First Western Financial, Inc. (MYFW) Q1 2022 Earnings Report, Transcript and Summary

Good day. Thank you for standing by and welcome to the First Western Financial Q1 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker of today call, Mr. Tony Rossi of Financial Profile. You may begin.

Thank you, Latonia. Good morning, everyone and thank you for joining us today for First Western Financials’ first quarter 2022 earnings call. Joining us from First Western’s management team are Scott Wylie, Chairman and Chief Executive Officer; and Julie Courkamp, Chief Financial Officer and Chief Operating Officer. We will use a slide presentation as part of our discussion this morning. If you have not done so already, please visit the events and presentations page of First Western’s Investor Relations website to download a copy of the presentation. Before we begin, I’d like to remind you that this conference call contains forward-looking statements with respect to the financial performance and financial condition of First Western Financial that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company’s SEC filings, which are available on the company’s website. I would also direct you to read the disclaimers in our earnings release and investor presentation. 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. Scott?

Thanks, Tony, and good morning, everybody. There were a number of macroeconomic and geopolitical headwinds that emerged during the first quarter 2022 to create a more challenging operating environment than we expected. However, we were still able to deliver strong financial performance, primarily due to our ongoing strong operating performance and the positive impact of the Teton Financial Services acquisition. The positive impact that it is having on our level profitability, even before we realized most the cost savings anticipated from this transaction. In the first quarter, we had $5.5 million in net income or $0.57 per share, and $0.61 per share including the – excluding the M&A expense while generating increases in all of our returns compared to the prior quarter. On an adjusted basis, excluding acquisition related expenses, our return on average assets increased one basis point to 92 bps. Our return on average equity increased four basis points to 10.70. And our return on tangible common equity increased 220 basis points to 12.41%. We were able to deliver this improvement despite a challenging environment that impacted our level of organic loan growth this quarter. We typically see some level of seasonality in the first quarter that impacts our level of loan production, which definitely occurred again this year, particularly in January and February, we’ve also seen an increase in the competitive environment in our markets somewhat driven by new entrance in acquisition activity. We operate very attractive markets, particularly in Colorado and more banks are making efforts to build a presence here. In order to do that, many of them are essentially trying to buy market share by offering very low, long-term fixed rate loans. As always, we’re maintaining our underwriting and pricing discipline and our unwillingness to compete on price is having some level of impact on our loan production. Particularly ahead of the coming interest rate increases, we believe that we’re best served by not putting low, long-term fixed rate loans on our balance sheet even if that costs us a bit in terms of loan growth and net interest income in the short-term. In addition, we saw a significant increase in the level of payoffs during the first quarter. Some of this is related to completion of construction projects that we expected to correlate last year, but got pushed into the first quarter. We also had quite a bit of payoffs related to liquidity events and the sale of businesses and properties. As we talked about in the past, we have a very sophisticated client base consisting of high net worth individuals and entrepreneurs, and they make intelligent decisions and are opportunistic. When it comes time to manage their assets. They’ve seen substantial appreciation of value their businesses investment properties, and seems like some of our clients have decided capitalize on what they think are near peak values for these assets. This high level of payoffs resulted in excess liquidity this quarter that impacted both net interest income and net interest margin. However, we saw improving trends in March with $44 million in loan growth, excluding PPP loans in the month. This momentum has continued and based on the current trends, we’re seeing loan production – the trends we’re seeing in loan production to start second quarter, we believe that we’ll have good opportunities to redeploy our assets excess liquidity into higher yielding assets in the coming months. Despite the more challenging operating environment, our asset quality remains exceptional with non-performing assets remaining into 17 bps of total assets. Another quarter with an immaterial amount of net charge-offs. Moving to Slide 4. Our strong profitability this quarter led to increases in book value and tangible book value per share of just under 2%, which goes against the broader industry turn this quarter with many banks reporting declines in book value per share due to the volatility in AOCI. Our success in protecting and continue to grow our loan – our book value is directly attributable to the strategic decision we made last year to retain our excess liquidity, rather than putting it into investment portfolio. With the prospect of higher rates on the horizon, we felt we were better served by retaining the excess liquidity and passing up the small amount of interest – incremental interest income that we would've received from growing the investment portfolio. Because of that decision, we've been able to protect our book value while now having significant liquidity that we can deploy at higher rates than what we would've gotten last year. As of that decision not to put on low, long-term fixed rate loans in the current environment, this reflects our commitment to operating the company with a long-term perspective and not making short-term decisions to support near term earnings growth that will ultimately come back to hurt the company in the future. On Slide 5, we'll look at the performance of our private banking, commercial banking and trust and investment management businesses. This is represented by the pre-tax earnings of our wealth management segment. Compared to the fourth quarter of 2021, our pre-tax earnings increased 8.5% in this segment quarter-over-quarter, again, reflecting the positive impact of the Teton acquisition. In the first quarter of 2022, our wealth management segment accounted for 96% of consolidated pre-tax earnings, as our mortgage business continues to return to its intended role as a complimentary source of fee income. Turning to Slide 6. We'll look at the trends in our loan portfolio. Excluding PPP, our total loans increased 11 million from the quarter end in spite of the high level of payoffs I talked about earlier. Over the long term, we continue to see very strong loan growth, both organically and through our acquisitions. Our non PPP loans are up 41% year-over-year and bank originated loans are up 28% excluding PPP. We grew our C&I portfolio by 16% during the first quarter, but this was offset by the payoffs that occurred in the construction and CRE portfolios. We had $102 million in loan production this quarter with almost half of that coming in the month of March, but we had 154 million in payoffs, which was significantly higher than the levels we've been seeing over the past several quarters. With interest rates rising and our commitment to maintaining our pricing discipline, our average yield on new loan production increased 55 basis points from the prior quarter to 4.07%. Moving to Slide 7. We'll take a closer look at our deposit trends. Our total deposits increased 66 million from the end of the prior quarter. Our new deposit relationship – new deposit development efforts are consistently resulting in new deposit relationships with new accounts accounting for 42 million of the deposit inflows during the first quarter. Turning to trust investment management on Slide 8, our total assets under management increased to 153 million from the end of the prior quarter due to market declines with the most significant impact coming in the investment agency balances. The lower value of assets due to market decline was partially offset by 48 million of inflow into new accounts. Year-over-year, AUM was up 11% reflecting the steady growth we're generating in this area. Now, I'll turn the call over to Julie for the discussion of our financial results. Julie?

