First Western Financial, Inc. (NASDAQ:MYFW) Q3 2024 Earnings Call Transcript

First Western Financial, Inc. (NASDAQ:MYFW) Q3 2024 Earnings Call Transcript October 25, 2024

Operator: Good day and thank you for standing by. Welcome to the First Western Financial Q3 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference is being recorded. I would like to hand the conference over to your speaker today, Tony Rossi. Please go ahead.

Tony Rossi: Thank you, Kevin. Good morning, everyone, and thank you for joining us today for First Western Financial’s third 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 the 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.

Scott Wylie: Thanks, Tony, and good morning, everybody. During the third quarter, we generated a higher level of profitability while continuing to prioritize prudent risk management and a conservative approach to new loan production. Overall, we continue to execute well on our strategic priorities, including maintaining disciplined expense control while also making investments into the business that will support our future profitable growth. We also continue to have success with our deposit gathering efforts, adding new clients and expanding relationships with existing clients that resulted in deposit inflows. During the third quarter, we saw the strongest growth in non-interest bearing deposits, which increased 19% from the end of the prior quarter.

We’ve also mentioned a number of times over the past several quarters that our goal was to reduce the loan to deposit ratio to the mid 90% range. And as a result of our success in this area, we’ve achieved our goal with the loan to deposit ratio being 95% at the end of the third quarter. We’ve also continued to make progress on resolving the large non-performing relationship where we had several properties as collateral. We now no longer have any remaining loan balance on that relationship, and we’ve taken possession of the remaining properties, which are now included in OREO. One of these properties has been sold, and we have three remaining properties that are currently being marketed. Aside from this relationship during the third quarter, we saw generally positive trends in asset quality with declines in both non-performing and classified loans.

As a result of our stronger financial performance and balance sheet management strategies, we had increases in all of our Tier 1 capital ratios and further increase in our tangible book value per share. Moving to Slide 4, we generated net income of $2.1 million, or $0.22 per diluted share in the third quarter, which was double the level of EPS we had in the prior quarter. With our prudent balance sheet management, our tangible book value per share also 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?

Julie Courkamp: Thank you, Scott. On Slide 5, we look at the trends in our loan portfolio. Our loans held for investment decreased $73 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production, which led to new production not being enough to offset the level of payoffs that we received, as well as the decline in non-performing loans and the decline in commercial line utilization. However, we did see an increase in new loan production relative to last quarter with $83 million of new loan production in the third quarter compared to $50 million in the prior quarter. Most of our new loan production is coming in the areas of commercial loans and residential mortgages where we are also getting deposit relationships.

We continue to be disciplined and we are maintaining our pricing criteria. This resulted in the average rate on new production being 7.49% in the quarter, which was higher than the average rate on our payoff, which resulted in the turnover and our loan portfolio being accretive to our average yield on loans. Moving to Slide 6, we’ll take a closer look at our deposit trends. Our total deposits increased $92 million from the end of the prior quarter. The increase was attributed to both new client relationships and an increase in balances among existing clients. As Scott mentioned, the strongest growth came in non-interest bearing deposits, which increased 19% from the end of the prior quarter. Turning to Slide 7, trust and investment management.

We had a $454 million increase in our assets under management in the third quarter, primarily attributed to improving market conditions resulting in an increase in the value of AUM. Over the past year, our AUM has increased nearly 17%. Now, I’ll turn the call over to David for further discussion of our financials.

David Weber: Thanks, Julie. Turning to Slide 8, we’ll look at our gross revenue. Our gross revenue decreased 1.7% from the prior quarter due to the migration of one problem credit into non-accrual status and increase in interest bearing deposits and one additional day in the quarter driving increased interest expense. Our non-interest income was flat with the prior quarter. Now turning to Slide 9, we’ll look at the trends in net interest income and margin. Our net interest income decreased 1.3% from the prior quarter, primarily due to the higher level of interest expense and was negatively impacted by one credit migrating to non-accrual status. Both net interest income and net interest margin in the third quarter were negatively impacted by this one credit.

Our NIM decreased 3 basis points from the prior quarter to 2.32%. This was due to a slight increase we had in our average cost of deposits over the quarter due to an unfavorable mix shift in average deposit balances while our average yield on interest earning assets was unchanged from the prior quarter. With the increase in core deposits we had during the quarter, we reduced our balances of wholesale borrowings, which will positively impact our cost of funds going forward. The increase in deposits also resulted in a higher level of cash balances at the end of the third quarter. Our higher level of non-interest bearing deposits will also positively impact our cost of funds as well as the reductions in rate on money market accounts that occurred following the Fed rate cut in mid-September.

