MYFW - NASDAQ

Thank you for standing by, and welcome to First Western Financial's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Tony Rossi. Please go ahead.

Thank you, Latif. Good morning, everyone, and thank you for joining us today for First Western Financial's Third Quarter 2025 Earnings Call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; Julie Courkamp, Chief Operating Officer; and David Weber, Chief Financial Officer. We will use a slide presentation as part of our discussion this morning. If you've not done so already, please visit the Events and Presentations page of First Western's Investor Relations website to download a copy of the presentation. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Western Financial that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. And with that, I'd like to turn the call over to Scott. Scott?

Thanks, Tony, and good morning, everybody. Starting on Slide 3. We executed well in the third quarter and saw positive trends in many areas of loan deposit growth, growth in our net interest income, well-managed expenses and generally stable asset quality. This resulted in an increase in our level of profitability and positive operating leverage. Market remains very competitive in terms of pricing on loans and deposits. We continue to successfully generate new loans and deposits by offering superior level of service, expertise and responsiveness rather than winning business by offering the highest rates on deposits or the lowest rates on loans as other banks are doing. We continue to maintain a conservative approach to new loan production with our disciplined underwriting and pricing criteria. However, as a result of the additions we made to our banking team over the past few years as well as generally healthy economic conditions in our markets, we had a solid level of loan production, which was well diversified across our markets and industries and loan types. As a result of our financial performance and the balance sheet management strategies, we had a further increase in both book value and tangible book value per share, and we used our strong capital position to repurchase some of our shares during the third quarter, which was accretive to our tangible book value per share. Moving to Slide 4. We generated net income of $3.2 million or $0.32 per diluted share in the third quarter, which is higher than the prior quarter and a 45% increase from our EPS in the third quarter of last year. With our prudent balance sheet management, our tangible book value per share increased by 1.2% this quarter. I'll turn over the call to Julie for some additional discussion on our balance sheet and trust and investment management trends. Julie?

Thanks, Scott. Turning to Slide 5. We'll look at the trends in our loan portfolio. Our loans held for investment increased $50 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production. But with the higher level of productivity we are seeing from the additions to our banking team that we have made over the last several quarters, we are seeing a solid level of new loan production. While we are also seeing an increase in CRE loan demand that meet our underwriting and pricing criteria, new loan production was $146 million in the third quarter. The new loan production was well diversified with the largest increases coming in our residential and commercial real estate portfolios. And we are also getting deposit relationships with most of these new clients. We continue to be disciplined and are maintaining our pricing criteria, which resulted in the average rate on new loan production being 6.38% in the quarter. Moving to Slide 6. We can take a closer look at our deposit trends. Our total deposits increased $320 million from the end of the prior quarter. This was due to both new accounts and a buildup among existing client balances. We had an increase in noninterest-bearing deposits due to inflows we saw from title companies, driven by mortgage industry volume. Additionally, we had an increase in interest-bearing deposits as a result of the successful execution of our deposit gathering strategies. Now turning to trust and investment management on Slide 7. We had a $64 million decrease in our assets under management in the third quarter, primarily attributed to net withdrawals on low fee product categories, partially offset by improved market conditions on investment agency accounts. This resulted in increased $43 million or 2.7% during the quarter. Trust and investment management fees increased $100,000 from the prior quarter, primarily driven by the increase in investment agency AUM. Now I'll turn the call over to David for further discussion of our financials. David?

