Q1 2022 First Western Financial Inc Earnings Call
Okay.
Purely a cure itself.
And good day. Thank you for standing by welcome to the first Western Financial Q1, 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. Please be advised that today's conference is being recorded.
You ask a question during this session you will need to price star one on your telephone if you require any assistance. Please press star zero I would now like to hand, the conference over to your speaker of today call Mr. Tony Rossi of financial profile you may begin.
Thank you Latanya.
Good morning, everyone and thank you for joining us today for first Western Financial's first quarter 2022 earnings call.
Joining us from first Western's management team are Scott Wylie, Chairman and Chief Executive Chair, Chief Executive Officer, and Julie core Kamp, Chief financial and Chief operating Officer.
We will use a slide presentation as part of our discussion this morning.
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 disclaimer in our earnings release and Investor presentation. The company disclaims any obligation to update any forward looking statements made during the call additional.
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.
There were a number of macroeconomic and geopolitical headwinds that emerged during the first quarter 2022 to create a more challenging operating environment than we expected.
However, we were still able to deliver strong financial performance, primarily due to our ongoing strong operating performance and the positive impact of the Teton financial services acquisition.
Yeah.
The positive impact that it's having on our level of profitability, even before we realize both the cost savings anticipated from this transaction.
In the first quarter, we had $5 5 million and net income or <unk> 57 per share and <unk> 61 per share.
Including the excluding the M&A expense.
Well generating increases in all of our returns compared to the prior quarter.
On an adjusted basis, excluding acquisition related expenses, our return on average assets increased one basis point to 92 bps.
Our return on average equity increased four basis points to 10, 7%.
And our return on tangible common equity increased 220 basis points to 12 four 1%.
We were able to deliver this improvement despite a challenging environment that impacted our level of organic loan growth this quarter.
We typically see some level of seasonality in the first quarter that impacts our level of loan production, which definitely occurred again this year.
Particularly in January and February we've also seen an increase in the competitive environment in our markets somewhat driven by new entrants and acquisition activity.
We operate very attractive markets, particularly in Colorado, and more banks are making efforts to build a presence here in.
In order to do that many of them are essentially trying to buy market share by offering very low long term fixed rate loans.
As always we're maintaining our underwriting and pricing discipline and our unwillingness to compete on price is having some level of impact on our loan production.
Particularly ahead of the coming interest rate increases we believe that we're best served by not putting low long term fixed.
Fixed rate loans on our balance sheet, even if that costs us a bit in terms of loan growth.
Net interest income in the short term.
In addition, we saw a significant increase in the level of payoffs during the first quarter.
Some of this is related to the completion of construction projects that we expected to occur late last year, but got pushed into the first quarter.
We also had quite a bit of payoffs related to liquidity events and the sale of businesses and properties.
As we've talked about in the past, we have a very sophisticated client base consisting of high net worth individuals and entrepreneurs and they make intelligent decisions and our opportunistic when it comes time to manage their assets.
They have seen substantial appreciation of the value of their businesses investment properties. It seems like some of our clients have decided to capitalize on what they think are near peak values for these assets.
This high level of payoffs resulted in excess liquidity this quarter that impacted both net interest income and net interest margin.
However, we saw improving trends in March with $44 million and loan growth, excluding PPP loans into months.
This momentum has continued and based on the current trends, we're seeing loan production.
The trends, we're seeing in loan production to start the second quarter. We believe that we will have good opportunities to redeploy our asset excess liquidity into higher yielding.
Assets in the coming months.
Despite the more challenging operating environment, our asset quality remains exceptional with nonperforming assets remained at just 17 bps of total assets and other another quarter with an immaterial amount of net charge offs.
Moving to slide four our strong profitability this quarter led to increases in book value and tangible book value per share with just under 2%, which goes against the broader industry turned this quarter with many banks reporting declines in book value per share due to the volatility in a OCI.
Our success in protecting and continue to grow our loan.
Our book value is directly attributable to the strategic decision, we made last year to retain our excess liquidity rather than putting it into investment portfolio.
With the prospect of higher rates on the horizon. We felt were better served by retaining the excess liquidity and passing up the small amount of interest incremental interest income that we would have received from growing the investment portfolio because of that decision. We have been able to protect our book value, while now having significant liquidity that we can deploy it higher.
Rates than what we would've gotten last year.
As with our decision not to put on low long term fixed rate loans in the current environment. This reflects our commitment to operating the company with a long term perspective.
Not making short term decisions to support near term earnings growth that will ultimately come back to hurt the company in the future.
Yeah.
On slide five we will look at the performance of our private banking commercial banking and trust and investment management businesses.
This is represented by the pre tax earnings of our wealth management segment.
Compared to the fourth quarter of 2021, our pretax earnings increased eight 5% in this segment.
