First Western Financial, Inc. (MYFW) Earnings Call Transcript

Thank you. Thank you for standing by and welcome to First Western Financial's third quarter 2026 earnings conference call. [Operator Instructions]. I would now like to hand the call over to Lisa Fortuna, Investor Relations. Please go ahead.

Thank you, Lateef. Good morning, everyone, and thank you for joining us today for First Western's third quarter 2026 earnings call. Running 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'll use a slide presentation as part of our discussion this morning. If you have not already done so, 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 involves 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. 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 GAAP to non-GAAP measures. And with that, I'd like to turn the call over to Scott.

Thanks, Lisa. And good morning, everybody. We executed well in the third quarter and saw positive trends in many areas, including loan growth, improving deposit mix, net interest margin expansion, trust and investment management fee growth, well-managed expenses, and improved asset quality. This resulted in another quarter of strong profitability. Pre-tax, pre-provision net income increased 15% in the third quarter, that's not annualized, compared to the prior quarter, and 27% compared to the third quarter 2025. We continue to maintain a conservative approach to new loan production with our disciplined underwriting and pricing criteria. The new banking talent over the past several years and increasingly over the past few months, and our healthy economic activity across our markets, fueled strong loan production that was diversified across markets, industries, and loan categories. As a result of our financial performance and balance sheet management strategies, we continued to grow tangible book value per share this quarter. In slide 4, we generated net income of about $6 million, or $0.60 per diluted share, in the third quarter, both of which were 88% higher, respectively, than the third quarter of 2025. With our prudent balance sheet management, our tangible book value per share increased by 3% this quarter to $26.40. Now I'll turn the call over to Julie for some additional discussion of our balance sheet and trust and investment management trends. Julie?

Thank you, Scott. Turning to slide 5, we'll look at the trends in our loan portfolio. Our loans held for investment increased $95 million from the end of the prior quarter, marking the sixth consecutive quarterly increase. On a year-over-year basis, total loans increased 8%. We continue to be conservative and disciplined in our new loan production. However, the higher productivity of the bankers added over the last several quarters is driving an improvement in loan originations. New loan production was $163 million in the third quarter and was diversified across various markets and loan types with a focus on relationship-based lending. Additionally, we are attracting deposit relationships with these clients. We continue to be disciplined with respect to pricing, which resulted in the average rate on new production of 6.79% in the quarter, which was 42 basis points higher from the prior quarter and 53 basis points higher than the average rate of loan payoffs of 6.26% in the quarter. Quarter-end loans outstanding were almost 3% higher than average loan balances for the quarter, which is providing strong momentum going into the fourth quarter. Moving to slide 6, we'll take a closer look at our deposit trends. Our total deposits increased 2.5% from the end of the prior quarter with growth in non-interest bearing and money market accounts. On a year-over-year basis, total deposits increased 2.4%. Average non-interest bearing deposits increased $14 million or 3.9% in the quarter and 10% using quarter-end balances. We remain focused on continuing to improve our deposit mix to drive further NIM expansion going forward. Now I'll turn the call over to David for some additional discussion of our balance sheet.

Thank you, Julie. Turning to slide 8, we'll look at our gross revenue. Gross revenue increased 2.8% from the prior quarter, primarily due to an increase in net interest income partially offset by a decrease in non-interest income. Turning to slide 9, we'll look at the trends in net interest income and margin. Our net interest income increased 5.5% from the prior quarter due to an increase in net interest margin and an $81 million increase in average interest earning assets. Our NIM increased 5 basis points from the prior quarter to 2.95%. This was primarily due to an increase in yield on average interest-earning assets, partially offset by an increase in cost of funds. The yield on interest earning assets increased 7 basis points driven by an increase in loan yields. The cost of funds increased 2 basis points due to higher rates on money market accounts. Our net interest income increased 18% from the third quarter of 2025 due to a 41 basis point increase in NIM and higher average interest earning assets. Turning to slide 10, our non-interest income decreased by $600,000 from the prior quarter. This was primarily due to a decrease in net gain on sale of mortgage loans as origination volumes were negatively impacted by higher mortgage rates and a decrease in bank fees, partially offset by an increase in trust and investment management fees. Trust and investment management fees increased 2.6% from the prior quarter, driven by increases in investment agency, trust, and retirement fees. Now turning to slide 11 and our expenses. Our non-interest expense decreased $400,000 from the prior quarter. The decrease was primarily driven by a decrease in technology and information systems as well as salaries and employee benefits. The decrease in technology and information systems was primarily attributable to a $400,000 non-recurring charge that we recorded in the second quarter of '26. The decrease in salaries and employee benefits was primarily driven by lower employer payroll taxes. Our efficiency ratio improved to 72% compared to 74% last quarter and 76% in the third quarter of 2025, as we continue to tightly manage expenses while also making investments in the business that we believe will positively impact our long-term performance. Now turning to slide 12, we'll look at our asset quality. As Scott indicated earlier, we saw improved trends in the loan portfolio in the third quarter with a decrease in non-accrual loans driven by paydowns. Our non-performing asset ratio decreased to 39 basis points in the third quarter. Increased loan volume contributed to a provision of $600,000 during the third quarter of 2026. Our allowance coverage ratio was 74 basis points in the third quarter, down from 75 basis points in the previous quarter. Now I will turn it back to Scott.

