Q3 2024 First Western Financial Inc Earnings Call
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Speaker Change: Good day and thank you for standing by. Welcome to the first Western Financial Q3 2024 earnings conference call.
Speaker Change: At this time, all participants are on a listen-only mode. After the speaker's presentation, they'll be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. You will then hear and automate a message advising your hand is raised.
Speaker Change: to withdraw your question. Please spread star one and one again. Please be advised today's conference being recorded. I would like to end the conference over to you. Speaker, Tony Rossi, please go ahead.
Tony Rossi: Thank you Kevin. Good morning everyone and thank you for joining us today for First Western Financials 3rd Quarter 2020 for earnings call.
Speaker Change: Joining us from First Western's Mandarin team, we're Scott Wylie, Chairman and Chief Executive Officer, Julie Courkamp, Chief Operating Officer, and David Weber Chief Financial Officer.
Tony Rossi: We will use a fly presentation as part of our discussion this morning.
Tony Rossi: If you've not done so already, please visit the events and presentations page of First Western Investor Relations website to download a copy of the presentation.
Speaker Change: Before we begin, I'd like remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of first Western financial, then revolve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed for implied by such forward-looking statements.
Speaker Change: These factors are discussed in the company's SEC filings, which are available on the company's website.
Speaker Change: and I would also direct you to read the disclaimer in our earnings release in investor presentation.
Speaker Change: The company describes any obligation update and he forward-looking statements made during the call.
Speaker Change: Additionally, management may refer to non-cat measures which are intended to supplement but not substitute for the most directly comparable gap measures.
Speaker Change: The press release available on the website contains the financial and other quantitative information we discussed today, as well as the reconciliation of the gaps and on gap measures. And with that I'd like to turn the call over to Scott.
Scott Wylie: Thanks, Tony, and to one of everybody. During the third quarter we generated a high level, higher level of profitability, while continuing to prioritize prudent risk management and a conservative approach to new-known production.
Scott Wylie: Overall, we continue to execute well on our strategic priorities, including maintaining disciplined expense control, also making investments into the business that will support our future profitable growth.
Scott Wylie: We also continued to have success with our deposit gathering efforts, adding new clients and expanding relationships with existing clients that resulted in deposit inflows.
Scott Wylie: During the third quarter, we saw the strongest growth in non-intersparing deposits, which increased 19% from the end of the prior quarter.
Scott Wylie: We've also mentioned a number of times over the past several quarters that our goal was to reduce the loan to deposit ratio to the mid 90% range. In a result of our success in this area, we've achieved our goal with the loan to deposit ratio being 95% at the end of the third quarter.
Scott Wylie: We've also continued to make progress and resolving the large.
Scott Wylie: Non-performing relationship where we had several properties as collateral.
Scott Wylie: We now no longer have any remaining long balance on that relationship. We've taken possession of the remaining properties which are now included in Oreo.
Scott Wylie: One of these properties has been sold and we have three remaining properties that are currently being marketed.
Scott Wylie: A side for this relationship during the third quarter, we saw a generally positive trans-inacid quality with declines in both non-performing and classified loans.
Scott Wylie: As a result of our stronger financial performance, in balancing management strategies, we have increases in all of our Tier 1 capital ratios and further increase in our tangible book value per share.
Scott Wylie: and we decide for.
Scott Wylie: We generated net income of 2.1 million, or 22 cents per diluted share in a third quarter, which was double-level of EPS we had in the prior quarter. With our proven balance sheet management, a tangible book value per share also increased by about 1% this quarter.
Scott Wylie: Now I'll turn to call her a bit Julie for some additional discussion of her balance sheet in trust and investment trends. Julie? Thank you, Scott.
Julie: On 5-5 we look at the trends in our loan portfolio.
Julie: Our loan helper investment decreased 73 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production, which led to new production not being enough to offset the level of payoffs that we received.
Julie: I'd love to decline in non-performing loans and a decline in commercial line utilization.
Julie: However, we did see an increase in new loan production relative to last quarter with 83 million of new loan production in the third quarter compared to 50 million in the prior quarter.
Julie: Most of our new loan production is coming in the areas of commercial loans and residential mortgages where we are also getting deposit relationships.
Julie: We continue to be disciplined and we are maintaining our pricing criteria.
Julie: This resulted in the average rate on new production being 7.49% in the quarter, which was higher than the average rate on RPF, which resulted in the turnover in our own portfolio being creative to our average yield on loans.
