Q3 2022 First Western Financial Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A.
You can dial star one one.
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Good day and thank you for standing by welcome to the first Western Financial's third quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.
We'll then hear an automated message advising you Jorge Reyes. Please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to your Speaker today, Tony Rossi with financial profiles. Please go ahead Sir.
Thank you Norma good morning, everyone and thank you for joining us today for first Western Financial's third quarter 'twenty two 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.
These factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
These factors are discussed in the company's SEC filings, which are available on the company's website.
I would also direct you to read the disclaimers in our earnings release and Investor presentation.
The company disclaims any obligation to update any forward looking statements made during the call.
Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.
The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures and with that I'd like to turn the call over to Scott Scott.
Thanks, Tony and good morning, everybody.
We delivered a very strong financial performance in the third quarter that was driven by our diverse lending platform that we built that enables us to pursue the most attractive lending opportunities at any given point in time.
This has become particularly valuable in the current environment.
Higher rates are having various degrees of impact loan demand across asset classes.
In general, though we continue to see healthy economic conditions and loan demand across our markets, which resulted in another quarter of strong well balanced loan growth.
We had increases across most of our major portfolio, leading to 38% annualized loan growth in the quarter.
There are many catalysts for our continued strong loan growth, including a stronger.
Commercial banking platform, the new banking talent, we've added and our improved business development capabilities in Wyoming following the <unk> acquisition.
More recently the bank has grown both in size and reputation and we're effectively moving up market and working with clients with larger borrowing needs.
Positively impact our loan production and loan growth.
With the strong loan growth in the third quarter driving the increase in net interest income.
Expansion in our net interest margin and a higher level of efficiencies, we were able to generate a substantial increase in net.
Net income and earnings per share despite the unfavorable environment that continues to impact our largest fee generating business.
And our pretax pre provision income.
Pre tax pre provision income increased by more than 50% from the prior quarter to $10 million.
Most importantly, we're generating profitable growth is our return on average assets return on average equity and return on average tangible equity were all significantly higher than the prior quarter.
We also continue to have exceptional asset quality with both nonperforming loans and.
Nonperforming assets declining as well as another quarter of immaterial amount of net charge offs.
Moving to slide four we generated net income of $6 2 million or <unk> 64 cents per diluted share in the third quarter were <unk> 66 per share when acquisition related costs are excluded.
Our strong profitability along with our effective management of the investment portfolio has enabled us to continue driving increases in both book value and tangible book value per share.
In the third quarter book value per share increased two 8% from the prior quarter intangible book value.
Per share increased three 4%.
Over the past year, both metrics have increased by more than 13%.
Collecting the strong value that we're creating for shareholders.
Turning to slide five we'll look at the trends in our loan portfolio.
We had another quarter of strong loan production originating $289 million in loans.
Well this was down a bit from the prior quarter. The average rate on new production increased by more than 100 basis points. So we're still generating strong production without compromising on pricing.
We're also seeing pay off start to moderate so more of our loan production is translating into net loan growth and total loans held for investment increased.
$205 million for the end of the prior quarter.
Our loan production was well diversified with increases across most of our major categories with C&I.
Sorry, construction and one to four family residential portfolio is all up between $30 million to $100 million in the quarter.
As with the prior quarter most of what we're adding the one to four family residential portfolio, our jumbo arms.
Provide attractive risk adjusted yields.
Our loan production was consistent throughout the quarter and our end of period loans were $114 million higher than our average loans during the quarter. So we have a nice tailwind going into the fourth quarter in terms of driving higher net interest income.
Moving to slide six we'll take a closer look at our deposit trends.
Our total deposits were essentially unchanged from the end of the prior quarter with minor fluctuations in each category.
Generally seen increased competition for deposits, which is impacting deposit gathering and the cost of interest bearing deposits.
Turning to trust and investment management on slide seven our total assets under management increased 300 decreased $359 million from the end of the prior quarter due to market declines, which more than offset the continued inflow were seeing from new accounts.
