First Western Financial Inc (MYFW) Q3 2026 Earnings Call Transcript

you for standing by and welcome to first western financials third quarter 2026 earnings conference call currently all participants are in a listen-only mode after the speaker's presentation there will be a question and answer session to ask a question during the session you will need to press star one one on your telephone to remove yourself from the queue you may press star one one again. I would now like to hand the call over to Lisa Fortuna, Investor Relations. Please go ahead.

Thank you, Latif. Good morning, everyone, and thank you for joining us today for First Western's third quarter 2026 earnings call. Joining us from First Western's management team are Scott Wiley, Chairman and Chief Executive Officer, Julie Korkamp, Chief Operating Officer, and David Weber, Chief Financial Officer. We will use a slide presentation as part of our discussion this morning. If you have not already done so, 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 involves 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 GAAP to non-GAAP measures. And with that, I'd like to turn the call over to Scott.

Thanks, Lisa, and good morning, everybody. We executed well in the third quarter and saw positive trends in many areas, including loan growth, improving deposit mix, net interest margin expansion, trust and investment management fee growth, well-managed expenses, and improved asset quality. This resulted in another quarter's strong profitability. Pre-tax, pre-provisioned income increased 15% in the third quarter, that's not annualized, compared to the prior quarter, and 27% compared to the third quarter 2025. We continue to maintain a conservative approach to new loan production with our disciplined underwriting and pricing criteria. The new Banking Talent Ed over the past several years and increasingly over the past few months and our healthy economic activity across our markets fueled strong loan production that was diversified across markets, industries, and loan categories. As a result, our financial performance and balance sheet management strategies, we continued to grow tangible book value. Moving to slide four, we generated net income about six million or 60 cents per diluted share in the third quarter, both of which were 88% higher, respectively, than the third quarter of 2025. With our prudent balance sheet management, our tangible book value per share increased by 3% this quarter to $26.28. Now I'll turn the call over to Julie for some additional discussion of our balance sheet and trust investment management trends. Julie?

Thank you, Scott. Turning to slide five, we'll look at the trends in our loan portfolio. Our loans held for investment increased $95 million from the end of the prior quarter, marking the sixth consecutive quarterly increase. On a year-over-year basis, total loans increased 8%. We continue to be conservative and disciplined in our new loan production. However, the higher productivity of the bankers added over the last several quarters is driving an improvement and loan originations. New loan production was $163 million in the third quarter and was diversified across various markets and loan types with a focus on relationship-based lending. Additionally, we are attracting deposit relationships with these clients. We continue to be disciplined with respect to pricing, which resulted in the average rate on new production of 6.79% in the quarter, which was 42 basis points higher from the prior quarter and 53 basis points higher than the average rate of loan payoffs of 6.26% in the quarter. Quarter-end loans outstanding were almost three percent higher than average loan balances for the quarter, which is providing strong momentum going into the fourth quarter. Moving to slide 6, we'll take a closer look at our deposit trends. Our total deposits increased 2.5% from the end of the prior quarter with growth in non-interest-bearing and money market accounts. On a year-over-year basis, total deposits increased 2.4%. Average non-interest-bearing deposits increased 14 million or 3.9% in the quarter and 10% using quarter imbalances. We remain focused on continuing to improve our deposit mix to drive further NIM expansion going forward. Now I'll turn the call over to David for some additional discussion of our balance sheet.

