First Western Financial Inc Q4 FY2024 Earnings Call

Hello, everyone, and welcome to First Western Financial's Fourth Quarter 2024 Earnings Conference Call. Please note that today’s conference is being recorded. Now I will hand the call over to Tony Rossi. Please go ahead.

Thank you, Carmen. Good morning, everyone, and thank you for joining us today for First Western Financial's fourth quarter 2024 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've 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.

Thanks, Tony, and good morning, everybody. As expected, during the fourth quarter, we generated a higher level of profitability as a result of the positive trends in many areas of the business, including the growth in loans and deposits while keeping our loan-to-deposit ratio in the mid-90% range and maintaining disciplined expense control. We continue 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 saw a higher level of loan production in the fourth quarter, which was our highest level of loan production of any quarter in 2024. We also continue to have success in our deposit gathering efforts, adding new clients and expanding relationships with existing clients that resulted in deposit inflows that more than offset the seasonal outflows we typically see in the fourth quarter. We were also able to successfully lower our deposit costs, which contributed to the expansion we saw in the net interest margin. We saw generally positive trends in asset quality during the fourth quarter, resulting in a decline in our NPAs to total assets, and we had another quarter of immaterial charge-offs. We've also continued to make progress on resolving the large nonperforming relationship where we had several properties as collateral. The largest of those properties is now under contract for sale, and we expect the transaction to close in the first quarter. We're also seeing a good level of interest in other properties that are currently being marketed. 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 in the quarter. Moving to Slide 4, we generated net income of $2.7 million or $0.28 per diluted share in the fourth quarter, both increased from the prior quarter. We had a $1.1 million write-down in OREO from new appraisals that negatively impacted EPS by $0.08 in the fourth quarter. With our prudent balance sheet management, our tangible book value per share increased by 1.6% this quarter. Now I'll turn the call over to Julie for some additional discussion of our balance sheet and trust and investment management trends.

Thanks, Scott. Turning to Slide 5, we'll look at the trends in our loan portfolio. Our loans held for investment increased $42 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production that saw an increase in loan production driven by a higher level of productivity from the additions we made over the last several quarters to our banking team. New loan production was $94 million in the fourth quarter, up from $83 million in the third quarter. 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 also saw an increase in CRE loan demand as borrowers are looking to take advantage of lower property valuations. Essentially, all of the new CRE loan production was owner-occupied, which is what we typically focus on. We continue to be disciplined in our pricing criteria. This resulted in the average rate on new production being 7.44% in the quarter, which was higher than the average rate on our payoffs, which resulted in the turnover in our loan portfolio being accretive to our average yield on loans. Moving to Slide 6, we'll take a closer look at our deposit trends. Our total deposits increased $11 million from the end of the prior quarter. The increase is largely attributed to an expansion of existing client relationships. This more than offset the typical seasonal runoff that we see in noninterest-bearing deposits during the fourth quarter, which typically starts to build back up again as we move through the year. On an average basis, our deposits were $96 million or 4% higher in the fourth quarter than in the prior quarter. Turning to trust and investment management on Slide 7. We had a $145 million decrease in our assets under management in the fourth quarter, primarily attributed to net withdrawals and lower market values during the fourth quarter. During 2024, our AUM increased more than 8% due to both new client additions and market performance. Now I'll turn the call over to David for further discussion of our financial results.

