First Western Financial Inc Q3 FY2025 Earnings Call

Thank you for your patience, and welcome to First Western Financial's Earnings Conference Call for the Third Quarter of 2025. I will now turn the call over to Tony Rossi. Please proceed.

Thank you, Latif. Good morning, everyone, and thank you for joining us today for First Western Financial's Third Quarter 2025 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. Scott?

Thanks, Tony, and good morning, everybody. Starting on Slide 3. We executed well in the third quarter and saw positive trends in many areas of loan deposit growth, growth in our net interest income, well-managed expenses and generally stable asset quality. This resulted in an increase in our level of profitability and positive operating leverage. Market remains very competitive in terms of pricing on loans and deposits. We continue to successfully generate new loans and deposits by offering a superior level of service, expertise and responsiveness rather than winning business by offering the highest rates on deposits or the lowest rates on loans as other banks are doing. 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 made to our banking team over the past few years as well as generally healthy economic conditions in our markets, we had a solid level of loan production, which was well diversified across our markets and industries and loan types. As a result of our financial performance and the balance sheet management strategies, we had a further increase in both book value and tangible book value per share, and we used our strong capital position to repurchase some of our shares during the third quarter, which was accretive to our tangible book value per share. Moving to Slide 4. We generated net income of $3.2 million or $0.32 per diluted share in the third quarter, which is higher than the prior quarter and a 45% increase from our EPS in the third quarter of last year. With our prudent balance sheet management, our tangible book value per share increased by 1.2% this quarter. I'll turn over the call to Julie for some additional discussion on our balance sheet and trust and investment management trends. Julie?

Thanks, Scott. Turning to Slide 5. We'll look at the trends in our loan portfolio. Our loans held for investment increased by $50 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production. But with the higher level of productivity we are seeing from the additions to our banking team that we have made over the last several quarters, we are seeing a solid level of new loan production. While we are also seeing an increase in commercial real estate loan demand that meets our underwriting and pricing criteria, new loan production was $146 million in the third quarter. The new loan production was well diversified with the largest increases coming in our residential and commercial real estate portfolios. And we are also getting deposit relationships with most of these new clients. We continue to be disciplined and are maintaining our pricing criteria, which resulted in the average rate on new loan production being 6.38% in the quarter. Moving to Slide 6. We can take a closer look at our deposit trends. Our total deposits increased by $320 million from the end of the prior quarter. This was due to both new accounts and a buildup among existing client balances. We had an increase in noninterest-bearing deposits due to inflows we saw from title companies, driven by mortgage industry volume. Additionally, we had an increase in interest-bearing deposits as a result of the successful execution of our deposit gathering strategies. Now turning to trust and investment management on Slide 7. We had a $64 million decrease in our assets under management in the third quarter, primarily attributed to net withdrawals on low fee product categories, partially offset by improved market conditions on investment agency accounts. This resulted in an increase of $43 million or 2.7% during the quarter. Trust and investment management fees increased by $100,000 from the prior quarter, primarily driven by the increase in investment agency assets under management. Now I'll turn the call over to David for further discussion of our financials. David?

Thank you, Julie. Turning to Slide 8, we'll look at our gross revenue. Our gross revenue increased by 8.7% from the prior quarter due to increases in both net interest income and noninterest income. Year-over-year, our gross revenue increased by 15.5%. Now turning to Slide 9. We'll look at the trends in net interest income and margin. Our net interest income increased for the fourth consecutive quarter and increased by 8.9% from the prior quarter, primarily due to an increase in our average interest-earning assets with the strong deposit growth we had contributing to our higher level of cash on the balance sheet. Our net interest income increased by 25% relative to the third quarter of 2024. Our net interest margin decreased by 13 basis points from the prior quarter to 2.54%. This was due to unfavorable mix shifts in both interest-earning assets and deposits as our deposit growth during the quarter was in higher cost money market accounts. The strong deposit growth during the quarter contributed to higher cash held on the balance sheet. As this liquidity is deployed into the loan portfolio during the fourth quarter, we expect to see net interest margin expansion. Now turning to Slide 10. Our noninterest income increased by more than $500,000 or 8.5%, which is 34% annualized from the prior quarter. This was primarily due to increases in all major fee categories, including trust and investment management fees, insurance fees and gain on the sale of mortgage loans. The increase in gain on sale of mortgage loans was driven by a higher level of mortgage production and the increase in trust and investment management fees was driven by an increase in investment agency assets under management as a result of improving market conditions. Now turning to Slide 11 and our expenses. Our noninterest expense increased by less than $1 million from the prior quarter. Most 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. Turning to Slide 12. We'll look at our asset quality. As Scott indicated earlier, we saw generally stable trends in the loan portfolio in the third quarter with slight increases in non-performing loans and non-performing assets. This was primarily due to one loan that was downgraded during the quarter. And we had a minimal level of net charge-offs again this quarter. We had a slight increase in our allowance coverage from 75 basis points in the prior quarter to 81 basis points in the third quarter. Now I'll turn it back to Scott. Scott?

