Q2 2021 First Western Financial Inc Earnings Call
[music].
Yeah.
Good day and thank you for standing by welcome to the first Western financial Q2, 'twenty 'twenty 1 earnings conference call.
And as signs all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. So ask a question. During the session you will need to press star 1 on your telephone.
Be advised that today's conference is being recorded.
Any further she says first star zero.
And I'd like to hand, the conference over to your Speaker today, Tony Rossi of financial profiles. Please go ahead.
Thank you Gino good morning, everyone and thank you for joining us today for first Western financial second quarter 2021 earnings call joining us from first Western's management team are Scott Wylie, Chairman and Chief Executive Officer, and Julie Core campus 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.
At 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, including the impact of the COVID-19 pandemic.
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 and the company's SEC filings, which are available on the company's website I would also direct you to read the disclaimers and 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 and 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.
Alright, Thanks, Tony Good morning, everybody.
And as I imagine you've seen yesterday, we announced the signing of a merger agreement with Teton financial services on our call today, we will start with our usual review of the results for the quarter and then we'll discuss the acquisition in more detail before opening up the call to questions.
The second quarter, we generated net income of $6.3 million earnings per share of 676 cents on a ROA of 1 point to 2 per cent and an ROE of 15.1 and 7% on.
All of which on an improvement over our first quarter results.
While our mortgage segment has underperformed our expectations largely due to the housing inventory constraints and our markets were still delivering earnings growth.
And a higher level of returns due to the significant growth we've generated in our private banking commercial banking and operations.
On a year over year comparison, excluding our mortgage business, our gross revenues up 27%, while our noninterest expenses up just 7%.
And our non mortgage segment diluted pretax earnings per share up.
113%.
With revenue growth exceeding expense growth by nearly 4 times, we've reached an inflection point and realizing the operating leverage that we expected as we scaled the business and we're seeing the positive impact and our profitability.
Our successful new business development efforts are driving growth and nearly all parts of.
The business, including Trust wealth management, where fees are up 9% over the prior year. Despite the revenue we lost through the sale of the la fixed income team and the fourth quarter of last year.
As we indicated on our last call. We began the year with a relatively small loan pipeline, which impacted loan production loan growth and the first quarter.
Over the course of the year.
Our loan pipeline has steadily built and during the second quarter, we returned to a more normalized level of loan production.
Excluding PPP loans, which had a significant level of forgiveness and the first in the second quarter.
Our total loans held for investment increased at an annualized rate of 34%.
Notably loan production was well balanced across the portfolio with a higher level of loan production in each area than we had and the first quarter.
We continue to have strong and inflows of new low cost deposits and a high level of liquidity, which enabled us to fund our loan growth. While we also intensely ran off some of the higher cost non relationship deposit accounts.
This resulted in a decrease and our total deposits during the second quarter. We believe is a good use of our excess liquidity that will support our net interest margin and net interest income going forward.
And we have strong deposit pipeline will enable us to continue to fund the loan growth. We expect the second half of the year with low cost deposits.
From an asset quality perspective, we continue to see very good trends, we had a decline in non performing assets and once again had zero net charge offs, which continues our long history of exceptionally low credit losses.
Moving to slide 4.
Our improved financial performance is not only driving earnings growth, but also strong increases and our book value and our tangible book value and the second quarter, our book value per share increased 3.6%, while our tangible book value per share increased 4.3%.
Turning to slide 5 we've added a new slide deck that shows our pre tax earnings per share excluding the mortgage segment.
This reflects the performance of our private banking commercial banking and trust investment management businesses.
Obviously last year was an extraordinary year for the mortgage business and we don't want that to overshadow the progress we've made and these other important areas.
So this slide provides a better sense for the foundation, we built that is producing a sustainable path to higher earnings and profitability.
Our non mortgage earnings are up 28% up from 28% of pre tax EPS in Q2 of last year to 85% in Q2, this year and we're on pace to meet or exceed 2020 EPS totals.
And in the second quarter, our pre tax earnings per share in the non mortgage segment increased 16% from the prior quarter and was the highest level and our history.
Turning to slide 6 we'll look at the trends and our loan portfolio.
On a period end basis, our total loans held for investment increased $26.2 million from the end of the prior quarter or $113.6 million when PPP loans are excluded.
Loan production increased to $137.5 million, which is more in line with normalized levels, while net loan pay offs declined significantly from elevated levels. We saw on the prior 2 quarters.
Loan production increased throughout the quarter with June being our highest production month of the year, so far excluding PPP.
We had growth across all of our portfolios with the exception of cash securities and others, which was down due to the runoff of PPP loans.
