First Western Financial, Inc. Stock

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 AUM 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. Our 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, our 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, partially 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. Lisa, please open up the call.

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

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 1.25% 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 delve 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.

So I -- and we talked to the front office about that. We had our two-day annual summit earlier this week, and so we asked the 19 office heads that were here. Are we 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, Julie? 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 officers calls were up 180% in the first half of the year.

So definitely a culture shift in the organization, including on the P10 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.

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

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, which is why we're guiding now to $20 million to $21 million 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. So that would be a good problem.

But after that, I don't know, David, if you have more to add, but I think the shift that we've seen -- the increases 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.

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.

Yes, so if I could start and then David, if you could fill in the blanks here, because there are going to be some. You know, back to your seasonality question, Q2 for us is almost always a down quarter. We see about 2% shrinkage in core deposits in Q2 and you know when we got into April this year we sure enough saw that. But it's interesting, we've had a real focus on core deposit growth that brought the deposit growth back to be positive in May, positive in June, and of course we ended up 2% positive for the quarter and notably our non-interest-bearing deposits were up like 5% quarter-over-quarter in average balances. So some really good improvements in the mix which, as David said in his comments, has been a focus for us.

Yes, and specifically on the spot rate, Matt, 2.8% for the spot rate of deposits at June 30.

Thoughts about deposit costs going forward? Can you continue to chip away at those or do you feel like this environment makes it more difficult.

I think it makes it more difficult. You know, the cost of deposit acquisition has certainly increased in our markets given the disruption that we've seen, and banks trying to hold onto their deposits for obvious reasons. We haven't necessarily seen pressure from our existing depositors on deposit rates, but that cost of new acquisition has certainly crept up a bit. And then from a time deposit repricing standpoint, we've had some benefits there over the past few quarters. Our time deposit portfolio is currently at 3.64% on a spot basis. So, I don't know that there's a ton of opportunities still left in that portfolio.

I think our biggest opportunity is going to be on continuing to chip away at improving our mix of deposits through non-interest-bearing deposit growth from a core basis. I don't think we're seeing a lot of opportunity on changing rates, but changing the mix is definitely the focus.

Our next question comes from the line of Ross Haberman of Rlh Investments.

Scott. Nice quarter. You seem to indicate that if I'm hearing you right, if rates stay the same, you could see some improving margin, is that correct, from what I'm hearing from you?

Well, that's certainly what we've seen the last several quarters now, and we do think that will continue, but I'm going to put a caveat on that this quarter and say that the trade-off between growth and NIM improvement is definitely on our mind. And our feeling is, it probably drives more shareholder value from where we are today given the disrupted markets to be a little bit more flexible on NIM improvement to try and drive better growth in Q3 than what we've seen year-to-date, better asset growth.

If we do see a pickup in interest rates, let's say they raise a 0.25% for argument's sake, how do you see that affecting your margin expectations, you know, one time rate increase?

So historically, we try and run a balanced balance sheet. So our interest rate risk is neutral. Right now we've shifted to be more neutral, although I think we're still liability sensitive. David, do you want to speak to that?

Yes. We maintain a relatively neutral balance sheet profile and that's certainly been a goal of ours over the past few years. We do lean slightly liability sensitive, which a 25-basis-point decrease by the Fed will benefit us a little bit. Let's call it 1 to 2 basis points in the end, but it's not all that material, [indiscernible] increase, yes.

And just one follow-up question. Asset quality looked really good. You got rid of all of those non-performers which plagued you the last year or so. Are they all completely gone now?

Yes, the two problem credits we had from 2023 or whenever that was are long gone. We have seen a return to kind of zero losses per quarter. You know, I think if you go back two or three quarters, we had, you know, 0.01% or 0.02%, but it's basically been zero most quarters recently and most quarters over the last 20 years. So definitely in terms of net losses, we seem to be back at zero.

In terms of NPAs, we were flat quarter-over-quarter, slightly improved at about 50 basis points, but from what I know today, assuming no surprises this quarter, we're going to see some improvement in that in Q3. So you know, I think our underwriting standards that we've always had here of requiring sources of repayment, personal guarantees, hard collateral, those are definitely protecting us against losses in normal economic environments like we're in.

Nothing in the criticized or substandard that you're losing sleep about?

Nothing causing us to lose sleep, no...

In fact, both classified and criticized loans were slightly down in the quarter from last quarter.

Thank you. I would now like to turn the conference back to Scott Wylie for closing remarks. Sir?

Okay, great. Well, you know, the key themes this quarter I think are largely unchanged. First Western, if you compare us to other $2 billion to $25 billion banks nationwide, we're in some great markets. We have a top decile mix of affluent markets. We have a great niche. We are in the top three of all of those banks in terms of wealth management fees as a percent of revenues. And we have great bankers.

Historically, our organic annual asset growth rate is well above peers. We're about double the median for that group and well into the top quartile and all that with very high asset quality. We're continuing to see earnings normalize here. We typically don't talk about our internal plan on these calls, but I would tell you we're performing well against plan on an earnings basis, and we think that the opportunity to continue to see the kind of gains that we've seen so far this year over a year ago, that's going to continue through year-end, we believe. So with that, thanks, everybody, for dialing in, and have a great day.

Good day, and thank you for standing by. Welcome to the First Western Financial First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

Now it's my pleasure to hand the conference to Tony Rossi. Please proceed.

Thank you, Carmen. Good morning, everyone, and thank you for joining us today for First Western Financial's First 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'll use a slide presentation as part of our discussion this morning. If you have not done so already, please visit the Events and Presentations page of First Western's Investor Relations website to download a copy of the presentation.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of First Western Financial that involve risks and uncertainties. Various factors could cause actual results to be materially different 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 a reconciliation of the GAAP to non-GAAP measures.

And with that, I'd like to turn the call over to Scott.

Thanks, Tony, and good morning, everybody. We executed well in the first quarter and saw positive trends in many areas including loan and deposit growth, net interest margin expansion, well-managed expenses, higher mortgage banking revenues and improved asset quality. This resulted in another increase in our level of profitability with EPS up 85% quarter-over-quarter. We continued to maintain a conservative approach to our new loan production with our disciplined underwriting and pricing criteria.

As a result of the additions we've made to our banking team over the past few years as well as a generally healthy economic conditions in our markets, we had a solid level of loan production which was diversified across our markets, industries and loan types. As a result of our financial performance and the balance sheet management strategies, we had a further increase in both book value and tangible book value per share.

Moving to Slide 4. We generated net income of $6.2 million or $0.63 per diluted share in the first quarter which was higher than the prior quarter. This represented our third consecutive quarter where we generated an increase in net income and earnings per share. With our prudent balance sheet management, our tangible book value per share increased 3.3% for the quarter-over-quarter.

Now I'll turn the call over to Julie for additional discussion of 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 $41 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production. But with the higher level of productivity we are seeing from the additions to our banking team that we have made over the last several quarters, we are seeing a solid level of new loan production. New loan production was $116 million in the first quarter. That production was diversified across our portfolios, and we are also getting deposit relationships with most of these new clients. We continue to be disciplined and are maintaining our pricing criteria. This resulted in the average rate on new production of 6.31% in the quarter.

Moving to Slide 6, we'll take a closer look at our deposit trends. Our total deposits increased $95 million from the end of the prior quarter with growth in all types of deposits. The increase was driven by both new deposit relationships and inflows from existing deposit accounts. Notably, noninterest-bearing deposits increased 10% or $35 million in the quarter. The deposit growth in the quarter brought our loan-to-deposit ratio down from 96.5% in the prior quarter and 9.4% from a year ago to below 95%.

Now turning to trust and investment management Slide 7. We had a $43 million increase in our assets under management in the first quarter, primarily attributed to lower market values, which were partially offset by the addition of new accounts. Net new accounts and contributions contributed a net increase of $42 million in the quarter. On a year-over-year basis, our assets under management increased by approximately 1%.

As David will cover shortly, our trust and investment management fees have increased 5.3% 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?

Thank you, Julie. Turning to Slide 8, we'll look at our gross revenue. Our gross revenue increased 3.4% from the prior quarter due to increases in both net interest income and noninterest income. Turning to Slide 9. We'll look at our trends in net interest income and margin. Our net interest income increased 1.5% from the prior quarter due to an increase in our net interest margin.

Our NIM increased 10 basis points from the prior quarter to 2.81%. This was due to a reduction in our cost of funds, which was primarily due to lower rates on money market deposit accounts as a result of the company reducing deposit rates commensurate with the short-term decrease -- short-term rate decreases in 2025 and runoff of higher cost deposit accounts.

Our net interest income increased 19.7% from the first quarter of 2025 due to an increase in net interest margin and an increase in average interest earning assets.

Now turning to Slide 10. Our noninterest income increased by approximately $600,000 from the prior quarter. This was primarily due to increases in gain on sale of mortgage loans risk management and insurance fees and trust and investment management fees, which increased for the third consecutive quarter.

Now turning to Slide 11 and our expenses. Our noninterest expense decreased by $1.1 million from the prior quarter. The decrease was due to an OREO write-down in the fourth quarter of 2025 and the decrease in professional services partially offset by an increase in salaries and employee benefits due to payroll tax seasonality and an increase in bonus accruals as a result of the improved earnings in the quarter. Our efficiency ratio improved for the sixth consecutive quarter 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 first quarter with decreases in nonaccrual loans and NPAs. This was partially driven by the sale of the last OREO property we had on the balance sheet. Additionally, we had no loan charge-offs in the quarter. Our allowance coverage was 77 basis points of total loans as improved trends during the quarter drove a release of provision.

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 first quarter performance and what we're seeing in our markets, our expectations for the year are unchanged from what we provided at the start 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, particularly in the Colorado banking market.

We're also seeing -- what we also recently added a new market president for Scottsdale, Arizona, where we see good opportunities for growth. Our loan to deposit pipelines remain strong and should continue to result in solid balance sheet growth in 2026 with loan deposit growth at similar levels to what we had in 2025. In addition to the balance sheet growth, we expect to see more positive trends in our net interest margin, our fee income and more operating leverage resulting from our disciplined expense control. We had net interest net interest margin expansion of 26 basis points in 2025. And while we expect further expansion in 2026, it may not be at the same level as last year. While we remain disciplined in our expense control, we believe that investing in the business will drive future shareholder value and ongoing disruption from the M&A activity in our markets creates unique opportunities for us to add banking talent. We will take advantage of those opportunities if and when they materialize as well as opportunities to add new clients.

