Q2 2022 First Western Financial Inc Earnings Call
The conference will.
Good day, and thank you for standing by and welcome to first Western Financial Q2, 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to press star.
Our one one on your telephone please be advised that today's conference is being recorded will now like to hand, the conference over to your speaker today, Tony Rossi of financial profiles. Please go ahead.
Thank you Justin good morning, everyone and thank you for joining us today for first Western Financial's second quarter 2022 earnings call joining us from first Western's management team are Scott Wylie, Chairman and 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, if you've not done so already please visit the events and presentations page of first Western's Investor Relations website to download a copy of the presentation.
Before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition of first western financial that involve risks and uncertainties.
Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
These factors are discussed in the company's SEC filings, which are available on the company's website.
I would also direct you to read the disclaimers in our earnings release and Investor presentation. The company disclaims any obligation to update any forward looking statements made during the call. Additionally management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information.
To be discussed today as well as the reconciliation of the GAAP to non-GAAP measures without I'd like to turn the call over to Scott Scott.
Thanks, Tony.
Good morning, everybody.
Over the past few years, we focused on building a stronger commercial bank platform.
And our second quarter results demonstrate the significant progress that we've made.
We had 342 million of new loan production in Q2, which was a record level for the company.
To put this into perspective, our loan production second quarter was about 90 million more than the amount of loans that we added in the Teton financial services acquisition.
This translated in exceptionally strong loan growth with total loans, increasing at an annualized rate of 45% with the highest rate coming in our C&I portfolio, which was up $76 million or 32% from the end of the prior quarter.
And so I like to say the machine is working the way it's supposed to work and we're capitalizing on the strong economic conditions that we continue to see in the attractive growing markets that we operate in.
Given the value proposition and the expertise that we offer commercial banking teams are finding good lending opportunities without having to compromise on pricing or structure.
Our client base consists of a lot of knowledge based companies and in general their businesses aren't impacted by the supply chain constraints and inflation doesn't have what sort of impact on end user demand.
So despite the macro headwinds they continue to perform well.
We have good opportunities to fund our continued growth.
Another significant contributor our loan production growth this quarter was our one to four family residential portfolio.
Over the longer term, we expect this portfolio to decline as a percentage of total loans as we continue to grow our commercial lending.
Point in time, we may choose to grow this portfolio with new production opportunities new production provides the opportunity to add.
High quality, earning assets with attractive risk adjusted yields.
In the current environment.
As we've indicated in the past our mortgage operations have strategic importance to our business model.
From an offensive standpoint, it's one of the tools, we use to attract new clients to the bank that we can then deepen our relationships with overtime.
From a defensive standpoint, it ensures that we're meeting the needs of our clients. So they don't have to go to the bank across the street to get their mortgage.
And the way, we operate and what we produce both sellable conforming mortgages and jumbo arms that we portfolio. Its a compelling advantage in terms of attracting and retaining high performing mmos.
May be limited in the type of loans they can offer at other institutions.
This differentiator becomes even more attractive for them are lowest when overall demand for mortgages is declining.
With the strong loan growth that we were able to generate we're able to redeploy more of our excess liquidity and see a more favorable mix of earning assets along with the higher rates that we're seeing on earning asset and deposit costs remain well controlled we saw significant expansion in our net interest margin in the second quarter.
Despite the more challenging economic environment, our asset quality remains exceptional with nonperforming assets remained at just 17 basis points of total assets and another quarter with an immaterial amount of net charge offs.
Moving to slide four we generated net income of $4 5 million or <unk> 46 cents per diluted share in the second quarter were 49 cents per share when acquisition related expenses are excluded.
Well, we had a strong balance sheet growth and a significant interest in that it's a significant increase in net interest income.
Our earnings were lower than the prior quarter due to unfavorable market conditions that resulted in a decline in both wealth management revenue.
And our net gain on mortgages sold.
However, our strong profitability continued to drive increases in book value and tangible book value per share as we continue to benefit from our strategic decision last year to retain our excess liquidity in cash rather than putting it into the investment portfolio.
So we have plenty of liquidity to invest in loans and security through the quarter that are now providing much higher yields.
Turning to slide five we'll look at the performance of our private banking commercial banking trust and investment management businesses.
As represented by the pre tax earnings of our wealth management segment.
As you can see the core business continues to perform very well while the mortgage segment was a drag on earnings this quarter. Although this doesn't completely presented completely accurate picture well all the expense in our mortgage operations recorded the mortgage segment.