Thank you, Julie. Turning to Slide 8, we'll look at our gross revenue. Our gross revenue increased 8.7% from the prior quarter due to increases in both net interest income and noninterest income. Year-over-year, our gross revenue increased 15.5%. Now turning to Slide 9. We'll look at the trends in net interest income and margin. Our net interest income increased for the fourth consecutive quarter and increased 8.9% from the prior quarter, primarily due to an increase in our average interest-earning assets with the strong deposit growth we had contributing to our higher level of cash on the balance sheet. Our net interest income increased 25% relative to the third quarter of 2024. Our NIM decreased 13 basis points from the prior quarter to 2.54%. This was due to unfavorable mix shifts in both interest-earning assets and deposits as our deposit growth during the quarter was in higher cost money market accounts. The strong deposit growth during the quarter contributed to higher cash held on the balance sheet. As this liquidity is deployed into the loan portfolio during the fourth quarter, we expect to see NIM expansion. Now turning to Slide 10. Our noninterest income increased by more than $500,000 or 8.5%, which is 34% annualized from the prior quarter. This was primarily due to increases in all major fee categories, including trust and investment management fees, insurance fees and gain on sale of mortgage loans. The increase in gain on sale of mortgage loans was driven by a higher level of mortgage production and the increase in trust and investment management fees was driven by an increase in investment agency AUM as a result of improving market conditions. Now turning to Slide 11 and our expenses. Our noninterest expense increased by less than $1 million from the prior quarter. Most areas of noninterest expense were relatively consistent with the prior quarter as we continue to tightly manage expenses while also making investments in the business that we believe will positively impact our long-term performance. Turning to Slide 12. We'll look at our asset quality. As Scott indicated earlier, we saw generally stable trends in the loan portfolio in the third quarter with slight increases in NPLs and NPAs. This was primarily due to one loan that was downgraded during the quarter. And we had a minimal level of net charge-offs again this quarter. We had a slight increase in our allowance coverage from 75 basis points in the prior quarter to 81 basis points in the third quarter. Now I'll turn it back to Scott. Scott?

Thanks, David. Turning to Slide 13, I'll wrap up with some comments about our outlook. Overall, we continue to see relatively healthy economic conditions in our markets, and we're seeing good opportunities to add both new clients and banking talent due to the ongoing disruption from M&A activity here in the Colorado market. Our loan deposit pipelines remain strong and should continue to result in solid balance sheet growth in the fourth quarter. In addition to balance sheet growth, we also expect to see positive trends in net interest margin, fee income and more operating leverage resulting from our disciplined expense control. Based on trends we're seeing in the portfolio and the feedback we're getting from our clients, we're not seeing anything to indicate that we'll experience any meaningful deterioration in asset quality. The positive trends we're seeing in a number of key areas are expected to continue, which we believe should result in steady improvement in our financial performance and further value being created for our shareholders going forward. So with that, we're happy to take your questions. Latif, if you could please open up the call.

[Operator Instructions] Our first question comes from the line of Brett Rabatin of Hovde Group. Please go ahead, Brett.

I wanted to start with the deposits and the strong MMDA growth. And if I heard you correct, it sounds like that's a mix of internal efforts as well as maybe the mortgage department. Just any -- can you maybe go into a little more color there? And then are those levels sticky, the growth in the level?

Well, I think we've talked about our efforts to grow deposits and the fact that, that would happen a little bit in a lumpy fashion wouldn't be a big surprise given our history here. We do see large deposits coming in and out. And in this case, I think the things that we saw that happened in Q3 are deposits that are going to stay here and give us a higher deposit base to grow from into Q4.

Okay. That's helpful. And then the NPA that you added during the quarter, any color on that credit? And then just was there part of the provision related to a specific reserve for that NPA?

Yes. I think we have a number of credits that have performance issues over time, and this is one that is a C&I loan. We have been paying attention to it. We downgraded it in Q3, and we do have a specific provision for it. We expect it to be worked out and work through over time, the provision is more than adequate.

Okay. And then just maybe lastly, if I could ask on the margin. Julie, you indicated the margin would be up from here. Any magnitude that you could share in terms of what you think 4Q might look like, presuming we get a rate cut or 2?

Yes. I think we do have opportunity to see NIM expansion. If you look at the amount of liquidity that's sitting on the balance sheet, if we redeploy that into the loan portfolio at something like plus 200, I think that should drive NIM expansion there. We also certainly have the ability to continue to improve earning asset yields and lower our deposit costs. So I think we've got we've got a pretty nice path for NIM expansion in the fourth quarter.

