Operator: Thank you for standing by. And welcome to First Western Financial's Second Quarter 2020 Earnings Conference Call. Currently, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. I would now like to hand the call over to Lisa Fortuna, Investor Relations. Please go ahead. Thank you, and good morning, everyone. Thanks for joining us today for First Western Financial's Second Quarter 2020 Earnings Call. Joining us from First Western's management team are Scott Wiley, 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 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 would like to remind you that this conference call contains forward-looking statements with respect to 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. With that, I would like to turn the call over to Scott.
Scott C. Wylie: Thanks, Lisa, and good morning, everybody. We executed well in the second quarter and saw positive trends in many areas, including deposit cost deposit growth, net interest margin expansion, managed expenses, and stable asset quality. This resulted in another quarter of solid profitability. We continue to maintain prudent risk management and conservative new loan production practices. Supported by the banking talent over the last several years, and good economic activity across our markets, we achieved healthy loan production was diversified across markets, industries, and loan categories. As a result of our financial performance, and the balance sheet management strategies, further strengthened our tangible book value per share this quarter. Moving to slide 4. We generated net income of $6.7 million or $0.57 per diluted share in the second quarter, a 129% and 119% higher respectively than the year ago period. With our prudent balance sheet management, our tangible book value per share increased by 2.6% this quarter to $25.53. Now I will turn the call over to Julie for some additional discussion of our balance sheet and trust and investment management trends. Julie?
Julie A. Courkamp: Thank you, Scott. Turning to slide 5, we will look at the trends in our loan portfolio. Our loans held for investment increased 23 million from the end of the prior quarter marking the fifth consecutive quarterly increase. On a year over year basis, total loans increased 7%. We remain conservative and disciplined in our new loan production, and the higher productivity of the bankers added over the last several quarters is supporting a stable pace of loan originations. New loan production was 115 million in the second quarter, and was diversified across various markets and loan types. We focus on relationship-based lending. We continue to be disciplined with respect to pricing, which resulted in the average rate on new production of 6.37% in the quarter. Which was 6 basis points higher on a quarter over quarter basis and higher than the average rate of loan payoff of 5.89% in the quarter. Now moving to slide 6, we will take a closer look at our deposit trends. Our total deposits increased from the end of the prior quarter, with growth in money market accounts, partially offset by a decrease in time deposit accounts. On a year over year basis, total deposits increased 12.6%. Average noninterest bearing deposits increased 18 million or 5.1% in the quarter. Turning to trust and investment management slot on slide 7. We had a 41 million increase in our assets under management in the second quarter primarily attributed to improving market conditions. Investment agency AUM increased $91 million in the quarter and 122 million on a year over year basis. Which is our highest fee category. As David will cover shortly, our trust and investment management fees have increased 5.1% from the second quarter of 2020. We have restructured that team for growth. Now I will turn the call over to David for further discussion of our financial results.