The interest income generated by the loans that we add to our portfolio is recognized in the wealth management segment. So even though we're showing a pretax loss in the mortgage segment for the second quarter. There is significant value being provided to our overall results that isn't reflected in the segment reporting.
Turning to slide six we'll look at the trends in our loan portfolio. Our total loans increased $219 million from the end of the prior quarter.
It is a record level of loan production offset the high level of payoffs that we continue to see.
Our loan production was well diversified and we had increases across most of our major categories.
Most of what we added the one one to one to four family residential portfolio, our jumbo arms that provide attractive risk adjusted yields.
We had quite a bit of loan production to come on towards the end of the quarter.
End of period loans were 140 million higher than our average loans during the quarter. So we have a nice tailwind going into the third quarter in terms of driving higher net interest income.
Moving to slide seven and we'll take a closer look at our deposit trends.
Our total deposits decreased $102 million for the end of the prior quarter the.
The decline was due to typical fluctuations that we see in commercial operating accounts as well as some seasonal outflows for tax payments and some withdrawals related investment opportunities.
We were able to offset some of the outflow with the development of new deposit relationships with new accounts, providing $85 million in deposit inflows during the second quarter.
Turning to trust and investment management on slide eight.
Total assets under management decreased $922 million from the end of the prior quarter due to market declines with the most significant impact coming in the investment agency advantaged Trust balances.
Although I would note that all of our portfolios outperformed their benchmarks.
Our investment management team did a very good job of moderating the impact of the severe market pullback on client assets.
Lower value of assets due to market decline was partially offset by $50 million.
Increase in AR.
Inflow of new accounts.
With that I'll turn the call over to Julie for a discussion of our financial results Julien. Thanks.
Thanks, Scott turning to slide nine we'll look at our gross revenue.
Our total gross revenue was essentially flat with the prior quarter and beyond.
Increase in our net interest income was offset by lower noninterest income.
On Slide 10, we'll look at the trend in net interest income and margin.
Our net interest income increased 10% from the prior quarter, primarily due to higher average loan balances and an increase in our net interest margin.
We indicated last quarter given higher interest rates, we have started to grow our investment portfolio, which also contributed to the increase in net interest income.
Net interest margin increased 37 basis points in the second quarter to $3 three 5% exclude.
Excluding the impact of PPP fees and accretion on acquired loans, our net interest margin increased 43 basis points to 330 per cent.
Our net interest margin benefited from a more favorable mix of earning assets as we deployed our excess liquidity into the loan portfolio I thought it was 14 basis point increase in our average loan yields.
48 basis point increase in our cash balances have been held with other financial institutions.
The favorable shift in the mix of earning assets and higher yields more than offset the three basis point increase we had in our cost of deposits.
Well, we expect to see a larger increase in our cost of deposits going forward.
Our continued opportunities to grow the loan portfolio.
Our asset sensitive balance sheet, we expect to continue seeing expansion in our net interest margin, although not at the same level that we had in the second quarter.
Turning to slide 11, our non interest income decreased 19% from the prior quarter, primarily due to lower trust and investment management fees, resulting from lower limb caused by market performance and a lower net gain on mortgage loan.
These declines are partially offset by approximately 300000 and unrealized gains on equity securities.
On slide 12, we have provided some additional details on our mortgage operations.
Our total mortgage operations increased 48% from the prior quarter.
As Scott mentioned, a significant portion of the originations were a jumbo arm that we retained in our portfolio.
The volume of mortgage locks on loans held for sale.
When revenue is recognized.
Our mortgage segment declined by 18% from the prior quarter as the decline in refinancing volumes more than offset the increase in purchase volumes. We saw as we entered in to the traditionally strong season for the housing market.
Well, it's been troubled and our mortgage operations were flat with the prior quarter the lower level of locks in revenue resulted in a loss for the second quarter.
Although as Scott mentioned this does not account for the interest income that we generate from loans that we retain in our portfolio.
Turning to slide 13, and our expenses.
Our noninterest expense increased 6% from the prior quarter, but remained in our anticipated range of 19, 5% to 21 5 million excluding acquisition related expenses noninterest expense increased due to higher salaries and employee expense.
Nothing from higher commission payments on the strong mortgage.
Production in.
And our investment in new banking talent to support our continued growth.
The combination of the lower level of noninterest income and the investment in new banking talent resulted in an increase in our efficiency ratio, which we expect to trend in a positive direction as the new bankers have added bill to that had built and their pop up pipeline and began contributing to our loan production.
We completed the system conversion and consolidation of our Jackson hole branches in mid May which will result in more cost savings from the Teton acquisition, a portion of which we are using to invest in new banking talent.
