First Western Financial, Inc. (NASDAQ:MYFW) Q1 2024 Earnings Call Transcript

First Western Financial, Inc. (NASDAQ:MYFW) Q1 2024 Earnings Call Transcript April 19, 2024

First Western Financial, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by and welcome to the First Western Financial First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentations, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Tony Rossi of Financial Profiles. Sir, please go ahead.

Tony Rossi: Thank you, Norma. Good morning, everyone, and thank you for joining us today for First Western Financial’s first quarter 2024 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 for many 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?

Scott Wylie: Thanks, Tony, and good morning everybody. During the fourth quarter, while continuing to prioritize prudent risk management and conservative approach to new loan production, we were able to deliver a higher level of profitability than our originally reported $0.03 a share in Q4. This improvement is encouraging, although not at the level of profitability that we target. We executed well on our strategic priorities, which resulted in positive trends in a number of key areas, including further lowering our loan-to-deposit ratio, generating a higher level of non-interest income, primarily driven by our wealth management and mortgage banking businesses, an improvement in our asset quality with a decline in non-performing loans and zero net charge-offs in the quarter.

The higher level of profitability combined with our prudent balance sheet management resulted in an increase in our tangible book value per share and increases in our risk-based capital ratios. As we indicated in our last call, the primary focus in the near-term is on core deposit gathering in order to further improve our level of liquidity, which is reflected in our balance sheet trends in the first quarter. We remain conservative in new loan production, maintaining our disciplined underwriting and pricing criteria while prioritizing lending to clients that provide full banking relationships, including deposits and wealth management business. This approach, along with lower level loan demand due to higher interest rates, resulted in a lower level of loan production in the quarter.

Loan payoffs continue to be at relatively the same level we’ve been seeing, but we also saw lower level of draws on existing credit lines that we’ve seen in the past few quarters. This resulted in a decline in total loans during the first quarter, most notably in the areas of commercial and industrial loans. In terms of asset quality, we continue to make progress on the resolution of loans that were put in non-accrual status over the past several quarters. This included a pay down of one of the loans that comprised our largest non-accrual relationship following the sale of one of the properties that we had as collateral and a second already in Q2. As we’ve indicated, this process will take some time and the sale of various collateral part pieces will proceed on different schedules, but based on the progress we’re making we expect to see continued successful resolutions with minimal loss incurred.

Aside from the existing non-accrual loans, the rest of the portfolio is performing well and we had a decline in past due loans during the first quarter. This continues a positive trend we’ve been seeing in this area. As compared to the first quarter of 2023, past due loans are down 59%. As we announced during the first quarter, we successfully charged-off the other large non-accrual loan after the guarantor filed for bankruptcy. So the full extent of the losses on this loan have already been incurred and are reflected in our income statement. And as we pursue our recovery efforts, there will only be positive potential impact from here on out. We also sold off a third, smaller non-accrual loan last quarter at a small premium, further reducing our problem loans to the lowest percent of total loans over the past three quarters, down to 1.86%.

Moving to Slide 4, we generated net income of $2.5 million, or $0.26 per diluted share in the quarter and pre-tax pre-provision net income of $3.7 million. Q1 earnings in EPS were about 16% higher than the average of the prior four quarters using our originally reported Q4 earnings as we showed positive trends in several areas of our operations. With our higher level of profitability and prudent balance sheet management, we had a 1% increase in our tangible book value per share this quarter. 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 Courkamp: Thank you. Turning to Slide 5, we’ll look at the trends in our loan portfolio. Our total loans decreased by $56 million – decreased $56 million from the end of the prior quarter. We continue to be conservative and highly selective on our new loan production, focusing primarily on non-CRE lending opportunities and clients that also bring deposits to the bank. This resulted in $31 million in new loan production in the first quarter, which was a lower level than we have had in the past several quarters, combined with payoffs continuing at a relatively consistent level and a lower level of draws on existing credit lines than we had been seeing, primarily due to clients being cautious about interest, increasing debt levels at higher rates and until economic conditions improve.

