First Western Financial Inc (MYFW) 2023 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to First Western Financial First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Tony Rossi of Financial Profiles. Please go ahead.

Thank you, Amy. Good morning, everyone, and thank you for joining us today for First Western Financial's First Quarter 2023 Earnings Call.

Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; and Julie Courkamp, Chief Financial 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 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, everyone. Because of the prudent approach we've always taken to risk management, First Western has been a consistent source of strength and stability for our clients and that was never more true than over the past couple of months. And at the same time, we never benefited more from the strong relationships we've built with our clients. As part of the ordinary course of business, we're in regular contact with our clients, so that we can stay appraised of any changes in their business or personalized and ensure that we continue to meet their financial needs.

So in the recent bank failures occurred, we didn't have to do anything other than what we usually do, which is continue to remain in regular contact with our clients. Our clients know that we're a considerably managed financial institution. So there's essentially no concern expressed by our clients and due to the deep relationships we've built and the value our clients place on the service and expertise that we provide, the stickiness of the deposit base we built was never more apparent.

Earlier in January -- earlier in the quarter in January, we had some liquidity events among our clients that resulted in some meaningful, but routine deposit outflows. But in both February and March, we had net deposit inflows, which speaks to the stability of the deposit base we've built. In fact, we've been the beneficiary of the recent term line of the bank industry with many new clients coming to First Western as they wanted to move their banking relationship to a stronger financial institution.

During March, we added $42 million in new deposit relationships will only $5 million of deposit relationships left the bank. While we saw good stability in the deposit base, we took some balance sheet management actions that had an impact on our level of profitability in the first quarter, but we believe we're prudent from a risk management standpoint. This included holding a higher level of cash on the balance sheet.

Our level of FHLB borrowings also increased, but this was not related to issues being experienced in the banking industry. We had already decided to increase our borrowings as they provided a less expensive source of funding given the extremely competitive deposit pricing environment that we're seeing. But as I indicated earlier, on a short-term basis, we've chosen to hold most of the increase in borrowings and cash rather than deploy them into loan fundings or some new purchases of investment securities.

We also chose to sell some nonrelationship loans most of which were added through acquisitions. These were loans where we had no deposit relationships, and they were relatively low yielding. While the sale of these loans did have an impact on our profitability this quarter, we felt that the benefit we would get in terms of capital and liquidity was more important in the current environment, while also improving the risk profile of the loan portfolio.

Because of our prudent approach to risk management in a conservative manner in which we run the company, the fundamentals of our franchise remain extremely strong. We have $1.5 billion available in liquidity, which is 1.7x our level of uninsured deposits, which represents just 37% of our total deposits.

We have a diverse client base with no meaningful industry concentrations. Our asset quality remains exceptionally strong with an immaterial level of losses, and we have a well diversified CRE loan portfolio with minimal exposure to nonowner-occupied office properties where there's a broader concern.

I'll provide some additional information about our CRE portfolio later in the call. And we also have a relatively small investment portfolio, so we don't have anywhere near the high level of unrealized losses that some banks have experienced. At the end of the first quarter, our held-to-maturity securities represented just 2.7% of total assets and unrealized losses were less than 3% of our total shareholder equity.

Moving to Slide 4. We generated net income of $3.8 million or $0.39 per diluted share in the first quarter in spite of some significant industry headwinds. While there are small nonoperating items every quarter, the combination of the loan fair value mark, severance payments and the small loss on loans sold add about 6% per share in impact in Q1. Over the past year, we've seen increases in both book value and tangible book value per share despite the impact to capital resulting from our adoption of CECL at the beginning of the year.

Turning to Slide 5. We'll look at the trends in our loan portfolio. Our total loans were about flat with the prior quarter, but this includes the $41 million of nonrelationship loans that we sold in the first quarter. Excluding those loan sales, our total loans would have increased at an annualized rate of about 6%. The largest increase came from our CRE portfolio. Most of those are multifamily properties in markets where there are supply constraints and high demand for housing and we believe they're very strong credits.

Given our more selective approach in light of the economic uncertainty, our total volume of loan production was quite a bit lower than what we had generated in recent quarters. Most of what we're generating now are C&I and residential mortgage loans that we believe present the most attractive risk-adjusted yields in the current environment. With our discipline on loan pricing, we continue to see higher rates on new loan production with the average rate on new loan production increasing by 125 basis points from the prior quarter.

