MYFW - NASDAQ

Good day and thank you for standing. Welcome to First Western Financial First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's call is being recorded. I would now like to turn the conference over to your speaker today, Tony Rossi of Financial Profiles. Please go ahead.

Thank you, Valerie. Good morning, everyone, and thank you for joining us today for First Western Financial's first quarter 2023 earnings call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; and Julie Courkamp, Chief Financial and Chief Operating Officer. We will use a slide presentation as part of our discussion this morning. If you have not done so already, please visit the Events and Presentations page of First Western's Investor Relations website to download a copy of the presentation. Before we begin, I'd like to remind you that, this conference call contains forward-looking statements with respect to the future performance and financial condition of First Western Financial that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. And with that, I'd like to turn the call over to Scott. Scott?

Thanks, Tony. Good morning, everyone. Because of the prudent approach we have always taken to risk management, First Western has been a consistent source of strength and stability for our clients and that was never more true than over the past couple of months. And at the same time, we never benefited more from the strong relationships we have built with our clients. As part of the ordinary course of business, we are in regular contact with our clients so that we can stay appraised of any changes in their business or personalized to ensure that we continue to meet their financial needs. So, when the recent bank failures occurred, we didn't have to do anything other than what we usually do, which is continue to remain in regular contact with our clients. Our clients know that we are a conservatively manage financial institution, so there was essentially no concern expressed by our clients. Due to the deep relationships we have built and the value our clients face on the service and expertise that we provide, the stickiness of the deposit base, we built was never more apparent. Earlier in the quarter in January, we had some liquidity events among our clients that resulted in some meaningful, but routine deposit outflows. But in both February and March, we had net deposit inflows, which speaks to the stability of the deposit base we have built. In fact, we have been the beneficiary of the recent term loan in the banking industry with many new clients coming to First Western, as they wanted to move their banking relationship to a stronger financial institution. During March, we added $42 million in new deposit relationships with only $5 million of deposit relationships left the bank. While we saw good stability in the deposit base, we took some balance sheet management actions that had an impact on our level of profitability in the first quarter, but we believe we are prudent from a risk management standpoint. This included holding a higher level of cash on the balance sheet. Our level of FHLB borrowings also increased, but this was not related to issues being experienced in the banking industry. We had already decided to increase our borrowings, as they provided a less expensive source of funding, given the extremely competitive deposit pricing environment that we are seeing. But as I indicated earlier, on a short-term basis, we have chosen to hold most of the increase in borrowings in cash rather than deploy them into loan funding’s as to new purchases of vested securities. We also chose to sell some non-relationship loans, most of which were added through acquisitions. These were loans where we had no deposit relationships and they were relatively low yielding. While the sale of these loans did have an impact on our profitability this quarter, we felt that the benefit we would get in terms of capital and liquidity was more important in the current environment, while also improving the risk profile of the loan portfolio. Because of our prudent approach to risk management in a conservative manner in which we run the company, the fundamentals of our franchise remain extremely strong. We have $1.5 billion available in liquidity, which is 1.7 times our level of uninsured deposits, which represents just 37% of our total deposits. We have a diverse client base with no meaningful industry concentrations. Our asset quality remains exceptionally strong with an immaterial level of losses, and we have a well-diversified CRE loan portfolio with minimal exposure to non-owner occupied office properties where there is a broader concern. I'll provide some additional information about our CRE portfolio later in the call. And we also have a relatively small investment portfolio, so we don't have anywhere near the high level of unrealized losses that some banks have experienced. At the end of the first quarter, our held-to-maturity securities represented just 2.7% of total assets, and unrealized losses were less than 3% of our total shareholder equity. Moving to Slide 4. We generated a net income of $3.8 million or $0.39 per diluted share in the first quarter in spite of some significant industry headwinds. While there are small non-operating items every quarter, the combination of the loan fair value mark, severance payments, and the small loss on loans sold, add about 6% per share in impact in Q1. Over the past year, we have seen increases in both book value and tangible book value per share despite the impact to capital resulting from our adoption of CECL at the beginning of the year. Turning to Slide 5, we will look at the trends in our loan portfolio. Our total loans were about flat with the prior quarter, but this includes the $41 million of non-relationship loans that we sold in the first quarter. Excluding those loan sales, our total loans would have increased at an annualized rate of about 6%. The largest increase came from our CRE portfolio. Most of those our multifamily properties are in markets where there are supply constraints and high demand for housing and we believe they are very strong credits. Given our more selective approach in light of the economic uncertainty, our total volume of loan production was quite a bit lower than what we had generated in recent quarters. Most of what we are generating now are C&I and residential mortgage loans that we believe present the most attractive risk adjusted yields in the current environment. With our discipline on loan pricing, we continue to see higher rates on new loan production, with the average rate on new loan production increasing by 125 basis points from the prior quarter. Moving to Slide 6. We provided some additional information about our CRE loan portfolio. This portfolio is well-diversified and conservatively underwritten. Multi-family loans represent the largest percentage of any property type in that portfolio at 16% of total CRE loans and only 5% of total loans. We have never been a big lender for office properties and as a result, office loans comprised just 11% of the CRE portfolio and only 3% of total loans. Within that office portfolio, we have no exposure to properties in major metropolitan areas, including Downtown Denver, no exposure to buildings over seven stories. And the majority of the properties are located in suburban areas with tenants in recession-resistant industries like medical practices. Our average loan size among the office loans is just $2.3 million. Over the past 10 years, we have not incurred any losses in our office loans, and we have been a -- we have a minimal amount that are maturing through the end of 2024. We're also very productive in our approach, proactive in our approach to portfolio management, and we review current cash flows, vacancy rates, and rental rates at least on an annual basis and more frequently if warranted so, that we can identify any deteriorating trends at the earliest possible time. Due to the conservative underwriting and our proactive approach to portfolio management, our CRE portfolio continues to perform very well. At this point, we've not seen any concerning trends. Moving to Slide 7, we'll take a closer look at our deposit trends. Our total deposits were down just slightly from the end of the quarter, but we're about 5% higher than the prior quarter on an average basis. As I indicated earlier, the liquidity events experienced by our clients resulted in our total deposits declining $71 million during the month of January, and then we had net inflows in February, March, and again in April. The mix of deposits continues to reflect a trend of clients moving money out of non-interest bearing accounts and into interest-bearing accounts in order to get a higher yield on their excess liquidity. We also continue to add some time deposits in order to lock in fixed rate funding that we believe will enable us more effectively to manage our deposit costs going forward. Turning to trust and investment management, on Slide 8, we indicated in our last earnings call, we've allocated some additional resources to business development in trust and investment management. We're seeing the positive impact from these efforts in the combination of inflows for new clients, market performance, which resulted in $275 million increase in assets under management during the first quarter, and notably, we had increases in all five of our product categories. Now I'll turn the call over to Julie for further discussion of our financial resort results. Julie?