This resulted in the decline in total loans that we saw in the first quarter. The largest decline came in our C&I portfolio, which was partially attributed to a loan that we sold during the quarter. We continue to be disciplined in our pricing criteria. However, the average rate on our new loan production dropped a bit this quarter to 6.95%, which is primarily due to one large cash secured origination. Moving to Slide 6, we’ll take a closer look at our deposit trends. Our total deposits were up slightly during the quarter. We continue to have success in new business development and added $17 million in new deposit relationships during the first quarter with average deposits up $83 million or 14% annualized quarter-over-quarter. We had the largest growth in our money market accounts, which reflects the expansion of existing client relationships as well as clients moving funds into money market accounts from time deposits.

Turning to Trust and Investment Management on Slide 7, we had a $388.5 million increase in our assets under management in the first quarter, primarily due to market performance. This continues the positive trend we are seeing in AUM, which has increased 12% or $750 million over the past year. Now I will turn the call over to David for further discussion of our financial results.

David Weber: Thank you. Turning to Slide 8, we’ll look at our gross revenue. Our gross revenue increased 4.6% from the prior quarter, primarily due to an increase in our non-interest income. As expected, this reversed the downward revenue trends we saw in 2023. Now, turning to Slide 9, we’ll look at the trends in net interest income and margin. Our net interest income decreased 1.6% from the prior quarter due to an increase in interest expense resulting from a higher average cost of deposits. Our net interest margin decreased 3 basis points to 2.34%, driven by an increase in interest-bearing deposit cost and an unfavorable mix shift in our deposit portfolio, offset partially by an increase in the average yield on interest earning assets.

The rate of decline in NIM has decelerated over the past four quarters, nearing a point of stabilization. During March, we repaid $31 million of borrowings from the Bank Term Funding Program, which will reduce our level of borrowings in the second quarter. We continue to have $10 million of borrowings outstanding from the BTFP, but the rate is locked for one year so we will not see a rate increase on these borrowings. Now turning to Slide 10, our non-interest income increased 19.7% from the prior quarter. We generated increases in trust and investment management fees, net gain on mortgage loans and bank fees, which were partially offset by a decrease in risk management and insurance fees, which are seasonally higher in the fourth quarter each year.

The increase in net gain on mortgage loans was due to two factors. First, loan production increased to $91 million from $67 million in the prior quarter as we saw an increase in home buying activity in our markets, as well as the contribution of production from new MLOs we had added this year. And second, we had an increase in our average gain on sale margins. Now, turning to Slide 11 and our expenses. Our non-interest expense increased to $19.7 million, primarily due to the seasonal impact of higher payroll taxes and higher incentive compensation, which returned to a more normalized level as a result of our increase in profitability and we had higher legal costs in the quarter. For the next few quarters, we expect to manage core operating expenses carefully as in 2023, with the main variable being the level of incentive compensation, which will be dependent upon our financial performance.

Now, turning to Slide 12, we’ll take a look at our asset quality. Our non-performing assets declined $5.1 million, which was primarily due to the sale of a non-performing construction loan at a gain and the paydown of our largest non-performing relationship following the sale of a property that we had as collateral. The remainder of the portfolio continues to perform well and we had a decline in past due loans and zero losses in the quarter. With the decline we had in loans, our level of allowance to adjust to total loans increased five basis points to 1% at March 31. I also want to note that multifamily loans represent just 7% of our total loan portfolio. These loans are performing well and none of the loans are to borrowers for rent controlled properties.

Now I’ll turn it back to Scott. Scott?

