First Western Financial - Earnings Call - Q2 2025

Executive Summary

• Q2 EPS of $0.26 and gross revenue of $24.16m fell below S&P Global consensus, driven by a sharp sequential increase in provision expense and normalization of one-time gains from Q1; NIM expanded to 2.67% and efficiency improved modestly, while net income declined QoQ to $2.5m. EPS est: $0.3567* vs $0.26 actual; revenue est: $25.28m* vs $24.16m actual.
• Positive operating momentum: loans +4.7% QoQ to $2.54B on diversified production ($167m) and deposit costs eased (spot 3.07% at June-end), lifting NIM +6 bps QoQ; AUM rose 4.5% QoQ on markets.
• Funding and liquidity: interest-bearing deposits grew 2.8% QoQ; noninterest-bearing deposits fell seasonally; FHLB/FRB borrowings increased to $163m (over-night, mid-4%); management plans to pay these down as deposits rebuild in Q3.
• Outlook/guidance: management expects NIM flat in Q3 then to expand in Q4 toward low–mid 2.70s (consistent with prior “exit NIM” commentary), OpEx run-rate unchanged at $19.5–$20.0m, and continued balance sheet growth; NII sensitivity to 25 bps cut ~-$1.0m, slightly reduced vs prior due to lower rate sensitivity.

What Went Well and What Went Wrong

What Went Well

• NIM expansion and deposit cost relief: NIM rose to 2.67% (+6 bps QoQ) on lower deposit costs and higher earning-asset yields after redeploying OREO sale proceeds; CEO: “We executed well…expansion in our net interest margin…redeploy[ed] cash from the sale of our two largest OREO properties into loan production and securities purchases”.
• Strong loan growth and pipelines: Loans +4.7% QoQ to $2.54B on $167m diversified production; management cites “solid level of loan production” and healthy pipelines expected to sustain balance sheet growth in 2H.
• Operating discipline: Efficiency ratio improved to 78.83% (from 79.16% in Q1 and 82.25% YoY); OpEx decreased $0.3m QoQ; TBVPS increased to $23.39 (+0.9% QoQ).

What Went Wrong

• EPS/revenue miss vs consensus: EPS $0.26 vs $0.3567*; revenue $24.16m vs $25.28m*; drivers were higher provision ($1.77m vs $0.08m in Q1) and loss of prior quarter one-time gains (OREO gain $0.5m; LHFS gain $0.2m in Q1). EPS/revenue estimates from S&P Global*.
• Funding mix pressured: Noninterest-bearing deposits fell 11.7% QoQ on seasonality, offset by interest-bearing growth; borrowings rose to $163m to fund asset growth; plan is to reduce in Q3 as deposits rebuild.
• Noninterest income down 13.7% QoQ to $6.3m as one-time gains rolled off; trust/investment management fees slipped with mix shift to lower-fee categories; management highlighted reversing PTIM fee pressure as a priority.

Transcript

Speaker 5

Good day, and thank you for standing by. Welcome to the First Western Financial Q2 2025 earnings conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question-and-answer session. To ask a question, please press star one-one on your telephone and wait for your name to be announced. To withdraw your question, please press star one-one again. I would now like to hand the conference over to your speaker today, Tony Rossi.

Speaker 1

Thank you, Josh. Good morning, everyone, and thank you for joining us today for First Western Financial's second 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 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. With that, I'd like to turn the call over to Scott.

Speaker 5

Thanks, Tony, and good morning, everybody. We executed well in the second quarter and saw positive trends in many areas, including loan and deposit growth, expansion in our net interest margin, well-managed expenses, and stable to improving asset quality. The market remains very competitive in terms of pricing on loans and deposits, but we continue to successfully generate new loans and deposits by offering a 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 quarters, 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, industries, and loan types. We were also able to successfully lower deposit costs, as well as redeploy the cash we generated from the sale of two OREO properties into new loan production and securities purchases, which contributed to the expansion we're seeing in our net interest margin. We continue to maintain disciplined expense control despite the inflationary environment, as we capitalize on the previous investments we made in both banking talent and technology that have enhanced our business development efforts and overall level of efficiency, including a higher level of mortgage banking income. We also had generally stable asset quality during the second quarter.