Thanks, Julie. Turning to Slide 8, we'll look at our gross revenue. Our gross revenue increased 4.8% from the prior quarter, primarily due to an 8.3% increase we achieved in our net interest income. Now turning to Slide 9, we'll look at the trends in net interest income and margin. Our net interest income increased 8.3% from the prior quarter or 33% annualized due to an increase in average interest-earning assets and expansion in our net interest margin. Our NIM increased 13 basis points from the prior quarter to 2.45%. This was due to a reduction in our cost of deposits, which was larger than the decline we had in our average yield on interest-earning assets. While we expect to benefit from rate cuts, we are not solely reliant on rate cuts to see expansion in our NIM going forward. Now turning to Slide 10. Our noninterest income decreased by approximately $500,000 from the prior quarter. This was due to a decline in gain on sale of mortgage loans resulting from the seasonal decline we see in mortgage demand during the fourth quarter. This was partially offset by a record quarter of risk management and insurance fees of $1.1 million, which was double the level we generated in the fourth quarter of the prior year. In addition, our 2024 trust and investment management fees increased by $400,000 or 2.2% year-over-year. Now turning to Slide 11, and our expenses. Our noninterest expense was up $1 million from the prior quarter, which was entirely attributable to a $1.1 million write-down of OREO following the receipt of updated appraisals during the quarter. All other areas of noninterest 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. Now turning to Slide 12, we'll look at our asset quality. As Scott indicated earlier, we saw generally positive trends in the loan portfolio in the fourth quarter, with a decline in nonperforming assets and another quarter of immaterial charge-offs. With the positive overall trends we had in asset quality and improved economic forecasts, we had a small release of reserves, which resulted in a negative provision for loan losses in the quarter. Now I'll turn it back to Scott.

Thanks, David. Turning to Slide 13, I'll wrap up with some comments about our outlook for 2025. While we're pleased that we've been able to improve our financial performance over the past few quarters, we're still not at the level of performance that we target, but we expect to make continued improvement in our financial performance in 2025. Overall, economic activity continues to be healthy in our market. And with the strength of our balance sheet and the franchise we've built, we see good opportunities to capitalize on market disruption and challenges being faced by competing banks to add new clients and banking talent. We'll continue to prioritize prudent risk management and conservative underwriting criteria, but we are seeing some increase in our loan pipelines as the new bankers we've added in the past several quarters increased their level of productivity. Deposit gathering will remain a top priority throughout the organization, as we work to further reduce our loan-to-deposit ratio. With the successful repositioning of our balance sheet and the increased liquidity that we have in our loan-to-deposit ratio, we believe we're well positioned to generate a higher level of loan growth in 2025 as loan demand increases while maintaining our disciplined pricing and underwriting criteria. We see a number of catalysts that we expect to contribute to our improved financial performance in 2025. These include a higher level of loan growth, continued expansion in our net interest margin, the redeployment of cash generated from the sale of our OREO properties into interest-earning assets, more robust business development activities in our Wealth Management business as a result of changes we made in this business during 2024, and more operating leverage as we increase revenues while maintaining disciplined expense control. Should the environment become more favorable for mortgage demand in 2025, we should benefit from the MLOs we added during 2024 and generate a higher level of gain on the sale of mortgage loans. The positive trends we're seeing in a number of key areas are expected to continue, which we believe should result in steady improvement in our financial performance and further value being created for our shareholders in 2025 as well as in the coming years. With that, we're happy to take your questions. So Carmen, can you please open up the call?

Please standby for the first question, which will be from Brett Rabatin with Hovde. Please proceed.

Hi, good morning, everyone. I wanted to start off by discussing the large ORE property. To clarify, the ranch is under contract, which surprised me considering that the winter selling season in Colorado typically faces challenges. I would appreciate more details about the sale of the large ORE property and whether that relates to the write-down on ORE this quarter or if it pertains to one of the houses.

So we have three properties left in the resolution of that Aspen problem loan. One of them is the 3 Metals Ranch, which is a very large and unusual property outside of Basalt, which is just down Valley from Aspen. Actually, each of these three properties is quite unique. None of them are production homes in the neighborhood; these are all very unique properties. And so in the Aspen market, it's just not very predictable who will show up. Since we've had control of these properties, we've had lots of showings and interest in all three of them. Towards the end of the fourth quarter, we had a couple of strong bidders show up for the ranch. A lot of activity resulted in us accepting a contract from one of them. We haven't talked about the price, and I would be reluctant to prior to the closing, which is scheduled for early February. But I would tell you it's a very strong price that will not involve a write-down on that property. We're really pleased with the buyer and what that's going to do for that ranch in the future and the community. So it's a very happy ending to that part of the story, provided it happens as expected. The other two properties are smaller in dollar amounts, the ranch was in the high 20s on our books and our asking price. The other two are around $5 million or $6 million, and so completely different price points, they are both on the river in Basalt, which is very desirable, and they are very different from each other. We've had steady interest since we started marketing those. We've had a number of lowball offers; we've had a few serious offers, but nothing that we felt we should jump on yet. I think we probably won't sell those during the winter season, but you never know. I would have thought the ranch wouldn't sell until summer either, and there it is. We'll have to see what happens with the other two, but we're really happy with the outcome on the ranch and hope that that closes on schedule, which as far as we know, is 100% on track to do.