Julie: Moving to slide six, we'll take a closer look at our deposit trends.
Julie: Our total deposit increased 92 million from the prior end of the prior quarter. The increase was attributed to both new plant relationships and an increase in balances among existing clients.
Speaker Change: Scott mentioned the strongest growth came in non-interest bearing deposits, which increased 19% from the end of the prior quarter.
Speaker Change: Tornning, turning, defied seven trust and doesn't management. We had a 454 million increase on our access under management in the third quarter. Primarily attributed to improving market conditions, resulting in an increase in the value of AUM.
Speaker Change: Over the past year, our AUM has increased nearly 17%. Now I'll turn the call over to David for further discussion over financials.
David Weber: Thanks, Julie
David Weber: Turning the slide eight, we'll look at our gross revenue. Our gross revenue decrease, 1.7% from the prior quarter, due to the migration of one problem credit into non-acruc status and increase in interest-mearing deposits and one additional day in the quarter, driving increased interest expense.
David Weber: Howard, not interested in coming with flat with the prior quarter.
David Weber: Now turning the slide nine, we'll look at the trends in net interest income and margin.
David Weber: Our net interest income decreased 1.3% from the prior quarter. Primarily due to the higher level of interest expense and was negatively impacted by one credit migrating to non-acruble status.
David Weber: Both net interest income and net interest margin in the third quarter were negatively impacted by this one credit.
David Weber: Our name decreased three-base points from the prior quarter to 2.32%.
David Weber: This was due to a slight increase we had in our average cost of the positive over the quarter due to an unfavorable mixed shift in the average deposit balances while our average yield on the average average.
David Weber: With the increase in court deposits we had during the quarter, we reduced our balances of wholesale borrowings, which will positively impact our cost of funds going forward.
David Weber: The Increasing the Paws is also resulted in a higher level of cash balances at the end of the third quarter.
David Weber: Our higher level of non-interest bearing deposits will also positively impact our cost of funds, as well as the reductions in rate on money market accounts that occurred following the Fed Red Cut in mid-setting.
David Weber: These rate cuts have not resulted in any deposit outflows, and further rate cuts are expected to reduce our cost of funds.
David Weber: Our September 30th, 2024, Spot, Net Interest margin increased from the prior quarter to 2.4%.
David Weber: and as the financial markets normalize and as the quality stabilizes we expect the further expand net interest margin.
David Weber: Now turning the flight 10, our non-interest income was unchanged from the prior quarter.
David Weber: Quarterly variations in that game of mortgage loans were offset by an increase in risk management and insurance fees.
David Weber: We saw a low level of mortgage production in July and August and then a large increase in September which was our highest level of mortgage production in two and a half years.
David Weber: Now turning the flight 11 in our expenses.
David Weber: Our non-interess expense was up slightly this quarter, but in line with first half of the year, primarily due to higher salaries and expenses driven by front office personality.
David Weber: as well as higher marketing expenses to support our new business development efforts.
David Weber: These increases were partially offset by a decrease in other operational expenses due to a partial recovery on a fraud loss that occurred in the first quarter.
David Weber: Reversing our recent gross revenue declines with continued expense control will get our earnings back on a favorable trend.
David Weber: Now turning the slides 12, we'll look at our asset quality.
David Weber: Our non-performing assets increased to 52.1 million, which was due to the addition of a non-performing loan and foreclosed property, partially offset by non-performing loan paydowns, charge us and alone sale.
David Weber: However, we saw decline in non-performing loans due to the migration of one relationship out of non-performing loans and into Oreo. Paydowns, Charge Offs and a Loan Cell.
David Weber: We had a higher level of charge-offs in the quarter than typical, which was primarily related to the migration of the large relationship into Oreo.
David Weber: with positive trends in non-performing loans, classified loans, past two and non-accrual loans, each down about 50% quarter-over quarter, our expected improvements and asset quality are more evidence.
David Weber: With this positive overall trend, we had in asset quality, we had a minimal provision for credit losses, which reduced our level of allowance to adjust the total loans to 79-based disciplines at September 30th.
Speaker Change: Now I'll turn it back to Scott. Scott.
Scott Wylie: 30s slides 13, a wrap up with some comments about our
Scott Wylie: Albert.
Scott Wylie: Overall, economic activity continues to be healthy in our markets and when the strength of our balance sheet in the franchise we built, we see good opportunities to capitalize on market disruption and challenges being faced by competing banks to add new clients and banking talent.