As a result of our financial performance and balance sheet management strategies, we had a further increase in our tangible book value per share, and we used our strong capital position to repurchase some of our shares during the second quarter, which was accretive to our tangible book value per share. Moving to slide four, we generated net income of $2.5 million, or $0.26 diluted share in the quarter. This was lower than the prior quarter due to a number of one-time gains that positively impacted our financial performance in the first quarter, as well as the higher level of provision that we recorded due to the strong loan growth that we had late in the second quarter. On a pre-provision net revenue basis, once the one-time items from last quarter are excluded, we had an increase during the quarter.

In addition, it was about $5.1 million in Q2, down slightly from Q1, including those one-time revenue adds in Q1, but up about 36% year over year. With our prudent balance sheet management, our tangible book value per share increased by about 1% this quarter. Now I'll turn the call over to Julie for some additional discussion of our balance sheet and trust and investment management trends. Julie?

Speaker 2

Thank you, Scott. Turning to slide five, we'll look at the trends in our loan portfolio. Our loans held for investment increased $114 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. That new loan production was $167 million in the second quarter. This new loan production was well-diversified and resulted in an increase in most of our portfolios, and we are also getting deposit relationships with most of these new clients. We continue to be disciplined, and we are maintaining our pricing criteria.

This resulted in the average rate on new loan production being 6.35% in the quarter, or 6.67% excluding loans secured by trust and investment management assets originated in the quarter. Moving to slide six, we'll take a closer look at our deposit trends. Our total deposits were slightly up from the end of the prior quarter. We had a decline in non-interest bearing deposits due to typical seasonal outflows we see in the second quarter related to tax payments. This was offset by an increase in interest-bearing deposits as a result of the successful execution in our deposit gathering strategies. Given the nature of our client base, following the seasonal outflow that related to tax payments in the second quarter, we typically see that these balances tend to build back up over the second half of the year.

Turning to trust and investment management on slide seven, we had a $320 million increase in our assets under management in the second quarter, driven largely by favorable market performance. Over the past year, our AUM has increased nearly 7%. I'll turn the call over to David for further discussion of our financial results. David?

Speaker 5

Thanks, Julie. Turning to slide eight, we'll look at our gross revenue. Our gross revenue was slightly down from the prior quarter due to some one-time gains we had in the first quarter that positively impacted our net interest or non-interest income, which was partially offset by an increase in net interest income. Now, turning to slide nine, we'll look at the trends in net interest income and margin. Our net interest income increased 2.3% from the prior quarter due to an expansion in our net interest margin. Our NIM increased six basis points from the prior quarter to 2.67%.

This was due to a reduction in our cost of deposits, as well as the payoff of high-cost subordinated debt, along with the deployment of the cash we generated from the sale of two OREO properties into new loan production and securities purchases, which increased our average yield on interest-earning assets. Based on recent deposit inflow trends over the past few weeks, we expect NIM to be relatively flat in the short term, but it should expand later in the year, which, along with our balance sheet growth, should result in strong NII growth in the third and fourth quarters. Turning to slide ten, our non-interest income decreased by approximately $1 million from the prior quarter. This was due to one-time gains we recorded in the first quarter, which were partially offset by an increase in gain on sale of mortgage loans.

PTIM fees have been trending down as our clients have shifted to lower margin services. Reversing this trend is a management priority. Now, turning to slide 11 and our expenses. Our non-interest expense decreased approximately $300,000 from the prior quarter, which was primarily due to lower salaries and benefits. All other areas of non-interest 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. Now, 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 second quarter, with slight increases in NPLs and NPAs. However, we had a meaningful decline of $10 million in our classified loans.

