First Western Financial, Inc.
Q2 2021 Earnings Call Transcript

Published: 23 Jul 2021

[Operator:]

Good day and thank you for standing by. Welcome to the First Western Financial Q2 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. 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.

[Tony Rossi:]

Thank you, Dino. Good morning everyone and thank you for joining us today for First Western Financial's second quarter 2021 earnings call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; and Julie Courkamp, Chief Financial Officer.

[Scott Wylie:]

All right. Thanks Tony. Good morning everybody. As I imagine you've seen yesterday, we announced the signing of a merger agreement with Teton Financial Services. On our call today, we'll start with our usual review of the results for the quarter and then we'll discuss the acquisition more detailed before opening up the call to questions. In the second quarter, we generated net income of $6.3 million, earnings per share of $0.76, an ROA of 1.22%, and an ROE of 15.17%, all of which are an improvement over our first quarter results. While our mortgage segment has underperformed our expectations, largely due to the housing inventory constraints in our markets, we're still delivering earnings growth and a higher level of returns due to the significant growth we generated in our private banking, commercial banking operations. On a year-over-year comparison, excluding our mortgage business, our gross revenue is up 27%, while our non-interest expense is up just 7%. In our non-mortgage segment, diluted pretax earnings per share are up 113%. With revenue growth exceeding expense growth by nearly four times, we reached an inflection point realizing the operating leverage that we expected as we scaled the business and we're seeing the positive impact in our profitability.

[Julie Courkamp:]

Thanks Scott. Turning to slide 10, we have provided an update on our participation in the PPP program and how it impacted various metrics in the second quarter. We had approximately $91.4 million of PPP loans received forgiveness in the second quarter. During the quarter we funded an additional $5.4 million in PPP loans and have now submitted over $200 million in forgiveness applications to the SBA. This resulted in $103.1 million in PPP loans remaining on our balance sheet at the end of the quarter and $2.1 million net fees remaining to be recognized. With increased loan forgiveness by the SBA in the second quarter, we saw a good amount of accelerated fee recognition which resulted in a positive seven basis points of net interest margin impact. While we have plenty of liquidity resulting from our strong deposit inflows, we have continued to utilize the PPP liquidity facility to fund our PPP loan origination so that we can get the preferred capital treatment on these loans. Now turning to slide 11, we'll look at gross revenue. Our total gross revenue was unchanged from the prior quarter, although the mix of revenue was significantly different. We had a higher level of net interest income and trust and investment management fees, which offset the decline we had a net gains on mortgage loans. Turning to slide 12, we look at the trends in net interest income and margin. Our net interest income increased 9% from the prior quarter. The increase was due to higher PPP-related fee income and higher average balances of non PPP loans. On a reported basis, our net interest margin increased 11 basis points from the prior quarter to 3.01%. When the impact of PPP loans and purchase accounting adjustments are excluded, our net interest margin was unchanged from the prior quarter. With the runoff at the higher cost deposits, we saw a three basis point reduction in our cost of funds from the prior quarter. With a portion of our excess liquidity utilized to fund the deposit runoff, our loan to deposit ratio increased to 94% at the end of the second quarter, up from 85% at the end of the prior quarter. Given the higher loan to deposit ratio and our expectation for a higher level of loan growth in the second half the year, we believe our net interest margin should be flat to slightly higher over the remainder of the year, even though we continue to see some pricing pressure on new loan originations, which are coming on the balance sheet at yields lower than the existing portfolio.

[Scott Wylie:]