Scott Wylie: Our current expense structure is historically supported higher revenues with modest growth in the balance sheet, improve net interest margin, higher fiancum, improve gas equality. We expect solid operating leverage.
Scott Wylie: in the near term.
Scott Wylie: will continue to prioritize prudent risk management in conservative underwriting criteria. But we are seeing some increase in our loan pipelines.
Scott Wylie: which we believe will help us better offset the level of payoffs we're seeing and keep loan balances relatively flat in the current quarter.
Scott Wylie: The Posit Gating will remain a top priority throughout the organization.
Scott Wylie: with the successful repositioning of our balance sheet and the increased liquidity.
Scott Wylie: We have, uh, increased the point we have with lower, lower deposit ratio. We believe we're well positioned to generate a higher level of loan growth in 2025 as loan demand increases. Well, maintaining our discipline pricing and underwriting criteria.
Scott Wylie: Artificialian Dad M&Lows, well, the mortgage market is slow, is paying good dividends and we're seeing higher-level mortgage production now.
Scott Wylie: with interest rates now declining. We expect to see a positive impact on both our net interest margin and the income generated from our mortgage business.
Scott Wylie: and as we sell the properties we represent from the large, non-performing relationship, we'll have significant amount of cash that can be redeployed into inter-stirning assets that will positively impact our level of profitability.
Scott Wylie: The positive trans were seeing in a number of key areas are expected to continue.
Scott Wylie: which we believe should result in steady improvement in our financial performance and further value being created for our shareholders.
Scott Wylie: with that. We're happy to take your questions. Kevin, can you please open up the call?
Kevin: Thank you, ladies and gentlemen, if you have a question or a comment at this time, please press star one and one on your telephone. If your question has been answered, it was to live yourself from the queue. Please press star one and one again. We will pause for a moment while we can pilot a Q&A roster.
Speaker Change: Our first question comes from Brett Revitang with Hobbie Group. Your line is open.
Speaker Change: Hey, good morning everybody.
Speaker Change: wanted to start on credit.
Brett Revitang: and walked through a few things if we could. The new credit that was moved to non-acrule.
Brett Revitang: Any color on that loan?
Brett Revitang: and then if I understood correctly the chargeoffs were almost all or all related to the one large credit, so I wanted to understand kind of...
Brett Revitang: What happened there and then from an old re perspective is that at this point the ranch in two houses maybe let's just start with those questions.
Brett Revitang: Okay.
Brett Revitang: Well, the wing breath. The one shot.
Speaker Change: 10 million dollar loan. So this is a borrower that...
Speaker Change: Clark Wylie is a very wealthy guy. He's got a liquidity crunch from when he's got himself into on the liquidity situation that
Speaker Change: Put our loan and the nine of cruel.
Speaker Change: You know, it's a loan directly to him, so there's no guarantee to get in to around it, but, you know, he's on the hook for it. He's got...
Speaker Change: Um...
Speaker Change: Good collateral pledge to it and so we're collecting on the collateral like, you know, we've seen this sort of thing before here.
Speaker Change: and seems to happen periodically.
Speaker Change: I think this is another one-off situation.
Speaker Change: in this case, we do expect the full recovery and we have it now, not a cruel until we can.
Speaker Change: either get a painter collected. Apart from that one relationship, David noted, I think we've got improving.
Speaker Change: Trends in the lone portfolio pretty much across the board in Q3 so I think we're seeing nice progress now, notwithstanding that one.
Speaker Change: and the situation.
Speaker Change: Related to our one large credit that we've talked a lot about and mechanically what happens there.
Speaker Change: That.
Speaker Change: Chefs from a performing loan or performing loans into...
Speaker Change: and Oreo. So as part of that, you write off the specific reserve that we have. And so that's really the bulk of the change in the...
Speaker Change: Chargeoff's headquarters is related to that conversion from an NPL into Oreo. In fact, that it went up is because the value of the Oreo is higher than what the loan balance was.
Speaker Change: Good.
Speaker Change: As well as we had hoped and you know frankly now having the collateral is way better than having a non-performing loan because we go ahead and sell a collateral and we have control of it at this point in the loans off the book. So I think those are all.
Speaker Change: So, nice silver lining there to system with what we had said and shows good progress in Q3.
Speaker Change: The Young.
Speaker Change: The third question about selling those properties is we have, you know, as I said, you'll.
Speaker Change: repeatedly said it would take several quarters to do that and we're doing that.