We had one loan charge-off in the quarter, which had unique issues and is not reflective of broader trends we are seeing in the portfolio. We had a slight increase in our allowance coverage, which was primarily driven by the significant loan growth we had in the quarter. Now, I'll turn it back to Scott. Scott?

Speaker 1

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. Our loan and deposit pipelines remain strong and should continue to result in solid balance sheet growth for the second half of the year. In addition to balance sheet growth, we expect to see continued positive trends in our net interest margin, net interest income, fee income, and more operating leverage resulting from our disciplined expense control. Based on the trends that we're seeing in the portfolio and the feedback we're getting from 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 will result in steady improvement in our financial performance and further value being created for our shareholders as we move through the year. With that, we're happy to take your questions. Josh, please open up the call.

Speaker 5

Thank you. As a reminder, to ask a question, please press star one-one on your telephone and wait for your name to be announced. To withdraw your question, please press star one-one again. One moment for questions. Our first question comes from Matthew Clark with Piper Sandler. You may proceed.

Speaker 1

Hey, good morning, everyone.

Morning.

Speaker 0

Morning, Matthew.

Speaker 1

First question just on the, it looks like you added some borrowings toward the end of the quarter. Just want to get a sense for the rate on those, whether or not those are overnight or term borrowings, and the plan to maybe pay those off as deposit growth comes through in the second half.

Speaker 0

Yeah, Matt. Yes, they were overnight, and yes, the plan is to pay them off as our deposits come in in the third quarter. It was in the mid-fourth as far as the rate, but like I said, we do plan to pay those off.

Speaker 1

Okay, great. Your cost of interest bearing and total deposits both down two basis points. I'm just curious what the spot rate was at the end of June and kind of what your expectations are for more reliefs in the back half?

Speaker 0

Yeah, the spot rate at the end of June was 3.07%, and that's total deposits. We do still have the opportunity to continue to reprice down on the CD portfolio. As far as NIM expectations, we're thinking relatively flat in the third quarter due to strong deposit pipelines in the third quarter. As we deploy that into loan production, we still are expecting NIM to expand in the fourth quarter back to really that exit NIM that we talked about last quarter, kind of in the low to mid-2.70s.

Speaker 1

Okay, great. Just last one from me on expenses. Good cost control here this quarter, better than the guide. I think that was $19.5 million to $20 million. What are your updated thoughts on the run rate here in the back half?

Speaker 0

Yeah, we're still thinking same range, $19.5 to $20 million. Yeah.

Speaker 1

Okay, thank you.

Speaker 0

We continue to think that our path to success is not in cost cutting, right? It's in operating leverage from growing revenues with our current expense base, and our focus has really been on just trying to make sure we're not seeing excessive growth in that expense base.

Speaker 1

Thank you. Our next question comes from Woody Lee with KBW. You may proceed.

Hey, thanks for taking my questions. Had a quick follow-up on the NIM outlook, and I believe you said that you still expect to hit a low to mid-270s NIM by year end, and just wanted to get a sense of how sensitive that could be to how rate cuts play out in the back half of the year.

Speaker 0

Yeah, Woody, I think our guidance that we've previously spoken to as far as how rate cuts impact NII in that $1 million range is still relatively fair. We took a little bit of sensitivity off the balance sheet in the second quarter, so maybe it's $100,000 or so below that, but I think that's still a fair assumption as far as how a 25 bps reduction would impact NII.

Got it. Maybe shifting over to expenses and profitability, you mentioned that you can continue to invest in the franchise through the longer-term focus. I was hoping that y'all could just kind of sort of peel back the curtain and walk through how you toggle between investing and seeing the profitability ramp actually play out.

