Q1 2024 First Western Financial Inc Earnings Call
Thank you.
Speaker Change: Good day, and thank you for standing by and welcome to the first Western financial first quarter 24 earnings conference call.
Speaker Change: At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please first star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Tony Rossi, of Financial Profiles. Sir, please go ahead.
Tony Rossi: Thank you, Norma. Good morning, everyone, and thank you for joining us today for First Western Financial's first quarter 2024 earnings call. Joining us from First Westerns Management team are Scott Wiley, Chairman and Chief Executive Officer, Julie Corkamp, Chief Operating Officer, and David Weber, Chief Financial Officer.
Tony Rossi: We will use a slide presentation as part of our discussion this morning.
Tony Rossi: If you've not done so already, please visit the events and presentations page, a First Westerns Investrelations website, to download a copy of the presentation.
Tony Rossi: 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.
Tony Rossi: Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements.
Tony Rossi: 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.
Tony Rossi: 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 is available on the website, contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the gap to non- GAAP measures .
Tony Rossi: And with that, I'd like to turn the call over to Scott. Scott?
Scott C. Wylie: Thanks Tony and good morning everybody.
Scott C. Wylie: During the fourth quarter, we're continuing to prioritize
Scott C. Wylie: Fruit and Risk Management and conservative approach to new loan production, we were able to deliver a higher level of profitability than our originally reported three cents a share in Q4. This improvement is encouraging, although not at the level of profitability that we target.
Scott C. Wylie: We executed well on our strategic priorities, which resulted in positive trends in a number of key areas, including further lowering our loan to deposit ratio.
Scott C. Wylie: generating a higher level of non-interest income, primarily driven by our wealth management and mortgage banking businesses,
Scott C. Wylie: in improvement in our asset quality with the decline in non-performing loans and zero net charge offs in the quarter.
Scott C. Wylie: The higher level profitability combined with our prudent balance sheet management resulted in an increase in our tangible book value per share and increases in our risk-based capital ratios.
Scott C. Wylie: As we indicated in our last call,
Scott C. Wylie: The primary focus in the near term is on core deposit gathering in order to further improve our level liquidity, which is reflected in our balance sheet trends in the first quarter.
Scott C. Wylie: We remain conservative and new loan production, maintaining our discipline, underwriting, and pricing criteria, while prioritizing lending to clients that provide full banking relationships, including deposits and wealth management business.
Scott C. Wylie: This approach, along with lower level loan demand due to higher interest rates, resulted in a lower level of loan production in a quarter.
Scott C. Wylie: Loan payoffs continue to be at relatively the same level we've been seeing, but we also saw lower level of draws on existing credit lines than we've seen the past few quarters.
Scott C. Wylie: This resulted in a decline in total loans during the first quarter, most notably in the areas of commercial and industrial loans.
Scott C. Wylie: In terms of asset quality, we continue to make progress on the resolution of loans that were put in non-acrual status over the past several quarters.
Scott C. Wylie: This included a pay down one of the loans that comprised our largest non-accrual relationship following the sale of one of the properties that we had is collateral in a second already in Q2.
Scott C. Wylie: As we've indicated, this process will take some time and the sale of various collateral pieces will proceed on different schedules. But based on the progress we're making, we expect to see continued successful resolutions with minimal loss incurred.
Scott C. Wylie: Aside from the existing non-accrual loans, the rest of portfolio is performing well, and we had a decline in past due loans during the first quarter. This continues a positive trend we've been seeing in this area, as compared to the first quarter of 2023. Past due loans are down 59%.
Scott C. Wylie: As we announced during the first quarter, we successfully charged off the other large non-acool loan after the guarantor
Scott C. Wylie: filed for bankruptcy. So the full extent of the losses on this loan have already been incurred and are reflected in our income statement. And as we pursue our recovery efforts, there will only be positive potential impact from here on out.
Scott C. Wylie: We also sold off a third smaller non-acrual loan last quarter.
Scott C. Wylie: at a small premium, further reducing our problem loans to the lowest percent of total loans over the past three quarters down to 1.86%.
Scott C. Wylie: We were to slide four, we generated net income of 2.5 million or 26 cents per diluted share in the quarter, and pre-tax pre-provision net income of 3.7 million.