David Weber: Thanks, Julie. Turning to slide 8, we will look at our gross revenue. Our gross revenue increased 1.8% from the prior quarter primarily due to an increase in net interest income partially offset by a decrease in noninterest income. Our gross revenue has increased 16% from the second quarter of 2020. Now turning to slide 9. Look at the trends in our net interest income and margin. Our net interest income increased 4.3% from the prior quarter due to an increase in net interest margin and an increase in day count. Our net interest margin increased 9 basis points from the prior quarter to 2.9%. This was primarily due to a decrease in cost of funds combined with an improved mix shift in average interest earning assets. The yield on interest earning assets increased 4 basis points driven by a favorable shift toward higher yielding loans while the cost of funds declined 4 basis points due to an improved funding mix and lower rates on time deposits. Our net interest income increased 21.7% from the second quarter of 2020. Due to a 23 basis point increase in net interest margin and an increase in average interest earning assets. Now turning to slide 10. Our noninterest income decreased by $0.3 million from the prior quarter. This was primarily due to a decrease in net gain on sale of mortgage loans given lower origination volume due to higher mortgage rates, a decrease in risk management and insurance fees, partially offset by an increase in bank fees. Now turning to slide 11 and our expenses. Our noninterest expense increased by $1.0 million from the prior quarter. The increase was due to an increase in technology and information systems, data processing, and marketing. The increase was primarily attributable to a $0.4 million nonrecurring charge related to the write off of certain previously capitalized technology assets. Negatively impacted diluted EPS by $0.03. Our efficiency ratio was 74.03% compared to 73.11% last quarter and 78.83% in the second quarter of 2020. Going forward, we expect quarterly noninterest expense to be between $20 million and $21 million, and we will continue to exercise disciplined expense control. Now turning the slide 12, we will look at our asset quality. As Scott indicated earlier, we saw stable trends in the loan portfolio in the second quarter with relatively flat nonaccrual loans and NPAs. Additionally, we had no loan charge offs for the second consecutive quarter. Our allowance coverage was 75 basis points of total loans, as improved trends during the quarter drove a release of provision of $0.5 million. Now I will turn it back to Scott. Scott?
Scott C. Wylie: Thanks, David. Turning to slide 13. I will wrap up with some comments about our outlook. Based on our second quarter performance and what we are seeing in our markets, we are encouraged and expect further improvement in our financial performance during the second half of the year. Overall, we continue to see relatively healthy economic conditions in our markets. We are seeing good opportunities to add both new clients and banking talent, due to the ongoing disruption from M&A activity in our markets. We have also recently added new leadership in Arizona where we are beginning to see good traction and opportunities for growth. Our loan and deposit pipelines remain strong and should have result in improved balance sheet growth in the second half of the year a key objective of ours. In addition to balance sheet growth, we also expect to see positive trends in our net interest margin, or fee income and more operating leverage resulting from continued revenue growth and ongoing expense discipline. We had a net margin expansion of 26 basis points in 2025, And another 19 basis points so far in 2026. While we remain disciplined on our expense control, we believe there will be opportunities invest in our business by adding banking, trust, and investment management talent and new clients due to the disruption caused by the continued M&A in our markets. These investments in the business will drive future shareholder value. The ongoing disruption from M&A activity in our markets creates opportunities for us to add revenue growth talent. We will take advantage of these opportunities if and when they materialize. As well as opportunities to add new clients. Based on the trends we are seeing in the portfolio, and the feedback we are getting from our clients, the credit outlook appears stable and healthy. The positive trends we are seeing in a number of key areas are expected to continue. Which we believe will result in steady improvement in our financial performance and further value being created for our shareholders in 2026. So with that, we are happy to take your questions. Operator, please open up the call.
Operator: As a reminder, to ask a question, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. Our first question comes from the line of Woody Lay of KBW. Your line is open, Woody.
Analyst: Hi. This is Woody stepping in for Wood Lay. Thanks for taking my question.