Well, we had balanced growth this year as the economy continues to recover and loan demand increases, we expect commercial loans to resume growing at a faster rate and the rest of the portfolio.
Moving to slide 7 and we'll take a closer look at our deposit trends.
Our total deposits decreased $128.8 million from the end of the prior quarter.
As I mentioned earlier, we intensely ran off some higher cost public funds that were not relationship oriented accounts. This accounted for approximately $75 million on the decrease in deposits and the remainder was largely attributable to seasonal outflows rate of tax payments and runoff of PPP related deposits.
Moving to slide 8 we'll look at our progress and building our commercial banking platform, which is providing more loan diversification and improving our deposit base by adding low cost transaction deposits.
Commercial loans increased 104 million from prior quarter and $190 million from the prior year.
Commercial deposits are down $158 million largely due to the intentional run off the tax payments and the PPP run offs.
Turning to trust and investment management on slide 9 our total assets under management increased $276.5 million from the end of the prior quarter.
The increase was primarily attributable to contributions to existing accounts and new accounts as well as improving market conditions, resulting in an increase and the value of the assets under management balances.
Our investment agency accounts increased by $111.3.
$3 million or 5.8% from the first quarter of 2021.
During the second quarter, new clients accounted for approximately $28.4 million of our growth and assets under management.
Now I'll turn the call over to Julie for further discussion of our financial results Julien. Thanks.
Scott.
Turning to slide 10, we have provided an update on our participation and the PPD program and how it impacted various non tech and the second quarter.
And that May $91.4 million of PPP loans received forgiveness and the second quarter during the quarter, We fund and an additional $5.4 million and PPP loans and have announced that mandate over $200 million and forgiveness application to the SBA.
Resulted and $103.1 million and PPP loans remaining on our balance sheet at the end of the quarter and $2.1 million net fees remaining to be recognized.
And with increased loan forgiveness by the SBA and the second quarter, we saw a good amount of accelerated fee recognition, which resulted in a positive 70 basis points of net interest margin impact.
We have plenty of liquidity, resulting from our strong deposit and plans. We have continued to utilize the PPP liquidity facility to fund our PPP loan origination so and we can get the preferred capital treatment on these loans.
Now turning to slide 11, and we'll look at gross revenue.
Growth revenue was unchanged from the prior quarter, although the mix of revenue is significantly different we had.
On a higher level of net interest income and trust and investment management fees, which offset the decline we had and net gains on mortgage loans.
Turning to slide 5 we look at the trends and net interest income and margin.
Our net interest income increased 9% from the prior quarter Inc.
Kris and due to higher Pvp related to fee income and higher average balances of non PPP loans.
On a reported basis, our net interest margin increased 11 basis points from the prior quarter Q3, 0.0% to 1%.
When the impact of PPP loans and purchase accounting adjustments are excluded our net interest margin was unchanged from the prior quarter.
With the run off at the higher cost deposits, we saw a 3 basis point reduction and our cost of funds from the prior quarter.
With a portion of our excess liquidity utilize to fund the deposit ran on our loan to deposit ratio increased to 94% at the end of the second quarter up from 85% at the end of the prior quarter.
Given the higher loan to deposit ratio and our expectation for a higher level of loan growth and the second half of the year. We believe our net interest margin should be flat to slightly higher over the remainder of the year, even though we continue to see some pricing pressure on new loan originations, which are coming on the balance sheet at yield slower than the existing portfolio.
Turning to slide 13, our net interest and non interest income declined 10, 5% from the prior quarter.
And this was due to a lower net gain on mortgage loans, which was partially offset by higher trust and investment management fees.
And as Scott mentioned earlier tests and investment management fees increased 9% over the prior year. Despite the sale of our la fixed income team during the fourth quarter of 2020.
On an apples to apples basis, when excluding the fees generated by that team our trust and investment management fees were up 17% over the prior year.
On slide 14, we've provided some additional detail on our mortgage operations.
Total originations and mortgage locks, which is when the revenue is recognized declined from the prior quarter due to lower demand for refinancing.
And as Scott mentioned, while purchase originations have increased and Havent met our expectations due to the limited and inventory of housing and our markets.
With the decline and refinancing our mix of production is moving back towards the level, we have historically seen which is roughly 70% purchase and 30% refinance it.
With the lower revenue this quarter, we saw a decline and the pre tax profit margin and this business up 31%.
And with lower volumes, and we reduced our fixed expenses and our mortgage group on June 30th and expect them tier being about 18% or 500000 lower and.
Annualized going forward.
Turning to slide 15, and our expenses are.