If you look at the history over the past several quarters, we've had pretty stable expenses. I think our focus has been how do we take our current spend, make sure we're getting the maximum value out of that, and how do we take advantage of opportunities we see in the marketplace. We've brought in significant new hires from other local banks, from First Republic, from Goldman Sachs, from UMB here, and those folks have been really helpful to the growth numbers that we started seeing in Q2 here. We do continue to invest. We continue to upgrade when vacancies come up, and hopefully, we'll continue to do that in the back half of the year. That's our expectation.

I don't think we need to increase our expenses significantly to achieve significantly higher revenues that are going to drive the operating leverage that we've seen since our IPO, where your expense is steady, you grow your revenues, that's going to have a really nice impact for our bottom line.

Got it. Last for me, I believe in the opening comments you called out, you know, building up trust fees is a top priority at this point. I know they were down a little bit quarter on quarter. Could you just give some additional color on thoughts on that business line and how you could increase fees from there?

Yeah, so we have now replaced most of our PTIM leadership here to put in more of a growth mentality than what we had. Since the IPO, we've been pretty flat in PTIM. We've tripled the size of the balance sheet and dramatically improved our net interest income. Our feeling is that this is an area of opportunity for us. We talk about that area as PTIM, which stands for Planning, Trust, and Investment Management, PTIM. Historically, we've put a lot of emphasis on the investment management and the trust side, and the trust has certainly grown nicely over the years. We think there's a big opportunity on the planning side as well, and we have brought in new leadership there. The Head of Planning joined us right at the beginning of the second quarter.

Historically, I would tell you, we find it takes some time for these folks to get traction, and not with him. There's really good stuff going on in terms of product development and new channel distribution. Historically, we focused here on the B2C channel with our 19 offices, and now we're launching a new B2B initiative that fits really nicely into some of the other capabilities of the organization beyond planning, like our focus on CNI and our focus on treasury management and our focus on retirement services business. You don't see any of that in the numbers in Q2, either on the expense or the revenue side, but as I think David mentioned in his comments with the deck, that is something we're focused on, and we do expect to see results going forward.

All right, that's good to hear. Thanks for taking my questions.

Thank you.

Speaker 5

Thank you. Our next question comes from Bill Dezellem with Tieton Capital Management. You may proceed.

Speaker 4

Thank you. I had a couple of questions. First of all, what, if any, structural factors are holding you back from returning to a 3% or greater NIM?

Speaker 0

I think the path of the time, Bill, you know, we've talked about that now on the past several calls that we thought that we would see a nice steady improvement in NIM, which is what we've seen. I think, you know, I don't have the exact page in front of me here, but I think in the deck that's pretty evident. What we've looked at internally is that we believe that our historic number of some number like 315, 320 is what our business model should produce in a normal interest environment where you don't see inverted yield curve and you don't see rapid run-up in short-term rates like we saw there a couple of years ago. We do think we're going to trend back there, and that's what we've been saying, and that's what we've been seeing. As David said, you know, we expect that to continue.

I think with the growth we saw at the end of the second quarter and the funding and the fact that our deposits typically decrease, especially, you know, operating deposits in Q2 because of tax payments with our type of client, we'll see that continue to come back in the second half of the year. We'll see the improvement from that. I don't think we're going to get to 315 here in the next couple of quarters. I'm not sure whether it takes to the end of next year or beyond that, but you know, we do think we're going to see continued progress there.

Every quarter, every month where we see some nice organic growth, some improvement in fee income, some good cost control, NIM expansion, and organic growth, all of those things compound each other, drive the top line growth that goes straight to the bottom line if we're not increasing expenses.

Speaker 4

That's helpful, Scott. Just to be clear, there aren't any factors that are required to achieve that $315, $320 other than a continuation of growing assets and essentially seeing that net interest income growing more quickly than expense growth. It's just a matter of moving the business forward. Is that the correct interpretation?

Speaker 0

I think that's safe to say. I don't, David, do you feel comfortable with that?

Speaker 5

Yeah, I think that's fair, Bill.