Based on the trends we're seeing in the portfolio and the feedback we're getting from clients, we don't see anything to indicate that we'll experience any meaningful deterioration in asset quality. The positive trends we're seeing in a number of key areas expected to continue and which we believe should result in a steady improvement in our financial performance and further value being created for shareholders in 2026.

So with that, we're happy to take your questions. So Carmen, please open up the call.

[Operator Instructions] One moment for our first question. It comes from the line of Brett Rabatin with Stonex Group.

Wanted to start off, obviously, great to see the trends this quarter in a number of categories. How many MLOs have you guys added? And then just obviously, a stronger start than usual on mortgage, how much production that you guys had this quarter? I know it was better than usual for 1Q?

I think we had one new MLO this quarter, and we added another 7 folks in front office banker type jobs. The MLO additions are especially nice if they're a good fit for us and producers because they have very low fixed costs and their compensation largely comes from rare cost from production. Scott, do you have the data for last year, Handy? For last, we will add. We'll look up that number, Brett.

And then just mortgage production totals?

Yes. Mortgage had a good, strong first quarter. We saw gains on mortgage loans go from $800,000 in quarter 4 to $1.5 million in quarter 1. So severally strong production, good economic conditions, I think per that, but also the MLO ads we've been doing over the last several quarters have just given us a level of ability to produce mortgages.

Yes. And lock volume increased a little under $40 million quarter-over-quarter. We were just under $180 million in secondary lock volume for Q1. And then we added in -- in 2025, we added 8 MLOs.

Okay. That's helpful color. And...

Just on that point, I would love to tell you that we were expecting a strong first quarter. But actually, our experiences first quarter tends to be pretty quiet. And we had been thinking that with the pent-up demand from slow mortgage markets in our geographic region that eventually, we see some kind of demand come out in play and drive some volume. And I think that's what happened in Q1 is a combination of pent-up demand. Of course, we had seasonally warm weather in our markets, unseasonably warm weather in Q1 and then definitely the impact of the new MOs we've added. So those were -- those are really nice results to see.

Yes. Brett, I'll add one more data point. We did not see a material decrease in lock volume in March when rates materially increased. So that's what gives us comfort as far as what was driving the mortgage origination volume that it really wasn't solely dependent on improved rates because in March, that obviously didn't happen from a rates perspective and our volume still looks good at large.

Okay. That's helpful. And then you mentioned Scottsdale New market president. Any other markets that you're keen in on trying to grow stronger organically? And then I saw P&C had made quite a few layoffs. I'm sure mostly back office, but just wanted to hear if you guys are being able to capitalize on any disruption in Colorado? And just maybe an update on what you're seeing from that perspective?

So let's start with Arizona. In Arizona, we were feeling like we needed a leadership team that others would follow, and that could really help us build our teams out there. We have two offices, one in -- and one of Phoenix that we've been open for years, and they've had good growth and they're profitable. But we have tiny market share in Arizona. And we think we have a platform that would be attractive and unique and differentiated in that market, but we didn't really have the leaders to put the teams together to make that happen. And so we recruited 1 of the top folks out of First Republic JPMorgan and added him 9 months ago, something like that, the summer right, Julie?

Yes, over .

And then we hired one of the top folks out of First Bank/PNC that started maybe a month or two ago. And those two skill sets of the -- those two executives have a very complementary set of skills and they work really well together so far. I mean who knows. But seems like they work really well together. And so we're excited about what they can accomplish. So we're feeling really positive about these hires we've made for Arizona and where that team is going to go. .

In terms of your second part of your question about kind of the market opportunities in other markets, it's everywhere. I mean, it's amazing to see the quality of talent that we're seeing in -- when we open up a position. And I just think it's like a generational opportunity for us. And we've hired several people already. We've got several more in the works that are going to be real value drivers for us, I think, going forward. And we've done it all in a fairly well contained cost environment. We've been spending between $19 million and $20 million a quarter for something like 12 quarters now. And it looked higher in the fourth quarter last year. But remember, we wrote down $1.3 million and OREO because we had that last area under contract, and we knew the price is going to be down $1.3 million from our book value. So that actually shows up as an operating expense even though it's nonrecurring, obviously. So those expenses appeared inflated -- more inflated in Q2, Q4 of last year that they really were on an operating basis.

And then your last question on P&C. I mean I think that -- and we've talked about this before on this call, that there is a really unique kind of emotional connection between color ends and First Bank that had long deep roots here that we could talk about, if you want. But I just think it's a real challenge for any acquirer from the outside to come in and navigate that. And certainly, the news this week that they were laying off 800 people or whatever it was, was big news. And I had phone calls this week from people just calling to say that they were sad, like that this was a real tragedy for our economy here and stuff like that. And so -- so I think that, that is just going to continue to create opportunities for us, and we see that -- I mean, personally, I don't want to say I see it every day, but pretty much every day. it's going to continue to create opportunities, I think.

And P&C, I think, is making a big effort to analyst food transition and all that. I mean, no knock on P&C. I think what the task they have is a real challenge.

Okay. And with all that said, Scott, you've started the year at a stronger pace than last year on loans, in particular, -- would it be too aggressive to say you guys could be a double-digit grower this year?

Well, if you look at our -- if you look at our loans year-over-year, I think we grew 11%, and our deposits, we grew 13% year-over-year. So I think our guidance we've been giving is kind of high single digits. Although if you take out kind of the quarter-over-quarter puts and takes, I feel like we seem to be around 10%-ish, which would be double digits, I guess, to your question, I think the fee income, we've really seen that flat for years, and we've made many changes now into that area in particular. We talked about the organ already, but also in the wealth side, we've got some changes that we feel very positive about.

We've talked a little bit about it, but we're seeing some green shoots there that are pretty exciting. And so yes, I do think that we'll see continued revenue growth this year with really nice operating leverage. If you look back, again, kind of take out some of the bumps here, we did $0.54 in EPS in '23, $0.87 in '24; $1.34 in 2025. And now our run rate is easing pretty clearly over $2. I think that, that bodes well for '26, '27 earnings.

One moment for our next question. It comes from the line of Wood Lay with KBW.

I wanted to start on the net interest margin. It's been two consecutive quarters of pretty meaningful expansion. I believe you noted you expect the expansion to moderate, but it still feels like the NIM is tired. So any thoughts on how we should think about the trajectory there?

Well, I've been saying for, I don't know, 6 quarters, few quarters, something like that. But I believe that we will ultimately get back to a $3.15, $3.20 kind of of a NIM because that's historically what we've seen in normal markets with normal yield curve and sort of normal economics, normal competitive environment over my 40 years of running my banks. And so I think we'll still get there. The pace is just hard to predict. And I think for the finance team, in particular, they're reluctant to say, well, not knowing anything about what's going to happen in the future in the Fed and the war and whatever, we're going to see 10 basis points improvement in a quarter. I mean I think David would feel comfortable saying we're not going to see that in 2026. But we have seen, as you said in your question, really good really good improvements.

And I think what's driving that, and David, I encourage you to speak to this point, but our people are doing a really good job of having pricing discipline, and that shows up on the loan side. We saw loan yields in Q1 down slightly when actual rates were down 50 basis points. And I'll tell you, we're seeing -- with all these acquisitions, we're seeing acquires wanting to prove they make a decision, they're out doing really aggressive loan pricing, and we hear about this stuff. And we're like, well, we're not going to compete with that. And people are still producing nice growth with high-quality credits that produce loan losses like we've had now again. And then on the deposit side, again, we saw 50 basis point decline in Q4, and we put all that into our deposit pricing, which a lot of banks here didn't and we didn't see any run -- we actually saw a nice deposit growth. So I don't know, David, did I miss anything big there?

No, you covered it.

You're guiding the 10 basis points a quarter?

Not quite.

I mean I guess as a follow-up to that normalized $3.15 to $3.20 margin, it's not going to happen this year, but what's a realistic time line to getting the net interest margin back to those levels?

I just think it's hard to predict. It's -- there's so many variables that go into it. And we just talked about 4 or 5 of them on that last answer. So I won't repeat that. But -- I'm hopeful that we're back with a 1% ROA in 2027. Whether we get there for the full year, whether we get there in January, where we get there in December, I don't know yet. But I do think that we've come a long way since all that excitement or the rapid run up in short-term rates, the very yield curve, the failure of the big regional banks, all that stuff. -- we said we were going to play defense. We did. We said we're going to go back on offense. We have. We've got some really historic opportunities in the markets right now that I think we're doing a great job of taking advantage of and our see that play out. I think that's going to drive more operating leverage, more profitability and some nice outcomes for our shareholders.

What our ability to materially improve NIM is -- there's a very large opportunity for us in DDAs. And just our organization is extremely focused on that. There's a lot of different things that we're working on. And hires that we're looking to make or have made in that area. So I think that -- to the point, we can't really predict it, but there's a lot of effort going into focusing on that. Noninterest-bearing deposits and timekeeping, as we've mentioned, our discipline on loan pricing, which has been something that we're also quite focused on. So I think that those 2 points are really kind of organizational focus of ours.

Yes. No, I really appreciate you walk into the moving pieces there. Maybe just last for me on the Trust business. It's great to hear the commentary on new accounts opened and fees were up quarter-over-quarter. You've made some changes to that business to emphasize more of a growth on business model. So where do we sort of stand in the trajectory of that business?

We brought in a new head of Wealth with a year ago now and started on April 1 of last year from Goldman. And he was in a senior wealth role over there. And we, through him, he's leading it, have done a complete overhaul of our planning function here of our trust function here of our investment management which those 3 areas also include our insurance area and our retirement services. We've replaced the leadership in all those areas and build stronger teams. We built out some new products and services, which we've been test marketing and that's all gone better than we had expected.