These rate cuts have not resulted in any deposit outflows, and further rate cuts are expected to reduce our cost of funds. Our September 30, 2024, spot net interest margin increased from the prior quarter to 2.4%. And as the financial markets normalize and asset quality stabilizes, we expect to further expand net interest margin. Now turning to Slide 10, our non-interest income was unchanged from the prior quarter. Quarterly variations in net gains on mortgage loans were offset by an increase in risk management and insurance fees. We saw a low level of mortgage production in July and August and then a large increase in September, which was our highest level of mortgage production in 2.5 years. Now turning to Slide 11, and our expenses. Our non-interest expense was up slightly this quarter but in line with the first half of the year primarily due to higher salaries and expenses driven by front office personnel additions as well as higher marketing expenses to support our new business development efforts.

These increases were partially offset by a decrease in other operational expenses due to a partial recovery on a fraud loss that occurred in the first quarter. Reversing our recent gross revenue declines with continued expense control will get our earnings back on a favorable trend. Now turning to Slide 12, we’ll look at our asset quality. Our non-performing assets increased to $52.1 million, which was due to the addition of a non-performing loan and foreclosed property, partially offset by non-performing loan paydowns, charge-offs and a loan sale. However, we saw a decline in non-performing loans due to the migration of one relationship out of non-performing loans and into OREO, paydowns, charge-offs, and a loan sale. We had a higher level of charge-offs in the quarter than typical, which was primarily related to the migration of the large relationship into OREO.

With positive trends in non-performing loans, classified loans, past due and non-accrual loans, each down about 50% quarter-over-quarter, our expected improvements in asset quality are more evident. With this positive overall trend we had in asset quality, we had a minimal provision for credit losses, which reduced our level of allowance to adjust the total loans to 79 basis points at September 30th. 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. Overall economic activity continues to be healthy in our markets, and with the strength of our balance sheet and the franchise we’ve built, we see good opportunities to capitalize on market disruption and challenges being faced by competing banks to add new clients and banking talent. Our current expense structure has historically supported higher revenues. With modest growth in the balance sheet, improved net interest margin, higher fee income, and improved asset quality, we expect solid operating leverage in the near term. We’ll continue to prioritize prudent risk management and conservative underwriting criteria, but we are seeing some increase in our loan pipelines, which we believe will help us better offset the level of payoffs we’re seeing and keep loan balances relatively flat in the current quarter.

Deposit gathering will remain a top priority throughout the organization. With the successful repositioning of our balance sheet and increased liquidity we have with lower loan to deposit ratio, we believe we’re well positioned to generate a higher level of loan growth in 2025 as loan demand increases while maintaining our disciplined pricing and underwriting criteria. Our decision to add MLOs while the mortgage market is slow is paying good dividends, and we’re seeing higher level of mortgage production now. With interest rates now declining, we expect to see a positive impact on both our net interest margin and the income generated from our mortgage business. And as we sell the properties we’ve repossessed from the large non-performing relationship, we’ll have a significant amount of cash that can be redeployed into interest earning assets that will positively impact our level of profitability.

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. With that, we’re happy to take your questions. Kevin, can you please open up the call?

Q&A Session

Operator: [Operator Instructions] Our first question comes from Brett Rabatin with Hovde Group. Your line is open.

Brett Rabatin: Hey, good morning everybody. I wanted to start on credit and walk through a few things if we could. The new credit that was moved to non-accrual, any color on that loan. And then if I understood correctly, the charge-offs were almost all or all related to the one large credit. So I wanted to understand kind of what happened there. And then from an ORE perspective, is that at this point the ranch in two houses? Maybe let’s just start with those questions.

Scott Wylie: Okay. Well, good morning, Brett.

Brett Rabatin: Good morning, Scott.

Scott Wylie: The $10 million loan. So this is a borrower that, as far as we know, is a very wealthy guy. He’s got a liquidity crunch growing. He’s got himself into a liquidity situation that put our loan under non-accrual. It’s a loan directly to him, so there’s no guarantor on it, but he’s on the hook for it. He’s got a good collateral pledge to it, and so we’re collecting on the collateral. We’ve seen this sort of thing before here, And it seems to happen periodically. I think this is another one-off situation. In this case, we do expect a full recovery. And we have it now non-accrual until we can either get it paid or collect it. Apart from that one relationship, as David noted, I think we’ve got improving trends in the loan portfolio pretty much across the board in Q3.