All right. Thanks Julie. Turning to slide 18, I'm going to discuss the acquisition of Teton Financial Services that we announced yesterday. Teton, the holding company for Rocky Mountain Bank is a commercial bank with a small wealth management business operating in three branches in Western Wyoming. We currently operate two offices in Wyoming and expanding our presence in the state is a key part of our long-term growth strategy, given the attractive demographics and favorable operating environment for our business model and unique approach to private banking Our similar business models, core values, client-centric approach makes our two institutions highly compatible, which should make for a smooth integration and strong synergies as we leverage our collective strengths to further expand our presence in Wyoming. We've used acquisitions very effectively throughout our history to grow and diversify the bank and with the addition of Teton, will further increase our scale with further -- and further improve our operating leverage, while adding more core deposits, more diversification to our loan portfolio, and strengthening our commercial banking capabilities. Teton has built a very attractive franchise, built on a low cost deposit base, and a banking team that generates C&I and real estate loans with attractive risk adjusted yields that will enhance our net interest margin. And although we haven't modeled any revenue synergies, we believe that we will have opportunities to increase lending relationships with our larger scale, cross-sell our larger offering of products and services, particularly in the trust and investment management businesses. It's a transaction with attractive economics as we expect it to be 5.2% accretive to earnings per share in 2022 and 7.4% accretive once the cost savings are fully phased in with a very short tangible book value earned back of less than half a year. Turning to slide 19, this will be our 13th acquisition since founding the company in 2002 and this will bring us to 19 total offices, although we'll consolidate our two Jackson Hole offices during 2022. Turning to slide 20, we provided some additional information about Teton. It was founded in 1983 and has grown to more than 400 million in total assets. Over the last seven years, it's been very effective at building its client base and generated a double-digit compound annual growth rate in both loans and deposits. And with the additional support and resources that we can provide, we believe we can further accelerate their business development and steadily increase our market share in Wyoming in the coming years, particularly as we continue to invest in the market and add more banking talent. Despite their relatively small scale, they're a nicely profitable company generating an ROA of 1.32% and an ROE of 13.3%. They also have exceptional credit quality with non-performing assets representing just three basis points of total loans and OREO. Turning to slide 21, we shall break down their loan and deposit composition and how they'll impact our balance sheet. They have a well-diversified loan portfolio that has an average yield of 4.79%. When combined with our current portfolio, this will increase our average loan yield by about 16 basis points. Similar First Western, they have a low cost deposit base that will keep our costs of deposits at the same level. But with the average loan yield -- higher average loan yield, we should see positive impact on our net interest margin, particularly as we increase loan growth and deploy some of the excess liquidity that they will provide. Turning to slide 22, we'll take a quick look at the transaction structure. The consideration for the transaction is approximately 76% stock and 24% cash. The stock we'll be using -- we'll be issuing will provide a meaningful increase in our flow. Since coming public with a relatively small flow three years ago, one of our objectives has been to increase our flow in order to add more liquidity to our stock and to expand the interest of potential investors, but to do it in a manner that's a creative to shareholders and this transaction certainly does. And we believe the transaction multiples are very reasonable, particularly for a franchise of this quality. And we're expecting to close the transaction in the fourth quarter of 2021 or early in the first quarter of 2022. Turning to slide 23, we'll review some of the transaction assumptions. We're basing the earnings accretion estimates off the current consensus analyst estimates as well as Teton's forecasts for its standalone financial performance. In our current earnings accretion estimates, we're including the impact of a $15 million sub debt raise that we plan to do prior to the closing to support the acquisition. We're projecting costs saves of approximately 30% of Teton's non-interest expenses, but most of that coming from consolidation of the Jackson Hole locations and vendor and technology contracts. We expect our 75% of the cost savings in place by the end of 2022 and 100% thereafter. In summary, we believe this is a very positive transaction that will expand our presence in Wyoming, provide increased scale and efficiencies, at a talented team of bankers that we believe can steadily our increase our client base in Wyoming with additional resources, support and products that we can provide. It will also further strengthen our private banking and commercial banking operations, positively impact our level of profitability, and move us closer to making First Western a high performing financial institution built on a foundation of attractive deposit base, exceptional asset quality, and growing sources of stable recurring revenue fee income. Turning slide 24, I'd like to wrap-up with some comments about our outlook. We believe we're well-positioned to deliver strong second half for 2021. We continue to see strong in migration trends into our markets, which is creating more business development opportunities for us. We're also adding more banking talent to help us expand to new markets that have similar demographics to the areas where our value proposition has already been successful in attracting clients to the bank. We recently built a small team in Bozeman, Montana market, which has similar characteristics to Jackson Hole and has become a popular destination for entrepreneurs and wealthy retirees. As with Wyoming, we believe Bozeman could be another nice growth market for us in the coming years. Our loan pipeline continues to increase and should lead to higher level of loan growth in the second half of the year. We also have significant amount of unfunded commitments that could create another potential catalyst for loan -- future loan growth. We've made good progress in reducing our excess liquidity and with a higher loan growth we're expecting, we believe we hit the trough in our net interest margin in Q2, and it will be higher relative to what we saw in the first half of the year. We also have good momentum and attracting new clients in our wealth management business, which should continue to drive growth in our trust and investment management fees. We expect our mortgage activity to remain relatively constant in third quarter before likely declining in the seasonally slower fourth quarter. With the revenue growth we're expecting and stable expense levels, we should see further improvement in operating leverage and additional increases in our levels of profitability. Looking a bit further down the road with the acquisition of Teton, we believe we're well-positioned to deliver another strong year of organic and acquisition growth in 2022. And with Teton being relatively small transaction that should have a smooth integration, we still have the ability to evaluate other potential transactions that can add value to our franchise, particularly on the fee income side. With that, we're happy to take your questions. Dino, please open up the call.