Okay. David, any magnitude that you're thinking about in terms of basis points?

Yes. I'm thinking we can achieve something like 5 basis points of NIM expansion.

Okay. Okay. Great. Appreciate all the color.

Our next question comes from the line of Matthew Clark of Piper Sandler.

I wanted to start on the spot rate on deposits at the end of the quarter.

Yes. Matthew, it was 3.04%.

Okay. And then any updated thoughts on the beta you're looking to achieve with additional Fed rate cuts through the cycle and whether or not that starts to decline over time?

Yes. It has been declining, and it will certainly continue. We achieved somewhere around a 63% beta on money market accounts in the third quarter. And I think that's reasonable for the fourth quarter expectation as well.

Okay. And then the expense run rate going forward, I think some of the increase this quarter was related to incentive comp. But what are your thoughts on the run rate here in the fourth quarter?

Yes. The incentive comp can vary certainly with the financial performance. But I think something similar to third quarter as far as expenses is probably a reasonable estimate for fourth quarter.

Okay. Great. And then last one for me, just on the wealth management business. AUM down a little bit. It looked like it was in the lower fee products, though may have been deliberate, not sure. But any update on the kind of renewed growth and profitability improvement strategy there?

Yes. We've definitely been working on getting that going again, and we've replaced the team on the trust and in the planning side. We've got a new leader that joined us beginning in the second quarter for our planning team and definitely seeing some nice progress from them. As David noted, we saw AUM go down, which is not really something we manage for. We're really more concerned about the fee income, and we saw fee income grow in the agency accounts in Q3, which is what we want to see. So definitely nice progress from that new team with, I think, a lot more to come. And Matt, just a little bit more color on deposit pricing. With the increase in deposits, you're always going to see relatively expensive at first, and then it's going to moderate over time typically with these new relationships and additional deposits you bring in. Our average deposit costs last quarter peaked at 3.22% in August, and then we're down about 3.15% in September. And as David said, ended the quarter at 3.04%. So you're seeing a nice trend just within the quarter there. So hopefully, we can see that continue into Q4.

Our next question comes from the line of Will Jones of KBW.

I wanted to circle back to the deposit growth. Obviously, a fairly banner quarter there for deposits, and it sounds like you expect maybe to see a little bit more balance sheet growth in the fourth quarter here. But should we, in any way, view this large influx of deposits as a way to prefund your expected growth for 2026, and maybe '26 then becomes more about just remixing the balance sheet? And then just, I guess, pairing within that, you obviously have a fair amount of liquidity from the deposit growth. How should we think about you guys being a little more opportunistic with securities purchases at this point?

Well, I think that was a 3-part question. So let me see if I can get them all here.

Yes. I'm sorry about that through...

Well, we appreciate the question. So I think you're right on with the idea that we were opportunistic in bringing deposits on. We have done a number of things over the last 12 months to get the team here focused on deposit growth. We know we can grow loans, and we wanted to see the loan-to-deposit ratio come more in line. And so the way you described that is reasonable. Although I would say it's not like a one-off thing that prefunds 2026 or something like that. I mean, I think this is an ongoing effort that goes throughout the product group throughout the -- our PTIM world, planning, trust and investment management world goes definitely through each one of our 19 locations. We require relationships with each loan, and that includes deposits. And so very much a focus of the company. I think that we're seeing a lot of market disruption out there. So on one hand, you've got this competitive environment for deposits, but you've also got people that don't want to be with really large out-of-state banks. And that disruption is continuing, I would say, increasing, and that creates opportunity for talent for people that we can bring centrally to support our teams. We can bring new people into our teams and then we're bringing in new clients. And so I think that's going to continue. I don't really see any reason to think that's going to abate. And at the same time, we've got this tiny low market share in most of our markets. We're kind of 1% or 2% in our bigger markets and less in the newer markets. So in strong and growing economy. So I think all those things set up for some nice continued asset growth into the fourth quarter and next year.