Our non interest expense declined by approximately 108000 from the prior quarter. The decline was attributed to lower salaries and benefits expense, resulting from lower payroll taxes and incentive compensation.
With the decline in non interest expense, our efficiency ratio improved to 65, 4% from 66% and the prior quarter given investments, we're making and creating more business development personnel. We expect a small increase on our expense levels to the 16 million to $16.3 million range. During the second half of 2000 and.
And 21.
Turning to slide 16, we will look at our asset quality, we saw positive trends across the portfolio and the second quarter, our nonperforming assets decreased by approximately 900000 and declined 16 basis points of total assets.
The provision requirement for our loan growth was largely offset by improvement in asset quality.
Which resulted in just a 12000 per bed per.
Provision for credit losses, and the quarter.
This brought our adjusted <unk>, which excludes PPP and acquired loans to 93 basis points of total loans at the end of the prior quarter.
Now I'll turn the call back over to Scott.
Alright, Thanks, Julie turning.
Turning to slide 18.
And to discuss the acquisition of <unk> financial services that we announced yesterday.
<unk> on the holding company for Rocky Mountain Bank is a commercial bank with a small wealth management business operating and 3 branches and western Wyoming.
We currently operate 2 offices and Wyoming and expanding our presence and the state is a key part of our long term growth strategy, given the attractive demographics and favorable operating environment for our business model and unique approach to private banking.
Our similar business models core values client centric approach.
Our 2 institutions highly compatible which should make for a smooth integration and strong synergies as we leverage our collective strength to further expand our presence in Wyoming.
We've used acquisitions very effectively throughout our history to grow and diversify the bank.
And with the addition of <unk> will further increase our scale with first and further improve our operating leverage will adding more core deposits more diversification to our loan portfolio and strengthening our commercial banking capabilities.
<unk> has built a very attractive franchise built on our low cost deposit base and our banking team that generates C&I and real estate loans with attractive risk adjusted yields that will enhance our net interest margin.
And although we haven't modeled any revenue synergies, we believe that we will have opportunities and increased lending relationships with our larger scale.
Cross seller.
Larger offering our products and services, particularly and the trust and investment management businesses.
It's a transaction with attractive economics, as we expect it to be 5.2% accretive to earnings per share in 2022 and.
7.4% accretive once the cost savings are fully phased in with a very short tangible book value earn back of less than half a year.
Turning to slide 19, this will be our 13th acquisition since founding the company and 2002.
And this will bring us to 19 total offices, although we will consolidate our 2 Jackson hole offices during 2022.
Turning to slide 20, we provided some additional information about <unk>.
It was founded and $819.83, and has grown to more than $400 million and total assets.
Over the last 7 years, it's been very effective and building its client base and generated a double digit compound annual growth rate and both loans and deposits.
And with the additional support and resources that we can provide we believe we can further accelerate their business development and steadily increase our market share and Wyoming in the coming years, particularly as we continue to invest and the market and add more banking talent.
Despite the relatively small scale they are a nicely profitable company generating an ROA of 132% and an ROE of 13, 3%.
They also have exceptional credit quality with nonperforming assets, representing just 3 basis points of total loans and Oreo.
Turning to slide 21, we show a breakdown and loan and deposit composition and how the impact on our balance sheet.
A well diversified loan portfolio that has on average yield of 4.7 and 9%.
And when combined with our current portfolio. This will increase our average loan yield by about 16 basis points.
Similar to first western and they have a low cost deposit base that will keep our cost of deposits at the same level, but with the average loan yield higher average loan yield we should see positive impact on our net interest margin, particularly as we increase loan growth and deploy some of the excess liquidity and they will provide.
Turning to slide 22, we'll take a quick look at the transaction structure.
The consideration for the transaction is approximately 76% stock and 24% cash.
Stock, we'll be using we'll be issuing will provide a meaningful increase in our flow since coming public with a relatively small flow 3 years ago..1 of our objectives has been to increase our float in order to add more liquidity to our stock and to expand the universe of potential investors, but to do it in a manner that's accretive to shareholders.
And this transaction certainly does it.
We believe the transition transaction multiples are very reasonable, particularly for our franchise of this quality.
And we're expecting to close the transaction and the fourth quarter of 2021 or early in the first quarter of 2022.
Turning to slide 23, we'll review some of the transaction assumptions were.
We're basing the earnings accretion estimates off the current consensus analyst estimates as well as tetons forecast, where it stand alone financial performance.
And our current earnings accretion estimates, we're including the impact of a $15 million sub debt raise that we plan to do prior to the closing to support the acquisition.
We're projecting cost saves approximately 30% of tea times noninterest expenses.