Scott Wylie: Thanks David. Turning to Slide 13, I’ll wrap up with some comments about our outlook. While economic conditions remain uncertain, we’ll continue to prioritize prudent risk management and conservative approach to new loan production, while continuing to make progress on resolving the credits that were placed on nonperforming status over the past few quarters, which we continue to expect to result in immaterial losses. However, with the strength of our balance sheet, we’re well positioned to capitalize on increased loan demand once borrowers have more confidence in the economic outlook and interest rates start to move lower. Our business development focus will remain on full banking relationships with high quality clients that need the multiple products and services that we can provide in banking, wealth management and other areas.

These are what we consider to be our core clients and they’ve historically resulted in highly profitable relationships and strong asset quality. Over the past several quarters, we’ve had good success in achieving our goal of reducing our loan-to-deposit ratio, and we’ll continue to prioritize core deposit gathering to further increase our liquidity. We also expect the positive trends we saw in the first quarter in the areas of wealth management and mortgage banking to continue. We’ve recently added some new MLOs in the mortgage business which should contribute to higher levels of loan production, particularly as we move into the seasonally stronger period for home buying. With the increase in our tangible book value per share and risk-based capital ratios in the first quarter, along with the improvement in asset quality, we have the flexibility considering adding additional options for capital utilization, which we’ll continue to discuss with the board as market conditions evolve.

As always, we’ll act in the best interest of shareholders. Given the strength of the balance sheet and the franchise we built, we believe we’re well positioned to continue adding attractive full banking relationships, growing our balance sheet over long-term, increasing revenue and realizing more positive operating leverage, which should result in further increases in our level of profitability and additional value being created for our shareholders. With that, we’re happy to take your questions. So Norma, please open up the call.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Brett Rabatin with Hovde Group. Your line is now open.

Brett Rabatin: Hey, good morning, everybody.

Scott Wylie: Good morning, Brett.

Brett Rabatin: Wanted to start just on the asset quality and understand a little bit better. You had the sale of the construction loan and the pay down of the largest NPL. What is the balance of that largest NPL at this point? And then maybe, can you talk about the resolution of the remaining piece from here, additional sales of properties, how you think that might play out?

Scott Wylie: Yes, we’ve said, I think pretty consistently that this is a process that’s going to take some time. And that’s true with any loan – in workout and in this particular case, we’ve got one relationship with four loans and seven pieces of collateral that are cross collateralized. So it’s a particularly complicated process. Our goal is to get these properties sold and get repaid. And so the fact that one of them was sold in Q1 was definitely a positive. And then we’ve had another one already sold in Q2 and we’ve been paid down on that one. So we have five remaining properties, and they’re in different stages of collection and they’re in different locations. So it’s going to have some differences in the timing. But we have already foreclosed in two of those remaining properties so far this month.

And as we move through the year, there should be consistent progress with making these recoveries. As of quarter end, we had $38.5 million still outstanding on the relationship with about $5.8 million of specific reserve, including the $2.3 million we put into specific reserve on that relationship in Q1. So I think on the books, you could look at it as 38.5 minus 5.8 and then once we get titled to these properties that we got in the foreclosure auction, then that’ll be a decrease of $12 million or so and an increase in OREOs [ph] obviously there.

Brett Rabatin: Okay. Yes, that’s pretty – that’s helpful, Scott. So I understand – so make sure I understand correctly. Seven properties, you sold one in the first quarter, you’ve already sold one in the second quarter, and you’ve taken possession, or you’ve repossessed two more for $12 million, and then the remaining would be two other properties, is that right?

Scott Wylie: Well, 7 minus 2 minus 2 is three more to go.

Brett Rabatin: Three more, okay. Three more, okay.

Scott Wylie: And technically, Brett, we didn’t sell them. The borrower sold the two that were sold in Q1 and in the beginning of Q2. And that’s good with us. I mean, if we want the loan repaid, we don’t want to be in the property business, so.

Brett Rabatin: So the borrow is paying down credit. Okay. And then what about recoveries on the one that you ended up having to fully charge-off in the fourth quarter? What does that process look like from the legal perspective on that? I know a judge has to basically take care of that at this point.