Moving to Slide 6. We provided some additional information about our CRE loan portfolio. This portfolio is well diversified and conservatively underwritten. Multifamily loans represent the largest percentage of any property type in that portfolio at 16% of total CRE loans and only 5% of total loans. We've never been a big lender for office properties. And as a result, office loans comprised 11% of the CRE portfolio and only 3% of total loans.

Within that office portfolio, we have no exposure to properties in major metropolitan areas, including Downtown Denver, no exposure to buildings over 7 stories and the majority of the properties are located in suburban areas with tenants in recession-resistant industries like medical practices. Our average loan size among the office loans is just $2.3 million. Over the past 10 years, we've not incurred any losses in our office loans, and we have been a minimal amount that are maturing through the end of 2024.

We're also very productive in our approach -- proactive in our approach to portfolio management, and we review current cash flows, vacancy rates and rental rates, at least on an annual basis and more frequently afforded, so that we can identify any deteriorating trends at the earliest possible time. Due to the conservative underwriting and our proactive approach to portfolio management, our CRE portfolio continues to perform very well. At this point, we've not seen any concerning trends.

Moving to Slide 7, we'll take a closer look at our deposit trends. Our total deposits were down just slightly from the end of the quarter, but were about 5% higher than the prior quarter on an average basis. As I indicated earlier, the liquidity events experienced by our clients resulted in our total deposits declining $71 million during the month of January, and then we had net inflows in February, March and again in April. The mix of deposits continues to reflect a trend of clients moving money out of noninterest-bearing accounts and into interest-bearing accounts in order to get a higher yield on their excess liquidity. We also continue to add some time deposits in order to lock in fixed rate funding that we believe will enable us more effectively to manage our deposit costs going forward.

Turning to trust and investment management on Slide 8. We indicated in our last earnings call, we've allocated some additional resources to business development in trust and investment management. We're seeing the positive impact from these efforts and the combination of inflows from new clients, market performance, which resulted in $275 million increase in assets under management during the first quarter. And notably, we had increases in all 5 of our product categories.

Now I'll turn the call over to Julie for further discussion of our financial results. Julie?

Thank you, Scott. Turning to Slide 9. We'll look at our gross revenue. Our gross revenue declined 10% from the prior quarter due to lower levels of both net interest income and noninterest income. However, due to the higher average asset yields and the growth we have had in our balance sheet, on a year-over-year basis, our interest income increased 74.6%, but our net interest income increased 5.8% compared to the first quarter of 2022.

Turning to Slide 10. We'll look at the trends in net interest income and margin. Our net interest income decreased 10% from the prior quarter due to an increase in interest expense resulting from a higher average cost of deposits as well as the impact of holding higher cash balances in March. Our net interest margin decreased 37 basis points to 2.93% and due to the higher average cost of deposits and excess liquidity we carried in the quarter. Much of the funding we have added is in the form of borrowings and time deposits are short term and/or callable, which gives us the flexibility to quickly make adjustments in our funding mix as market conditions change.

Turning to Slide 11. Our noninterest income decreased 11% from the prior quarter, primarily due to lower bank fees and risk management and insurance fees. The lower bank fees were partially attributed to a decrease in prepayment penalty fees, while the decline in risk management and insurance fees primarily is typical following the seasonal bump we see in the fourth quarter. The decline in these areas offset a 6% increase in trust and investment management fees and higher net gain on mortgage loans.

The increase in net gain on mortgage loans is primarily attributed to the increased loan production we are seeing from our expanded team in Arizona, which more than offset the seasonality we typically see in first quarter production in Colorado. The volume of locks on mortgage loans originated for sale increased 41% from the prior quarter with 96% of the originations being for purchase loans.

Turning to Slide 12 and our expenses. Our net interest expense increased 3% from the prior quarter, primarily due to the seasonal impact of higher payroll taxes as well as lower deferred compensation due to the decline in loan originations. In addition, the higher FDIC assessment rate now in place contributed to the increase in noninterest expense. These increases were partially offset by a decline in technology and marketing expense.

As part of our regular review of expenses, we have recently made some adjustments throughout the organization in areas such as staffing, software spending and real estate, all of which reflect the changing nature of our business, and areas we no longer focus on growing. A portion of the cost savings from these adjustments will be reinvested into other areas of the company. Overall, these adjustments will help us to maintain expense control and should result in our noninterest expense being in the range of $19 million to $20 million per quarter for the remainder of 2023.