With most of that coming from consolidation of the Jackson hole locations and.
And vendor and technology and technology contracts.
We expect our <unk> 75 per cent of the cost saves and placed by the end of 2022 and 100% thereafter and.
In summary, we believe is a very positive transaction that will expand our presence and Wyoming provide increased scale efficiencies and a talented team of bankers that we believe can steadily increase our client base and Wyoming with additional resources support and products that we can we can provide.
It will also further strengthen our private bank and commercial banking operations positively impact our level of profitability and move us closer to making first western a high performing financial institution built on a foundation of attractive deposit base exceptional asset quality and growing sources of stable recurring revenue fee.
Income.
Turning to slide 24.
To wrap up with some comments about our outlook.
We believe we are well positioned to deliver strong second half for 2021, we continue to see strong in migration trends into our markets, which is creating more business development opportunities for us.
We're also adding more banking talent to help us expand.
2 new markets that have similar demographics to the areas, where our value proposition has already been successful in attracting clients to the bank.
We recently built a small team and Bozeman, Montana market, which has similar characteristics to Jackson hole and has become a popular destination for entrepreneurs and wealthy retirees.
As with Miami, We believe Bozeman could be another nice growth market for us in the coming years.
Our loan pipeline continues to increase it should lead to higher level of loan growth and the second half of the year.
We also have a significant amount of unfunded commitments that could create.
Other potential catalysts for loans future loan growth.
We've made good progress on reducing our excess liquidity and with the higher loan growth were expecting we believe we hit the trough and our net interest margin in Q2 and it will be.
It will be higher relative to what we saw on the first half of the year.
We also have good momentum and attracting new clients and our wealth management business, which should continue to drive growth and our trust and investment management fees.
We expect our mortgage activity to remain relatively constant and the third quarter.
And for likely declining in the seasonally slower fourth quarter.
With the revenue growth, we're expecting and stable expense levels, we should see further improvement and operating leverage and additional increases and our levels of profitability.
Looking a bit further down the road with the acquisition of <unk>, We believe we're well positioned deliver another strong year of organic and acquisition growth in 2022.
And with tea time, being relatively small transaction that should have a smooth interest.
Integration, we still have the ability to evaluate other potential transactions that can add value to our franchise, particularly on the fee income side.
With that we're happy to take your questions do you now please open up the call.
Alright, so as a reminder.
As a reminder to ask a question you will need to press star 1 on and Telecom tours and all your question press the pound key.
And that and star 1 on your telephone please stand by while we compile the Q&A roster.
First question comes from line of Brett robots and from Hovde Group your and our lives.
Hey, good morning, guys and this has actually been garlinger on for Brett.
Good morning, Dan.
I was wondering if we could just start horizontal.
Higher level of strategy perspective, I get that keeps on is kind of checks all the boxes for you guys and market is great credit and similar.
Loan portfolio and structure is there is there anything.
They can bring to the table that would further complement.
First western as a whole and.
And then kind of going off of that Scott and I know you said that you.
You would continue to look for other acquisitions and other partnerships.
Just wanted to close first or do you think you could see something teed up for this 1 actually.
Late 'twenty 1 early 'twenty 2.
Oh, Okay, well, let's tackle that 2 part question and 2 parts first of all a strategic rationale.
A lot of reasons it makes sense and you highlighted a couple of them. This is a market we're already in and we really like we've done well there, adding additional market share and Jackson as well as entering these new markets and Pinedale and rock Springs, where they have a nice strong market position.
And our attractive of course this is in a state where the demographics are attractive.
Business landscape aligns well with our business model and they have favorable trust the state tax laws.
And improves our loan yields and improves our cost of deposits I think building a stronger core deposit base for US is a really attractive part of this I know that people don't really value surplus core deposits today, but we all know that that goes in cycles, and I think having a nice stable.
On our core deposit base as part of this is attractive it's accretive to earnings it is going to expand our OE and our return on tangible common equity.
And it has a quick earn back so it's really.
I think kind of a perfect deal.
People are really a nice fit with our folks the cultures are very similar they have a very client centric focus which is a big part of what we do here at first western and we have a similar loan mix. So.
Overall, if we could find another 1 of those we do it and heartbeat.
It's a really high quality franchise, and we're thrilled to be partners with these folks.
And.
I think we're going to be able to add a lot of value assets as I commented in my prepared remarks too.
In terms of future M&A activity.
We have and active corporate development program, we've talked before on these calls that growth for first western comes in 3 parts, we do organic growth, where we're trying to grow each office.
And in the double digits every year.