Scott Wylie: That’s right. It’s in the bankruptcy process now. And I think the point we’ve tried to make on that is now we don’t really control it as much. And because it’s the bankruptcy trustee that was appointed by the bankruptcy judge, we are supporting the bankruptcy trustee with analytic work to help get to the bottom of where the money is and how we can collect on it. I would say we are anticipating some recovery. We don’t have a strong sense yet of how much or when, but I think a reasonable expectation is we’re going to have some recovery over the next 12 months. I think the main point for us as shareholders is, we’ve taken our lumps on that one and there’s not going to be more bad news on it. We’ve got the bad news and hopefully, we’ll see some good news playing out here over the next 12 months or so.

Brett Rabatin: Okay. And then was just curious if you had the margin for December and then just how much of the loan portfolio reprices this year and maybe an outlook. David or Julie on the margin from here?

Scott Wylie: Well, David, you want to tackle that one?

David Weber: Yes. As far as the repricing, we’ve got about 25% of the loan portfolio that reprices in the next 30 days. And then from a margin standpoint, we had – I assume you’re asking about March and not December.

Brett Rabatin: Yes.

David Weber: Okay. Our March margin was a little bit lower.

Brett Rabatin: I’m sorry, March. March, not December, yes.

David Weber: Yes, yes, correct. Okay. Our March margin was a little bit lower. There can be some noise that, that comes through amortized loan fees and things of that nature. So it was about 224. But if we look at more of a normalized basis, we’re thinking that number is about 231. And then going forward, we expect second quarter to be relatively in line with where we were in the first quarter in that kind of low 230s type of range.

Brett Rabatin: Okay. And David, you said 25% of portfolio reprices are those variable rate loans that are repricing and what rate are they repricing from?

David Weber: Yes. So that’s – that is variable. That’s correct. As far as what rate they’re repricing from, I’ll have to give that for you. I don’t have that in front of me.

Brett Rabatin: Okay. And then if I could sneak in one last one, if I understood correctly, this expense run rate is probably a good run rate from here. And you mentioned that the biggest variable was the compensation. What about the other piece of the legal fees and all that? That might be elevated to any outlook overall on expenses from here?

David Weber: Yes. Going forward, the incentive compensation is certainly will be dynamic based on the financial performance of the company. And then we should see a little bit of relief due to the seasonality of payroll taxes that will start to come down in second quarter and continue through the third and fourth quarter. As far as legal and workout fees, a bit hard to predict at this point, but I don’t think we expect those to be really at the same levels that we saw in the first quarter going forward.

Scott Wylie: Just to give a little bit more transparency, Brett, on Q1, I think the total number in Q1 was 700,000 for workout and special legal fees, that sort of thing. And like David said, I don’t think that goes to zero in Q2, but if you look at our underlying core expenses, I think it’s typically much less than that and hopefully will normalize here over the course of the year. We also had a $0.5 million operating losses in Q1, which were related to wire fraud, and that’s a very high number for us. That’s not typical of what we see here. So those numbers are in our Q1 expenses that, again, I wouldn’t really consider to be core expense.

Brett Rabatin: Okay. Appreciate all the color.

Operator: Thank you. [Operator Instructions] Our next question will come from the line of Brady Gailey. Your line is now open, with KBW.

Brady Gailey: Hey, thanks for taking my questions. Wanted to follow-up on credit to start and just on the NPA bucket, trying to understand all the movements. So how large was the credit that moved into the NPA bucket in the first quarter? And any color you can give on that loan?

David Weber: Yes. The size of that loan was a little bit under $2 million, and it is a C&I loan.

Brady Gailey: Okay. That’s helpful. And any trends to note just in criticized or classified assets in the quarter?