Okay. That's helpful color on that. And then maybe for Julie or David, just the margin outlook from here with or without rate cuts and how you think the margin progression will trend through the year? And how much maybe you might have repricing in the loan portfolio from the fixed side?

Yes, Brett, we feel that we do have the opportunity to continue to expand our margin through 2025 without rate cuts. Obviously, rate cuts will certainly benefit that additionally. As for the rate cut standpoint, I think our previous comments on roughly $1 million of annualized NII increase per 25 basis point reduction still holds. Without rate cuts, we have the opportunity to continue to turn over the loan portfolio as we bring on new loans at a higher level than our average yield on the loan portfolio. On the deposit portfolio, we certainly need to stabilize DDAs. We're focused on seeing some growth in 2025 in DDA, so if we can achieve that growth in DDAs, that improved mix will help on our average cost of funds as well. That's how we're thinking about it for 2025.

Okay. And then, David, just a follow-up on that. Any thoughts on the margin progression throughout the year in terms of basis points? And maybe if you had it for December.

For the month of December, we were at $247. Like I said, we are expecting NIM expansion. I think there are a number of variables at play that could certainly impact that, whether it's quicker or slower than our expectations. But yes, we are thinking that we will continue to see NIM expansion in 2025.

Okay, fair enough. Appreciate all the color guys. Thank you.

One moment for our next question, and it comes from the line of Woody Lay with KBW. Please proceed.

Hi, thanks for taking my questions. Wanted to start on fees and especially the risk management insurance fees, that was a really strong quarter there. Any color on what drove the increase in the quarter?

Sure. One of the efforts we've been making this year, Woody, is to strengthen our PTIM planning, trust, and investment management offering, including insurance and retirement services. We had expectations this year that we would be able to grow that insurance business. We were holding our breath by the fourth quarter because we weren't really seeing the progress that we hoped for during the year, but obviously, that turns out to be very seasonal anyway. It tends to happen in the latter part of the year, and it was a strong fourth quarter for us this year, like David talked about. It was a record quarter. I hope that this is an important part of our effort to get our fee income back in line with where it's historically been. We've been able to operate First Western over the years at close to a 50% split between fee income and net interest income. That number came down as we've grown the bank post-IPO. We've tripled the size of the bank, and the fee income really has not kept up with that. I think we were down kind of 24%, 25% a couple of quarters ago, I think, 27.7% in Q4. So I'm hoping that this is an indicator of things to come in the future. I don't know that we'll continue to have record quarters every quarter in insurance; I would say that's very unlikely. But another strong year next year, another strong quarter for fourth quarter next year. I would say that's where we're working towards and building towards. That's a small part of the overall PTIM fee business, and that grew without insurance by 2% year-over-year. I'd like to see that accelerate and grow and become a meaningful part of our fees. It would also be helpful if mortgages would wake up. I think the mortgage industry has just gotten clobbered this year, and we had signs of hope in Q3 that really did not pay out in Q4, which is seasonally slow anyway, but Q4 was pretty disappointing on the mortgage side.

Yes. Yes. I mean, mortgage activity just continues to be a little slow. Does that impact your thoughts on hiring in 2025 and hiring additional MLOs?

We had some success with that this year, which again doesn't show up anywhere. We wanted to bring in a number of new MLOs. We did that successfully. They've been producing at reasonable levels given the market. We actually opened two new production offices in 2024. So those expenses are in there. I think some of the results we saw in Q3 were reflecting that. Those were for some of the new folks, too. The question is what's going to happen in 2025 with that business. I think it was slightly positive for us. We made money in mortgages in 2024. We outperformed our plan a little. We're definitely congratulating the team on hanging in there and performing well compared to the industry. But we'd like to see that normalize and really become a nice contributor for us in our overall financial picture. We are seeing signs of life in January. We had a really good week last week after a quiet couple of weeks at the start of the year. Hopefully, we'll see that pick up certainly as we get out of the seasonal slow period, which will be the first quarter still. I'd just want to check with Julie if she wants to add on mortgages. She looks over that day to day and pays a lot of attention to it.

