarter. This was primarily due to a decrease in net gain on sale of mortgage loans given lower origination volume due to higher mortgage rates, a decrease in risk management and insurance fees, partially offset by an increase in bank fees. Now turning to slide 11 and our expenses. Our non-interest expense increased by $1 million from the prior quarter. The increase was due to an increase in technology and information systems, data processing, and marketing. The increase was primarily attributable to a $400,000 non-recurring charge related to the write-off of certain previously capitalized technology assets, which negatively impacted diluted EPS by 3 cents. Our efficiency ratio was 74.03% compared to 73.11% last quarter and 78.83% in the second quarter of 2025. Going forward, we expect quarterly non-interest expense to be between $20 and $21 million and we will continue to exercise disciplined expense control. Now turning to slide 12, we'll look at our asset quality. As Scott indicated earlier, we saw stable trends in the loan portfolio in the second quarter with relatively flat non-accrual loans and NPAs. Additionally, we had no loan charge-offs for the second consecutive quarter. Our allowance coverage was 75 basis points of total loans as improved trends during the quarter drove a release of provision of half a million. Now I'll turn it back to Scott.

Scott? Thanks, David. Turn to slide 13, I'll wrap up with some comments about our outlook. Based on our second quarter performance and what we're seeing in our markets, we are encouraged and expect further improvement of financial performance during the second half of the year. Overall, we continue to see relatively healthy economic conditions in our markets. We're seeing good opportunities to have both new clients and banking talent due to the ongoing disruption from M&A activity in our markets. have also recently added new leadership in Arizona where we're beginning to see good traction and opportunities for growth. Our loan deposit pipelines remain strong and should result in improved balance sheet growth the second half of the year, a key objective of ours. In addition to balance sheet growth, we also expect to see positive trends in our net interest margin, our fee income, and more operating leverage resulting from continued revenue growth and ongoing expense discipline. We had a net margin expansion of 26 basis points in 2025 and another 19 basis points so far in 2026. While we remain disciplined in our expense control, we believe there will be opportunities to invest in our business by adding banking, trust, and investment management talent and new clients due to the disruption caused by the continued M&A in our markets. These investments in the business will drive future shareholder value and the ongoing disruption from M&A activity in our markets creates opportunities for us to add revenue growth talent. We will take advantage of these opportunities if and when they materialize as well as opportunities to add new clients. Based on trends we're seeing in the portfolio and the feedback we're getting from our clients, the credit outlook appears stable and healthy. The positive trends we're seeing in a number of key areas are expected to continue. which we believe will result in steady improvement in our financial performance and further value being created for our shareholders in 2026. So with that, we're happy to take your questions. Letiz, please open up the call.

As a reminder, to ask a question, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. Please stand by while we compile the Q&A roster. My first question comes from the line of Hannah Wynn of KBW. Your line is open, Hannah.

Hi, this is Hannah stepping in for Woody Lay. Thanks for taking my question.

Yeah, good morning, Hannah.

I wanted to start off with loans. I saw you guys noted and mentioned earlier that you have a strong loan and deposit pipelines and was wondering if you could give a little more color on where that growth is coming from and how you're thinking about overall loan growth for the second half of the year?

Sure. Let me start with a short answer and then give a little bit more detailed one if that's okay. The short answer is we've seen a really nice balance in where our loan production is coming from. And on the loan page of the deck, you can see there that we saw, you know, our usual $100 million a quarter in payoffs and paydowns. and the production that we did in the quarter of $115 million-ish was better than that but not enough to drive the growth that we thought that we would see. The longer answer to the question is we're seeing some impact as I had predicted in the prior two quarters from all this market disruption which is a real two-edged sword. one side of the sword is that the clients are disrupted and the bankers are disrupted and there's opportunity there. And so we're definitely taking advantage of that and we'll see more results from that. And we can talk about that more in the Q&A if you want. But the other side of the sword is that we're seeing real price competition on loans. And so we have made the decision here today right or wrong, but this is what we said, is that we're going to be disciplined in our pricing and in our terms. And so, for example, we saw a loan at Credit Commit last week where it was proposed to be priced at 125 over Treasuries for a, I don't know what, a five-year, seven-year fixed rate loan. And we're just not going to do that. That doesn't make sense to me. And the fact that, you know, others that have entered the market here that want to defend their clients or be really aggressive with pricing. I think it's understandable why they could do that, but that doesn't mean we're going to chase that. So I think we've seen a really nice increase in NIM continue. I mean, the fact that we've done almost a bunch of improvement in the first half of the year in NIM as we did all of last year, I think is a really telling story on how this NIM improvement that we predicted you know, nine months ago to continue. We didn't think it was going to go this fast, but I think it has because we focused on NIMS. So David did some really interesting analysis that we can delve into if you want about kind of the trade-off of NIM and growth. But the short answer is if we grew $280 million in net growth by the end of the year and just kept our NIM flat from here, that would actually have the same income effect as growing zero in assets and having 10 basis points a quarter in improvements. Or if you take the midpoint, $130 million in growth a quarter and a five basis point improvement per quarter in NIM. So I think that certainly got the leadership team here thinking, maybe we back off the pace of improvement of NIM in the second half and see a little more asset growth. And we talked to the front office about that. We had our two-day annual summit earlier this week, and so we asked the 19 office heads that were here, you know, are we missing the market by a little or a lot? And they said, you know, in some cases a lot and in some cases a little. And if we're a little more competitive, we think we can grow faster. So that's how we're looking at it. and I'm sorry that that turned out to be such a long answer, but I think it's a great question.