For the remainder of the year, we expect our noninterest expense to range from $20 5 million to $21 5 million.
Turning to slide 14, and we'll look at our asset quality.
We continue to see positive trends across the portfolio, our nonperforming assets remain at 17 basis points of total assets and we continue to see minimal losses in the portfolio.
We're in the process of successfully resolving our largest nonperforming loan and that's part of the workout plan. We received a residential property that is not now held in Oreo.
As a result of receiving this property, we released a portion of the specific reserve held against this loan.
We recorded a provision for loan losses of approximately 500000 as it relates to the specific reserve offset some of the provision required for our growth in total alone.
The release of the specific reserve also had the effect of lowering our H O L to 78 basis points of adjusted total loans, which reflects the strong credit quality and low level of losses, we have experienced in the portfolio now.
Now I'll turn it back to Scott.
Thanks Julie.
Turning to slide 15, I'll wrap up with some comments about our outlook.
We expect many of the positive trends, we experienced in the second quarter to continue in the second half of the year, primarily driven by further organic balance sheet growth.
Our loan pipeline remains very strong and it's consistent with the size of the pipe.
The plane at the end of the first quarter.
As rates increase it's likely we'll start to see lower demand for commercial real estate loans, but we've built a well diversified loan per production platform.
Which provides us with the ability to be flexible and focus on whatever asset classes are experiencing the strongest loan demand and present, the most attractive lending opportunities at any given point in time.
So while the mix of production might change, we still expect to see a high level of new loan originations.
Even as we maintain disciplined in our pricing and underwriting criteria.
The strong loan production, we experienced in the second quarter also increased our unfunded commitments by 14% to $802 million. So that rep. It represents another potential catalyst for loan growth if utilization rates increase.
It's also likely to pay us will start to moderate as rates increase.
Which would.
It presents less of a headwind to loan growth that we experienced in the first half of the year.
Given all these trends we feel confident in our ability to continue generating strong loan growth.
With the continued expansion in our net interest margin. This should result in significant further increases in net interest income in the second half of the year.
As Julie mentioned, we're going through a bit of investment phase as we add new talent.
To expand our presence in newer markets like Montana in Arizona, as well as continuing to grow in Colorado.
We're funding these investments with a portion of the cost saves from the Teton acquisition. So we expect to expense levels to slightly increase over the remainder of the year.
We're also seeing steady growth in the pipeline in these new areas, which should translate into larger revenue contribution.
As we move through the rest of the year and improvement in operating leverage inefficiencies.
In addition to new banking talent, we're also making investments in technology and infrastructure to support our future growth.
We're upgrading two of our core systems, and the trust and investment manager.
But definitely that's what business as part of our broader technology modernization initiative.
With the upgraded systems will have more features better user interface.
Greater efficiencies improved performance reporting capabilities as well as more flexibility to add other fintech tools in the future that will enhance our ability to serve clients and create a more create more fee income opportunities.
And finally, while we continue to see relatively strong economic conditions throughout our market.
What's the broader concerns about a potential recession.
I wanted to take a few minutes to talk about our historical credit experience during the past economic downturns, most notably during the great recession, resulting from the financial crisis.
Our loan portfolio performed very well during the great recession that was for a couple of reasons first the strength of our client base, which consists of companies with strong balance sheets and cash flows and high net worth individuals that have the liquidity and financial strength to manage through periods of economic stress.
Second a very conservative approach to credit.
And what's your underwriting criteria.
There's three sources of repayment.
This is consistently served us well in terms of keeping credit losses, very low even when the loan goes through into nonperforming status.
We've grown our franchise, we have not deviated from this conservative approach to credit.
Accordingly, we would expect to continue to maintain strong asset quality and low level of credit losses in a recessionary environment, particularly one that could be relatively shallow and short in duration.
If economic conditions and loan demand remains strong we feel we're very well positioned to continue generating profitable growth, particularly as we start to see larger contribution from some of our newer markets.
And if economic conditions weekend, we have an exceptionally strong balance sheet and loan portfolio that we believe will help us to effectively manage through any economic stress that occurs and protect shareholder value.
With that we're happy to take your questions.
Thank you as a reminder to ask a question you will need to press star one one on your telephone. Please standby we compile the Q&A roster.
For questions.
Yeah.
Yes.
And our first question comes from Greg <unk> from Citigroup. Your line is now open.
Yes.
Hey, good morning, Scott and Julie.
Morning, Brett.
Wanted to first ask just <unk>.
Given that mix shift change in the balance sheet and a quarter versus average would seem like the June margin would've been quite a bit about the margin.