Thanks, David. Turning to Slide 13, I'll wrap up with some comments about our outlook. Overall, we continue to see relatively healthy economic conditions in our markets, and we're seeing good opportunities to add both new clients and banking talent due to the ongoing disruption from M&A activity here in the Colorado market. Our loan deposit pipelines remain strong and should continue to result in solid balance sheet growth in the fourth quarter. In addition to balance sheet growth, we also expect to see positive trends in net interest margin, fee income and more operating leverage resulting from our disciplined expense control. Based on trends we're seeing in the portfolio and the feedback we're getting from our clients, we're not seeing anything to indicate that we'll experience any meaningful deterioration in asset quality. 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 going forward. So with that, we're happy to take your questions. Latif, if you could please open up the call.

Our first question comes from Brett Rabatin of Hovde Group. Please go ahead, Brett.

I wanted to start with the deposits and the strong MMDA growth. If I understood you correctly, it seems that this growth is a result of both internal efforts and possibly contributions from the mortgage department. Could you provide more details on that? Are these growth levels likely to be stable?

Well, I think we've talked about our efforts to grow deposits and the fact that that would happen a little bit in a lumpy fashion wouldn't be a big surprise given our history here. We do see large deposits coming in and out. And in this case, I think the things that we saw that happened in Q3 are deposits that are going to stay here and give us a higher deposit base to grow from into Q4.

Okay. That's helpful. And then the NPA that you added during the quarter, any color on that credit? And then just was there part of the provision related to a specific reserve for that NPA?

Yes. I think we have a number of credits that have performance issues over time, and this is one that is a commercial and industrial loan. We have been paying attention to it. We downgraded it in Q3, and we do have a specific provision for it. We expect it to be worked out and work through over time; the provision is more than adequate.

Okay. And then just maybe lastly, if I could ask on the margin. Julie, you indicated the margin would be up from here. Any magnitude that you could share in terms of what you think 4Q might look like, presuming we get a rate cut or two?

Yes. I think we do have the opportunity to see net interest margin expansion. If you look at the amount of liquidity that's sitting on the balance sheet, if we redeploy that into the loan portfolio at something like plus 200, I think that should drive net interest margin expansion there. We also certainly have the ability to continue to improve earning asset yields and lower our deposit costs. So I think we've got a pretty nice path for net interest margin expansion in the fourth quarter.

Okay. David, any magnitude that you're thinking about in terms of basis points?

Yes. I'm thinking we can achieve something like 5 basis points of net interest margin expansion.

Okay. Okay. Great. Appreciate all the color.

Our next question comes from the line of Matthew Clark of Piper Sandler.

I wanted to start on the spot rate on deposits at the end of the quarter.

Yes. Matthew, it was 3.04%.

Okay. And then any updated thoughts on the beta you're looking to achieve with additional Fed rate cuts through the cycle and whether or not that starts to decline over time?

Yes. It has been declining, and it will certainly continue. We achieved somewhere around a 63% beta on money market accounts in the third quarter. And I think that's reasonable for the fourth quarter expectation as well.

Okay. And then the expense run rate going forward, I think some of the increase this quarter was related to incentive compensation. But what are your thoughts on the run rate here in the fourth quarter?

Yes. The incentive compensation can vary certainly with the financial performance. But I think something similar to the third quarter as far as expenses is probably a reasonable estimate for the fourth quarter.

Okay. Great. And then last one for me, just on the wealth management business. AUM down a little bit. It looked like it was in the lower fee products, though may have been deliberate, not sure. But any update on the kind of renewed growth and profitability improvement strategy there?

