Ladies and gentlemen, thank you for standing by, and welcome to the First Western Financial First Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Tony Rossi with Financial Profiles. Please go ahead, sir.

Thank you, Alexander. Good morning, everyone, and thank you for joining us today for First Western Financial's First Quarter 2021 Earnings Call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; and Julie Courkamp, 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, including the impact of the COVID-19 pandemic. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. I would also direct you to read the disclaimers in our earnings release and investor presentation. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. And with that, I'd like to turn the call over to Scott. Scott?

All right. Thanks, Tony, and good morning, everybody. Our first quarter results reflect the continuation of the significant increase in profitability that we began generating last year. Our net income was $6 million and earnings per share of $0.74 are both more than 300% increases over our financial results in the first quarter of 2020. We're also seeing substantial improvement in our level of returns with our ROA coming in at 1.16% for the quarter, our ROE at just about 15%, and our ROTCE coming in at 17.5%. We're still operating in far from a normalized environment, we continue to make exceptional progress on our path to becoming a high-performing institution. Our new client acquisition activity remains very strong, which is resulting in strong inflows of low-cost deposits and further improvement in our deposit mix. Given our business model and the types of clients we target, we often get large deposit accounts that sit on our balance sheet temporarily until some of the funds are placed in investment management accounts, and we saw quite a bit of that activity in the first quarter. Well, this creates excess liquidity that's negatively impacting our net interest margin in the short term. We believe the addition of these clients and low-cost deposits they provide and fee income they generate significantly enhanced long-term value of the franchise. In the fourth quarter of last year, we had the highest level of loan production in our history, which left our loan pipeline relatively small to start the year. So we spent the first quarter rebuilding the pipeline as well as focusing on helping our clients access the second round of PPP funding. Over the last few quarters, we made some adjustments in our loan pricing to try and improve our average yield on new production. However,…

Thanks, Scott. Turning to Slide 10. We have provided an update on our participation in the PPP program and how it impacted various metrics in the first quarter. We had approximately $30 million of PPP loans received forgiveness in the first quarter. We have also submitted nearly $100 million in loan applications for the second round of the PPP program and had received approval on $82.5 million of these loans through the middle of April. This resulted in $190.5 million of PPP loans remaining on our balance sheet at the end of the quarter and $3.1 million in fees remaining to be recognized. With a relatively small amount of accelerated fee recognition in the first quarter, the low-yielding PPP loans had a negative impact on our net interest margin of 6 basis points. While we have plenty of liquidity resulting from our strong deposit inflows, we have continued to utilize the PPP liquidity facility to fund our PPP loan origination so that we can continue to get the preferred capital treatment on these loans. Turning to Slide 11, we'll look at our gross revenue. We had a very strong quarter of revenue growth with increases coming in both net interest income and noninterest income. Relative to the first quarter of 2020, our net interest income was a 46.2%, while our noninterest income was up 36.7%. And while we are very pleased that we are able to continue to generate this level of revenue of growth while keeping our expense relatively stable. Turning to Slide 12, we'll look at the trends in net interest income and margin. Our net interest income decreased 3% from the prior quarter. The decrease was due to lower PPP-related fee income and 2 fewer days of interest accrual. Given the payoffs we saw in other areas…

Okay. Thanks, Julie. Turning to Slide 17. I'll wrap up with some comments about our outlook. I'll start with some general comments about the macro environment in our markets. We've seen a very efficient rollout of the vaccines, and as of last evening, about 27.2% of the population in Colorado is fully vaccinated and about 42% has at least one dose. We're definitely seeing this have an impact on the level of confidence that our clients have in the economic recovery. From an anecdotal perspective, we're having more clients asked for in-person meetings, which is an encouraging sign that things are getting back to normal. We continue to work on rebuilding our loan pipeline. And since we made the adjustment in our pricing requirements, we're getting more traction. They'll probably take another quarter of building the loan pipeline to put us in a position for higher loan production and stronger loan growth in the second half of the year. The stronger loan growth will enable us to profitably redeploy our excess liquidity, and we'll also see some of that liquidity start to generate fee income as it's transferred into investment management accounts. We're also making nice progress in adding MLOs, mortgage loan officers, ahead of the seasonal -- seasonally strong spring and summer months. The MLOs we're adding are focused on purchase originations it will enable us to capitalize on the high level of population growth and strong housing trends in our markets. As a result, we expect the mortgage segment to continue making a significant contribution to our overall profitability. With the higher revenue that we generate is we redeploy our excess liquidity and drive additional growth in our fee income, we should realize additional operating leverage and further increases in our level of profitability. While we're well positioned to drive additional organic growth, the environment for acquisitive growth is also becoming more favorable. M&A discussions in our markets are starting to increase and give us more opportunities to evaluate deals that could enhance the value of our franchise. And given the success we've had over the past year, I think we're now being viewed as a very desirable merger partner, which certainly helps our efforts. From an earnings perspective, we got off to a good start this year without the benefit of strong loan growth that we've seen over the past few quarters. We're confident that we'll return to a more normalized level of loan growth later in the year. And as we do, we should see further earnings improvements, which we will look to continue supplementing with additional M&A transactions that can further accelerate our growth and our profitability. And with that, we're happy to take your questions. Alexander, please open up the call.