Thank you, Scott. Turning to Slide 9, we'll look at our gross revenue. Our gross revenue declined 10% in the prior quarter due to lower levels of both net interest income and non-interest income. However, due to the higher average asset yields and the growth we have had in our balance sheet on a year-over-year basis, our interest income increased 74.6%, but our net interest income increased 5.8% compared to the first quarter of 2022. Turning to Slide 10, we'll look at the trends in net interest, income, and margin. Our net interest income decreased 10% from the prior quarter due to an increase in interest expense resulting from a higher average cost of deposits as well as the impact of holding higher cash balances. In March, our net interest margin decreased 37 basis points to 2.93% due to the higher average cost of deposits and excess liquidity we carried in the quarter. Much of the funding we have added is in the form of borrowings and time deposits are short term and or callable, which gives us the flexibility to quickly make adjustments in our funding mix as market conditions change. Turning to Slide 11, our non-interest income decreased 11% from the prior quarter, primarily due to lower bank fees and risk management and insurance fees. The lower bank fees were partially attributed to a decrease in prepayment penalty fees while the decline in risk management and insurance fees primarily is typical following the seasonal bump we see in the fourth quarter. The decline in these areas offset an 6% increase in trust and investment management fees and higher net gain on mortgage loans. The increase in net gain on mortgage loans is primarily attributed to the increased loan production. We are seeing from our expanded team in Arizona, which more than offset the seasonality we typically see in first quarter production in Colorado. The volume of lock sum mortgage loans originated for sale increased 41% from the prior quarter with 96% of the originations being for purchase loans. Turning to Slide 12 and our expenses, our net interest expense increased 3% from the prior quarter, primarily due to the seasonal impact of higher payroll taxes, as well as lower deferred compensation due to the decline in loan origination. In addition, the higher FDIC assessment rate now in place contributed to the increase in non-interest expense. These increases were partially offset by a decline in technology and marketing expense as part of our regular review of expenses. We have recently made some adjustments throughout the organization in areas such as staffing, software spending, and real estate, all of which reflect the changing nature of our business and areas we no longer focus on growing. A portion of the cost savings from these adjustments will be reinvested into other areas of the company. Overall, these adjustments will help us to maintain expense control and should result in our non-interest expense being in the range of $19 million to $20 million per quarter for the remainder of 2023. Turning the Slide 13, we'll look at our asset quality. On a broad basis, the loan portfolio continues to perform very well as our non-performing assets were essentially unchanged from the end of the prior quarter, and we had another quarter of minimal losses. Following the adoption of CECL at the beginning of the year. Our allowance for credit losses stood at 81 basis points at March 31st. This is down 3 basis points from our CECL Day one coverage, as we had a small reserve release during the quarter due to changes in loan volumes and the mix in the portfolio. Now I will turn it back to Scott.