[Operator:]

All right. First question comes from line of Brett Rabatin from Hovde Group. You are now live.

[Ben Gerlinger:]

Hey, good morning guys. This is Ben Gerlinger on for Brett.

[Scott Wylie:]

Morning Ben.

[Ben Gerlinger:]

Hey. I was wondering if we could just start more from the higher level strategy perspective. I get that Teton is -- kind of checks all the boxes for you guys, it's in-market, has great credit, has a similar loan portfolio structure. Is there anything that they can bring to the table that would further complement First Western as a whole? And then kind of going off of that, Scott, I know you said that you would continue to look for other acquisitions and other partnerships, does this one need to close first? Or do you think you could see something teed up for this one actually closes late 2021, early 2022?

[Scott Wylie:]

Okay, well, let's tackle that two-part question in two parts. First of all, a strategic rationale -- and a lot of reasons this makes sense and you highlighted a couple of them. This is a market we're already in and we really like. We've done well there. Adding additional market share in Jackson, as well as entering these new markets in Pinedale and Rock Springs, where they have a nice, strong market position are attractive. Of course, this is in a state where the demographics are attractive, business landscape aligns well with our business model, and they have favorable trust the state tax laws. It improves our loan yields, it improves our cost to deposits. I think building a stronger core deposit base for us is a really attractive part of this. I know that people don't really value surplus core deposits today, but we all know that that goes in cycles. And I think having a nice stable core deposit base is part of this is attractive. It's accretive earnings. It's going to expand our ROA and our return on tangible common equity and it has a quick earn-back. So, it's a really -- I think, kind of a perfect deal. The people are really a nice fit with our folks, the cultures are very similar. They have a very client-centric focus, which is a big part of what we do here at First Western, and we have a similar loan back. So, overall, if we could find another one of those, we do it in a heartbeat. I think it's a really high quality franchise and we're thrilled to be partners with these folks. I think we're going to be able to add a lot of value as I commented in my prepared remarks too. In terms of future M&A activity, we have an active corporate development program. We've talked before on these calls, that growth for First Western comes in three parts, we do organic growth, where we're trying to grow each office in the double-digits every year and now we're going to have 18 offices that are doing that. We also grow by expansion. So, adding a couple offices is here, we talked about the Bozeman opportunity that we're launching in the second half of the year. And then the third thing is acquisition, of course, we've done 13 of these acquisitions now. The last three, in particular, with the mortgages, the Simmons deal last year, and then this one, I think are particularly dramatic kind of examples of the power of layering strategic acquisitions into our business model. So, we do have an active corporate development program. These things can be lumpy, we have a number of things that we're working on that that we hope will come and bear fruit over time. This one here -- I met Alan -- I called on Alan for the first time, the Chairman of Rocky Mountain Bank and Teton, I think five years ago now. So, these things take time and you never know when things are going to happen. I think this is a smooth bet, our priority is going to be to make sure that this gets done right. But we are always working on these things and looking for additional opportunities. I do think that that we will continue to be active and hopefully, find other opportunities for either later this year or next year. That answers your questions, Brett .

[Ben Gerlinger:]

Yes, actually, they are very helpful.

[Scott Wylie:]

Good.

[Ben Gerlinger:]

And then my other question is -- it might be more so geared towards Julie, if you guys have a near-term outlook of slight margin improvement and that's on an organic basis between loan growth and deposit management, if you add in Teton, which has a higher loan yield and similar deposit structure, which I know that you guys are going to be running offload as you said in your prepared remarks. If you kind of add those two efforts, what you're doing organically and then also Teton next as a bit of a one-two punch for margin improvement, I was curious if you guys had anything modeled out in terms of what that combined lift might be for the first full quarter of integration?