And now we're going to have 18 offices that are doing that we also grow by expansion. So adding a couple offices. This year, we talked about the bozeman opportunity that were.
Launching and the second half of the year and then the <unk>.
Third thing is acquisition of course, we've done.
13 of these acquisitions now.
On the last 3 and particular with our mortgages. The Simmons deal last year and then this 1 I think are particularly.
And dramatic kind of.
Examples of the power of layering strategic acquisitions into our business model. So we do have an active corporate development program. These things can be lumpy, we have a number of things that we're working on that.
And we hope will.
Come and bear fruit over time. This 1 here I met Alan I called on Alan's and the first time, the chairman of Rocky Mountain Bank and Teton I think 5 years ago. Now. So these things take time and and you never know when things are going to happen and I think this is a smooth fit our priority is going to be to make sure that this.
<unk> done right, but we are always working on these things and looking for additional opportunities I do think that.
That we are.
We will continue to be active and hopefully find other opportunities Florida.
Either later this year next year.
That answered your questions Brett.
Yes.
Very helpful.
And then my other question is it might be more so geared towards.
Julie.
If you guys have on near term outlook on slide <unk>.
Margin improvement and that's on an organic basis between loan growth.
Cause and management.
And if you're adding to ton, which has a higher.
Loan yield and similar deposit structure looks like.
Know that you guys are going to be running offload on this.
The prepared remarks.
You kind of add those 2 efforts that you're doing organically and the non also cheats on it acts as a bit of a 1.2 punch for margin improvement.
Curious if you guys had anything modeled out in terms of what that.
Combined with Lyft and might be for the first full quarter of integration.
Yes, so I think youre, absolutely right with and.
All the things we talked about on the Colorado regarding our expectations are on margin improvement should see a little bit above NAV just organically and.
Danielle notice and combined entity with Rocky Mountain bank their loans.
Loan yields there.
A little bit above ours kind of on an average basis and our expectation is for that.
To fold and nicely and to continue to grow and.
But on a higher rate so the combined entities should have a little bit more of a lift and maybe we would see organically and our net interest margin and net interest income overall.
Yeah.
Alright, and we said on our prepared remarks Brett.
With with the combined portfolio will be about 16 basis point lift and the loan side, so and help.
And model out.
Got you.
And include.
Organic basis, and what Youre doing free deal close as well.
Got it Okay that was my confusion also I'll step back and acute.
Alright, and next 1 on acute is Matthew Clark from Piper Sandler your and all lives.
Hey, good morning.
Good morning.
Yeah.
Just first 1 for me on.
The.
On loan pricing I think coming out of last quarter, you guys talked about maybe.
Given and given in a little bit and getting a little more price competitive on the loan side and just wanted to know.
The weighted kind of weighted average rate on new loans this quarter.
And then follow up question on growth and a second.
If you start there.
Sure.
Well, we did provide more flexibility on loan pricing.
2 our front office folks in reality has had only a minor impact on the prices we are realizing.
We have tried to be more competitive, but we're seeing competitors being very aggressive and we're not <unk>.
Following them down.
We still do get a premium over market rates.
And we never have and continue to just win deals based on being the lowest offer thats not really our our value proposition do you have the information that he asked for Julie on the relative loan pricing and so on the average rate of the new loan production quarter over quarter, we saw a little bit of a decline. So it was about $3.57.
Last quarter and average $3.46, this quarter and.
And obviously, there's always going to be a little bit of volatility based on the mix of our loan production and and the second quarter we saw.
And 1 of our family with a little bit of a higher contributor to the mix so that brought down the average rate.
And as we continue to produce on C&I lending and more of the commercial loans.
Expect that to bounce around a little better.
Okay.
And then it sounds like the pipelines building he spoke about growth stepping up I assume youre not talking about stepping up from the growth rate on an annualized basis this quarter, but.
What are your thoughts on kind of overall core loan growth ex PPP for the year, we still looking for kind of mid double digits or high teens.
Yes, I think if we step up too much where we're going to be and triple net price and I would not be a.
Good idea, but.
Yes, I think.
Year to date, we're mid mid teens, and I think that's where we expect to be and the second half of the year.
Okay.
Great.
And then just on the.
The reserve.
Came down a little bit just from the growth.
And I think you are kind of back around.
Around pre pandemic levels, maybe still above it but.
And what are your thoughts on just the overall reserve coverage and as you migrate to seasonal and.
Going forward.
We've seen such strong performance from a credit standpoint over the last.
18 months or so.
And just getting hard to justify a bigger reserve number.
We're trying to be conservative with it and.
And.
Continuing as you say, we're today up above if you adjust for the.