So I think we’re seeing nice progress now withstanding that one situation. On your second question about the charge-offs in the quarter, the majority of that is related to our one large credit that we’ve talked a lot about. And mechanically what happens there is as it moves off of the balance sheet as a loan and the collateral that we have, which was all real estate, in that case with the cross-collateralization on the four loans, that shifts from a non-performing loan or [four] (ph) non-performing loans into OREO. So as part of that you write off the specific reserve that we have and so that’s really the bulk of the change in the charge-offs this quarter is related to that conversion from an NPL into OREO. And the fact that it went up is because the value of the OREO is higher than what the loan balance was.

So that’s a positive there and consistent with what we’ve been saying all along, which is, this is a complicated workout and it was going to be a whole sausage making process this year. And actually I think is progressing as well as we had hoped. And frankly, now having the collateral is way better than having a non-performing loan, because we go ahead and sell a collateral, and we have control of it at this point, and the loan’s off the books. So I think those are all sort of nice silver lining there and consistent with what we had said and shows good progress in Q3. The third question about selling those properties is we have, as I said, repeatedly said, it would take several quarters to do that. And we’re doing that. I think that of the three remaining properties, two of them we’ve seen a lot of interest in.

And so I would expect those to be sold in the next quarter or two, although that’s not always easy to predict, I think. We’re not really interested in having some kind of fire sale. So, we’ll try and maximize the value on those in line with the market conditions, which are generally positive. Andwe have those things on our books now at or below appraisal. So I think that that should be final, get done in the near term. On the ranch, that typically takes — ranches typically take 9 to 12 months to sell, and So that’s really our expectation there. We got control of that midway through the third quarter. And so we’ve been working hard in Q3 to get that ready to go. And we’ve had a number of showings there. I just don’t know if it’s realistic to think that’ll get off the books in the short term because these large ranch properties do take a while to sell typically.

And this is a very unusual and large and well-located property. It’s a pretty spectacular, unique property. And just my experience with that kind of thing is it’s going to take some time. Did I get all your questions, Brett?

Brett Rabatin: Yeah, yeah. And then in the press release and the slide deck, there’s a comment about classified loans being lower. And I know criticized peaked out in the first quarter at $80 million, and I think classified was like $53.5 million in 2Q. Scott, do you have a number for classified, criticized for the third quarter?

Scott Wylie: I do, but I don’t have it at my fingertips.

Brett Rabatin: Okay.

Scott Wylie: I see Julie looking through a stack of papers there. Do you have it, Julie?

Julie Courkamp: Non-accrual classified was at $14.4 million, compared to about $37.6 million in the prior quarter. So good progression there, which is largely the large credit that went into OREO. And then on accrual classified is at $11 million compared to $17 million in the prior quarter. So, again, good movement in the right direction on both of those.

Brett Rabatin: Okay. And then the other question I wanted to ask was just around the DDA growth in the quarter and if that’s sticky and has that been the effort put into growing core relationships, any additional color on the DDA growth during the quarter?

Scott Wylie: Yeah, I think this is a culmination of several quarters of working on improving this loan to deposit ratio and seeing some deposit growth. So it was great to see that happen in Q3. We went in and looked at the increase in all the larger accounts where that happened. And it tended to be kind of episodic, which is the way our clients tend to work anyways, is some of it’s new business, some of it’s deposits into existing accounts, the motion — the movement around the accounts seem pretty typical for us. And that’s typically how we’ve grown historically. So I think the details of this vary from quarter to quarter, but I think this is a definite positive sign in terms of the effort that we’ve put into that. The shift from the interest bearing to DDAs, I think, is particularly significant because really we’ve seen that going the other way for the past, I don’t know, three or four quarters now.

I didn’t go back and look, but it feels like it’s been going down every quarter. And so to see such a nice rebound in Q3 was really positive. And again, I don’t think there was any particular seasonal or one-time thing in there, that was just our clients doing what they do and the benefit of having our team focused on this. And I would expect that to continue. Our deposit pipeline at quarter-end was actually up about 12% over the prior quarter. So still, I think, more good things to come.

Brett Rabatin: Okay. Appreciate all the color.

Operator: One moment for our next question. Our next question comes from Woody Lay with KBW. Your line is open.