Scott C. Wylie: Q1 earnings in EPS were about 16% higher than the average of the prior four quarters using our originally reported Q4 earnings.
Scott C. Wylie: as we showed positive trends in several areas of our operations.
Scott C. Wylie: With our higher level of profitability and prudent balance sheet management, we had a 1% increase in our tangible book value per share this quarter.
Scott C. Wylie: Now turn to call over to Julie for some additional discussion of our balance sheet and trust and investment management trends.
Scott C. Wylie: Julie?
Julie A. Courkamp: Thank you.
Julie A. Courkamp: Turning to slide five, we'll look at the trends in our loan portfolio.
Julie A. Courkamp: Our total loans decreased by 56 million, decreased 56 million from the end of the prior quarter. We continue to be conservative and highly selective on our new loan production, focusing primarily on non-CRU lending opportunities and clients that also bring deposits to the banks.
Julie A. Courkamp: This resulted in 31 million in new loan production in the first quarter, which was a lower level than we have had in the past several quarters.
Julie A. Courkamp: Combined with payoffs, continuing at a relatively consistent level, and a lower level of draws on existing credit lines than we had been seeing,
Julie A. Courkamp: primarily due to decline being cautious about interest, increasing debt levels at higher rates, and until economic conditions improve. This resulted in the decline in total loans that we saw in the first quarter.
Julie A. Courkamp: The largest decline came in our C&I portfolio.
Julie A. Courkamp: which was partially attributed to a loan that we sold during the quarter.
Julie A. Courkamp: We continue to be disciplined in our pricing criteria. However, the average rate on our new loan production dropped a bit this quarter to 6.95%.
Julie A. Courkamp: which is primarily due to one large cash secured origination.
Julie A. Courkamp: Moving to slide six, we'll take a closer look at our deposit trends. Our total deposits were up slightly during the quarter.
Julie A. Courkamp: We continue to have success in new business development and added 17 million in new deposit relationships during the first quarter, with average deposits up 83 million or 14% annualized quarter over quarter.
Julie A. Courkamp: We had the largest growth in our money market accounts, which reflects the expansion of existing client relationships, as well as clients moving funds into money market accounts from time deposits.
Julie A. Courkamp: Turning to Trust and Investment Management on slide seven.
Julie A. Courkamp: We had a 388.5 million increase in our assets under management in the first quarter, primarily due to market performance.
Julie A. Courkamp: This continues the positive trend we are seeing an AUM, which has increased 12% or 750 million over the past year.
Julie A. Courkamp: Now I'll turn the call over to David for further discussion of our financial results.
David Weber: Thank you. Turning to slide 8, we'll look at our gross revenue. Our gross revenue increased 4.6% from the prior quarter, primarily due to an increase in our non-interest income. As expected, this reversed the downward revenue trends we saw in 2023.
David Weber: Now turning the slide 9, we'll look at the trends in net interest income and margin.
David Weber: Our net interest income decreased 1.6% from the prior quarter due to an increase in interest expense resulting from a higher average cost of deposits.
David Weber: Our net interest margin decreased three basis points to 2.34% driven by an increase in interest-bearing deposit costs and an unfavorable mix-shift in our deposit portfolio, offset partially by an increase in the average yield on interest earning assets.
David Weber: The rate of decline in NIM has decelerated over the past four quarters nearing a point of stabilization.
David Weber: During March, we repaid 31 million of borrowings from the Bank Term Funding Program, which will reduce our level of borrowings in the second quarter.
David Weber: We continue to have 10 million of borrowings outstanding from the BTFP, but the rate is locked for one year, so we will not see a rate increase on these borrowings.
David Weber: Now turning the slide 10, our non-interest income increased 19.7% from the prior quarter.
David Weber: We generated increases in trust and investment management fees, net gain on mortgage loans, and bank fees, which were partially offset by a decrease in risk management and insurance fees, which are seasonally higher in the fourth quarter each year.
David Weber: The increase in net gain on mortgage loans was due to two factors.
David Weber: First, loan production increased to 91 million from 67 million in the prior quarter, as we saw an increase in home buying activity in our markets, as well as the contribution of production from new MLOs we had added this year.