PPP loans and the.
The acquisition from the Simmons last year, we're still above where we were pre pandemic and the credit numbers are actually significantly better so.
And I think.
We're trying to grow into this reserve that we have the allowance and.
I would think that would be a reasonable expectation for what we know right now in and.
And Q3, and and assess where we are for Q4.
Okay.
And then just on the run rate of expense you did a good job of controlling expenses.
Expenses this quarter.
But you guided up to 16% to 16.3.
So I think for the next couple of quarters could you just give us a sense for what's driving.
The bump up I assume its new people, but.
A little more color there would be helpful.
Well part of it is julie's conservatism, so let me answer that.
Joe do you want to go ahead and no you're exactly right. It's just a little added personnel.
The added production increasing incentive compensation accruals.
We were looking to add into our planning and.
And at that berms on offense, we been talking about that and build out of that is occurring and then we should be and that rent space and the second half of the year. So there's a few events and expenses that are coming in and that's just very slightly increasing that quarterly rate.
Future revenue drivers all of those things you listed.
Yes, Okay, and then just last 1 on the remaining PPP net fees left.
To be realized there.
And $1 million equivalents.
Okay.
Thank you.
Thank you Matt.
Alright, and next 1 on the Q is Brady gailey from <unk> and our lives.
And thank you so I wanted to start with.
And what the acquisition and it looks like a perfect fit for you guys. How does that change if it does change at all and the overall growth profile of the company and I know you guys are.
And well into the double digits.
Pita and either.
Pull that back or pushed that forward at all.
Well.
I think.
And have been growing and in the mid teens and and.
And they know these 3 markets quite well, we were very familiar with the Jackson market and have seen nice growth. There. So I don't really see any scenario where that slows down.
In our modeling that we've done for this.
We've incorporated sort of their continued organic growth with our organic growth plus the cost saves or it gets minus the cost saves.
Make for some really great numbers here and then I.
I think theres a lot of revenue synergies here, we have a number of capabilities, we're going to be $7.2 billion and assets under management and that just brings a whole bunch of <unk>.
Products and services bigger toolkit for our Wyoming folks to be able to.
Selling these 3 markets and I think once once we get the.
But.
Transaction completed and the conversion done and the transition completed.
I think it is going to be more opportunity to grow and in Wyoming beyond this theres an interesting.
Connection and.
Those of us that have lived on the east coast.
Hard to believe but.
Bozeman, and Jack Center, 5 hours apart, but culturally they actually have a lot of shared interests or mini jacks and people that go to Bose men or have moved to Bozeman.
Yes.
A lot of cultural affinity between those 2 markets and frankly to Denver as well, so having a stronger presence and western Wyoming makes that jump into Montana is on.
Our fifth state I think a lot easier and lower risk and.
And frankly, you know.
I think we'll accelerate our growth profile.
And both of those markets.
And then Scott you talked about kind of continued operating leverage and profitability improvement from here.
You're on.
ROA is already.
Pretty nicely improved I think your core ROA and was about 80 basis points back and back in 2019, it's now running about 120 basis points.
How much higher do you think you can get the ROA or 120 <unk>.
First half of the year, you did 120 basis points is that adjusted right level on how much higher could it possibly go.
I don't know Brady, we've seen historically the high fee banks produce really high ROA.
And there's a reason for that which is that you don't need capital to support those businesses you need expertise and.
And we have paid for that expertise and our product groups and frankly, we continue to build on that.
And and there's just a ton of operating leverage with that and when we went public 3 years ago. You only had 10 offices now we have 18 with this acquisition.
You know as you continue to leverage more of this expertise for generating fee income across more offices that are actually producing organic growth.
Just a lot of operating leverage built into that and we.
We said that at the IPO 3 years ago and many of you on this call. We're supportive of that at that time and frankly, it was a little hard to see.
But many of you are supported us on that and I think it's really panned out exactly like we said I don't see any reason it can't continue.
Obviously, it's not going to continue forever.
At the rates that we've seen the forex.
On multiple that we've seen and the non mortgage.
Operating leverage improvement over the last 12 months, but I think it can continue and then 2 or 3 times range.
And for the foreseeable future.
Okay and.
And we started to see.
Mortgage normalize and.
And the second quarter Youre now a little under 4 million.
On a per quarter and fees and the second quarter.
Much more of a step down do you think we could see on the mortgage front or.
Are we close to.
And a new run rate.
Yeah, we've been talking for.
And I feel like Forever, I think it's probably been 5 or 6 quarters now about our desire to expand on.