Speaker Change: I think that of the three remaining properties.
Speaker Change: Two of them we've seen a lot of interest in.
Speaker Change: and so I would expect those to be sold in the next quarter or two, although
Speaker Change: You know, that's not always easy to predict. I think, you know, we're not really interested in having some kind of fire sales, so, you know, we'll try and maximize the value on those in line with sub.
Speaker Change: you know the market conditions which are generally positive and you know we have those things on our books now at our below-o-praise, we'll feel like that should be fine I'll get done in the near term on the ranch
Speaker Change: You know, that typically takes, ranches typically take, um, nine to twelve months to sell, and so that's really our expectation there. We got control of that midway through the third quarter, and so we've been working hard.
Speaker Change: and Q3 that get that ready to go and we had a number of showing there. I just so know, you know.
Speaker Change: If it's realistic to think that'll get off the books in the short term because...
Speaker Change: and these large ranch properties do take a while to sell typically and this is a very unusual and large and well-located properties of pretty spectacular unique property.
Speaker Change: Don't mind experience with that kind of thing, it's going to take some time.
Speaker Change: and the personal ease in the slide deck, you know there's a comment about classified loans being lower and I know criticized
Speaker Change: Peaked out in the first quarter at 80 million and I think classified was like 53.5
Speaker Change: and Tsuqq. Scott, you have a number for classified, criticized.
Speaker Change: for the third quarter.
Scott Wylie: I do but I don't have it at my fingertips.
Speaker Change: and Julie looking at the rest of the papers there. Do you have it Julie? No, I've grown classified with that 14.4 million compared to about 37.6 million in a prior quarter.
Speaker Change: So, good progression there, which is largely the large credit that went into Oreo.
Speaker Change: and then on a cruel, classified is at 11 million compared to 17 million in a pair of quarters. Again, good news, men and the right direction on both of those.
Speaker Change: Okay
Speaker Change: and then the other question I wanted to ask was just around the DDA growth in the quarter and if that's sticky and you know that's been the effort put into growing correlationships and you just don't call on the DDA growth during the quarter.
Speaker Change: Yeah, I think this is a culmination of...
Speaker Change: of several quarters of working on improving this phone to the positive ratio and seeing some deposit growth. So it was great to see that happening in Q3. You know, we went in and looked at.
Speaker Change: the increase in all the larger accounts where that happened and it...
Speaker Change: attended the B kind of Apostolic.
Speaker Change: which is the way our clients tend to work anyways, you know, so that's new business, so it's the positive to do existing accounts, the motion, the movement around the accounts seem pretty typical for us, and that's typically how we've grown historically. So, I think.
Speaker Change: You know the details of this vary from quarter to quarter but I think this is a definite, you know, positive sign in terms of the effort that we put into that, the shift from that.
Speaker Change: Intersparing the DDAs, I think, is particularly significant because really we've seen that go on the other way for the past.
Speaker Change: I don't know three or four quarters now I didn't go back and look but I feel like it was going down every quarter and so to see such a nice
Speaker Change: Rebound in Q3 was really positive and again I don't think there was any particular you know season all or one time thing in there that was just you know our clients doing what they do and uh
Speaker Change: and the benefit of having her team focused on this. I would expect that to continue. The positive pipeline.
Speaker Change: at quarter-end was actually up about 12% over the prior quarter, so they think a good thing to come.
Speaker Change: OK, I appreciate all the color.
Speaker Change: Good, one moment for our next question.
Speaker Change: i
Speaker Change: Our next question comes from Woody Lay with KBW. Your line is open.
Woody Lay: Hey, thanks for taking my questions.
Woody Lay: Just one follow-up on the DDAs. So it sounds like that growth was driven pretty broad-based amongst your customers. It wasn't influenced by, you know, just a handful of customers or sort of an outlier in that sense.
Woody Lay: Correct.
Woody Lay: Got it. So maybe shifting over to deposit cost, you know, we got the 50 basis point cut in the quarter. Could you just walk through how deposit rates have trended sort of pre and post cut and are the betas coming in line with expectations?
Speaker Change: I'll take a stab at that and then David, you know, feel free to jump in with
Speaker Change: with more facts if you are so inclined. I mean, I think the fact that our
Speaker Change: 240. So I think that that's, you know, early indication of some positive trends that we'll expect to continue, whether or not we see more interest rate cuts. You know, if you look at the benefits.
Speaker Change: Just on the loan side, I know your question was about deposits, but on the loan side, you know, we saw payoffs
Speaker Change: kind of in the 6% range on average.