David Weber: And second, we had an increase in our average gain on sale margins.
David Weber: Now turning the slide 11 and our expenses.
David Weber: Our non-interest expense increased to $19.7 million, primarily due to the seasonal impact of higher payroll taxes and higher incentive compensation, which returned to a more normalized level as a result of our increase in profitability,
David Weber: and we had higher legal costs in the quarter.
David Weber: For the next few quarters, we expect to manage core operating expenses carefully, as in 2020, with the main variable being the level of incentive compensation, which will be dependent upon our financial performance.
David Weber: Now turning the slide 12, we'll take a look at our asset quality.
David Weber: Our non-performing assets declined 5.1 million, which was primarily due to the sale of a non-performing construction loan at a gain and the paydown of our largest non-performing relationship following the sale of a property that we had as collateral.
David Weber: The remainder of the portfolio continues to perform well, and we had a decline in past due loans and zero losses in the quarter.
David Weber: With the decline we had in loans, our level of allowance to adjust to total loans increased five basis points to 1% at March 31st.
David Weber: I also want to note that multifamily loans represent just 7% of our total loan portfolio.
David Weber: These loans are performing well and none of the loans are to borrowers for rent-controlled properties.
David Weber: Now I'll turn it back to Scott. Scott?
Scott C. Wylie: Thanks, David.
Scott C. Wylie: Turning to slide 13, I'll wrap up with some comments about our outlook.
Scott C. Wylie: While economic conditions remain uncertain, will continue to prioritize prudent risk management and conservative approach to new loan production, while continuing to make progress on resolving the credits that were placed on non-performing status over the past few quarters, which we continue to expect to result in immaterial losses.
Scott C. Wylie: However, with the strength of a balance sheet, we're well positioned to capitalize on increased loan demand once borrowers have more confidence in the economic outlook and interest rates start to move lower.
Scott C. Wylie: Our business development focus will remain on full banking relationships with high-quality clients that need the multiple products and services that we can provide in banking, wealth management, and other areas.
Scott C. Wylie: These are what we consider to be our core clients, and they've historically resulted in highly profitable relationships and strong asset quality.
Speaker Change: Thank you.
Speaker Change: Over the past several quarters, we've had good success in achieving our goal of reducing our loan deposit ratio, and we'll continue to prioritize core deposit gathering to further increase our liquidity. We also expect the positive trends we saw in the first quarter in the areas of wealth management and mortgage banking to continue.
Speaker Change: We've recently added some new MLOs in the mortgage business, which should contribute to higher levels of loan production, particularly as we move into the seasonally stronger period for home buying.
Speaker Change: With the increase in our tangible book value per share and risk-based capital ratios in the first quarter, along with the improvement in the asset quality, we have the flexibility considering adding additional options for capital utilization, which will continue to discuss with the board as market conditions evolve.
Speaker Change: As always, we'll act in the best interest of shareholders
Speaker Change: Given the strength of the balance sheet, the franchise we built, we believe we're well positioned to continue adding attractive full banking relationships. Growing our balance sheet over long term,
Speaker Change: increasing revenue and realizing more positive operating leverage, which should result in further increases in our level of profitability and additional value being created for our shareholders.
Speaker Change: With that, we're happy to take your questions, so Norma, please open up the call. Thank you. As a reminder, to ask your question, you'll need to press star 1-1 on your telephone. To withdraw your question, please press 1-1 again, and please wait for your name to be announced.
Norma: Please stand by where we compile the Q&A roster.
Norma: And their first question comes from the line of Brett Robeson with Havdi Group. The line is now open.
Brett D. Rabatin: Hey, good morning, everybody.
Brett D. Rabatin: Wanted to start just on the asset quality and understand a little bit better, you had the sale of the construction loan and the pay down of the
Brett D. Rabatin: largest NPL. What is the balance of that largest NPL at this point? And then maybe can you talk about the resolution of the remaining piece from here, additional sales of properties, how you think that might play out?
Speaker Change: Yeah, we've said, I think, pretty consistently that this is a process that's going to take some time, and, you know, that's true with any
Speaker Change: low in workout and in this particular case we've got
Speaker Change: one relationship with four loans and seven pieces of
Speaker Change: collateral that are cross collateralized so it's a particularly
Speaker Change: complicated process. You know, our goal is to get these properties sold and get repaid.