And then in addition to those things, this new hire is news brand in summers, he was particularly had an expertise in selling B2B in wealth services. And we -- that's not something we've done before and was a big part of why we wanted him and recruited him to join us. And so we've also launched a B2B offering, which is similar to what you see at the big Fortune 500 companies where the company will hire a specialist firm like Goldman Sachs, for example, to provide wealth consulting services to their executives as a benefit to them. Obviously, we don't have a lot of Fortune 500 companies in our market here and we don't really want to compete against that business. But for our target clients, which are lots of entrepreneurial and some good-sized businesses, they don't have a product offering like that. And so we've created a trademark offering called Work wealth, and we're out selling that and we haven't the person dedicated to marketing that. And we think that, that's going to be really impactful in the future. Of course, there are really nice synergies between that and selling corporate banking services and back to Julie's treasury management and the DDAs, right? This is all -- has really nice synergies to what we're doing anyway. And so I guess, would be a little summary of what we're doing on the whole wealth management side. That's, I think, really exciting starting to show results, as you said, but really just green shoots at this point. We're going to see a lot more impact to that, I think, in the next couple of years.

Our next question comes from Matthew Clark with Piper Sandler.

I want to touch on interest-bearing deposit costs and maybe the spot rate at the end of March, if we could have it. And then how you're thinking about additional relief from here with the Fed on hold?

That's one question for David to be.

Thank you. Matt, the spot rate on deposits was [ $279 ] million for the end of the quarter. And with the Fed on pause, I go back to Julie's comments, we have a lot of opportunity from a funding cost perspective with growing our DDA balances. And even with the Fed on pause, we feel with the company's focus there and the things we've laid out and we're working on accomplishing that we have opportunity to grow that portfolio, which will then help obviously bring down our average cost of deposits and average cost of funds.

Okay. And along those lines, your noninterest-bearing deposits tend to decline in the second quarter. Is that -- should we still expect that to be the case? Or is it different this time?

I wouldn't say anything different at the moment. We typically see deposit outflows as you mentioned, related to tax payments in the second quarter. So I don't know that there's anything that we know today that would make that difference. So I think that's what we're thinking about as far as

Okay. And then your -- the FHLB borrowings that you have, can you just remind us that those are overnight or if there's some term to them? And is there a plan to use excess cash to pay those off?

Yes. The FHLB borrowing, it was an overnight that was swapped, and that actually -- that's what matured in early April. So we -- depending on how our liquidity evolves going forward, we'll see if it makes sense to pay that off and keep it at 0 or if we need to replace that. We'll just have to see how things evolves...

Okay. So it's 0 as of in April here? Is that what you're saying?

Sorry, say that again?

It's a 0 balance in April as of now?

Correct. .

Okay. Sounds good. And then in terms of the near-term NIM, I know there's a little bit of relief on the deposit side, but assuming you lose some noninterest-bearing seasonally, you got the benefit of the FHLB going away. It does seem like maybe the margin is flattish in the near term to flat to down slightly. I haven't have to recast the numbers, but that's kind of where I am.

I think we still have opportunities to continue to see NIM expansion in the remaining quarters in 2026. To Scott's point earlier, I don't think it's going to be 10 basis points a quarter, but I do feel that we will continue to have opportunities to expand them.

Okay. Great. And then just last minor one. You bought back a little bit of stock. It's not a big amount, but just curious what price you paid?

Yes. It was $23.85 on an average basis.

Our next question comes from the line of Bill Dezellem with Titeon Capital Management.

A couple of questions. First of all, the deposits grew at roughly 2x the rate of loan growth in the first quarter. Would you step back and just walk us through the general dynamic behind that, if that is a normal seasonal phenomenon? Or if there is that was something specific to your activities that led to that ratio?

Well, I think over the last many quarters now, again, I'm not really sure whether it's 8 or 12 or whatever. But we have put a much more significant focus on deposit growth. And our feeling is to get to be the bank that we want to be at $5 billion or $10 billion, we need to have as strong of a deposit story, as we do on the loan and the PTM side. So it's definitely been a focus for us now for several quarters. Bill, we don't really do loans here that don't come with a primary banking relationship. We literally write that into our loan documents here now. And so it's part of the expectation that we have with any conversation we have with any prospective client. It's a part of the conversation we have with existing clients. We report on it internally, what loans we have that don't have deposits associated or have smaller ones, it's a very routine part of the conversation here just being good bankers, and driving relationship-oriented clients.

So I think the fact that in one quarter, we saw a little bit more deposit growth and loan growth, I wouldn't read too much into that. We saw something like that in third quarter last year, you'll recall, and I think some of the feedback, what we got was you should try and manage that. So it's more consistent and is no way of doing that. It just kind of happens when it happens. I think the more relevant number for me is the fact that we grew deposits 2% more than we grew loans over the last 12 months. I think that's probably a really relevant and helpful data point. And if we see some decline in deposits in Q2, which is likely, I wouldn't read anything into that, either that's just part of who our clients are and the fact that they pay taxes in Q2 that pulled down the money market accounts and what the here. So think I wouldn't read too much in that.

That's helpful, Scott. Let me take it one step further though. Over time, where would you anticipate that the loan-to-deposit ratio would end up? You said sub-95 now. And if you keep up the trend that's been in place for several quarters, you'll be at sub-85 and then sub-75, and next thing you know, we're sub-50%. And I suspect that's not where you're headed on being a bit facetious of course. But what's your long-term thought?

That is true that is not where we -- what we have found, and again, I've been doing this a long time, Bill. And so I never really know where the next $1 billion of deposits are going to come from. But our clients do have a lot of liquidity, and we find that we're always able to produce deposits when we want them, and that doesn't mean you don't have to focus on it. It doesn't mean you have to do the things that Julie was just talking about in terms of focusing on deposit strategies and strengthening our treasury management team, improving our technology stuff like that. But at the end of the day, we've historically operated First Western and my prior banks with loan deposit ratios in the 90s. And I think when it gets into the high 90s, we get more uncomfortable when it's in the low 90s, we think that's fine, but we're not going to pay out for higher cost deposits. And I think that, that all has fueled nice growth for us over the years and continue to do that and provide the operating leverage we need to drive earnings that can support the growth of what we want to do.

Great. Now that's really a nice perspective. And lastly, with the geopolitical events, specifically the Iran War, What, if any, impact have you seen from your customers' behavior on either the loan or deposit side or the pipeline of activity?

Yes. I actually was thinking about that before this call, Bill. And over time, what I have found is when our clients get nervous, they kind of stop doing things, and they just say, "I can wait." And we haven't seen that yet in this case. And I'm not sure why that is. I think maybe Middle East seems like a long way away from the Rocky Mountain region. I'm not sure why we're not seeing it and knock on what it hasn't had any negative impact on us so far. But we really haven't seen any impact. And I'm not hearing about it in my conversations with client prospects or with our folks in the field at this point. That could change, I don't know. But right now, I would say our days are much more consumed by all this market disruption that we're seeing from the M&A activity than it is kind of that global economic stuff, political stuff.

Our next question comes from the line of Ross Haberman with Rlh Investments.

I'm sorry, Scott. I got I got on a bit late. So if you address these questions, I do apologize. Could you talk about loan growth and what your expectation is for '26 in terms of net loan growth? And what offices do you think it's going to originate? Or what are you seeing better demand from? Is it Arizona, Colorado or elsewhere?

Yes. So great question. We didn't really talk specifically about that. I did mention that we're seeing loan growth across the platform in terms of geography and industry type. And so I think that we're not seeing weakness in one place or another. We're also not stretching anywhere. I would tell you that our owner-occupied CRE number was getting a little higher than we felt comfortable, and we have pulled that down. I don't have that number handy. Is it from 2.60 -- 3.60 to down to like 3.25 now?

Yes, in that range, yes.

And so that's a change that we're driving. We're actually seeing probably more owner-occupied CRE demand than ever, but we're being very selective there. The guidance we've given for balance sheet growth is high single digits, but I did say early in the call that we're up 11% year-over-year in loans were up 13% year-over-year in deposits. So I don't think we're ready to jump out and say, we're going to see mid-teen growth this year, but it does seem like 10% would be a reasonable guesstimate from where we are today.

Is a lot of that coming from the Arizona branch or Montana?

What was the beginning of the question, our loans?

I said, is a good amount of the growth of the loans coming from Arizona and/or Montana?

I would say in the in the backward-looking data, no, neither one. But I would also tell you that we're seeing some nice opportunities in both markets. And I think that you're going to see nice growth out of both those markets in the next 12 to 24 months. We've got really good people there, and they're working hard. And we do live the market disruption in Colorado more than elsewhere, but it's everywhere. We're seeing it in Wyoming. We're seeing it in Arizona. We think there are lots of opportunities for us in Montana, too. So the numbers are just bigger in Colorado and more immediate for us because we're in Denver. But we're seeing opportunities everywhere. And Ross, pretty well about our theory about market share. I mean we just have tiny market share. And I think by just showing up and doing a good job of what we do differently than everybody else, which is we're local, we're trusted and we're expert. Those three things play really well in the market today.

Are you seeing a number of other banks I'm talking to are really beginning to see some pressure on the deposit side, particularly from some of the bigger banks in different markets. Are you seeing pressure to raise deposits rates on the deposit side? And is it coming from the bigger banks in your markets today?

I would take a stab at that question, David, and then maybe I'll be really interested in your answer, too, because it seems like less to me, but you answered from what you're seeing. My answer, Ross, would be of the conversations I'm having. People are calling or I'm calling them and they're saying, "I don't want to be with a big National Bank, I want to be with a local bank." And they don't even say the word rate. They say, "When can I move?" And we've actually created here a conversion concierge, the internal people call it, I call it the SWAT team, the Swiss SWAT team actually. And where we tell people that we have a Swiss SWAT team that will come out and help them transfer their accounts here and simplify the whole conversion process. They love it. And again, they're just -- I mean, I literally don't hear the question, well, what rate are you going to give me? And so again, I think we have a really extraordinary window of opportunity here, and we're doing everything we can to jump through it. But that would be my answer. David, what are you seeing in terms of the day-to-day stuff?

Yes. My simple answer would be is the pricing market for deposits still highly competitive? Yes. Am I fielding a bunch of calls from our bankers saying we need to raise deposit rates? No. So I think that -- those are the dynamics that we're seeing in our markets at the moment.

And just one final question, if I may. Have you announced any new plans for new -- for new branches in any of your markets? Or if you found something small to buy as a fit in or would you consider buying that today? Or any growth you really want it to be organic?