Yeah, that's super helpful. Really appreciate all of that color and wanted to touch back on what you said earlier about taking advantage of the market disruption and was wondering what you guys are seeing on the hiring front and how you're expecting this to impact expenses moving forward.

Yeah, another great question. So we've added 12 new front office people into the profit centers so far this year and eight new people into the product group areas. And if you look at people that are actually just direct sales people, we've added 10 of those which will be included in the 20 I just mentioned so far this year. So one of the challenges that we have with that kind of hiring is our experience over the years is sometimes it takes some time to get those people up to speed. The first day they get here, they don't typically produce a lot of new activity. So we've done a couple of things to try and accelerate that. The first thing we did is we started a program, actually had this idea in February that to really try and activate this shift back onto offense, that we should get out and call more. And so I said I would do 100 calls between February and the end of June. And Julie got a hold of that and called it Westward 100 because we have these Westward initiatives this year to try and drive more growth. And so we ended up, I think, I ended up doing 168 calls. So I luckily beat my 100 call goal because that would have been embarrassing otherwise. but I think in the Westward 100 program we ended up doing, what was the number doing, 3,963 or some number like that, almost 4,000 calls company-wide. And we actually raised the bar on what a call was defined as. It had to be planned, it had to be in face-to-face, had to have a call plan around it and a follow-up in the CRM, stuff like that. And we had an 88% increase in calls year over year. Yesterday we had our board trust committee meeting and our trust department, which trust officers are not the ones most famous for being proactive salespeople. Our head of the trust department put a slide in there for the board that said from reactive to proactive, trust officer calls were up 180% in the first half of the year. So definitely a culture shift in the organization, including on the PTEN side about getting out and making calls. And then if you would allow me, Can you talk, Julie, a little bit about this activation program we have for new hires?

Yeah, so several months ago we implemented a program to help the new hires coming into the organization, most specifically those that are client-facing, to really get launched as quickly as possible, to understand our product set, to understand our culture and our kind of methodology for client service. And that has been implemented two months ago. and every new hire in those front office roles is going through this additional program that we've added into it just to make sure that we are optimizing their ability to get out and tell the first Western story and serve clients well.

Great. That is all super helpful. Really appreciate that. Thanks for taking my questions and I'll step back.

Thank you. Once again, to ask a question, please press star 11 on your telephone. Our next question comes from the line of, sorry. Our next question comes from the line of Matthew Clark of Piper Sandler. Your line is open, Matthew.

Hey, good morning, everyone.

Good morning.

Good morning, Matthew. I guess I just wanted to touch on the expense guide first, gave the range, and I think 3Q, at least the last couple of years, 2Q to 3Q, you've seen a bump up in comp, and I'm just curious if that's still expected to be the case this coming quarter, and if there are some offsets to that.

Well, just to be clear for Q2, we had some one-time expenses in there related to technology and data processing, which I think totaled a little under half a million dollars. So the baseline for second quarter appears higher than what it actually is. I think looking forward, we've got these new hires that we've brought on in production roles that we're working to activate like we just talked about. So I think we are going to see a higher expense, which is why we're guiding now to 20 to 21 instead of 19 to 20. Our hope is that expenses are higher in Q3 because we have more incentive comp, because we're seeing some nice growth, because we do accrue for incentive comp based on a number of performance metrics, but primarily revenue growth and earnings growth. that would be a good problem. But after that, I don't know, David, if you have more to add, but I think the shift that we've seen, the increases in expenses did show up already in Q2 and we don't really anticipate additional core expenses in Q3.

Yeah, Matt, there's no seasonality component that occurs every year in Q3 that would cause expenses to increase. but there's a lot of dynamics whether it's hiring or incentive comp performance or things like that that are likely causing some of those spikes.

Yeah, the other thing, Matthew, is if you look back to 2023 and our expense increase over these three years, we've earned $3 in revenue growth, core revenue growth for each dollar in core expense growth. So it's pretty good operating leverage which we would expect to continue.

Yep, yep, good. And then just on the deposit costs, wondered what the spot rate was at the end of June, if you had it, and then your thoughts on pricing and overall deposit costs going forward, assuming the Fed stays on hold, but this hire for longer environment, what that's doing to your competition.