Margin for the quarter would you happen to have the June margin.
I do.
The average.
Net interest margin in April was three O nine.
It may was $3 35.
And in June was $3 67.
So your guess is right on and breadth.
Okay.
And I wanted to make sure I understood.
The changes to the balance sheet linked quarter. It seems like maybe you took attack can become less asset sensitive with adding the mortgages the jumbo mortgages, but I would assume that that.
Hmm.
My partially just be too.
Given what's the ability to sell those in the open market can you talk about the decision to put those on the portfolio.
Yeah, we talked about some of the reasons, but your your question is correct.
We've seen the jumbo arm.
Every market dry up.
And the people that are doing those now are doing them for their portfolio. So you know for our MLR is we want to be competitive and make sure. They don't starve as we go through you know a difficult period here in the mortgage world and so having the ability to put some of those on the on the portfolio is helpful to them and frankly helpful dust there they're all.
Five seven and 10 year arm. So are you there.
Not monthly floating variable rate like most of our commercial C&I lending is but but certainly you know attractive risk adjusted assets at.
Have you know well managed.
Risk on the balance sheet, and it's certainly adding those is going to make us less asset sensitive going forward I think with the reduction in cash on the balance sheet and the increase there that will certainly have that impact we think as of the end of the quarter, we're still asset sensitive, but less so than we were coming into the quarter.
Okay. That's helpful. And then just lastly, and I'll hop back in the queue you know.
How much do you look at the $180 million of cash at the end of the quarter. How much liquidity do you do you think you have left to deploy and then what would be the assumption on deposit betas from here given you only seven basis points of increase from a cost of funds during <unk>.
Yeah, I'll take a stab at both of those questions and then Julie if you want to add more depth to it.
You have deposit beta.
You know, it's a little hard to say Ah, we expected that that would be low at first and it has been and then as we got further into the year with higher <unk>.
Rate increases like we've seen youll, probably see a little more pressure there.
Each of our markets is a little bit different too.
So.
It's difficult to predict but I think from everything we've seen so far deposit beta is relatively low overall and we will see a couple of areas like our trust cash where it's going to be higher as it has been historically.
You know in terms of overall liquidity I think we're comfortable with where we are in long term, we would expect to.
Continue to be about where we are in terms of liquidity. Obviously, we've seen an increase now in our loan to deposit ratio back in line with historical numbers for us, which we have tended to be in that kind of high nineties.
And interestingly you know over the 18 years since we opened you know we've been able to consistently find.
Deposits.
To fund our.
R R.
Our loan growth.
Our clients tend to be these large depositors.
Our type of client is that large deposit balances and at the margin when we want them they'll bring them over and when we don't need them.
They'll take them elsewhere. So I think we're gonna be able to continue to manage that in the future as we have in the past I don't I don't see any reason that would change.
I think I Miss in there Julien those two questions I think you have it.
Okay, Great I appreciate all the color.
Thanks, Brent and thank you.
And one moment for questions.
And our next question comes from Brady Gailey from <unk>. Your line is now open.
Hey, Thank you good morning, guys good morning Brady.
But I know we've talked about for first western up mid teens level of loan growth.
You guys, obviously did a lot better than that in the second quarter.
How should we think about loan growth for the back half of the year do you think you'll still outpace that mid teens level or do you think <unk> is just kind of a one off a really good quarter.
Well, we've talked before that.
Our balance sheet, just small enough that they're going to be very variations quarter to quarter.
But I talked in my prepared remarks about you know all of the.
The reasons that we think we're going to see continued loan growth I mean number one.
Went into the quarter.
Our third quarter with actually higher.
Pipelines than what we had going into the second quarter. So you know.
That's a favorable trend I would tell you our numbers for July are have continued to be strong both in terms of volume and rate. So you know we're seeing.
<unk> nice.
The growth there a payoff balances you know we were thinking that that might slow down.
As rates went up and they actually have come down now as a percent of beginning balances from two seven in March two 8% in April to seven in May down to 2.5 in June .
And through I think two days ago in July we were down about 1.9% of beginning balances, we're seeing payoffs slow down we're seeing good strong loan demand for new originations and Amazon improving are we there.
These lenders that Julie spoke about in her comments.
In Arizona in Wyoming, and Montana and here in Colorado.
Yeah, those are all pretty strong.
Tail winds up would help offset economic slowdown and higher rates I think.
Alright.
Alright, and then on the.
Loan loss reserve percentage I know things have.
Improve that that ratio has come down it's now at 62 basis points do you think that you know.
<unk> level as kind of a floor and it should be.