[Operator Instructions] We have your first question from Matthew Clark with Piper Sandler.

Maybe just first on the expense outlook, I think you mentioned $16 million to $16.5 million for the first half. Does that imply that there might be a step-up in the second half? And if so, what are your thoughts and what's driving it?

I second that. I think that there will be some amount of increase, but it's nothing -- that wasn't intended to imply that there is an increased step up happening in the second half. It was just trying to give guidance for the first half. I would expect as we continue to grow the balance sheet that we will have moderately increase in expenses that nothing above the kind of normal pace that you would expect for total expense increases that we've given guidance for.

Okay. And then just on the mortgage piece, I think you guys had targeted 20%, I think a 20% reduction for the year, obviously, going the other way to start the year. Given the mix of refi versus purchase and the outlook for more purchase going forward in the spring and summer, what are your overall thoughts on kind of mortgage volume and sales?

Well, clearly, Q1 was stronger than Q1 a year ago, but we don't expect the giant boom that we saw in Q2 and Q3 of last year, which was refi-driven. We were doing 75% or so purchase money and 25% refi historically. And then over the last 4 quarters now, we've seen that flip to some number like 60% or 70% refi, even higher in some months, and then in Q1, we've seen a big drop in the refi activity. And we would expect that to continue. In fact, we were looking at the April production this week, and we're back to a number more like 70-30 purchase to refi. But the good news is that this is the time of year when we see a big increase in purchase activity because of the seasonality factor. So I think that the 20% decrease from last year that we had talked about seems like a reasonable estimate from where we sit today.

Okay. And then maybe just on the revenue you generate on your AUM, which was up this quarter. Can you just remind us, is there a lag in terms of the realization of that revenue? Should we see kind of a similar step-up in fees from the increase in AUM this quarter?

I think technically, no. We recognize the income as it gets -- as we take over the management of the assets. But in reality, yes, because what happens and it just takes forever to get the accounts sold and closed and moved and implemented into the investment activity that they're going to have. And I mean it wont' say forever, but it's a 3-month process or including the sales cycle can be much longer than that. So I think probably the technical answer to your question is no. But I think that realistically, we're going to see some benefit in future quarters in fee income from the activity we've seen in the first quarter.

We have your next question from Woody Lay with KBW.

Just wanted to touch on loan growth. I appreciate the color you provided earlier in the call. How is the pipeline shaping up so far in the second quarter? And do you think we can get growth back up in that high-teen range in the back half of the year?

Well, I could try to answer that, and then we could get a rebuttal from Julie. But last year, I think we grew loans, depending on how you want to look at it, something like 50% by low. And so we don't expect that level of growth this year. We had a $50 million payoff on 31st March that kind of skews the numbers for period end quarter-over-quarter. But there's nothing that's changed in our markets. In fact, I would say conditions have gotten more favorable for economic activity and new clients and loan growth and all that stuff. So I mean, to me, core organic loan growth this year in the teens, mid-teens, like we've historically produced seems like a very reasonable number first quarter, notwithstanding. We've talked before, Woody, about how, at our size, which is relatively small for a regional bank, small changes, small numbers that like the example of the $50 million loan on 31st March can have a big impact in the overall appearance. But if you look at the underlying average loans outstanding, we saw good growth. I think we're going to continue to see good growth. The pipeline is actually up a little bit in April. And as I say, I mean economic underpinnings here are very strong. So I think we'll be fine. Julie, is there other color you'd want to add to that?

No, you touched on the pipeline and part of his question was related to that. We have seen some growth in the pipeline every month since January. So I feel like we're starting to see that momentum going into the second quarter and more business activity typically happens more in the second and third quarter in our season, in our areas. So I think pipelines that are showing that trend holding out to.

Got it. That's good color. And then as you mentioned, it does seem that the loan pricing side is really intense right now. Could you just give some color on where new loans are coming on the balance sheet at this point?