Quarter over quarter again, reflecting the positive impact of the <unk> acquisition.
In the first quarter of 2020 to our wealth management segment accounted for 96% of consolidated pre tax earnings as our mortgage business continues to return to its intended role as a complementary source of fee income.
Turning to slide six we'll look at the trends in our loan portfolio.
Excluding PPP, our total loans increased $11 million from the prior year from the quarter and in spite of the high level of payoffs I talked about earlier.
Over the long term, we continue to see very strong loan growth, both organically and through our acquisitions.
Our non PPP loans are up 41% year over year in.
And bank originated loans are up 28% excluding PPP.
We grew our C&I portfolio by 16% during the first quarter, but this was offset by the payoffs that occurred and the construction in CRE portfolios.
We had $102 million in loan production this quarter with almost half of that coming in the month of March we had $154 million and pay offs, which was significantly higher than the levels, we've been seeing over the past several quarters.
With interest rates rising and our commitment to maintaining our pricing discipline, our average yield on new loan production increased 55 basis points from the prior quarter to four point <unk>, 7%.
Moving to slide seven we will take a closer look at our deposit trends are.
Our total deposits increased $66 million from the end of the prior quarter.
Our new deposit relationships, the new deposit development efforts are consistently resulting in new deposit relationships with new accounts accounting for $42 million of the deposit inflows during the first quarter.
Turning to trust and investment management on slide eight our total assets under management increased to $153 million for the end of the prior quarter due to market declines with the most significant impact coming in the investment agency balances.
Lower value of assets due to market decline was partially offset by $48 million of inflow into new accounts.
Year over year.
AUM was up 11%, reflecting the steady growth we're generating in this area.
Now I'll turn the call over to Julie for further discussion of our financial results Julien. Thanks, Dan.
Turning to slide nine we provided an update on our participation in the PPP program and how it impacted various metrics in the first quarter.
As of March 31st we had a $16 7 million and Pvp loans remaining on our balance sheet, which is a decline of $30 1 million from the end of the prior quarter.
Recognized approximately 400000.
During the first quarter.
<unk> had approximately 300000 and fees remaining to be recognized as of March 31st.
TPP had a six basis point positive impact on our net interest margin in the first quarter.
As the PPP loans are forgiven, our borrowings from the PPP liquidity facility and were used to fund our loan originations also decline at March 31st our borrowings from that facility were down to $12 6 million.
Turning to slide 10, we'll look at our gross revenue.
Our total gross revenue increased 15% from the prior quarter due to our higher level of net interest income following the <unk> acquisition.
This was partially offset by a decline in noninterest income.
Turning to slide 11.
At the trends in net interest income and margin our net.
Net interest income increased 27% from the prior quarter, primarily due to higher average loan balances.
Our net interest margin increased six basis points in the first quarter to 298%.
Excluding the impact of PPP fees and accretion on acquired loans, our net interest margin decreased eight basis points to eight 7% due to the excess liquidity created by the high level level of loan payoffs and deposit growth.
We produced a 25 basis point increase in average loan yields compared to the prior quarter.
Merrily due to improving pricing on new loan originations. The addition of <unk> higher yielding loan portfolio and the impact of accretion income on purchase loans, partially offset by the impact of excess liquidity.
We expect to see some expansion in our net interest margin going forward.
Higher rates and higher levels of loan growth enable us to redeploy our excess liquidity.
As well as benefit from the positive impact of additional interest rate increases on our asset sensitive balance sheet.
Turning to slide 12.
Non interest income decreased nine 5% from the prior quarter.
Which included a net gain of approximately 500000 on equity interest excluding the <unk>. Our non interest income decreased by four 6% from the prior quarter, primarily due to lower risk management and insurance fee.
Although it was a difficult quarter for equity and fixed income markets and higher interest rates impacted demand for residential mortgages.
We're able to keep our two largest sources of noninterest income trust and investment management fees and net gain on mortgage loans remained relatively consistent with the prior quarter.
Over the longer term, we continue to see steady growth in our trust and investment management fees, which were $6, 6% higher than the first quarter of 2021.
On slide 13, we have provided some additional detail on our mortgage operations.
Our volume of mortgage locks increased four 5% from the prior quarter, primarily due to the seasonal increase in home buying activity.
Our profit margin in the mortgage business was consistent with the prior quarter as we continue to benefit from the efforts, we have made to improve efficiencies and reduce our fixed expenses in the mortgage group.
The lower levels of volumes or announcing relative to 2020.
Turning to slide 14, and our expenses.
Our non interest expense decreased by five 5% from the prior quarter, excluding acquisition related expenses noninterest expense increased due to the addition of <unk> operations.
On an adjusted basis, excluding acquisition related expenses, our efficiency ratio improved to 69, 8% from 71, 8% in the prior quarter, reflecting the greater operating leverage resulting from our increased scale.
