Ladies and gentlemen, thank you for standing by, and welcome to the First Western Financial Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference to your speaker today, Tony Rossi, Investor Relations. Please go ahead, sir.

Thank you, Joelle. Good morning, everyone, and thank you for joining us today for First Western Financial's Fourth Quarter 2019 Earnings Call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; and Julie Courkamp, Chief Financial Officer. We will use a slide presentation as part of our discussion this morning. If you have not done so already, please visit the events and presentations page of First Western's Investor Relations website to download a copy of the presentation. The management team will discuss the fourth quarter results, and then we will open up the call for questions. 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. Good morning, everybody. Thank you for dialing in. We know it's a busy time for everybody. We completed 2019 with another good quarter of execution, delivering strong earnings despite the seasonal slowdown in our mortgage business. On a year-over-year basis, our net income increased by 49% in the fourth quarter, while EPS increased just over 45%. As I mentioned on our last call, one of our top priorities was enhancing our loan growth to match the success we've had in growing deposits and assets under management. We had a strong pipeline of loan opportunities entering the fourth quarter, and I'm pleased to report that we are very successful in closing on these opportunities, which resulted in a record level of loan production for the company. We had $146.1 million of loan production in the fourth quarter, which topped our previous record for a quarter by more than $40 million. Our markets are healthy, and we've expanded into new markets such as Vail Valley and Broomfield. And most importantly, the new business development officers we've added over the last couple of years are becoming more seasoned and generating more consistent pipelines. The combination of all these factors resulted in the strong loan production we saw in the fourth quarter. We continue to experience a high level of payoffs and paydowns. However, the strong new production helped us more than offset the runoff in the portfolio and grow our gross loans at an annualized rate of 30.8%. We're still a relatively small institution and our loan production can still be subject to some lumpiness, so we don't expect to maintain this 30% plus level of growth each quarter. But we are encouraged that our increased focus on loan production is gaining traction and should help us grow revenues and improve…

Thanks, Scott. As Scott has already discussed, we are pleased to report another quarter of solid financial performance. The quarter also highlighted the value in our diverse revenue mix. As the residential mortgages were seasonally slower, we saw a reduction in gain on mortgages sold, but we saw a nice expansion in our net interest income and insurance revenues. I'll begin with Slide 8 and First Western's revenue trends. Gross revenue of $16.2 million with a slight decrease from the prior quarter, but up 13.9% from the fourth quarter of 2018. Relative to the prior quarter, we saw a decline in noninterest income, as expected, due to the seasonally slower mortgage activity in the fourth quarter, but this was partially offset by growth in net interest income. As a result, our revenue mix was just about 50-50 in the quarter between fee and spread income, in line with our historic mix. Moving to Slide 9, we can take a closer look at the net interest income and the margin. Our net interest income increased 3.1% from the prior quarter. The increase was primarily due to lower interest expense resulting from a decline in our cost of funds. Our net interest margin declined to 2.91% from 2.95% last quarter. As Scott mentioned earlier, our loan production was back-end loaded this quarter, so we continue to carry excess liquidity throughout most of the quarter that weighed on our margins. We had a 23 basis point decline in our yield on earning assets, which reflects the impact of the excess liquidity as well as the effect of repricing in our loan portfolio following the most recent interest rate cuts and a higher mix of residential mortgage loans in our portfolio. This was offset partially by a 19 basis point decline in our cost…

Thanks, Julie. Moving to Slide 13, I'll provide a few comments on our outlook. Heading into 2020, we're going to continue to put more emphasis on asset generation to complement the success we've had in growing total deposits and assets for our investment management business. One of the things we're working on is a commercial banking initiative designed to build expertise that will enable us to target specific vertical markets. The first vertical market we're targeting is medical and dental practices. We've hired a leader for this market, who's developing commercial banking products and services specific for the unique needs of these practices. We intend to replicate the same model for other vertical markets as we move forward on this initiative. We also expect to see our expansion into the new markets paying more dividends this year. We expect to see a nice contribution from our Vail Valley office as it continues to ramp up and generate more awareness for our unique value proposition. We also recently hired a market President and focused on the Broomfield area, which we -- where we haven't previously had a presence. Broomfield's about halfway between Boulder and Denver and has similar demographics to a number of our other most successful markets. The housing market remains healthy in Colorado, which should continue to present good opportunities for mortgage production. For the full year, we anticipate mortgage activity will be relatively consistent with what we saw in 2019. With the continued growth in revenue and additional scale we expect to add in 2020, we should be able to realize additional operating leverage and further improve our efficiency ratio. In closing, we feel like we have a number of catalysts in place that will drive another year of strong earnings growth and positively impact our level of profitability. And we believe we're well positioned to steadily enhance the value of our franchise in the coming years. So with that, we're happy to take your questions. Joelle, please open up the call.

[Operator Instructions] Our first question comes from Brady Gailey with KBW.

So Scott, it was great to see a pickup in the level of buybacks. You repurchased out 0.5% of the company. How should we think about buybacks in 2020?

Well, we were a lot more active in the fourth quarter buying back about 43,000 shares. We don't have a predetermined level for how active we want to be. In general, we believe that the best use of our capital is supporting the continued growth of the business. So as we move forward through the year, we'll continually evaluate what our best opportunities are for deploying capital and growing the business or buying back the stock.

Okay. All right. And then, Julie, on the net interest margin, I mean, it's running around 2.90%. It sounds like there's some moving parts. But you expect it to be relatively stable around that level for the year 2020?

