First Western Financial Inc Q2 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to First Western Financial Q2 2022 Earnings Conference Call. 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, Justin. Good morning, everyone, and thank you for joining us today for First Western Financial's Second Quarter 2022 Earnings Call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; and Julie Courkamp, Chief Financial and Chief Operating 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 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 GAAP to non-GAAP measures. And with that, I'd like to turn the call over to Scott. Scott?

Thanks, Tony. Good morning, everybody. Over the past few years, we've focused on building a stronger commercial bank platform, and our second quarter results demonstrate the significant progress that we've made. We had $342 million in new loan production in Q2, which was a record level for the company. To put this into perspective, our loan production in the second quarter was about $90 million more than the amount of loans that we added in the Teton Financial Services acquisition. This translated into exceptionally strong loan growth with our total loans increasing at an annualized rate of 45%, with the highest rate coming in our C&I portfolio, which was up $76 million or 32% from the end of the prior quarter. As I like to say, the machine is working as it should, and we're capitalizing on the strong economic conditions that we continue to see in the attractive growing markets that we operate in. Given the value proposition and the expertise that we offer, our commercial banking teams are finding good lending opportunities without having to compromise on pricing or structure. Our client base consists of many knowledge-based companies, and generally, their businesses aren't impacted by the supply chain constraints and inflation doesn't have much of an impact on end-user demand. So despite the macro headwinds, they continue to perform well, and we have good opportunities to fund our continued growth. Another significant contributor to our loan production growth this quarter was our 1-4 family residential portfolio. Over the longer term, we expect this portfolio to decline as a percentage of total loans as we continue to grow our commercial lending. At a given point in time, we may choose to grow this portfolio when new production provides the opportunity to add high-quality earning assets with attractive risk-adjusted yields, as it has done in the current environment. As we've indicated in the past, our mortgage operations have strategic importance to our business model. From an offensive standpoint, it's one of the tools we use to attract new clients to the bank that we can then deepen our relationships with over time. From a defensive standpoint, it ensures that we're meeting the needs of our clients so they don't have to go to the bank across the street to get their mortgage. The way we operate in producing both sellable conforming mortgages and jumbo ARMs that we portfolio is a compelling advantage in terms of attracting and retaining high-performing MLOs that may be limited in the type of loans they can offer at other institutions. This differentiator becomes even more attractive for MLOs when overall demand for mortgages is declining. With the strong loan growth that we generated, we're able to redeploy more of our excess liquidity and see a more favorable mix of earning assets. Along with the higher rates we're seeing on earning assets and deposit costs that remain well-controlled, we saw a significant expansion in our net interest margin in the second quarter. Despite the more challenging economic environment, our asset quality remains exceptional with nonperforming assets remaining at just 17 basis points of total assets and another quarter with an immaterial amount of net charge-offs. Moving to Slide 4. We generated net income of $4.5 million or $0.46 per diluted share in the second quarter or $0.49 per share when acquisition-related expenses are excluded. While we had strong balance sheet growth and a significant increase in net interest income, our earnings were lower than the prior quarter due to unfavorable market conditions that resulted in a decline in both wealth management revenue and our net gain on mortgages sold. However, our strong profitability continued to drive increases in book value and tangible book value per share as we continue to benefit from our strategic decision last year to retain our excess liquidity in cash rather than putting it into the investment portfolio. This gives us plenty of liquidity to invest in loans and securities through the quarter that are now providing much higher yields. Turning to Slide 5. We'll look at the performance of our private banking, commercial banking, trust, and investment management businesses. This is represented by the pretax earnings of our Wealth Management segment. As you can see, the core business continues to perform very well, while the mortgage segment was a drag on earnings this quarter, although this doesn't present a completely accurate picture. While all the expenses in our mortgage operations are recorded in the mortgage segment, the interest income generated by the loans we add to our portfolio is recognized in the Wealth Management segment. So even though we're showing a pretax loss in the mortgage segment for the second quarter, there is significant value being provided to our overall results that isn't reflected in the segment reporting. Turning to Slide 6. We'll look at the trends in our loan portfolio. Our total loans increased $219 million from the end of the prior quarter as our record level of loan production offset the high level of payoffs that we continue to see. Our loan production was well diversified, and we had increases across most of our major categories. Most of what we added to the 1-4 family residential portfolio are jumbo ARMs that provide attractive risk-adjusted yields. We had considerable loan production come in towards the end of the quarter, and our end-of-period loans were $140 million higher than our average loans during the quarter. So we have a nice tailwind going into the third quarter in terms of driving higher net interest income. Moving to Slide 7. We'll take a closer look at our deposit trends. Our total deposits decreased $102 million from the end of the prior quarter. This decline was due to typical fluctuations in commercial operating accounts, as well as some seasonal outflows for tax payments and some withdrawals related to investment opportunities. We were able to offset some of the outflow with the development of new deposit relationships, with new accounts providing $85 million in deposit inflows during the second quarter. Turning to trust and investment management on Slide 8. Our total assets under management decreased $922 million from the end of the prior quarter due to market declines, with the most significant impact coming in the investment agency and managed trust balances. Although, I would note that all of our portfolios outperformed their benchmarks as our investment management team did a very good job of moderating the impact of the severe market pullback on client assets. The lower value of assets due to market decline was partially offset by a $50 million increase in the inflow of new accounts. With that, I'll turn the call over to Julie for a discussion of our financial results. Julie?