Woody Lay: Hey, thanks for taking my questions. Just one follow up on the DDAs. So, it sounds like that growth was driven pretty broad based amongst your customers, it wasn’t influenced by just a handful of customers or sort of an outlier in that sense?

Scott Wylie: Correct.

Woody Lay: Got it. So maybe shifting over to deposit costs, we got the 50 basis point cut in the quarter. Could you just walk through how deposit rates have trended sort of pre and post cut and are the betas coming in line with expectations?

Scott Wylie: I’ll take a stab at that and then, David, feel free to jump in with more facts if you are so inclined. I mean, I think the fact that our NIM was down in the reported numbers, like in the deck, for example, for this quarter, is pretty frustrating, but we talked in the comments about why that is. The spot rate for quarter-end on NIM was 2.40%. So I think that that’s early indication of some positive trends that we’ll expect to continue. Whether or not we see more interest rate cuts, if you look at the benefits, just on the loan side, I know your question was about deposits, but on the loan side, we saw payoffs kind of in the 6% range on average for the $80-some-million that paid off in the quarter where new production was coming at 7.5%.

So that’s $1.5 million a year in an interest income pickup as that plays out, plus whatever growth we produce, plus getting the NPAs out of cash and back into production, and plus whatever benefit we get from the rate cuts. So, I think that the NIM, we’re going to see some nice positive momentum here going forward. In terms of the spot costs of deposits, those actually came down in Q3, I think we ended the quarter, David, at 3.16%.

David Weber: Yes.

Scott Wylie: So that was quite a bit lower. And then when we looked at the detail of the deposit beta, we were hoping that we would see a high deposit beta on the way down, actually higher than what we saw on the way up. And I think that played out. Do you want to share the numbers on that?

David Weber: Yeah, absolutely. To Scott’s point, we were expecting higher beta on the way down and we were able to achieve 85% beta on our money market accounts and haven’t seen really any outflow yet. So I think that’s a really good progress there.

Woody Lay: Yep — sorry, go ahead.

Scott Wylie: I said, did that address your question?

Woody Lay: Yeah. That was all great color. All right. I think that’s all for me. Thanks for taking my questions.

Scott Wylie: All right. Thank you.

Operator: One moment for our next question. Our next question comes from Matthew Clark with Piper Sandler. Your line is open.

Matthew Clark: Hey, good morning, everyone. Thank you.

Scott Wylie: Good morning.

Matthew Clark: Just on the spot rate NIM at the end of the quarter, 2.40%, does that include the interest reversal that negatively impacted that number by 6 bps or is that adjusted?

David Weber: It does not include the impact of the interest reversal, but it would include those non-accrual loans still sitting in non-accrual, generating zero interest income. Does that make sense?

Matthew Clark: Yep, yep. Okay.

David Weber: Okay.

Matthew Clark: Okay. And then can you remind us the percent of your loan book that’s truly floating? I’m not sure if I saw it in the deck.

David Weber: Yeah, it’s about 25%.

Matthew Clark: Okay.

Scott Wylie: Which implies, Matt, I’m sure this is where you’re going, is that we continue to be liability sensitive. So to the extent we see short-term rates decline, that should be a benefit to NIM.

Matthew Clark: Yeah, I mean, just rough math, based on the adjustment of the interest reversal going forward and then the spot rate on deposits, it implies a pretty decent lift in your NIM and 4Q here, but we can all kind of guess to me what that’s going to be. On your asset management fees your AUM was up 6.5% but your fees were down 3%. Is that just a lag effect that we’ll see the benefit in 4Q or is there something else going on there?

Scott Wylie: Well, we took a deep dive on that one because it seemed like a head scratcher to us too. And I think a big part of the story there is the mix of the types of assets that are in that $7.5 billion. So in this quarter, a fair amount of the increase was in directed trust, which are mostly fixed income, fixed fee. And so if it goes up — if you have a trust that goes from $1 million to $2 million, it’s got a fixed fee of $25,000 or whatever. I mean, it isn’t going to change the fee. So that’s part of — a big part of what went on in Q3 for us is the mix of the accounts. I would tell you, we do have an initiative going on internally to take a look at that and see how we monetize that. We think there’s a nice opportunity. Obviously, we’re seeing a business grow. And so we want to figure out how to better monetize that. So that’s certainly a priority for our trust and investment team.