Thanks, Scott. Turning to Slide 9. We've provided an update on our participation in the PPP program and how it impacted various metrics in the first quarter. As of March 31, we had a 16.7 million in PPP loans remaining on our balance sheet, which is a decline of 30.1 million from the end of the prior quarter. We recognized approximately 400,000 in fees during the first quarter and had approximately 300,000 in fees remaining to be recognized as of March 31. PPP had a six basis point positive impact on our net interest margin in the first quarter. As the PPP loans are forgiven, our borrowings from the PPP liquidity facility that were used to fund the loan originations also declined. At March 31, our borrowings from that facility were down to 12.6 million. Turning to Slide 10. We'll look at our gross revenue. Our total gross revenue increased 15% from the prior quarter due to our higher level of net interest income following the Teton acquisition. This was partially offset by a decline in non-interest income. Turning to Slide 11. We'll look at the trends in net interest, income and margin. Our net interest income increased 27% from the prior quarter, primarily due to higher average loan balances. Our net interest margin increased six basis points in the first quarter to 2.98%. Excluding the impact of PPP fees and accretion on acquired loans, our net interest margin decreased eight basis points to 2.87% due to the excess liquidity created by the high level of loan payoffs and deposit growth. We produced a 25 basis point increase in average loan yields compared to the prior quarter, primarily due to improving pricing on new loan originations. The addition of Teton’s higher yielding loan portfolio and the impact of accretion income on purchase loans, partially offset by the impact of excess liquidity. We expect to see some expansion in our net interest margin going forward as higher rates and higher levels of loan growth enable us to redeploy our excess liquidity as well as benefit from the positive impact of additional interest rate increases on our asset sensitive balance sheet. Turning to Slide 12, our non-interest income decreased 9.5% from the prior quarter, which included a net gain of approximately 500,000 on equity interests. Excluding this net gain our non-interest income decreased by 4.6% from the prior quarter, primarily due to lower risk management and insurance fees. Although it was a difficult quarter for equity and fixed income market and higher interest rates impacted demand for residential mortgages, we were able to keep our two largest sources of non-interest income; trust and investment management fees, and net gain our mortgage loans for the relatively consistent with the prior quarter. Over the longer term, we continue to see steady growth in our trust and investment management fees, which were 6.6% higher than the first quarter of 2021. On Slide 13, we have provided some additional detail on our mortgage operations. Our volume of mortgage locks increased 4.5% from the prior quarter, primarily due to the seasonal increase in home buying activity. Our profit margin in the mortgage business was consistent with the prior quarter. As we continue to benefit from the efforts we have made to improve efficiencies and reduce our fixed expenses in the mortgage group to reflect the lower levels of volumes we are now seeing relative to 2020. Turning to Slide 14 in our expenses. Our non-interest expense decreased by 5.5% from the prior quarter, excluding acquisition related expenses. Non-Interest expense increased due to the addition of Teton’s operations. On an adjusted basis, excluding acquisition related expenses are efficiency ratio improved to 69.8% from 71.8% in the prior quarter, reflecting the greater operating leverage resulting from our increased scale. Once the core system conversion and Jackson Hole Branch consolidation occur in May, we should see our run rate for non-interest expense, excluding M&A related expenses at $19.5 million to $21 million a quarter for the next several quarters. Turning to Slide 15, we’ll look at our asset quality. We continue to see positive trends across the portfolio. Our non-performing assets remained at 17 basis points of total assets, and we continue to see minimal losses in the portfolio. We recorded a provision for loan loss of approximately 200,000, which was related to the growth in total loans, excluding PPP loans and changes in the portfolio mix. This brought our ALLL to 87 basis points of adjusted total loans, which has relatively consistent with the end of the prior quarter. Now, I will turn it back over to Scott.