Thanks, Scott. Turning to Slide 9. We'll look at our gross revenue. Our total gross revenue was essentially flat with the prior quarter as the increase in our net interest income was offset by lower noninterest income. On Slide 10, we'll look at the trends in net interest income and margin. Our net interest income increased 10% from the prior quarter, primarily due to higher average loan balances and an increase in our net interest margin. As we indicated last quarter, given higher interest rates, we have started to grow our investment portfolio, which also contributed to the increase in net interest income. Our net interest margin increased 37 basis points in the second quarter to 3.35%. Excluding the impact of PPP fees and accretion on acquired loans, our net interest margin increased 43 basis points to 3.30%. Our net interest margin benefited from a more favorable mix of earning assets as we redeployed our excess liquidity into the loan portfolio, as well as a 14 basis point increase in our average loan yields and a 48 basis point increase in our cash balances held with other financial institutions. The favorable shift in the mix of earning assets and higher yields more than offset the 3 basis point increase we had in our cost of deposits. While we expect to see a larger increase in our cost of deposits going forward, given our continued opportunities to grow the loan portfolio and our asset-sensitive balance sheet, we expect to continue seeing expansion in our net interest margin, although not at the same level that we had in the second quarter. Turning to Slide 11. Our noninterest income decreased 19% from the prior quarter, primarily due to lower trust and investment management fees resulting from lower AUM caused by market performance and the lower net gain on mortgage loans. These declines were partially offset by approximately $300,000 in unrealized gains on equity securities. On Slide 12, we have provided some additional details on our mortgage operations. Our total mortgage operations increased 48% from the prior quarter. Although, as Scott mentioned, a significant portion of the originations were jumbo ARMs that we retained in our portfolio. The volume of mortgage locks on loans held for sale, which is when revenue is recognized in the mortgage segment, declined by 18% from the prior quarter, as the decline in refinancing volumes more than offset the increase in purchase volumes we saw as we entered into the traditionally strong season for the housing market. While expense levels in our mortgage operations were flat with the prior quarter, the lower level of locks and revenue resulted in a loss for the second quarter. Although as Scott mentioned, this does not account for the interest income that we generate from loans that we retain in our portfolio. Turning to Slide 13 and our expenses. Our noninterest expense increased 6% from the prior quarter but remained in our anticipated range of $19.5 million to $21.5 million. Excluding acquisition-related expenses, noninterest expense increased due to higher salaries and employee expenses resulting from higher commission payments on the strong mortgage production and our investment in new banking talent to support our continued growth. The combination of the lower level of noninterest income and the investment in new banking talent resulted in an increase in our efficiency ratio, which we expect to trend in a positive direction as the new bankers build their pipeline and begin contributing to our loan production. We completed the system conversion and consolidation of our Jackson Hole branches in mid-May, which will result in more cost savings from the Teton acquisition, a portion of which we are using to invest in new banking talent. Over the remainder of the year, we expect our noninterest expense to range from $20.5 million to $21.5 million. Turning to Slide 14, we'll look at our asset quality. We continue to see positive trends across the portfolio. Our nonperforming assets remain at 17 basis points of total assets, and we continue to see minimal losses in the portfolio. We are in the process of successfully resolving our largest nonperforming loans. As part of the workout plan, we received a residential property that is now held in OREO. As a result of receiving this property, we released a portion of the specific reserves held against this loan. We recorded a provision for loan losses of approximately $500,000 as a release of the specific reserve offset from the provision required for our growth in total loans. The release of the specific reserve also had the effect of lowering our ALLL to 78 basis points of adjusted total loans, reflecting the strong credit quality and low level of losses we have experienced in the portfolio. Now I'll turn it back to Scott.