Thank you, Julie. Turning to Slide 8, we'll look at our gross revenue. Our gross revenue increased 2.8% from the prior quarter, primarily due to an increase in net interest income partially offset by a decrease in non-interest income. Slide 9, we'll look at the trends in net interest income and margin. Our net interest income increased 5.5% from the prior quarter due to an increase in net interest margin and an 81 million dollar increase in average interest earning assets. Our NIM increased five basis points from the prior quarter to 2.95% was primarily due to an increase in yield on average interest-earning assets partially offset by an increase in cost of funds. The yield on interest-earning assets increased seven basis points driven by an increase in loan yield funds increased two basis points due to higher rates on money market accounts increased 18% from the due to a 41 basis point increase in non-interest income decreased by six was primarily due to a decrease in net gain on sale of mortgage loans as origination volumes were negatively impacted by high recent bank fees partially offset by an increase in trust and investment management and investment management fees increased 2.6 percent from the prior quarter driven by increases in investment agency at 11 and our expense non-interest expense decreased $400,000. The decrease was primarily driven by a decrease in technology and information systems as well as salaries and employee benefits. The decrease in technology and information systems was primarily attributable to a $400,000 non-recurring charge that we recorded in the second quarter. The decrease in salaries and employee benefits was primarily driven by lower efficiency ratio improved to 72% compared to 74% last quarter and 76% in the third quarter of 2025. 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 improved trends in the loan portfolio in the third quarter with a decrease in non-apprual loans. The non-performing asset ratio decreased to 39 basis points. Increased loan volume contributed to a provision of $600,000. The coverage ratio was 74 basis points in the third quarter down from 75 basis points. I will turn it back to Scott.

Thanks David. Turning to slide 13, I'll wrap up with some comments about our outlook. Based on our third quarter performance and what we're seeing in our markets, we're encouraged, and we expect further improvement of financial performance in the fourth quarter of the year. Overall, we continue to see relatively healthy economic conditions in our markets. We're seeing good opportunities to add new clients and banking talent due to the ongoing disruption from imminent activity in our markets. Our loan pipeline remains strong and should fuel solid loan growth going forward. We expect positive trends to continue across several key areas, including loan growth, deposit growth, deposit mix improvement, debt interest margin expansion, and increased activity in our wealth management business. Combined with a disciplined expense management, we believe continued revenue growth should drive even more positive operating leverage and further improve our financial performance. We had a net interest margin expansion of 26 basis points in 2025 and another 24 basis points in expansions so far in 2026. This will continue. We remain disciplined with expenses continuing to invest selectively in opportunities that can enhance long-term shareholder value. Continued M&A disruption in our market is creating attractive opportunities to add experienced banking talent and new client relationships and we're well positioned to capitalize on those opportunities as they emerge. Based on the 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 with positive trends across several key areas in a business. We believe we're well positioned to deliver continued improvement in financial performance and create additional value for our shareholders. So with that, we're happy to take your questions. Lateef, please open up the call.

As a reminder to ask a question, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. Please stand by while we compile the Q&A roster. Our first question, sorry, one moment. Our first question comes from the line of Hannah Nguyen of KBW. Your line is open, Hannah.

Hi, good morning, guys.

Morning, Hannah.

I want to start on loan growth. I know you had talked on the call last quarter about expecting to see strong loan growth in the second half of the year, so it was great to see that 14% number this quarter. Just wondering if you could give us a sense of how pipelines are shaping up for the fourth quarter and into 2027, and curious if you think we could expect to see another double-digit growth quarter to end the year.

Well, I'm always reluctant to say, well, this quarter is going to be this percent because, you know, it does bounce around a little bit, but there are definitely favorable trends that we've seen progressing through the year, which we expected. We said we were going to be investing in more talent in the first half of the year, and that would produce more growth in the second half of the year, and that's exactly what we're seeing. I was actually talking to the team this morning. You know, we've seen more loans in our credit working group, which means three times a week, to preview upcoming credits, and then also credit committee over the past several weeks now than we've seen in the first half of the year. So pipelines are stronger and continue to be strong. The actual work in process that we're seeing and the activity we're getting from our frontline folks is stronger. So I do think that we're going to see positive trends. I feel like, you know, our forecast for this year, kind of 10%-ish growth seems like we're on track for that. And I think, you know, a 15% run rate here going into 2026 seems like, 2027, I mean, seems like a reasonable indication of what we're seeing.

Great. That's really helpful.