From there or is there more downside or with the economic uncertainty and you start to think about building that ratio.
I'll take a stab at that Julian and if you could just correct me when I go run here, we don't look at it at 62 basis points Brady, we adjust out PPP and purchase loans because the purchase loans have.
Their own mark on them and so if you just take the bank originated loans.
We brought that ratio down to pre pandemic levels this quarter.
Our excellent asset quality is quite a bit better than it was pre pandemic. So we thought that that was reasonable did that get us to 78 basis points, Yeah, Hi, Jessica yes. So so.
Adjusted its 78 bps, and we don't anticipate that going lower from what we know today.
You know what car T cells in the back of our mind too Brady and we wanted to be mindful of that of course.
Yes.
Alright, great. Thanks for the color guys.
Thank you and thank you.
And if you have a question that is star one one again if you have a question that is star one one and one moment for our next question.
And our next question comes from Matthew Clark from Piper Sandler Your line is now open.
Hey, good morning, Scott and Julie.
Morning, Matt.
Just on the loan to deposit ratio it sounds like there's still a fair amount of momentum.
Loan growth side with the pipeline being comparable to last quarter and some momentum here in July .
Hi are you willing to let that loan to deposit ratio go.
Assuming you probably won't be able to match fund that with deposits at that kind of above trend level.
Well. This was certainly a question as we got into the quarter for US you know what was causing the deposit declines we've seen obviously this historical liquidity added by the fed into the.
Economy over the last couple of years and you know people have been wondering when all that comes out what is that due to.
We wondered what it does to the deposit balances and a bank like ours.
With such a small percent of the overall deposits in our markets.
And so we did a deep dive in the second quarter into.
What was causing our deposit declines and we looked at all the significant declines in U S. I think.
Thank Julie mentioned in her comments and I know, it's in the deck to what's what slide is the deposit slide seven gives you the fluctuations and I think we're as Scott said it as well while we identified when we did that deep dive is just commercial operating accounts for just having their kind of normal movement and we saw some seasonal tax payments, which we typically see about this time.
And then you know clients are still making investment lives with their cash in hand with some of that go out of the bank does for their own.
That's impressive.
From that perspective, I think we feel pretty good about where we're at on the deposit side of course, you know what.
We're monitoring that loan to deposit ratio pretty.
Heavily and feel like we have a lot of liquidity in different places and as Scott mentioned, we felt pretty good about our historical ability to raise deposits and they need to we have a lot of clients with high balances that we can meet them typically bring in if we need to so we're planning to be pretty flexible on.
You know pricing.
<unk> to bring in those that gathering additional deposits.
As we look into the future here with our loan pipelines remain very strong, but we're gonna be mindful of the kind of the cost of those and in our business development first of all just continue to work on the deposit gathering as well.
I feel like we're a little bit unprecedented financial times between what the fed's doing in.
<unk>.
Inflationary pressures, we're seeing today.
So.
You hate to say the next quarter is going to look a lot like the last 18 years, but again I mean, we have had a consistently at.
At least at times, our loan to deposit ratio in the high nineties that's been.
It's worked well for us and it's been very manageable for us and we have been able to grow deposits.
Consistently so.
But I guess it would be my direct answer to your question Dan.
Okay, Great and then do you happen to have the spot rate on interest bearing deposits at the end of June just to give us a starting point.
Of the spot rate for total deposits for.
June I think it was 25 bps, but at the end of the month was 35 bps.
Okay, Great and then the weighted average rate on new loans in the quarter.
Relative to <unk>.
Well. This is this is actually an interesting number.
The number that we spent some time looking at to try and.
See what was ahead as well so with.
With a mix of production and a higher amount being in mortgage loans that certainly affects the rate that we had in.
In Q2, and then and then you also look at.
The mortgage loans that actually close.
In the second quarter, you know some of those are getting locked in Q1. So if you look at kind of where we are today in June the average rate was 416 for new loan production and in July so far at 481. So you know, we're seeing very strong positive trends in.
And loan price of course, all of that comes before the 75 basis point increase yesterday.
We also know that hit the point, where loans are getting booked at higher rates than what we're seeing in the payoffs.
Now helps kind of stop that type of a whole lot of that.
No no longer so much of a headwind against the margin.
Alright, Great and then last one for me just on the mortgage segment is there anything else you can do there to cut expenses or do you feel like you've.
All you can do on that front.
So.
As we've talked about them and I won't go through the whole song and dance just the short version.
That's a small but strategic important strategically important part of our overall story.
You know we have said that we're not going to lose money in that business and then of course, we did lose money in that business.
And.
In Q2, if you look at just the.