Now I will turn the call over to Julie for further discussion of our financial results.
Lee.
Thanks Scott.
On to slide eight we'll look at our gross revenue.
Our total gross revenue increased two 4 million or eight 8% from the prior quarter.
Which is entirely driven by higher net interest income.
From our strong loan growth.
This continues the strong growth trend.
<unk> in our commercial and private banking operations.
Excluding that gain on sale of mortgages, our gross revenue increased at an annualized rate of 41% from the prior quarter.
Turning to slide nine we look at the trends in net interest income and margins.
Our net interest income increased 13% from the prior quarter, primarily due to higher average loan balances.
And an increase in our net interest margin.
Our net interest margin increased 40 basis points.
Third quarter to 375%.
Excluding the impact of PPP fees and accretion on acquired loans, our net interest margin increased 47 basis points to 377%.
Our net interest margin benefited from the increase in total loan balances.
On an average basis loans increased to 92, 2% of our total earning assets in the third quarter upfront.
From 83, 7% in the prior quarter.
We also had a 41 basis point increase in our average loan yields.
Partially driven by the higher pricing on new loan originations that Scott mentioned.
As well as significant increases in the yield on our cash balances held with other financial institutions and the investment securities portfolio.
This more than offset the 30 basis point increase we had in our cost of deposits.
We also increased our balances of <unk> borrowings to help fund our strong loan production.
All of the increase was an overnight borrowings, which is a more attractive funding source in the current environment and gives us the flexibility to quickly adjust our level of borrowings based on deposit and loan production.
It will likely become more challenging to manage funding costs going forward.
And although we expect continued increases in our yield on earning assets.
We believe wed likely see many near term peak in our net interest margin.
As a result for the near future, we expect our margin to decrease from the level, we had in the third quarter.
Turning now to slide 10, our non interest income decreased 7% from the prior quarter.
Primarily due to lower net gain on mortgage loans.
The volume of what's on mortgage loans originated for sale declined 25% from the prior quarter.
Approximately 94% of the originations were purchase loans as we are seeing very little demand for refinancing given the rise in mortgage rates.
The decline in net gain on mortgage loans was partially offset by slight increases in bank fees and risk management and insurance fees.
Turning to slide 11, and our expenses.
Our noninterest expense decreased 6% from the quarter.
Primarily due to a decrease in salaries and employee benefits driven by higher deferred loan fees, resulting from our strong loan production.
Lower incentive compensation.
And a decline in health insurance and payroll taxes.
Another contributor to the overall decline in expenses once the full quarter impact of system conversion and branch consolidation that occurred mid may related to the <unk> acquisition.
We have now fully realized all of the cost savings that were projected for this transaction and we now expect our non interest expense to range from $20 5 million to $21 5 million in the fourth quarter of 'twenty two.
Turning to slide 12, we'll look at our asset quality.
We continue to see positive trends across the portfolio.
Our nonperforming loans declined two basis points to 16 basis of total loans.
Our nonperforming assets declined three basis points to 14 basis points of total assets.
We also had a quarter of minimal another quarter of minimal losses in the portfolio.
We recorded a provision for loan losses of $1 8 million, which was driven by the growth and changes in the mix of our loan portfolio.
This to our H O L. Two adjusted total loans at 77 basis points.
Which was relatively consistent with the end of the prior quarter and reflective of our strong credit quality and the low level of losses that we've experienced in the portfolio.
Now I'll turn the call back to Scott Scott.
Thanks Julie.
Turning to slide 13, I'll wrap up with some comments about our outlook.
Economic conditions remain healthy in our markets, we've always run the bank with a conservative approach.
The potential for an economic.
It kind of slowdown we believe it's prudent to me.
Some adjustments in our underwriting and loan pricing to reflect the uncertainty of the economic outlook.
We believe this will likely lead to some degree of moderation in our level of loan growth.
However, with the diverse loan.
<unk> platform, we built the new banking talent, we have added in Colorado, Montana, Arizona, starting to make larger contributions. We believe we can continue generating significant loan growth, even with more conservative underwriting and pricing.
