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

Thank you for standing by and welcome to First Western Financial's second 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 and good morning, everyone. Thanks for joining us today for First Western Financial's second quarter 2026 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 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.

Thanks, Lisa, and good morning, everybody. We executed well in the second quarter and saw positive trends in many areas, including deposit growth, net interest margin expansion, well-managed expenses, and stable asset quality. This resulted in another quarter of solid profitability. We continue to maintain prudent risk management and conservative new loan production practices. Fortified by banking talent over the last several years and good economic activity across our markets, we achieved healthy loan production that was diversified across markets, industries, and loan categories. As a result of our financial performance and the balance sheet management strategies, we further strengthened our tangible book value per share this quarter. Moving to slide 4, we generated net income of $6.7 million or $0.57 per diluted share in the second quarter, 129% and 119% higher respectively than the year-ago period. With our prudent balance sheet management, our tangible book value per share increased by 2.6% this quarter to $25.53. Now I'll turn the call over to Julie for some additional discussion on our balance sheet and trust 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 $23 million from the end of the prior quarter, marking the fifth consecutive quarterly increase. On a year-over-year basis, total loans increased 7%. We remain conservative and disciplined in our new loan production, and the higher productivity of the bankers added over the last several quarters is supporting a stable pace of loan origination. New loan production was $115 million in the second quarter and was diversified across various markets and loan types with a focus on relationship-based lending. We continue to be disciplined with respect to pricing, which resulted in the average rate on new production of 6.37% in the quarter, which was 6 basis points higher on a quarter-over-quarter basis and higher than the average rate of loan payoffs of 5.89% in the quarter. Now moving to slide 6, we'll take a closer look at our deposit trends. Our total deposits increased from the end of the prior quarter with growth in money market accounts partially offset by a decrease in time deposit accounts. On a year-over-year basis, total deposits increased 12.6%. Average non-interest-bearing deposits increased $18 million or 5.1% in the quarter. Turning to trust and investment management on slide 7, we had a $41 million increase in our assets under management in the second quarter, primarily attributing to improving market conditions. Investment Agency increased $91 million in the quarter and $122 million on a year-over-year basis, which is our highest fee category. As David will cover shortly, our trust and investment management fees have increased 5.1% from the second quarter of 2025 as we have restructured that team for growth. Now I'll turn the call over to David for further discussion of our financial results. David?

Thanks, Julie. Turning to slide 8, we'll look at our gross revenue. Gross revenue increased 1.8% from the prior quarter, primarily due to an increase in net interest income partially offset by a decrease in non-interest income. Our gross revenue has increased 16% from the second quarter of 2025. Now turning to slide 9, we'll look at the trends in our net interest income and margin. Our net interest income increased 4.3% from the prior quarter due to an increase in net interest margin and an increase in day count. Our net interest margin increased 9 basis points from the prior quarter to 2.9%. This was primarily due to a decrease in cost of funds combined with an improved mix shift in average interest-earning assets. The yield on interest-earning assets increased 4 basis points, driven by a favorable shift toward higher-yielding loans, while the cost of funds declined 4 basis points due to an improved funding mix and lower rates on time deposits. Our net interest income increased 21.7% from the second quarter of 2025 due to a 23-basis-point increase in net interest margin and an increase in average interest-earning assets. Now turning to slide 10, non-interest income decreased by $0.3 million from the prior quarter. This was primarily due to a decrease in net gain on sale of mortgage loans given lower origination volume due to higher mortgage rates, a decrease in risk management and insurance fees, offset by an increase in bank fees. Now turning to slide 11 and our expenses. Our non-interest expense increased by $1 million from the prior quarter. The increase was due to an increase in technology and information systems, data processing, and marketing. The increase was primarily attributable to a $400,000 non-recurring charge related to the write-off of certain previously capitalized technology assets, which negatively impacted diluted EPS by $0.03. Our efficiency ratio was 74.03% compared to 73.11% last quarter and 78.83% in the second quarter of 2025. Going forward, we expect quarterly non-interest expense to be between $20 million and $21 million and we will continue to exercise disciplined expense control. Now turning to slide 12, we'll look at our asset quality. As Scott indicated earlier, we saw stable trends in the loan portfolio in the second quarter with relatively flat non-accrual loans and NPAs. Additionally, we had no loan charge-offs for the second consecutive quarter. Our allowance coverage was 75 basis points of total loans, as improved trends during the quarter drove a release of provision of $0.5 million. Now I'll turn it back to Scott. Scott?

