First Western Financial, Inc. Q2 FY2025 earnings call

• Executed well in Q2 with positive trends in loan and deposit growth, net interest margin expansion, expense management, and stable asset quality.
• Conservative new loan production but saw solid growth due to banking team additions and healthy economic conditions.
• Lowered deposit costs and redeployed cash from OREO sales into new loans and securities to enhance NIM.
• Disciplined expense control despite inflation, capitalizing on investments in talent and technology.
• Tangible book value per share increased, with shares repurchased in Q2 accretive to tangible book value.
• Loan portfolio up $114 million, new loan production $167 million, deposits slightly up with interest-bearing deposits increasing.
• Trust and investment assets under management up $320 million, 7% growth over past year.
• Net interest income up 2.3%, NIM 2.67%, noninterest income down $1 million, expenses down $300k, asset quality stable.

Loan Portfolio: Loans held for investment increased $114 million from the prior quarter. New loan production was $167 million in Q2, well diversified across markets, industries, and loan types. Deposits: Total deposits were slightly up, with noninterest-bearing deposits declining due to seasonal tax outflows but offset by an increase in interest-bearing deposits. Trust and Investment Management: Assets under management increased $320 million in Q2, up nearly 7% over the past year. Net Income: Generated net income of $2.5 million or $0.26 diluted share in Q2, lower than prior quarter due to one-time gains and higher provision. Net Interest Income: Increased 2.3% from prior quarter, with net interest margin (NIM) at 2.67%, up 6 basis points. Noninterest Income: Decreased approximately $1 million from prior quarter due to one-time gains and PTIM fees trending down. Expenses: Noninterest expense decreased ~$300,000 from prior quarter, primarily lower salaries and benefits. Asset Quality: Generally stable with slight increases in NPLs and NPAs, but $10 million decline in classified loans and one loan charge-off.

• Expect NIM to be relatively flat in Q3 due to strong deposit pipelines, then expand in Q4 to a low to mid 2.70s range.
• NII expected to grow strongly in Q3 and Q4 due to balance sheet growth.
• Expenses still expected in the range of $19.5 million to $20 million for the back half.
• Focus on operating leverage from growing revenues with current expense base, not excessive cost cutting.

• Market competition in loan and deposit pricing.
• Potential impact of rate cuts on NIM.
• Economic uncertainty affecting mortgage volumes.
• PTIM fees trending down, requiring effort to reverse this trend.

Q: Just on the borrowings towards the end of the quarter, rate on those, type of borrowings, and plan to pay off as deposits come in?

A: Yes, they were overnight, rate mid-4s, plan to pay off as deposits come in Q3.

Q: Cost of interest-bearing total deposits, spot rate at end of June and NIM expectations?

A: Spot rate at end of June was 3.07%, NIM expected relatively flat in Q3, then expand in Q4 to low to mid 2.70s.

Q: Expenses, updated thoughts on back half run rate?

A: Still in range of $19.5 million to $20 million.

Q: NIM outlook and impact of rate cuts?

A: Guidance still fair, sensitivity off balance sheet, still expect impact on NII.

Q: NIM outlook to hit low to mid 2.70s, sensitivity to rate cuts?

A: Guidance relatively fair, took some sensitivity off balance sheet, $100k or so below previous assumption.

Q: Expenses and operating leverage?

A: Path to success is not cost cutting, but operating leverage from growing revenues with current expense base.

Q: Structural factors holding back NIM from 3%+?

A: Belief NIM should trend back to historic 3.15%-3.20% in normal interest environment, driven by growth and expense control.

Q: Mortgage volumes down despite hiring MLOs?

A: Industry-wide mortgage market not rebounded, impact from economic and interest rate uncertainty, but mortgage business contributing to earnings.

Q: Customer mindset and loan growth?

A: Caution early in year shifted, more client demand, competitive environment, and market disruption seen as positive.