Once the core system conversion and Jackson Hull branch consolidation that occurred in May we should see our run rate for non interest expense, excluding M&A related expenses at 19 $5 million to $21 million a quarter for the next several quarters.
Turning to slide 15, we will look at our asset quality, we continue to see positive trends across the portfolio.
Our nonperforming assets remained at 17 basis points of total assets and we continue to see minimal losses in the portfolio.
We recorded a provision for loan loss of approximately 200000, which was related to the growth in total loans, excluding PPP loans and changes in the portfolio mix.
This brought our triple L 287 basis points of adjusted total loans, which is relatively consistent with the end of the prior quarter.
Now I will turn it back over to Scott.
Thanks Julie.
Turning to slide 16, I'll wrap up with some comments about our outlook.
One of the more positive developments. So far this year is the quality and quantity of banking talent that we've had opportunities to add.
It's individual commercial bankers team lift outs or new Emilo's, our Q1 hires and the pipeline of candidates is stronger than it's ever been and I think thats due to the positive reputation we've developed as a very attractive place to work.
Bankers are seeing in our growth and the success, we're having and they want to be part of it particularly when many of them are frustrated with their current institutions.
People <unk> is the first of our five themes in our 2022 business plan with associates reporting high levels of engagement in spite of Covid <unk> impact.
Put a lot of focus and resources towards associate engagement training and career development that makes people feel like there is a lot of value to work at first western and that has enhanced our ability to both retain and attract new talent.
This is helping us continue to grow in our more mature markets in Colorado as well as expand our business development capabilities in some of our newer markets and Wyoming, Arizona in Montana, where we expect to see increasing contributions being made to our organic growth.
As we look at the rest of the year, we see a number of catalysts that should lead to further improvement in our levels of profitability.
Our loan pipeline has steadily built since the beginning of the year. It is more than 60% larger than it was in January .
As I mentioned earlier, we're seeing a higher level of loan production to start the second quarter.
With a diverse lending platform, we have we have the ability to be flexible and pivot to whichever asset classes are seeing the strongest demand and presenting the most attractive risk adjusted risk adjusted opportunities.
At any given point in time.
They also remain a wildcard and difficult to predict but at this point, we still feel good about our ability to generate strong organic.
Net loan growth this year.
And as loan growth picks up we should be able to deploy our excess liquidity and further drive growth in net interest income and expand our net interest margin.
We're on track to complete the Teton system conversion and branch consolidation in May.
After which we will.
Start to get the full benefit of the cost savings from this transaction.
Portion of which we're reinvesting in the business to support continued growth and expansion.
The combination of higher loan growth.
<unk> shifted our mix of earning assets and the realization of the cost savings from Teton.
Should lead to further growth in earnings and additional increases in our levels of profitability.
While macroeconomic and geopolitical issues, including increasing concern about a possible reception.
[laughter] recession.
Have created more uncertainty around the operating environment.
And we believe that the strength of our client base and the business model, we have we have.
Built positions.
Positions us well.
To effectively manage through these headwinds and continued to deliver strong results for our shareholders.
So with that we're happy to take your questions Latanya. Please open up the call.
Certainly as a reminder to ask a question. Please press star one on your telephone to withdraw your question. Please press the pound key.
Our first question comes from Brady Gailey of <unk>. Your line is open.
Hey, Thanks, good morning, guys.
Brady.
Maybe we'll just start with loan growth payoffs burden that number this quarter I think in the past we've talked about kind of a mid teens level of loan growth.
In the near term with.
Slash longer term for you all.
How do you think about given the payoff dynamics, how do you think about loan growth for the balance of this year and into next year.
Well.
I think the starting point has to be a point that we've made before Brady, which as you know we're just small enough that.
A change in the number of payoffs that we get in a quarter like we saw in Q1 or the amount of loans that actually get funded in a quarter.
Just has an outsized impact on that quarter's reported number I mean with the 200.
24 million or 225 million that we produced of loan growth in Q4, it's not surprising that it would fall a little bit in <unk>.
In Q1, right and so I think we expect the machine to continue to produce lots of loans and.
And I would expect the payoffs to normalize I think we did a deep dive into <unk>.
What was going on with those payoffs this quarter and we talked in the prepared comments about the two drivers which were.
Some construction loans that we expected to pay off last year actually ended up paying off in Q1 and then.
This whole thing about our clients.
Looking to monetize some of the asset appreciation that <unk> seen so.
I think just based on all that we're still pretty comfortable with the mid teen loan growth forecast, we've talked about I did mentioned in our in our comments that net of PPP and.
And the <unk> acquisition, we grew 27% year over year. So I think we've had pretty good success outperforming that mid teen number.