And the next just wanted to touch on mortgage i know the rate environment has been a bit of a headwind there just curious how you see activity trending from here if rates continue to rise so mortgages is as a percent of you know revenues for us is is a small number you know we we just are in that business primarily because we think it's strategically important for a private bank to be able to play good defense with our clients that want mortgages and to use that to play offense to attract jumbo mortgage clients that we can turn profitably into, you know, full relationships. So, you know, definitely the production nationwide has fallen off the cliff. We actually looked with our mortgage team earlier this week to see how we were doing relative to the overall secondary market, and we're outperforming, and I think that's because, you know, we're doing the things we can. We can't control, obviously, you know, the 10-year Treasury. We can't control demand for mortgages, which is way down nationally. But what we can control is the fixed expenses in that area, which we've cut, and the quality and productivity of the MLOs that we have in place, who are commission-based, So there's not a significant direct cost to them on an ongoing basis, but we have, from last year, adding MLOs. So that helps with our strategic benefit, but it also helps when the market comes back, which eventually it will, you know, we'll be able to take advantage of that. But, you know, it's a little bit of a sideshow. I actually think the more interesting part of the fee income story this quarter, and we kind of glossed over page seven of the deck. So I just want to go back to that for a minute. Is it page 7? You know, the fee income this quarter was down thanks to insurance and mortgages, but actually P-TEM fees, oh, and the AUM was down, so it looks all negative. But, you know, we said that we've done this restructuring of our P-TEM folks and completely reorganized that business for the future over the last couple years. We brought in Brandon Summers from Goldman Sachs. and he's leading that team now. We said, you know, we're going to see some results of that in 2026. Well, in Q2, we talked a little bit about green shoots, and now we see, you know, that was up. Trust and investment management fees were up over $100,000 in Q3, which if you look at that on a growth rate basis, you know, that's 2.6% increase or annualized. That's, what, 10.4%. and a 5.1% from a year ago. So those are trends that we haven't seen in years here. And I think that that's really a very bright spot in our fee income story that's kind of buried in some of the headwinds from mortgages and our insurance sales.

That's great. Thanks for all the color there. Thanks for taking my questions. I'll step back.

Thanks, Hannah. Thank you. Our next question comes from the line of Matthew Clark of Piper Sandler. Your line is open, Matthew.

Hey, good morning, everyone.

Morning, morning.

Just on the deposit cost side, maybe if we could just start with getting the spot rate at the end of September and then the beta assumption we should use on interest-bearing deposits, assuming we get one or two more rate hikes here?

Yeah, Matt, the spot deposit rate for total deposits was 2.86 at the end of September. And from a beta standpoint, the way I look at the deposit portfolio is really focusing on the money market accounts from a beta standpoint. So we have $740 million in indexed money market accounts, which would translate to 100% beta. And then we have $760 million in standard money market accounts, which that's where, and we saw a 28% beta on that.

Just to add a little bit of strategic overview on that too, Matt, we've focused on building our deposit base. And I thought we saw some really nice progress in Q3 on that, not only in the growth that we saw, but also the mix. And, you know, David and his team did a drill down on that. And there's really three components that seem to be driving that. You know, our business development focus that we're working on the deposit side. You know, we brought in this new deposits are nine months ago now. And, you know, the focus we're doing there seems to be working. And then we've restructured and rebuilt our treasury management team. We've always had a competitive treasury management offering, but we've really changed that pretty significantly and upgraded that. And then the third area is we require relationships with every loan we do. We've been doing that for, I don't know, a year and a half now, something like that. And we literally write into every loan document a requirement that the borrower use us as their primary bank. So those three components are driving deposit growth. They're driving a deposit shift into more DDAs, non-interest-bearing deposits, which of course is an area full of opportunity for first-win.

Matt, one data point I should also mention is we do have $200 million, and that's a pay fixed swap. It takes that index money market.

Okay, great. And then just wanted to ask about the borrowings at the end of the quarter. It looked like on average they were down but up a decent amount at the end of the quarter. And you expect, you know, margin expansion to continue. Can you just provide some color on, you know, those additional borrowings and whether or not they might stick around? I would think that would be a headwind for the margin in 4Q.

Yeah, on an average basis, we expect that to normalize. We do have internal liquidity policies and things of that nature that are growing at the end of the quarter. On an average basis, we do expect that.

Okay. Similar to where you were is what you're implying? Yeah. Okay. And then just some profitability. Any thoughts on when you think you can achieve a 1% ROA?