Speaker Change: And so the fact that one of them was sold
Speaker Change: if you won
Speaker Change: was definitely a positive and then we've had another one already sold in Q2 and we've been paid down on that one. So we have, you know, five remaining properties.
Speaker Change: And there are different stages of
Speaker Change: collection and they're in different locations so it's going to have some differences in the timing but we have already foreclosed in two of those remaining properties so far this month and as we move through the year there should be consistent progress with making these recoveries
Speaker Change: As of quarter-end, we had 38.5 million
Speaker Change: still outstanding on the relationship with about $5.8 million of specific reserve, including the 2.3 million we put into a specific reserve on that relationship in Q1.
Speaker Change: So,
Speaker Change: You know, I think on the books, you could look at it as 38.5 minus 5.8.
Speaker Change: And then once we get titled to these properties that we got in the foreclosure,
Speaker Change: auction and that'll be a decrease of 12 million or so and an increase in Oreos obviously.
Speaker Change: There.
Speaker Change: Okay, that's, yeah, that's pretty, that's helpful, Scott. So I understand, so we'll make sure I understand correctly. Seven properties, you sold one in the first quarter, you've already sold one in the second quarter, and you've taken possession or you're repossessed.
Speaker Change: Two more for 12 million.
Speaker Change: And then the remaining would be two other properties. Is that right?
Scott C. Wylie: Well, seven minus two minus two is three more to go. Three more, okay. And technically, Brett, we didn't sell them.
Scott C. Wylie: the borrower sold, the two that were sold in Q1 and
Scott C. Wylie: in the beginning of Q2. And that's good with us. I mean, if we want the loan repaid, we don't want to be in the property business, so.
Scott C. Wylie: So the borrow is paying down credit, okay.
Speaker Change: And then what about recoveries on the one that you ended up having to fully charge off in the fourth quarter? What does that process look like from the legal perspective on that?
Speaker Change: I know a judge has to basically take care of that at this point.
Speaker Change: That's right, it's in the bankruptcy process now. And I think the point we've tried to make on that
Speaker Change: is, you know, now we don't really control it as much.
Speaker Change: and because it's, you know, the bankruptcy trustee that was appointed by the bankruptcy judge. We are supporting...
Speaker Change: the bankruptcy trustee with
Speaker Change: analytic work to help
Speaker Change: get to the bottom of, you know, where the money is and how we can collect on it. I would say, you know, we are anticipating some recovery. We don't have a strong sense yet of how much or
Speaker Change: When, but you know, I think a reasonable expectation is we're going to have some recovery over the next 12 months. I think, you know, the main point for us as shareholders is, you know, we've taken our lumps on that one and there's not going to be more bad news on it. You know, we've got the bad news.
Speaker Change: and hopefully we'll see some good news playing out here over the next 12 months or so.
Speaker Change: Okay.
Speaker Change: And then was just curious if you had the margin for December and then just how much of the loan portfolio reprises this year and maybe an outlook, David or Julie, on the margin from here?
Speaker Change: Thank you.
Speaker Change: Well, David, you want to tackle that one?
David Weber: And then from a margin standpoint,
David Weber: You know, we had
Speaker Change: I assume you're asking about March and not December .
Speaker Change: Yes. Okay.
David Weber: Our March margin was a little bit lower. Oh, I'm sorry, March, not December . Yeah, yeah, correct. Our March margin was a little bit lower. There can be some noise that comes through, through, you know, amortized loan fees and things of that nature.
David Weber: So it was about 224, but if we look at it at more of a normalized basis,
David Weber: You know, we're thinking that number is about 231. And then going forward, you know, we expect second quarter to be relatively in line with where we were in the first quarter in that kind of low 230s type of range.
Speaker Change: Okay, and David, you said 25% of portfolio reprises. Are those variable rate loans that are repricing, and what rate are they repricing from?
Speaker Change: as far as what rate they're repricing from.
David Weber: I'll have to give that for you. I don't have that in front of me.
David Weber: Okay.