Scott C. Wylie: Good morning, Woody. Wanted to start off with loans. I saw you guys noted and mentioned earlier that you have a strong loan in deposit pipelines. And I was wondering if you could give a little more color on where that growth is coming from and how you are thinking about overall loan growth for the second half of the year. Sure. Let me start with a short and then give a little bit more detailed 1, if that is okay. The short answer is we have seen a really nice balance in where our loan production is coming from. And on the loan page of the deck, you can see there that we saw, you know, our usual $100 million a quarter in payoffs and paydowns. In the production that we did in the 0.25 of whatever, it is $115 million-ish. Was better than that, but not enough to drive the growth that we saw that we would see. You know, the longer answer to the question is we are seeing some impact as I had predicted in the prior 2 quarters from all this market disruption. Which is a real 2-edged sword. 1 side of the sword is that the clients are disrupted and the bankers are disrupted and there is opportunity there. And so we are definitely taking advantage of that. And, you know, we will see more results from that. We could talk about that more in the Q&A if you want. But the other side of the sword is that we are seeing real price competition on loans. And so, you know, we have made the decision here today right or wrong, but this is what we said is that we are going to be disciplined in our pricing and in our terms. And so, for example, we saw a loan and credit company last week where it was proposed to be priced at 125 over treasuries, for a do not know what a 5 year, 7 year fixed rate loan. And you we are just not gonna do that. That does not make sense to me. And the fact that, you know, others that have entered the market here that want to defend their clients or be really aggressive with pricing, I think, because it is understandable why they could do that. But that does not mean we are going to chase that. So I think we have seen a really nice increase in NIM continue. I mean, the fact that we have done almost a bunch of improvement in the first half of the year in NIM as we did all of last year I think, is a really telling story on how the NIM improvement that we predicted you know, 9 months ago to continue I mean, we did not think it was gonna go this fast, but I think it has because we focused on NIM. So David has some really interesting analysis that we can delve into if you want about kind of the trade-off of NIM and growth. But the short answer is, if we grew $280 million in net growth by the end of the year, And just kept our NIM flat from here. That would actually have the same income effect as growing zero in assets and having 10 basis points a quarter in improvements. Or, you know, if you take the midpoint, $130 million in growth a quarter, and a 5 basis point improvement per quarter in NIM. So I think that certainly got the leadership team here thinking, you know, maybe we back off the pace of improvement of NIM in the second half and see a little more asset growth. So I and we have talked to the front office about that. We had our 2-day annual summit earlier this week, and so we asked the 19-office heads that were here you know, are we missing the market by a little or a lot? And they said, you know, in some cases, a lot, in some cases, a little. And we are a little more competitive. We think we can grow faster. So that is how we are looking at it. And I am sorry that turned out to be such a long answer, but I think it is a great question. Yeah. that is super helpful. Really appreciate all of that color. And wanted to touch back on what you said earlier about taking advantage of the market disruption was wondering what you guys are seeing on the hiring front and how you are expecting this to impact expenses moving forward. Yeah. Another great question. So we have added 12 new front office people into the profit centers so far this year. and 8 new people into the product group areas. And if you look at people that are actually just direct salespeople, we have added 10 of those, which will be included in the 20 I just mentioned. So far this year. You know, 1 of the challenges that we have with that kind of hiring is, you know, our experience over the years is sometimes it takes some time to get those people up to speed. You know, the first day they get here, they do not typically produce a lot of new activity. So we have done a couple of things to try and accelerate that. The first thing we did is we started a program Actually, had this idea in February that, you know, to really try to activate this shift back to the offense that we should get out and call more. And so I said, I would do 100 calls between February and the end of June And Julie got ahold of that and called at Westwood 100. Because we have these Westward initiatives this year. To try and drive growth. And so we ended up I think I ended up doing a 168 calls So I luckily beat my 100-call goal because that would have been otherwise. But I think in the 100 program, we ended up doing what was the number, Julie? 963 or some number like that. Almost 4 thousand calls company wide. And we actually raised the bar on what the call was defined as. It had to be planned. It had to be a face-to-face, had to have a call plan around it and a follow-up in the CRM. Stuff like that. And we had an 88% increase in calls year over year. Yesterday, we had our board trust committee meeting and our trust department which, you know, trust officers are not the ones most famous for being proactive salespeople. Our head of the trust department put a slide in there for the board that said, from reactive to proactive, trust officer calls were up 180% in the first half of the year. So definitely a culture shift in the organization, including on the P&L side. About getting out and making calls. Then if you would allow me, can you talk to me a little bit about this activation program we have for new hires?
Julie A. Courkamp: Yeah. So several months ago, we implemented a program to help the new hires coming into the organization, most specifically those that are client facing. To really get launched as quickly as possible to understand our product set, to understand our culture, and our kind of methodology for client service. And that has been implemented 2 months ago. And every new hire in those front office roles is going through this additional program that we have added into it just to make sure that we are optimizing their ability to, you know, get out and tell the First Western story and serve clients well.