Well, we're very focused on organic growth without a doubt. We haven't talked about it because we don't have anything to talk about yet, but -- but as part of the whole market disruption thing, we're seeing really good people that are available that we're trying to bring here. And some of those are -- well, most of them so far, all of them have been in our existing footprint, but there are some that are in adjacent footprints that would be very attractive to us. And hopefully, we'll have something to talk about later this year there. That would be a big plus as far as I'm concerned. If we could bring a couple of well-established teams that want our toolbox to be able to go out and sell it, that would be fantastic in new market.

And as I see no further questions in the queue, I will conclude the session and turn it back to management for closing remarks.

Well, thank you, and I appreciate everybody dialing in on the call today. We talked about some of the noise in Q1 and that was built off of the noise in Q2. But clearly, we're seeing really nice trends in operating leverage that's translating into great EPS results. And again, if you kind of back up and look at that year-over-year, we've seen a nice multiyear trend. Our NIM is continuing to improve. Organic growth is continuing across the platform. Our asset quality continues to be very strong, and we don't see anything today that would change that. And I think that, that's very encouraging referendum on the credit quality that we pursue here.

Our efficiency ratio has really trended down nicely from 79% a year ago to 73% and that's not going to stop, I don't think. Our goal here is to get our ROA back over 1% with -- our capital efficiency is going to drive a nice ROE in the low teens and really, I think, get First Western back towards a financial performance where we should be.

So with that, thanks, everybody, for dialing in. We really appreciate the support and your interest in First Western. Have a great weekend.

And this concludes our conference. Thank you for participating, and you may now disconnect.

Good day, and thank you for standing by. Welcome to the First Western Financial Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today, Tony Rossi. Please go ahead.

Thank you, Marvin. Good morning, everyone, and thank you for joining us today for First Western Financial's Fourth Quarter 2025 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've 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 we 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?

Okay. Thanks, Tony, and good morning, everybody. We executed well in the fourth quarter and saw positive trends in many areas, including loan growth, net interest margin expansion, well-managed operating expenses and generally stable asset quality. This resulted in an increase in our level of profitability.

The market remains very competitive in terms of pricing on loans and deposits, but we continue to successfully generate new loans and deposits by offering a superior level of service, expertise and responsiveness rather than winning business by offering the lowest rates -- highest rates on deposits and the lowest rates on loans as other banks are doing.

We continue to maintain a conservative approach to new loan production with our disciplined underwriting and pricing criteria. As a result of the additions we've made to our banking team over the past few years as well as generally healthy economic conditions in our market, we've had a solid level of loan production, which was diversified across our markets, industries and loan types. As a result of our financial performance and the balance sheet management strategies, we had a further increase in both book value and tangible book value per share.

Moving to Slide 4. We generated net income of $3.3 million or $0.34 per diluted share in the fourth quarter, which is higher than the prior quarter. We had a write-down of value of an OREO property that reduced our earnings per share by $0.10 after tax in the fourth quarter. With our prudent balance sheet management, our tangible book value per share increased 1.6% this quarter.

So, now I'll turn the call over to Julie for some additional discussion of our balance sheet and our treasury -- trust and investment management trends. Julie?

Thanks, Scott. Turning to Slide 5. We'll look at the trends in our loan portfolio. Our loans held for investment increased $59 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production, but with the higher level of productivity we are seeing from the additions to our banking team that we made over the last several quarters, we are seeing a solid level of new loan production, while we are also seeing an increase in our CRE loan demand that meets underwriting relationship and pricing criteria. We also saw some construction loans that moved into our CRE portfolio after completion of their projects. New loan production was $146 million in the fourth quarter. The new loan production was diversified with the largest increases coming in our commercial real estate portfolios, and we are also getting deposit relationships with most of these new clients. We continue to be disciplined, and we are maintaining our pricing criteria. This resulted in the average rate on new production being 6.36% in this quarter.

Moving to Slide 6, we'll take a closer look at deposit trends. Our total deposits increased $102 million from the end of the prior quarter. While we continue to successfully add new deposit relationships, this was partially offset by seasonal outflows we saw largely related to title company operating accounts who typically see declines in their deposit balances during the fourth quarter due to lower home purchase activity. In addition, we were able to run off high-cost deposits as a result of the strong core deposit production in the third quarter. Average deposits increased 10% in the fourth quarter of 2025 compared to the fourth quarter of 2024.

Turning to Trust and Investment Management on Slide 7. We had $155 million decrease in our assets under management in the fourth quarter, primarily attributed to net withdrawals on low fee and fixed fee product categories, which was partially offset by improved market conditions on investment agency accounts that carry a higher variable fee, which increased $15 million or approximately 1% during the quarter.

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. Our gross revenue increased 1.5% from the prior quarter, primarily due to an increase in net interest income. Relative to the fourth quarter of 2024, our gross revenue increased 12.2%.

Turning to Slide 9. We'll look at the trends in net interest income and margin. Our net interest income increased 5.6% from the prior quarter and 21.7% from the fourth quarter of 2024 due to an increase in our net interest margin. Our NIM increased 17 basis points from the prior quarter to 2.71%. This was due to a reduction in our cost of funds, which was primarily due to lower rates on money market deposit accounts as a result of the company reducing deposit rates commensurate with the short-term rate decreases and runoff of high-cost deposit accounts.

Now turning to Slide 10. Our noninterest income decreased by approximately $800,000 from the prior quarter. This was primarily due to a decrease in gain on sale of mortgage loans, which typically see seasonal declines in the fourth quarter and a decrease in risk management and insurance fees. We have successfully transitioned to previously discussed new leadership and focus in Trust and Investment Management and insurance that are expected to produce improved results going forward.

Now turning to Slide 11 and our expenses. Our noninterest expense increased $1.2 million from the prior quarter. Our noninterest expense was impacted in the fourth quarter by a onetime $1.4 million write-down we took on the value of an OREO property. Excluding the write-down of the OREO property, our noninterest expense decreased $100,000 in the quarter. Most areas of noninterest expense were relatively consistent with the prior quarter 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 generally stable trends in the loan portfolio in the fourth quarter with decreases in nonaccrual loans and NPAs. And we had a minimal level of net charge-offs in the quarter. Our last piece of OREO is currently under contract for sale and is expected to close during the first quarter. Our allowance coverage remained unchanged at 81 basis points of total loans as the decrease in nonaccrual loans and NPAs resulted in a more normal level of provision during the quarter.

Now I will turn it back to Scott. Scott?

Thanks, David. Turning to Slide 13, I'll wrap up with some comments about our outlook. Overall, we continue to see relatively healthy economic conditions in our markets, and we're seeing good opportunities to add both new clients and talent due to the ongoing disruption from M&A activity in the Colorado banking market. We also recently added a new market presence for Arizona, where we're seeing good opportunities for growth.

Our loan deposit pipelines remain strong and should continue to result in solid balance sheet growth in 2026 with loan and deposit growth at similar levels to what we had in 2025. In addition to the balance sheet growth, we also expect to see positive trends in our net interest margin, our fee income and more operating leverage resulting from our disciplined expense control. We had net interest margin of 26 basis points in 2025. And while we expect further expansion in 2026, it may not be at the same level as we saw last year.

And while we remain disciplined in our expense control, we believe that investing in the business will drive future shareholder value. The ongoing disruption from the M&A activity in our markets creates opportunities for us to add banking talent, and we will continue to 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, we're not seeing anything to indicate that we'll experience any meaningful deterioration in asset quality. The positive trends we're seeing in a number of key areas are expected to continue, which we believe will result in a steady improvement in our financial performance and further value being created for our shareholders in 2026.

With that, we're happy to take your questions. Marvin, please open up the call.

[Operator Instructions] Our first question comes from the line of Brett Rabatin of Hovde.

I wanted to start off on the margin and just the outlook in terms of magnitude of margin expansion opportunities you see in the next few quarters. And then if you add it, the amount of loans that are repricing this year at lower rates from fixed rates?

Yes. So we had -- certainly had good NIM performance in the fourth quarter. Pretty pleased with the expansion that occurred there. That was primarily driven by our ability to reduce our -- primarily deposit costs. And we do expect further expansion to continue through 2026. Now it may not be at the same level that we saw through 2025, if you look at Q4 '24 to Q4 '25. It may not be at that same level, but we do expect to continue through 2026.

And then specifically on the loan portfolio, we have about $250 million in fixed loans -- fixed rate loans maturing over the next year. And those average yield on those is in the low 5s. So that does give us an opportunity, obviously, to continue to reprice our loan book and see some positive trends on the yield on interest-earning assets.

The only thing I would add to that is we have shifted our balance sheet interest rate risk to be closer to neutral over the last six months, and we feel like continued improvement in NIM is not dependent on continued rate cuts. If we do see rate cuts, that will be beneficial to us. But we're expecting for the purposes of planning and budgeting, no rate cuts. I think we could debate that one all day, but the feeling is that we should have the balance sheet more neutral, and that's where we are today.

Okay. That's helpful. And then on the asset management, wealth management business and the mortgage banking operation, you've obviously made some changes. I was hoping for maybe some clarity on the AUM levels in the fourth quarter relative to 3Q, if you had clients that were just taking money out to do things? Or what was the driver behind the trends in that business in the fourth quarter? And then just thinking about '26, given the changes, what do you think those businesses might do? Obviously, rates will impact mortgage, but just any thoughts on those businesses and the growth of fee income?

Yes. So, maybe I'll start on that one, Julie, do you want to pick it up.

So with respect to the wealth management fees, the AUM, we obviously did a deep dive on that because we were a little surprised to see the decline happening in the quarter. And what we have seen is a lot of the lower-yielding categories and the fixed rate categories have had reductions. We're actually in the higher-yielding categories for us on the AUM side that we're seeing improvements.

So, I think the trend there is positive. It looks negative on the surface. But in reality, those are actually things that we're trying to do to improve the trend on PTIM over time. We've made a pretty major shift there over the last year, which we've talked about a little bit before from being so investment management focused and led in the PTIM world over the last 20 years to being more fiduciary and trust and especially planning driven now. And we've talked about the change in leadership there and a number of very positive changes that have been underway over the last six months. We've seen a lot of progress here in the last few months, and that's going to show up in the numbers in 2023 -- 2026.