[Julie Courkamp:]

Yes, so I think you're absolutely right. With all the things we talked about on the call already regarding our expectations, our margin improvement should see a little bit of a lift just organically, but then you'll notice in the combined entity with Rocky Mountain being there, loan yields are a little bit above ours, kind of, on an average basis and our expectation is for that to fold in nicely and to continue to grow at a little bit of a higher rate. So, the combined entity should have a little bit more of a lift than we would see organically in our net interest margin and net interest income overall.

[Ben Gerlinger:]

All right.

[Scott Wylie:]

We said in our prepared remarks, Brett , that with the combined portfolio to be about 16 basis point lift in the loan side. So, I think that should help you model out.

[Ben Gerlinger:]

Got you. It did include the organic basis while you're doing pre-deal close as well.

[Scott Wylie:]

Yes.

[Julie Courkamp:]

Yes.

[Ben Gerlinger:]

Got you. Okay, sorry. That was my confusion. I'll step back in the queue. Thanks.

[Operator:]

All right. Next one on the queue is Matthew Clark from Piper Sandler. You are now live.

[Matthew Clark:]

Hi. Good morning.

[Julie Courkamp:]

Morning.

[Scott Wylie:]

Morning.

[Matthew Clark:]

Just first one for me on the -- on loan pricing, I think, coming out last quarter, you guys talked about maybe giving in a little bit and getting a little more price competitive on the loan side and just wanting to know what the -- kind of weighted average rate on new loans were this quarter? And then follow-up question on growth in a second, but maybe start there?

[Scott Wylie:]

Sure. Well, we did provide more flexibility on loan pricings to our front office folks. In reality, it's had only a minor impact on the prices we're realizing. We have tried to be more competitive, but we're seeing competitors being very aggressive and we're not following them down. We still do get a premium over market rates and we never have and continue not to just win deals based on being the lowest offer, that's not really our value proposition. Do you have the information that he asked for Julie on the relative loan pricing?

[Julie Courkamp:]

So, on the average rate of the new loan production quarter-over-quarter, we saw a little bit of a decline. So, it was about 3.57 last quarter and it was 3.46 this quarter. Obviously, there's always going to be a little bit of volatility based on the mix of the loan production. And then the second quarter we saw one to four family with a little bit of a higher contributor to the mix. So, that brought down the average rate. And as we continue to produce the C&I lending and more of the commercial loans, I would expect that to bounce around a little bit.

[Matthew Clark:]

Okay. And then it sounds like the pipeline is building, you spoke about growth stepping up, I assume you're not talking about stepping up from the growth rate on an annualized basis this quarter. But what are your thoughts on kind of overall core loan growth ex-PPP for the year, are we still looking for kind of mid double-digits or high teens?

[Scott Wylie:]

Yes, I think if we step-up too much, we're going to be in trouble, and that's probably not a good idea. But yes, I think, year-to-date, we're mid-teens and I think that's where we expect to be in the second half of the year.

[Matthew Clark:]

Okay. Great. And then just on the reserve came down a little bit just from the growth and I think you're kind of back around pre-pandemic levels, maybe still above it, but what are your thoughts on just the overall reserve coverage and as you migrate to CECL going forward?

[Scott Wylie:]

We've seen such strong performance from a credit standpoint over the last 18 months or so that it's just getting hard to justify bigger reserve number. We're trying to be conservative with it and continuing as you say, we're today up above -- just for the PPP loans and the acquisition from the Simmons last year, we're still above where we were pre-pandemic and the credit numbers are actually significantly better. So, I think we're trying to grow into this reserve that we have, the allowance, and I would think that would be a reasonable expectation from what we know right now in Q3 and then assess where we are for Q4.

[Matthew Clark:]

Okay. And then just on the run rate of expense, you did a good job of controlling expenses this quarter, you guided up to $16 million to $16.3 million, I think, for the next couple of quarters, could you just give us a sense for what's driving the bump up? I assume it's new people, but a little more coal there will be helpful?

[Scott Wylie:]

Well, part of its Julie's conservative, so let me answer that. Julie, you want to go ahead?

[Julie Courkamp:]

No, you're exactly right. It's just a little bit added personnel. With the added production, increasing incentive compensation of roles, we're looking to add into our -- finally open up a office. We've been talking about that and build out of that as occurring and we should be in that rent space in the second half of the year. So, there's a few of those expenses that are coming in that's just very slightly increasing that quarter re-rate.