Matthew Clark: Okay. And then how much was the recovery on the fraud loss this quarter that benefited expenses and then what’s your current outlook on the run rate for 4Q?

Scott Wylie: Well, I don’t. Do you have the fraud loss?

David Weber: Yeah, the fraud loss recovery was about $100,000.

Scott Wylie: And our forecast for additional fraud losses is zero. We try and minimize that. I’m kidding, I assume your question was about the expense outlook. So we definitely have seen elevated workout and legal expenses in 2024. And we do expect those not to be recurring as we collect all this stuff. We’ve talked about new hires in the front office, which are going to be a big part, which were a big part of our Q3 increase. But we expect those to start producing revenue growth, including in Q4. So I think that that will offset some of that increased expense. And then, we’re going to continue to manage expenses in line with our revenue outlook in for 2025. We’re thinking an expense target in the $19.5 million to $20.5 million range, assuming a nice revenue growth story would be a reasonable guesstimate at this point.

Matthew Clark: Okay. But you think relatively stable here in 4Q or do you think there’s a little lift in comp that causes it to drift a little, maybe up to $19.5 million or even a little bit above that?

Scott Wylie: Yeah, I think $19.5 million would be a good starting point.

Matthew Clark: Okay. And then just…

Scott Wylie: Julie and David are both signaling increase. $19.4 million in Q3. So we’re doing everything we can to manage that, but I think it’s probably some number similar or a little higher in Q4.

Matthew Clark: Okay, and then the classified number, I think was $14.4 million plus $11 million, the $11 million being, I think still accruing. I assume that’s a substandard number. Do you have the special mention number?

Julie Courkamp: Special mention is flat quarter-over-quarter, to about $5.4 million in a gross data.

Matthew Clark: Okay. And then just how about the reserve in general? I mean, you released with the charge-offs and I think there, you guys obviously want to build C&I over time, but do we have to kind of backfill this reserve and cause it to drive it back toward, call it, 1% or even above that?

Scott Wylie: Well, we’ve been admonished by our accounts not to manage to a particular number. I would tell you our methodology has remained consistent ever since we converted onto the new way of calculating the allowance under CECL. So, I think we’re in a reasonable place for our performance, we talked in the comments about seeing a 50%-ish quarter-over-quarter improvement in all of our underlying credit indicators. And we do think we’re getting towards the end of this workout cycle, which is again, what we’ve talked about for, I think, four quarters now. So I think that where we are is reasonable and in line with what the expectations are in CECL. We don’t know any reason to think otherwise.

Matthew Clark: Okay, thanks for all the questions.

Operator: One moment for our next question.

Scott Wylie: Thanks, Matt.

Operator: Our next question comes from Bill Dezellem with Tieton Capital Management. Your line is open.

Bill Dezellem: Thank you. To get some more perspective on the mortgage business. In particular, whether your view is that the strength that you saw this quarter was really seasonality or whether this strength can continue really as a result of the expansion of your MLO team?

Scott Wylie: Yeah, so just to review the facts, our mortgage revenues were actually down in Q3 for the quarter, September was a very strong month. And was in fact, I think David, you said the highest month we’ve seen in 2.5 years.

David Weber: Correct.

Scott Wylie: So really positive trend there. I think there was some sentiment for a while there that rates were going to come down, and that created some enthusiasm. Seems like now maybe they’re not going to come down so much. And so I don’t know what that means for a bounce back. I continue to think there’s a lot of pent-up demand out there, and we are seeing more product in the market. So we’re going to see some seasonality, I would think, in the next two quarters. But I think it’s going to be better than what we saw, for example, a year ago. If for no other reason, then we’ve got all these new MLOs that we brought on. And I think, Julie, you could speak to this, but there’s a pipeline of additional MLOs that we think we can bring in here in Q4.

So those are great hires. They’re no direct expense. They’re building capacity, and they’re producing results that we saw in September. I think that was a big driver of the results we saw in September. And the same thing there, Julie, from how you’re looking.

Julie Courkamp: Nope, that’s all right. We’re still working to bring in the right kind of MLOs into the organization. And I think we’re internally thinking we’ll still see a higher level of productivity and gain on sale than we have in prior fourth quarters. Just seasonally, it will be slower in the fourth and the first quarter, but should still be higher than it was in prior years.