And then I just wanted to follow up on expenses, sorry if I missed it, but is there any run rate you're expecting for the first quarter of 2025?

Yes. We have worked hard to keep expenses flat over the last year or so, and we're trying to do that again in 2025. There's just a lot of inflationary pressure everywhere in our business. We've had efficiency initiatives, productivity initiatives, and we've driven more accountability. We've really asked people to step up and drive more productivity. Even with that, I think it's going to be hard to hold the line on $19.5 million, which is the target we've talked about in 2025. So we're thinking in terms of guidance, I think $20 million is probably a reasonable estimate for 2025 quarterly operating expenses. Hopefully, we can outperform that. There might be some bad surprises; I don't know. But that's a reasonable starting point.

Perfect. Thanks for taking my questions.

Thank you so much. One moment for our next question. And it comes from the line of Matthew Clark with Piper Sandler.

Good morning, everyone. Just on the OREO, I just want to confirm that the marks on the ranch are now fully reflected in the fourth quarter relative to the sale. And then as a follow-up, the two homes that you have out there, can you just give us a sense of the market you've incurred on those two and your comfort level kind of being able to clear those houses at that level?

So I have our controller in here giving me the stink eye because she likes to remind me we have to carry these things at the lower of cost or market. I keep telling her the market could be better, and she's like, well, it’s lower cost or market. So where we are is we're carrying the ranch below the price that we have it under contract for. So that would be a first quarter impact. And then the other two properties, we have to appraise them annually. David said in his comments that we got new appraisals in the quarter. We didn't. We got them on January 1, and I'm talking to accounting saying are we really going to write these down in Q4 because we get the report, the updated appraisals? But I mean those are the rules, so we follow them. I believe these properties are very unusual, and if we find the right buyer, we're going to get a good bid on those. If we don't, we'll have to look at the carrying costs and hopefully, we can get those off the books here in 2025. But that's how the accounting works.

And so does the updated appraisals on January 1 reflect the 4Q?

Correct.

Okay. And then back to the margin. Do you have the spot rate on deposits at the end of December?

Yes, it was 3.05%.

Okay. And then I think when we met a couple of months ago, and updated numbers, we were trending toward a 2.73% margin for the year. But that was before I think we knew the ranch might be sold before mid-year and knowing you're going to be able to redeploy those proceeds. I mean, do you feel better about that 2.73% for the year on average, obviously higher than that? Any updated thoughts on kind of where you might exit the year based on your baseline assumptions on the margin?

Let me just start with your comment about the benefit to NIM of taking $20-some million in non-earning assets and turning it into productive earning assets is spot on. That's a material number, and we're really pleased to be able to have that for most of 2025. Regarding your comment about the 2.73%, I think that is in the ballpark of what we're thinking for Q4.

Yes, I think that's still achievable. As I said, we've got to see improved loan production, and we need to get the right behaviors on our DDAs as well. But yes, I think that can still be achievable.

And that's for the year, just to clarify, not exiting the year.

Exiting the year, right, David?

Exiting, yes.

I do think, Matt, that historically, First Western has produced a net interest margin of some number like 3.15%, 3.20%, and as we see a normalized economic environment with a positively shaped yield curve and all the dust settles on all this we've been through over the last couple of years, we're going to get back there. I don't see any reason we wouldn't. That's not going to happen in 2025, but I see continued progress in that direction as we saw in the latter half of last year.

Yes, great. For my last question, I wanted to ask about the noninterest-bearing deposits. On average, they increased slightly, but they significantly decreased by the end of the year. Can you provide any insight into whether there were any fluctuations there or if we can expect some of that to rebound?