Thanks, Julie. Turning to Slide 14. I want to take a moment and review our strong track record of value creation for our shareholders. This slide shows our trend in tangible book value per share since our IPO in 2018. As you can see, we've consistently increased our tangible book value per share throughout a variety of economic estate cycles, including the pandemic, and then the higher rate high inflation environment we've seen over the last year. We believe this reflects our strong execution of our strategies for generating profitable growth while prudently managing our balance sheet, as well as our commitment to protecting shareholder value by not doing capital raises that are diluted to shareholders and being disciplined in our acquisition pricing. As you may recall, our acquisition of Teton Financial Services was immediately accretive to tangible book value per share. Our core wealth management earnings have also shown great progress in recent years, although they too have come under pressure in the last two quarters. Turning Slide 15, I'll wrap up with some comments about our near-term outlook. Well, the banking system remains under stress and there's a high degree of economic uncertainty we're going to continue to provide to prioritize prudent risk management, even if that impacts our level of profitability in the short-term. We will also continue to focus on disciplined expense control so that we can realize more operating leverage, as we continue to grow our balance sheet. We recently completed a review of operating expenses and made adjustments that will reduce our non-interest expense by approximately 6.9% or $1.4 million per quarter from the level of expense we had in the first quarter. When we started the year, we knew it was going to be a challenging year to forecast and it's only gotten more difficult since. In particular, loan growth is particularly hard to forecast in the current environment, given that we are being very selective in the new credits that we originate, and overall demand is lower due to higher interest rates, and we see more clients reconsidering investments they were planning to meet. We believe that, we will have some level of loan growth this year, but there is now a wider range of possible… [Technical Difficulty]

All right. Please proceed with your call.