Mortgage.
Segment reporting, but you know a couple of points on that number one.
If you.
A factor in the.
Net interest income that we get from those jumbo loans that we book as portfolio loans, which was a much higher percentage than normal for us in Q2.
More than offsets the <unk>.
Million dollar reported segment losses, the revenues that go into the segment or just from the secondary sales and all the attendant hedging and whatnot that goes with that so so that's kind of the first point more directly.
But the to your question, but we have reduced costs already in the second quarter again, you remember last June we made a significant cut.
When we saw the slowdown.
Right away and and we've done that again at the end of the second quarter and we have some additional cost control measures in place. We do think that this environment is going to help us.
Attracts some new producing mmos that would help.
Offset the cost you know I just reaffirmed we have no intention of losing money in that business and I think if you look at it on a kind of.
Overall basis today.
Today, we're not and we can get the segment reporting to look a lot better.
Going forward.
Okay. Thank you.
And thank you.
And one moment our next question.
Okay.
And our next question comes from Ross Haberman from <unk> investments. Your line is now open.
Good morning, Scott how are you.
Good morning.
You had great loan growth I was wondering if you could sort of break it down by geography.
Better loan growth from from Wyoming or Montana.
<unk> channel or Arizona sort of where where you have seen.
The best the best.
Growth.
Yeah, So a really good question.
<unk>.
If I could take us out a little bit of a detour it's across the platform.
Strongest in Colorado, because that's where our biggest basis, Arizona you know we've hired a significant new production capability that didn't produce that much in Q2, but is going to I feel really good about what we're doing there.
But if I could just address the Wyoming question for a minute.
You know one of the things you worry about in an acquisition.
Is when you bring them on to first western from being you know the Rocky Mountain Bank base there in Jackson.
You want to make sure you don't go backwards right. So first quarter was all about retaining clients and making sure that they were comfortable and then you put them through the conversion and you know I'd love to tell you where greater conversion that it went perfectly but that would be not true because all conversions I think are painful and we certainly did everything we could do.
To mitigate the team there did a great job.
But that that was a big challenge in Q2 may 15th as Julie said, we conducted this weekend conversion moved everybody over so you get to the end of the quarter, you're thinking boy you know if it's flat for the quarter. That's good well it turns out Wyoming was actually Jackson was our third.
Highest producing net loan growth.
P C for the quarter and so actually when I saw that I set up all our big high five because that's obviously a really great accomplishment. It tells you the opportunity in Wyoming for US I mean, we thought that if we could take our platform and our tool box and apply it to you know the nice.
Community banking history that they have yet rocky legacy Rocky Mountain Bank that we could do something really special there and it's nice to see that already showing up in Q2.
Yeah.
And just one last question you.
Yeah.
I think youre, saying that if we continue to see a.
A rising rate.
Environment.
On this.
Maybe another 75 basis points on them in September so that that will continue.
To help the margin it helps us spread is that correct.
Well I think the question that came earlier about you know the NIM improvement in the quarter tell.
Tell you that we're going to see a lot stronger NIM for the second half of the year.
Even without increased rates right.
The strong momentum, we've seen in asset growth and loan growth.
And our earning assets and then you put on top of that the NIM improvement that we've seen I mean, that's going to continue to have a significant impact on the.
On the <unk>.
Earnings in the second half of the year.
In fact I was.
I was.
Wondering when I saw you know like the headline numbers are disappointing.
To me at least when you look at you can see EPS.
Not where we want to see it and when you see the.
Cincy ratio now, where we want to see it I mean, we think that those numbers.
Can it should be significantly better. So I was looking at the operating leverage and if you just take net interest income.
And and you divide it by the operating expense of the whole company.
On an operating basis and that data is actually in the.
In the appendices.
We had a two to one growth and operating leverage in Q1, and 132% growth and operating leverage in Q2. So you know, what's what what's being hidden there is the fee income declines from those theaters is offsetting more than offsetting that but that's not going to continue to decline at that at that rate and in fact.
Hopefully it will it will be able to turn that around here in the short term and so I.
We're still seeing the kind of positive operating leverage that we've seen now in the past. Many quarters is just hidden in Q2, and I think that's going to come back really in a nice focus in Q.
Q3, and the rest of the year Ross.
And just one final question have you added the purchase.
Are you out of the bond business for the moment or are you still looking around for.
Either operations or branches.
To further.
Bye.
As opposed to organic.
Expansion.
Well.
Do have as we said before an active corporate development program, we have a number of identified targets that we're interested in.
And we continue to.
To work on those you know, there's a couple of really interesting opportunities for us.