You're right, Brady. There are some moving parts and puts and takes on that. I think on the positive side, we're seeing lower rates on our deposits, and we have excess liquidity that we can reinvest into higher-yielding assets. On the negative side, the rates on our new loan production are lower than what's been rolling off in the portfolio, which has been putting some pressure on our average loan yields. So for us, I think as we look into -- moving into the 2020 year, we would expect the impact of the positive factors to outweigh the negative factors and likely lead to some margin expansion, assuming kind of no change in the Fed funds' rate.

Okay. And I heard you guys say that expenses should be up by a mid-single-digit growth level. I think in the past, we've talked about expenses more flattish. So I was just wondering what the change was? I know you announced the medical and dental practice groups and maybe that plays into it, but it just feels like before you were talking about kind of flat expenses and now we're expecting a little bit of growth there.

We do see some inflation pressure on a number of our cost areas, and we have added some expense that will show up in this expense forecast that we've talked about for 2020. We do anticipate significant operating leverage from those expenses, something in the -- in excess of 2.5x operating leverage for the incremental expense. So I think we're going to continue to grow the business at the rate we have, add new offices, add business lines and do all the things we're doing realistically. We're not going to be able to hold expenses at prior year levels forever. I think the question for us is whether we can invest this money profitably and show short-term operating leverage. And with the results we've seen from 2019, I think we feel pretty confident that we'll be able to continue to do that.

[Operator Instructions] Our next question comes from Gordon McGuire with Stephens.

So on the medical and dental practice vertical, it sounds like this is still in the development phase. So when would you expect to be fully online there and contributing?

Well, the expense is already online. The revenues from it will grow through 2020. I mean that's -- it's a project, and we have many of the products and services we need to be competitive there. We don't have them all yet. And I can tell you that the leader that we brought in for that group has been very actively calling and has a good, strong pipeline. So I think we'll see good results in 2020 from that.

Okay. So you are already on the ground with a few products and hoping to build out some more?

Correct.

Good. And then you alluded to other verticals of interest? Any color on what those might be?

We haven't determined that yet, no.

Okay. I just want to get an update on the Los Angeles fixed income team. I guess you're still holding that goodwill and held for sale. So is the expectation to still seek a new location for the team?

We're still hopeful of finding a good owner for them that can provide the distribution that they need to grow the business beyond the things that we have them doing for us. The performance of that group continues to be very strong in terms of the investment management results, and the mutual funds that they advise for us continue to do really well as well.

Got it. And Julie, thanks for the color on the NIM trajectory. Just triangulating a little bit. With the runoff in CDs, it looks like it maybe only partially impacted part of the quarter. I think last quarter, you gave us spot rates. Do you have that number?

I do. So our spot rates at the end of the fourth quarter were 0.96% compared to 1.13% at the end of the third quarter. So we continue to see pretty good decline in those cost of funds.

Our next question comes from Ross Haberman with RLH Investments.

A quick question. I missed a mid part where you were talking about the margin or the spread. What's your expectation if -- assuming that rates stay sort of in this flattish low level for the rest of this calendar year? What's your expectation for the margin or the NIM for the rest of the year with that assumption?

Yes. Julie addressed that in the Q&A here a little bit. I mean we had hoped to see a stronger recovery in the NIM in Q4 than what we've seen. We do think that there are some pluses and minuses to the outlook for 2020. But we feel like, on a net basis, we're going to have some margin expansion in 2020, assuming rates stay flat.

And just one sort of overall macro view, what is -- what are you seeing in terms of your overall -- your different markets? Any sort of slowness or asset quality inklings, which you're concerned about? Or again, the overall macro environment, both on the residential and then on the commercial loan demand, is still as good as it has been this past year?

Well, obviously, coming off a record quarter in terms of loan growth, we're not seeing any problems in terms of generating the kind of mid-teen growth that we would like to see in the loan portfolio. I do think that it's interesting. We've talked -- I feel like on every single call about the fact that with a company as small as ours, it's going to be volatile. If you look at Q-end, quarter-end numbers, of course, in Q3, we saw a net decline, in Q4, we saw a record production and record growth. But it's interesting to me, if you take a little bit longer view of it and you look at the average total loans in Q4 of 2018 and average total loans in Q4 2019, that's 14% growth, which is, I think, a nice indication that we're making progress in line with what we had anticipated. In terms of the economic activity, Colorado has definitely slowed from the pace it was going at, which was probably not sustainable, but it's still growing nicely. We're still seeing strong entrepreneurial activity, pretty diverse economic growth here. We still see a lot of in-migration to Colorado from high-cost states on the coast. So lots of positive fundamentals. I think the bigger challenge for financial institutions in Colorado is the competitive environment here. It continues to be very challenging on the loan and deposit side. And I think with some of the big acquisitions that we've seen, that's really driving a lot of competitive pressure. And of course, that shows up in loan yields and structuring. So I think one of the challenges for financial institutions, including First Western, is to resist the temptation to be as competitive as our -- most competitive. Other institutions in this market and -- be disciplined and true to our credit standards, and I think you see in our results, significant improvements in the asset quality, continued very low credit losses and such. So I think we're doing it. We're certainly mindful of it, and I think we're doing a nice job of managing that risk.

Just one final question. Are you happy with your overall mix of loans today in terms of the residential and non? And if not, what are you going to skew or focus more on for the coming calendar year in terms of adjusting that mix?

Yes. Great question. We would like to shift more towards commercial loan production, and we've talked about some of the initiatives that we have in place to do that. But having said that, we do think it's important for us to put our liquidity work. So if we don't see enough attractive opportunities in the C&I space, we will continue with the same mix of production that we saw last year. And I do think that we have a nicely diversified mix that we can continue to build on into 2020.

I'm not showing any further questions at this time. I would now like to turn the call back over to management for any closing remarks.

Great. Well, I just like to thank everybody again for joining us on the call. We really appreciate you making time and appreciate the questions and for your support for First Western. Have a great weekend.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.