Analyst: Great. That is all super helpful. Really appreciate that. Thanks for taking my questions, and I will step back.
Operator: Thank you. Our next question comes from the line of sorry, Our next question comes from the line of Matthew Clark of Piper Sandler. Your line is open, Matthew.
Matthew Clark: Hey. Good morning, everyone.
Scott C. Wylie: Morning.
Julie A. Courkamp: Morning.
Scott C. Wylie: Morning, Matthew.
Matthew Clark: Yeah. I just wanted to touch on the expense guide first. You gave the range, and I think 3Q, at least the last couple of years, 2Q to 3Q, you have seen a bump up in comp. And I am just curious if that is still expected to be the case this coming quarter, and if there are some offsets to that.
David Weber: Well, just to be clear for Q2, we had some onetime expenses in there related to technology and data processing, which I think totaled a little under $0.5 million. So the baseline for second quarter appears higher than what it actually is.
Scott C. Wylie: I think, you know, looking forward, you know, we have got these new hires that we have brought on in production roles. That we are working to activate like we just talked about. So I think we are going to see a higher expense which is why we are guiding now to 20 to 21 instead of 19 to 20. You know, our hope is that expenses are higher in Q3 because we have more incentive comp, because we are seeing some nice growth because we do accrue for incentive comp. Based on a number of performance metrics, but primarily revenue growth and earnings. Growth. So you know, that would be that would be a good problem. But absent that, do not know, David, if you have more to add, but I think, you know, the shift that we have seen the increases in expenses did show up already in Q2, and we do not we do not really anticipate additional Core expenses in Q3.
David Weber: Yeah. Matthew, there is no seasonality component that occurs every year in Q3. that is what you call expenses to increase. But there is a lot of dynamics whether it is hiring or incentive comp performance or things like that were likely causing some of those spikes.
Scott C. Wylie: Yeah. The other thing, Matthew, is if you look back to 2023, our expense increase over these 3 years, we have earned $3 and revenue growth core revenue growth for each dollar in core expense growth. So it is pretty good operating leverage, which we would expect to continue.
Matthew Clark: Yep. Yep. Good. And then just on the deposit costs, Wondered what the spot rate at the end of June if you had it, and then your thoughts on pricing and overall deposit costs going forward, you know, assuming the Fed stays on hold, but this higher for longer environment, what that is doing to your competition.
Scott C. Wylie: Yeah. So if I could start and then David, if you could fill in the blanks here. Because they are gonna be some. You know, q back to your seasonality question. Q2 for us is almost always a down quarter. We see about 2% shrinkage in Our core deposits in Q2. And know, when we got into April this year, we sure enough saw that. But it is interesting. You know, we have had a real focus on core deposit growth, that brought this deposit growth back to be positive in May, positive in June, and, of course, we ended up 2% positive for the quarter. And notably, our net non-interest-bearing deposits were up, like, 5% quarter over quarter average balances. So some really good improvements in the mix, which as David said in his comments has been a focus for us.
David Weber: Yeah. And specifically on the spot rate, Matthew, 2.8% for the spot rate of deposits at June 30.
Matthew Clark: Okay. And your and your thoughts about deposit costs going forward, can you continue to chip away at those, or do you feel like this environment makes it more difficult?
Scott C. Wylie: I think it makes it more difficult. You know, the cost of deposit acquisition has certainly increased in our markets given the disruption that we have seen and you know, trying to hold on to their deposits for obvious reasons. We have not necessarily seen pressure from our existing depositors on deposit rates. But that cost of new acquisition has certainly crept up a bit.
David Weber: Then from a time deposit repricing standpoint, you know, we have had some benefits there over the past few quarters. But our time deposit portfolio is currently at 3.64% on a spot basis. So I do not know that there is a ton of opportunities still left in that portfolio. I think our biggest opportunity is going to be on continuing to chip away at improving our mix of deposits. Through noninterest bearing deposit growth. So from a core basis, I do not think we are seeing a lot of opportunity on changing rates, but changing the mix is definitely the focus.