Thanks, Julie. Turning to Slide 16, I’ll wrap up with some comments about our outlook. One of the more positive developments so far this year is the quality and quantity of banking talent that we’ve had opportunities to add, but individual commercial banker’s team lift outs, or new MLOs, our Q1 hires and the pipeline of candidates is stronger than it’s ever been. And I think that’s due to the positive reputation we’ve developed as a very attractive place to work. Bankers are seeing in our growth and the success we’re having, and they want to be part of it, particularly when many of them are frustrated with their current institutions. People first is the first of our five themes in our 2022 business plan with associates reporting high levels of engagement in spite of COVID’s impact. Put a lot of focus on resources towards associate engagement, training, and career development that makes people feel like there’s a lot of value to work in First Western, and that’s enhanced our ability to both retain and attract new talent. This is helping us continue to grow in our more mature markets in Colorado, as well as expand our business development capabilities in some of our newer markets in Wyoming, Arizona, and Montana, where we expect to see increasing contributions being made to our organic growth. As we look at the rest of the year, we see a number of catalysts that should lead to further improvement in our levels of profitability. Our loan pipeline has steadily built since the beginning of the year and is more than 60% larger than it was in January. As I mentioned earlier, we’re seeing a higher level of loan production and to start the second quarter with the diverse lending platform, we have the ability to be flexible and pivot to whichever asset classes are seeing the strongest demand in presenting the most attractive risk adjusted opportunities at any given point in time. Payoffs remain a wildcard and difficult to predict. But at this point we still feel good about our ability to generate strong organic net loan growth this year. And as loan growth picks up, we should be able to deploy our excess liquidity and further drive growth in net interest income and expand our net interest margin. We’re on track to complete the Teton system conversion and branch consolidation in May, afterwards we’ll start to get the full benefit of the cost savings from this transaction. A portion of which we’re reinvesting in the business to support continued growth and expansion. The combination of higher loan growth, a favorable shift in our mix of earning assets and the realization of the cost savings from Teton should lead to further growth in earnings and additional increases in our levels of profitability. Well macroeconomic and geopolitical issues, including increasing concern about a possible reception – recession have created more uncertainty around the operating environment. And we believe that the strength of our client base and the business model we have built positions us well to effectively manage through these headwinds and continue to deliver strong results for our shareholders. So with that, we’re happy to take your questions. Latonia, please open up the call.

[Operator Instructions] Our first question comes from Brady Gailey of KBW. Your line is open.

Hey, thanks. Good morning guys.

Good morning, Brady.

Maybe we’ll just start with loan growth. I know payoffs burden that number this quarter, I think in the past, we’ve talked about kind of a mid teams level of loan growth kind of the near/longer term for y’all. So how do you think about, given the payoff dynamics, how do you think about loan growth for the balance of this year and end of next year?

Well, I think the starting point has to be, a point that we’ve made before Brady, which is we’re just small enough that a change in the number of payoffs that we get in a quarter, like we saw in Q1 or the amount of loans that actually get funded in a quarter, just has an outsize impact on that quarter’s reported number. I mean, with the $224 million or $225 million that we produced of loan growth in Q4, it’s not surprising that it would fall a little bit in Q1, right? And so I think, we expect the machine to continue to produce lots of loans and I would expect the payoffs to normalize. I think we did a deep dive into what was going on with those payoffs this quarter. And we talked in the prepared comments about the two drivers, which were some construction loans that we expected to pay off last year actually ended up paying off in Q1. And then the, this whole thing about our clients looking to monetize some of the asset appreciation that they’ve seen. So, I think just based on all that, we’re still pretty comfortable with the mid teen loan growth forecast we’ve talked about. I did mention in our comments that, net of PPP and the Teton acquisition, we grew 27% year-over-year. So, I think we’ve had pretty good success outperforming that mid teen number. And then the third point, I would make is if you look at our current pipeline and our current loans and process that are already approved that are just kind of making their way through the machine. Those numbers are much larger than they were in January. So, I think we’re going to be fine.