Okay. Helpful response. And just as I kind of like pair some of those comments, just into how the margin looks for 2026. As I kind of look back how you've transformed the margin this year, about 20 to 25 basis points of year-over-year expansion. Do you think that magnitude is repeatable again in 2026? Is the opportunity there from both a deposit pricing standpoint and loan growth standpoint to see that kind of magnitude again in 2026?

Well, what I've been seeing is that we really got heavily impacted by that rapid run-up in short-term rates and the inverted yield curve and that we thought that, that would turn around and we'd see nice deposit betas as rates declined, which we have. And the fact that we've seen 22 basis point improvement from Q3 of last year to Q3 of this year, I think it's a nice start in that. We've moved out of the 2.30s into the 2.50s. And I continue to think that in normal environments, my banks, including this one, have produced 3.15%, 3.20%, 3.25% NIM for the way we do business. And that's where I think we're going. I don't think we're going to get there next quarter. I don't know if we can get there next year, but that, I think, is going to continue and the fact we've seen that amount of improvement here over the last 12 months in spite of the growth that we've seen on the balance sheet, I think, is really promising and bodes well for continued operating leverage into 2026.

Yes. Okay. Very helpful there. And then lastly for me, you touched a little bit on in some of your comments, just the organic opportunity that's arisen from some of the M&A disruption. But there has been a lot of deal announcements. There's been a lot of price discovery. So just curious how you think about your own scarcity value within that? And then maybe how you view yourself as a downstream buyer potentially of banks.

Well, we believe that our path to -- we believe our job is to drive shareholder value. And we believe our path to creating shareholder value is creating operating leverage in our business here by growing revenues a lot faster than expenses. And that turns into improved efficiency ratio, improved bottom line. And we're not happy where the profitability is. We're not happy where the efficiency ratio is. But we've made a bunch of investments here over the last couple of years and changes that are now paying off, and we're seeing the green shoots of that, and that's going to drive continued organic growth and operating leverage for us. And now talked a couple of times about why we think that continues into '26 and beyond. So specifically, in terms of scarcity value, clearly, First Western is a unique franchise that both is becoming more unique in Colorado, but I would say also more unique as a successful wealth management business on a national basis. I mean I think the bank, in a lot of ways, most similar to us in terms of their balance sheet and AUM was FineMark in Florida, and the fact that they sold for 6.5x revenue and 92x trailing earnings to a really good buyer, I think, is an interesting data point for us. And I know others use other metrics on that, but I mean, I think that's what the data is. So yes, I think there is good scarcity value here. I think our clients, frankly, see that and they find us to be a desirable place to do business. I think other bankers around the country are seeing that, too. In terms of acquisitions, we would love to be buyers. We've done that over the years a lot, 13 times, and we just have to get our stock price back to something reasonable. And definitely, there's a lot of activity out there that we could benefit from if we can get our stock price back in line or when we get our stock price back in line.

Okay. I appreciate that. Appreciate that response. That's all for me.

Our next question comes from the line of Bill Dezellem of Tieton Capital Management. Please go ahead, Bill.

First of all, Scott, it sounded like you may have had some additional comments that you were going to share to the last question. I'll let you do that if there's something more you want to add.

No, I'll add a few comments at the end. Thank you, Bill.

All right. So continuing down the deconsolidation route, would you talk about what transactions have been most disruptive and possibly favorably impactful for First Western?