Speaker Change: And then if I had sneak in one last one, if I understood correctly, this expense run rate is probably
Speaker Change: A good run rate from here, and you mentioned that the biggest variable was the compensation. You know, what about the other piece of the legal fees and all that that might be elevated to, you know, any outlook overall on expenses from here?
Speaker Change: Yeah, going forward,
Speaker Change: You know, the incentive compensation is certainly will be dynamic based on the financial performance of the company.
Speaker Change: And then we should see a little bit of relief due to the seasonality of payroll taxes that will start to come down in second quarter and continue through the third and fourth quarter.
Speaker Change: As far as, you know, legal and workout fees, a bit hard to predict at this point, but I don't think we expect those to be really at the same levels that we saw in the first quarter going forward.
Speaker Change: Just to give a little bit more transparency bread on Q1, I think the total number in Q1 was 700,000 for
Speaker Change: kind of workout and special legal fees, that sort of thing.
Speaker Change: And like David said, you know,
Speaker Change: I don't think that goes to zero in Q2.
Speaker Change: But if you look at our underlying core expenses, I think it's
Speaker Change: Typically, much less than that.
Speaker Change: and hopefully we'll normalize here over the course of the year. We also had a half a million dollar
Speaker Change: operating losses in Q1, which were related to wire fraud.
Speaker Change: and
Speaker Change: That's a very high number for us. That's not typical of what we see here. So those numbers are in our Q1 expenses that
Speaker Change: Again, I wouldn't really consider to be core expense.
Speaker Change: Okay, appreciate all the color.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question will come from the line of Woody Lay.
Woody Lay: Your line is now open.
Woody Lay: with KBW.
Woody Lay: Hey, thanks for taking my questions. Wanted to follow up on credit to start. And just on the MPA bucket.
Woody Lay: Trying to understand all the movement. So how large was the credit that moved into the MPA bucket in the first quarter and any color you can give on that one?
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Yeah, the size of that loan was a little bit under 2 million.
Speaker Change: And it is a C&I loan.
Speaker Change: Okay, that's helpful. And any trends to note just then criticize or classified assets in the quarter?
Speaker Change: No, I think we're seeing stable
Speaker Change: to improving trends in most of the credit metrics
Speaker Change: We look at
Speaker Change: The only real exception to that is I would tell you that we're definitely increasing our watch efforts. So, you know, loans that
Speaker Change: We think
Speaker Change: could be under stress, the boroughs could be under stress.
Speaker Change: If rates continue to higher rates or CRE loans that are maybe maturing, we're definitely paying a lot more attention to those these days.
Speaker Change: and they show up on the watch list. So I don't necessarily view that as a credit indicator or as a concern. I think, you know, I hope those are signs of good.
Speaker Change: Credit Administration and Credit Management here. But as I said, I mean, I think the headline number on the NPL side and the
Speaker Change: 56% reduction on the past due loans are both really positive trends for asset quality here.
Speaker Change: Yeah, yeah, definitely.
Speaker Change: I guess last for me shifting over to loan growth, I believe last quarter we sort of talked about an expected loan growth rate in the mid single digits. It sounds like you might be strategically pulling back a little bit. How should we think about loan growth going forward?
Speaker Change: Um
Speaker Change: I don't know. It's just really hard to predict right now, especially, you know, month to month and quarter to quarter and rates are up and rates are down and all that, right? But given that context,
Speaker Change: You know, what we have said in the past and what we continue to think,
Speaker Change: is, you know, in our
Speaker Change: strong growth markets that we have, and with the platform that we have and the people that we have, you know, producing loan growth in the mid single digits
Speaker Change: this year seems like a reasonable goal. Now obviously when you start down in the first quarter, that gets a little less
Speaker Change: likely so I mean I would say you know
Speaker Change: If we saw a flat in the second quarter, that would be great.
Speaker Change: And, you know, if you talk to our regional presidents and our market of presidents, which we have, you know, they seem confident that we're going to see some loan growth here this quarter and this year on a net basis. So, you know,
Speaker Change: I think for modeling purposes,
Speaker Change: Given a lot of uncertainty, you know, flat here for the next few months, and then growth over the course of the latter half of the year, depending on what happens in the economy, makes sense.