Okay. That’s good to hear. Then as I look at mortgage fees around $2.5 million this quarter, there’s about the same $2.5 million last quarter. So pretty consistent. I mean, do you think we found kind of the normalized pace here, or with the tick up in mortgage rates, do you think there’s some downside potentially to that as we move throughout the rest of the year?

Well, with mortgage revenues now contributing 4% of our total revenues. I would tell you, there’s not a lot of downside. It’s getting pretty close to zero. So, I think seriously, I would say that we’re definitely going to see lower refi volumes. They, that trended down in Q1 and that’s continuing into Q2. And obviously we’re seeing that around the industry. So our expectation is those refis are going to continue to go down. We have seen improvement in purchase volumes, and I would expect that to continue going into the seasonal impact we have here in especially the front range of Colorado. And we’re working on adding some more loan originators, which would certainly help production, we’ve reduced the fixed expenses as we talked about last year and we made a number of improvements in efficiency in the mortgage business, which has helped our margins. And so, we look to keep the mortgage team to be revenue positive and earnings positive. And I expect that the revenue at the end of the day is going to be pretty flat this year. It’s possible that could trend down, but I think we’ve shown pretty good cost discipline on that as well. I think the important part here is that other parts of our business are doing really well and are going to drive further revenue and earnings growth this year.

Okay. And then finally for me, with this level of excess liquidity, I don’t think you guys have ever had this amount of cash on the balance sheet before. I mean, it average almost $0.5 a billion in the quarter, do you leave that there and wait for loan growth to return, or do you start thinking about growing the bond book? More, I mean, the bond book is almost zero for you guys. It’s only like 2% of average earning assets, just thoughts on what to do with the excess liquidity. Wait, put it in loans later, or do you start growing the bond book near term, just because, bond rates are a lot better today than they have been the last couple years.

Yes. So, if I could give you a little bit of a roundabout answer to that. I mean, I just would point out that we grew average loans. We did, we talked about month end numbers or quarter end numbers, but we grew average loans, 15% quarter-over-quarter, which is, largely the Teton effect. And then we grew deposits 26% quarter-over-quarter average balances, right? So, we already had a liquidity problem in December and then adding Teton in which was half deposits, half went out obviously exacerbated that. And like you say, I mean we’ve been carrying $500 million in the first quarter, mostly at a negative spread because even, that’s a close to zero you’re by the time you’ve pay, you have to, I see insurance, you’re getting zero on it. So it’s actually negative spread. So we were really happy with the first quarter raise, because at least it got the break even. And if we do see 50 basis points next week, like, or next early May, like we’re expecting, you know, obviously that’ll just help just from that. But to answer your question more directly I think the decision not to buy, 1% Jenny May’s last year is looking pretty good right now. And I think, once we see what happens with this first raise in early May, we will be looking to deploy some of that liquidity into in the bond portfolio over the remaining portion of the year. I think we’ll do that in kind of a normal First Western way, which will be cautious. And in the meantime I do expect, loan production to really come in and help take up some of that liquidity, the improvements on cash yields will help take up some of that you know, negative impact on them that we saw late last year to early this year. So I think all those things are like nice tailwinds for us.

Okay. All right. Great. Thanks for the color, Scott.

Yes. Thank you, Brady.

Our next question comes from Matthew Clark of Piper Sandler. Your line is open.

Hey, good morning, Can you remind us how much you have in the way of loans that float kind of immediately or within a month and how much re prices within a year?

Yes, Julie, you have those numbers handy. You want to walk through that?

So of our portfolio, we’ve got about 30% that’s variable rate and 70% of those loans are above their floors and most of the loans will reprice immediately. So we’re seeing some benefit from the first rate hike, but we’ll see quite a bit more as additional rate hikes occur. Basically above 50 basis points is where about 23 of that book of business is, and then above 50, you know, it’s split between up to a 100, we will get the rest of it. So I think we’ll see a lot of benefit in the next rate hike in May and then probably more the full book of our variable business. We’ll see a benefit in the next version of it after May.

Order magnitude Matt, if we saw a 100 basis point shift from where we are today, our loan or floating loans would yield about $4.5 million more annually.

Yes. It’s okay. And then on the competitive pricing commentary in the quarter, can you give us a sense for the weighted average rate on new loans in the quarter and how that may have changed here in April with the increase in rates, whether or not just trying to get a sense for new loan pricing relative to what you’ve been putting on the books here more recently?