Speaker 4

Great, thank you. Additionally, you have hired MLOs over the course of the last year, and I think you inferred in the press release that your mortgage volume was down. I realize that the mortgage market is a bit, maybe this is appropriate time to say wonky now, but help us understand why you think your volumes are down when your MLOs have increased.

Speaker 2

Yeah, Bill, I can take this one. You're right. We have been working to increase our MLOs, which helps us with just general production and geographic spread of that production. They're in different locations, and we have more in the pipeline to continue to grow those. Industry-wide, I think the general mortgage industry has still not really rebounded. We have not seen the production that we typically see in the summer months, which are typically our higher seasonality months. I think we're seeing impact from the economic uncertainty, but also the interest rate uncertainty. I think people are just not in the buying and/or selling part of life right now, and it appears that everybody's kind of staying on the sidelines. We are hearing that buyers believe that the home prices will start to decline at some point in the near future.

I think that the interest rate certainty will help with that as well. I think that we might see a little bit more, but our general belief is that if we can continue to add individuals that aren't fixed cost to us, that bring in more production, we will see the increase in revenues with that, as well as as economic conditions continue to improve. I would note, however, that we are contribution positive on mortgage for the year, and we were last year as well, and so this is a contributing business. You'll see a lot of our production in the second quarter was through mortgages as well. One to four family residential mortgage increase in our mix. Very much a contributing part of the business, and from an earnings perspective, it's doing nice, paying nice dividends to us as well.

Speaker 4

Julie, to be clear, the decline in the mortgage volumes, you all see entirely as market-related as opposed to some internal challenge that you all need to be working on internally?

Speaker 2

That's correct, yes.

Speaker 4

That's helpful. One last question relative to your customer's mindset, on the, I guess I'll call it the cautious or not spectrum. What are you seeing and hearing from them today? I think you referenced that you had good loan growth late in the second quarter. Has the mindset shifted over the course of the last few months as the macro environment has shifted? Share as much insight on all those factors as you can, please.

Speaker 0

Yeah, that's actually a great question, and I think really interesting, Bill, to try and understand, which you know isn't easy, right? We do a mid-year review where we bring in all of our senior people for a couple of days, and earlier this week, we had all the leadership and the managers here Monday, and then Tuesday, all the PC presidents from the 19 locations stayed, and we had a PC president summit. We also had Tuesday a PTIM summit working on some of the changes we have going on there. At the PC president summit, I asked the PC presidents that very question. I said, you know, what are you seeing in terms of competitive environment? What are you seeing in terms of client demand?

Each one of them said, as they always do, that it's a very competitive environment, and they're still seeing cost pressure on the deposit side, cost pressure on the loan side. The facts are that we're seeing more bigger pipelines, we're seeing more demand, and I think the feeling is among those guys that are really close, men and women that are closest to our markets, that the caution that we saw early in the year has shifted, and people are kind of back to doing business. I think your question is spot on. I think we're still in a competitive environment. I think we're still seeing some market disruption that's good for us. In fact, I think that's probably accelerating, and I think we're seeing confidence with our clients as to making them move on things that they're thinking about.

Speaker 4

Great. Thank you all for taking the many questions.

Speaker 0

Thank you.

Speaker 5

Thank you. I would now like to turn the call back over to the management team for any closing remarks.

Speaker 0

Great. Thanks, Josh. I just want to thank everybody for joining us on the call today. We have targeted improvements in asset quality and NIM, net interest margin, and organic growth. We've talked about that now for several quarters, and we feel that with the progress we're making there, we're going to return to our historic strong numbers. We're seeing that over the past few quarters, and we see continued progress going into the second half of the year. This is driving more operating leverage, which is going to restore our strong earnings growth story, and our internal and external trends that we see across our products and services and across our geographical footprint are all positive. We expect to benefit from these trends in the second half of the year and into 2016, all else being equal.

We really appreciate the support, and thanks for taking the time today to listen to our earnings call. Thanks, everybody.

Speaker 5

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.