Speaker Change: for the $80-some million that paid off in the quarter, where new production was coming at $7.5 million. So that's $1.5 million a year in interest income pickup as that plays out, plus whatever growth we produce,
Speaker Change: getting the NPAs out of cash and back into production, plus whatever benefit we get from the rate cuts. So I think that the NIM, we're going to see some nice positive momentum here going forward. In terms of the...
Speaker Change: spot costs of deposits, those actually came down in
Speaker Change: Q3, I think we ended the quarter, David, at 316, so that was quite a bit lower.
Speaker Change: And then when we looked at the detail of the deposit beta, we were hoping
Speaker Change: that we would see a high deposit beta on the way down, actually higher than what we saw on the way up.
Speaker Change: And I think that played out. Do you want to share the numbers on that?
Speaker Change: Yeah, absolutely. To Scott's point, we were expecting higher beta on the way down, and we were able to achieve 85% beta on our money market accounts.
Speaker Change: and haven't seen really any outflow yet so I think that's a that's a really good really good progress there.
Speaker Change: All right, you ready?
Speaker Change: Sorry, go ahead.
Speaker Change: I said, did that address your question? Oh yeah, that was all.
Speaker Change: Great color. All right, I think that's all for me. Thanks for taking my questions.
Speaker Change: All right. Thank you. One moment for our next question.
Speaker Change: Our next question comes from Matthew Clark with Piper Stanley. Your line is open.
Matthew Clark: Hey, good morning, everyone. Thank you.
Speaker Change: Good morning.
Matthew Clark: Just on the on the spot rate NAM at the end of the quarter of 240 does that include the interest reversal that negatively impacted that number by six bips or is that adjusted?
Speaker Change: It does not include the impact of the interest reversal, but it would include...
Speaker Change: Those non-accrual loans still sitting in non-accrual, you know, generating zero interest income. Does that make sense?
Speaker Change: Yep. Yep. Okay. Okay.
Speaker Change: Okay, and then can you remind us the percent of your loan book that's truly floating?
Speaker Change: I'm not sure if I saw it in the deck.
Speaker Change: Yeah, it's about 25%.
Speaker Change: So calm.
Speaker Change: which applies Matt I'm sure this is where you're going is that we continue to be liability sensitive so the extent we see short-term rates defying that should be a benefit to them
Matthew Clark: Yeah, I mean, just rough math, you know, based on the adjustment of the interest reversal.
Matthew Clark: Going forward, and then the spot rate on deposits, it implies a pretty decent lift in your NIM and the 4Q here. But we can all kind of guesstimate what that's going to be. On
Matthew Clark: On your asset management fees, your AUM was up 6.5%, but your fees were down 3%.
Speaker Change: Is that just a lag effect that we'll see the benefit in 4Q or is there something else going on there?
Speaker Change: Well, we took a deep dive on that one because it seemed like a head-scratcher to us, too. And I think a big part of the story there...
Speaker Change: is the mix of the types of assets that are in that $7.5 billion. So in this quarter, a fair amount of the increase was in directed trust, which are mostly fixed income, fixed fee.
Speaker Change: And so, you know, if it goes up, if you have a trust that goes from a million to two million, it's got a fixed fee of $25,000 or whatever, I mean, it isn't going to change the fee. So that's part of...
Speaker Change: Big part of what went on in Q3 for us.
Speaker Change: is the mix of the accounts.
Speaker Change: I would say we do have an initiative going on internally to take a look at that and see how we monetize that we think there's a nice opportunity. Obviously, we're seeing a business grow. And so, you know, we want to figure out how to better monetize that. So that's certainly a priority for our Trust Investment Management team.
Speaker Change: Okay, and then how much was the recovery on the fraud loss this quarter that benefited expenses and then what's your current outlook on the run rate for 4Q?
Speaker Change: Yeah, the fraud loss recovery was about $100,000.
Speaker Change: Thank you.
Speaker Change: Our forecast for additional fraud losses is zero. We try to minimize that.
Speaker Change: Bye.
Speaker Change: I'm kidding, I assume your question was about the expense outlook. So we definitely have seen elevated workout and legal expenses in 2024, and we do expect those not to be recurring.
Speaker Change: as we collect all this stuff.
Speaker Change: We've talked about new hires in the front office, which were a big part of our Q3 increase.
Speaker Change: including in Q4. So I think that that will.