David Weber: No, I think we’re seeing stable to improving trends in most of the credit metrics we look at. The only real exception to that is, I would tell you that we’re definitely increasing our watch efforts. So loans that we think could be under stress, the borrowers could be under stress. If rates continue to higher rates or CRE loans that may be maturing, we’re definitely paying a lot more attention to those these days and they show up on the watch list. So I don’t necessarily view that as a credit indicator or as a concern. I think, I hope those are signs of good credit administration and credit management here. But as I said, I think the headline number on the NPL side and the 56% reduction on the past due loans are both really positive trends for asset quality here.

Brady Gailey: Yes, yes, definitely. I guess last for me, shifting over to loan growth. I believe last quarter we sort of talked about an expected loan growth rate in the mid-single digits. It sounds like you might be strategically pulling back a little bit. How should we think about loan growth going forward?

Scott Wylie: I don’t know. It’s just really hard to predict right now, especially month to month and quarter to quarter, rates are up or rates are down and all that, right? But given that context, what we have said in the past and what we continue to think is in our strong growth markets that we have and with the platform that we have and the people that we have, producing loan growth in the mid-single digits this year seems like a reasonable goal. Now, obviously, when you start down in the first quarter, that gets a little less likely, so I would say, you know, if we saw flat in the second quarter that would be great. And if you talk to our regional presidents and our marketer presidents, which we have, they seem confident that we’re going to see some loan growth here this quarter and this year on a net basis.

So, I think for modeling purposes, given a lot of uncertainty, flat here for the next few months and then growth over the course of the latter half of the year, depending on what happens in the economy, makes sense. One of the things we’ve been looking at internally is we’re seeing some really aggressive pricing now coming out of the community banks and the credit unions in our markets on certain types of loans. And those are particularly in the case of owner occupied real estate and in C&I loans. And we’re just not going to play that game. We have encouraged our people to stay disciplined on pricing and structure and not chase rates. In the C&I area in particular, it’s frustrating because we’ll get a client, a prospect that wants to move here and bring their deposits and whatnot.

And then wherever they are gets really aggressive in terms of retaining them. And so these are just the challenges that our frontline folks are dealing with these days in the market. But I think that stuff sorts itself out over time. We’ve seen some nice growth, really, across the growth opportunities, across the different loan types here and I think you’re going to see loan growth across the different loan types over the course of the year as things stabilize.

Brady Gailey: That’s really helpful details. Thanks for taking my questions.

Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Adam Butler with Piper Sandler. Your line is now open.

Adam Butler: Good morning, everyone. This is Adam on for Matthew Clark. If I could just start on the deposit side, looks like there was some remix into interest bearing during the quarter with NIBs down at a slightly faster pace than last quarter. I was just curious to get your updated expectations on if you expect that will slow going into the second quarter or just kind of how you’re seeing deposit flows move around right now. Thanks.

Scott Wylie: Yes. Thanks for the question, Adam. We – again, hard to predict, we were thinking that our DDA shift into interest bearing accounts had really stabilized in Q4 because we saw it actually grow. The DDAs were growing and then we see a $48 million decline in those DDAs in Q1 and like obviously very disappointing trend. So we did a deep dive on that. And what we found is about 40% of that decrease are just kind of operating account fluctuations. So people using their money and at quarter end it was $20 million lower than it started. And then about 40% was people shifting out into interest bearing accounts. And then the remaining 20% was people that had DDAs related to construction projects that are funded here. And the cash from a borrower in a construction project goes in before our loan does.

So that they’re using those funds to pay their equity essentially in these construction projects. So that was about 20% of it. So that’s kind of the mix. So hopefully, as we go forward through the year, we’re going to see a lot less of that. Maybe the fluctuations are positive other quarters instead of negative and whatnot. So that would be kind of the general outlook. Now, having said that, historically, we’ve seen deposit declines in Q2 because we have clients making tax payments. And so that’s going to be a headwind for Q2, but that’s a normal thing here. And underlying, hopefully, we continue to grow deposits, and some of those are DDAs and we can retain the DDA mix that we have today.