Yes. We've definitely been working on getting that going again, and we've replaced the team on the trust and in the planning side. We've got a new leader that joined us beginning in the second quarter for our planning team and definitely seeing some nice progress from them. As David noted, we saw AUM go down, which is not really something we manage for. We're really more concerned about the fee income, and we saw fee income grow in the agency accounts in Q3, which is what we want to see. So definitely nice progress from that new team with, I think, a lot more to come. And Matt, just a little bit more color on deposit pricing. With the increase in deposits, you're always going to see relatively expensive at first, and then it's going to moderate over time typically with these new relationships and additional deposits you bring in. Our average deposit costs last quarter peaked at 3.22% in August, and then we're down about 3.15% in September. And as David said, ended the quarter at 3.04%. So you're seeing a nice trend just within the quarter there. So hopefully, we can see that continue into Q4.

Our next question comes from the line of Will Jones of KBW.

I wanted to circle back to the deposit growth. Obviously, a fairly banner quarter there for deposits, and it sounds like you expect maybe to see a little bit more balance sheet growth in the fourth quarter here. But should we, in any way, view this large influx of deposits as a way to prefund your expected growth for 2026, and maybe '26 then becomes more about just remixing the balance sheet? And then just, I guess, pairing within that, you obviously have a fair amount of liquidity from the deposit growth. How should we think about you guys being a little more opportunistic with securities purchases at this point?

Well, I think that was a 3-part question. So let me see if I can get them all here.

Yes. I'm sorry about that.

We appreciate the question. You're correct that we have been proactive in attracting deposits. Over the past year, we have implemented several strategies to concentrate our efforts on deposit growth. While we are capable of increasing loan volume, we aimed to align the loan-to-deposit ratio more closely. Your description of the situation is reasonable. However, it's important to note that this is not a temporary initiative to prepare for 2026; it's an ongoing effort that spans our product group and involves our planning, trust, and investment management teams across all 19 of our locations. We require strong relationships with each loan, which includes deposits, making this a primary focus for the company. We are witnessing significant market disruption, resulting in a competitive landscape for deposits. Simultaneously, there is a segment of clients who prefer not to engage with large out-of-state banks. This disruption is ongoing and appears to be increasing, providing us with opportunities to attract talent that can support our teams. We are also bringing in new clients, and I expect this trend to persist. There isn't any indication that this will change. Additionally, our market share remains low in most areas, typically around 1% or 2% in larger markets and even lower in newer ones. Given the robust economy, I believe these factors will lead to continued asset growth in the fourth quarter and into next year.

Okay. Helpful response. And just as I kind of pair some of those comments, just into how the margin looks for 2026. As I kind of look back how you've transformed the margin this year, about 20 to 25 basis points of year-over-year expansion. Do you think that magnitude is repeatable again in 2026? Is the opportunity there from both a deposit pricing standpoint and loan growth standpoint to see that kind of magnitude again in 2026?

Well, what I've been seeing is that we really got heavily impacted by that rapid run-up in short-term rates and the inverted yield curve and that we thought that that would turn around and we'd see nice deposit betas as rates declined, which we have. And the fact that we've seen a 22 basis point improvement from Q3 of last year to Q3 of this year, I think it's a nice start in that. We've moved out of the 2.30s into the 2.50s. And I continue to think that in normal environments, my banks, including this one, have produced 3.15%, 3.20%, 3.25% net interest margin for the way we do business. And that's where I think we're going. I don't think we're going to get there next quarter. I don't know if we can get there next year, but that, I think, is going to continue and the fact we've seen that amount of improvement here over the last 12 months in spite of the growth that we've seen on the balance sheet, I think, is really promising and bodes well for continued operating leverage into 2026.

Yes. Okay. Very helpful there. And then lastly for me, you touched a little bit on in some of your comments, just the organic opportunity that's arisen from some of the M&A disruption. But there has been a lot of deal announcements. There's been a lot of price discovery. So just curious how you think about your own scarcity value within that? And then maybe how you view yourself as a downstream buyer potentially of banks.