And then the third point I would make is if you look at our current pipeline and our current loans in process that are already approved that are just kind of making their way through the machine.
Those numbers are much larger than they were in January so I think we're going to be fine.
Okay, that's good to hear.
And then as I look at mortgage fees around $2 $5 million. This quarter was about the same $2 $5 million last quarter. So pretty consistent I mean do you think we've found kind of a normalized pace here or.
With the tick up in mortgage rates do you think there is some some downside potential to that as we move throughout the rest of the year.
Well with mortgage revenues now contributing 4% of our total revenues.
I would tell you there's not a lot of downside, it's getting pretty close to zero.
I think seriously I would say that we're definitely going to see lower refi volumes, they've trended down in Q1, and that's continuing into Q2.
Obviously, we're seeing that around the industry. So.
Our expectation is those refis are going to continue to.
Go down we have seen improvement in purchase volumes and I would expect that to continue going into.
The seasonal.
The impact we have here in.
Especially the front range of Colorado and were working on adding some more loan originators, which would certainly.
<unk> production.
We've reduced the fixed expenses as we talked about last year and we've made a number of improvements inefficiency in the mortgage business, which has helped our margins and so we are looking to keep.
The mortgage team to be.
Revenue positive and earnings positive and I expect that the revenue at the end of the days can be pretty flat this year.
It's possible that that could trend down, but I think we've shown pretty good cost discipline.
On that as well.
The important part here is that the other parts of our business.
<unk> are doing really well and are going to drive further revenue and earnings growth this year.
Okay.
Then finally for me with this level of excess liquidity I don't think you guys have ever had this amount of cash on the balance sheet before I mean, it averaged almost half of $1 billion in the quarter.
Do you leave that there and wait for loan growth to return or.
Do you start thinking about growing the bond book.
Milwaukee The bond book is almost zero doesn't it's only like 2% of average earning assets just thoughts on what to do with the excess liquidity. The way you put it in loans later or do you start growing the bond book near term just because rates.
Our rates are a lot better so that it might have been last couple of years.
So if I could give you a little bit of a roundabout answer to that I mean, I just would point out that we grew average loans. We did we talked about month, then numbers are quarter end numbers, but we grew average loans, 15% quarter over quarter, which is largely the teton effect and then we grew deposits 26% quarter over quarter.
Average balances right. So we already had a liquidity problem in December and then adding <unk>, which was half.
Deposits.
<unk> have lent out.
Obviously exacerbated that and like you say I mean, we've been carrying $500 million in the first quarter, mostly at a negative spread because even Neil that's at close to zero.
By the time you pay your FDIC insurance, you get zero at it. So it's actually negative spreads. So we were really happy with the first quarter raised because at least breakeven and if we do see 50 basis points next week like or next early may like we're expecting.
We see that will just help just from that but to answer your question more directly.
Think the decision not to buy 1% Ginnie Mae's last year is looking pretty good right now and I think once we see what happens with this first raise in early may we will be looking to deploy some of that liquidity into.
In the bond portfolio over the remaining portion of the year I think we will do that and kind of a normal first western way would still be cautious and in the meantime, I do expect.
Loan production to really come in and help.
Take up some of that liquidity to improvements on cash yields will help take up some of that.
Negative impact on NIM that we saw late last year and early this year. So I think all of those things are looking like nice tailwind for us.
Okay, alright, great. Thanks for the color Scott.
Thank you Brady.
Our next question comes from Matthew Clark of Piper Sandler Your line is open.
Hey, good morning.
Sure.
Can you remind us how much you have in the way of loans that float kind of immediately or within a month and how much re prices within a year.
Yes, Julian you have those numbers handy you want to walk through that so of our portfolio. We've got about 30% that's variable rate.
And 70.
70% of those loans are about their floors.
And most of the landfill reprice immediately.
And some benefit from the first rate hike, but we will see quite a bit more as additional rate hikes occur.
<unk>.
Basically about 50 basis points as were about 23 of that.
Book of businesses and then about 50, you know its split between Abdullah Heng you will get the rest of that so I think we will see a lot of benefit in the next rate hike in May and then probably more.
Full a full book of business will see a.
A benefit in the next.
Alchemy.
Order of magnitude, Matt if if we saw 100 basis point.
From where we are today, our loan our floating loads floater.
Floating rate loans would yield about $4 $5 million more annually.
Okay.
Okay and then on the.
Competitive pricing commentary.
In the quarter can you give us a sense for.
So the weighted average rate on new loans in the quarter and how that may have changed here in April with the increase in rates, whether or not I'm, just trying to get a sense for new loan pricing relative to.
What <unk> been putting on the books here more recently.
So excluding mortgage which does seem to cause a little bit of variation depending on the type and mix of those are yields that out.