Turning to Slide 13. We'll look at our asset quality. On a broad basis, the loan portfolio continues to perform very well as our nonperforming assets were essentially unchanged from the end of the prior quarter, and we had another quarter of minimal losses. Following the adoption of CECL at the beginning of the year, our allowance for credit losses stood at 81 basis points at March 31. This is down 3 basis points from our CECL day 1 coverage as we had a small reserve release during the quarter due to changes in loan volumes and the mix in the portfolio.

Now I will turn it back to Scott.

Thanks, Julie. Turning to Slide 14, I want to take a moment and review our strong track record of value creation for our shareholders. This slide shows our trend in tangible book value per share since our IPO in 2018. As you can see, we've consistently increased our tangible book value per share throughout a variety of [economically safe] cycles including the pandemic and then the higher rate, high inflation environment we've seen over last year.

We believe this reflects our strong execution on our strategies. We're generating profitable growth while prudently managing our balance sheet as well as our commitment to protecting shareholder value by not doing capital raises that are dilutive to shareholders and being disciplined in our acquisition pricing.

As you may recall, our acquisition of Teton Financial Services was immediately accretive to tangible book value per share. Our core wealth management earnings have also shown great progress in recent years, although they too have come under pressure in the last 2 quarters.

Turning to Slide 15. I'll wrap up with some comments about our near-term outlook. While the banking system remains under stress and there's a high degree of economic uncertainty, we're going to continue to provide -- to prioritize prudent risk management even if that impacts our level of profitability in the short term. We'll also continue to focus on disciplined expense control, so that we can realize more operating leverage as we continue to grow our balance sheet. We recently completed a review of operating expenses and made adjustments that will reduce our noninterest expense by approximately 6.9% or $1.4 million per quarter from the level of expense we had in the first quarter.

When we started the year, we knew it was going to be a challenging year to forecast, and it's only gotten more difficult since. In particular, loan growth is particularly hard to forecast in the current environment, given that we're being very selective in the new credits that we originate and overall demand is lower due to higher interest rates, and we see more clients reconsidering investments they were planning in May. We believe that will have some level of loan growth this year, but there's now a wider range of possible...

(technical difficulty)

All right, please proceed with your call.

Okay. Well, this is Scott Wylie, and I understand we got cut off there. I'm not sure exactly where we got cut off. So I'll go back to the outlook slide, on Slide 15. And I was noting that we -- while the banking system remains under stress and there's a high degree of economic uncertainty, we're going to continue to prioritize prudent risk management even if that impacts our level of profitability in the short term.

We'll continue to focus on disciplined expense control so that we can realize more operating, leverage as we continue to grow our balance sheet. We recently completed a review of operating expenses and made adjustments that will reduce our noninterest expense by approximately 6.9% or $1.4 million per quarter from the level of expense we had in the first quarter.

When we started the year, we knew it was going to be a challenging year to forecast and it's only gotten more difficult since then. In particular, loan growth is particularly hard to forecast in the current environment given that we're being very selective in the new credits that we originate and overall demand is lower due to the higher interest rates and you see more clients reconsidering investments they were planning to make.

We believe that we'll have some level of loan growth this year, but there's now a wider range of possible outcomes and where we end up will be highly dependent on what we see in terms of economic conditions. While it's a challenging environment, ultimately, we believe will be -- it will be one that will be favorable for our franchise given the strength of our balance sheet. We have high levels of capital and liquidity, a stable deposit base, exceptional asset quality and an extremely low level of unrealized losses in our securities portfolio.

Given our balance sheet, we believe we can capitalize on opportunities just as we did during the pandemic, adding new clients, who are reevaluating their banking relationships and looking to move to a stronger, more responsible financial institution. Earlier in the year, we completed a reorganization of how our offices operate, which was designed to improve our senior leaders -- to provide our senior leaders in those offices more time to focus on business development. Essentially, we've made it possible for our best salespeople to spend more time selling and focusing on new clients for both trust and banking.

While we'll likely continue to see near-term impact on our level of profitability due to the current economic environment, ultimately, we believe that will be a net beneficiary as the opportunities we have to add new clients will contribute to our long-term continued profitable growth and additional value being created for our shareholders.

With that, we're happy to take your questions. So Amy, if I could ask you to open up the call, please.

(Operator Instructions) And our first question is from Brett Rabatin with Hovde Group.