Speaker Change: offset some of that increased expense.
Speaker Change: And then, you know, we're going to continue to manage expenses in line with our revenue outlook in for 2022.
Speaker Change: 2025, you know, we're thinking an expense.
Speaker Change: target in the $19.5 to $20.5 million range, assuming a nice revenue growth story would be a reasonable guesstimate at this point.
Speaker Change: Thank you.
Speaker Change: Thank you for joining us. Have a great day. Have a great day. All right.
Speaker Change: Okay, but you think relatively stable here in 4Q or do you think there's a little lift in comp?
Speaker Change: that has it causes it to drift a little maybe up to 19 and a half or even a little bit above that.
Speaker Change: I think 19 and a half would be a good.
Speaker Change: started.
Speaker Change: Okay.
David Weber: Julie and David are both signaling increase, 19.4 in Q3, so we're doing everything we can to manage that, but I think it's probably some number similar or a little higher in Q4.
David Weber: The 11 being, I think, still accruing.
David Weber: I assume that's a substandard number. Do you have a special mention number?
Speaker Change: Special mention is flat quarter over quarter, about 5.4 million.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: And then just how about the reserve in general? I mean, you know, you released with the charge offs and.
Speaker Change: I think there you know you guys obviously want to build C&I over time but I mean do we do we have to kind of backfill this reserve and cause it to you know drive it back toward call it 1% or even above that?
Speaker Change: Thank you. Thank you.
Speaker Change: Well, we've been admonished not to, by our accounts, not to manage to a particular number. I would tell you our...
Speaker Change: Our methodology has remained consistent ever since we converted onto the new way of calculating the allowance under CECL. So, you know, I think...
Speaker Change: I think we're in a reasonable place for our performance, you know, we talked in the
Speaker Change: comments about
Speaker Change: seeing a 50%-ish quarter-over-quarter improvement in all of our underlying credit indicators. And we do think we're getting towards the end of this workout cycle, which is, again, what we've talked about for, I think, four quarters now.
Speaker Change: So I think that where we are is reasonable and in line with what the expectations are in C. So we don't know any reason to think otherwise.
Speaker Change: Okay, thanks for all the questions.
Speaker Change: One moment for our next question.
Speaker Change: Thanks ma'am.
Speaker Change: Our next question comes from Bill Dellison with Titan Capital Management. Your line is open.
Speaker Change: this strength can continue really as a result of the expansion of your MLO team.
Speaker Change: Yes, so just to review the facts, our mortgage revenues were actually down in Q3 for the quarter.
Speaker Change: September was a very strong month.
Speaker Change: and was, in fact, I think, David, you said the highest.
Speaker Change: Month we've seen in two and a half years. So correct. So really positive trend there You know, I think there was some sentiment for a while there that rates were going to come down and that created some enthusiasm
Speaker Change: Seems like now maybe they're not going to come down so much and so I don't know what that means for
Speaker Change: for a bounce back. I continue to think there's a lot of pent-up demand out there, and we are seeing more product.
Speaker Change: So we're going to see some seasonality, I would think, in the next two quarters, but I think it's going to be better than what we saw, for example, a year ago.
Speaker Change: If for no other reason, then we've got all these new MLOs
Speaker Change: Julie, you could speak to this, but there's a pipeline of additional MLOs that we think we can bring in here in Q4. So those are great hires. They're no direct expense.
Speaker Change: They're building capacity and they're producing results that we saw in September. I think that was a big driver of the results we saw in September.
Speaker Change: And the same thing there, Julie, from how you're looking at working it out. Nope, that's all I have, right. We're still working to bring in...
Speaker Change: the right kind of MLOs into the organization. And I think we're internally thinking we'll still see a higher level of pro-debtivity and gain on sale than we have in prior fourth quarters. Just seasonally, it will be slower in the fourth and the first quarter, but should still be higher than it was in prior years.
Speaker Change: a solid mortgage operation.
Speaker Change: year or so in integrating what we're doing on the mortgage side into our profit centers and cross selling more effectively and that sort of thing. So I think that that all votes well for the strategic value of the business as well.
Speaker Change: Thank you. And would you please remind us how many MLOs you've brought on this year and off of what base that's on?
Speaker Change: We've brought on seven new MLOs. We're looking to bring on a few more in the fourth quarter.
Speaker Change: And the 7 is on top of how many at 1231?
Speaker Change: Oh, um, somewhere in the mid-teens.
Speaker Change: maybe 15 to 17.