Improving our about a little bit above 5% on that date.
New loans that we put in in the first quarter.
Our expectation given the competitive environment is we're not going to be able to capture 100% of the rate increases in loan yields.
But I think we're going to continue to.
To benefit from it substantially.
I also think that our loan demand is high enough now that we have the luxury to have this pricing discipline on pricing and terms that I talked about like you know if you are fighting for the last dollar growth.
Maybe that's harder to say have the backbone, but I think with the amount of demand that we're seeing in the pipelines, we're seeing and the success of our teams in producing these opportunities.
And maintaining price discipline through the relationship things, we've talked about before but it seems like we're able to do a good job of that and still grow.
Okay, and then just on on deposit pricing those costs came down here this quarter.
I think your expectation last quarter was to probably hold the line on deposit.
Pricing, but a lot has changed between now and then what are your updated thoughts on kind of deposit betas and the overall kind of pressure to have to raise rates on deposits.
Well one of the nice things about the <unk> acquisition is they do have a very stable base of low cost deposits and I think the debt.
Didn't really contribute much in Q1 to our success in fact was probably neutral because of the liquidity that we already had but for the longer term I think thats going to be.
A really nice benefit overall.
The only real pricing pressure, we've seen on deposit so far is about $260 million of our deposits are what we call trust cash which is the.
The cash that's maintained in trust and investment management balances here Thats invested in.
In the bank deposits and that is indexed to money market mutual fund rates and so as of quarter end that has increased <unk>.
<unk> thousand 14 basis points.
And that has more or less 100% beta to it although it seems to have about a three months lag.
Because of the way.
The way.
Money market mutual funds adjust pricing post rate increases.
Okay.
Okay. Thank you.
Our next question comes from.
Ross Haberman of or I'm, sorry, <unk> investments. Your line is open good morning, Scott Scott Nice quarter, how are you.
Morning.
I guess I want to ask a further question about cheat Teton.
How are they doing in terms of contributing to the.
To the loan growth as well as.
Deposits and now that you're in there.
You have them.
They are more are there are there products, which you can sell more than you originally thought.
I've been having revenue enhancements more than you might have originally thought thanks.
Yes, so great question.
When you do a.
A combination like this.
And especially when we're in market like we were already.
You want to make sure you have a smooth transition.
And we were hoping to be able to convert them onto our systems.
Is it more or less the time of the merger we had it scheduled in mid January and ultimately weren't able to do that thanks to our core processor, but we scheduled for May and so you want you want to make sure that between the time you close in December at the time, we convert and through all that that you've retained the folks.
And the clients that are new partners. There. So definitely we have been focused on integration and smooth transition for our new colleagues and for the clients.
Our existing office in Jackson has been extremely helpful. With that the team has really stepped up and I would say that our legacy RMB folks have been terrific and working with us to retain.
These clients and helping us.
<unk> positioned for.
In Wyoming.
In this upcoming quarter. So so far so good it's gone frankly better than I could have hoped.
Now, we're getting people focus more on <unk>.
Business development and cross selling other folks have figured out that the legacy RMB folks have figured out how to take advantage of first western strengths in our processes and whatnot.
So we're seeing that impact in the loan pipeline you are to your point about new products, obviously their legal lending limit is much higher now and so we're able to support them with larger loans and support larger relationships and frankly, we're optimistic that the.
Continued turmoil in that market is going to benefit.
The stable base of folks that we have in that in.
In that market. So we're feeling very positive about that and I do think we will see.
Significant revenue.
Synergies that we did not include in the numbers that we announced last summer.
Yes.
Just one follow.
A follow up.
Question regarding the mortgage business and your revenue there.
Just a breakdown of how much of that is purchase versus refi.
Of that two 2 million plus in revenue you have for the quarter yes.
Yes.
Two years ago.
Was 60 40 purchase revenue.
Historically, it's been as high as 70 30 purchase.
And.
Of course in the great refi boom it flipped and it was 70 or even over 70 of refi and I think the numbers in Q1, as I recall, where you'll kind of high teens in refi and the last number I saw was it's now down to something like 8% refi. So I mean this is drew.
So it's mostly purchase tax what I wanted to know.
I think that's it thank you nice quarter.
To support all.
All the best Thank you. Thank you.
Thank you. Our next question comes from Bill <unk> of Titan Capital. Your line is open. Thank you let me start with the.
Mortgage business with all of the negative talk and the slowdown that we know has taken place how did you.
Managed to have the success to have your gain on mortgage loan sales flat versus Q4.
I think that there are a couple of things going on there we have a very good team.
We've worked hard on this over the last two or three years.
When we bought EMC and was at 2017 Julie.
We talk to them about the idea of integrating the back office.
The secondary services into the bank and our folks here worked really hard to do just that and so we have a much more efficient.