We believe our responsibility is to enhance shareholder value, and we see that as achievable by generating operating leverage through significantly higher revenue growth compared to expense growth. This will lead to a better efficiency ratio and improved profitability. We are not satisfied with our current profitability or efficiency ratio. However, we have made several investments and changes over the past few years that are now beginning to yield positive results, indicating potential for ongoing organic growth and further operating leverage. We have discussed our outlook extending into 2026 and beyond. Regarding our unique position, First Western is increasingly distinct in Colorado and also as a successful national wealth management entity. For instance, FineMark in Florida, which has a balance sheet and assets under management similar to ours, sold for a noteworthy multiple, indicating good scarcity value for us. Our clients recognize this and find us appealing, and it seems other bankers across the country do too. When it comes to acquisitions, we are eager to pursue opportunities, having successfully done so 13 times in the past. We just need our stock price to reach a more reasonable level, as there are numerous opportunities we could capitalize on once our stock price improves.

Okay. I appreciate that. Appreciate that response. That's all for me.

Our next question comes from the line of Bill Dezellem of Tieton Capital Management. Please go ahead, Bill.

First of all, Scott, it sounded like you may have had some additional comments that you were going to share to the last question. I'll let you do that if there's something more you want to add.

No, I'll add a few comments at the end. Thank you, Bill.

All right. So continuing down the deconsolidation route, would you talk about what transactions have been most disruptive and possibly favorably impactful for First Western?

Yes. I don't entirely understand it, Bill. So I can't really give you a really solid prediction of what's going to happen with all this. But I would tell you that when Guaranty Bank and CoBiz sold, I thought that was going to create a lot of opportunity because our type of clients definitely were at those two banks. And I thought with them being acquired by out-of-state banks that was going to create a lot of opportunity for us. As it turned out, it didn't. And I think a lot of the reason for that is the bankers stayed in place for a while. And then when they did move, they were really bid up by other players. And so it got to be really expensive to bring those folks over. Now with the second-tier acquisitions that we're seeing, for example, with Citywide, which was a really great local family-owned and family-run bank, they sold to Heartland, I don't know, 5, 7 years ago, something like that. And then I think Heartland really had a strategy of trying to run these local banks as the way they had run historically. UMB buys Heartland, UMB is going to drive a UMB culture into what used to be Citywide. And so we've seen some good people and good opportunities come out of that. And so I think interestingly, it's sort of the second-tier acquisitions that really create more opportunities in some way. And then the FirstBank one in this market is just really interesting. Like FirstBank is a great retail bank and just really loved by Coloradans. So there's this emotional tie that I don't entirely understand. But definitely local people here, local business leaders, local entrepreneurs have strong relationships with that company. And it's just going to be a challenge for a big national player to keep that passion. And we'll see. I mean we've had lots of calls. We have clients that bank here and bank there. And you can be pretty sure that those folks are calling us to say what additional capacity you guys have for us to stay with you guys. So I don't know how all that plays out, Bill. I do feel like we're seeing more benefits of the disruption in today's market than what we saw 5 or 7 years ago. And again, I'm not sure all the reasons why, but it's been really good for us so far.

So let me take that one step further. Do you sense that you have the opportunity to become the new bank that Coloradans love that others look at you and go, we don't even know why, but they sit on this pedestal?

Well, I do know our clients love us. We're never going to be a retail bank the way FirstBank was. Like FirstBank, one of their strengths was they did one thing. And over the years, I've talked to people like John Ikard and other CEOs over there, and they're like, well, what do you think about the trust and investment management business? And I would tell them and they would say, well, that's fine, but we're never going to do that at FirstBank. So I mean they're just very focused on being a retail bank. And I think they did that better than anybody. And we're not ever going to do that. We're not going to open branches on every corner like they did and stuff like that. So I think we'll continue to be First Western. I know that our folks are very committed to their markets and their communities. We talk here about taking care of our four key stakeholders, which are shareholders, associates, clients, and communities. And so we try and do those things that are right for our people and create that emotional connection that you're talking about. And certainly, with our niche, that's something we would hope to expand and build on.

That's helpful. And then relative to Arizona specifically, are you seeing anything from a transaction standpoint that you see as benefiting your opportunity for bringing on new people there?

Well, I don't think we've announced it yet. We have Julie, who is telling me. I was thinking I was going to make some news here, Julie, but you're ahead of me. We actually recruited one of the top individuals from First Republic to build our franchise in Arizona for us, and he had a garden leave period and now he has joined us. We are really optimistic about what we think the team there can accomplish in the coming years. I believe that if we had the same small market share in Arizona that we have in Colorado, we would be about $4 billion to $6 billion bigger. That's what we've tasked the team there to aim for. I think we've got a strong leader in place who can achieve that.