[Scott Wylie:]

Future revenue drivers, all those things you listed.

[Matthew Clark:]

Okay. And then just last one on the remaining PPP net fees left to be realized?

[Julie Courkamp:]

$2.1 million.

[Scott Wylie:]

$2.1 million.

[Matthew Clark:]

Okay. Thank you.

[Scott Wylie:]

Thank you, Matt.

[Operator:]

All right. Next one on the queue is Brady Gailey from KBW. You are now live.

[Brady Gailey:]

Thank you. So, I wanted to start with the acquisition, it looks like a perfect fit for you guys. How does it change, if it does change at all, the overall growth profile of the company? And I know you guys are growing well into the double-digits, does Teton either pull that back or push that forward at all?

[Scott Wylie:]

Well, I think they have been growing in the in the mid-teens and they know these three markets quite well. We're very familiar with the Jackson market and have seen nice growth there. So, I don't really see any scenario where that slows down. I think in our modeling that we've done for this, we've incorporated sort of their continued organic growth with our organic growth plus the cost saves or I guess, minus the cost saves make for some really great numbers here. And then I think there's a lot of revenue synergies here. We have a number of capabilities. We're going to be $7.2 billion in assets under management and that's just brings a whole bunch of products and services, bigger toolkit for our Wyoming folks to be able to sell in these three markets. And I think once we get the transaction completed, and the conversion done and the transition completed, I think there's going to be more opportunity to grow in Wyoming beyond this. There's an interesting connection and those of us that have lived on East Coast, it's hard to believe, but the Bozeman and Jackson are five hours apart, but culturally, they actually have a lot of shared interests. Many Jackson people that go to Bozeman or have moved to Bozeman, there's a lot of cultural affinity between those two markets and frankly, to Denver as well. So, having a stronger presence in Western Wyoming makes that jump in the Montana as our fifth state, I think a lot easier and lower risk. And frankly, I think will accelerate our growth profile in both of those markets.

[Brady Gailey:]

And then Scott, you talk about kind of continued operating leverage and profitability improvement from here, your ROA is already pretty nicely improved. I think your core ROA was about 80 basis points back in 2019, it's now running about 120 basis points. How much higher do you think you can get the ROA? Or is the 120 -- first half of the year you did 120 basis points, is that the right level? Or how much higher could it possibly go?

[Scott Wylie:]

I don't know Brady, we've seen historically, the high fee banks produce really high ROAs. And there's a reason for that, which is that you don't need capital to support those businesses, you need expertise. And we have paid for that expertise and our product groups and frankly, we continue to build on that. And there's just a ton of operating leverage with that. And when we went public three years ago, we only had 10 offices, now we have 18 with this acquisition. As you continue to leverage more of this expertise for generating fee income across more offices that are actually producing organic growth. I mean, there's just a lot of operating leverage built into that. And we said that at the IPO three years ago and many of you on this call were supportive of that at that time and frankly, it was a little hard to see at that time, but many of you supported us on that. And I think it's really panned out exactly, like we said. I don't see any reason it can't continue. Obviously, it's not going to continue forever at the rates that we've seen, the 4x multiple that we've seen in the non-mortgage operating leverage improvement over the last 12 months. But I think it can continue in the two or three times range for the foreseeable future.

[Brady Gailey:]

Okay. And we started to see mortgage normalize in the second quarter, you're now a little under $4 million per quarter in fees in the second quarter. How much more of a step down do you think we could see on the mortgage front? Or are we close to a kind of new run rate?

[Scott Wylie:]

We've been talking for, I feel like forever, I think it's probably been five or six quarters now about our desire to expand our mortgage platform into our other markets outside of Metro Denver more successfully and Arizona's in particular one that we focused on. And with a boom going on as it has been for last year or so, it's just hard to get people to move. We put as a priority this year to attract some new purchase-oriented MLOs into our structure. And we're actually seeing some results there. I think we saw one new hire in Q2, we got another one that I think is joining us here in Q3. We've got a number of other leads that we're working on possibly expanding into Arizona in a bigger way. So, I hate to promise that because I feel like we've been talking about it a lot. But that that's how we're thinking about it, Brady, as you know, we'd like to replace a lot of those refi fees that we saw last year with purchase money fees. We continue to think this is a strategically important business for private banking. The really good private banks have strong mortgage operations that produce consistent purchase money, revenues, and create cross-selling opportunities. And we think that's a real opportunity for us that we continue to work on notwithstanding the challenges of getting good people to move over the last 15 months or so.

