First Western Financial Inc (MYFW) 2022 Q1 法說會逐字稿

Good day. Thank you for standing by. Welcome to the First Western Financial Q1 2022 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 over to the speaker of today's call, Mr. Tony Rossi of Financial Profiles. You may begin.

Thank you, Latonia. Good morning, everyone, and thank you for joining us today for First Western Financial's 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 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 claimers 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 were intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures. And with that, I'd like to turn the call over to Scott. Scott?

Thanks, Tony, and good morning, everybody. There were a number of macroeconomic and geopolitical headwinds that emerged during the first quarter of 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 of profitability even before we realized most of 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, 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 1 basis point to 92 bps. Our return on average equity increased 4 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 entrants in acquisition activity. We operate in 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 occur late 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 of their businesses and investment properties, and it seems like some of our clients have decided to capitalize on what they think are near peak values for these assets. This high level of payoffs resulted in excess liquidity in 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 trends we're seeing in loan production to start second quarter. We believe that we'll have good opportunities to redeploy our asset excess liquidity into higher-yielding assets in the coming months. Despite the more challenging operating environment, our asset quality remains exceptional with nonperforming assets remaining to 17 bps of total assets and another quarter within a material 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 was 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 continuing to grow our book value is directly attributable to the strategic decision we made last year to retain our excess liquidity rather than putting it into the investment portfolio. With the prospect of higher rates on the horizon, we felt we are better served by retaining the excess liquidity and passing up a small amount of incremental interest income that we would have 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 have gotten last year. As with our 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 pretax earnings of our Wealth Management segment. Compared to the fourth quarter of 2021, our pretax earnings increased to 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 pretax earnings as our mortgage business continues to return to its intended role as a complementary 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, while 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 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 $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 the 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 further 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 $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 6 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 noninterest 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 6 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 8 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 purchased 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 noninterest 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 noninterest income decreased by 4.6% from the prior quarter, primarily due to lower risk management and insurance fees. Although it was just a difficult quarter for equity and fixed income markets and higher interest rates impacted demand for residential mortgages, we were able to keep our 2 largest sources of noninterest income, trust and investment management fees, and net gain on mortgage loans was 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're now seeing relative to 2020.

Turning to Slide 14 in our expenses. Our noninterest expense decreased by 5.5% from the prior quarter excluding acquisition-related expenses, noninterest expense increased due to the addition of Teton's operations. On an adjusted basis, excluding acquisition-related expenses, our 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 noninterest 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 nonperforming 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 is 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. With its individual commercial bankers, team lift-outs, our 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 5 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 at 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 to start the second quarter. With the diverse lending platform we have, we have the ability to be flexible and pivot to whichever asset classes are seeing the strongest demand and presenting the most attractive risk-adjusted opportunities at any given point in time. There also 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, after which 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.

While macroeconomic and geopolitical issues, including increasing concern about a possible 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 as 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.

I am going to start with loan growth. You payoffs burden that number this quarter. I think in the past, we've talked about kind of a mid-teens level of loan growth, kind of near/longer-term for you 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 then the 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 outsized 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.

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 2 drivers, which were yield some construction loans that we expected to pay off last year actually ended up paying off in Q1 and then 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 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. And then as I look at mortgage fees around $2.5 million this quarter was about the same $2.5 million last quarter, so pretty consistent. I mean do you think we found kind of 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. Seriously, I would say that we're definitely going to see lower refi volumes. 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 refi's 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've made a number of improvements and efficiency in the mortgage business, which has helped our margins. And so we're looking to keep the mortgage team to be revenue positive, when 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, 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 the 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 averaged almost $0.5 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? I mean the bond book is almost zero for you guys I think it's only like 2% of average earning assets. Just thoughts on what to do with the excess liquidity way you put it in loans later? Do you start growing the bond book near term just because bond rates are a lot better today than they have been in the last couple of 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 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 medial that's it close to zero, by the time you pay the FDIC insurance, you're getting zero on it. So it's actually negative spread. So we were really happy with the first quarter rate because at least it got to breakeven. And if we do see 50 basis points next week, like early May, like we're expecting to obviously, that will help just from that.

But to answer your question more directly, I think the decision not to buy 1% Ginnie Mae'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 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 improvements on cash yields will help take up some of that negative impact on NIM that we saw late last year and early this year. So I think all those things are looking like next tailwinds for us.

Our next question comes from Matthew Clark of Piper Sandler.

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 reprices 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 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 and then about 50 a split between up to 100, we'll get the rest of it. So I think we'll see a lot of benefit in the next freight 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 me.

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

Yes. 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 math changed here in April with the increasing rates, where I am 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 put in, in the first quarter.

Our expectation, given the competitive environment is we're not going to be able to capture 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 discipline in 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. 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 current deposit betas 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 to 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 100% beta to it; although, it seems to have about a 3 month lag because of the way money market mutual funds adjust pricing post rate increases.

Our next question comes from Ross Haberman, RLH Investments.

Scott, nice quarter. How are you? Just, I want 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 more other products which you can sell more than you originally thought in terms of being having revenue enhancements more than you might have originally thought?