Well, this is Scott Wylie, and I understand we got cut off there. I'm not sure exactly where we got cut off. So, I'll go back to the outlook slide, on Slide 15. And I was noting that with -- well, the banking system remains under distress and there's a high degree of economic uncertainty. We're going to continue to prioritize prudent risk management, even if that impacts our level of profitability in the short term. We'll continue to focus on discipline expense control so that we can realize more operating leverage as we continue to grow our balance sheet. We recently completed a review of operating expenses and main adjustments that will reduce our non-interest expense by approximately 6.9% or $1.4 million per quarter from the level of expense we had in the first quarter. When we started the year, we knew it was going to be a challenging year to forecast and it's only gotten more difficult since then. In particular, loan growth is particularly hard to forecast in the current environment, given that we're being very selective in the new credits that we originate. And overall demand is lower due to the higher interest rates and, and you see more clients reconsidering investments they were planning to make. We believe that we'll have some level of loan growth this year, but there's now a wider range of possible outcomes, and where we end up will be highly dependent on what we see in terms of economic conditions. Well, it's a challenging environment. Ultimately, we believe will be, it will be one that we favor for a franchise. Given the strength of our balance sheet, we have high levels of capital and liquidity, a stable deposit base, exceptional asset quality, and an extremely low level of unrealized losses in our securities portfolio. Given our balance sheet, we believe we can capitalize on opportunities just as we did during the pandemic, adding new clients who are reevaluating their banking relationships and looking to move to a stronger, more responsible financial institution. Earlier in the year, we completed a reorganization of how our offices operate, which was designed to improve our senior leaders to provide our senior leaders in those offices more time to focus on business development. Essentially, we've made it possible for our best salespeople to spend more time selling and focusing on new clients for both trust and banking, while we'll likely continue to see near-term impact on our level of profitability due to the current economic environment. Ultimately, we believe that we'll be a net beneficiary as the opportunities we have to add new clients will contribute to our long-term continued profitable growth and additional value being created for our shareholders. With that, we're happy to take your questions. So, Amy, if I could ask you to open up the call, please.

[Operator Instructions]. And our first question is from Brett Rabatin with Hovde Group. Your line is open.

Hi, good morning, Scott and Julie. Wanted just to start off on margin, and then just thinking about the balance sheet and maybe dollars of NII, could you maybe give us a little bit of flavor for where you're seeing new deposit rates come on the balance sheet and just thinking about NII dollars this year, if the margin is down but the balance sheet grows can NII kind of hold in or increase a little bit? Or is that you think too aggressive given the deposit outlook?

Well, I'll start with a high-level answer and then ask Julie to give you more of the numbers if I can. I think that, we had projected a tightening in our NIM in Q1, which certainly we saw, and that seems likely to continue into Q2. We do think that because of the nature of our business, we've probably seen more pressure earlier than most banks on our interest expense side and our interest income side. We've actually seen really nice progress there, which we would expect to continue. Julie mentioned in her prepared remarks that our interest income is up 74% year-over-year from the first quarter of last year to first quarter of this year. But our interest expense is up like 10x. So, I think that kind of pressure just really pretty strong headwind, and the fact that we've been able to grow net interest income in dollars year-over-year is pretty impressive. So, that would be kind of my general answer, I think. Julie, if you want to highlight some of the numbers behind our NIM progress and outlook.

So NIM for March was 2.97%, so if you just look at the month of March, our spot rate on deposits or cost of deposits was 2.57% at the end of March. I think, our new deposits were coming in quite a bit higher than that, more at the 369 level. We I would say we would expect to see some compression as Scott mentioned in the second quarter, but then it really depends on our loan growth and what happens in the rest of the rate environment and competition. So, we're not really giving guidance on NIM. And as a secondary point, we haven't raised race in April or at the end of March. We are continuing to hold our rate sheet where it is and then making exception pricing as needed to win or retain client deposits.

Okay. That's helpful. Julie, what was -- I'm sorry, the 297 number what for March, which was that?

That's NIM for March.

Okay. NIM for March. Okay. Great. And then the other thing I just wanted to ask was thinking about that $41 million of bucket that you exited non-relationship and any other color around that just didn't fit in any of the boxes from a relationship perspective going forward or any additional color that would obviously lower rate, but anything else that made those loans sensible to move on from?