[Brady Gailey:]

Okay, got it. Thanks for the color and congrats on the deal.

[Scott Wylie:]

Yes, thank you.

[Operator:]

Next one on our queue is Bill Dezellem from Tieton Capital. You are now live.

[Bill Dezellem:]

Thank you. Scott, you've referenced the housing shortages is causing troubles with the ability to grow the mortgage business, would you talk through how you anticipate the shortage ultimately being resolved? And to what degree you will be able to benefit or not from that resolution?

[Scott Wylie:]

Well, I think that if you step back from the current situation, 10 years ago, Denver and the other markets that we're in were relatively attractive from a price standpoint to a lot of other markets around the country. And so you had desirable quality life here and relatively desirable cost of living and that just isn't like that anymore, right? Denver and Fort Collins and resort markets we're in Phoenix, Scottsdale all gotten a lot more expensive as folks have realized the benefit of being here. So, I think that's going -- Economics 101, right, that's going to slow the in migration and take some pressure off. Certainly, it's interesting that I talked about the connection Jackson and Bozeman, what we're seeing right now is lots of, kind of, the middle wealth, not the ultra-high wealth in Jackson selling and moving to Bozeman. And I personally know a handful of people that are doing that. One of them called me last night to congratulate us on this Rocky Mountain Bank deal. And she said, I just sold my big house with great views in Jackson. And I buy in another one -- building another one in Bozeman with the great views and a similar style house. So, I mean, it's just interesting how economics really play out and people do that. So, I think, Bill, that's ultimately what's going to happen here. I think where we slow the immigration, because it's going to be more expensive. And then obviously, it takes a little time for builders and whatnot, developers to fill the demand. So, we'll see that all normalized here over time. Our focus -- I can't control a lot of that, what we can control is the team and what they're focusing on. And as I mentioned, I think for us bringing in high-producing, well-connected, purchase-oriented MLOs is the game and will allow us to not only continue to build our mortgage business, but provide that strategic benefit and I think is really important to us. And that ain't going to happen overnight, but it will happen over time and we're seeing that.

[Bill Dezellem:]

And Scott taking your comment one step further, using that Bozeman example, which is all characterized it as a burgeoning low cost market even though probably the people who live in Bozeman or have for 20 years would disagree with the statement. Do you see multiple markets throughout the West that would be Bozeman-equivalent, that historically haven't been on the radar, but will be as some of your previously primary markets become more expensive and you see a shift to the next level of new markets?

[Scott Wylie:]

Yes. I actually don't really -- when you asked the question, I can't think of one that isn't. Like -- I think there's a ton of opportunity for us in Boise and and over there going south into Utah from the Montana, Wyoming, Idaho area, I think makes a lot of sense for us. And I think that we need to continue to build in our current markets and then we can grow, kind of, incrementally into some of these other markets like we're doing, and I think that's a really nice low risk way for us to continue to build our franchise and reach further scale profitability.

[Bill Dezellem:]

Great, thank you.

[Scott Wylie:]

Yes. Thank you, Bill.

[Operator:]

All right. Next one on the queue is Ross Haberman from RLH Investments. You are now live.

[Ross Haberman:]

Scott, nice quarter, nice acquisition. I just have a couple of quick questions. The numbers question on the allowance for which was touched upon earlier. I think you're at 90-somewhat basis points in total. Give me a sense of why you think that's adequate as opposed to something north of 100 or 120 basis points given your mix of loans today? Thanks.

[Scott Wylie:]

Well, there's a short answer to that and the long answer. I mean, I think the short answer is that we look at our credit quality and the credit losses, which are zero over the last several years and then we have to kind of scale the allowance to that. And so short answer is I think those allowances actually up. And the credit statistics -- every credit statistic you look at here is improving from already really good level. So, I think that's the high level answer. The more detailed answer, I'll take a crack at and Julie can explain in more detail if you like. But for me you want to show a consistent approach to calculating allowance over time and so we have this whole complex methodology that we go through with the credit team and the finance team, the accounting team, and the Board. And we look at economic factors and we look at performance factors for the portfolio and all this other stuff and that generates a number at the end of what that allowance needs to be. And as I said, I mean, we're kind of struggling to keep it where it is to be honest with you that the analytics that we do suggests that we're very conservatively provided for allowance today. So, Julie is other color you'd add in terms of the -- how we calculate?