Scott and Julie. I wanted just to start off on margin and then just thinking about the balance sheet and maybe dollars of NII. Could you maybe give us a little bit of flavor for where you're seeing new deposit rates come on the balance sheet and just thinking about NII dollars this year, if the margin is down, but the balance sheet grows, can NII kind of hold in or increase a little bit? Or is that you think too aggressive given the deposit outlook?

Well, I'll start with a high-level answer and then ask Julie to give you more of the numbers, if I can. I think that we had projected tightening in our NIM in Q1, which certainly we saw, and that seems likely to continue into Q2. We do think that because of the nature of our business, we've probably seen more pressure earlier than most banks on our interest expense side and our interest income side, we've actually seen really nice progress there, which we would expect to continue.

Julie mentioned in her prepared remarks that our interest income is up 74% year-over-year from the first quarter last year to first quarter this year. But our interest expense is up like 10x. So I think that kind of pressure just really a pretty strong headwind and the fact that we've been able to grow net interest income in dollars year-over-year is pretty impressive. So that would be kind of my general answer.

I think, Julie, if you want to highlight some of the numbers behind our NIM progress and outlook?

Sure. So NIM for March was [2.97%]. So if you just look at the month of March, our spot rate on deposits or cost of deposits was [$2.57] at the end of March. I think our new deposits were coming in quite a bit higher than that more at the [$3.69] level. I would say we would expect to see some compression, as Scott mentioned, in the second quarter, but then it really depends on our loan growth and what happens in the rest of the rate environment and competition. So we're not really giving guidance on NIM.

And as a secondary point, we haven't raised rates in April or at the end of March. We are continuing to hold our rate where it is and then making exception pricing as we get to win or retain client deposits.

Okay. That's helpful. Julie, I'm sorry, the 2.97% number, well, for March, which was that?

That's NIM for March.

Okay. NIM for March. Okay. Great. And then the other thing I just wanted to ask was thinking about that $41 million of bucket that you exited non-relationship. Any other color around that, just didn't fit in any of the boxes from a relationship perspective going forward? Or any additional color that obviously lower rate, but anything else that made those loans sensible to move on from?

No. With our acquisitions, we've acquired some loans that weren't really our -- what we do. And so if they're attractive and they're not distracting us fine, but if it's taken up balance sheet space that we don't need and we were able to sell them at a small loss. I think we took a $175,000 loss something like that in the quarter.

In a principal balance kind of perspective, but when you look at the allowance and the purchase credit on it, it was actually accretive to overall earnings for the quarter. So we look at all of the factors on each of the loans and make sure that it makes sense from a P&L as well as a going-forward balance sheet management perspective.

And our next question comes from Matthew Clark with Piper Sandler.

Just want to clarify the margin in the month of March. Did you say 2.57% or 2.97%?

9. 2-9-7.

Okay. And then also to clarify...

Matthew, excuse me, the other number that she gave was the cost of deposits at the end of March, and that spot cost was $2.57.

Yes, that's what I was going to ask. Great. And then your commentary on loan growth should slow to some amount -- that's down from your prior mid-teens expectations and understandable and we wouldn't probably want you growing mid-teens right now anyway. How should we think about deposit growth from here and kind of the mix change?

We've said that we want to get our loan-to-deposit ratio down below 100% traditionally operated kind of in the 95% loan-to-deposit range. And I think if we could get it down below 100% by year-end, that would be a good objective for us. We're pretty flat in Q1. And I think that's probably a good accomplishment considering the drama of the quarter in the industry, but we're going to look to continue to grow deposits at a pace that's probably higher than the rate we anticipate growing loans. And hopefully, a lot of those are core deposits that will be building a core deposit base for the future for us.

Okay. Great. And then on the uninsured deposits at the end of the quarter, any plans to reduce that amount further? Is there anything else you can do to increase the coverage there?

Well, I think our clients have indicated with their feedback and with their actions that they're comfortable with the deposits they have here. We have seen people looking to move to products that have 100% deposit insurance, whether that's CDARS or ICS or one of those. And so we see a little bit more of that at the margin. But overall, I think our deposit base has been very stable. And as I mentioned in slide deck and in the prepared comments, we've actually seen nice growth in existing deposits and new deposits in February, March and April.