So excluding mortgage, which does seem to cause a little bit of variation depending on the type and mix of those, our yields are about improving and are about a little bit above 4% on the new loans that we’ve put in the first quarter.

Our expectation given the competitive environment is we’re not going to be able to capture a 100% of the rate increases in loan yields, but I think we’re going to continue to benefit from it substantially. I also think that our loan demand is high enough now that we have the luxury to have this pricing and discipline pricing in terms that I talked about, like if you’re fighting for the last dollar growth, maybe that’s harder to have the backbone, but I think with the amount of demand that we’re seeing and the pipelines we’re seeing and the success of our teams and producing these opportunities and maintaining price discipline through, the relationship things we’ve talked about before, and it seems like we’re able to do a good job of that and still grow.

Okay. And then just on deposit pricing those costs came down here this quarter. I think your expectation last quarter was to probably hold the line on deposit pricing. But a lot has changed between now and then, and what are your updated thoughts on kind of deposit datas and the overall kind of pressure to have to raise rates on deposits?

Well, one of the nice things about the Teton acquisition is they do have a very stable base of low cost deposits. And I think that didn’t really contribute much in Q1 too. Our success in fact was probably neutral because of the liquidity that we already had, but for the longer term, I think that’s going to be a really nice benefit, overall the only real pricing pressure we’ve seen on deposits so far is about 260 million of our deposits are what we call trust cash, which is the cash that’s maintained in trust and investment management balances here. That’s invested in the bank deposits and that is indexed to money market mutual fund rates. And so as of quarter end that has increased 14 basis points. And that has more or less a 100% beta to it, although it seems to have about a three month lag because of the way, the way money market mutual funds adjust pricing post rate increases.

Okay. Thank you.

And our next question comes from Ross Haberman of RLH Investments. Your line is open

Good morning, Scott, Scott nice quarter. How are you? I just, I wanted to ask a further question about Teton. How are they doing in terms of contributing to the loan growth as well as deposits and now that you’re in there, you have them, is there more, are there products which you can sell more than you originally thought in terms of being of having revenue enhancements more than you might have originally thought? Thanks.

Yes. So great question. When you do a combination like this, and especially when we're in market like we were already, you want to make sure you have a smooth transition, and we were hoping to be able to convert them onto our systems at the – at more or less the time of the merger we had it scheduled in mid-January and ultimately weren't able to do that things to our core processor. But we scheduled it for May. And so you want to make sure that between the time you close in December, the time you convert, and through all that you retain the folks, and the clients that are new partners there. So definitely we've been focused on integration and smooth transition for our new colleagues and for the clients. Our existing office in Jackson has been extremely helpful with that. The team has really stepped up, and I would say that our legacy RMB folks have been terrific in working with us to retain these clients and helping us position for growth in Wyoming in these upcoming quarters. So, so far so good, it's gone, frankly, better than I could have hoped. And now we're getting people focused more on business development and cross-selling, the folks have figured out that the legacy RMB folks have figured out how to take advantage of First Western’s strengths and our processes and whatnot. And so we're seeing that impact in the loan pipeline. You’d point about new products, obviously their legal lending limits much higher now. And so we're able to support them with larger loans and support larger relationships. And frankly, we're optimistic that the continued turmoil in that market's going to benefit the stable able base of folks that we have in that market. So, we're feeling very positive about that. And I do think we will see significant revenue synergies that we did not include in the numbers that we announced last summer.

Just a follow up question regarding the mortgage business and your revenue there. Do you have a breakdown of how much of that is purchased versus refi of that $2 million plus in revenue you have for the quarter?

Yes, so two years ago it was, 60/40 purchase revenue historically it's been as high as 70/30 purchase. And of course in the great refi boom, it flipped and it was 70, or even over 70 of refi. And I think the numbers in Q1, as I recall, were kind of high teens in refi. And the last number I saw was it's now down to something like 8% refi. So, I mean, it's just drop stone.

Okay. It's mostly purchased. That's what I wanted to know. I think that's it. Thank you. Nice quarter.

Thank you to support.

All the best. Thank you.

Thank you.

Thank you. Our next question comes from Bill Dezellem of Tieton Capital. Your line is open.

Thank you. Let me start with the mortgage business with all of the negative talk and the slowdown that, that we know has taken place. How did you manage to have the success to have your gain on mortgage loan sales flat versus the Q4?

I think that there are a couple things going on there. We have a very good team. We worked hard on this over last two or three years. When we bought EMC in, was it 2017, Julie?

Yes.