I mentioned in the past that throughout the history of our bank, we've typically not a problem attracting deposits than we typically run the bank with a loan to deposit ratio in the low to mid nineties.
Over the past few years, we focused on adding banking talent that can positively impact our loan production.
We've been very successful in this regard and redeploying our excess liquidity into higher yielding earning assets has been a key driver of earnings growth and the higher level returns we're now generating.
One of our priorities going forward is to shift some of that.
Development focus of the organization back to core deposits.
And so we can have a better balance between.
Loan and deposit growth.
This includes making some adjustments to incentive comp.
Give our bankers and profit centers more opportunities to benefit from bringing in more core deposits.
As Julian mentioned, we expect our expense levels to be relatively stable.
Near term market expansion efforts in Colorado, Arizona, Montana are largely completed.
With our continued loan revenue growth, we should continue to realize improved efficiencies.
Deliver a higher level of financial performance for our shareholders.
Maintaining strong asset quality and capital levels, even if we see an economic slowdown as we've consistently done during previous periods of economic stress.
And with that we're happy to take your questions.
Normal please open up the call. Thank you as a reminder to ask a question you will need to press star one on your telephone. Please wait for your named BMO. Please standby, while we compile the Q&A roster.
One moment for your first question.
Yeah.
Our first question comes from Brady Gailey with <unk>. Your line is now open.
Hey, Thanks, good morning, guys.
One of them already.
So I heard the <unk> expense guidance of around $21 million plus or minus.
How do we think about the expense growth rate as we look to next year. All the banks are talking about especially wage inflation. So how do we think about what <unk>.
Expense creep could be in 2023.
Yes, I think that's going to be an issue for us to weave.
Been able to.
Manage expenses pretty well this year I think.
And we're certainly looking at areas, where we can manage expenses into 2023, but.
I think that has gone up with the headline inflation numbers that are out there there's going to be a lot of.
Wage pressure just built in and then you look on top of that of the competition that we see in our markets.
Yes.
It continues to put wage pressure on us in terms of competitive pressure I think.
You're right, we're going to we're going to have some.
Continued wage pressure next year, we've tried to get ahead of that somewhat.
By increasing our focus on associate engagement here, we launched this initiative in the middle of last year, So 18 months ago.
Where our number one business the business plan theme. This year was people first.
So we've done a whole bunch of work on career tracking and training and engagement.
Associate activities and things just to try and drive more.
Have a sense of belonging here that hopefully insulates us a little bit from pressure wage pressure. We've also tried to build in some non wage.
For more efficient adjustments to help the lower income.
Folks here with the.
The inflation pressures they're experiencing.
We've done some of that with.
Managing benefits costs for them in 2023 and things like that but.
Overall.
I think you're right, we're going to see some wage pressure next year.
Alright, thats good color.
And then when I look at how.
Loan growth has outpaced deposit growth, especially the last couple of quarters.
Loan to deposit ratios had a big move here, it's now up to 109.
So how do you think about.
Those dynamics I know youre guiding the kind of a moderation in loan growth.
But how do you think about the <unk>.
Loan to deposit ratio or are you fine to have it at 110 to 115 or are you going to.
Actively work to get that number back to a 100 or lower.
Well for the short term.
We'd like to see that back to 100.
Sure.
For the for the mid term, we've historically operated in the low to mid 90% and I think we're comfortable there.
But already I would tell you we're very focused on getting that number.
Back to 100 and it.
And hopefully below.
Alright, and then finally from me another quarter of really nice net interest margin expansion.
One theme that we've heard so far through earning season is just that.
Looks like.
NIM will expand at a decelerating rate.
So how do you think about kind of the outlook.
From the NIM here.
It goes up but by a much smaller.
And kind of hit the Max level at some point in the first half of next year.
No.
I just would start this by saying that.
<unk>.
It feels to me like it.
It extraordinarily difficult time to predict what's going to happen.
The fed moving rates at rates, we really haven't we really haven't seen in my career.