Great. Congratulations on that. One additional question, please. The excess cash that you have on the balance sheet, how long are you thinking that it will take to redeploy that cash?

Yes. Actually, that was one of the 3-part question that I missed on, David. And do you want to talk about what we've done already with investments and then what our thoughts are.

Yes. I mean, Bill, if you kind of look back at the history of our balance sheet, we certainly have our liquidity and capital really more earmarked towards the loan portfolio. And I think that continues. Now that being said, when there are opportunities from a bond perspective that we like, we will take advantage of them. So we did add about $50 million in the third quarter to the bond portfolio, and those were primarily floaters that got us a nice spread over interest-bearing cash, which still really remains highly liquid assets, government guaranteed bonds, agency GSEs, things like that. So I think the focus is still to deploy that liquidity into the loan portfolio. But as we see opportunities in the bond portfolio, we'll certainly assess those as they come up.

I have two follow-up questions regarding the $49 million available for sale that's on the balance sheet. Are you considering redeploying it, and do you see this as a phenomenon lasting two to three quarters based on the current economic activity? Will this be resolved by the end of Q4, or is it more likely to extend into next year? I'm looking for a clearer perspective on how you anticipate loan demand will relate to that excess liquidity.

Yes. Good question, Bill. We expect our loan demand trends to continue. We had a really strong second quarter in loan growth and had a good quarter again in the third quarter in terms of loan growth. Given our loan pipelines and what we're observing in our markets, we do expect those trends to persist. Therefore, I don't believe it's a situation that will take a year to develop regarding redeploying that liquidity.

I would just add, Bill, that we have seen a modest growth rate in the balance sheet, right? Like I think that our expectation is that we can grow single digits, mid-single digits, maybe low double digits. We're not interested particularly in growing faster than that. And I think that you're going to see this growth continue at a moderate pace here into 2026 from everything we know. Not expecting to go out and lend all this money out next week. That is not in our game plan.

I would now like to turn the conference back to Scott Wylie for closing remarks. Sir?

Thank you. We have mentioned for several quarters that we successfully played defense and plan to shift back to offense in 2025. We faced significant challenges for a time, including a rapid 525 basis point increase in short-term rates and an extended inverted yield curve. We also experienced three of the four largest bank failures in U.S. history, including First Republic, which was recognized as a strong player in our niche. Having navigated those defensive strategies, we aim to shift to offense and capitalize on the investments we've made recently in five key areas. We have revamped our technology infrastructure, transitioned to a fully cloud-based environment, installed middleware, and launched a new digital platform, with new services and tools that position us as a tech leader. Additionally, we've reorganized our product teams in areas such as loans, deposits, investment management, planning, trusts, and mortgages, strengthening our capabilities. Our local office teams have been expanded and equipped with new tools for growth, which have been rolled out recently. We have also standardized our internal control processes to enhance efficiency and focus on delivering value rather than competing on price. Lastly, we've restructured our credit, risk, support, and marketing teams to align with the future vision for First Western, all of which is integrated into our current expense structure. We hoped to see signs of progress this year, which became evident in Q3, as our net interest income increased by 35% quarter-over-quarter annualized, and our fees rose by 31.6% in the same period across our key areas, as David noted. Pre-provision net revenues increased nearly 35% quarter-over-quarter annualized, and our efficiency ratio is improving, indicating operational leverage. Looking ahead to 2026, we are currently engaged in business planning with each department lead, and we'll assess the outcomes in due course. In Q3, year-over-year trends reveal our net interest income grew by 25%, supported by modest balance sheet growth and improved net interest margin, contributing to favorable operating leverage. Our fees increased 21% from last September to this September, while operating expenses rose only 4%, mainly due to incentive compensation linked to our revenue growth. If we see higher expenses in Q4 from incentive compensation tied to good performance, we view that as a positive issue to have. Moving forward, we aim to return to being a high financial performer like we were earlier in this decade, with a clear path to achieving a 1% return on average assets, and we see potential for even more. We are proud to have been named one of only 16 KBW Bank Honor Roll members in 2025 for our past performance. Recently, we were also included in Piper Sandler's list of the top 200 U.S.-listed banks by size, and we have received requests to add time slots at the upcoming Hovde Conference in Florida due to high interest. This indicates positive momentum, and we are optimistic about concluding the year well and continuing to create shareholder value into 2026. Thank you all for your support, and we appreciate you joining us today.

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