We talked to them about the idea of integrating the back office, and the secondary services into the bank, and our folks here work really hard to do just that. And so we have a much more efficient back office support, operation support. The – as I mentioned a minute ago, the hedging was something that we had outsourced and bringing that in house and hiring an expert to lead that for us turned it out to be a great move. They've done a wonderful job with that. And then this latest change where we've been able to get Fanny and Freddy direct access for our secondary team further improves the margin. So all those things, none of them by themselves are transformational, but taken as a group, I think are really important to success. As you know, we also paired expenses last June at the end of the second quarter, looking forward for this downturn. And so I think that's really helped us manage expense. And you see that in the chart on Page 13, if we had the expenses that we had the first couple quarters of last year and the revenues that we have today, obviously we'd be losing a lot of money. So, I think, the team's done a really nice job with that. Having said that I just would underscore, we're talking about 4% of our revenues. And so I believe that this mortgage operation is really critical to our strategy and to being successful in what we do as a company whether or not the revenues are kind of at the level they are now, and we're making a little bit of money with it, or whether, they go back to the kind of things that we saw in 2020 and 2021, which, they will eventually, but for now I think this is a nice stable business that fits with what we're doing. It's adding clients to the core business and it's protecting our clients from going across the street. And so I think it's actually been a really nice story, and I'm really proud of the effort that teams done on managing this.

Thank you. And continuing down the path with the mortgage business, would you expand on your comments that you made in the opening remarks that you're seeing the purchase activity pickup? So, I guess the question ultimately will be, is in spite of the drift off with the little bit of remaining refis, are you anticipating that, or sensing that the market is firm enough in the areas where you operate that you're going to be able to see the mortgage business grow from this level?

Yes. Grow from this level? I don't know. I think that that's hard to say, but I think stabilize here, I feel pretty good about, and I'll give you the optimist answer. And if any other people from our management team on this call want to – that an opposing view, they can do that. But from my perspective, Bill, I think that we always see a seasonal slowdown late in Q4 and Q1, and then, springtime, we see people coming out wanting to buy. And so, we're seeing that now it's sewing up in the numbers in March and April. And I think there's a lot of demand in our markets for housing. Our problem with the purchase money is not supply to support it. And so I think that's where the challenge they're going to be, if we had more supply, I think we'd see a lot more volume opportunities, but what we're doing is a couple of things, number one we're trying to be competitive, and make sure MLOs have the tools they need to succeed. We're actually adding some new products that are in line with what the market seems to want today, which is things like this one closed mortgage that lets people buy a lot and build a house with a single closed mortgage that deals with the supply problem, right. And then that single one close converts into a permanent financing, which is a really nice product, I think perfect for the times. And our team's very excited about that. And I would expect significant volumes out of that yet to come this year. And then I think the disruption in the industry creates some interesting opportunities for us too. And we were working yesterday with one of our regional presidents and they feel very confident that we're going to be able to hire some MLOs into their region and that are going to be nice producers and really fit nicely with the business. So, I think, the position we're in which is a position of strength because of the scale and scope we have the reputation that we built that the team that we have, the products and services and efficiency that we deliver to those MLOs, I think we're going to be able to build that team, but that's probably a little bit on the optimistic view. I think my assumptions in business planning, my assumptions in forecasting here would be – we're probably going to be stable revenue wise where we are, and we can produce steady income. So Julie, you want to issue a counterpoint to any of that?

No, I think that's a good way to look at that's how we're looking at it internally. Obviously as you said Scott, Q2, Q3 are traditionally seasonally higher for us, so we probably will see a little bit of a bump, but we're not going to see significant change in our production levels. The other thing I would just note is putting a finer point on your broader strategic initiative of what mortgage does for the bank. And if you just look at Slide 13, that doesn't really show you what is being produced into kind of the portfolio of our a balance sheet. So you have to take both pieces, and that's the downfall of breaking, the business into components. You don't get to see all of that benefit, but you can see it on the loan side. As we do benefit from mortgages even more than just what it shows in the segment. And I…

Yes, the mortgage team helps us build the wealth management segment.

That's right.

So if I were to put all that together and summarize the purchase activity in your markets, you sense we'll roughly steady with season at normal seasonality that will then affect that up and down. And the reason it's steady rather than growing is a lack of housing supply that's available for sale.

Yes. That's what we're seeing. And if that leaves you a little frustrated, because it's hard to forecast join the club, right. I mean, it has the challenge right now. I agree with that.

It probably wouldn't leave me as frustrated as it was someone trying to buy a home. That can't find one.

Well, that is so true.

Yes. Let me ask one more question relative to the excess liquidity or one line of questioning here. How much excess liquidity do you have, meaning if you have $454 million of cash in investments is $400 million of that excess, or is it what would be the number?