Yes. So Julie, I'll start, and then I'll call you after we're done. If you're ready. So -- but for me, we made a conscious decision last year, which I think we talked about on these calls to increase pricing because we thought that we had the ability to do that. And what we have seen in the first quarter is the competitive market has tightened quite a bit. And so we've been reluctant to match what we would consider to be unreasonably low pricing historically in last quarter. And so that's definitely been a factor for us this year. I think we've taken a look at that and said, we don't want to lose good deals on price. And so we're being a little more competitive going into Q2. But generally, I would tell you, that pricing has been a challenge. Now having said that, our pricing was quite a bit stronger in Q1 than it was in Q4. And again, part of that is kind of onetime things. But our new production, I think, average rate was 3.57% in Q1, which is a good number for us. Julie, any thing you wanted to add?

No.

All right. That's helpful. And then last from me, the CECL or your reserve levels, they saw a little bit of an increase just due to the loan shrinkage. I think they're currently running about the reserves running about 15 basis points higher than where it was pre-pandemic. With credit quality seemed really strong. Do you envision having that reserve drop back to sort of pre pandemic levels over the next couple of quarters?

We're not budgeting for that. You're absolutely right. We have seen strong credit quality continue and, in fact, improve over the last 12 months considerably by any measure that we use internally. But we know we have CECL ahead of us, and we're not sure what the impact of that's going to be. And so I think the strategy for us is more to grow into the reserve that we have. And we are starting our CECL work now, so we can figure out what that's going to mean for us and start prepping for that, But we don't really anticipate a big [ release ]. And frankly, we don't really anticipate a big increase in our level of reserves. Net of PPP and purchase accounting for acquired loans were over 1% now, which is very adequate for the level of credit quality.

Right. Can you just remind me is CECL a 2023 event for you all?

Correct. Yes.

We have your next question from Bill Dezellem from Tieton Capital.

I have a couple of balance sheet questions and then a more broad question. Accounts receivable was up a little more than $5 million versus December. What was driving that?

So normal activity for us and normal business activities as well as some of the interest rate lock commitment and valuation of the mortgage portfolio. So that typically drives a bit of a change in the valuation of the receivables and other assets.

And Julie, did you just say other assets?

Yes. There's different lines within receivables and assets.

You just jumped to my next question then, which was other assets dropped approximately $10 million versus December. So is that somehow related to accounts receivable increasing? And if so, would you walk through kind of how the mechanics work there? And if you prefer to take it offline, that's totally fine.

I'm happy to take it offline as well. But yes, it's just the difference in the activity within the mortgage pricing.

All right. Let's jump to your growth anticipated this year. How many offices are you planning on opening in 2021?

Well, I think it depends. We have, depending how you count them in terms of the trust offices and loan production offices, 17 offices today. And of course, our main focus is on organic growth. We believe that getting each one of these offices growing and reaching maturity. And once they're mature, continue to grow, it's kind of a key to our operating leverage story. We think that these offices can need to be $8 million or $10 million businesses with 70% or 80% contribution margin. And I think the rapid increase in profitability that we've seen accelerating last year and I think, again, on that slide, I think 4 this time, that excludes mortgages, shows more of that happening going into 2021. So I mean that's kind of the first piece of that. The second piece is that we have started over the last couple of years, incubating new offices in existing offices. And then when they reach a certain level of revenues that they can operate as a breakeven contribution, we'll move into their own office. And so the most -- 2 recent most examples of that, we've just move Vail out of a temporary space into their permanent space. That's been a nice success story for us over the last year or so. And then we've got Broomfield, but we've been incubating up in Boulder, and we've got permanent space for them that they'll be moving into sometime late Q2 or early Q3. We have a couple of other incubator projects going now. So maybe another 2 offices this year in terms of kind of incubated expansion, that would be our general target. And then the third leg of that would be acquisition activity, and we commented on that. We're seeing more activity, more opportunities. So there could be new offices that come out of that eventually sometime in '21 or '22.

And following up on that piece. From what you are currently seeing with the acquisition chatter, would you suspect that you would be adding offices if you were to do a deal really at infill within some of your more densely office markets? Or are you thinking that it would be more likely that you would be adding really adding geographic dispersion?

We work on both. We have a list of markets that are of interest to us and some are fill in markets and some are new markets. And we actually don't think of a just as acquisition, we think about is corporate development. And so we were kind of lift out recruiting teams. As you know, Bill, we've talked about the fact that First Western is unique in it and we can buy a bank add investment and trust services to their branches. We can buy an RIA and add banking service to their location, and then we can just do de novo. And we've done all those things successfully at First Western over the years.

[Operator Instructions] We have your next question from Ross Haberman from RLH Investments.