[Julie Courkamp:]

Yes, just specifically, we have the various factors that we look at. Obviously, we're pre-CECL still and won't be having that impact for another year or two. But from the factors perspective, we take a hard look at those than the factors and economic environmental conditions that we are operating within in the markets and adjust those as you know we see fit and based on what's going on in our own portfolio. So, all of those things come into play and we feel like the level of our allowance is appropriate for where we're at.

[Ross Haberman:]

Okay. Just two other quick questions. Julie, on the PPP fees for the quarter, did I understand that slide right, I think it was slide 13 or 14, you're $1.5 billion in this quarter from the PPP forgiveness fees, is that correct?

[Julie Courkamp:]

Forgiveness net of interest and the fees in the loan, PPP LF funding costs, we had a net interest income impact of $1.5 million in the quarter.

[Ross Haberman:]

Okay. And just on the apples-to-apples basis, there's $2.1 million more to go over the next couple of quarters.

[Julie Courkamp:]

That's right. The $2.1 million is apples-to-apples to the number on that slide, that's the amortization of fee income and deferred expense of $1.2 million. We don't try to predict the interest income from PPP in the funding costs that that net $300,000 that we had in the quarter. So, apples-to-apples, we had $1.2 million in quarter two, and then we have $2.1 million remaining.

[Ross Haberman:]

And just for Scott, just one or two more. Scott in the Jackson acquisition, could you ramp up their loan growth quicker; one, because they can make bigger loans? And is there opportunity to open up additional offices there? Or really you're going to just keep what you have there and Bozeman is going to be the next sort of stop in terms of the loan office or full service office expansion?

[Scott Wylie:]

Well, you're right, the borrowers that they're dealing with in Rocky Mountain Bank today, and certainly that we deal with in our office there have borrowing needs that are higher than the legal end limit of Rocky Mountain Bank. So, that's going to create opportunity just by itself. Again, not factored into our modeling for the acquisition purpose, but I can tell you I've talked to the senior lenders there in Rocky Mountain Bank and they're excited about the additional capacity that we bring for their existing clients, let alone new clients as we go out and compete as a combined entity. In terms of the expansion, we have two offices in Jackson at closing; one, the Rocky Mountain Bank has a really great building right at the corner First and Main. So, we'll be moving our office, which is just a few blocks down the street over to there after closing is our plan at the moment. So, we'll go from two offices in Jackson to one. And I don't think we would want to add a second office in Jackson. I do think there are other markets in Wyoming that will be of interest and our team there has extensive experience, actually, not only in Wyoming, but also in Montana. So, I think that this is going to be a really nice bridge into further growth in Wyoming and our expansion into Montana.

[Ross Haberman:]

And just one final question for Julie. Going back to your 5% accretion or maybe as much as 7.4%, what dollar per share basically, you're starting from in 2022 with that with that number?

[Scott Wylie:]

So, we're using the analyst estimates for 2022, that's why we didn't give you a 2023 number in case analysts revise for 2023 after our strong Q2 core growth. So, the 5% is assuming 75% cost saves. And if we got the total 100% cost stays in 2022, it would be I think 7.4% or 7.5%, yes.

[Ross Haberman:]

And that's based on a base of what about $2.50 a share or something around starting from?

[Scott Wylie:]

Analyst -- I think the analysts are $2.99 for 2022.

[Ross Haberman:]

2022? So, you build in the 5% off of that base, you're saying?

[Scott Wylie:]

That's what the 5% is referring to, yes.

[Ross Haberman:]

I got it. Okay. Thanks guys. Best of luck.

[Scott Wylie:]

Yes. Thank you, Ross.

[Ross Haberman:]

Thank you.

[Operator:]

All right. I show no further questions and would like to turn it back to management for any closing remarks.

[Scott Wylie:]

All right. Well, I would like to thank everybody for joining us today. Hopefully, you see that we're making really great progress in our core business and also with this new acquisition and the merger partners that we'll have in West Wyoming, I think it's really an exciting time at First Western. So, thanks again for dialing in. We look forward to speaking everybody again next quarter. Thank you.

[Operator:]

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