The other thing that I think you asked about in there was the risk and insurance revenues. And those are typically quite strong in the fourth quarter, and they were not in this quarter. And we've also made a pretty big restructuring of that group. And there were two very high-cost leaders for that group that we're comfortable operating as a loss leader. We're not a big believer in loss leaders here. And so we have made some changes there and brought that into the wealth planning team more directly. And you don't see the expense save that went with that, and you do see the cost reduction. So, I think that those were actually very positive developments that we wanted to see in Q4 there.

What I missed, Julie?

Maybe something on mortgage. I don't think that was part of your question as well. But Q4 mortgage production, Q1 mortgage production for us is typically lower just given the seasonality. But we continue to remain very focused as a strategic part of our business. We've added, I think, eight MLOs in the year of 2025. And as you know, it's hard to move MLOs whenever times are strong. So we feel like continuing to make that effort. Even though overall, the production isn't at the level we want it to be, we're profitable in that area. We're still adding and contributing net positive clients into the bank and the portfolio of the bank. And I would expect that second and third quarters of the coming year, 2026 are going to be seasonally stronger than the first and fourth.

So I think we have good outlook there. I think we're doing the right things. And then to add on to the wealth planning conversation, we have a lot of really strong momentum in that business line and feel really good about what we're doing there. We've also added a B2B offering that's really just now getting going, and we're seeing some early green shoots on that. So I think the outlook for us is strong, but the last year's production really hasn't shown that yet. So we're looking to that growth into 2026.

Good points there, Julie. And just to give some context to the eight people, that's a 45% increase from where we were a year ago. on MLOs at no direct expense. It's a variable cost that's commission-based.

Okay. That's really helpful. And then if I could ask one last one. You're almost a double-digit grower in '25 on loans and deposits. Does the outlook for you guys as you see it in your economies and markets, does that suggest another similar performance in '26? Or any thoughts on how you see the pipelines playing out for the year?

We are expecting growth in 2026 in line with what we saw in 2025. We continue, as you know, Brett, to have really small market share in all of our markets. We're in strong economies. I mean I think the big change that we've really seen in the past few months is this market disruption. And it continues and in fact, is accelerating and it's creating all this opportunity for talent and for new clients. We set up this disruption task force, when Julie? Was that in the third quarter?

Yes, late summer.

And we're working through that group on a series of very specific recruiting and sales and marketing initiatives. And we just had our big annual manager summit the last two days and the success stories coming out of that were remarkable. I mean there's just a lot of momentum in the field from prospects that don't want to be with these new organizations, and they want a stable local expert team and an expert stable local institution. And I think that's especially true in our niche with the private bank and trust focus. And with strong and healthy and diverse economies, I think all that's going to continue on into '26 and give us good opportunity for balance sheet growth.

Our next question comes from the line of Woody Lay of KBW.

I wanted to start on the expense outlook. If I adjust for that OREO adjustment, it was good to see sort of the core run rate flat. You talked about continuing to want to invest in the business, especially given the M&A disruption. So how should we think about the expense growth rate in 2026?

The way we've talked about it internally is we wanted to keep our expense below $20 million a quarter. And I think we've done that. Did you go back and look, David, I've been saying it's something like 12 quarters in a row. I don't know exactly. But certainly, over the last eight quarters, that's been true. And so I think that's kind of our base case is how do we drive more efficiency and more effective teamwork here without driving up expenses.

But having said that, and this was very much in your question, Woody, if we see opportunities, we have an internal business case process, and we told our people, if you can bring in some good people that are going to have a strong short-term and long-term impact, we want to hear about it and we want to look at it and support you with that.

So I think we're doing the best of both worlds here where we can manage expenses, grow revenues, get that operating leverage. And if we see opportunities for more revenue growth, go ahead and invest in that. That's the outlook we're taking for '26.

Got it. So if I pair that with the commentary of growth remaining strong, the NIM should continually grind higher. How should we think about the profitability improvement potential in 2026? Is there kind of an ROA range that you're hoping to be at by year-end?

Yes, there is, but I'm sworn to secrecy. I'll give my answer and let Julie and David do their rebuttal if they want.

If you look at our operating run rate, in the third quarter and again in the fourth quarter, we're doing something like $0.50 a quarter if you take out things like that OREO write-down, which, again, that was a decision we made. We had this last property up in Aspen in Basalt, actually near Aspen. And there were some unpermitted construction done by the former owner that we foreclosed on. And the city has just really taken it out on us and made it very difficult for us to sell that thing given the strong attributes, but the unpermitted construction that was done on it. And so we've been back and forth and back and forth with them. We had a buyer that was really interested and she worked with the city and she couldn't get them anywhere. And then we have a buyer now that put under contract and is taking it kind of as is, and he was supposed to close in December, and he hasn't finished his diligence yet. So we gave a 60-day extension. his request supposed to close in February. And the update from this week is he's on track.

So I think that's going to get sold. It's $1.4 million write-down from the discounted value that we had already put on it. So frankly, we're looking forward to having that off our books, not having OREO. So that is a onetime thing. We don't have other OREO. We had that marked below our appraised value. We worked hard to realize that value at some point, that's not really our highest and best use of our executives' time and efforts. So, hopefully, that will get sold here in Q1.

So if you take that out and you look at kind of the typical monthly expenses, and we always have puts and takes, and I'm not adjusting for that. I'm saying if you take out the big things and you kind of run through the net interest income, you look through the fee income, you look through the operating expenses, we're doing kind of a $2 run rate, and it improved actually a little bit from Q3 to Q4. So that's my starting point going forward is under a normal world, we ought to be starting the year at a 2% operating run rate, $2 that was wishful thinking a 2% thing, $2 a share operating run rate. And then I do think we can grow from there.

We have said our near-term objective here is to get to a 1% ROA, which would be 3.50-ish. And so we got people focused on that. Can we get there on a run rate basis this year? I think that's pretty stretchy. But I think we will get there. And I think we can get beyond that, but we have to get there first with the improvements in NIM and the operating growth and the impact of all these initiatives we've been talking about, we seem well on the way.

Is anything, David or Julie, you want to add? Yes.

No, not for me.

Well, that's really helpful color. And I guess just last for me, with a strong loan pipeline, how do you think about matching that with core deposits? The growth has been a little lumpy as you've optimized the balance sheet. But just curious on your thoughts on maybe the deposit competition in the next year.

Yes. The team is really focused on that. And one of the questions we asked folks while they were here for the summit was how do you feel about the loan pipeline and the deposit pipeline? And the feedback is that both are strong. I think the focus that we've put on the deposit side seems to be paying dividends in terms of that new business.

Historically, if you look back at the 22-year whatever history of First Western, we have found that at the margin, when we need deposits to fund the loan opportunities that we want to do, we can bring those in. And there was a period there. Actually, after our last call, it was interesting. One of our bigger holders texted or e-mailed Julie and me and said, hey, great quarter, good report on the third quarter. must feel good to get out of the slog of the last couple of years. And for me, that just really resonated. It was kind of a difficult period there with the bank failures and the darling of the private banking industry going out of business and all that.

So I think getting out of that slot, getting back on a growth track, getting off of defense, which I feel like we played well to get back on offense. And those are all things that I think are panning out in our deposit growth story, which your use of the term lumpy was kind. I mean that was obviously not what we would choose to see all that great growth in Q3, but it did let us run off some of the high-cost deposits in Q4 and in some way kind of proved what we've seen over the years, which is when we want deposits, we can bring them in. And when we don't need them, we can pay them off and those things help NIM. And I like the NIM slide this quarter, I'm not sure which page that's on. But if you look at kind of the full year trends for the last five quarters, it shows a nice upward trend that gets us -- is that Page 9, Julie? Yes. It gets us on this trajectory back to 3.10%, 3.15% that I've talked about before that historically we've seen in our banks.

And our next question comes from the line of Matthew Clark of Piper Sandler.

Just the first question on the deposit beta, 54% this quarter from an interest-bearing perspective. Do you feel like you can hold that kind of mid-50s beta this year? Or do you feel like that might come down a little bit?

No, I think we can hold that.

Okay. And then do you have the spot rate...

An unhedged response, I like it. I mean we have seen it come down, you know, Matt. And we do think that -- well, David said it.

Yes. Okay. And then do you have the spot rate on deposits at the end of the year?

Yes, it was 2.86%.

286%, okay. Got it. And then -- assuming that's the case and just thinking about the near-term margin kind of implies your beta steps up here actually in the first quarter. With the noninterest-bearing deposits down at the end of the year, I'm assuming they'll come back to some degree, but borrowings are up a little bit. You'll likely see some asset yield pressure from the December rate cut on the floating rate portfolio, which I think is 25% of the book. It appears like your NIM might come down a little bit here in the first quarter, but I'd love to hear your thoughts and tell me why I'm wrong.

Our NIM in the month of December was 2.72%.

Okay. Okay. But in terms of the end-of-period balance sheet, you don't think there's some incremental pressure there?

No, I don't.

All right. Fair enough. And then the other one I had -- actually, I think it was already asked and answered on expenses.

Our next question comes from the line of Bill Dezellem of Tieton Capital Management.

Two questions from the balance sheet. The first one is mortgage loans for sale jumped in the fourth quarter from, I think, $22 million or so in Q3 up to $40 million in Q4. Would you discuss the dynamics behind that, please?

You're asking about the mortgage held-for-sale balance.

That's right.

Yes. Yes. There are timing dynamics there, timing of when the sales occur relative to the end of period.

Can you explain what those are? Which are loans that we're originating and selling in the secondary markets that are on the balance sheet in the interim.

Yes. Yes. Those loans are originated for the purpose from the beginning of application and lock and everything, those are originated for the purpose of selling. So the balance typically will kind of trend up and then we'll package those and we'll do a sale and move those off the balance sheet. So it does get impacted simply just by the timing of when those sales occur relative to the end of the period.

Your question is a good one, though, Bill, because generally, when volumes are higher, that balance goes up, but then it's also offset by this timing thing that David was talking about. So, I wouldn't read too much into that.

And part of the, I guess, backdrop of the spirit of the question was wondering if there was some dynamic that you saw in the market, whether it was sale premiums or something else that led you to conclude you wanted to hold those a little bit longer or if it truly was simply timing and getting proper volume set up for your sale?