Thanks, Julie. Turning to Slide 15. I'll wrap up with some comments about our outlook. We expect many of the positive trends we experienced in the second quarter to continue in the second half of the year, primarily driven by further organic balance sheet growth. Our loan pipeline remains very strong and is consistent with the size of the pipeline at the end of the first quarter. As rates increase, it's likely we'll start to see lower demand for commercial real estate loans, but we've built a well-diversified loan production platform that provides us with the ability to be flexible and focus on whatever asset classes are experiencing the strongest loan demand and present the most attractive lending opportunities at any given point in time. So while the mix of production might change, we still expect to see a high level of new loan originations, even as we maintain discipline in our pricing and underwriting criteria. The strong loan production we experienced in the second quarter also increased our unfunded commitments by 14% to $802 million, representing another potential catalyst for loan growth if utilization rates increase. It's also likely that payoffs will start to moderate as rates increase, which would present less of a headwind to loan growth than we experienced in the first half of the year. Given all these trends, we feel confident in our ability to continue generating strong loan growth. Combined with the continued expansion in our net interest margin, this should result in significant further increases in net interest income in the second half of the year. As Julie mentioned, we're going through a better investment phase as we add new talent to expand our presence in newer markets like Montana and Arizona, as well as continue to grow in Colorado. We're funding these investments with a portion of the cost savings from the Teton acquisition, so we expect our expense levels to slightly increase over the remainder of the year. We're also seeing steady growth in the pipeline in these new areas, which should translate into a larger revenue contribution as we move through the rest of the year, improving our operating leverage and efficiencies. In addition to new banking talent, we're also making investments in technology and infrastructure to support our future growth. We're upgrading two of our core systems in trust and investment management business as part of our broader technology modernization initiative. With the upgraded systems, we'll have more features, a better user interface, greater efficiencies, improved performance reporting capabilities, as well as more flexibility to add other fintech tools in the future that will enhance our value to serve clients and create more fee income opportunities. Finally, while we continue to see relatively strong economic conditions throughout our market, with broader concerns about a potential recession, I want to take a few minutes to talk about our historical credit experience during the past economic downturns, most notably during the Great Recession resulting from the financial crisis. Our loan portfolio performed very well during the Great Recession for a couple of reasons. First, the strength of our client base consists of companies with strong balance sheets and cash flows and high-net-worth individuals who have the liquidity and financial strength to manage through periods of economic stress. Second, our conservative approach to credit, where our underwriting criteria requires three sources of repayment. This has consistently served us well in keeping credit losses very low even when a loan goes into nonperforming status. As we've grown our franchise, we have not deviated from this conservative approach to credit. Accordingly, we expect to continue to maintain strong asset quality and a low level of credit losses in a recession environment, particularly one that could be relatively shallow and short in duration. If economic conditions and loan demand remain strong, we feel we're very well positioned to continue generating profitable growth, particularly as we start to see larger contributions from some of our newer markets. If economic conditions weaken, we have an exceptionally strong balance sheet and loan portfolio that we believe will help us effectively manage through any economic stress that occurs and protect shareholder value. With that, we're happy to take your questions.

Our first question comes from Brett Rabatin from Hovde Group.

Scott and Julie, wanted to first ask just given the mix shift change in the balance sheet in the quarter versus average, it would seem like the June margin would have been quite a bit above the margin for the quarter. Would you happen to have the June margin?

I do. The average net interest margin in April was 3.09%, in May was 3.35%, and in June was 3.67%. So your guess is right on, Brett.

Okay. And then wanted to make sure I understood the changes to the balance sheet linked quarter. It seems like maybe you took a tax to become less asset sensitive with adding the mortgages, the jumbo mortgages, but I would assume that movement might partially just be to giving less ability to sell those in the open market. Can you talk maybe about the decision to put those on the portfolio?