Yes. I don't entirely understand it, Bill. So I can't really give you a really solid prediction of what's going to happen with all this. But I would tell you that when Guaranty Bank and CoBiz sold, I thought that was going to create a lot of opportunity because our type of clients definitely were at those 2 banks. And I thought with them being acquired by out-of-state banks, that was going to create a lot of opportunity for us. As it turned out, it didn't. And I think a lot of the reason for that is the bankers stayed in place for a while. And then when they did move, they were really bid up by other players. And so it got to be really expensive to bring those folks over. Now with the second-tier acquisitions that we're seeing, for example, with Citywide, which was a really great local family-owned and family-run bank, they sold to Heartland, I don't know, 5, 7 years ago, something like that. And then I think Heartland really had a strategy of trying to run these local banks as the way they had run historically. UMB buys Heartland, UMB is going to drive a UMB culture into what used to be Citywide. And so we've seen some good people and good opportunities come out of that. And so I think interestingly, it's sort of the second-tier acquisitions that really create more opportunities in some way. And then the FirstBank one in this market is just really interesting. Like FirstBank is a great retail bank and just really loved by Coloradans. So there's this emotional tie that I don't entirely understand. But definitely local people here, local business leaders, local entrepreneurs have strong relationships with that company. And it's just going to be a challenge for a big national player to keep that passion. And we'll see. I mean we've had lots of calls. We have clients that bank here and bank there. And you can be pretty sure that those folks are calling us to saying what additional capacity you guys have for us to stay with you guys. So I don't know how all that plays out, Bill. I do feel like we're seeing more benefits of the disruption in today's market than what we saw 5 or 7 years ago. And again, I'm not sure all the reasons why, but it's been really good for us so far.

So let me take that one step further. Do you sense that you have the opportunity to become the new bank that Coloradans love that others look at you and go, we don't even know why, but they sit on this pedestal.

Well, I do know our clients love us. We're never going to be a retail bank the way FirstBank was. Like FirstBank, one of their strengths was they did one thing. And over the years, I've talked to people like John Ikard and other CEOs over there, and they're like, well, what do you think about the trust and investment management business? And I would tell them and they would say, well, that's fine, but we're never going to do that at FirstBank. So I mean they're just very focused on being a retail bank. And I think they did that better than anybody. And we're not ever going to do that. We're not going to open branches on every corner like they did and stuff like that. So I think we'll continue to be in First Western. I know that our folks are very committed to their markets and their communities. We talk here about taking care of our 4 key stakeholders, which are shareholders, associates, clients and communities. And so we try and do those things that are right for our people and create that emotional connection that you're talking about. And certainly, with our niche, that's something we would hope to expand and build on.

That's helpful. And then relative to Arizona specifically, are you seeing anything from a transaction standpoint that you see as benefiting your opportunity for bringing on new people there?

Well, I don't think we've announced it yet. We have Julie, who is telling me. So I was thinking I was going to make some news here, Julie, but you're ahead of me. But we actually recruited one of the top folks out of First Republic to build our franchise in Arizona for us, and he had a garden leave period and all that stuff, but he's now joined us. And we are really optimistic about what we think the team there can do in the years to come. I think that, that Arizona market for us, if we had the same tiny market share that we had in Arizona that we have in Colorado, we would be -- what's the number, Julie, $4 billion, $6 billion, bigger or something like that. And so that's what we've charged the team there to come up with. I think we've got a leader in place that can do it.

Great. Congratulations on that. One additional question, please. The excess cash that you have on the balance sheet, how long are you thinking that it will take to redeploy that cash?

Yes. Actually, that was one of the 3-part question that I missed on, David. And do you want to talk about what we've done already with investments and then what our thoughts are.

Yes. I mean, Bill, if you kind of look back at the history of our balance sheet, we certainly have our liquidity and capital really more earmarked towards the loan portfolio. And I think that continues. Now that being said, when there are opportunities from a bond perspective that we like, we will take advantage of them. So we did add about $50 million in the third quarter to the bond portfolio, and those were primarily floaters that got us a nice spread over interest-bearing cash, which still really remains highly liquid assets, government guaranteed bonds, agency GSEs, things like that. So I think the focus is still to deploy that liquidity into the loan portfolio. But as we see opportunities in the bond portfolio, we'll certainly assess those as they come up.

So 2 follow-on questions to that. Number one is that the $49 million available for sale that's now on the balance sheet that you're referring to. And then that redeploying of that, I mean, is this something that is a 2-, 3-quarter phenomenon given what you see with economic activity? Is it something you think by the end of the Q4 -- is it more like full year next year? I guess I'm looking for a bit more solid view of how you see loan demand relating to that excess cash -- excess liquidity, I should say.