Scott Wylie: Bill, we’ve talked, and you’ve been in these conversations over the many quarters about the strategic importance of mortgages for us and how really good private bank and trust companies have a solid mortgage operation. I think we’ve made some really nice progress over the last year or so in integrating what we’re doing on the mortgage side into our profit centers and cross-selling more effectively and that sort of thing. So I think that that all bodes well for the strategic value of the business as well.

Bill Dezellem: Thank you. And would you please remind us how many MLOs you’ve brought on this year and off of what base that’s on?

Julie Courkamp: We brought on seven new MLOs. We’re looking to bring on a few more in the fourth quarter.

Bill Dezellem: And the seven is on top of how many at [1231] (ph)?

Julie Courkamp: Somewhere in the mid-teens, maybe 15 to 17.

Bill Dezellem: So nearly a 50% increase in the MLOs.

Julie Courkamp: Yes, yeah, yeah, that’s about right.

Bill Dezellem: And you said you’re planning on bringing additional on here in the fourth quarter, roughly how many are you thinking right now?

Julie Courkamp: We’ve got two pretty strong MLOs in the pipeline that we’re hoping to onboard in the next month.

Bill Dezellem: And the markets that these two and the prior seven will be serving or are serving?

Julie Courkamp: Yeah, Colorado is where all of those have been sitting somewhere in the front range here between Denver and the Northern Colorado area.

Bill Dezellem: What is the prognosis for expanding the MLO group in the Phoenix metro area?

Julie Courkamp: We would love to do that. We have a couple there today. They are doing a good job, and it’s just not the market and the reach that we would like to have. So we have some recruiting efforts that have been ongoing over the last quarter to try and identify additional candidates for hire there.

Scott Wylie: We added a team there. We were talking about this, Bill, you’ll remember a couple years ago, and we added a team there at that point and opened a new MLO.

Julie Courkamp: LPO office we have there.

Scott Wylie: LPO office, yeah.

Julie Courkamp: We’d like it to be there.

Scott Wylie: So if you’re remembering that, you’re remembering it correctly.

Bill Dezellem: Great. That’s helpful. And I guess the reason that I ask about that market is just so much larger and so under-penetrated or you all are so under-penetrated relative to the front range that it seemed like that was potentially a large opportunity.

Scott Wylie: We agree.

Bill Dezellem: Great, thank you.

Scott Wylie: Thank you, Bill.

Operator: One moment for our next question. Our next question is a follow-up from Brett Rabatin with Hovde Group. Your line is open.

Brett Rabatin: Hey, appreciate the follow-up. Wanted to go back, Scott, to the charge-off in the quarter and make sure I understand what happened. And so as you described it, the process of moving the loans from non-accrual to ORE resulted in the additional or resulted in the charge-offs, which in my mind, it would require maybe new appraisals on the properties that you foreclosed on that came up quite a bit shorter than the remaining loan balance. Could you maybe go over that one more time and make sure I understand why there was a deficit relative to the movement of those loans to ORE?

Scott Wylie: Sure. So I’ll give that another try. And if I’m not successful, Brett, in satisfying you, we can turn this over to the experts in the room here. But my answer to your question would be that we carry the loan on the books with a specific reserve based on the appraisal. So, if we think that a $10 million loan has $8 million in collateral, you’re going to put up a $2 million reserve. So when you take the collateral in, you’re going to pay off the loan on the books, you’re going to write-off the $2 million in specific reserve, and you’re going to set up as a charge off. And then you’re going to set up a new OREO [fits] (ph) real estate for the $8 million. So that’s, I think, mechanically how it works. We do get new appraisals, and I think we’ve ordered them all for all three.

I don’t know that we received any since we’ve got the OREOs on the books, but we have talked to appraisers and we think that our values are reasonable and in line and we have ordered new ones. So we’ll get that confirmation here shortly.

Brett Rabatin: Okay. So reserve was set aside but hadn’t been charged off for the difference. But when I look at the reserves, when you went from 2Q ‘23 to 3Q ‘23, the reserve went from $22 million to $23 million, and it peaked out at $27 million last quarter, but now it’s $18.8 million. So it’s $4 million less than it was in 2Q of last year, which I guess would have to mean your Q factors are better or something. I’m just having trouble reconciling the change and the difference.

Julie Courkamp: And it also follows the balance of your loans. So total loans have been declining, therefore your overall reserve, your CECL reserve follows that line as well. So it’s all part of the mathematical calculation that goes into the general reserve, I’ll call it, and specific reserve is based off of what each of these impaired loans has supporting them in collateral.