Yes. We talked about some of the reasons, but your question is correct. We've seen the jumbo ARM secondary market dry up. The people that are doing those now are doing them for their portfolio. So for our MLOs, we want to be competitive and make sure they don't starve as we go through a difficult period here in the mortgage world. Having the ability to put some of those on the portfolio is helpful to them and, frankly, helpful to us. They're all 5-, 7-, and 10-year ARMs. They're not monthly floating variable rates like most of our commercial C&I lending is; however, they are certainly attractive risk-adjusted assets that are well-managed risks on the balance sheet. Adding those will make us less asset sensitive going forward. I think at the end of the quarter, we're still asset-sensitive, but less so than we were coming into the quarter.

Okay. That's helpful. And then just lastly, and I'll hop back in the queue. How much do you look at the $180 million of cash at the end of the quarter? How much liquidity do you think you have left to deploy? And then what would be the assumption on the deposit betas from here given only 7 basis points of increase in the cost of funds during 2Q?

Yes. I'll take a stab at both of those questions. And then Julie, if you want to add more depth to it. Deposit beta, it's a little hard to say. We expected that it would be low at first, and then it has been. As we got further into the year with higher rate increases like we've seen, we'll probably see a little more pressure there. Each of our markets is a little bit different, so it's difficult to predict. But from everything we've seen so far, deposit beta is relatively low overall. We'll see a couple of areas, like our trust cash, where it's going to be higher, as it has been historically. In terms of overall liquidity, I think we're comfortable with where we are. Long-term, we would expect to continue to be about where we are in terms of liquidity. We've seen an increase now in our loan-to-deposit ratio, which is back in line with our historical numbers for us, which we have tended to be in the kind of high 90s. Over the 18 years since we opened, we've been able to consistently find deposits to fund our loan growth. Our clients tend to be these large depositors. Our type of client tends to have large deposit balances, and at the margin, when we want them, they'll bring them over. When we don't need them, they'll take them elsewhere. So I think we'll be able to continue to manage that in the future as we have in the past. I don't see any reason that would change. Anything I missed in there, Julie, on those two questions?

Yes, I think you covered it.

Our next question comes from Brady Gailey from KBW.

I know we've talked about for First Western a mid-teens level of loan growth. You guys obviously did a lot better than that in the second quarter. How should we think about loan growth for the back half of the year? Do you think you'll still outpace that mid-teens level? Or do you think 2Q is just kind of a one-off really good quarter?

Well, we've talked before that our balance sheet is just small enough that there are going to be variations quarter-to-quarter. But I talked in my prepared remarks about all the reasons that we think we're going to see continued loan growth. Number one, we went into the quarter with actually higher loan pipelines than what we had going into the second quarter, which is a favorable trend. I would tell you our numbers for July have continued to be strong, both in terms of volume and rate. We're seeing continued nice growth there. Our payoff balances, we were thinking that might slow down as rates went up, and they actually have come down now as a percent of beginning balances from 2.7% in March, 2.8% in April, 2.7% in May, down to 2.5% in June. Through, I think, two days ago in July, we were down to about 1.9% of beginning balances. We're seeing payoffs slow down. We're seeing strong loan demand for new originations. NIM is improving. We've added these lenders that Julie spoke about in her comments in Arizona, Wyoming, Montana, and here in Colorado. These are all pretty strong tailwinds that would help offset economic slowdown and higher rates, I think.

All right. And then on the loan loss reserve percentage, I know as things have improved, that ratio has come down. It's now at 62 basis points. Do you think that 2Q's level is kind of a floor, and it should be flat from there? Or is there more downside? Or with the economic uncertainty, you start to think about building that ratio?

I'll take a stab at that, Julie. If you could just correct me when I go around here. We don't look at it as 62 basis points, Brady. We adjust out PPP and purchase loans because the purchase loans have their own mark on them. If you just take the bank originated loans, we brought that ratio down to pre-pandemic levels this quarter, and our asset quality is quite a bit better than it was pre-pandemic. We thought that was reasonable. That got us to 78 basis points, Julie?

78 basis points for us, adjusted, yes.