And I think we all know how you can get there but um any thoughts on timing there well we've been working on our plan for 2027 and i think um you know for if we define that as kind of short term here we do think that we'll be operating at one percent roa during 2027 whether that's mid-year or the average for the year the full year i would be reluctant to say today but i i think you know from the progress we've seen now over the last three years and then these trends that i talked about which seem to be accelerating in q3 that are so positive i do think that that is something we can achieve in in you know the the other interesting question that i uh have been wondering about and asking david and his team about is you know when we were doing 54 cents in 2023 you know we're thinking boy you know it's our eps we got to get back to one percent here uh is one percent you know any kind of a ceiling for us and you know our new three-year forecast that we use internally you know, we can see a line of sight to three to one-and-a-half percent ROA just based on, you know, kind of stable, healthy markets, upward sloping yield curve, relatively stable rates, healthy economy. You know, if those sorts of things continue, I think that that's something that we can look forward to in the medium term to drive shareholder value here.

Great. Thanks again.

Thanks, Matt.

Thank you. Our next question comes from the line of Liam Coohill of Hubdy Group. Your line is open, Liam.

Thank you, and good morning, Scott, Julie, and David. Thanks for taking the questions. Good morning. So, one of the highlights for me this quarter was definitely the non-interest-bearing balance growth. Now, curious to hear about what you think some of the key drivers are there, especially given how difficult it is to grow non-interest-bearing balances in this right environment.

Yeah, so, you know, at First Western, we've always focused on business owners and those individual entrepreneurs and their families and their charities. And I think, you know, what's changed here, and I mentioned some of this a minute ago, But, you know, the business development focus, our treasury management focus, our relationship-based lending that we require for each borrower, I mean, those are all positives. You know, some of what we saw in Q3 was also just fluctuations in operating accounts we already have. But, you know, a big driver of all this for us today, and I think going forward for the foreseeable future, is all of this market disruption. And it's really profoundly affecting the competitive environment here in a way that I haven't seen in my 40 years of banking and our own banks here in the market. And, you know, where that translates into is our ability to attract really outstanding talent. You know, we brought in this quarter, we added Bill Sullivan as our head of strategic planning here. You know, Bill is a really interesting guy. He's been around Denver forever. He's got a great reputation among our target markets and among bankers here because he's so well-known and well-liked. He built the Colorado State story for, he was the former CEO of Bank of Oklahoma here, and they bought Colorado State Bank and Trust, which is where a lot of entrepreneurs and a lot of trust, personal trust business went over the years. And then 10 years ago, the Bank of Oklahoma bought Colorado Business Bank, which was another place that's full of our type of clients. So Bill knows that market really well. He's actually working on some really interesting strategic initiatives for us. But, you know, it's not just Bill, right? It's Brandon that we brought in from Goldman. It's 14 hires now we've made of senior folks out of what used to be First Bank. And these folks, a number of them have a CNI focus. all of them have a focus on our type of clients and, you know, providing that kind of community-oriented, team-based service that's something that First Bank was so good at and that we believe in here. And, you know, of those 14 hires, I mean, they're all hitting the ground quickly and having a big impact here and really feel comfortable in the culture of First Western and how similar it is to some of the really great qualities that First Bank had over the years. So, I mean, all those things, I think, are going to drive deposit growth, deposit opportunities, and DDA, treasury management, relationship banking opportunities.

Especially the last point you made there about the new hires impacting loan growth. We definitely saw that in the quarter. Originations were really strong. But one question I did have was payoffs did tick up a little bit, and I was wondering how you expect payoffs to trend in a higher-rate environment. Are those mostly, like, variable-rate loans that are paying off?

Yeah, that's a great question. And, David, I think you took a look at that to see if there was anything in particular there that stood out.

Yeah, no real trends to call out. Our clients do tend to be episodic at times, and I think that's just what we're seeing.