Nope. With our acquisitions, we've acquired some loans that weren't really our -- what we do. And so, if they are attractive and they are not distracting us fine, but if it's taken up balance sheet space that we don't need, and we were able to sell them at a small loss. I think we took $175,000 loss, something like that in the quarter.

In a principal balance kind of perspective, but when you look at the allowance and the purchased credits on it, it was actually accretive to overall earnings for the quarter. So, we look at all of the factors on each of the loans and make sure that, it makes sense from a P&L as well as a going forward balance sheet management perspective.

Okay. That's helpful. Thanks for all the color.

Thank you. [Operator Instructions]. And our next question comes from Matthew Clark with Piper Sandler. Your line is open.

Good morning. Just want to clarify the margin in the month of March. Did you say 2.57% or 2.97%?

2.97%.

Okay. Thank you. And then also to clarify...

Matthew, excuse me, the other number that she gave was the cost of deposits at the end of March and that spot cost of 2.57.

Yes, that's what I was going to ask. Thank you. Great. And then your commentary on loan growth should slow to [indiscernible] ''some amount'' that's down from your prior mid-teens expectations and understandable and not we wouldn't probably want you growing mid-teens right now anyway. How should we think about deposit growth from here and kind of the mix change?

We have said that, we want to get our longer deposit ratio down below 100%. We traditionally operated kind of in the 95% loans to deposit range. And I think if we could get it down below 100% by year-end, that would be a good to for us. We are pretty flat in Q1. And I think that's probably a good accomplishment considering the drama of the quarter in the industry. But we're going to look to continue to grow deposits at a pace that's probably higher than the rate we anticipate growing loans. And hopefully a lot of those are core deposits that will be capability in a core deposit base for the future for us.

Okay, great. And then on the uninsured deposits, at the end of the quarter, any plans to reduce that amount further? Is there anything else you can do to increase the coverage there?

Well, I think our clients have indicated with their feedback and with their actions that they are comfortable with the deposits they have here. We have seen people looking to move to products that have 100% deposit insurance, whether that's FDIC’s or one of those. And so, we have seen a little bit more of that at the margin. But overhaul, I think our deposit base has been very stable. And then as I mentioned in the slide deck and in the prepared comments, we have actually seen nice growth in existing depositors and new deposits in February, March and April. I would tell you historically, and this has been true for all 18 or 19 years here and in all 30 whatever years of my career in my little private banks, is that we see significant outflows in Q2 for tax payments. Our client base tends to put deposits in when they have their various liquidity events and then pay their taxes in April. So, I don't know how that'll play out this quarter. As I said, month to date we've seen I think $65 million in net deposit increases here in April and $91 million in new deposits. So, we're see seeing the continued trend we saw in February and March. We'll see how it plays out over the quarter.

Okay, great. And then last one for me, just on the reserve and CECIL, can you give us a sense for some of the underlying assumptions you assumed with adopting CECIL? Just how conservative they might be and trying to get a sense for the flexibility of that reserve going forward and whether or not we should assume it continues to migrate higher with deterioration in the macro factors.

So, I don't know that I can give you all the core details of the modeling, but we used the most, I would say complicated modeling in the DCF modeling, and we went down to very low level of categories of loans to do a lot of work on that. Did a pretty deep dive on peer sets that, obviously, that's our hardest area is because of our lack of loan loss in our portfolio. And then, finding peers that might be somewhat consistent with us in our loan book and loan types is was a little bit more challenging. But I think we have a pretty good handle and we've been running it parallel for about a year now and feel like we have a pretty good handle on the different metrics and economic factors that go into that model. And I think as things are changing in the environment, we're keeping a pretty close eye on the different things that, and levers that we can pull within the modeling to make sure that we're properly reserved for. And we've given a lot of information, I feel like on the different impact there was a decent amount of reserve put on the unfunded commitments and then an additional amount of model of our $2 million that was put on the purchase loans as part of implementing CECIL. So, overall, I think it will move around as our loan funding does your, or loan, excuse me, does move around. So, I think, we're just trying to figure out how to manage through those different changes, but trying to stay consistently applying each of the factors is where we're at right now.