Matthew Clark: Got it. Thank you.
Operator: Our next question comes from the line of Ross Haberman of RLH Investments. Your line is open.
Ross Haberman: Good morning, Scott. Nice quarter.
Scott C. Wylie: Good morning, Ross.
Ross Haberman: You seem to indicate that if I am hearing you right, if rates stay the same, you could see some improving margin. Is that correct? From what I am hearing from you?
Scott C. Wylie: Well, that is certainly what we have seen the last several quarters and we do think that will continue. But I am gonna put a caveat on that this quarter. And say that the trade off between growth and NIM improvement is definitely on our mind. And our feeling is probably drives more shareholder value from where we are today given the disrupted markets to be a little bit more flexible on NIM improvement to try and drive better growth in Q3 than what we have seen year to date, better asset growth.
Ross Haberman: Do you see a pickup in interest rates. Let's say they raised the rates a quarter percent for argument's sake. How do you see that affecting your margin expectations? You know, a 1-time rate increase.
Scott C. Wylie: So historically, we try and run a balance sheet. So our interest rate risk is neutral. Right now, we have shifted to be more neutral. Although, I think we are still liability sensitive. David, do you wanna speak to that?
David Weber: Yeah. We maintain a relatively neutral balance sheet profile, and that is certainly been a goal of ours over the past few years. We do lean slightly liability sensitive. A 25-basis-point decrease by the Fed will benefit us a little bit. Let's call it 1 to 2 basis points in NIM, but it is not all that material.
Scott C. Wylie: And that is off an increase. Yeah.
Ross Haberman: So Okay. Just 1 follow-up question. Asset quality looked really good. You got rid of all those nonperformers, which plagued you the last year or so. Are all just completely gone now?
Scott C. Wylie: Yeah. Yeah. The 2,000 credits we had from 2023 or whenever that was, are long gone. We have seen a return to kind of zero losses per quarter you know, I think if you go back 2 or 3 quarters, had, you know, 0.01 or 0.02, but it is basically been zero most quarters recently and most quarters over the last 20 years. So definitely in terms of net losses, we seem to be back at zero. In terms of NPAs, we were flat quarter over quarter, a slight improvement, at about 50 basis points But from what I know today, assuming no surprises this quarter, We are going to see some improvement in that in Q3. So, you know, I think our underwriting standards that we have always had here of requiring 3 sources of repayment, personal guarantees, hard collateral, Those are definitely protecting us against losses in normal economic environment like we are in. in.
Ross Haberman: Nothing in the criticized or substandard that you are losing sleep about?
Scott C. Wylie: Nothing causing us to lose sleep. No. In fact, both classified and criticized.
David Weber: Loans were slightly down in the quarter from last quarter.
Ross Haberman: Thanks, guys. Nice quarter. Have a nice week.
Scott C. Wylie: Yep. Thanks, Ross.
Operator: Thank you. I would now like to turn the conference back to Scott Wylie for closing remarks. Sir?
Scott C. Wylie: Okay. Great. Well, you know, the key themes this quarter I think, are largely unchanged. You know, First Western, if you compare us to other $2 billion to $25 billion banks, nationwide, We are in some great markets. We have top-decile mix of affluent markets We have a great niche. We are in the top 3 of all of those banks. In terms of wealth management fees as a percent of revenues. And we have great bankers Historically, our organic annual asset growth rate is well above peers. We are about double the median for that group. And well into the top quartile and all that with very high asset quality. You know, we are continuing to see earnings normalize here. We typically do not talk about our internal plan. On these calls, but I would tell you we are performing well against plan. On an earnings basis. And we think that the opportunity to continue to see the kind of gains that we have seen so far this year-over-year, ago that is gonna continue through year end, we believe. So with that, thanks to everybody for dialing in. Have a great day.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