Yes. So great question. When you do a combination like this, 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 more or less a 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 we want to make sure that between the time you close in December, the time you convert, and through all that should 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 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 legacy RMB folks have figured out how to take advantage of the First Western strengths and our processes and whatnot.

And so we're seeing that impact in the loan pipeline. To your 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 is going to benefit the stable 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 purchase versus refi? Of that $2 million plus in revenue you had for the quarter?

Yes. So 2 years ago, it was 60-40 purchase revenue. Historically, it has been as high as 70-30 purchase and, of course, in the great refi boom, it slipped 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 a drop.

Our next question comes from Bill Dezellem of Tieton Capital.

Let me start with the mortgage business. With all of the negative talk and the slowdown 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 of things going on there. We have a very good team. We've worked hard on this over the last 2 or 3 years. When we bought EMC in -- was it 2017, Julie?

Yes.

We talked to them about the idea of integrating the back office and secondary services into the bank. And our folks here worked really hard to do just that. And so we have a much more efficient back-office support, operation support. 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 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 Fannie and Freddie direct access for our secondary team further improves the margin.

So all those things, none of them by myself 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 of 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 has done a really nice job with that. Having said that, I just would underscore time up 4% of our revenues.

And so I believe that this mortgage operation is really critical to our strategy and 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 '20 and '21, 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 the team has done on managing this.

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 pick up. So I guess the question ultimately will be is in spite of the drift off with a little bit of remaining refis, are you anticipating 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'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 set an opposing view 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 and wanting to buy. And so we're seeing that now. It's showing 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 the supply to support it. And so I think that's where the challenge they're going to be. If we have more supply, I think we'd see a lot more volume opportunities.

But what we're doing is a couple of things there. Number one, we're trying to be competitive and make sure our envelopes 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.

And then that single one closed converts into a permanent financing, which is a really nice product, I think, perfect for the times, and our team is 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 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've built, 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 in business planning, my assumptions and forecasting here would probably going to be stable revenue-wise, where we are, and we can produce steady income. So Julie, you want to issue a counterpoint, any of that?

Yes, 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 balance sheet. So you have to take both pieces. And that's the downfall of breaking the business into component, you don't get to see all that benefit. But you can see on the loan side as we do benefit from mortgages, even more than just what it shows in the segment and a...

Yes. The mortgage team helps us build the Wealth Management segment.

That's right.

In revenues.

So if I were to put all that together and summarize the purchase activity in your markets, you sense will be 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 is a challenge right now. I agree with that.

Probably wouldn't leave me as frustrated as it was someone trying to buy a home that can't find one.

No, that is so true. Yes.

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

Well, historically, we've operated a bank pretty close to 100% loan-to-deposit ratio. And what we have found over the years, and 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...

I would say then may be $250 million to $300 million range. Just wanting to keep enough cash on the books that we can manage and also playing around with that 10% liquidity ratio. So that's the answer I would guess.

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 you'd have your provision that would be associated with it. Is that the essentially the right way to think about it if there's another buck of earnings potential built into the business as you redeploy just the existing excess cash?

I think that's 1 of 5 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 4 would be floating rates. We talked about $4.5 million for 1% rate increase on the short end. The production of the machine, just kind of doing its job in 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, we see short-term rates 100% higher and most of our deposits don't have a high beta. We 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 and investments. I mean that's a far cry from where we are today and a lot of additional incremental earnings for us in the revenues.

Careful. Scott, you're going to highlight a path to $5 of earnings?

Hadn't occurred to me...

Your next question comes from Brad Ness of Choral Capital.

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

So I'm an optimist, but I'm not that big an optimistic. I have our Director of Finance sitting here, and I'm going to put him on this slot. [David], do you think that, 100 carries over in the second 100 basis points more or less?

Yes.

Be a little bit more because you've got everything out of the floors at that point. Yes. He's nodding his head yes. Did you all see that?

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

Well, our analyst is trying to call is. So we don't want to get too far over that easier.

Yes. Okay. Let's see another question. The expense guidance, kind of the clean quarter after the DP conversion of $19.5 million to $21 million per quarter that seems like a rather large range to me because on the low side or high side, it's a different 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, 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 successful 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 in 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. So they're forecasting includes all of those items as well.

Great. Let's see, last question here. And I was thinking that a clean quarter would translate into about a 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're 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 of incremental people that are really good bankers in the market, the incremental cost of that maybe a few hundred thousand dollars. They go out and they grow you another couple of 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 5 years from now? I don't know. I mean I don't think anybody has 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. It 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 it 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.

(Operator Instructions) Our next question comes from Taylor Brodarick of Hovde Group.

Just 2 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 and 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 the provision about 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 of years from now, everybody will be why do 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 may be 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 activities 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.

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 target list, and we're working on 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 2 years ago, our folks from EMC, the mortgage company would tell you from 3 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 a nice referral sources. When you can tell a target, hey, call these other folks that were 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.

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

Yes. Well, thanks so much, everybody, for dialing in today. I just had 3 points that I wanted to leave you with. I spoke in 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 jobs they are doing I 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 office is maturing. Our expansion is definitely gaining traction. You look in the Front Range of Colorado that stuff is 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 be coming together quite nicely. I think that's going to be a really interesting story for the future. And 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 Dan and everybody. Have a great weekend.

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