No, it's mechanical. We don't play that game.

So, it's truly just a timing phenomenon?

Correct.

Okay. And then the other question was relative to your construction and development loans. You had a pretty significant reduction in the amount of those loans. And the question is whether that was an intentional risk mitigation strategy or whether it was all part of the normal ebb and flow of bringing on new loans and loans paying off moving out of that C&D category.

I would say much more the former than the latter. We had a review of that portfolio 18 months ago, something like that, and felt like that was as high as we wanted to get, and we wanted to work it down. And so if you look on Page 5, you can see that's gone $315,000, $230,000, $189,000, and actually, a lot of the increase that we've seen in nonowner-occupied CRE is that those construction projects getting finished and then moving on to our investor real estate. And I don't think that those generally sit there very long because they get refinanced into permanent financing. So that's something that I think we'll continue to see there is less of an increase in that investor real estate line item, too.

And our next question comes from the line of Brett Rabatin of Hovde.

Just one follow-up around the tax rate. It's been jumping around a lot the last few quarters. Any thoughts on the tax rate from here? And then just any strategies that you guys are implementing on the tax side, whether it be municipals or other things?

Yes. Good question, Brett. The tax rate, I agree, it has been a bit lumpy over the quarters. And some of those dynamics at play just have to do with some of our LIHTC investments and the K-1 losses that flow through and the timing of when we actually receive that information of the actual losses versus the projected losses that we're kind of using to work that through the year for the effective tax rate as well as there are components of equity compensation and the differences that come with that, that come at play as well, and that had an impact in the fourth quarter. So that's -- that was one of the main drivers of why we saw the fluctuation in the effective tax rate in Q4. But going forward, I think we're more in that 23% to 24% range from an effective tax rate perspective.

We have added some tax-exempt interest income sources, I think, over the past 12 months, and we're working on another one now or looking at it. So I mean it's something that we do pay attention to, Brett. But I think for planning purposes and forecasting purposes, that 23%, 24% is a reasonable range.

Our next question comes from the line of Ross Haberman of Rlh Investments.

Scott, I got on a bit late. Could you just tell me -- did you touch upon your opinion of the mortgage market and what your expectations are for '26? Let's say, I don't know, rates stay about the same or maybe come down a little bit. What's your expectation on your mortgage operation?

Well, thanks for the question, Ross. We have been trying to build our production capability there, even though the market is slower, and Julie did talk on the call a little bit about our experience has been that when the market is really strong and you want to add more mortgage loan officers, which are commission-based the producers, they won't move because they have a big pipeline wherever they are. So building that team when times slow is pretty much how we've experienced that you have to do it if you want to get good ones. And so as we talked about on the call, we've increased -- that has been a focus for us, and we've deliberately gone out and increased our MLO team by 8 producers in 2025, which is a 45% increase year-over-year. So that's somewhere we are investing.

We do think -- well, investing, they're commission based, so it's not a cost. But we're investing effort for sure in building that team for future productivity. We do think that there just has to be a lot of pent-up demand out there for people that want to move. We know people aren't going to leave their 2% or 3% mortgages behind. But at some point, if you got another kid or you're moving, relocating, you need to do that. And we're seeing prices, I think, at least in the Denver market, moderate. And so at some point, that's going to create some mortgage opportunities for us, I think. And obviously, the decline we saw this year and this quarter, it's not us, it's the industry. And so I think that we are doing a good job of being -- playing the hand that we're dealt by this industry. But I also think we're well positioned that when that comes back and we see some growth, we're well positioned to take advantage of it.

Are you seeing any pickup in that division, either in Phoenix or Wyoming or I think you opened up -- was a lending office in Bozeman, was it? Are you seeing -- are those -- would those -- would you see a pickup there first? Or maybe the Denver area, if you saw any sort of pickup, it would show up there first.

We have actually brought in a few in the Lowes and Arizona. So we've seen some nice production out of that region. And then we've also brought in a few from the Wyoming region, which has really helped us there, too. And these are really high-quality producers that have really our type of clients. So some of that you'll see adding to the portfolio. Montana is a little bit trickier. We haven't been successful finding a pure-play MLO there, but we have a great lending team and they're capable of doing all of the lending needs.

So it's definitely a focus of ours is to make sure that all of the markets are seeing the growth that we want. So -- and we've been seeing production in all of the markets.

And to be clear, Bozeman is a full-service First Western profit center that is actually contribution positive. They've made really nice progress there.

Yes.

And just one other question. Have you been looking around for other operations to buy either money management or branches or other little banks? Are you actively looking at in either -- in any of those other three markets or any other -- now that you have a little bit of a currency this year than you had in the year or two past. Is that on your radar screen? Or that's a backseat and you would rather -- if you found some great relationship bankers, you would rather hire one or two and/or a lift out rather than a whole bank.

Yes. So, as you know, we have a long history of acquisitions and our currency really is not been in a place where that has made sense here for the last couple of years. Our focus is on organic growth. We talked on the call a little bit about all this market disruption. And the beauty of hiring the people you want is you get the business that you want, you have to take the stuff you don't want. And so definitely, there's a strong focus here with this disruption task force and with our internal focus on how do we take advantage in an organic way. And that's Front Range, that's resort markets, that's Arizona, Montana and Wyoming, all of them. So we do think there's a lot of opportunity right now for us to just do our jobs and get after this organic growth.

Thanks a lot, and best of luck.

I'm showing no further questions at this time. I'll now turn it back to Scott Wylie for closing remarks.

Great. Thank you. So we said for several quarters that we had success playing defense through that slog of '22 and '23, and now we're shifting back on to offense. The headwinds out in the market have changed to tailwinds for 2026, and that's both in financial and economic and competitive terms. We feel like our 2025 shift to offense really worked, and we've leveraged our investments that we've been making in these five key areas I talked about last time, which is our tech infrastructure, our product teams, our local PC teams, profit center teams, our reset of our internal processes for more efficiency and more value add. And we've also now strengthened our credit and risk support and marketing teams to support the First Western of the future.

So with the positive trends that we saw from Q3 to Q4, where our net interest income was up 22% quarter-over-quarter annualized or it was also up year-over-year nicely. Our NIM was up 17 basis points quarter-over-quarter, 26 basis points year-over-year on a continued path back to where that should be. We -- if you adjust for the operating -- the OREO write-down, our pre-provision net revenues were up another 39% quarter-over-quarter annualized or double from a year ago. Our efficiency ratio when adjusted for that OREO continues to trend down nicely and our operating run rate in the last quarter was, as I said, $0.50 if you take out -- if you normalize it, and that's a little over $2 annualized.

So looking at our 2026 business plan, assuming a stable environment, we expect these positive trends to continue, as we've talked about. Market disruption continues and increases. The opportunity for talent and clients, I don't think has ever been better. Our disruption task force is we're focused on recruiting and sales marketing initiatives. Our prospects are telling us they want a stable local team of experts and a stable local institution, especially in our niche. This small market share that we have in each of our markets provides lots of upside in our strong and healthy and diverse economies that we are operating in.

Our PTIM restructuring is working. We'll see some results of that this year, both with the reemphasis on planning and our B2B initiative that we've launched. Our MLOs are up, and that's taking advantage of the slow market for building for the future. And our NIM, I think, is going to continue to trend up towards the 3.15% number we've talked about as the economy and our financial markets normalize. So those NIM gains and some modest balance sheet growth, they will generate some nice net interest income gains and they'll generate some nice earnings gains. So our intent is to get back to being a financial high performer. We see a clear path to 1% ROA and plenty of room beyond that.

So, thanks, everybody, for your support. We really appreciate you dialing in today, and we'll look forward to connecting in the future. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Thank you for standing by, and welcome to First Western Financial's Third Quarter 2025 Earnings Conference Call.

[Operator Instructions] I would now like to hand the call over to Tony Rossi. Please go ahead.

Thank you, Latif. Good morning, everyone, and thank you for joining us today for First Western Financial's Third Quarter 2025 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've 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.

And with that, I'd like to turn the call over to Scott. Scott?

Thanks, Tony, and good morning, everybody. Starting on Slide 3. We executed well in the third quarter and saw positive trends in many areas of loan deposit growth, growth in our net interest income, well-managed expenses and generally stable asset quality. This resulted in an increase in our level of profitability and positive operating leverage. Market remains very competitive in terms of pricing on loans and deposits. We continue to successfully generate new loans and deposits by offering superior level of service, expertise and responsiveness rather than winning business by offering the highest rates on deposits at the lowest rates on loans as other banks are doing.

We continued to maintain a conservative approach to new loan production with our disciplined underwriting and pricing criteria. However, as the result of additions we made to our banking team over the past few years, as well generally healthy economic conditions in our markets, we had a solid level of loan production, which was well diversified across our markets and industries and loan types. As a result of our financial performance and the balance sheet management strategies, we had a further increase in both book value and tangible book value per share, and we used our strong capital position to repurchase some of our shares during the third quarter, which was accretive to our tangible book value per share.

Moving to Slide 4. We generated net income of $3.2 million or $0.32 per diluted share in the third quarter which higher than the prior quarter and a 45% increase from our EPS in the third quarter of last year. With our prudent balance sheet management, our tangible book value per share increased by 1.2% this quarter.

I'll turn over the call to Julie for some additional discussion of our balance sheet and trust investment management trends. Julie?

Thanks, Scott. Turning to Slide 5. We'll look at the trends in our loan portfolio. Our loans held for investment increased $50 million from the end of the prior quarter. We continue to be conservative and highly selective in our new loan production. But with the higher level of productivity we are seeing from the addition to our banking team that we have made over the last several quarters, we are seeing a solid level of new loan production. While we are also seeing an increase in CRE loan demand that meet our underwriting and pricing criteria. New loan production was $146 million in the third quarter. The new loan production was well diversified with the largest increases coming in our residential and commercial real estate portfolios, and we are also getting deposit relationships with most of these new clients. We continue to be disciplined and are maintaining our pricing criteria which resulted in the average rate on new loan production being 6.38% in the quarter.