Would you say, Julie, to be a little more direct from what we know today, assuming a relatively stable economic and asset quality environment, that we don't think that the extra $5 million we put in January is a trend, right? That would be reflective of our future [ph].

Correct. That as a one time, transition cost going into the CECIL modeling and from here it will really just be modifications based on any economic changes and or just the mix and volume of the portfolio growth

Got it. Thank you.

And our next question is from Brady Gailey with KBW. Your line is open.

Thanks, good morning. So, the $40 million of non-relationship loans that were sold in the quarter are there other non-relationship loans that where something similar could happen in future quarters?

I would say not material. Although having said that, we do keep a list here of broken promises. So, if clients say that they're going to bring over relationships and they don't do it, we'll call them up and bug them about it. And if you were in a time when you were looking to grow deposits, you'd probably pay a lot more attention to the broken promises list than you might otherwise. So definitely is an organization, we're paying attention to that. And I think people that want to be relationship-based clients here, great. Those that want to have a transaction, that's not really what we do. And as I said, the ones that we had and that we sold were really not part of our core business modeling came through acquisition. And I think that I don't really anticipate doing more of that, Brady, but we do expect our clients to honor their promises when we make loans with to them.

All right. And then with forward growth slowing, potentially you're going to be building some capital here. The stock is at 80% of tangible book value, so a decent discount is tangible book price. How do you think about share buybacks going forward?

I think I'd love to do, obviously, from our perspective at this price, it's very attractive. But I think, we have to be conservative and preserve capital here. And I think, our actions are let's work on the margin, let's work on the fees, let's manage expenses, make sure that our earnings are continuing to improve. And then, we'll see where that leaves us. I think, historically we've been opportunistic, and if we get to a point where we feel comfortable doing that we will. But we've got right now great credit history and current experience. We don't have unrealized losses in our investment portfolio. You need issues that might put stress on our capital at other banks are not an issue for us here. But again, we don't want to put ourselves in a position where we have to raise capital at a time. We wouldn't want to do that either.

And our next question is from Ross Haberman with RLH Investment. Your line is open.

You were fairly optimistic about, I guess the Arizona market, the Wyoming market and Montana. Could you talk about the growth of those markets where you see them today vis-a-vis where you view them, say on a six or nine months ago? And could you also comment on, I saw there was actually a small deal, I think in the Phoenix area, announced last night, a roughly book value. If you look at that, was that attractive to you? And if something came up like that, would you be a -- would you rather use your money to do something like that as opposed to buying back your own shares? Thanks. Bye.

Yes, thanks Ross. Good questions. So, for the optimistic view, I'll go first. Julie if you want to issue a rebuttal, go ahead. We have talked for a long time about our desire to expand in Arizona and add the mortgage team there that could help us in a counter cyclical way. I mean, you think that's presting [ph] part of the Arizona franchise is that there's a lot of connections between Colorado and Arizona from a culture and business and people standpoint, but also with their counter cyclical certainly in mortgages, which is an attractive piece of it. And so, we did add a Arizona mortgage team latter half of last year. I'm not sure exactly when they are getting ramped up. And we actually saw a nice benefit of that in Q1. March was our first month of making money in mortgages in quite a while. So, it was great to see some progress there. We have actually added mortgage folks up, mortgage loan originators in our resort communities. We have some coverage in Wyoming. We'd like to expand that and into Montana. The broader, core business, I think we have great opportunities in all three of those markets Montana has been a really pleasant surprise for us. We are very small there. Our permanent office, we just have an LPO right now. Our permanent office will be opening, Julie in the third quarter, you still think it?

September ish.