Thanks, David. Turning to slide 13, I'll wrap up with some comments about our outlook. Based on our third quarter performance and what we're seeing in our markets, we're encouraged and we expect further improvement in financial performance in the fourth quarter of the year. Overall, we continue to see relatively healthy economic conditions in our markets. We're seeing good opportunities to add new clients and banking talent due to the ongoing disruption from M&A activity in our markets. Our loan pipeline remains strong and should fuel solid loan growth going forward. We expect positive trends to continue across several key areas, including loan growth, deposit growth, deposit mix improvement, net interest margin expansion, and increased activity in our wealth management business. Combined with disciplined expense management, we believe continued revenue growth should drive even more positive operating leverage and further improve our financial performance. We had a net interest margin expansion of 26 basis points in 2025 and another 24 basis points in expansion so far in 2026. This will continue. We remain disciplined with expenses, continuing to invest selectively in opportunities that can enhance long-term shareholder value. Continued M&A disruption in our market is creating attractive opportunities to add experienced banking talent and new client relationships. And we're well positioned to capitalize on those opportunities as they emerge. Based on the trends we're seeing in the portfolio and the feedback we're getting from our clients, we're not seeing anything to indicate that we'll experience any meaningful deterioration in asset quality through the rest of the year. Positive trends across several key areas in the business, we believe we're well positioned to deliver continued improvement in financial performance and create additional value for our shareholders. So with that, we're happy to take your questions. Latif, please open up the call.

As a reminder, to ask a question, you will need to press star 11 on your telephone. To remove yourself from the queue, you may press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Hannah Nguyen of KBW. Your line is open, Hannah.

Hi, good morning, guys.

Morning, Hannah.

I wanted to start on loan growth. I know you had talked on the call last quarter about expecting to see strong loan growth in the second half of the year. So it was great to see that 14% number this quarter. Just wondering if you could give us a sense of how pipelines are shaping up for the fourth quarter and into 2027, and curious if you think we could expect to see another 14% number double-digit growth quarter to end the year.

Well, I'm always reluctant to say, well, this quarter is going to be this percent because it does bounce around a little bit, but there are definitely favorable trends that we've seen through the year, which we expected. We said we were going to be investing in more talent in the first half of the year, and that would produce more growth in the second half of the year. That's exactly what we're seeing. I was actually talking to the team this morning. You know, we've seen more loans in our credit working group, which meets three times a week, to preview upcoming credits, and then also credit committee over the past several weeks now than we've seen in the first half of the year. So pipelines are stronger and continue to be strong. The actual work in process that we're seeing and the activity we're getting from our frontline folks is stronger. I do think that we're going to see positive trends. I feel like, you know, our forecast for this year kind of – 10%-ish growth, seems like we're on track for that, and I think a 15% run rate here going into 2026 seems like, or 2027, I mean, seems like a reasonable time indication of what we're seeing.

Great. That's really helpful. And the next, just wanted to touch on mortgage. I know the rate environment has been a bit of a headwind there. Just curious how you see activity trending from here if rates continue to rise?

So mortgages as a percent of revenues for us is a small number. We are in that business primarily because we think it's strategically important for a private bank to be able to play good defense with our clients that want mortgages and to use that to play offense to attract jumbo mortgage clients that we can turn profitably into, you know, full relationships. So, you know, definitely production nationwide has fallen off the cliff. We actually met with our mortgage team earlier this week to see how we were doing relative to the overall secondary market and we're outperforming. And I think that's because, you know, we're doing the things we can. We can't control obviously, you know, the 10-year Treasury, we can't control demand for mortgages, which is way down nationally, but what we can control is the fixed expenses in that area, which we've cut, and the quality and productivity of the MLOs that we have in place who are commission based, so there's not a significant direct cost to them on an ongoing basis. But we have had a lot of success over the last year adding. So that helps with our strategic benefit, but it also helps when the market comes back, which eventually it will, you know, we'll be able to take advantage of that. But, you know, it's a little bit of a sideshow. I actually think the more interesting part of the fee income story this quarter, and we kind of glossed over page 7 of the deck, so I just want to go back to that for a minute. Is it page 7 or? You know the fee income this quarter was down thanks to insurance and mortgages, but actually our PTIM fees, oh, the AUM was down, so it looks all negative, but we said that we've done this restructuring of our PTIM folks and completely reorganized that business for the future over the last couple of years. We brought in Brandon Summers from Goldman Sachs, and he's leading that team. We said, you know, we're going to see some results of that in 2026. Well, in 2Q we talked a little bit about green shoots and now we see, you know, that was investment management fees were up over $100,000 in 3Q, which if you look at that on a, on a growth rate basis, that's 2.6% increase, or annualized, that's 10.4%, and up 5.1% from a year ago. So those are trends that we haven't seen in years here. And I think that that's really a very bright spot in our fee income story that's kind of buried in some of the headwinds from mortgages and our insurance sales.