I would tell you, historically, and this has been true for all 18 or 19 years here and in all -- whatever years of my career in my private banks is that we see significant outflows in Q2 for tax payments. Our client base tends to put deposits in when they have their various liquidity events and then pay their taxes in April. So I don't know how that will play out this quarter. As I said, month-to-date, we've seen, I think, $65 million in net deposit increases here in April and $91 million in new deposits. So seeing the continued trend we saw in February and March, we'll see how it plays out over the quarter.

Okay. Great. And then last one for me. Just on the reserve and CECL, can you give us a sense for some of the underlying assumptions you assumed with adopting CECL, just how conservative they might be? I'm trying to get a sense for the flexibility of that reserve going forward and whether or not we should assume it continues to migrate higher with deterioration in the macro factors?

Sure. So I don't know that I can give you all the core details of the modeling, but we use the most, I would say, complicated modeling in the DCF modeling. And we went down to very low level categories of loans to do a lot of work on that, did a pretty deep dive on peer set that obviously, there's -- that's our hardest area as because of our lack of loan loss in our portfolio and then finding peers that might be somewhat consistent with us and our loan book and loan types was a little bit more challenging, but I think we have a pretty good handle, and we've been running it parallel for about a year now and feel like we have a pretty good handle on the different metrics and economic factors that go into that model.

And I think as things are changing in the environment, we're keeping a pretty close eye on the different things and levers that we can pull within the modeling to make sure that we're properly reserved for. And we've given a lot of information, I feel like, on the different impacts. There was a decent amount of reserves put on the unfunded commitments and then an additional amount of model over $2 million that was put on the purchased loans as part of implementing CECL.

So overall, I think it will move around as our loan funding does -- or loan mix, excuse me, does move around. So I think we're just trying to figure out how to manage through those different changes, but trying to stay consistently applying each of the factors as where we're at right now.

Would you say, Julie, to be a little more direct from what we know today, assuming a relatively stable economics an asset quality environment, we don't think that the extra $5 million we put in, in January is a trend, right, that would be reflective of our future.

Correct. As we said that as a onetime transition costs going into the CECL modeling. And from here, it will really just be modifications based on any economic changes and/or just the mix and volume of the portfolio.

And our next question is from Brady Gailey with KBW.

So the $40 million of nonrelationship loans that were sold in the quarter, are there other nonrelationship loans that were something similar could happen in future quarters?

I would say not material. Although having said that, we do keep a list here of broken promises. So if clients say that they're going to bring over relationships and they don't do it, we'll call them up and bug them about it. And if you were in a time when you were looking to grow deposits, you'd probably pay a lot more attention to the broker promises list than you might otherwise.

So definitely as an organization, we're paying attention to that and I think people want to be relationship-based clients here, right? Those that want to have a transaction, that's not really what we do. And as I said, the ones that we had and that we had sold were really not part of our core business modeling came through acquisition and I think that I don't really anticipate doing more of that, Brady, but we do expect our clients to honor their promises when we make on to [withdraw].

All right. And then with forward growth slowing, potentially, you're going to be building some capital here. The stock is at 80% of tangible book value. So a decent discounts or tangible book price. How do you think about share buybacks going forward?

I think I'd love to do them. Obviously, from our perspective, at this price gets very attractive. But I think we have to be conservative and preserve capital here. And I think our actions are -- let's work on the margin, let's work on the fees, let's manage expenses, to make sure that our earnings are continuing to improve. And then we'll see where that leaves us. I think historically, we've been opportunistic and if we get to a point where we feel comfortable doing that, we will.

But we've got right now, great credit history and current experience. We don't have unrealized losses in our investment portfolio. The issue that might put stress on our capital at other banks are not an issue for us here. But again, we don't want to put ourselves in a position where we have to raise capital at a time we wouldn't want to do that either.

And our next question is from Ross Haberman with RLH Investments.

Scott. You were fairly optimistic about, I guess, the Arizona market, the Wyoming market and Montana. Could you talk about the growth of those markets where you see them today vis-a-vis where your views and, say, on 6 or 9 months ago?

And could you also comment on, I thought there was actually a small deal, I think, in the Phoenix area announced last night at roughly book value, if you look at that, was that attractive to you? And if something came up like that, would you be -- would you rather use your money to do something like that as opposed to buying back your own shares?

Yes. Thanks, Ross. Good question. So for the optimistic view. I'll go first. Julie, if you want to issue a rebuttal go ahead. We've talked for a long time about our expand in Arizona and the mortgage team there that could help us in a countercyclical way. I mean, we think that's an interesting part of the Arizona franchises. And there's a lot of connections between Colorado in Arizona from a culture, business and a people standpoint, but also with their countercyclical certainly in mortgages, which is an attractive piece of it.