Well, historically we've operated the bank pretty close to a 100% loan to deposit ratio, and what we have found over the years. And, and you know, what, by years, I mean, 18 years of doing this here in 32 years, doing it in my career is that there's our type of client has a lot of deposits and a lot of liquidity, and we can raise deposits when we need them. So, I think we're relatively comfortable operating at a higher loan to deposit ratio. And we've been down in the low-80s of late. And so, Julie, if you think about Bill's question of excess liquidity, what number does that get you to do?

I would say, maybe the $250 million to $300 million range, just wanting to keep enough cash on the books so we can manage and also playing around with that 10% liquidity ratio. So, that's the answer I would give.

So, if we just do some back of the envelope math, if you had $300 million of excess liquidity or to loan that out at 4% knock off 25% for taxes, that gives you roughly an extra dollar per share of earnings after the first quarter of origination, when, when you'd have your provision that would be associated with it, is that the essentially the right way to think about it, that there’s another buck of earnings potential built into the business as you redeploy just the existing excess cash?

I think that’s one of five significant factors for NIM going forward here, Bill. So I would say let’s call that one number four on my list. And the other three, the other four would be floating rates, right? We talked about $4.5 million from 1% rate increase on the short end. The production of the machine, just kind of doing its job and growing mid teens would be number two. Number three, I think, the growth and expansion that we see bringing in these new producers, all that is going to be additive to what the current mature PCs can produce. That’s number three. Number four would be deploying this liquidity and don’t forget about the other factor I talked about, if we see short-term rates are 100% higher, and most of our deposits don’t have a high beta, have to see what our competitors do and whatnot. But I think there’s a nice pickup there. And then, the fifth one would be the question on the investment portfolio if we’re back to being comfortable having 10% of the book or something of the balance sheet in investments. I mean, that’s a lot fire cry from where we are today and a lot of additional incremental earnings for us and revenues.

Careful, Scott. You’re going to highlight a path to $5 of earnings?

And occurred to me.

Thank you both for the time.

Thank you.

Your next question comes from Brad Ness of Choral Capital. Your line is open.

Thank you. You highlighted the up 100 basis points scenario where it adds 4.5 million to net interest income. What about an up 200 basis points scenario? What does that add to net interest income?

So I’m an optimist, but I’m not that big an optimist. I have our Director of Finance sitting here and I’m going to put him on the spot. David, do you think that 100 carries over in the second or third, 100 basis point more or less? Yes. Be a little bit more because you’re got everything out of on the floors at that point. Yes. He’s nodding his head, yes. Can you all see that?

So what I’m hearing is it could be 10 million, so maybe the first 100 is 4.5 and the second 100 is 5.5, something like that.

Well, [indiscernible] so we don’t want to get too far over our skis here.

Yes. Okay. Let’s see another question. The expense guidance kind of clean quarter after the DP conversion of 19.5 million to 21 million per quarter, that seemed like a rather large range to me, because on the low side or high side, it’s a difference basically of like $0.45 a share. Can you maybe tighten that up a little bit, or just give us a little bit more color around that big range?

Yes, so we have budgeted for this year and in line with our analyst forecast, generally, I would say for continuing to grow our teams here. We’re seeing such nice revenue growth that we would like to continue to build our front office and back office teams which frankly is a little bit sort of future growth, right. I mean, it doesn’t necessarily pay off in the current quarter. So I think, when we can hire those people and find the right people and get them on board, or whether we have a couple of success for lift outs that we’re working on right now, and those expenses come on, it just all adds a little bit of uncertainty to it. So I think, when Julie talks about 19.5 to 21, I mean, for me, that’s where I would think the uncertainty is, but let’s ask her.

And I would echo that, but we’re giving a broader range because we’re trying to get you over a couple of quarters here. So, the lower end will be ramping up into the higher end by the third quarter out. So the fourth quarter of this year, so hopefully that’s a little bit helpful, but the reasons are because we’re staffing up and we’ve got new offices, we’re talking about their forecasting includes all of those items as well.

Great. No, thank you. Let’s see, last question here. And I was thinking that the clean quarter, which translate into about 1.25 ROA and that was maybe a quarter ago now that we’re in a totally different interest rate environment with higher rates and a much higher interest income. Should I think of you guys as a 1.35 now ROA company kind of clean quarter, maybe in 2023 with higher rates, or how do you think of that?