That's great. Thanks for all the color there. Thanks for taking my questions. I'll step back.

Thanks, Hannah. Thank you. Our next question comes from the line of Matthew Clark of Piper Sandler. Your line is open, Matthew.

Good morning, everyone.

Good morning.

Um, just on the deposit cost side, um, maybe if we could just start with getting the spot rate at the end of September and you know, the beta assumption we should use on interest-bearing deposits, you know, assuming we get, you know, one or two more rate hikes here.

Yes, Matt, the spot deposit rate for total deposits was 2.86% at the end of September. And from a beta standpoint, the way I look at the deposit portfolio is really focusing on the money market accounts from a beta standpoint. So we have $740 million in index money market accounts, which would translate to 100% beta. And then we have $760 million in standard money market accounts. That's how I refer to them, which that's where it's more of, you know, a standard type of beta, and we saw a 28% beta on that September hike. Um, and you know, we think that that's.

Certainly what we're targeting going forward. So just to add a little bit of strategic overview on that too, Matt. You know, we've focused on building our deposit base, and I thought we saw some nice progress in 3Q on that. Not only in the growth that we saw, but also the mix. And, you know, David and his team did a drill down on that, and there's really three components seem to be driving that. Our business development focus that we're working on the deposit side, you know, we brought in this new deposits team nine months ago now, and, you know, the focus we're doing there seems to be working. And then, uh, we've restructured and rebuilt our treasury management team. We've always had a competitive treasury management offering, we've really changed that pretty significantly and upgraded that. And then the third area is we require relationships with every loan we do. We've been doing that for, I don't know, a year and a half now, something like that. And we literally write into every loan document a requirement that the borrower use us as their primary bank. So those three components are driving deposit growth, they're driving a deposit shift into more DDAs, non-interest bearing deposits, which of course is.

An area full of opportunity for First Western. Got it. Matt, one data point I should also mention is we do have $200 million notional of capital cash flow hedge on the deposit portfolio, and that's a pay fixed swap. So that effectively takes that, you know, $740 million of index money markets $200 million.

Yep. Okay, great. And then just, I want to ask about the borrowings at the end of the quarter. It looked like on average they were down but up a decent amount at the end of the quarter. And you expect, you know, margin expansion to continue. Can you just give us provide some color on um, you know, those additional borrowings and and uh whether or not they might stick around. I would I would think that would be a headwind for the margin in 4Q.

Yes, on an average basis we expect that to normalize. We do have, you know, internal liquidity policies and things of that nature that drive some of the borrowing at the end of the quarter. But like I said, on an average basis, we do expect that to.

Okay. Similar to where you were is what you're implying? Okay. And then just some profitability. Any thoughts on when you think you can achieve a 1% ROA? And I think we all know how you can get there, but any thoughts on timing there? Okay.

Well, we've been working on our plan for 2027 and I think if we define that as kind of short term here, we do think that we'll be operating a 1% ROA during 2027, whether that's mid-year or the average for the year, the full year, I would be reluctant to say today. But I think from the progress we've seen now the last three years and then these trends that I talked about, which seem to be accelerating in 3Q that are so positive, I do think that over the course of 2027. The other interesting question that I have been wondering about and asking David and his team about is, you know, when we were doing $0.54 in 2023, you know, we're thinking, boy, you know, it's our EPS, we gotta get back to 1% here. Is 1% any kind of a ceiling for us? And our new three-year forecast that we use internally we can see a line of sight to 1.5% ROA, just based on stable, healthy markets, an upward sloping yield curve, relatively stable rates, healthy economy, if those sorts of things continue, I think that that's something that we can look forward to in the medium term to drive shareholder value here.

Great. Thanks again. Thank you. Thanks, Matt. Thank you. Our next question comes from the line of Liam Coohill of Hovde Group. Your line is open, Liam.

Thank you, and good morning, Scott, Julie, and David. Thanks for taking the questions.

Morning, Liam.