Our mortgage platform into our other markets outside of Metro Denver, more successfully and and Arizona is in particular, 1 that we focused on and with the boom going on as it has been for the last year or so.
It's just hard to get people to move.
And we put as a priority this year and attracts some new purchase oriented mmos into our structure and.
And we're actually seeing some results there I think we saw 1 new hire and.
And Q2, we got another 1 that I think is joining us here in Q3, we've got a number of other leads that we're working on possibly expanding into Arizona and a bigger way so.
And I hate to promise that because I feel that <unk> been talking about it a lot but.
But that's how we're thinking about it Brady is we'd like to replace.
A lot of those refi.
Refi fees that we saw last year with purchase money fees. We continue to think this is a strategically important business for private banking the really good private banks have strong mortgage operations that produce consistent purchase money revenues and create.
Cross selling opportunities and we think that's a real opportunity for us that we continue to work on notwithstanding the challenges of.
Getting good people to move over the last.
15 months or so.
Okay got it thanks for the color and congrats on the deal.
Yep. Thank you.
Thanks, 1 on acute is there's a lag from sites and capital you are now live.
Q, Scott you've referenced to the and the housing shortage is causing troubles.
With the with the ability to grow the mortgage business would you talk through how you anticipate this shortage ultimately being resolved and to what degree you will be able to benefit or not from from that resolution.
Well.
<unk>.
Think that.
If you step back from the current situation.
10 years ago, Denver, and the other markets that we're in we're relatively attractive from a price standpoint to a lot of other markets around the country and and so you had you know desirable.
Quality of life here, and and relatively desirable cost of living and that just isn't like that anymore right Cup, Denver, and Fort Collins and resort markets, where in Phoenix, Scottsdale, all gotten a lot more expensive as folks have.
And have realized the.
The benefit to be and here so.
Thank you know thats going to.
Economics, 1 on 1 right that's going to slowly and migration.
And take some pressure off certainly.
Interesting that I talked about the connection and Jackson and both on and what we're seeing right now is lots of kind of the middle wealth not the ultra high wealth and Jackson, selling and moving to to Bozeman, and I personally know a handful of people that are doing that 1 of them called me last night and I congratulate us on there.
Yes.
On this.
Rocky Mountain Bank deal and she said you know I just sold my bag house with great views and Jackson and I buy and another 1 building another 1 and Bozeman and with the great views and a similar style house. So I mean, it's interesting how.
And economics really play out and people.
And do that so I think bill that's ultimately what's going to happen here is I think where we slow slow the and migration because it's going to be more expensive and then obviously.
<unk>.
It takes a little time for builders and whatnot developers to fill that demand. So we'll see that all normalized here over time, our focus and I can't control a lot of that what we can control is the team and what they're focusing on and as I mentioned I think for us, bringing in high producing well connected.
Purchase oriented mmos is the game and will allow us to not only continue to build our mortgage business, but provide that strategic benefits and I think it's really important to us and that isn't going to happen overnight, but it will happen over time and we're seeing that.
And as Scott, taking taking your comment 1 step further using net Bozeman, and example, which is I'll characterize it as a.
Burgeoning low cost market, and even though probably the people, who live and Bozeman and or have for 20 years would disagree with the statement do you see multiple markets throughout the west that would be Bozeman equivalent that historically haven't been on the radar.
But will be as as some of your.
Previously primary markets become more expensive and you see a shift to a to the next level of new market.
Yes.
Uh huh.
I actually don't really.
And you asked the question I can't thank and 1 that isn't like.
I think there is a ton of opportunity for us and Boise and correlate and over there.
South.
And the Utah from from the Montana, Wyoming, Idaho area, I think makes a lot of sense for us and I think that.
And we need to continue to build in our current markets.
And and we'll then we can grow.
And a.
Incrementally and into some of these other markets like we're doing and I think that's a really nice low risk way for us to continue to build our franchise and.
Reach further scale.
<unk> ability.
Great. Thank you Yep. Thank you Bill.
Alright, again, if you would like to ask a question. Please press star 1 on your telephone.
First 1 on acute is Ross haberman from <unk> investments you are and our lives.
Scott, Scott and nice quarter nice.
Acquisition.
And I just have a couple of quick quick quick questions.
The numbers question on the allowance for which was touched upon earlier.
I think you were 90, some odd basis points and total <unk>.
And why you think that's that's it.
As opposed to something north of.
100 are on 20 basis points, given your mix of loans today.
And <unk>.
Well.
There's a short answer to that on a long answer I mean, I think the short answer is that we.
Look at our credit quality and the and the.
Credit losses, which are zero over the last several years and.
And.
And then we have to.