Speaker Change: You know, one of the things we've been looking at
Speaker Change: internally is, you know, we're seeing some really aggressive pricing now coming out of the community banks and the credit unions in our markets.
Speaker Change: on certain types of loans. And those are particularly in the case of owner-occupied real estate.
Speaker Change: and in CNI loans and you know we're just not going to play that game we we
Speaker Change: have encouraged our people to stay disciplined on pricing and structure and not chase rates.
Speaker Change: You know, in the CNI area in particular, it's frustrating because, you know, we'll get a client
Speaker Change: a prospect that wants to move here and bring their deposits and whatnot, and then, you know, wherever they are gets really aggressive in terms of retaining them.
Speaker Change: And so,
Speaker Change: You know, these are just the challenges that are
Speaker Change: frontline folks are dealing with these days in the market. But I think that stuff sorts itself out over time. And we've seen some nice growth really across the,
Speaker Change: growth opportunities across the different loan types here, and I think you're going to see loan growth across the different loan types over the course of the year as things stabilize.
Speaker Change: That's really helpful details. Thanks to take my questions.
Speaker Change: Thank you. One moment for our next question, please.
Speaker Change: Our next question comes from the line of Adam Butler with Piper Sandler. Your line is now open.
Adam Scott Butler: Good morning, everyone. This is Adam on for Matthew Clark.
Adam Scott Butler: If I could just start on the deposit side,
Adam Scott Butler: Looks like there was some remix into interest bearing during the quarter.
Adam Scott Butler: with NIPs down at a slightly faster pace than last quarter. I was just curious to get your updated expectations on if you expect that we'll slow going into the second quarter or just kind of how you're seeing deposit flows move around right now. Thanks.
Speaker Change: Yeah, thanks for the question, Adam.
Speaker Change: Again, you know, hard to predict. We were thinking that
Speaker Change: our DDA shift into interest-bearing accounts had really stabilized in Q4 because we saw it actually grow. The DDAs were growing and then we see a you know, $48 million decline in those DDAs in the
Speaker Change: in Q1 and you know like
Speaker Change: Obviously very disappointing trends. So we did a deep dive on that and what we found is about 40% of that decrease are just kind of operating account fluctuations. So people, you know, using their money and at quarter end it was
Speaker Change: you know, $20 million lower than it started. And then about 40% was people shifting out into interest-bearing accounts.
Speaker Change: and then the remaining 20%
Speaker Change: was
Speaker Change: people that had DDAs related to construction projects.
Speaker Change: that are funded here and you know the cash from a borrower in a construction project goes in before our loan does so that they're using those funds to
Speaker Change: you know, pay their equity essentially these construction projects. So that was about 20% of it.
Speaker Change: So that's
Speaker Change: That's kind of the mix.
Speaker Change: So hopefully,
Speaker Change: You know, as we go forward through the year, we're going to see a lot less of that. Maybe the fluctuations are positive, other quarters instead of negative and whatnot.
Speaker Change: So that would be kind of the general outlook. Now, having said that, historically we've seen
Speaker Change: deposit declines in Q2 because we have clients making tax payments.
Speaker Change: And so, you know, that's going to be a headwind for Q2, but that's a normal thing here. And underlying, you know, hopefully we continue to grow deposits, and some of those are DDAs, and we can retain the DDA mix that we have today.
Speaker Change: Okay, thank you, thank you for that. That was...
Speaker Change: Thank you for the clarification there.
Speaker Change: If I could just
Speaker Change: Switch over to your NIH Outlooking.
Speaker Change: if loans
Speaker Change: trend flat over the next quarter. Is it fair to assume that NIA stays relatively flat or maybe drops in the second quarter and then beyond there with your growth outlook maybe starts to step up again?
Speaker Change: Yeah, David and his team do a really granular look at that, bottom up, and it's largely with a
Speaker Change: flat interest rate outlook we originally had started the year thinking you know maybe 25 depths decline mid year and 25 reps later in the year and we've now redone that with just one decline rate cut late in the year but David you want to walk through how
David Weber: how we expect that NEM to play out in the
David Weber: coming up. Yeah, I think your comments are fair.