Yeah, so if I could start, and then David, if you could fill in the blanks here, because they're going to be some. You know, back to your seasonality question, Q2 for us is almost always a down quarter. We see about 2% shrinkage in our core deposits in Q2. And, you know, when we got into April this year, we sure enough saw that. But it's interesting, you know, we've had a real focus on core deposit growth that brought the deposit growth back to be positive in May, positive in June, and of course we ended up 2% positive for the quarter. And notably, our non-interest bearing deposits were up like 5% quarter over quarter in average balances. and some really good improvements in the mix, which as David said in his comments has been a focus for us.

Yeah, and specifically on the spot rate, Matt, 2.8% for the spot rate of deposits at 630.

Okay, and your thoughts about deposit costs going forward, can you continue to chip away at those or do you feel like this environment makes it more difficult?

I think it makes it more difficult. The cost of deposit acquisition has certainly increased in our markets given the disruption that we've seen and banks trying to hold onto their deposits for obvious reasons. We haven't necessarily seen pressure from our existing depositors on deposit rates, but that cost of new acquisition has certainly crept up a bit. and then from a time deposit repricing standpoint, we've had some benefits to error over the past few quarters, but our time deposit portfolio is currently at 3.64% on a spot basis. So I don't know that there's a ton of opportunities still left in that portfolio.

I think our biggest opportunity is gonna be on continuing to chip away at improving our mix of deposits through noninterest-bearing deposit growth. So, from a core basis, I don't think we're seeing a lot of opportunity on changing rates, but changing the mix is definitely the focus.

Got it. Thank you.

Our next question. comes from the line of Ross Haberman of RLE Investment. Your line is open, Ross.

Good morning, Scott. Nice quarter. Good morning, Rob.

You seem to indicate that if I'm hearing you right, if rates stay the same, you could see some improving margins. Is that correct from what I'm hearing from you?

Well, that's certainly what we've seen the last several quarters now, and we do think that that will continue. but I'm going to put a caveat on that this quarter and say that the trade-off between growth and NIM improvement is definitely on our mind and our feeling is probably drives more shareholder value from where we are today given the disrupted markets to be a little bit more flexible on NIM improvement to try and drive better growth in Q3 than what we've seen here today, Better Asset Growth.

You do see a pickup in interest rates.

Let's say they raise or raise a quarter percent, for argument's sake. How do you see that affecting your margin expectations? So historically, we try and run a balanced balance sheet. So our interest rate risk is neutral. Right now, we've shifted to be more neutral. although I think we're still liability sensitive. David, do you want to speak to that?

Yeah. We maintain a relatively neutral balance sheet profile, and that's certainly been a goal of ours over the past few years. We do lean slightly liability sensitive, which a 25 basis point decrease by the Fed will benefit us a little bit. Let's call it one to two basis points in the end, but it's not all that material. And a statement of an increase.

Yeah.

Yeah.

Okay, and just one follow-up question. Asset quality looked really good. You got rid of all of those non-performers which plagued you the last year or so.

Are all this completely gone now?

Yeah. Yeah, the two thousand credits we had from 2023 or whenever that was are long gone. We have seen are returned to kind of zero losses per quarter. I think if you go back two or three quarters, we had .01 or .02, but it's basically been zero most quarters recently and most quarters over the last 20 years. So definitely in terms of net losses, we seem to be back at zero. In terms of NPAs, we were flat quarter over course slightly improvement at about 50 basis points. But from what I know today, assuming no surprises this quarter, we're going to see some improvement in that in Q3. So, you know, I think our underwriting standards that we've always had here of requiring three sources of repayment, personal guarantees, hard collateral, those are definitely protecting us against losses in a normal economic environment like we're in. Nothing in the criticized or substandard that you're losing sleep about. Nothing causing us to lose sleep, no.

In fact, both classified and criticized loans were slightly down in the quarter from last quarter.

Thanks, guys. Nice quarter.

Have a nice week.

Thanks, Rob.

Thank you. I would now like to turn the conference back to Scott Wylie for closing remarks, sir.

Okay, great. Well, you know, the key themes this quarter I think are largely unchanged. You know, First Western, if you compare us to other two to $25 billion banks nationwide, we're in some great markets. We have top decile mix of affluent markets. We have a great niche. We are in the top three of all of those banks in terms of wealth management fees as a percent of revenues and we have great bankers. Historically, our organic annual asset growth rate is well above peers. We're about double the median for that group and well into the top quartile and all that with very high asset quality. We're continuing to see earnings normalize here. We typically don't talk about our internal plan. on these calls, but I would tell you we're performing well against plan on an earnings basis and we think that the opportunity to continue to see the kind of gains that we've seen so far this year over a year ago, that's going to continue through year end, we believe. So with that, thanks everybody for dialing in and have a great day.

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