Thanks, David. Turning to slide 13, I'll wrap up with some comments about our outlook. Based on our second quarter performance and what we're seeing in our markets, we are encouraged and expect further improvement of financial performance in the second half of the year. Overall, we continue to see relatively healthy economic conditions in our markets. We're seeing good opportunities to add both new clients and banking talent due to the ongoing disruption from M&A activity in our markets. We've also recently added new leadership in Arizona, where we're beginning to see good traction and opportunities for growth. Our loan and deposit pipelines remain strong and should result in improved balance sheet growth in the second half of the year, a key objective of ours. In addition to balance sheet growth, we also expect to see positive trends in our net interest margin, our fee income, and more operating leverage resulting from continued revenue growth and ongoing expense discipline. We had a net margin expansion of 26 basis points in 2025 and another 19 basis points so far in 2026. While we remain disciplined in our expense control, we believe there will be opportunities to invest in our business by adding banking, trust, and investment management talent and new clients due to the disruption caused by the continued M&A in our markets. These investments in the business will drive future shareholder value, and the ongoing disruption from M&A activity in our markets creates opportunities for us to add revenue growth talent. We will take advantage of these opportunities if and when they materialize as well as opportunities to add new clients. Based on trends we're seeing in the portfolio and the feedback we're getting from our clients, the credit outlook appears stable and healthy. The positive trends we're seeing in a number of key areas are expected to continue, which we believe will result in steady improvement in our financial performance and further value being created for our shareholders in 2026. So with that, we're happy to take your questions. Operator, please open up the call.

[Operator Instructions] Our first question comes from the line of Hannah Wynn of KBW. Your line is open, Hannah.

Hi, this is Hannah stepping in for Woody Lay. I wanted to start off with loans. I saw you guys noted and mentioned earlier that you have strong loan and deposit pipelines and was wondering if you could give a little more color on where that growth is coming from and how you're thinking about overall loan growth for the second half of the year.

Sure. Let me start with a short answer and then give a little bit more detailed one if that's okay. The short answer is we've seen a really nice balance in where our loan production's coming from. And on the loan page of the deck, you can see there, that we saw our usual $100 million a quarter in payoffs and paydowns, and the production that we did in the quarter of, whatever it was, $115 million-ish, was better than that, but not enough to drive the growth that we saw, that we would see. The longer answer to the question is we're seeing some impact, as I had predicted in the prior two quarters, from all this market disruption, which is a real two-edged sword. One side of the sword is that the clients are disrupted and the bankers are disrupted and there's opportunity there. And so we're definitely taking advantage of that, and we'll see more results from that. And we can talk about that more in the Q&A if you want. But the other side of the sword is that we're seeing real price competition on loans. And so we have made the decision year-to-date, right or wrong, but this is what we said, is that we're going to be disciplined in our pricing and in our terms. And so, for example, we saw a loan at Credit Committee last week where it was proposed to be priced at 125 over Treasuries for a, I don't know what, a 5-year, 7-year fixed-rate loan. We're just not going to do that. That doesn't make sense to me. And the fact that others that have entered the market here that want to defend their clients or be really aggressive with pricing, I think it's understandable why they could do that. But that doesn't mean we're going to chase that. So I think we've seen a really nice increase in NIM continue. I mean, the fact that we've done almost as much of an improvement in the first half of the year in NIM as we did all of last year, I think, is a really telling story on how this NIM improvement that we predicted, you know, nine months ago to continue. We didn't think it was going to go this fast, but I think it has because we focused on NIMs. So David did some really interesting analysis that we can get into if you want about kind of the trade-off of NIM and growth. But the short answer is, if we grew $280 million in net growth by the end of the year, and just kept our NIM flat from here, that would actually have the same income effect as growing zero in assets and having 10 basis points a quarter in improvements. Or, you know, if you take the midpoint, $130 million in growth a quarter and a 5-basis-point improvement per quarter in NIM. So I think that certainly got the leadership team here thinking, you know, maybe we back off the pace of improvement of NIM in the second half and see a little more asset growth. We had our two-day annual summit earlier this week, and so we asked the 19 office heads that were here, missing the market by a little or a lot. And they said, you know, in some cases a lot, in some cases a little. And if we're a little more competitive, we think we can grow faster. So that's how we're looking at it. And I'm sorry that turned out to be such a long answer, but I think it's a great question.