And so, I think that will be an important next step for us. The Wyoming folks are doing great and actually it's been a continued ongoing, pleasant surprise to the upside with our partnership with the former, the legacy Rocky Mountain Bank team there. So, all that I think is opportunity for us. Ross, it's all relatively small compared to our core footprint here in Colorado. But I think creating long-term shareholder value, those are all really important and valuable components to us. And you can't get there without starting. And so, each of those we are making progress. Your question about M&A, I think M&A is tricky right now, right? When our stocks where it is and with the uncertainty out there, we don't think that we are really interested in doing lots of deals. And so, when we see opportunities that are relatively small or aren't that great a fit, I think we will look at them and see if it makes sense. But realistically, we really like to do things that can be either strategically or financially or both meaningful to us. And those opportunities I think are out there now in a limited way. I think we all remember from the great recession, coming out of the great recession there were some real winners and losers among banks and the difference was kind of your financial strength in your capital base and your earnings and your operating performance and that's really what created M&A opportunities in the last cycle. So, I think we didn't know those folks at the small bank that was announced a blank on the name Commerce Bank or Bank of Commerce, you see something like that in Arizona. We did know them, but I think we'd like to do something that's more impactful if we had the chance.

And just one follow-up question in terms of competition, local competition, who would you say for -- one on the commercial real estate loan side? Who is your toughest local competition? Is it the Alpine Banks of Colorado or some of the bigger banks? Thank you, very much.

Yeah, the competitive landscape is just really interesting right now. Obviously, on the deposit side, it’s really tough. We're seeing very strong competition from all kinds of bank and non-bank players. Frankly, one of the questions we've heard the most from clients over the last six months will you guys open a trust account for me and build a bond ladder? And so, that's a challenge on the deposit side. On the loan side, and particularly CRE to your point, what we're seeing is there's a few banks that are still being competitive and sort of living in the past in terms of interest rates. And we're seeing other banks that have stock lending and they're saying we're not going to do CRE right now. So, I would tell you that if we see growth this year, I think that's why we're going to see it is because our clients may slow down the things they might have otherwise done, but there may be some interesting client acquisition opportunities here at terms and rates that are appealing to us because of people kind of pulling out of the market and being less aggressive than they were a year or so ago.

And sorry, just one final thing on those CREs, what co what kind of rates are you getting today on those types of new loans?

Do you know, Julie, what are average rates? I mean, if it gets up dramatically, let me just --

Our new production is averaging about mid seven. On the -- that was the question. CRE is maybe like six and then C&I is going to be more like eight. So, it's a bit of a difference and that's a pretty rough average, but that's what we've been seeing.

And we have a follow up question from Brett Rabatin with Hovde. Your line is open.

Just two quick things. Hey Scott, so first, I mean, in your prepared comments, it sounded to me like the message was that, you're implementing things in the current environment for the long-term improvement and growth of the bank. But I got a sense that maybe the profitability you were in intimating that maybe profitability might continue to have some drag I in the near term. Is that a fair assessment or can you talk maybe directionally about your comment on profitability?

Yeah, well I have said on these calls before that our path to success is probably not cost-cutting. It's growing revenues. And you look at the environment today and you say, well, how confident do you feel about revenue growth? And I think it's hard to say, yeah, mid-teen growth and this other stuff, right now because it's a very uncertain environment. So, I think we've looked at this and said, okay, let's kind of plan for the worst and act on that, and then hope for the best. And so, the plan scenario is how do we manage our liability costs as best we can? How do we grow loans cautiously at rates that make sense to us on terms that make sense to us? If that doesn't produce a whole lot of net balance sheet growth, then how do we manage our expenses so that we can improve earnings? And so, I think we talked about the fact that we're down 22 FTs [ph] in the first quarter, that was on purpose. We also talked about the fact that we've done a 6.9% cost reduction in April versus our cost in Q1 to drive expenses that are more in the mid-19 ranges. Julie, I think, guided to $19 million to $20 million a quarter, which is down from kind of 21 where we've been headed. So, you just do those things, those tweaks on those numbers. You're going to see, I think absent of further drama in the industry, you're going to see improved earnings. And then the hope scenario is all that stuff plays out. We see better mortgages, revenues, and income. We see improved trust and investment management fees, which we saw in Q1. Then you see a little bit more growth on a well-controlled expense base. And then all that adds up just a really nice expense, excuse me, earnings growth. And you do all that with a strong capital base, and then you see what opportunities come out of the downturn in the recovery here. I think, that's kind of the picture I was trying to paint indirectly. So, I don't being a little more direct about it, that's how we're thinking about it.