Adam Butler: Okay, thank you. Thank you for that. That was – thank you for the clarification there. If I could just switch over to your NII [ph] outlook. If loans trend flat over the next quarter, is it fair to assume that NII stays relatively flat or maybe drops in the second quarter and then beyond there with your growth outlook, maybe starts to step up again?

Scott Wylie: Yes. David and his team do a really granular look at that bottom up, and it’s largely with a flat interest rate outlook. We originally had started the year thinking, maybe 25 bps decline mid-year and 25 bps later in the year, and we’ve now redone that with just one decline rate cut late in the year. But, David, you want to walk through how we expect that NIM to play out in the coming months?

David Weber: Yes. I think your comments are fair. The two components that we need is we need to continue to see loan production at these higher rates than our average loan yields, which are in the mid-5s, to help churn that loan portfolio. Obviously, the volume of loan production we had in the first quarter really wasn’t enough, frankly, to have a material impact there. So we need to see that continue to churn. And then certainly stabilization of our DDAs is a big component of really stabilizing our total average cost of deposits. And we’ve seen as far as the pricing pressures on existing accounts, it feels like that has certainly declined, but the mix shift has been unfavorable for us from a funding standpoint. So certainly need to see that stabilization of the DDAs, which those two dynamics will give us the ability to see NIM expansion in the second half of the year, we’ll call it.

Adam Butler: Okay. That makes sense. Thanks for the color there. And then just one last one for me. It was good to see the pickup in mortgage production during the quarter. And I think, as you alluded to in the presentation, it was attributable potentially to the originators that were hired this year. How much of that do you think was attributable to them and the original team? And do you think that level is sustainable? I think it was 1.2 million this quarter – 1.3 million this quarter. Do you think that’s sustainable throughout the year or will go up?

Scott Wylie: Sure. What’s going to happen with the 10-year treasury, Adam?

Adam Butler: Good question.

Scott Wylie: Well, to give a little more serious answer, we’ve hired, I think, seven or eight new MLOs since late last year, and there are a total of about 25 or so MLOs that are active producers. So that’s a pretty significant increase. Maybe a third of the MLO for us is new over the last 90 days. And actually, we’ve been pleasantly surprised at their productivity. They, a lot of times take three months or six months to kind of build a pipeline and get it going. And we’re actually seeing them producing some nice results already in Q1 and going into Q2. The real production in Q2, the improved earnings in Q1, I mean, came from a combination of volume and rate. And so we saw a nice improvement in the gain on sale, and we saw a nice increase in volume.

And as looking back, we did our monthly mortgage department review this morning, and I was looking back over the last 12 months, and there were many months last year where we were losing $250,000 in the mortgage operation contribution, and we made $250,000 in March, and that’s just, I mean, obviously, $6 million swing annualized is a very big number for us. So it is really great to see, if we see rate stability it seems like we could have a better year this year as the year progresses. Last year, obviously was record low production in the industry for like 30 years. And so we’re hopeful that that improves as we go through the year this year. And now we have some more MLOs to support that. Julie, you answered that question, because Julie looks over our mortgage area and is much closer to it than I am.

Did I miss any of the key points there? I’m sorry.

Julie Courkamp: No.

Scott Wylie: That’s my bad.

Adam Butler: Well, it’s great to hear, and I hope the momentum within the team continues. And thanks for taking my questions.

Scott Wylie: Yes.

Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Ross Haberman with MIH Investments [ph]. Your line is now open.

Unidentified Analyst: Good morning, Scott. How are you guys? Most of my questions have been answered. Thank you. I just want to go back. I think you said 700,000 in this quarter related was legal. Again, was that mostly related to the non-performers? And hopefully that’ll begin to moderate over the next couple quarters as these non-performers are resolved. Would that be a good assumption?

Scott Wylie: That’s what I said, and David’s nodding his head yes. So I think that’s materially correct, yes.