Yes. So adjusted, it's 78 basis points, and we don't anticipate that going lower from what we know today. CECL is in the back of our mind too, Brady, and we want to be mindful of that, of course.

Our next question comes from Matthew Clark from Piper Sandler.

Scott and Julie, just on the loan-to-deposit ratio. It sounds like there's still a fair amount of momentum on the loan growth side with the pipeline being comparable to last quarter and some momentum here in July. How high are you willing to let that loan-to-deposit ratio go? Assuming you probably won't be able to match fund that with deposits at that kind of above-trend level?

This was certainly a question as we got into the quarter for us; what was causing the deposit declines. We've seen, obviously, historical liquidity added by the Fed into the economy over the last couple of years. People have been wondering when all that comes out and what that does to deposit balances in a bank like ours with such a small percent of the overall deposits in our markets. We did a deep dive in the second quarter into what was causing our deposit declines. We looked at all the significant declines. As I think Julie mentioned in her comments, it is in the deck. To what slide is the deposit one?

Slide 7 kind of gives you the fluctuations. I think where Scott is headed is we identified when we did that deep dive that the commercial operating accounts were just having their normal movement. We saw some seasonal tax payments, which we typically see about this time. Clients are still making investment moves with their cash, and we've seen some of that go out of the bank just for their own investing purposes. From that perspective, we feel pretty good about where we're at on the deposit side. Of course, we're monitoring that loan-to-deposit ratio pretty heavily and feel like we have a lot of liquidity in different places. As Scott mentioned, we feel pretty good about our historical ability to raise those deposits as they need to. We have a lot of clients with high balances that we can typically bring in if we need to. So we're planning to be flexible on pricing and ability to bring in those that gather additional deposits as we look into the future with our loan pipelines remaining very strong.

I feel like we're in unprecedented financial times between what the Fed is doing and the inflationary pressures we're seeing today. You hate to say the next quarter is going to look a lot like the last 18 years. But again, we have had consistently at least at times loan-to-deposit ratios in the high 90s. That's worked well for us and been very manageable for us, and we have been able to grow deposits consistently. So I guess that would be my direct answer to your question, Matt.

Okay. Great. Do you happen to have the spot rate on interest-bearing deposits at the end of June, just to give us a starting point?

The spot rate for total deposits for June, I think, was 25 basis points, but at the end of the month was 35 basis points.

Okay. Great. And then the weighted average rate on new loans in the quarter relative to Q1?

This is actually an interesting number that we spent some time looking at to try and see what was ahead as well. With the mix of production and a higher amount being in mortgage loans, that certainly affects the rate that we had in Q2. If you look at the mortgage loans that actually closed in the second quarter, some of those are getting locked in Q1. The average rate was 4.16 for new loan production in June, and in July so far, it's 4.81. We're seeing very strong positive trends in loan prices. Of course, all that comes before the 75 basis point increase yesterday.

We also hit the point where loans are getting booked at higher rates than what we're seeing in the payoffs, which helps kind of stop that treadmill a little bit. No longer so much of a headwind against the margin.

Right. Great. And then last one for me. Just on the mortgage segment. Is there anything else you can do there to cut expenses? Or do you feel like you've done all you can do on that front?

As we've talked about, I won't go through the whole song. The answer is the short version; that's a small but strategically important part of our overall story. We have said that we're not going to lose money in that business. Of course, we did lose money in that business in Q2, if you look at just the mortgage segment reporting. A couple of points: first, if you factor in the net interest income from those jumbo loans that we book as portfolio loans, it's a much higher percentage than normal for us in Q2 that offsets the $1 million reported segment losses. The revenues that go into the segment are just from the sales, and all the attendant hedging and whatnot that goes with that. That's the first point. More directly, to your question, we've reduced costs already in the second quarter. I remember last June, we made a significant cut when we saw the slowdown right away, and we've done that again at the end of the second quarter, and we have some additional cost control measures in place. We believe this environment will help us attract some new producing MLOs that would help offset the cost. I just reaffirm; we have no intention of losing money in that business. If you look at it on kind of an overall basis today, we're not, and we can get the segment reporting to look a lot better going forward.

Our next question comes from Ross Haberman from RLH Investments.

Yes, great loan growth. I was wondering if you could sort of break it down by geography or see better loan growth from Wyoming or Montana or Arizona. Sort of where are you seeing the best growth like that?