Speaker Change: So nearly a 50% increase in the MLOs. Yes. Yeah. Yeah. That's about right.
Speaker Change: You said you're planning on bringing additional on here in the fourth quarter. Roughly how many are you thinking right now?
Speaker Change: We've got two pretty strong MLOs in the pipeline that we're hoping to onboard.
Speaker Change: in the next month.
Speaker Change: and the markets that these two and the prior seven will be serving or are serving.
Speaker Change: Yeah, and Colorado is, you know, where all of those have been sitting, somewhere in the front range here between Denver and the northern Colorado area.
Speaker Change: What is the prognosis for expanding the MLO group in the Phoenix metro area?
Speaker Change: We would love to do that. We have a couple there today. They are doing a good job, but it's just not the market and the reach that we would like to have. So we have some recruiting efforts that have been ongoing over the last quarter to try and identify additional candidates for hire there.
Speaker Change: We added a team there. We were talking about this, Bill, you'll remember a couple years ago, and we added a team there at that point and opened a new MLO office.
Speaker Change: So if you're remembering that, you're remembering it correctly.
Speaker Change: Great, that's helpful. I guess the reason that I ask about that market is it's just so much larger and so under-penetrated, or you all are so under-penetrated relative to the front range.
Speaker Change: that it seemed like that was potentially a large opportunity.
Speaker Change: We agree.
Speaker Change: Great. Thank you.
Speaker Change: Thank you, Bill. One moment for our next question.
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Speaker Change: Our next question is a follow-up from Brent Raboutin with Hobney Group. Your line is open.
Brent Raboutin: Hey, appreciate the follow-up. Wanted to go back, Scott, to the charge-offs in the quarter and make sure I understand
Brent Raboutin: what happened. And so, as you described it,
Brent Raboutin: It resulted in the charge-offs, which in my mind, it would require maybe new appraisals on the properties that you foreclosed on that came up quite a bit shorter than the remaining loan balance.
Brent Raboutin: Could you maybe go over that one more time and make sure I understand?
Speaker Change: Sure, so I'll give that another try. And if I'm not successful, Brett, in satisfying you, we can turn this over to the experts in the room here. But my answer to your question would be that we carry the loan on the books.
Speaker Change: with a specific reserve based on the appraisal.
Speaker Change: So if we think
Speaker Change: that a $10 million loan has $8 million in collateral, you're going to put up a $2 million reserve. So when you take the collateral in, you're going to pay off the loan on the books.
Speaker Change: you're going to write off the two million dollars in specific reserve and you're going to set up as a charge-off, yeah, and then you're going to set up a
Speaker Change: a new Oreo if it's real estate for the $8 million, so that's
Speaker Change: I think mechanically.
Speaker Change: how it works. We do get new appraisals.
Speaker Change: and Emma.
Speaker Change: I think we've ordered them all for all three. I don't know that we received any since we've got the Oreos on the books. But we have talked to appraisers, and we think that our values are reasonable and in line. And we have ordered new ones, so we'll get that confirmation here shortly.
Speaker Change: Okay, so reserve was set aside but hadn't been charged off for the difference.
Speaker Change: But when I look at the reserves...
Speaker Change: When you went from 2Q23 to 3Q23, the reserve went from $22 million to $23 million and it peaked out at $27 million last quarter, but now it's $18.8 million, so it's...
Speaker Change: 4 million less than it was in 2Q of last year, which I guess would have to mean your Q factors are better or something. I'm just having trouble reconciling the change in the difference.
Speaker Change: And it also follows the balance of your loans. So total loans have been declining, therefore your overall reserve, your CECL reserve.
Speaker Change: follows that line as well. So it's all part of the mathematical calculation that goes into the general reserve, I'll call it, and specific reserve is based off of what, you know, each of these impaired loans has supporting them and collateral.
Speaker Change: Okay, I appreciate the additional color and the explanation. Thanks.
Speaker Change: One moment for our next question.
Speaker Change: Thank you for watching. Bye. Bye. Bye.
Speaker Change #100: Our next question comes from Ross Haberman with RLH Investments.
Ross Haberman: Good morning. I just have a quick question. You touched upon it in the prior question.
Ross Haberman: Scott, you opened up, I guess it was
Ross Haberman: Are those making money on a stand-alone basis or how would you describe the profitability of those branches?
Scott Wylie: today. Thank you. Well, we now have three locations in Arizona. Two of them are full service.