Julie, I have a quick question on Slide 21. That $0.73 of non-mortgage income. If you backed out the PPP fee income for the quarter, what do we get to on how much does that lower the $0.73?

So I think we have a PPP slide in there for you. That talks about the net interest income. So net interest income for the PPP program was $800,000, 6 basis points of net interest margin impact. So if you take the $800,000 off of that, you would get there.

Got it. Okay. And Scott, just a quick question for you. Could you talk about the competition a little bit in the likes of like an Alpine Bank and guys like that? How difficult or competitive are they both on the loan and then the deposit side?

So, Julie, I know he didn't ask me about the PPP fees in the first quarter. But I think the fees that we recognized in Q1 were quite a bit less than we would have anticipated. Because you don't really book any new fees with PPP-2 until they either amortize or pay off, you get forgiven. And with PPP-1, the forgiveness was delayed. And so the fee income recognition from PPP was minimal, I think, in Q1. Is that a correct statement, Julie?

Yes.

So anyways, Ross, I think your question for me was more about the competitive environment. And I actually, we've seen, I think, 2 or 3 basis point improvement in reduction in our deposit costs in Q1. So I think we're doing a nice job of managing that. In terms of the competitive landscape for loan pricing, I mean I spoke to that. I think what we're seeing is a lot of banks having a lot of liquidity and be willing to bid down the loan pricing. And fortunately, we don't do project financing. We don't do like competitive bid financing. We have to obviously be in the market. Our borrowers can borrow anywhere they want. But we tend to do relationship-based kind of private banking borrowing. And so I think we do have probably more price ability than maybe another retail or community bank might. And I think we probably get somewhere between 5 and 15 basis points of benefit from that in a typical loan structure that we do here at First Western.

We have your next question from Matthew Clark with Piper Sandler.

I thought, we should touch on the margin outlook. Just given the latest pressure and the potential for loan growth to start picking up, do you -- I guess thinking it through -- I mean, is there -- I think last time we spoke, there was an expectation that interest-bearing deposit costs would start to level out maybe around 30 basis points, is there renewed, I thought there to maybe press on those costs a little bit? I guess, what's your overall view of the 2.88% core NIM going forward?

Looking month by month, NIM seems to have bottomed out. For us, it's so difficult, I'm sure, from the outside, in particular, to adjust for all of the noise that's in that number right now. I think you've got to factor in the PPP situation, which keeps getting, I would say, more complicated with the additions there. And then -- and you've got to factor out the cost of the excess liquidity. So our internal projections are that we should improve NIM this year. We think that we can operate First Western in kind of the 3%, the mid-teen range of 3%, of 3.10%, of 3.15%. It's probably going to take us the rest of the year to get there. But we do think that we could do better than 2.88% and we think that that's bottomed out. So we're looking for some NIM improvements during the rest of the year. Now having said that, we don't really manage for NIM. We manage for net interest income. And so if we continue to see rapid deposit growth that creates liquidity that we can't use that we can use to invest profitably in the short-term that will reduce NIM, then that would have that impact, of course. But I think for right now, the liquidity we have is kind of a nice problem, and we don't anticipate the NIM to continue to decline the way we've seen last quarter. Julie, is there other color you'd add to the NIM story?

Particular to deposit costs, our spot rate for deposits in March was 21 basis points, which is just a few basis points down from where we were seeing it in December. So I think on your interest expense question, I think we're chilling like we're kind of where we are. But as you have seen in our numbers, we continue to grow. The mix is better. So we continue to grow our noninterest-bearing deposits more than the other deposits, which will continue to help with the cost and [ half ] as well.

I'm showing no further questions at this time. I would now like to turn the conference back to management for any closing remarks.

Great. Thank you, Alexander. So just to wrap up here, obviously, is another strong quarter. I think the key to understanding this quarter is the underlying trends, which, number one, we continue to grow assets and revenues and fees much faster than expenses. There's some noise in there from PPP and mortgage and onetime activity, but underlying business is very strong. Our net income is up 4.6x year-over-year. Total assets are up 48%. Total loans up 55.7%. Gross revenues up 42%. Those are big number. Number two, mortgage is performing well. It's a strategic core business for us that fits with our private banking, and now we're entering the strong 6 months of the year, seasonally strong 6 months of the year. And I think the third point that we touched on there last with Matt was the core NIM is actually holding up pretty well and should recover as we continue to put liquidity work and reduce our PPP balances. So I think that we're really pleased with the underlying performance here. And sure appreciate everybody's time and questions today dialing in. Thanks so much for your interest in First Western.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. Have a wonderful day, and you may all disconnect.