David Weber: The two components that we need is, you know, we need to continue to see loan production at these higher rates that are average
David Weber: loan yields which are in the mid-fives to help churn that loan portfolio. Obviously, the
David Weber: The volume of loan production we had in the first quarter really wasn't enough, frankly, to have a material impact there. So we need to see that continue to churn and then certainly stabilization of our DDAs is a big component of
David Weber: really stabilizing our total average cost of deposits and we've seen
David Weber: As far as the
David Weber: pricing pressures on existing accounts, it feels like that has certainly declined, but the mix shift has been unfavorable for us from a funding standpoint.
David Weber: certainly need to see that stabilization of the DDAs, which, you know, those two dynamics will give us the ability to see NIM expansion in the second half of the year, we'll call it.
Speaker Change: Okay, that makes sense. Thanks for the color there. And then just one last one for me. It was good to see the pickup in mortgage production during the quarter. And I think
Speaker Change: as you alluded to in the presentation, it was attributable potentially to
Speaker Change: The originators that were hired this year.
Speaker Change: How much of that do you think was attributable to them and the original team and
Speaker Change: Do you think that's
Speaker Change: that level is sustainable what I think it was one point
Speaker Change: Wow.
Speaker Change: $1.2 million this quarter.
Speaker Change: One $1.3 million this quarter. Do you think that's sustainable throughout the year or we'll go up?
Speaker Change: Sure, what's going to happen with the 10-year Treasury, Adam?
Adam Scott Butler: Good question. Well, to give a little more serious answer,
Adam Scott Butler: We've hired, I think, seven or eight new MLOs.
Adam Scott Butler: since late last year.
Adam Scott Butler: And there are a total of about 25 or so MLOs that are active producers. So that's a pretty significant increase. You know, maybe a third of the MLO force is new over the last year.
Adam Scott Butler: 90 days and actually we've been pleasantly surprised at their productivity they a lot times you know take
Adam Scott Butler: three months or six months to kind of build a pipeline and get it going and we're actually seeing them producing some nice results already in Q1 and going into Q2 and
Adam Scott Butler: The real production in Q, too, the improved earnings,
Adam Scott Butler: in Q1 I mean, came from a combination of volume and rate. And so we saw a nice improvement in the gain on sale, and we saw a nice increase in
Adam Scott Butler: in volume and you know I was looking back at we did a
Adam Scott Butler: monthly mortgage department review this morning, and I was looking back over the last 12 months, and you know, there were many months last year where we were losing
Adam Scott Butler: $250,000 in a mortgage operation contribution.
Adam Scott Butler: And we made $250,000 in March
Adam Scott Butler: And, you know, that's just
Adam Scott Butler: better year this year.
Adam Scott Butler: As the year progresses, you know, last year obviously was
Adam Scott Butler: record low production in the industry for like 30 years.
Adam Scott Butler: And so we're hopeful that that improves as we go through the year this year. Now we have some more MLOs to support that.
Adam Scott Butler: Julie, you absolutely had you answer that question because Julie looks over our mortgage area and is much closer to it than I am. Did I miss any of the key points there? I'm sorry. No.
Julie A. Courkamp: That's my bad.
Julie A. Courkamp: Well, it's great to hear and I hope the momentum within the team continues and thanks for taking my questions.
Julie A. Courkamp: Yeah.
Speaker Change: Thank you. One moment for our next question, please.
Speaker Change: Our next question comes from the line of Ross Haberman with MIH Investments. Your line is now open.
Ross Haberman: Good morning, Scott. Scott, how are you guys? Once my questions have been answered. Thank you. I just want to go back. I think you said...
Ross Haberman: 700,000 in this quarter related was legal.
Ross Haberman: Again, was that mostly related to the non-performers and hopefully
Ross Haberman: That'll begin to moderate over the next couple quarters as these non-performers are resolved. Would that be a good assumption?
Ross Haberman: That's what I said, and David's nodding his head, yes.
Speaker Change: I think that's materially correct, yes.
Speaker Change: And the half a million you lost, are you insured? Does insurance cover any of that? I think you said it was a check, was it check hiding or something?