The payoff number seems to be about $100 million a quarter. We've commented on that before. What's higher this quarter? Do we expect that it go back to $100 million for the next few quarters? Yes. But will it bounce around? It historically has, yeah. But there's no big trend. The other interesting point there is, you know, these higher rates are actually creating opportunity for us with this disruption. And, you know, like yesterday we were out on a call and we heard this story from a client where, you know, their loan was maturing at another bank. And so they were having a discussion with the bank about their new pricing. and, you know, when you find out your coupon, your loan's going to go from 3% or 4% to something like 7% or 8%, you know, if another bank delivers that bad news and they're already mad at that other bank and they come here to see what we'll do and it's similar, you know, that's an opportunity for us. So I think it actually helps create opportunity for us to see that kind of impact going on in the financial market.

I maybe would just add in on the yield side, man, the payoff yields were about 6.26 percent, while origination yields were at 6.79. So it's not, they're not that low really for us, and it's creating a nice bump in our NIMS.

That actually is a great point, Julie. You know, I was thinking about this. You know, there's five different ways right now that are driving higher asset yields for us. So one would be new production. So when we see the yield that Julius is talking about there, that's on all the new loans that's coming in at that average rate. Then, of course, you're replacing the low rates that are maturing or prepaying or that's a second source and that's a hundred million we have quite a few of those coming through 2027 no and then and then the third area is floating rate you know we have about a billion dollars in floating rate loans and bonds and you know that didn't really even show up in Q3 because that Fed funds increase was actually on September 15th so you'll see that benefit really for the first time in q4 so that's a billion out of our 3.2 or whatever it is today then you've also got to julie's point 370 million dollars in loans either maturing or arms that are repricing through the end of next year and on top of that you've got another 400 million dollars in fair value and cash flow swaps that we have on our books. So you add all that stuff up and it really gives us a lot of protection on an upgrade and it really puts First Western in the position we want to be in, which is a relatively neutral balance sheet.

That's really helpful. Just one more for me, this is more of a housekeeping question, but I believe this is the case, but that tax benefit looked like a one-time benefit to me. Do you expect the normalized rate to kind of be back around 23 percent or so?

Yes, it was a one-time in the quarter. Not to say that we won't explore those opportunities again, but without those, you know, the 23 percent effective tax rate is a reasonable estimate.

Great. Well, thank you for taking all my questions. I'll step it back. Thanks, Liam.

Thank you. Once again, to ask a question, please press star 11 on your telephone. Our next question comes from the line of Bill DeZellum of Titan Capital Management. Your line is open, Bill.

Thank you. A couple of questions. First of all, relative to the dynamics setting you up for loan growth. Are we hearing you correctly that both the underlying dynamics and factors that will lead the loan growth are accelerating in addition to the loan growth itself and so therefore the flywheel has begun. Is that is that what we're hearing?

I think so. You know we talked last quarter about green shoots and we said you know we're seeing some green shoots on the banking side. We're seeing some on the PTEM side and now you know, those green shoots seem to be sprouting a little bit more and showing up more in the numbers. I think those are going to create opportunities for us going into 2027, Bill.

And not to get too far out over our skis here, are the characteristics setting up such that you could see quarters ahead where the year-over-year growth is in the, loan growth is in the 20% sort of range?

But that's a goal for us. I think that, you know, mid-teen growth is a great place to be. And if you can produce the kind of operating leverage that we have been, and I don't see any reason that changes, you know, we've seen our operating expenses bump up from $20 million a quarter to $21 million a quarter. I think that's a good number for us today. You know, I think we can still drive a lot of earnings gains. And I talked about, you know, kind of a three-year outlook and where we think we can get to. So I'd like to see us continue on in the mid-teens for now. And then, you know, what that lets you do is be picky. And in today's market, that's a good thing. I mean, we were at a credit committee last week and a couple of the relationship bankers we're talking about loans being priced at 90 and 95 percent basis points, 90 and 95 basis points over comparable treasuries at competitors. And, you know, we've seen this cycle before. We know that when somebody comes in, does a big acquisition, they want to show that they're able to protect the client base and stuff like that. They'll do that kind of thing. Doesn't make any sense. I mean, we can buy jinnies, floating jinnies at a yield like that. And, in fact, we have been. And, I mean, I think, you know, then you have something that's no credit risk and no capital requirement and a really attractive yielding asset for it. That's built into that NIMS story we told you, right? So I think, you know, if we're seeing more demand that could produce 20%, 25% loan growth, don't need to do it. You can just be more selective and get the relationships and the terms and the rate that you want.