Yes. So a really good question. If I could take us on a little bit of a detour, it's across the platform, strongest in Colorado, because that's where our biggest base is. Arizona, we've hired significant new production capability that didn't produce that much in Q2, but is going to. I feel really good about what we're doing there. If I could address the Wyoming question for a minute: One of the things you worry about in an acquisition is when you bring them on to First Western from being the Rocky Mountain Bank based here in Jackson; you want to make sure you don't go backward, right? So first quarter was all about retaining clients and ensuring they were comfortable. Then you put them through the conversion. And I'd love to tell you we’re great at conversion and that it went perfectly, but that would be untrue because all conversions, I think, are painful, and we certainly did everything we could to mitigate. The team there did a great job. That was a big challenge in Q2. May 15, we conducted this weekend conversion and moved everybody over. You get to the end of the quarter, and you think, boy, if it's flat for the quarter, that's good. It turns out Wyoming was actually our third-highest producing net loan growth PC for the quarter. When I saw that, I sent that all a big high five because that's obviously a great accomplishment. It tells you the opportunity in Wyoming for us. We thought if we could take our platform and toolbox and apply it to the nice community banking history that they have at legacy Rocky Mountain Bank, we could do something special there. It's nice to see that already showing up in Q2.

Just one last question. I believe you're suggesting that if we continue to experience rising interest rates, we might see another 75 basis points increase in September. This would likely benefit the margin and improve the spread, is that correct?

I think the question that came earlier about the NIM improvements in the quarter tells you that we're going to see a lot stronger NIM for the second half of the year even without increased rates. The strong momentum we see in asset growth, loan growth, and earning assets will continue to have a significant impact on earnings in the second half of the year. If the headline numbers are disappointing to me, at least when you look at it, you see EPS not where we want to see it. We think those numbers can and should be significantly better. Looking at the operating leverage, if you just take net interest income and divide it by the operating expense of the whole company on an operating basis, we've seen a 221% growth in operating leverage in Q1 and a 132% growth in Q2. What's being hidden there is the declines in fee income. Those fee declines are more than offsetting that, but that's not going to continue to decline at that rate, and that's going to come back in a nice focus in Q3 and the rest of the year.

And just one final question. You added the purchase. Are you out of the buying business for the moment, or are you still looking around for either operations or branches to further buy as opposed to organic expansion?

We do have, as we've said before, an active corporate development program. We have identified targets that we're interested in, and we continue to work on those. There are a couple of interesting opportunities for us that we're working on actively. Are they going to happen? You never know. They would be great fits for us and something we'd love to do. It has to be the right team, the right time for that team, and it has to be on the right terms that make sense for us. I think we've shown pretty good discipline on that historically. With a strong balance sheet, a strong story, and the credit record that we have, opportunities get more urgency when the economy slows down. This may be an interesting time ahead for First Western to capitalize on those.

Can I ask one detail about your potential acquisitions? How are you considering the AOCI adjustment? And when evaluating potential purchases, is that a significant obstacle between the bid and the asking price?

We've done enough of these that we feel pretty comfortable with our due diligence abilities. I've done a sample of these in my career, and we've done 13 acquisitions here at First Western. When we look at the value for our shareholders, we look at the risk-adjusted balance sheet and the earnings potential. From our track record, you know that we're going to do things that are beneficial for our shareholders. Our last merger with Rocky Mountain Bank and their parent Teton was actually accretive to tangible book value at closing and certainly going to have a very nice earnings accretion impact, as mentioned in my earlier comments. You can count on us, Ross, to continue to be disciplined in that and look for opportunities that drive shareholder value in the short term.

And our next question comes from Bill Dezellem from Tieton Capital Management.

I have a couple of questions. First of all, I'd like to start with the teams and bringing new people on. In this environment, are you sensing that people are more likely to move towards First Western today than they were a year ago? How are you thinking about that at this point?

I find it hard to predict. I've felt before that we'll be able to attract people from this acquisition that just closed. Maybe it's also true for whatever reason we are having a lot of success attracting people. I think we're getting to a scale and size that people see us as a really good place to build a career. Some legacy competitors are having trouble finding the right mix for growth. I think our market reputation is strong, and that's helping us attract people. We're having quite a bit of success attracting really strong relationship bankers to the bank, and I don't think that's going to slow. It's been very encouraging to see this here.