Back office support operations support.
As I mentioned a minute ago.
Hedging with something that we had outsourced in.
Bringing that in house and hiring.
An expert to lead that for us turned out to be a great move they've done a wonderful job with that and then this latest change where we've been able to get Fannie and Freddie direct access for our secondary team.
<unk> improves our margin. So so all of those things not only by himself or transformational but taken as a group I think are really important to the success.
As you know we also pared expenses last.
June at the end of the second quarter looking forward for this downturn and so I think thats really helped us manage expense and you see that in the chart on page 13, if we had the expenses that we had the first couple of quarters of last year and the revenues that we have today, obviously, we'd be losing a lot of money. So I think.
The team's done a really nice job with that.
Having said that I just would underscore you know we're talking about 4% of our our revenues and so I believe that this mortgage operation is really critical to our strategy and being successful in what we do as a company.
Whether or not the revenues are kind of at the level. They are now and we're making a little bit of money with it or whether they go back to the kind of things that we saw in 2021.
They will eventually but for now I think this is a nice stable business that fits with what we're doing it's adding clients to the core business and it's protecting our clients from going across the street.
And so I think it's actually been a really nice story and I'm really proud of the effort. The team has done on managing this.
Thank you and continuing down.
Down the path with the mortgage business would you expand on your comments that you made in your opening remarks that you are seeing the purchase activity pick up.
So I guess the question.
Ultimately will be is is in spite of the drift off a little bit of remaining refis are you anticipating that.
That.
Or sensing that the market is firm enough and in.
In the areas, where you operate.
Going to be able to see the mortgage business grow from this level.
Yeah grow from this level I don't know I think that thats hard to say, but I think stabilize here.
I feel pretty good about and I'll give you the Optimus answer and if any other people from our management team on this call one of them.
This added opposing view can do that but from my perspective Bill.
Think that yes.
Yes, we always see a seasonal slowdown late in Q4, and Q1, and then see a springtime, we see people coming out wanting to buy and so we're seeing that now its showing up in the numbers in March and April .
And I think there's a lot of demand in our markets for housing our problem with the purchase money. It does not supply to support it and so I think that's where the challenge they're gonna be if we had more supply I think we'd see a lot more volume opportunities, but you know what we're doing is a couple of things there number one.
<unk>.
We're trying to be competitive and make sure our <unk> have the tools they need to succeed we're actually adding some new products that are in line with what the market seems to want today, which is things like this one closed mortgage that lets people buy a lot.
And build a house with a single closed mortgage debt.
That deals with the supply problem right and then that single one closed converts into a permanent financing.
Which is a really nice product I think perfect for the times and our team is very excited about that and I would expect significant volumes out of that.
Yet to come this year and then.
I think the disruption in the industry create some interesting opportunities for us too.
And we were working yesterday with one of our regional presidents.
And they feel very confident that we're going to be able to hire some MLR was into their region that are going to be nice producers and really fit nicely with the business. So I think the position we're in.
As a position of strength because of the scale and scope we have the reputation that we've built the team that we have the products and services and efficiency that we deliver to those <unk> I think we're going to be able to build that team, but that's that's probably a little bit on the optimistic view I think.
My assumptions and business planning my assumptions in forecasting here would be we're probably going to be stable revenue wise, where we are and we can produce steady income. So Julie you want to issue a counterpoint to any of that.
That's a good way to look at that's how we're looking at it internally.
Fancy said, Scott Q2, Q3 are traditionally seasonally higher for us that we probably will see a little bit of a bump that we're not going to see significant change in production.
And the other thing I would just note.
Putting a finer point on your broader strategic.
Jake initiatives of what mortgage debt for the bank and if you just look at slide 13 that doesn't really show you what is being pretty into kind of the portfolio of our all of our balance sheet. So you have to take both pieces.
That's.
The downs on breaking the business component, if you don't get to see all of that benefit back.
You can see on the loan side as we do benefit from market is even more than just financial.
Yes.
<unk> team helps us build the wealth management segment I'm sorry.
In revenues.
So if I were to put all that together and summarize the purchase activity in your markets you sense.
<unk> will be roughly steady with with a season that normal seasonality.
That will then affect that up and down and the reason it steady rather than growing is a lack of of of housing.
Housing supply that's available for sale.
Yes, that's what we're seeing in <unk>.
That leaves you a little frustrated because it's hard to forecast.
<unk> joined the club right I mean, it is a challenge right now I agree with that.
It probably wouldn't leave me as frustrated as it why someone trying to buy a home that can't find one that is so true.
Yes, let me ask one more question relative to the excess liquidity.
Alright, one line of questioning here.
How much excess liquidity do you have meaning if you have 454 million of cash and investments is $400 million of that excess or is it what would be the number.
Well you don't historically.