Of 30, some years and then.
Competitive environments really kind of strange to you.
We're talking right before the call started among.
The group here in the conference room that we have clients that are telling us that big national banks are still doing mortgages in the fours today and when you have that kind of stuff going on.
It's very difficult to predict the competitive.
Response, we're gonna have to do to for example, attract deposits retained deposits attract alone are the borrowers that we want to retain the borrowers that we want.
So.
Well.
It's hard to predict but having said that.
Just kind of.
Being in a day to day.
Think we've seen a lot of NIM growth this year and we've had a lot of success with that.
He said we've gone from.
80, something percent loan to deposit in Q1 to over 100 in kind of record time.
And so.
If that moderates, which it's going to we will.
Make sure that that debt.
It's back down below 100, and if we continue to be competitive on deposit rates, which we will I think we're going to see this.
NIM that we're reporting this quarter at a peak.
I don't think we're going back down to where we were a year ago, either so I think the stronger numbers. We're seeing today, we're going to continue to benefit from but I think we're seeing kind of a peak.
Rates for the short term for the longer term who knows but.
Definitely.
I think that's going to moderate a little bit in Q4.
And if my voice holds out here I can add a little bit extra time.
I would add Brady that we don't really know.
Manage our NIM to achieve a particular outcome.
And I'll put up all the rest of the decisions, we're making on the balance sheet. So as we think about how to generate appropriate risk adjusted returns on capital are really pulling all of that into account. So looking at the longer term approach, we're not going to pass up on opportunities to add new client relationships.
Back to your loan to deposit ratio question, even if we have to use some of the higher cost sources of funding in the near term to fund the initial alone and then work on bringing in new relationships over time.
You mentioned that you've seen very high loan growth in the last two quarters and our expectation is that we'll be able to.
So I'll tell a bigger broader relationship with those clients that kind of mid term here. So I think we have a lot of good opportunities in our current book to improve that but overall, we want to continue to be very profitable, bringing long term clients. So even if the other near term negative impact.
On our NIM I think we're looking at what's in the best interest of the company for the long term and the shareholders for long term.
And drags growing net interest income.
Yes, I think thats a great drummer.
Yes.
Got it thanks guys.
Thank you one moment for our next question.
And our next question comes from Clark, Matthew with Piper Sandler Your line is now open.
Okay.
Like the sound of that.
I feel bad for asking questions just because I think we don't want to say Julian voice.
I'll try to ask a couple of brief ones for Julie do you have the spot rate on deposits either interest bearing a total at the end of September .
Yes at the end of September and I appreciate that.
I think I'm doing okay.
At the end of September our spot rate for deposits was 99 basis points.
Okay. Okay.
Okay.
And then I guess have you talked internally about.
Your thoughts on the cycle beta assuming we get.
450 475 total.
Move in fed funds.
Where you could shake out I know, it's pretty fluid and pretty competitive.
But when you think about last cycle, obviously, it's a lot different this time I would assume we take the over but.
Any commentary around deposit betas this time around in total.
Well, we do have.
Something of an advantage.
Looking at deposit betas, because we know that we have a certain amount of our deposit portfolio that has more or less 100% beta on it like our trust deposits that we have to.
Okay.
Right, that's competitive with money market mutual funds and so theres a lag of a month or so before that catches up but it's typically pretty much 100%.
And then we know the.
D D A's and then.
The other interest bearing deposits it's really.
Competitive pressure and what we've tried to do this quarter. This past quarter is get ahead of that a little bit.
<unk> built in some higher rates.
We were feeling like if the clients are seeing.
Fed tightening rates and they are still seeing <unk>, 1% on their money market accounts are probably not going to be happy with that and then we're going to have to adjust a lot. So we win.
We did a lot of exception pricing in Q2, and Q3 and in the latter part of Q3, we made some adjustments across the board.
That show up in that.
Not right that you asked about so.
I'm hopeful that we're going to.
See that.
That.
A third party I describe that.