Moving to Slide 6. We can take a closer look at our deposit trends. Our total deposits increased $320 million from the end of the prior quarter. This was due to both new accounts and the buildup among existing client balances. We had an increase in noninterest-bearing deposits due to inflows we saw from title companies, driven by mortgage industry volume. Additionally, we had an increase in interest-bearing deposits as a result of the successful execution of our deposit gathering strategy.

Now turning to trust and investment management on Slide 7. We had a $64 million decrease in our assets under management in the third quarter. primarily attributed to net withdrawals on low fee product categories, partially offset by improved market conditions on investment agency accounts. This resulted in increased $43 million or $2.7 million during the quarter. Trust and investment management fees increased $100,000 from the prior quarter, primarily driven by the increase in investment agency AUM.

Now I'll turn the call over to David for further discussion of our financials. David?

Thank you, Julie. Turning to Slide 8, we'll look at our gross revenue. Our gross revenue increased 8.7% from the prior quarter due to increases in both net interest income and noninterest income. Year-over-year, our gross revenue increased 15.5%.

Now turning to Slide 9, we'll look at the trends in net interest income and margin. Our net interest income increased for the fourth consecutive quarter and increased 8.9% from the prior quarter primarily due to an increase in our average interest-earning assets with the strong deposit growth we had contributing to our higher level of cash on the balance sheet. Our net interest income increased 25% relative to the third quarter of 2024.

Our NIM decreased 13 basis points from the prior quarter to 2.54%. This was due to unfavorable mix shifts in both interest-earning assets and deposits as our deposit growth during the quarter was in higher-cost money market accounts. The strong deposit growth during the quarter contributed to higher cash held on the balance sheet as this liquidity is deployed into the loan portfolio during the fourth quarter, we expect to see NIM expansion.

Now turning to Slide 10. Our noninterest income increased by more than $500,000 or 8.5%, which is 34% annualized from the prior quarter. This was primarily due to increases in all major fee categories, including trusted investment management fees, insurance fees and gain on sale of mortgage loans. The increase in gain on sale of mortgage loans was driven by a higher level of mortgage production and the increase in trust and investment management fees was driven by an increase in investment agency AUM as a result of improving market conditions.

Now turning to Slide 11 and our expenses. Our noninterest expense increased by less than $1 million from the prior quarter. Most areas of noninterest expense were relatively consistent with the prior quarter as we continue to tightly manage expenses, while also making investments in the business that we believe will positively impact our long-term performance.

Turning to Slide 12. We'll look at our asset quality. As Scott indicated earlier, we saw generally stable trends in the loan portfolio in the third quarter with slight increases in NPLs and NPAs. This was primarily due to one loan that was downgraded during the quarter. And we had a minimal level of net charge-offs again this quarter. We had a slight increase in our allowance coverage from 75 basis points in the prior quarter to 81 basis points in the third quarter.

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. Overall, we continue to see relatively healthy economic conditions in our markets, and we're seeing good opportunities to add both new clients and banking talent to the ongoing disruption from M&A activity here in the Colorado market. Our loan deposit pipelines remains strong and should continue to result in solid balance sheet growth in the fourth quarter. In addition to balance sheet growth, we also expect to see positive trends in net interest margin, fee income and more operating leverage resulting from our disciplined expense control.

Based on trends we're seeing in the portfolio and the feedback we're getting from our clients, we're not seeing anything to indicate that will experience any meaningful deterioration in asset quality. Deposit trends we're seeing in a number of key areas are expected to continue, which we believe should result in a steady improvement in our financial performance and further value being created for our shareholders going forward.

So with that, we're happy to take your questions. Latif, if you could please open up the call.

[Operator Instructions] Our first question comes from the line of Brett Rabatin of Hovde Group. Please go ahead, Brett.

I wanted to start with the deposits and the strong MMDA growth. And if I heard you correct, it sounds like that's a mix of internal efforts as well as maybe the mortgage department. Just any -- can you maybe go into a little more color there? And then are those levels sticky, the growth in the level?

Well, I think we've talked about our efforts to grow deposits. And the fact that, that would happen a little bit in a lumpy fashion wouldn't be a big surprise given our history here, we do see large deposits coming in and out. And in this case, I think the things that we saw that happened in Q3 are deposits that are going to stay here and give us a higher deposit base to grow from into Q4.

Okay. That's helpful. And then the NPA that you added during the quarter, any color on that credit? And then just was there part of the provision related to a specific reserve for that MTA?

Yes. I think we have a number of credits that have performance issues over time, and this is one that is a C&I loan. We have been paying attention to it. We downgraded it in Q3, and we do have a specific provision for it. We expect it to be worked out and work through over time. The provision is more than adequate.

Okay. And then just maybe lastly, if I could ask on the margin, Julie, you indicated the margin would be up from here. any magnitude that you could share in terms of what you think 4Q might look like, presuming we get a rate cut or 2.

Yes. I think we do have opportunity to see NIM expansion. If you look at the amount of liquidity that's sitting on the balance sheet, if we redeploy that into the loan portfolio at something like plus 200, I think that, that should drive NIM expansion there. We also certainly have the ability to continue to improve earning asset yields and lower our deposit costs. So I think we've got a pretty nice path for NIM expansion in the fourth quarter.

Okay. David, any magnitude that you're thinking about in terms of basis points?

Yes. I'm thinking we can achieve something like 5 basis points of NIM expansion.

Okay. Okay. Great. Appreciate all the color.

Our next question comes from the line of Matthew Clark of Piper Sandler.

I wanted to start on the spot rate on deposits at the end of the quarter.

Yes. Matthew, it was 3.04%.

Okay. And then any updated thoughts on the beta you're looking to achieve with additional fed rate cuts through the cycle and whether or not that starts to decline over time?

Yes. It has been declining and it will certainly continue. We achieved somewhere around a 63% beta on money market accounts in the third quarter, and I think that's reasonable for the fourth quarter expectation as well.

Okay. And then the expense run rate going forward. I think some of the increase this quarter was really the incentive comp, but what are your thoughts on the run rate here in the fourth quarter?

Yes. The incentive comp can vary certainly with the financial performance. But I think something similar to third quarter as far as expenses is probably a reasonable estimate for fourth quarter.

Okay. Great. And then last 1 for me, just on the Wealth Management business, AUM down a little bit. It looked like it was in the lower fee products to may have been deliberate, not sure. But any update on the kind of the renewed growth and profitability improvement strategy there?

Yes. We've definitely been working on getting that going again, and we've replaced the team on the trust and in the planning side. We've got a new leader that joined us beginning of the second quarter. for our planning team and definitely seeing some nice progress from them. As David noted, we saw AUM go down, which is not really something we manage for. We're really more concerned about the fee income, and we saw fee income grow in the agency accounts in Q3, which is what we want to see. So definitely nice progress, from that new team, but I think a lot more to come.

And Matt, just a little bit more color on deposit pricing. With the increase in deposits, you're always going to see relatively expensive at first, and then it's going to moderate over time typically with these new relationships and additional deposits you bring in. Our average deposit costs last quarter peaked at $3.22 in August, and they were down about $3.15 in September, and as David said, ended the quarter at $3.04. So you're seeing a nice trend just within the quarter there. So hopefully, we can see that continue into Q4.

Our next question comes from the line of Will Jones of KBW.

I wanted to circle back to the deposit growth. Obviously, a fairly banner quarter there for deposits, and it sounds like you expect maybe to see a little bit more balance sheet growth. And the fourth quarter here. But should we, in any way, view this large influx of deposits as a way to prefund that your expected growth for 2026? And maybe '26 then becomes more about just remixing the balance sheet. And then just, I guess pairing within that, you obviously have a fair amount of liquidity from the deposit growth. How should we think about you guys being a little more opportunistic with securities purchases at this point?

Well, I think that was a 3-part question, so let me see if I can get them all here.

Yes, I'm sorry about that. Through [indiscernible].

Well, we appreciate the question. So I think you're right on with the idea that we were opportunistic in bringing deposits on. We have done a number of things over the last 12 months to get the team here focused on deposit growth, we know we can grow loans, and we wanted to see the loan-to-deposit ratio come more in line. And so the way you describe that is reasonable. Although I would say it's not like a one-off thing that prefunds 2026 or something like that. I mean I think this is an ongoing effort that goals throughout the product grew throughout the our PTM World Planning Trust Investment Management world goes definitely through each 1 of our 19 locations. We require relationships with each loan and that includes deposits. And so very much a focus of the company. I think that we're seeing a lot of market disruption out there.

So on one hand, you've got this competitive environment for deposits, but you've also got people that don't want to be with really large out-of-state banks, and that disruption is continuing. I would say increasing and that creates opportunity for talent for people that we can bring centrally to support our teams. We can bring new people into our teams and then we're bringing in new clients. And so I think that's going to continue. I don't really see any reason to think that's going to abate. And at the same time we've got this tiny low market share in most of our markets, we're kind of 1% or 2% in our bigger markets and less in the newer markets, so in strong and growing economy. So I think all those things set up for some nice continued asset growth into fourth quarter and next year.

Okay. Helpful response. And as I kind of like pare some of those comments just into how the margin looks for 2026, as I kind of look back how you've transformed the margin this year about 20 to 25 basis points of year-over-year expansion. Do you think that magnitude is repeatable again in 2026? Is the opportunity there from both a deposit pricing standpoint and a loan growth standpoint to see that kind of magnitude again in 2026?

Well, what I've been seeing is that we really got heavily impacted by that rapid run-up in short-term rates and the inverted yield curve and that we thought that, that would turn around and we'd see nice deposit betas as rates declined, which we have. And the fact that we've seen 22 basis point improvement from Q3 of last year to Q3 of this year, I think it's a nice start in that. We moved out of the 230s into the 250s. And I continue to think that in normal environments, my banks, including this one, have produced 3.50, 3.20, 3.25% NIM for the way we do business. And that's where I think we're going. I don't think we're going to get there next quarter. I don't know if we can get there next year. But that, I think, is going to continue and the fact we've seen that amount of improvement here over the last 12 months in spite of the growth that we've seen on the balance sheet. I think it's really promising and bodes well for continued operating leverage into 2026.

Yes. Okay. Very helpful there. And then lastly for me. You touched a little bit on in some of your comments, just the organic opportunity that's arisen from some of the M&A disruption. But there has been a lot of deal announcements. There's been a lot of price discovery. So just curious how you think about your own scarcity value within that? And then maybe how you view yourself as a downstream buyer of potentially banks?