Yes. Good question, Bill. We expect our loan demand trends to continue. We had a really strong second quarter in loan growth. We had a good quarter again in the third quarter as far as loan growth. And we -- given our loan pipelines and what we're seeing in our markets, we do expect those trends to continue. So I don't think it's a year down the road type of thing with those trends continuing as far as redeploying that liquidity.

I would just add, Bill, that we have seen a modest growth rate in the balance sheet, right? Like I think that our expectation is that we can grow single digits, mid-single digits, maybe low double digits. We're not interested particularly in growing faster than that. And I think that you're going to see this growth continue at a moderate pace here into 2026 from everything we know. Not expecting to go out and lend all this money out next week. That is not in our game plan.

I would now like to turn the conference back to Scott Wylie for closing remarks. Sir?

Great. Thank you. We said for several quarters that we had success playing defense and that we were going to shift back on to offense in 2025. We had some pretty stiff headwinds there for a while with short rapid run-up 525 basis points in short-term rates. We had that inverted yield curve for an extended period. We have 3 of the 4 largest bank failures in U.S. history, including First Republic, which very much was seen as a successful player in our niche. But we said, we got through the defense, let's shift over to offense and really leverage the investments that we've made over the past couple of years in 5 key areas. We've replaced our technology infrastructure. We've moved to a completely cloud-based environment. We've installed middleware. We've rolled out a new digital platform. We're adding all kinds of new services and tools onto that tech platform that really, I think, help us be a leader from a tech standpoint. We've reorganized number two, our product teams, our loan deposit, investment management planning, trust, mortgage teams have all been strengthened and reorganized. We've expanded our PC local office teams. We've given them a new proprietary toolbox for growth and rolled that out here in the last quarter. We've reset and standardized our internal control processes for more efficiency and value add so that we're competing on value and not on price. And number five, we've rebuilt our credit and risk and support and marketing teams to support the First Western that we envision for the future. And that's all paid for and in our current expense structure. And so we were hoping to see some green shoots of progress in that this year, and that showed up in Q3. Our net interest income was up 35% Q-over-Q, quarter-over-quarter annualized. Our fees were up 31.6% quarter-over-quarter annualized in each of our key areas, David pointed that out, which I thought was a really great pointing in PTIM, in insurance, in banking, in mortgages, we saw nice growth. Our pre-provision net revenues were up almost 35% quarter-over-quarter annualized, and our efficiency ratio is trending down with operating leverage up. So thinking about 2026, we do our business planning in the fourth quarter. And so that's a big project that we're doing now with each department head in each office. And so we'll see how all that plays out. But if you just look at Q3 year-over-year trend lines, then our net interest income is up 25% year-over-year, and that was done with modest growth in the balance sheet plus NIM improvement, which drives nice operating leverage, which we saw. Our fees were up 21% from September of last year to September of this year. And our operating expenses were only up 4%, and that was mainly due to incentive comp that is driven off of revenue growth. So if we had higher expenses in Q4 because we're paying incentive growth because we're seeing good -- incentive comp because we're seeing good growth, and that's a good problem to have. So looking past this quarter, our intention is to get back to be a high financial performance like we were earlier in this decade. And we have a clear path to 1% ROAA and plenty of room beyond that. We were honored to be named one of just 16 KBW Bank Honor Roll members in 2025 for our performance over last year. We were just, I think, made as of Q3 now, Piper Sandler's list of the top 200 U.S.-listed banks in size. And then we just saw our schedule for the Hovde Conference down in Florida in a couple of weeks. And the organizers there asked us to add some time slots because of high demand. So I think there's good momentum here. We're really optimistic about how we can finish the year and continue to deliver shareholder value into 2026. Thanks, everybody, for your support, and thanks for dialing in today. We really appreciate it.