Speaker Change: A fraud is something? No, it's wire fraud. And this is just a big industry issue right now. We spend a lot of time and effort on training people and managing that and we put additional controls in place. And I can't tell you how many we catch.
Speaker Change: because it's a lot, but you know, we did have a couple that got by us this quarter and, you know, go into your expense numbers in the quarter.
Speaker Change: Gives me no
Speaker Change: Not happy about it, right? I'm not happy to talk about it, but I think, you know, in terms of understanding what our core expenses are, that was part of Q1.
Speaker Change: But what so that would fall under your deductible so you don't get reimbursed for that type of stuff because it would fall under your deductible or something. Okay, and
Speaker Change: How are the new branches coming? You had that operation, I believe, in Arizona and in Montana. How are they coming in terms of generating business as well as...
Speaker Change: Are they generating any sort of deposit level that you can talk about?
Speaker Change: Yeah, so, you know, the process of opening an office de novo is a project. And, you know, you can't get
Speaker Change: a branch approved unless you have a location, you have the people, and you get the regulatory approval on it. So, you know, in Bozeman, for example, we hired a team there, and we had an LPO that was producing loans.
Speaker Change: But then, you know, once you have the team in place, you have your new office built out, which takes, you know, like a year in a growth market like that, then you can convert it into a full-service branch.
Speaker Change: or Profit Center, as we describe them, and then they can start taking deposits. When did that open as a full service? It was six months ago now, something like that?
Speaker Change: And we think that that's
Speaker Change: going to be a really nice success story. We've got a great team there. They've identified lots of good opportunities. They've got a nice book that they're building a business. We held a client event, a prospect event up there.
Speaker Change: February , I want to say, that was very well attended. There's just a lot of interest, I think.
Speaker Change: in that market and what we're doing because it's different. You know, there's no other first western in Bozeman. So I think that that's going to be fine. Arizona, you know, we've been
Speaker Change: rebuilding the teams there since you asked about that, and I think that that's going to be on a better trajectory.
Speaker Change: some of the other new offices
Speaker Change: You know, I think our Western Wyoming offices that came with the acquisition a couple years ago are really seeing a lot of traction and making nice progress. Our bail office, which is our most recent
Speaker Change: resort market, that's probably what five years old now, something like that, Julie? Yeah. And really,
Speaker Change: is getting some great traction in the Vale Valley, and again, very differentiated from anything else in that market. So these things take time, Ross, and they take investment and they take persistence.
Speaker Change: But they're showing nice results and I think they'll be, you know, great long-term producers for the shareholders here.
Speaker Change: You think you'll be able to get
Speaker Change: I guess there was the one large
Speaker Change: non-performer with a lot of different parts to what I think you said you
Speaker Change: you've gotten control of
Speaker Change: For the parts, there's three left, I think. Will you be able to resolve the other three? Are you thinking, calendar 24?
Speaker Change: I think that's a reasonable expectation.
Speaker Change: Okay. Thanks a lot. I appreciate it. Have a good weekend.
Speaker Change: Yeah, thanks, Ross. Thank you. I'm currently showing no further questions at this time. I'd like to hand the conference back over to management for closing remarks.
Speaker Change: Great, thank you, Norma.
Speaker Change: Well, we consistently said this year,
Speaker Change: that this was going to be difficult to predict.
Speaker Change: given the economic uncertainty.
Speaker Change: but we have seen a number of positive trends as expected in Q1.
Speaker Change: You know, net interest income and NIM declines appear to be slowing. The income has definitely recovered nicely.
Speaker Change: Operating expenses, particularly have adjusted for some of these elevated workout and other Q1 expenses that we talked about.
Speaker Change: that we hope are non-recurring, expenses are well controlled, our AUM exceeded $7 billion, and fees were up,
Speaker Change: Our asset quality is improving. NPAs are down as we work through our one remaining large workout credit, as we've talked about.
Speaker Change: With the improved loan to deposit ratio and continued core deposit growth, we should be able to get the balance sheet back on
Speaker Change: track for at least modest growth this year. And these trends together with our many internal initiatives we have underway, will drive higher earnings, and improved efficiency in the quarters to come.
Speaker Change: So thanks everybody for down-in and we sure appreciate your interest in First Western. Have a great day.
Speaker Change: This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.