That we're working on actively or are they going to happen you never know.
They were.
Both be great fits for us and something we'd love to do but.
It has to be the right team it has to be the right time for that team and it has to be on the right terms that it makes sense for us and I think we've shown pretty good discipline on that historically I do think that with a strong balance sheet is strong story that we have and the credit.
Record that we have you know a lot of times these opportunities get come more into focus and they get more urgency when the economy slows and so it may be an interesting time ahead for first western ability to capitalize on those.
Can I just ask one deep detail about share.
Possible acquisitions, how did you how are you taking into account this <unk> adjustment and when Youre looking at things to buy is that a.
Is that going to turn out to be a major impediment, but between a bid and an ask.
Deal.
We've done enough of these that we're feel pretty comfortable with our due diligence abilities.
I've done 20 somebody I used in my career and we've done 13 acquisitions here at first Western So you know when we look at the.
Value for our shareholders.
We.
Look at the risk adjusted balance sheet, we look at the earnings potential and obviously.
From our track record you know that we're going to do things that are going to be.
Beneficial for our shareholders you know our last.
Merger with Rocky Mountain Bank and their parent Teton was actually accretive to book tangible book value at closing.
And.
Certainly going to have a very nice earnings.
Earnings accretion impact is as I've mentioned in my earlier comments. So I think you can count on us to continue to be disciplined in that and look for opportunities that are going to drive shareholder value in the short term.
Okay.
Thanks, guys have a good week.
Have a good weekend I appreciate the time, thank you Ross.
Thank you.
And one moment for questions.
And our next question comes from Bill <unk> from Titan Capital Management. Your line is now open.
Thank you I have a couple of questions first of all I'd like to start with.
And that brings people in this environment.
And seeing that.
People are more likely to move towards first question today than they were a year ago.
Or how are you thinking about that at this point.
Oh, well I don't know who showed up.
I find it hard to predict like that times when I thought boy, we're going to really be able to attract people from this acquisition that just closed and then you don't get them or they get better or whatever.
But for whatever reasons right now we are having a lot of success attracting people I think that.
You know, we're getting the scale and size that people see us as a really good place to build a career I think that.
Some of our.
Legacy longtime and newer competitors are having trouble.
Finding the right mix for the growth for whatever reason.
I think our reputation in the market is strong and I think that that's.
Helping us attract people, but we're having quite a bit of success right now attracting really strong releases.
Our relationship bankers it to the bank and frankly, I don't think that's going to slow I think that that's going to continue.
It's been it's been very encouraging to see this year.
Thank you Greg.
So let me shift if I may just in C&I.
With $76 million.
Total loans in the quarter.
Yes.
Number.
I was hoping you could dive into.
What's happening behind the scenes.
C&I specifically to be that strong.
Well.
I think its persistence on higher priority, we've talked I feel like pretty much every quarter on these calls.
<unk>.
US focusing on that business and wanting to diversify away from just traditional private banking and mortgage lending and building.
C&I capability and I think we're seeing that we have some good C&I lenders that we've recruited we certainly got some with the Simmons Bank acquisition and now with the.
Rocky Mountain Bank.
Acquisitions so.
I think building those teams and developing a reputation in the community.
It takes time, but it pays off and I think we're seeing that now.
And as to your sense that those teams are now operating at a mature.
Mature state or are they still in ramp up mode.
Well I'll tell you that the leader of our banking group here believes that we're just scratching the surface. There he thinks that there's a lot of opportunity there.
He is.
Bullish on building that.
Excellent. Thank you and congratulations on bringing on all of the people.
Thanks Bill.
Thank you.
Yeah.
And one moment for our next question.
And we have a follow up question from Brian <unk> from Hovde Group. Your line is now open.
Hey, Scott one one follow up.
When we were talking earlier near I think March you were kind of talking about the loan growth outlook being strong and getting ready for a recession at the same time.
You operate in some pretty good markets in terms of.
Economic growth here in the past year that could slow at some point with consumer.
Consumer and tourism, possibly.
What I wanted to know is are there any loan segments or any anything that youre seeing out there that you're like hey, we don't want to be doing any more of this or you have your eye on any loan categories that you would consider to be a riskier going into whatever we're going to go into in the next year or two.
Sure well Oh.
Two.
Two stories, there when I told before and then a new one.
Over the last 12 to 18 months.
We have talked to our credit team about Hey, you know this is a time that we don't wanna be stretching and so let's make sure we stay a whole our whole firm in terms of credit quality and in terms of our rate as well.
Tae sik.