Well, we believe that our path to -- we believe our job is to drive shareholder value. And we believe our path to creating shareholder value is creating operating leverage in our business here by growing revenues a lot faster than expenses. And that turns into improved efficiency ratio improve bottom line and we're not happy where the profitability is. We're not happy where the efficiency ratio is. But we've made a bunch of investments here over the last couple of years and changes that are now paying off, and we're seeing the green shoots of that, and that's going to drive continued organic growth and operating leverage for us. And now I talked a couple of times about why we think that continues into '26 and beyond.

So specifically, in terms of scarcity value, clearly, First Western is a unique franchise that both is becoming more unique in Colorado. But I would say also more unique as a successful wealth management business on a national basis. I mean I think the bank, in a lot of ways, most similar to us in terms of their balance sheet and AUM was fine mark in Florida, and the fact that they sold for 6.5x revenue and 92x trailing earnings to a really good buyer I think, is an interesting data point for us. And I know others use other metrics on that, but I mean, I think that's what the data is.

So yes, I think there's good scarcity value here. I think our clients, frankly, see that and they find us to be a desirable place to do business. I think other bankers around the country are seeing that, too. In terms of acquisitions, we would love to be buyers. We've done that over the years, a lot 13x, and we just have to get our stock price back to something reasonable. And definitely, there's a lot of activity out there that we could benefit from if we can get our stock price back in line or when get our stock price back in line.

I appreciate that. Appreciate that response. That's all for me.

Our next question comes from the line of Bill Dezellem of Tieton Capital Management. Please go ahead, Bill.

Scott, it sounded like you may have had some additional comments that you were going to share to the last question, I'll let you do that if there's something more you want to add.

I'll add a few comments at the end. Thank you, Bill.

All right. So continuing down the deconsolidation route, would you talk about what transactions have been most disruptive and possibly favorably impactful for First Western.

Yes. I don't entirely understand it, Bill. So I can't really give you a really solid prediction of what's going to happen with all this. But I would tell you that when Guaranty Bank [indiscernible]. I thought that was going to create a lot of opportunity because our type of clients definitely were at those 2 banks. And I thought with them being acquired by out-of-state banks, that was going to create a lot of opportunity for us. As it turned out, it didn't. And I think a lot of the reason for that is the banker stayed in place for a while. And then when they did move, they were really a bit up by other players. And so it got to be really expensive to bring those folks over.

Now with the second-tier acquisitions that we're seeing, for example, with Citywide, which was a really great local family-owned and family run bank, they sold the Heartland, I don't know when, 5, 7 years ago, something like that. And then I think Heartland really had a strategy of trying to run these local banks as the way they had run historically. UMB buys Heartland, UMB is going to drive a UMB culture into what used to be citywide. And so we're seeing some good people and good opportunities come out of that. And so I think Interestingly, it's sort of the second-tier acquisitions that really create more opportunities in some way. And then the First Bank one in this market is really interesting. Like First Bank is a great retail bank and does really love by Colorado. So there's this emotional tie that I don't entirely understand, but definitely local people here, local business leaders, local entrepreneurs have strong relationships with that company. And it's just going to be a challenge for a big national player to keep that passion and we'll see.

I mean, we've had lots of calls. We have clients that bank here and bank there. And you can be pretty sure that those folks are calling us to saying what additional capacity you guys have for us to stay with you guys. So I don't know how all that plays out, Bill. I do feel like we're seeing more benefits of the disruption in today's market than what we saw 5 or 7 years ago. And again, I'm not sure all the reasons why, but it's been really good for us so far.

So let me take that 1 step further, do you sense that you have the opportunity to become the new bank that Colorado's love that others look at year ago, we don't even know why, but there they sit on this pedestal?

Well, I do know our clients love us. we're never going to be a retail bank the way First Bank was. Like First Bank, one of their strengths was they did one thing. And over the years, I've talked to people like John Ikard and other CEOs over there. And they're like, well, what do you think about the trust investment management business. And I would tell them, and they would say, "Well, that's fine. But we're never going to do that at FirstBank. So I mean, they're just very focused being a retail bank. And I think they did that better than anybody. And we're not ever going to do that. We're not going to open branches on every corner like data and stuff like that.

So I think we'll continue to be in First Western. I know that our folks are very committed to their markets and their communities. We talk here about taking care of our 4 key stakeholders, which our shareholders, associates, clients and communities. And so we try and do those things that are right for our people and create that emotional connection that you're talking about. And certainly went on our niche, that's something we would hope to expand and build on.

That's helpful. And then relative to Arizona specifically are you seeing anything from a transaction standpoint that you see is benefiting your opportunity for bringing on new people there?

Well, I don't think we've announced it yet, we have Julie is telling me. So I was thinking I was going to make some news here, Julie, you're at me. But -- we actually recruited 1 of the top folks out of First Republic to build our franchise in Arizona for us, and he had a garden leave period and all that stuff, but he's now joined us -- and we are really optimistic about what we think the team there can do in the years to come. I think that, that Arizona market for us -- if we had the same tiny market share that we had in Arizona that we have in Colorado, we would be what's the number, Julie, $4 billion, $6 billion, bigger or something like that. And so that's what we've charged the team there to come up with. I think we've got a leader in place that can do it.

Great. Congratulations on that. one additional question, please. The excess cash that you have on the balance sheet, how long are you thinking that it will take to redeploy that cash?

Yes. Actually, that was 1 of the 3-part question that I missed on, David. And do you want to talk about what we've done already with investments and then what our thoughts are.

Yes. I mean, Bill, if you kind of look back at the history of our balance sheet, we certainly have our liquidity and capital really more earmarked towards the loan portfolio. And I think that continues. Now that being said, when there are opportunities from a bond perspective that we like, we will take advantage of them. So we did add about $50 million in the third quarter to the bond portfolio, and those were primarily floaters that got us a nice spread over interest-bearing cash, which still really remains highly liquid assets, government guaranteed bonds, agency, GSEs, things like that.

So I think the focus is still to deploy that liquidity into the loan portfolio. But as we see opportunities in the bond portfolio, we'll certainly assess those as they come up.

So 2 follow-on questions to that. Number one, is that the $49 million available for sale, that's now on the balance sheet this year referencing.. -- and then that redeploying of that. I mean is this something that is a 2-, 3-quarter phenomenon given what you see with economic activity? Is it something you think by the end of Q4? Is it more like the full year next year? I guess I'm looking for a bit more solid view of how you see loan demand relating to that excess cash. excess liquidity I should say.

Yes. Good question, Bill. We expect our loan and trends to continue. We had a really strong second quarter in loan growth. We had a good quarter again in the third quarter as far as loan growth. And we -- given our loan pipelines and what we're seeing in our markets, we do expect those trends to continue. So I don't think it's year down the road type of things with those trends continuing as far as redeploying that liquidity.

I would just add, Bill, that we have seen a modest growth rate in the balance sheet, right? Like I think that our expectation is that we can grow single digits, mid-single digits, maybe low double digits. We're not interested, particularly in growing faster than that. And I think that you're going to see this growth continue at a moderate pace here into 2026 from everything we know. Not expecting a lend all this money out next week. That is not in our game plan.

I would now like to turn the conference back to Scott Wylie for closing remarks. Sir?

Great. Thank you. We said for several quarters that we had success playing defense and that we were going to shift back on to offense in 2025. We had some pretty stiff headwinds there for a while with short the rapid run-up 525 basis points in short-term rates. We had that inverted yield curve for an extended period. We have 3 of the 4 largest bank failures in U.S. history, including First Republic, which very much was seen as a successful player in our net. But we said we got through the defense, let's shift over to offense and really leverage the investments that we've made over the past couple of years. in funky areas. We've replaced our technology infrastructure.

We've moved to a completely cloud-based environment. We've installed middleware. We've rolled out a new digital platform we're adding all kinds of new services and tools onto that tech platform that really, I think, help us be a leader from the tech standpoint. We've reorganized, number 2, our product teams, our loan, deposit, investment management, planning, trust, mortgage teams have all been strengthened and reorganized. We've expanded our PC local office teams. We've given them a new proprietary toolbox for growth and rolled that out here in the last quarter. We reset and standardized our internal control processes for more efficiency and value add so that we're competing on value and not on price.

And number five, we've rebuilt our credit and risk and support and marketing teams to support the First Western that we envision for the future. And that's all paid for and in our current expense structure. So we were hoping to see some green shoots of progress in this year, and that showed up in Q3. Our net interest income was up Q-over-Q quarter-over-quarter annualized. Our fees were up 31.6% quarter-over-quarter annualized. Each of our key areas, David pointed that out, which I thought was a really great pointing in PTAM in insurance, in banking and mortgages, we saw a nice growth. Our pre-provision net revenues were up almost 35% quarter-over-quarter annualized and our efficiency ratio is trending down with operating leverage up.

So thinking about 2026, we do our business planning in the fourth quarter. And so that's a big project that we're doing now with each department head in each office. And so we'll see how all that plays out. But if you just look at Q3 year-over-year trend lines, -- then our net interest income is up 25% year-over-year, and that was done with modest growth in the balance sheet plus NIM improvement, which drives nice operating leverage, which we saw our fees were up 21% from September of last year to September this year. And our operating expenses were only up 4%, and that was mainly due to incentive comp that is driven off of revenue growth.

So if we had a higher expenses in Q4 because we're making incentive because we're seeing good -- some conference, we're seeing good growth, and that's a good problem to have. So looking at this quarter, our intention is to get back to be a high financial performance like we were earlier in this decade. And we have a clear path to 1% ROAA and plenty of room beyond that. we were honored to be named one of just 16 KBW Bank Honorary members in 2025 for our performance over last year. We were just I think made as of Q3 now, Piper Sandler list of the top 200 U.S. listed banks in size. And then we just saw our schedule for the HUD conference down in Florida in a couple of weeks. And the organizers, they asked us to add some time slots because of high demand.

So I think there's good momentum here. We're really optimistic about how we can finish the year and continue to deliver shareholder value in 2026. Thanks, everybody, for your support, and thanks for dialing in today. We really appreciate it.

This concludes today's conference call. Thank you for participating. You may now disconnect.