Yes, that's super helpful. Really appreciate all of that color and wanted to touch back on what you said earlier about taking advantage of the market disruption and was wondering what you guys are seeing on the hiring front and how you're expecting this to impact expenses moving forward.

Yes, another great question. So we've added 12 new front-office people into the profit centers so far this year, and 8 new people into the product group areas. And if you look at people that are actually just direct salespeople, we've added 10 of those, which will be included in the 20 I just mentioned so far this year. So one of the challenges that we have with that kind of hiring is our experience over the years is sometimes it takes some time to get those people up to speed. The first day they get here, they don't typically produce a lot of new activity. So we've done a couple of things to try and accelerate that. The first thing we did is we started a program, I actually had this idea in February that, you know, to really try and activate this shift back on the offense, that we should get out and call more. And so I said I would do 100 calls between February and the end of June. And Julie got a hold of that and called it Westward 100 because we have these Westward initiatives this year to try and drive more growth. And so we ended up, I think, I ended up doing 168 calls. So I luckily beat my 100-call goal because that would have been embarrassing otherwise. But I think in the Westward 100 program, we ended up doing, what was the number, 3,963 or some number like that, almost 4,000 calls company-wide. And we actually raised the bar on what a call was defined as. It had to be planned, it had to be face-to-face, had to have a call plan around it, and a follow-up in the CRM, stuff like that. And we had an 88% increase in calls year-over-year. Yesterday we had our board trust committee meeting and our trust department, which you know trust officers are not the ones most famous for being proactive salespeople, our head of the trust department put a slide in there for the board that said from reactive to proactive, trust calls were up 180% in the first half of the year. So definitely a culture shift in the organization, including on the [ PTEN ] side, about getting out and making calls. And then if you would allow me, can you talk, Julie, a little bit about this activation program we have for new hires?

Yes, so several months ago we implemented a program to help the new hires coming into the organization, most specifically those that are client-facing, really get launched as quickly as possible to understand our product set, to understand our culture and our kind of methodology for client service. And that has been implemented two months ago and every new hire in those front-office roles is going through this advanced program that we've added into it just to make sure that we are optimizing their ability to get out and tell the First Western story and serve clients well.

Great. That is all super helpful. Really appreciate that. I'll step back.

[Operator Instructions] Our next question comes from the line of Matthew Clark of Piper Sandler. Your line is open, Matthew.

Good morning, everyone. I guess I just wanted to touch on the expense guide first. You gave the range and I think Q3, at least the last couple of years, Q2 to Q3 you've seen a bump up in comp and I'm just curious if that's still expected to be the case this coming quarter and if there are some offsets to that.

Well, just to be clear for Q2, we had some one-time expenses in there related to technology and data processing, which I think totaled a little under half a million dollars. So the baseline for the second quarter appears higher than what it actually is. I think looking forward, we've got these new hires that we've brought on in production roles that we're working to activate like we just talked about. So I think we are going to see a higher expense instead of $19 million to $20 million. Our hope is that expenses are higher in Q3 because we have more incentive comp, because we're seeing some nice growth, because we do accrue for incentive comp based on a number of performance metrics, but primarily revenue growth and earnings growth. That would be a good problem. But after that, I don't know, David, if you have more to add, but I think the increase we've seen in expenses did show up already in Q2, and we don't really anticipate additional core expenses in Q3.

Matt, there's no seasonality component that occurs every year in Q3 that would cause expenses to increase. But there's a lot of dynamics, whether it's hiring or incentive comp performance or things like that are likely causing some of those spikes.

Yes, the other thing, Matthew, is if you look back to 2023 and our expense increase over these three years, we've earned $3 in revenue growth, core revenue growth for each dollar in core expense growth. So it's pretty good operating leverage, which we would expect to continue.

Yep, yep, good. And then just on the deposit costs, I wondered what the spot rate was at the end of June, if you had it, and then your thoughts on pricing and overall deposit costs going forward, assuming the Fed stays on hold and this higher-for-longer environment, what that's doing to your competition.