And a scaled the allowance to that and so.
Short answer is I think the allowance is actually up and the <unk>.
Credit.
Statistics every credit statistic you'd look at here is improving from already really good level. So I think thats.
And the high level answer the more detailed answer I'll take a crack at and Julie can.
Can explain in more detail if you like but.
For me yet you want to show a consistent approach to calculate the allowance overtime and so we have this whole complex methodology that we go through with the credit team and the finance team and accounting team.
And the board and we look at economic factors and we look at.
Performance factors for the portfolio and all this other stuff.
And that generates a number at the end of.
What the allowance needs to be and as I said, I mean, we're kind of struggling to keep it where it is to be honest with you.
And the analytics.
Analytics that we do suggest that we are very conservatively.
Provided for it and the allowance today so Julien.
Julie's or other color you would add in terms of the.
And how we calculate that specifically we have you know the various factors and we look at similar pricing and also.
And we won't be having that impact us for another year and.
And from the factors perspective.
Take a hard look at those and actors and economic environmental and.
Conditions that we are operating within and the markets and adjust those as CPA and based on what's going on and I am quite familiar to all of those things come into play and we feel like the level of our and <unk>.
Allowance and appropriate for where we're at.
Okay.
Just 2 other quick quick quick question Julie on the PPP fees for the quarter did I understand Thats slide right Brian.
Hello.
13 or 14.
And 1 billion and a half and this quarter from the PPP free forgiveness fees is that correct.
And forgiveness, net ads and kits and and then the CE and alone PPP.
Funding costs, we had net interest income impact of 1 point and 5 million, Okay and Claire.
Okay, and just on an apples to apples basis, Theres $2.1 million net.
More to go over the next couple of quarters.
That's right the tier 1 is apples to apples to the number on that side, that's the amortization of fee income and deferred expense of 1 point.
And we don't try to predict the interest income from TPP and the funding cost that net net 300000 and that we had on the quarter. So apples to apples, we had $1.2 and in quarter Q and and we have 2.1 remaining.
And just for Scott just 1 more Scott.
And the checks and acquisition could you.
Could you ramp up their loans.
Quick 1 because they can make bigger loans and is there opportunity to open up additional offices there or.
Youre going to just keep what you have there and Bozeman is going to be the next sort of stopped in terms of day.
Loan office or a full service office expansion.
Well.
You are right that borrowers.
And that they're dealing with and Rocky Mountain Bank today, and certainly that we deal with and our office there have borrowing needs that are higher than the legal lending limit of Rocky Mountain bank. So that's going to create opportunity just by itself again not factored into our modeling.
For the acquisition purpose, but.
And I can tell you.
Talk to the senior lenders, there and Rocky Mountain Bank and they are excited about the additional capacity that we bring.
For the existing clients, let alone new clients as we go out and compete as a combined entity.
In terms of the expansion.
We have 2 offices and Jackson at closing 1 Rocky Mountain Bank has a really great building right at the corner of first and Maine. So we will be moving our office, which is.
Just a few blocks down the street over 2 to their after closing as our plan at the moment. So we will go from 2 offices and Jackson, the 1 and I don't think we would want to add a second office and Jackson.
I do think there are other markets and Wyoming net will be of interest and our team there has.
Extensive experience actually not only and Wyoming, but also in Montana. So I think that this is going to be really nice bridge into further growth in Wyoming and our expansion into Montana.
And just 1 final question for a truly coming back to your 5 percentage accretion.
Accretion or maybe as much as 7.4%.
<unk> per share based you're starting from and 22 with that with debt.
That number.
So we're using the analyst estimates for 'twenty 2 that's why we didn't give you 23 number and case analysts revise for 23 after our strong Q2.
Core growth so.
The 5% is assuming 75% cost saves and if we got the total 100% cost saves in 2022, it would be I think 7.4 points 5 yes.
And that's based on a base of about 2 <unk>.
<unk> 50, a share was something wrong.
Starting from.
Analysts I think the analyst.
Our $2.99 4.
'twenty 2.
22, so you build and the 5% off of that base you are saying.
That's what that 5% is referring to you.
Got it okay. Thanks, guys best of luck.
Yeah. Thank you Ross Thank you.
Sure.
Alright, I show no further questions and would like to turn it back to management for any closing remarks.
Alright, well.
We'd like to thank everybody for joining us today, hopefully you see that we're making really great progress on our core business and also with this.
New acquisition and the merger partners that will have.
And West Wyoming, and I think it's really.
And exciting time at first western so.
Thanks again for dialing in and we look forward to speaking everybody again next quarter.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Yes.
And.
Yes.
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