I think there’s a lot of operating leverage in our business and we’ve talked about that a lot in the IPO. And since then as our offices grow and now we are up to 19 offices, as they reach maturity, they get to be $8 million or $10 million in revenues and they have kind of $2.5 million in expenses. And then if you can add a couple incremental people that are really good bankers in the market, the incremental cost of that is, maybe a few $100,000, they go out and they grow you another couple million dollars in revenues. I mean, that all in the fixed cost of providing the central expertise and the central support is essentially zero. I mean that’s really powerful operating leverage. And does that get us to 2% ROA five years from now? I don’t know. I mean, I don’t think anybody’s really proven that, but I do think 1.25 is a very achievable number for us, 1.5 seems like an achievable number, as we grow this thing out, depends on how many new offices we’re opening, depends on how many new people we’re hiring this quarter or next quarter. But I think your analysis is right. And I do think there’s a lot of operating leverage in our business. And that was a little hard to see in 2018 when we went public. But you look back the last couple of years and it’s very evident and I think that’s going to continue to be the case.

Great. Thank you. And have a great weekend.

Thank you too.

[Operator Instructions] Our next question comes from [indiscernible]. Your line is open.

Great, thanks. Just two for me. Obviously, the focus on pricing and structure discipline probably makes the continued great asset quality likely to continue. Is there anything in your modeling or any indications that there could be even like lower provisioning going forward that might lead to the reserve to maybe edge down from where it’s been at?

Well, the question I thought you were going to ask is if we see any credit pressures, then we don’t. I think we’re comfortable with where the reserve is, candidly, we all have CECL on our minds for January of 2023. And so, we would like to make sure that we have reserves in line with where we think we’re going to be with CECL. So I wouldn’t expect a big decrease in the provision this year. I think we’re going to want to continue to provision about at the levels that we are. And then see where that leads us with CECL, to the extent that the numbers support that, which so far they do. I really agree with your comment at the beginning that this is the part of the cycle where bad loans are being made that a couple years from now, everybody will be well [ph] why don't we do that loan? And we’re sure trying to avoid that. I mean, I’ve been through enough of these cycles to know that maybe sooner, maybe later, but it’s not going to be never, so let’s don’t make those mistakes.

Great. And it seems like just in the Mountain West, there’s been enhanced M&A activity, even post Teton, obviously you’re going to be able to be selective on individual ads. Does this change at all maybe how you would look for, any sort of acquisition of an actual enterprise going forward? Does it speed it up at all given, maybe increased scarcity value?

As a buyer, do you mean, or?

Yes. Yes.

Well, I would tell you we have an active corporate development program as we have for years here. We’ve done 13 acquisitions I think over the years. We have a number of candidates right now that we’re talking to, it’s focused and targeted. We don’t want to do something that’s outside of what makes sense for us. And so, we have our targeted list and we’re working them and if they decide they want to sell, hopefully they’ll be familiar with us as a really attractive buyer for them that has really good experience in successful acquisitions and being a really good partner post acquisition, which I think, our folks from Simmons would tell you from two years ago, our folks from EMC, the mortgage company would tell you from three years ago. And I would certainly hope our Teton folks are feeling like we’re good partners and supporting them. So I mean, I think all that stuff builds a reputation in the industry and makes for nice referral sources, right. When you can tell a target, hey, call these other folks that are all still here and are all a lot more productive than they were before and see what they think about us as a partner. I mean, that’s a pretty powerful arrow in our quiver.

Great. Thank you very much.

I show no further questions and would like to turn the call back to management for any closing remarks.

Yes. Well, thanks so much everybody for down in today. I just had three points that I wanted to leave you with. I spoke in our comments, our prepared comments about our People First Initiative, and I feel like we’re showing some really great results in Q1. Thanks to these terrific people we have here managing their day jobs and managing the Teton integration and working through a number of exams and audits and having parallel systems that we have to integrate to have all this reporting that we have. And I just would really commend the folks that we have and the job they’re doing and appreciate that. Number two, I hope you see in the story here that there’s a nice upside ahead with organic growth and our new offices maturing, our expansion is definitely gaining traction. You look in the Front Range of Colorado that stuff’s working. Our new partnership in Wyoming is going to give us a lot more scale and opportunity in Western Wyoming. The Montana project seems to come together quite nicely. I think that’s going to be a really interesting story for the future in our Arizona team that we decided to restructure here a year or so ago is really coming together nicely. And we’re seeing lots of opportunity there. So, a couple of these lift outs and maybe some future acquisitions, I think that could all be really additive to the strong organic growth we’re seeing. And then the third point is just kind of these tailwinds, we see, I think some concern about the macroeconomic headwinds and the worldwide pressure, but just in a community or small regional bank market for us, we’re seeing a lot of tailwinds and opportunity. And I spoke about those on the call today. And I feel like we’re well positioned to take advantage of the situation that we’re in here. So thanks again for down in everybody. Have a great weekend.

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