Speaker Change #102: First Western Profit Centers, as we call them internally, you know, banks externally. And ones in Scottsdale, they both make money on a contribution basis every quarter. So that's been a nice.
Speaker Change #102: earnings producer for us. The third office that I mentioned is just a loan production office, and it makes money on a stand-alone basis.
Speaker Change #103: As far as I know, David or Julie, they're both saying yes. So all three of the offices are profitable.
Speaker Change #103: I don't know if he's also remembering the Bozeman office in Montana. The Bozeman, yeah, yeah, yeah. Yes, that one's in Montana and that's a full-service bank.
Speaker Change #103: depository taking and it's doing quite well. Yeah, it's roughly break-even at the moment, trending in the right direction.
Speaker Change #104: Any plans in the next couple quarters to to expand either either those areas with additional personnel or or branches?
Speaker Change #105: We are definitely looking at how to grow those businesses, and when you see things like the increased marketing expense in Q3, that's part of our effort there.
Speaker Change #106: What was that, two or three weeks ago? Just recently? And then I think we had one down in Phoenix last night.
Speaker Change #106: with really good turnout. So I think, you know, those are, we view those as growth markets for us and we're certainly investing in them and continuing to.
Speaker Change #106: Encourage those folks that they've got great market opportunities there.
Speaker Change #107: And just one final question along those lines, would you buy anything small if something came up in those markets for sale as a way to jumpstart the growth there? Either in Scottsdale, I guess, or Bozeman?
Speaker Change #108: Well, I think we would, theoretically. You know, when your stock's trading at a discount to tangible book, that's hard to make the numbers work.
Speaker Change #108: And so, you know, my hope and expectation is that as we prove out our NIMS story and our ESSA quality story and get our growth back on track and
Speaker Change #108: ship from
Speaker Change #108: You know, this kind of defensive posture we've taken over the last 12 or 18 months to our normal kind of growth orientation, that those kind of things will become much more...
Speaker Change #108: achievable as you know I mean we've had a long history of successful acquisitions here I think we've done 13 now in the history of the bank
Speaker Change #109: And just a follow-up along those lines, if my recollection is right, you had announced a small buyback, was it a couple quarters ago? Is that still outstanding?
Speaker Change #110: Yeah, it sure is, and we have set up a 10B51 plan in place.
Speaker Change #110: for that, as we said we would. I think we've...
Speaker Change #110: You know, where the stock is trading will be a function of how much we buy back.
Speaker Change #111: Sounds like you might have to raise your limit a little bit, but thank you very much. Best of luck, guys. Have a good weekend.
Speaker Change #110: Thanks for watching.
Speaker Change #112: And I'm not showing any further questions at this time. I'd like to turn the call back over to Scott for any closing remarks.
Scott Wylie: Sure. Well, thanks everybody for taking the time to dial in today and for all those good questions. We really appreciate the interest. You know, I would just summarize by saying I think the headline numbers again this quarter
Scott Wylie: were disappointing and where we want to see the
Scott Wylie: the NIM and the earnings and the efficiency ratio.
Scott Wylie: and the asset quality, but, you know, as we said last quarter, we think that the underlying trends are positive.
Scott Wylie: as expected.
Scott Wylie: and are going to continue and show up in the numbers.
Scott Wylie: here in the coming quarters. And I think we've talked today about a number of these trends. Certainly the core NIM is a big one. Asset quality is a big one.
Scott Wylie: The loan-to-deposit ratio, I think, was really great to see, and the mix of deposits was great to see.
Scott Wylie: The fact that we are still in strong markets
Scott Wylie: with, frankly, increasing competitive disruption.
Scott Wylie: because of acquisitions, I think is a really positive.
Scott Wylie: trend for us, the financial normalization that we're seeing with the yield curve straightening out, and some possible short-term
Scott Wylie: additional short-term rate cuts. Those are positives.
Scott Wylie: transfer us the front office hires we put in place.
Scott Wylie: seem to be producing, and pipelines continue to increase this quarter in some positive
Scott Wylie: evidence of that.
Scott Wylie: We haven't talked a lot about, certainly not today, about our technology and process upgrades that we have in place, but I think those are going to play out here in the near term and provide some real efficiency gains, which we're excited about. And overall, the shift from defense to offense is going to drive.
Scott Wylie: more profitability, better efficiency ratio, and hopefully some nice growth for us too. So we sure appreciate the interest and support. And everybody, hope you have a nice weekend. Thank you.
Speaker Change #113: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.