And so we did add an Arizona mortgage team latter half of last year, I'm not sure exactly when. They're getting ramped up. And we actually saw a nice benefit of that in Q1 and March was our first month of making money in mortgages in quite a while. So it was great to see some progress there. We've actually added mortgage folks, mortgage loan originators in our resort communities. We have some coverage in Wyoming. We'd like to expand that and into Montana.

But the broader for core business, I think we have great opportunities in all 3 of those markets. Montana has just been a really pleasant surprise for us. We're very small there. Our permanent office -- we just have an LPO right now. Our permanent office will be opening. Julie, in the third quarter, you still think it.

September-ish.

I think that will be an important next step for us. The Wyoming folks are doing great and actually, it's been a continued ongoing pleasant surprise to the upside with our partnership with the former -- the legacy Rocky Mountain Bank team there.

So all that, I think, is opportunity for us, Ross, it's all relatively small compared to our core footprint here in Colorado. But I think creating long-term shareholder value, those are all really important and valuable components to us. And you can't get there without starting. And so each of those were making progress.

Your question about M&A. I think M&A is tricky right now, right? When our stock is where it is, and with the uncertainty out there we don't think that we're really interested in doing lots of deals. And so when we see opportunities that are relatively small, or aren't that great a fit? I think we'll look at them and see if it makes sense. But realistically, we really like to do things that can be either strategically or financially or both meaningful to us. And those opportunities, I think, are out there now in a limited way.

I think we all remember from the Great Recession. Coming out of the Great Recession, there was some real winners and losers among banks and the difference was kind of your financial strength and your capital base and your earnings and your operating performance, and that's really what created M&A opportunities in the last cycle. So I think we did know those folks at the small bank that was announced, I'm blank on the name, Commerce Bank or Bank of Commerce or something like that in Arizona. We did know them, but I think we would like to do something that's more impactful if we had a chance.

And just one follow-up question in terms of local competition. Who would you say one on the commercial real estate loan side, who is your toughest local competition? Is it the Alpine Banks of Colorado or some of the bigger banks?

Yes, the competitive landscape is just really interesting right now. Obviously, on the deposit side, is really tough. We're seeing very strong competition from all kinds of bank and nonbank players. Frankly, one of the questions we've heard the most from clients over the last 6 months is when you guys open a trust account for me and build a bond ladder. And so that's a challenge on the deposit side. On the loan side, and particularly CRE to your point, what we're seeing -- there's a few banks that are still being competitive and sort of living in the past in terms of interest rates and with other banks that have top lending, and they're saying, "We're not going to do CRE right now."

So I would tell you that if we see growth this year, I think that's why we're going to see it is, because our clients may slow down the things they might have otherwise done, but there may be some interesting client acquisition opportunities here and terms and rates that are appealing to us because of people kind of pulling out of the market and being less aggressive than they were a year or so ago.

And sorry, just one final thing. On those CREs, what kind of rates are you getting today on those types of new loans?

Do you know, Julie, what our average rates -- I mean it's up dramatically. Let me just...

Our new production is averaging about mid-7s. With the [IR], if that was the question. CRE is maybe like 6% and then C&I is going to be more like 8%. So it's a bit of a difference, and that's a pretty rough average, but that's what we've been -- slowly been seeing.

And we have a follow-up question from Brett Rabatin with Hovde Group.

Just 2 quick things. Scott, first, in your prepared comments, it sounded to me like the message was that you're implementing things in the current environment for the long-term improvement and growth of the bank. But I kind of sense that maybe the profitability you were intimating that maybe profitability might continue to have some drag in the near term. Is that a fair assessment? Or can you talk maybe directionally about your comment on profitability?

Julie, I have said on these calls before that our path to success is probably not cost cutting, it's growing revenues. And you look at the environment today and you say, well, how confident do you feel about revenue growth. And I think it's hard to say, oh, yes, mid-teen growth and also our stuff right now because it's a very uncertain environment. So I think we've looked at this and said, okay, let's kind of planned for the worst and act on that and then hope for the best. And so the planned scenario is how do we manage our liability costs as best we can, how do we grow loans cautiously at rates that make sense to us on terms that make sense to us.

