First Western Financial Inc Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Profitability Improvement: Generated significant improvement in profitability driven by expansion in net interest margin, higher non-interest income (partially due to mortgage banking income from lower rates and added MLOs), increase in non-interest bearing deposits, solid loan production, and well-managed expenses.
• Loan Production: Conservative underwriting and pricing, solid loan production diversified across markets, industries, and property types. New loan production was $71 million, offset by $72 million in loan payoffs.
• Deposit Gathering: Inflows of non-interest bearing deposits from existing clients and new relationships, with time deposits replaced by lower cost deposits improving the deposit mix.
• Asset Quality: Stable trends, with NPA to total assets declining and successful resolution of two largest OREO properties for a net gain.
• Financial Results: Net income was $4.2 million or $0.43 per diluted share, with tangible book value per share increasing by 1.6%. Net interest income increased 3.6%, NIM was 2.61%, non-interest income increased ~$900,000, and non-interest expense decreased $1 million.

Segment Performance

• Loan Portfolio: Loans held for investment were essentially unchanged from the prior quarter. New loan production was $71 million in Q1, offset by $72 million in loan payoffs, resulting in a slight decrease in total loans. Most new production was in commercial loans and residential mortgages, with an average rate on new loan production of 6.89%.
• Deposits: Total deposits were up slightly. There were inflows of non-interest bearing deposits from existing clients and new relationships, offset by a decline in time deposits. Expect flat or lower deposits in Q2 due to tax payments.
• Trust and Investment Management: Assets under management decreased by $144 million in Q1 due to net withdrawals in fixed fee accounts. Over the past year, AUM increased nearly 1%.
• Gross Revenue: Increased 3.4% from the prior quarter, driven by growth in both net interest income and non-interest income.
• Net Interest Income: Increased 3.6% from the prior quarter, with the net interest margin (NIM) at 2.61%, up 16 basis points. This was due to a reduction in the cost of deposits and an increase in the average yield on interest earning assets.
• Non-Interest Income: Increased by approximately $900,000 from the prior quarter, due to a gain on the sale of mortgage loans and a net gain from the sale of two largest OREO properties.
• Expenses: Non-interest expense decreased by $1 million from the prior quarter, primarily due to a $1.1 million write-down of an OREO property recorded in the fourth quarter. Other non-interest expenses were relatively consistent.
• Asset Quality: Generally stable, with a decline in non-performing assets (NPA) to total assets. There were small charge-offs related to one loan, and a positive shift in the loan portfolio mix towards loans with lower historical loss rates.

Guidance

• Net Interest Income: Expect continued growth due to reduction in cost of funds, redeployment of cash from OREO sales into interest earning assets, and redemption of sub-debt.
• NIM: Expected to be flattish in Q2 due to deposit runoff, then expand in the second half of the year.
• Loan Growth: Loan pipeline is healthy, but macroeconomic uncertainty could impact loan demand later in the year.
• Expenses: Target to keep non-interest expense under $20 million per quarter.
• ROA: Target to get back to 1% as net interest margin improves and fee income increases.

Risks

• Macroeconomic Uncertainty: Impact on loan demand due to tariffs and economic conditions.
• Court Timing for NPL Resolution: Uncertainty in the timing of resolution for a substantial non-performing loan.
• Deposit Runoff: Expected runoff in deposits in Q2 due to tax payments, potentially affecting the net interest margin.

Question and Answer

• Q: Isolate interest recoveries on a dollar basis? **A: David Weber says there was a ~$200,000 increase in amortized loan fees compared to a typical quarter.
• Q: Spot rate on deposits at end of March and average margin in March? **A: Cost of deposit spot was 298, cost of funds was roughly 305. NIM is expected to be flattish in Q2 due to deposit runoff, then expand in the second half.
• Q: Resolution of non-performers? **A: One OREO is expected to sell in the summer, and a substantial NPL is in court process with expectation of collection in 2025 but uncertain timing.
• Q: Deployment of excess liquidity if loan growth doesn't play out? **A: Scott Wylie says deploying into the bond book is an option, with primary focus on growing banking relationships.
• Q: Expense guidance and ROA target? **A: Target expenses under $20 million per quarter, and target ROA to get back to 1% as net interest margin and fee income improve.
• Q: Payoffs vs origination go forward? **A: Payoff history is ~$100 million per quarter, Q1 was $70 million. Expect momentum from March to continue in Q2 with healthy loan pipelines.
• Q: Market-by-market loan originations? **A: Front Range Colorado is healthy, resort communities (Vail, Aspen, Jackson) have good activity, Bozeman is a hot market, and Arizona is working on growth initiatives.
• Q: Impact of new personnel on expenses and accretion? A: New personnel take time to settle, but expect impact over the next 2-3 quarters with expenses expected to be flat and balance sheet growth driving profitability.