Unidentified Analyst: Okay. And the half a million you lost, are you insured? Does insurance cover any of that? I think you said it was a check – was it check kiting or something or fraud or something?

Scott Wylie: No, it’s wire fraud. And this is the big industry issue right now, and we spend a lot of time and effort on training people and managing that, and we put additional controls in place, and I can’t tell you how many we catch because it’s a lot. But we did have a couple that by us this quarter and go into your expense numbers in the quarter gives me no – not happy about it, right, and not happy to talk about it. But I think in terms of understanding what our core expenses are, that was part of Q1.

Unidentified Analyst: But what – so that would fall under your deductible, so you don’t get reimbursed for that type of stuff because it would fall under your deductible or something?

Scott Wylie: That’s correct.

Unidentified Analyst: Okay. And how are the new branches coming? You had that operation, I believe in Arizona and in Montana. How are they coming in terms of generating business as well as are they generating any sort of deposit level that you can talk about?

Scott Wylie: Yes. So the process of opening an office de novo is a project. And you can’t get a branch approved unless you have a location, you have the people, and you get the regulatory approval on it. So in Bozeman, for example, we hired a team there, and we had an LPO that was producing loans. But then, once you have the team in place, you have your new office built out, which takes like a year in a growth market like that. Then you can convert it into a full service branch or profit center, as we described them, and then they can start taking deposits. When did that open as a full service? Was it six months ago now? Something like that. And we think that that’s going to be a really nice success story. We’ve got a great team there.

They’ve identified lots of good opportunities. They’ve got a nice book that they’re building a business. We held a client event, a prospect event up there, February. I want to say that was very well attended. There’s just a lot of interest, I think, in that market and what we’re doing because it’s different. You know, there’s no other First Western in Bozeman, so I think that that’s going to be fine. Arizona, we’ve been rebuilding the teams there since you asked about that, and I think that that’s going to be on a better trajectory. Some of the other new offices, I think our western Wyoming offices that came with the acquisition a couple years ago are really seeing a lot of traction and making nice progress. Our Vail office, which is our most recent resort market, that’s probably, what five years old now.

Something like that Julie?

Julie Courkamp: Yes.

Scott Wylie: And really is getting some great traction in the Vail Valley, and again, very differentiated from anything else in that market. So these things take time, Ross, and they take investment and they take persistence, but they’re showing nice results, and I think they’ll be great long term producers for the shareholders here.

Tony Rossi: And just one follow-up question about the non-performers, you think you’ll be able to get. I guess there was the one large non-performer with a lot of different parts to it. I think you said you’ve gotten control of four of the parts. There’s three left, I think. Will you, will you be able to resolve the other three, you think, in calendar 2024?

Scott Wylie: I think that’s a reasonable expectation.

Tony Rossi: Okay. Thanks a lot. I appreciate it. Have a good weekend.

Scott Wylie: Yes. Thanks, Ross [ph].

Operator: Thank you. I’m currently showing no further questions at this time. I’d like to hand the conference back over to management for closing remarks.

Scott Wylie: Consistently said this year that this was going to be difficult to predict given the economic uncertainty. But we have seen a number of positive trends as expected in Q1, your net interest income and NIM declines appear to be slowing. Fee income has definitely recovered nicely. Operating expenses, particularly if adjusted for some of these elevated workouts and other Q1expenses that we talked about, that we hope are non-recurring expenses are well controlled. Our AUM exceeded $7 billion and fees were up. Our asset quality is improving. NPAs are down as we work through our one remaining large workout credit. As we’ve talked about, with the improved loan-to-deposit ratio and continued core deposit growth, we should be able to get the balance sheet back on track for at least modest growth this year.

And these trends, together with our many internal initiatives we have underway, will drive higher earnings and improved efficiency in the quarters to come. So thanks everybody, for dialing in, and we sure appreciate your interest in First Western. Have a great day.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.