If that doesn't produce a whole lot of net balance sheet growth then how do we manage our expenses so that we can improve earnings. And so I think we talked about the fact that we're down 22 FTEs in the first quarter that was on purpose. We also talked about the fact that we've done a 6.9% cost reduction in April versus our cost in Q1 to drive expenses that are more in the mid-19 range. Julie, I think, guided to $19 million to $20 million a quarter, which is down from kind of $21 million where we've been headed. So just do those things. The tweaks on those numbers, you're going to see, I think, absent further drama, in the industry, you're going to see improved earnings.

And then the whole scenario is all that stuff plays out. We see better mortgage revenues and income. We see improved trust and investment management fees, which we saw in Q1, then you see a little bit more growth on a well-controlled expense base and then all that adds up just a really nice expense -- excuse me, earnings growth. And you do all that with a strong capital base and then you see what opportunities come out of the downturn and the recovery here. I think that's kind of the picture I was trying to paint indirectly. So I don't know being a little more direct about it, that's how we're thinking about it.

Okay. That's helpful. And then you talked quite a bit about the $1.4 million of reduction. And it sounds like you feel like you're going to have an improved efficiency with the production people with maybe some streamlining. Is there a concerted effort to maybe have a higher calling effort just to be out there talking to people a little more if business does become a little more available? And how do you see kind of the pullback if you're seeing it in credit by other banks affecting your production?

Well, your assumption of your question is 100% right. In our 19 locations, we've got these market presidents that have senior bankers on the bank trust and investment private banking side that we've now made as direct reports to the market president and then the other support people report to those folks. And what that does is that frees up all those top people that are most experienced bankers to spend less time being managers and administrators, more time getting out and being active in their markets and visible in their markets and letting our clients and prospects, COIs, centers of influence, know that we're in business and taking care of our clients.

So that was absolutely part of the reorganization that we did in those offices. We actually started that last fall, and I think our confidence today was that we completed that in Q1, which we did. And is that going to drive more new business in Q2, I don't know. But over the course of the year, I feel really good about it. I think it's going to be a really nice change for us, and it does allow us to do exactly the thing you asked about.

And we have a follow-up question from Matthew Clark with Piper Sandler.

Just want to clarify the margin commentary. 2.97% in the month of March is above the first quarter, which is a little -- it doesn't seem to make sense to me of 2.93%. And then when you recast loan yields and securities yield, deposit borrowings, I mean, it kind of suggests the margin that falls into the mid-2.50s. And I just want to square those 2 thoughts.

So I think through the latter part of March and into early April, we were carrying more liquidity on our balance sheet, which would have cost us a little bit more. I think we had some noise in our loan fees as well in the first and second quarter or first and fourth quarters. So it's a little bit lumpy from that perspective. But I think that, that at least gives you kind of a direction as to where we are seeing the NIM for the early part of April here.

I would not expect NIM in the second quarter of 2.97%, it's going to come in from there from what we know today, Matt. But...

We will see compression in the second quarter on the NIM for sure.

Yes. It is what we said before.

And maybe it's also around the borrowings. I mean, they were average -- they averaged $195 million if you include the sub debt in the quarter and the end of period was $314 million if you add again in the sub debt. Where do you see that $314 million going in total? Maybe just separate out the sub debt if you want. But what do you see borrowings trending?

Well, borrowings that were all will trend down. We pulled nearly $150 million, I think, off the balance sheet in the first part of April in the borrowing with the excess liquidity that we're holding on the balance sheet in March and the growth we've seen in deposits since the end of March. So I think we're up about $65 million net in deposits, which are going to just have a lower cost than our borrowings have had that was in that spot NIM for March.

Okay. So the $150 million comes out in the -- here in April. Okay.

And I'm showing no further questions at this time. I would now like to turn the call back over to Scott Wylie for closing remarks.

Great. Thank you, Amy. Just at this significant time of disruption in the industry, I'd like to give a special thanks to our associates and clients for the extra efforts of the associates and the support that we've had from the clients through this challenging time.

First Western has demonstrated solid steady progress in creating fundamental shareholder value in spite of significant headwinds. We've positioned our balance sheet and expense structure for continued headwinds. However, if cost of fund pressure stabilize and asset yields improve and fee income picks up and our expenses are well controlled, we believe our earnings outlook could improve nicely.

And with that, thank you, everybody, for their interest and support today. We really appreciate your interest in First Western.

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