So we've talked about that before and I can tell you. We continue to do that the only thing I really haven't talked about is once a quarter. We have what we call our summit, where we get all our managers together and I have our leadership team members. Each do a presentation on some topic of importance and urgency to the company.
To this assembled group of 60 or so of our top leaders in the company and our credit I asked our credit Chief Credit Officer, Scott Lolli to present at this summit, which was last week.
About lending into recession.
Very experienced credit Guy he did.
It did work out at Huntington and then was our number two a credit guy at Huntington before he joined US and so you know there's nothing like a good workout guy to scare the lenders and so he did a whole presentation on things we don't do late in the cycle and and it was a really good reminder, I think to everybody about.
<unk> holding firm on our credit standards and not stretching in and the kind of <unk>.
It's we're willing to do and the kind of credits we don't want to do in the industries, we want to focus on and not focus on so that is actually a very active topic here that we're training our people on to make sure everybody is focused on that.
It's got of course enforces that through the whole credit approval process here, which is a very centralized.
Okay.
Any specific categories or things that you want to stray away from here going forward.
I don't know any that I would call out, particularly you know we have and in our credit policy are desired.
Industries and not desired industry. So we do that anyway, and as I say you know.
Scott talked about in his presentation.
How do we think about that late in the cycle.
We have the list in front of me, but I know that I know, they're focused on it and that is a company where.
Thinking that we're late in the cycle here and we want to be cautious.
Okay fair enough.
And then just one last one if I could I wanted to make sure I understood. The.
Conversation around mortgage banking profitability from here and Yep, Yeah, you weren't going to lose money, but you did and you don't want to lose money, but is.
Is it fair to assume that the mortgage banking operation continues to be in a net loss for the near term until volumes either pick up our gain on sale margins expand.
Well, what I said was the mortgage segment shows a loss, but for the reasons we've talked about.
Mortgage business here is a profitable business.
I also don't want to report a negative earnings in the segment either.
Obviously, we did in the second quarter. So we're going to continue to manage the expense there and continue to look at ways to grow the revenues there so that we.
We are reporting a positive number for the segment, but if you look at just the mortgages they produced in.
In Q2, I think that produces another three and a half million dollars in income annually for the company. So.
So I still think it's a business we want to be and it's been great for us.
Since we bought that business in.
What was the Julie's a fall of 17.
And that's been a giant.
Benefit for us overall.
We expect it to be a positive contributor for the long term.
Did that.
Address your question, Brad I am not trying to be evasive.
No that.
That helps I realized part of the.
Profitability equation is due to the production going on the balance sheet, so I understand that.
Does that you're talking about expenses being a little higher from here if I heard correctly.
If that production slows.
Would that be an offset to what youre doing in terms of adding new talent.
Yes.
Yeah, I talked about you know if you just if you take the fee business out altogether and you just look at our net net net.
Net interest income over our operating cost total operating expenses, we've seen really strong operating leverage growth in Q1 and again in Q2. So we're going to continue to manage the overall expenses in line with our revenue growth and make sure that we're.
Showing the kind of improved profitability.
I talked about earlier.
Okay I appreciate the color. Thanks.
Thank you.
And thank you.
And I am showing no further questions I would now like to turn the call back to management for closing remarks.
Okay, Justin Thanks.
I've talked in the past about three growth engines at first western the organic machine and that is working and I think we saw that in space here in the second quarter. So we will continue to we expect that machine to continue on we're building the machine. So I think that those are very positive.
Trends for the organic portion of our growth engine.
Expansion, we've talked about we can't get to 50 offices, if we don't add new offices from time to time and so you know we've got Bozeman, now openness and L. P. O I tell you. The team here is very excited about our opportunities in Bozeman.
<unk>, we have put together the progress theyre showing already the opportunity in that market very significant longmont. We're incubating we've hired a team for the East Valley and Phoenix and we've got a team ready to go for the Westfalia in Phoenix.
So I mean, the expansion effort here continues and I think it's gonna be a big part of our organic growth and earnings growth going forward and then acquisitions, we talked about we see a number of attractive opportunities if the timing and the team and the terms all work out together you know our core business obviously very.
Strong and healthy.
We're seeing this positive operating leverage we talked about the fee income.
Challenges headwinds that we've had are short term headwinds I think that will we will show progress there over time and and.
And so we feel really good about the outlook from here in spite of some.
Some of these headlines that.
Don't look so positive from Q Q Q2.
So with that thanks, everybody for dialing in today, we really appreciate.
The work that the teams have done to produces results. The associates here at first western and everybody's time and attention today on the call. Thanks, so much.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Okay.
Yes.