We've operated our bank pretty close to a 100% loan to deposit ratio.
And what we have found over the years and you know what by years I mean 18 years of doing this here 32 years doing it in my career.
Is that there is.
Our type of client has a lot of deposits and a lot of liquidity and we can raise deposits when we need them. So you know I think we're relatively comfortable.
Operating at a higher loan to deposit ratio and we've been down in the low eighties of late and so.
Really if you think about bill's question of excess liquidity.
What number does that gets you to about $2 $50 million to $300 million range, just wanting to keep enough cash on the books that we can manage.
Okay.
Playing around with that 10% liquidity ratio.
That's the answer I am again.
So if we just do some back.
Back of the envelope math, if you had 300 million of.
Excess liquidity or to a loan that out.
At 4%.
Knock off 25% for taxes that gives you roughly.
An extra dollar per share of earnings after the first quarter of origination windows when you'd have the your provision that would be the associated with it is that the.
Essentially the right way to think about it that theres another buck of.
Uh Huh of earnings potential built built into the business as you redeploy just the existing excess cash.
I think thats one of five <unk>.
Significant factors for NIM going forward here Bill So I would say, let's call that one number four on my list.
And the other three of the other the other four would be floating rates right, we talked about $4 5 million from 1% rate increase.
The short end.
The production of the machine just kind of doing its job in growing mid teens would be number two.
Three I think the growth and expansion that we see.
Bringing in these new producers you know all of that is going to be additive to what the current mature Pcs can produce at number three.
Number four would be deploying this liquidity.
Don't forget about the other factor I talked about we see short term rates, 100% higher than most of our deposits don't have a high beta.
To see what our competitors do and whatnot, but I think there's a nice.
Pick up there and then and then the fifth one would be the.
Question on the investment portfolio.
Back to being comfortable having.
10% of the book or something of the balance sheet and investments I mean, that's a.
Fire Cry from where we are today and a lot of additional incremental earnings for us in revenues.
Careful Scott you're going to highlight a path to $5 of earnings.
Yes.
And occurred to me.
Yes.
Thank you both for the time.
Thank you.
Your next question comes from Brad <unk> of <unk> capital. Your line is open.
Thank you.
You highlighted the up 100 basis point scenario, where it adds $4 5 million to <unk> income when anybody up 200 basis points scenario, what does that add to net interest income.
So I'm, an optimist, but I'm not that big an optimist.
Yeah.
I have our director finance sitting here.
I'm going to put him on the spot David do you think that that 100 carries over in the second.
100 basis point more or less be.
It'd be a little bit more because you've got everything out of.
The floor is at that point, yes.
He is nodding his head yes.
And you all see that.
So what I'm hearing is it could be.
$10 million.
Maybe the first 100 is $4 five in the second hundred is five five.
Things like that well our outlets around the Paul So we don't want to get too far over our skis here.
Okay.
Let's see another question the expense guidance.
Kind of a clean quarter after it.
The <unk> conversion.
$19 5 million to $21 million per quarter.
It seems like a rather large range to me because you know what.
On the low side of our high side, it's a different basically at <unk> 45, a share.
Can you, maybe tighten that up a little bit or just give us a little bit more color around that big range.
Yeah. So we have budgeted for this year and in line with our analysts forecast generally I would say.
For continuing to grow our teams here, we're seeing such nice revenue growth that we would like to continue that.
Build our front office and back office teams.
Which frankly is a little bit sort of future growth right I mean, it doesn't necessarily pay off in the current quarter.
So I think.
When we can hire those people and find the right people and get them on board or whether we have a couple of successful lift outs that we're working on right now and those expenses come on it just all adds a little bit of uncertainty to it so I think.
When when Julie talks about 19, 5% to 21 I mean for me, that's where I would think the uncertainty is but let's say Oscar.
Echo that but we're getting a broader range because we're trying to get you over a couple of quarters here. So.
Lower and we will be ramping up into the higher end by the third quarter.
Third quarter outside of the fourth quarter of this year.
Hopefully that's a lot of alcohol that the reasons are the confirm we're staffing up and we've got new offices.
We're talking about so they're forecasting includes all of those items as well.
Great. Thank you that's the last question here.
I was thinking that a clean quarter would translate into about 125 ROA.
And that was maybe a quarter ago now that we're in totally different interest rate environment with higher rates and a much higher interest income should I think of you guys as a 1350 Aro a company kind of clean quarter Navy in 2023 with higher rates or.
How do you think of that.
I think there is a lot of operating leverage in our business and we've talked about that a lot.
In the IPO and since then.
As our offices grow and now we're up to 19 offices.
As they reach maturity they get to be eight or $10 million in revenues and they have kind of a $2 5 million in expenses.