Deposit beta on the interest bearing accounts that are not 100% and not noninterest.
Noninterest bearing.
Moderate in Q4 book, but we'll see as I said the competitive pressure is.
It is really important and frankly I find it hard to predict today were a little surprised with some of the competitors are doing.
Okay, Julia that 99 basis points was.
Total or interest bearing I'm sorry.
And with total.
Okay.
Okay.
And then the weighted average rate on new loans.
From the releases up over 100 basis points do you have that rate for the quarter.
Okay.
Well, so our pipeline loans for the fourth quarter when looking at that they're in the high sixes low sevens right now and they're in a slope to close situations. So depending on when they close and when the next rate hike happens they could could go even higher.
If you look at our NIM for September allowance it did dip down.
3361.
September Standalone NIM was.
But that doesn't have the full effect of some of the changes Scott just mentioned in it on deposit pricing.
Got it later in the month.
Okay.
Got it.
Okay. Good.
And then just on the borrowings I think you added in the quarter I think you may have mentioned there overnight but.
It sounds like three three and a quarter plus new borrowings that and do you feel like you might add more or do you feel like with the slower loan growth you might be able to pull in some wholesale deposits.
Mitigate that.
And yes, it's overnight.
Borrowing bases overnight youre right about three and a quarter.
Just under three for dividend adjusted but.
Our our whole focus right now is bringing in quite deposit.
So as we are able to do that we'll be able to pay down those borrowings and or any of that kind of brokered.
And we'll just manage accordingly.
The most sense.
For us that our core focus is bringing.
Bringing in.
Positive based on our loans have we just added in.
Great. Thank you.
Thank you. Thank you, Matt and unless we have to start calling you Clarke now.
Yes.
As a reminder, ladies and gentlemen that start wanted to ask your question.
Okay.
Yeah.
One moment for our next question. Our next question comes from Bill <unk> with Titan capital.
Thank you I had a couple of questions first of all.
On the mortgage loans held for sale.
It was more than cut in half sequentially at $13 million versus 26 last quarter.
Can you discuss the dynamics behind the scenes with that and then secondarily the construction and development loans were up a fair amount sequentially in <unk> and provide your thoughts and color on that if you would also place.
Sure.
The loans held for sale.
Sure.
30 days of activity more or less of the production.
The mortgages that are go into the secondary market. So when that drops off a cliff we're going to see the loans held for sale drop so that's that.
That's all that is.
The construction lending with the housing shortage here, we're seeing a lot of interest in that and we launched a one close.
Mortgage product.
<unk> product.
In Q3 that's.
<unk> had a lot of interest in it and as a profitable.
Product for us.
Good product, we're playing offense and attracting the type of clients with so.
So we have seen some growth in that I think some of the growth that showed up in the numbers in the quarter was actually.
From construction loans made in prior quarters that are now funding I think the things that we probably.
Closed in Q3, I don't know that they really would have balances at the end of the quarter, but we.
We have seen.
Some nice growth in our.
<unk> approved credits that are now showing up as funded credits.
Great. Thank you.
Thank you.
Sure. Thank you.
You bet.
Thank you and I'm currently showing no further questions at this time I would like to hand, the conference back over to management for any closing remarks.
Yes.
<unk>.
Thanks, everybody for dialing in and Julie Thanks for powering through your loss voice there good job.
I'm really proud of the work that the first western team has done this year and I think it really shows up in the numbers again in Q3, we've had strong growth in core revenues core earnings and we brought our legacy RMB team and clients onboard.
<unk> converted then we converted our core trust investment management system last quarter onto a new state of the art system Thats.
Much more flexible and powerful for internal <unk>.
Production in for clients, we see nice operating leverage gains with efficiency ratio back.
And the right trend the way that we had anticipated we do have some work to do growing our noninterest income and getting a loan deposit backwards should be.
Managing our NIM and expenses, but overall, we're very well positioned with a strong team.
And strong capital and good earnings outlook for Q4 and into 'twenty three so thanks, so much for down and we really appreciate your interest in first western.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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