That's very helpful. Thank you. And then in the press release, you referenced a roughly $10 million redemption of notes. Walk us through the background of that, please.

Subordinated debt notes that we had issued in November, they were eligible.

Just to be clear, those are subordinated notes that are Tier 2 capital at the holding company level. So it's just part of a capital management thing. But it actually reduces our debt load at the holding company, which is a good thing.

And was the entire issuance available to call, and you just chose the $10 million, and you can do the remainder later? Or are there specific dates? I've actually not looked at the details. When you can then call incremental pieces?

The entire – it was a $10 million note. The entire note was eligible, and we decided to call the full 10.

Thank you very much. And by the way, congratulations on a great quarter.

Thank you. Appreciate that.

Thank you. I would now like to turn the conference back to Scott Wiley for closing remarks.

Yeah, so one of the things I didn't get to highlight was, you know, a story actually from yesterday. Julie and I were out on a client call yesterday, and I tell our people frequently, we can compete on value, we can compete on price, and guess which one we'd rather see you out competing on. And so we were visiting this client, been a long-term client, and he's an entrepreneur in a very niche, interesting business, he and I, and really has had a great experience at First Western. So he's telling us a story, which interestingly, I didn't know this story, which tells you it's kind of a culture thing here, not one-off, and the story was that he had had a CFO look at doing an acquisition of a supplier that had run into trouble with their bank and was trying to sell to this upstream, and so the CFO came back and said, well, that doesn't really make sense, and so the principal that we were meeting with, the owner of the business, took a look at it, and he decided, no, this is a great thing for us. It's going to lower our costs, going to help us vertical integration can be great for our business and makes a ton of financial sense so he calls us and says hey i've got one day to get this loan done is that possible if we turn around approved the loan in one day funded it in three days and this guy said what bank in america is going to be able to fund an acquisition loan for a new business we want to acquire in 72 hours and i think it just tells you a lot about the position we put ourselves in the quality of people we have here the infrastructure that Julie and our team have built here and our ability to be responsive and drive value instead of price in in the market here and so you know I think what you're seeing here is us taking advantage of these extraordinary market conditions you know we've never seen market disruption like this we've really been able to take advantage that we set up that disruption task force we told you about a year ago and they're having a heyday with recruiting and with sales and marketing initiatives you know prospects today want a stable local expert team and an institution that can deliver that especially in our net servicing you know entrepreneurs and their businesses and their families you know our small market share we have in these growing markets creates a lot of opportunity for us we have strong healthy economies and our new hires as we said are already having an impact you know the investments and changes we've made over the last couple years are really paying off. We were hoping to see evidence of that in Q3, and in fact, we did. The P-10 restructuring that we did is working the increased attention that we've given to the planning, trust, and investment management area. Each has had significant impact and is showing some nice results. You know, I said last quarter there was no real magic bullet to our earnings gains that it was driven by five different things and they're all progressing nicely. And those five things, number one, organic growth, you know, that was up at a 14% rate in Q3. Number two was continued new improvements. We talked a lot about that on the call. Number three, fee income, which looks bad in the headline because of mortgages, but it's actually, I think, a really great turnaround story for us there that will play out in 27. Expense control, of course, and then asset quality, which was another great story in Q3 for us. And that's going to drive ongoing improvements in core earnings. Our pre-tax, pre-provision numbers, which we were asked about in the first half of this year, that's now turned around up a million dollars quarter over quarter which is 57 percent annualized in Q3 and 27 percent year-over-year and those are great numbers and you know we're headed back to this one percent ROA in the near term so I just want to give a special shout out to our board to the leadership team to the organization changes that we've made over the last couple years with Julie's leadership you know our associates I think are doing a great job of taking advantage of this environment and of course your clients for supporting all this change I just feel like there's great things to come here and really appreciate people's time and not in attention down in for a call today thank you today's conference call thank you for participating you may now disconnect