Then if you can add a couple of incremental people that are really good bankers in the market you know the incremental cost of that is maybe a few hundred thousand dollars. They go out.
And they grow you another couple of million dollars in revenues I mean that all in the fixed cost of providing the central expertise in our central support is essentially zero.
That's really powerful operating leverage.
Does that get us to 2% ROA five years from now I don't know I mean, I don't think anybody has really proven that but I do think.
One in a quarter is a very achievable number for us one and a half it seems like an achievable number as we grow this thing out <unk>.
Depends on how many new offices, we're opening depends on how many new people, we're hiring this quarter or next quarter, but but I think your your analysis is right and I do think there's a lot of operating leverage in our business.
That was a little hard to see in 2018, when we went public.
You look back the last couple of years, and it's very evident and I think that's going to continue to be the case.
Great. Thank you and have a great weekend.
Thank you too.
As a reminder, ladies and gentlemen, if you do have a question. Please press star one or.
Our next question comes from Taylor Broderick of hub Group. Your line is open.
Great. Thanks, just two for me obviously.
The.
Focus on pricing and structure discipline, probably makes the continued great asset quality likely to continue is there anything in your modeling or any indications that there could be even like lower provisioning going forward that might lead to the reserve to maybe edged down from where it's been at.
Well the question I thought you were going to ask is if we see any credit pressures and we don't.
I think we're comfortable with where the reserve is.
Candidly.
We all have seasonal on our minds for January of 2023, and so we would like to make sure that we have.
Our reserves in line with where we think we're going to be with Cecil So I wouldn't expect a big.
The decrease in the provision this year I think we're going to want to continue to provision about the levels that we are in.
And then see where that leads us with seasonal to the extent that the numbers support that so far they do.
I really agree with your comment at the beginning that this is the part of the cycle, where bad loans are being made that a couple of years from now.
Everybody will be well why do we do that loan and we should try to avoid that I mean I've been through enough of these cycles to know.
That may be sooner, maybe later, but it's not going to be never so let's don't make those mistakes.
Great and you know it seems like just in the mountain West Theres been enhanced M&A activity, even post Teton, obviously, youre going be able to be selective on individual ads does this change at all maybe how you would look for.
Any sort of acquisition of an actual enterprise going forward does it speed it up at all given maybe increase scarcity value.
As a buyer do you mean or yep yep.
Well I would tell you we have an active corporate development program as we have for years here. We've done 13 acquisitions I think over the years.
We have a number of candidates right now that we're talking to it's focused and targeted we don't.
I wanted to do something that's outside of.
What makes sense for us.
So we have our target list and we're working on them and if they decide they want to sell hopefully they'll be familiar with us as a really attractive buyer for them that has.
A really good experience and successful acquisitions and being a really good partner post.
Post acquisition, which I think you know our folks from Simmons would tell you from two years ago, our folks from EMC. The mortgage company would tell you from three years ago, and I would certainly hope our <unk> folks are feeling like we're good partners and supporting them. So I think all that stuff builds a reputation in the industry.
It makes for a nice referral sources right when you can tell at target.
Call. These other folks that are all still here and are all a lot more productive than they were before and see what they think about us as a partner I mean, that's a pretty powerful.
Arrow in our quiver.
Great. Thank you very much.
I show no further questions and would like to turn the call back to management for any closing remarks.
Yeah, well, thanks, so much everybody for dialing in today I would just add three points that I wanted to leave you with you know I spoke in our comments our prepared comments about our people first initiative and I feel like we're showing some really great results in Q1.
Thanks to these terrific people, we have here managing their day jobs and managing the Teton integration.
And working through a number of exams and audits and having parallel systems that we have to integrate to have all this reporting that we have and I just would really.
Commend the folks that we have and the job they're doing.
I appreciate that number too.
I hope you see in the story here.
That there is a nice upside ahead with organic growth in our new offices maturing our expansion is definitely gaining traction you look in the front range of Colorado that stuff's working our new partnership in Wyoming is going to give us a lot more scale and opportunity in western Wyoming.
Montana <unk>.
Project seems to be coming together quite nicely I think thats going to be a really interesting story for the future.
In our Arizona team.
That we decided to restructure here a year or so ago is really coming together nicely and we're seeing lots of opportunity. There. So you know a couple of these lift outs and maybe some future acquisitions I think that could all be really additive to the strong organic growth we're seeing.
And then the third point is just kind of these <unk>, we see I think some concern about the macroeconomic headwinds in the worldwide pressure, but just in a community or regional small regional bank market for.
For us, we're seeing a lot of tailwind and opportunity and I spoke about those on the call today.
I feel like we're well positioned to take advantage of the situation that we're in here. So thanks.
Thanks, again for down and everybody have a great weekend.
This concludes today's conference call. Thank you for participating you may now disconnect.
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