So let me shift, if I may, to the C&I and lending. With $76 million of incremental loans in the quarter, and that's a really big number. I was hoping if you could dive into what's happening behind the scenes to cause C&I specifically to be as strong?

Persistence on our part. We’ve talked about us focusing on our business and wanting to diversify away from just traditional private banking and mortgage lending, building a C&I capability. I think we're seeing that. We have good C&I lenders that we've recruited; we certainly got some with the Simmons Bank acquisition and now the Rocky Mountain Bank acquisition. So building those teams and developing a reputation in the community takes time, but it pays off, and we’re seeing that now.

Is that your sense that those teams are now operating at a fully mature state? Or are they still in that ramp-up mode?

The leader of our banking group believes that we're just scratching the surface there. He thinks that there's a lot of opportunity.

We have a follow-up question from Brett Rabatin from Hovde Group.

One follow-up. When we were talking earlier in the year, I think March, you were kind of talking about the loan growth outlook being strong and getting ready for a recession at the same time. You operate in some pretty good markets in terms of economic growth here the past year that could slow at some point with consumer and tourism possibly. What I wanted to know is, are there any loan segments or anything that you're seeing out there that you're like, 'hey, we don't want to be doing anymore of this,' or do you have your eye on any loan categories that you would consider to be riskier going into whatever we're going to go into in the next year or two?

I'll tell two stories there. One I told before and then a new one. Over the last 12 to 18 months, we have talked to our credit team about not stretching. Let's make sure we stay firm on terms to credit quality and in terms of rate as well and not chase. So we've talked about that, and I can tell you we continue to do that. The other thing I haven't talked about is once a quarter, we have a summit where we get all our managers together. I have our leadership team members each do a presentation on some topic of importance to the company to this group of 60 or so of our top leaders. I asked our Chief Credit Officer, Scott Lawley, to present at this summit about lending into recession. He is very experienced and did work out at Huntington before joining us. There's nothing like a good workout guy to scare the lenders. He did a whole presentation on things we don't do late in the cycle. It was a great reminder to everyone about holding firm on our credit standards and not stretching in lending and the industries we want to focus on versus not focusing on. This is an active topic here that we're training our people on.

Okay. Any specific categories or things that you want to stray away from here going forward?

We have in our credit policy desired industries and not desired industries. We do that anyway. We’re focused on opportunities at this point. We're thinking about being cautious in the credit cycle.

Fair enough. Just one last one if I could. I want to make sure I understood the conversation around mortgage banking profitability from here. You weren't going to lose money, but you did, and you don't want to lose money. But is it fair to assume that the mortgage banking operation continues to be at a net loss for the near term until volumes either pick up or gains until the margins expand?

The mortgage segment shows a loss, but for the reasons we talked about, the mortgage business here is a profitable business. I don't want to report a negative earnings segment either, which we did in Q2. We'll manage expenses there and look at ways to grow revenues so that we report a positive number for the segment. Looking at the mortgages produced in Q2, I think they produced another $3.5 million in income annually for the company. That's still a business we want to be in. It's been great for us since we bought that business, and we expect it to be a positive contributor for the long term. Does that address your question, Brett? I'm not trying to be evasive.

Our next question comes from Ross Haberman from RLH Investments.

Yes, great loan growth. I was wondering if you could sort of break it down by geography or see better loan growth from Wyoming or Montana or Arizona. Sort of where are you seeing the best growth?

Yes. So a really good question. If I could take us on a little detour: it's across the platform, strongest in Colorado, because that's where our biggest base is. Arizona; we've hired significant new production capability that didn't produce much in Q2, but is going to. I feel good about the work we're doing there. As for Wyoming, one concern with an acquisition is ensuring you don’t regress. Retaining clients was the first quarter's focus, then the conversion followed. I must say our conversion wasn't flawless, but that's expected with any transition. Our team performed admirably even with difficulties. At the quarter's end, seeing no decline is a victory. Wyoming in fact has been one of our strongest growth areas for the quarter. I'm pleased, and it shows the potential we have there. In summary, we remain optimistic and are positioned well amidst current economic challenges. Our strong credit quality instills confidence, and we expect to sustain growth momentum in the near future. Thank you.