Brett Rabatin: Okay. I appreciate the additional color and the explanation. Thanks.

Operator: One moment for our next question. Our next question comes from Ross Haberman with RLH Investments.

Ross Haberman: Good morning. I just got a quick question you touched upon it in the prior question. Scott, you opened up, I guess it was the Arizona office and I think it’s billings, I think it is. Are those making money on a standalone basis or how would you describe the profitability of those branches today? Thank you.

Scott Wylie: Well we now have three locations in Arizona. Two of them are full service First Western profit centers as we call them internally, banks externally and one’s in Scottsdale, they both make money on a contribution basis every quarter. So that’s been a nice earnings producer for us. The third office that I mentioned is just a loan production office. And it makes money on a standalone basis as far as I know. David or Julie, they are same. So all three of the offices are profitable.

Julie Courkamp: And then we open, don’t know if he is also remembering the Bozeman office in Montana.

Ross Haberman: The Bozeman, yes, yes.

Julie Courkamp: Yes, that one’s in Montana and that’s a full service bank depository taking and it’s doing quite well.

Scott Wylie: Yeah, it’s roughly breakeven at the moment, trending in the right direction.

Ross Haberman: Any plans in the next couple quarters to expand either those areas with additional personnel or branches?

Scott Wylie: We are definitely looking at how to grow those businesses. And when you see things like the increased marketing expense in Q3, that’s part of our effort there. We actually had a really positive client event, client prospect event up in Bozeman, what was that, two or three weeks ago? Just recently. And then I think we had one down in Phoenix last night with really good turnout. So I think those are, we view those as growth markets for us and we’re certainly investing in them and continuing to encourage those folks that they’ve got great market opportunities there.

Ross Haberman: And just one final question along those lines, would you buy anything small if something came up in those markets for sale as a way to jumpstart the growth there? Either in Scottsdale, I guess, or Bozeman?

Scott Wylie: Well, I think we would theoretically. When your stock’s trading at a discount to a tangible book, that’s hard to make the numbers work. And so, my hope and expectation is that as we prove out our NIM story and our asset quality story and get our growth back on track and shift from this kind of defensive posture we’ve taken over the last 12 or 18 months to our normal kind of growth orientation, that — those kind of things will become much more achievable. As you know, I mean, we’ve had a long history of successful acquisitions here. I think we’ve done 13 now in the history of the bank.

Ross Haberman: And just a follow-up along those lines, if my recollection is right, you had announced a small buyback, was it a couple quarters ago? Is that still outstanding?

Scott Wylie: Yeah, it sure is. And we have set up a 10b5-1 plan in place for that, as we said we would. I think we’ve bought a whopping 5,501 shares, some number like that, year-to-date. And we’re not intending to change that criteria. We put the criteria in place and kind of leave it there. And where the stock is trading will be a function of how much we buy back.

Ross Haberman: Sounds like you might have to raise your limit a little bit, but thank you very much. The best of luck, guys. Have a good weekend.

Scott Wylie: Thanks, Ross.

Operator: And I’m not showing any further questions this time. I’d like to turn the call back over to Scott for any closing remarks.

Scott Wylie: Sure. Well, thanks everybody for taking the time to dial in today. And for all those good questions, we really appreciate the interest. I would just summarize by saying I think the headline numbers, again, this quarter were disappointing and not where we want to see the NIM and the earnings and the efficiency ratio and the asset quality. But as we said last quarter, we think that the underlying trends are positive as expected and are going to continue and show up in the numbers here in the coming quarters. And I think We’ve talked today about a number of these trends. Certainly the core NIM is a big one. Asset quality is a big one. The loan to deposit ratio, I think, was really great to see. And the mix of deposits was great to see.

The fact that we are still in strong markets with, frankly, increasing competitive disruption because of acquisitions, I think, is a really positive trend for us. The financial normalization that we’re seeing with the yield curve straightening out and some possible short-term additional short-term rate cuts. Those are positive trends for us. The front office hires we’ve put in place seem to be producing And pipelines continue to increase this quarter in some positive evidence of that. We haven’t talked a lot about, certainly not today, about our technology and process upgrades that we have in place. But I think those are going to play out here in the near term and provide some real efficiency gains, which we’re excited about. And overall, the shift from defense to offense is going to drive more profitability, better efficiency ratio, and hopefully some nice growth for us too.

So we sure appreciate the interest and support, and everybody hope you have a nice weekend. Thank you.

Operator: Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.