Okay. That's helpful. And then you talked quite a bit about the $1.4 million of reduction, and it sounds like you feel like you're going to have an improved efficiency with the production people with maybe some streamlining is there a concerted effort to maybe have a higher calling effort just to be out there talking to people a little more, if business does become a little more available and how do you see kind of the pullback if they're seeing it in credit by other banks affecting your production?

Well, you're -- assumption of your question is a 100% right. In our 19 locations. We've got these market presidents that have senior bankers on the bank trust and investment side -- bank trust investment, private banking side that we've now made as direct reports to the market president and then the other support people report to those folks. And what that does is that frees up all those top people that are most experienced bankers to spend less time being managers and administrators, more time getting out and being active in their markets and visible in their markets, and letting our clients and prospects COIs centers of influence, know that we're in business and taking care of our clients. So that was absolutely part of the reorganization that we did in those offices. We actually started that last fall, and I think our comment today was that we completed that in Q1, which we did. And is that going to drive more new business in Q2? I don't know. But over the course of the year, feel really good about it. I think it's going to be a really nice change for us and it does allow us to do exactly the thing you asked about.

Okay. Great. Thanks for additional color.

Thank you. [Operator Instructions]. And we have a follow-up question from Matthew Clark with Piper Sandler. Your line is open.

Hi. Thanks for the follow-up. Just want to clarify the margin commentary, 2.97% in the month of March is above the first quarter, which is a little, that doesn't seem to make sense to me of 2.93%. And then when you recap loan yields and securities yield deposits borrowings? I mean, it kind of suggests a margin that falls into the mid-250s? And I just want to square those two thoughts.

So, I think through the latter part of March and into early April, we were carrying more, like, putting down our balance sheet, which would have cost us a little bit more. I think we had some noise in our loan fees, as well in the first and second quarter or first and fourth quarters. So, it's a little bit lumpy from that perspective. But I think that, that at least gives you kind of a direction as to where we are seeing the NIM for the early part of April here.

I don't expect -- I would not expect NIM in the second quarter of 2.97. It's going to come in from there, from what we know today, Matt. But I...

We will see compression in the second quarter and then for sure.

Yeah. So, this is what we said before.

Yeah. And then maybe it's also around the borrowings. I mean, they were average, they average $195 million if you include the sub debt the quarter and the end of period was $314 million if you add again in the sub debt. And where do you see that $314 million going in total? Maybe just separate out the subject if you want. But what do you see borrowings trending?

Well, borrowings that were all well-trimmed down. We pulled nearly $150 million I think off the balance sheet in the first part of April, in the borrowings with the excess liquidity that we were holding on the balance sheet in March. And the growth we have seen in deposits since the end of March. So, I think we were up about $65 million net in deposits, which are going to have a lower cost than our borrowings have had that was in that spot NIM for March.

Okay. So that $150 million comes out in the year in April? Okay. Great. Thank you.

And I'm showing no further questions at this time. I would now like to turn the call back over to Scott Wylie for closing remarks.

Great. Thank you, Emmy. Just at this significant time of disruption in the industry, I'd like to give a special thanks to our associates and clients for the efforts of the associates and the support that we have had from the clients through this challenging time. First Western has demonstrated solid, steady progress in creating fundamental shareholder value in spite of significant headwinds. We have positioned our balance sheet and expense structure for continued headwinds. However, if cost of fund pressure stabilize and asset yields improve and fee income picks up, and our expenses are well controlled, we believe our earnings outlook could improve nicely. And with that, thank you everybody for their interest and support today. We really appreciate your interest in First Western.