Yes. So we did a close look at why it came up at the end of Q3 and why it came down in Q4. There were some one-time things at the end of Q3 that are normal for us. Clients that have liquidity events deposit at the bank and then they use it. In Q4, I thought that the average balance number was significant for us. To see average deposits up 4% in the quarter was really positive. Personally, I don't put a lot of weight on the quarter-end number because it bounces around. Q4 has specific months where we see unusual effects in tax season, leading to runoff, and then at year-end, we see runoff because the operating accounts for our clients, they'll go and pay bonuses, and distributions typically come out of their operating accounts which are DDAs. You see this in Q4, particularly in the latter half of December; it’s very typical for us.

Okay. Thank you.

Thank you. One moment for our next question, and it comes from the line of Bill Dezellem with Tieton Capital. Please go ahead.

Thank you. I had a couple of questions. First of all, Scott, you referenced loan activity picking up after the election. Would you please talk a little bit about the loan pipeline and the overall discussions that you've been having since the election? If you are sensing that there is a mind shift that's taking place favorable or unfavorable?

Yes. I mean, there are many factors at play in loan demand, and one of them is the mood of our clients. When people feel confident and optimistic about the economic or political outlook, that's good for loan demand in our market and with our niche. We're definitely seeing that. I would say with other banks not wanting to invest in commercial real estate, we've seen a lot more demand for that. We don't really want to either; our appetite for that is full. As both Julie and David mentioned in their comments, we've focused on owner-occupied commercial real estate, which we do anyway, but that's really been our focus in the latter part of 2024. The other positive trend is we had been focused last couple of years on building more C&I demand, and that has played out nicely in Q4. We did our monthly senior management meeting yesterday and talked about the loans in the pipeline ready to close in Q1. The bulk of those are either C&I or cash collateralized securities secured loans. It's encouraging to see that coming and not a reliance on CRE or especially not investor CRE. Demand is there, and competition remains intense. We've talked about being strict on rates and terms. I think the team is doing a good job with that discipline, and we had a strong quarter in Q4 and a strong pipeline going into 2025.

So just to pick up on that. So the loan pipeline increased. Is that what we're hearing you say, Scott?

Significantly, and I think the right kind of loans, good quality relationship loans with a strong commercial borrower bias.

That's great. I wanted to ask about C&I loans compared to a year ago, which have decreased by over $100 million. Is this decline intentional or due to the needs of borrowers? Given the strong C&I pipeline you mentioned, I'm curious why the C&I book has decreased over the last year. What is the current inflection point we are facing?

Yes. Some of the problem loans we identified from our friend in Aspen were C&I loans, so that's a big part of that. I think some of this is just the ups and downs of what we see in commercial lending. Actually, I think we saw increased line utilization in Q4. Julie, you mentioned that the other day. But I don't think there's anything significant to read into those numbers, other than just the ins and outs of our loan clients. When we look at the pipeline of what we're seeing now, the focus we’ve had on C&I has led to increased demand. When we mention the pipeline, we are talking specifically about loans coming out of the pipeline and into closed loans now.

And Scott, just to make sure that I'm understanding correctly, the increase in C&I activity that you are seeing in terms of new loans being put on the books is due to both the concerted efforts you've made over the last few quarters and a more confident backdrop by your customers. It’s a combination of both of those. Is that correct?

I think that's right.

Okay, great. Thank you for taking the questions.

Yes. Thank you, Bill.

Thank you so much. And as I see no further questions in the queue, I will turn it back to management for final remarks.

Well, thanks, everybody, for dialing in today. We believe that this business can and will deliver attractive shareholder returns as it has in the past and is now back trending toward. I started my first bank in 1987, and so I've seen a number of rate cycles over these years and none was as fast-changing or as lengthy an inverted yield curve as what we've experienced here over the last few years in this market. This made for a challenging couple of years for banks in our niche, and First Western has proven to be up to these challenges. As we reported in the past couple of quarters, we've seen really positive underlying trends that are now reflected in our numbers with much more to come. With modest growth in 2025, improved margins, fewer non-earning assets, improved fee income, and limiting expense growth, all those should produce additional operating leverage and earnings gains. We believe the shift to offense at First Western will make 2025 a really good year for our stakeholders, including our shareholders. We appreciate the support we've had and appreciate everyone taking the time to dial in and speak with us today. Thanks, everybody.

And thank you, everyone, for participating in today's conference, and you may now disconnect.